Innovation Economics
Topic 1
Introduction
Dr. E. Walkowiak Lecture highlights
• Economics and innovation: why ?
• Definition of innovation
• Economic properties of knowledge Innovation and economics
Why ?
• Innovation drives economic growth. It is a factor of competitiveness
Competitiveness = Business / Territorial / countries in competition • Territories compete to attract business investment and create jobs existence of territorially delimited technology clusters which creates an endogenous dynamic of innovation and growth (eg Silicon Valley, Route 128 in the U.S.) • Countries compete for the same reasons concept of national innovation system that focuses on performance differences from one country to another as regards to innovation Saxenian, A.L., (1994), Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Cambridge, MA: Harvard University Press. http://www.netvalley.com/archives/mirrors/sv&128.htm
Gu, S., Lundvall, B.A., (2006), “China’s Innovation System and the Move Toward Harmonious
lGrowth and Endogenous Innovation”, DRUID wp, No. 06‐7. http://www.druid.dk/wp/pdf_files/06‐07.pdf Innovation and Economics
Who cares?
• Top managers & entrepreneurs
– “competitive advantage lies in the ability to create an economy driven not by cost efficiencies but by ideas and intellectual know‐how” (HBR 2007) • National Leaders – “economic growth comes from effectively linking the twin powers of the competitive market & the scientific method” (Romer, 2004) – The economic downturn makes it imperative to find new sources of growth
– Innovation is a means of dealing with global and social challenges Innovation and business performance
During the 90’s ... Source: Australian Paralympic Committee [CC BY‐SA 3.0 (http://creativecommons.org/licenses/by‐sa/3.0) Source: Chicago Tribune, Saturday, August 23, 1997, p.25 Science and society •
•
• Meet major challenges: climate change, fight poverty…
Science and evidence based policy: climate change IS NOT a hoax ;
vaccination protect from diseases
Major challenges in healthcare to fight disease, conquest of space… Innovation and growth
Macro‐perspective
• Early theories of economic growth (Solow, 1956) postulated that
the source of the growth is a technical progress disconnected from
any economic considerations (exogenous)
• Inability to explain certain observations
• Since 1980, new macroeconomic models of endogenous growth =
‐ innovation is endogenous (Romer), it is a decision of firm
‐ innovation produce a knowledge that irrigates the whole economy (externalities)
‐ Patents and intellectual property rights guarantee a return on investment in innovation while ensuring the dissemination of knowledge in line with the insights of Schumpeter that made innovation (creative destruction) the driver of development 7 Innovation drives growth
Contributions to labour productivity growth, 1995‐2006, in % Innovation explains a good portion of labour productivity growth. Source: OECD (2010), Measuring Innovation: A New Perspective, Paris. The costs of meeting climate challenge depend crucially on the pace of innovation in mitigation technologies Patents for climate change mitigation technologies, 2007
PCT patent applications Source: OECD (2010), Measuring Innovation: A New Perspective, Paris. Definition
http://www.youtube.com/watch?v=2NK0WR2GtFs
• Technology in an economic sense:
– The goods and services produced and the means by which they are produced in a firm, an industry or economy (Stoneman
2002)
– Technology in its purest form is knowledge knowledge to pursue our goals and solve our problems (Simon 1973)
– To innovate means to generate and to apply new knowledge / new technology that solves practical problems • No innovation without new knowledge, but not vice versa Definition of innovation
The classic definition of innovation by Schumpeter (1934): “carrying out of new combinations”
• Five possible cases
– Introduction of a new good
– Introduction of a new method of production
– Opening of a new market
– Opening of a new source of supply
– Carrying out of the new organization of an industry, like the creation or breach of a monopoly position
• This is largely compatible with the more precise, modern microeconomic definition of innovation
Seminar Question 1 Definition of innovation
“Innovation activities are all scientific, technological, organisational, financial and commercial steps which actually, or are intended to, lead to the implementation of innovations. Some innovation activities are themselves innovative, others are not novel activities but are necessary for the implementation of innovations. Innovation activities also include R&D that is not directly related to the development of a specific innovation.” (OECD, 2005)
OECD, 2005, “The Measurement of Scientific and Technological Activities: Guidelines for Collecting and Interpreting Innovation Data: Oslo Manual, Third Edition” prepared by the Working Party of National Experts on Scientific and Technology Indicators, OECD, Paris, para. 149. •
•
•
• Oslo Manual for measuring innovation (OECD)
Product Innovation.
Process innovation Marketing Innovation
Organisational Innovation Definition of innovation
RADICAL (ex. steam
electricity, computer)
→ industrial revolution
vs. INCREMENTAL Quality engine, GLOBAL (ex. antibiotics)
vs. LOCAL (ex. Implementation
of a new system) Radical
Major
Incremental Time Seminar Question 2 2/10 Actors
• Individuals : role of inventors and entrepreneurs
• Firms / organisations: private production of knowledge (a market of property rights ?)
• Universities : public knowledge
• Networks (of innovators)
• States : what to do to unleash innovations ? Basic dilemma of knowledge economy
• It is a non rival good that can • Producing it is (very) expensive
expand infinitely
The most efficient use to We are not competing to use produce knowledge requires it: giving it away is a positive that the cost of all the input sum game
needed is covered by the economic value of the final The most efficient use of product : a price must be paid
knowledge is when there is no restriction in use : price should The use of knowledge should be zero
be restricted
How to protect the inventor yet distribute the invention
Tension between production and use of a public good Basic dilemma of knowledge economy
A typology of economic goods
Rivalrous
good Degree of excludability
Degree of control High Low Romer (1993)
Seminar Question 3 Non rivalrous
good • A non excludable commodity
A lot of leaks and disclosure (intentional and unintentional)
• A low degree of control does not mean that knowledge will diffuse rapidly
• Secret
• Tacit knowledge Basic dilemma of knowledge economy
A typology of economic goods
Rivalrous
good Degree of excludability
Degree of control HighLawyer services, machines Non rivalrous
good Encoded
satellite TV transmission Fish in the Basic R&D
sea
Mathematical formula Low Romer (1993)
Seminar Question 3 • A non excludable commodity
A lot of leaks and disclosure (intentional and unintentional)
• A low degree of control does not mean that knowledge will diffuse rapidly
• Secret
• Tacit knowledge Basic dilemma of knowledge economy
Economic solutions
• Restriction of use : creation of property rights which give the inventor a temporary monopoly (private management)
• Freedom of use : public financing The solution depends on what CAN or CAN NOT , what SHOULD or SHOULD NOT be left in private hands Private / public management of knowledge production
A market of property rights
• A patent gives a temporary monopoly over a technique or a device in exchange for disclosing to the world of the nature of the invention; ownership for a set period of time, over a stated geographical area and covering a specified technical application. – Juridical limits of a patent : differentiation between something that is a pure product of human ingenuity and something that is mainly the result of working with nature
– Economic limits of a patent
• A balance between incentives to diffuse knowledge and protection of inventor Open science, open knowledge
• Public financing is provided in exchange for a full and immediate disclosure of the findings Expected profitability for firms Private / public management of knowledge production Minimum required by private investors Expected social benefits
Source : K. M. Brown (1998) : Downsizing Science, Washington, D.C., The AEI Press, p.45; • The two models are closely linked : private sector R&D draws on the pool of open knowledge Seminar Question 4 References
Essential reading:
• Handbook: chapters 1
• Arrow, K.J. (1962) “Economic Welfare and the Allocation for Resources for Inventions”, in Nelson (ed.), The rate and the direction of economic activity : economic and social factors, Princeton University Press.

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