Saturday, 26 October 2013

4. Types of innovation

In this item I discuss a few basic aspects of innovation.

Innovation has much to do with knowledge and learning, but it is not just technology. As recognized already by the innovation economist Joseph Schumpeter, there is innovation in products (goods and services), production processes, design, communication, organization, markets, and institutions. Here, ‘products’ include anything with added value. Services are products ‘that you cannot drop on your toes’, are more or less immaterial. Examples are trade, transport, financial services, care, education, information and communication, administration, etc.

While traditionally innovation was studied mostly in firms and markets, for some time now attention has been broadened to innovation in public or semi-public organizations of many kinds (health care, education, municipal services, etc.)

Innovation is part of a wider process of invention, innovation and the diffusion of innovations. Here, innovation is the activity of developing an invention into practice, in markets, and diffusion is the spread into and across areas of application, and there it yields economic growth. This is not to be seen as a purely linear succession of stages. Innovation and diffusion often elicit supplementary and secondary innovations.

There is a distinction between incremental innovation and radical, disruptive, competence destroying innovation or creative destruction. The latter was characterized by Schumpeter as novel combinations. The distinction is close to that between exploitation, defined as improvements within a basic logic or design, and exploration as breaking through them. The first entails stable perceptions, priorities, meanings, roles and division of labour, the second a break or shift of them. They entail require organizational environments and cultures, and are hard to combine within a single organization.

That is one reason why inter-organizational cooperation is important for innovation, in so-called open innovation, often between one firm (or more) focused on exploitation and one (or more) focused on exploration. An example is the pharmaceutical industry, with small firms developing new active substances or diagnostics and large pharmaceuticals carrying the result through clinical testing, regulatory approval, and large scale production and distribution under a brand name.

In innovation statistics attempts have increasingly been made to include the different dimensions of innovation. Thus, a distinction was made between new for the firm, new for the industry or market, and new for the world, in terms of number of products or share in turnover. Much used measures of innovation have been R&D and patents, since data are available from their registration, but they are input rather than an output measures, relating to invention rather than innovation. New products also are not a perfect measure since they do not by themselves say anything about success in the market.

Innovation policy at first was no more than technology and science policy, but gradually was broadened to include other dimensions, such as design, training and education, marketing, organization, and entrepreneurship.

Since innovation goes beyond invention and entails a host of other factors next to knowledge, it is not easy to prove the economic value of fundamental research, as policy makers demand. To prove it econometrically one would need data on all the other factors and the ways in which they enter a complex causal structure with different possible configurations.

Above all, innovation, especially radical innovation, carries a high risk of failure. As a rule of thumb, only one or two in ten projects achieve success. The few successes justify the cost of the many failures, and failures are not worthless because they increase insight, but this idea is hard to sell in a society that is risk-averse. That yields a major problem in debates on research policy.

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