T THEHE NATIONALNATIONAL LAWLAW INSTITUTEINSTITUTE

UNIVERSITYUNIVERSITY,,

BBHOPALHOPAL

SECOND TRIMESTER

ECONOMICS II

PROJECTPROJECT ONON

INNOVATIONINNOVATION ECONOMICSECONOMICS

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SUBMITTED TO

SUBMITEED BY

PROF. C RAJSHEKHAR

VIPIN UPADHYAY

(2009BALLB56)

NIMISHA JHA

(2009BALLB01)

INDEX

INDEX 2

INTRODUCTION 3

THE THEORY OF INNOVATION ECONOMICS 5

INNOVATION AND FREE TRADE ECONOMY IN 21ST CENTURY 7

INNOVATION AND STRATEGY 9

1.   MARKET STRATEGY 9

2.   ORGANISATIONAL STRATEGY: WHAT IS A STAGE-GATE PROCESS? 10

3.   KNOWLEDGE MANAGEMENT 11

KEYNESIANS AND INNOVATION ECONOMIST 12

CONCLUSION 14

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1. WHERE DO INNOVATIONS COME FROM? IDEAS... 14

2. WHAT ARE INNOVATIONS DIRECTED TO? CREATE VALUE. 15

BIBLIOGRAPHY 16

INTRODUCTIONThe term innovation may refer to both radical and incremental

changes in thinking, in things, in processes or in services.

Invention that gets out in to the world is innovation. In

economics the change must increase value, customer value, or

producer value. The goal of innovation is positive change, to

make someone or something better. Innovation leading to increased

productivity is the fundamental source of increasing wealth in an

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economy. Colloquially, the word "innovation" is often used as

synonymous with the output of the process. Since innovation is

also considered a major driver of the economy, the factors that

lead to innovation are also considered to be critical to policy

makers.

If Adam Smith is the patron saint of neo-classical economics

and Keynes of neo-Keynesian economies, it is Joseph

Schumpeter who is the patron saint of innovation economics.

Indeed, if there is a “bible” for innovation economics it is

perhaps Joseph Schumpeter’s classic 1942 book Capitalism,

Socialism and Democracy. Writing around the same time as Keynes,

Schumpeter had a decidedly different take on the economy and on

economics. For Schumpeter it was institutions, entrepreneurs, and

technological change that were at the heart of economies and

economic growth.

But it is only within the last 15 years that a theory and

narrative of economic growth focused on innovation and grounded

in Schumpeter’s ideas has emerged. Indeed, a new theory and

narrative of economic growth focused on innovation has emerged in

the last decade. This new economic doctrine – known as

“innovation economics”– or by a range of other terms, including

“new institutional economics,”“new growth economics,”“endogenous

growth theory,”“evolutionary economics,”“neo-Schumpertarian

economics”– provides an economic framework that explains and

helps support growth in today’s knowledge-based economy.

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Innovation economics is based on two fundamental tenets. One is

that the central goal of economic policy should be to spur higher

productivity and greater innovation. Second, markets relying on

price signals alone will not always be as effective as smart

public-private partnerships in spurring higher productivity and

greater innovation.

“The legs are the wheels of creativity.”

~ Albert Einstein ~

Innovation, like spring, is in the air. Creativity is

all the rage, Entrepreneurship is on every agenda. As Einstein

tells us, it seems managers are more and more “using their legs”

(and their brains) to convert their ideas into constructive

products. Indeed, a lot of serious surveys show that more and

more product or service innovations arrive on the market.

According to a survey made by the WTO in 2003, for 100 new

products or services developed in 2000, there were 123 in 2002

and 164 in 2003.

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THE THEORY OF INNOVATION ECONOMICS

Joseph Schumpeter1 defined economic innovation in The Theory of

Economic Development, 1934, Harvard University Press, Boston

1. The introduction of a new good — that is one with which

consumers are not yet familiar — or of a new quality of a

good.

1 Joseph Alois Schumpeter (8 February 1883 – 8 January 1950) wasan economist and political scientist born in Moravia, then Austria-Hungary, now Czech Republic.6 | P a g e

2. The introduction of a new method of production, which need

by no means be founded upon a discovery scientifically new,

and can also exist in a new way of handling a commodity

commercially.

3. The opening of a new market, that is a market into which the

particular branch of manufacture of the country in question

has not previously entered, whether or not this market has

existed before.

4. The conquest of a new source of supply of raw materials or

half-manufactured goods, again irrespective of whether this

source already exists or whether it has first to be created.

5. The carrying out of the new organization of any industry,

like the creation of a monopoly position (for example

through trustification) or the breaking up of a monopoly

position.

Innovation economists believe that what primarily drives economic

growth in today’s knowledge-based economy is not capital

accumulation, as claimed by neo-classicalists, but innovation.

The major changes in the U.S. economy of the last 15 years have

occurred not because the economy accumulated more capital to

invest in even bigger steel mills or car factories; rather they

have occurred because of innovation. The U.S. economy developed a

wide array of new technologies, particularly information

technologies, and used them widely. Although capital was needed

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for these technologies, capital was not the driver; nor was

capital a commodity in short supply.

The major drivers of economic growth are productive efficiency

and adaptive efficiency. If the focus in neoclassical economics

is “the study of how societies use scarce resources to produce

valuable commodities and distribute them among different people,”

the focus in innovation economics is the study of how societies

create new forms of production, products, and business models to

expand wealth and quality of life.

In contrast to neoclassical economics, which is focused on

getting the price signals right to maximize the efficient

allocation of scarce resources, innovation economics is focused

on spurring economic actors – from the individual, to the

organization or firm, and to broader levels, such as industries,

cities, and even an entire nation – to be more productive and

innovative. From the standpoint of innovation economists, if

government policies to encourage innovation “distort” price

signals and result in some minor deadweight loss to the economy,

so be it, because allocative efficiency is not the major factor

in driving economic growth in the 21st century knowledge-based

economy.

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Spurring evolving and learning institutions is the key to growth.

Neoclassical economics, which focuses principally on markets and

individuals and firms acting in them as atomistic particles

responding pretty much exclusively to price signals along supply

and demand curves does explain a share of the economy. But

innovation in the neoclassical economic model is an exogenous

process – a black box, if you will, that works its magic solely

in response to price signals. In this sense, the neoclassical

model sees innovation as falling like “manna from heaven,” not

something that can be induced by proactive economic policies.

In innovation economics, innovation is central. Innovation

economists recognize that innovation and productivity growth take

place in the context of institutions. Indeed, it is the “social

technologies” of institutions, culture, norms, laws, and networks

that are so central to growth, yet are so difficult for

conventional economics to model or study. Innovation economists

view innovation as an evolutionary process in a market where

firms act on imperfect information and where market failures are

common.

INNOVATION AND FREE TRADE ECONOMY IN 21ST

CENTURYThe market is governed by five major forces:9 | P a g e

- The first force is that of the buyers. Towards them must be

oriented all theefforts of the firm, particularly concerning

modifications of switching costs, manufacturing processes,

or the positioning of the products and services.

- Suppliers must also be taken into account. Because of their

huge power of negotiation, they are able to weigh dull as far as

supplying is concerned.

-Thirdly, firms must pay attention to the threat of substitutes,

and to the fact that followers do not have to support the R&D

costs in the production process, and thus are able to

implement the innovative service or product at a lower cost.

-The fourth element playing a great role in the innovation

environment is that of entry or exit barriers. Anticipating and

managing if necessary the different entry and exit barriers

should be one of the major preoccupations of thefirms operating

on the market.

-Last but not least, Rivalry among competitors has numerous

consequences on the level of activity, as well as on the value

chain, by increasing or lowering one or several structural

elements of the market.

Until now, the world economy, and more especially markets and

firms structures have known a lot of major trends, from a

technology push model, going through a market pull model (1960-

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1970), then to an innovation coupling and to networks firms’

current “fashionable” structure (1990-2000).

 As a result, it is important to be aware of current economic

trends as far as production and diffusion of innovations are

concerned for a better understanding of the phenomenon. It seems

managers have to cope with three major trends nowadays: 

The first one is the growing environmental pressure, due

to the increasing competition in the business sphere.

Globalization process is one of the explanations of this

evolution.

The second trend is related to the time compression, between

invention and innovation (i.e. invention plus commercialization).

On the one hand, firms are faster and faster to create

innovations, and on the other hand the speed of innovations

adoption time is getting less and less long. This means time

between the creation of an innovation product or service and its

adoption by consumers has been divided by ten on average.

Thus the “market pull” economy since the 70’s and 80’s has

progressively given way to a “technology push” system directed

towards innovation.

Thirdly, the number of new products or services directed towards

consumers increases by 11% each year’s (Peters, 1997). This is due

first to the growing number of mergers; more and more global

firms pool the risks in order to win on all the markets and to

benefit from different configurations. Moreover, this is related11 | P a g e

to R&D intensity and to the fact that top patenting company are

based near high knowledge places, as Novartis implanted

near the Route 128 in Boston.

 To sum-up, innovation process has to deal with the more and more global shape

of the environment, the need for fast life cycle innovations, and the interdependence of

research and business institutions.

“Innovation is the process of turning ideas into manufacturable and marketable form.”

~ Watts

Humprey ~

"The function of entrepreneurs is to reform or revolutionize the pattern of production by

exploiting an invention or, more generally an untried technological possibility for

producing a new commodity or producing an old one in a new way, by opening up a

new source of supply of materials or a new outlet for products, by reorganizing an

industry and so on."

~ Joseph

Schumpeter~

INNOVATION AND STRATEGYResearchers agree on this subject to say that there is a

capitalizing relation between them. More precisely, in the one

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hand, technology cultivates strategy whereas on theother,

strategy drives technology. The two concepts work together in

order to produce more value.

To establish a profitable strategy, managers have to choose in

which direction they want to gain a competitive advantage on

competitors by creating value. For that, firms must determine

three main positionings:

-The choices of products and services offered to the consumer.

-Technical and economical choices related to the conception,

supplying, production, distribution of these products and

services.

-The choices of organisation and information system adapted to

this general frame.

1.   MARKET STRATEGY 

After the phase of creation, new products have to be adopted by

consumers. This adoption process relies on a “life cycle”,

composed of various stages (knowledge, attitude, decision,

implementation, confirmation). To benefit from the product’s life

cycle, innovating firms have to pay attention to the diffusion of

innovations. This one takes place within a social system

embracing many different situational fields. The five categories,

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innovators, early adopters, early majority, late majority and

laggards may each be regarded as a situational field.

The dominant value of innovators is ventures omens. They appear

to gain interpersonal security by being more venturesome than

other members of a social system. Then come early adopters (early

majority), who take more time to deliberate on adoption

decisions. Finally come the late majority, more sceptical about

innovation, and laggards, the most traditional of the social

system. They are all parts of the firms’ target, but they will

not have the same attitude towards a product or service. They

will then take more or less time to buy or use it.

 

Mainstream users have a stronger perception of the risk involved

by innovation. After early buyers have purchased the product

or the service, different phases take place: the Bowling alley

(i.e. the product become popular), the main stream, characterised

by a mass-purchase, and the end of life. Of course, for one

product exists one typical product life cycle.

 To anticipate these evolutions, firms must decide in favour of a

high reactivity in the processes of design (the products that

innovate clearly must do quickly to satisfy the needs

of the consumers), a simultaneous engineering (project groups),

to increase reactivity and an incremental development to foresee

the future of the products.

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2.   ORGANISATIONAL STRATEGY: WHAT IS A STAGE-GATE

PROCESS? 

In order to better benefit from an innovation, firms have to

adopt a specific process, named stage-gate. A stage-gate process is a

conceptual and operational road map for managing the new-product process. The

successive stages involved in an innovation process

are the following: evaluation of new collected ideas, choice

of the concept, development, implementation, and launching

phases.

 More particularly, a stage-gate process is composed of five

steps giving a rhythm to the innovation production.

Stage 1 includes scoping plus a fast investigation

of the project.

Stage 2 deals with detailed investigation of the project

and the building of the “business case”.

Stage 3 concerns design and development phases, added

to the definition of manufacturing and operating processes.

Stage 4 makes testing and validation processes possible.

Stage 5 consists in the launching and full commercialisation

of the product or the service.

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Payoffs of the Stage-Gate Process are improved teamwork, less

recycling and rework, improved success rates, earlier detection

of failure (i.e. less costs) as well as better launches.

Key success factors of new products development include

proficiency of pre-development activities, such as initial

screening, detailed market study, but also protocol

implementation, regarding target, customer’s need, as well as

proficiency of market-related and technological activities.

Risk of failure (overestimated market, underestimated

competition, not well designed, not well positioned) of products

innovations may be contained thanks to specific organizational

innovative implementations, summarized in the following table. 

                      

3.   KNOWLEDGE MANAGEMENT

Stage-gate process is one of the elements of a greater current

trend: Knowledge Management, which includes creation, production

and diffusion of innovations. This kind of management is quite

new, and considers the whole value created by a firm relies on

its capacity to manage mobile assets, more particularly

knowledge.  A common definition is “the collection of processes that

govern the creation, dissemination, and leveraging of knowledge to fulfil organisational

objectives”. A more useful definition: “Knowledge Management is an emerging set of

principles that govern organizational and business process design, as well as specific

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processes, applications, and technologies that help knowledge workers dramatically

leverage their creativity and ability to deliver business value”. Although verbose -

puts focus and responsibility on the individual – the knowledge

worker - and on the holistic nature of knowledge management.

KEYNESIANS AND INNOVATION ECONOMISTWhile the U.S. economy has been transformed by the forces of

technology, globalization, and entrepreneurship, the doctrines

guiding economic policymakers have not kept pace and continue to

be informed by 20th century conceptualizations, models and

theories. Without an economic theory and doctrine that matches

the new realities, it will be harder for policymakers to take the

steps that will most effectively foster growth.

Fortunately within the last decade a new theory and narrative of

economic growth grounded in innovation has emerged. Known by a

range of terms – “ institutional economics,” “new growth

economics,” “evolutionary economics,” “neo-Schumpertarian

economics,” or just plain “innovation economics”: – collectively,

this new economics reformulates the traditional economic growth

model so that knowledge, technology, entrepreneurship, and

innovation and are now positioned at the center, rather than seen

as forces that operate independently.17 | P a g e

But up to now, innovation economics, and innovation policy, has

not fully been appreciated by policymakers, in large part because

the dominant economic policy models advocated by most economic

advisors and implicitly held by most policymakers largely ignore

innovation and technology-led growth, in favor of macroeconomic

issues, such as tax cuts on individuals, budget surpluses, or

social spending, which at the end of the day pale in significance

to innovation in driving economic growth.

In contrast, “innovation economics” recognizes the reality that a

global, knowledge-based economy requires a new approach to

national economic policy based less on capital accumulation,

budget surpluses, or social spending and more on smart support

for the building blocks of private sector growth and innovation.

Rather than focus on ensuring that prices accurately reflect

costs to drive what conventional economists call allocative

efficiency, innovation economists argue that the lion’s share of

economic growth is determined by productivity and innovation.

Rather than focus principally on markets assumed to be in

equilibrium and individuals assumed to be acting rationally in

response to price signals along supply and demand curves,

innovation economics recognizes that innovation and productivity

growth take place in the context of institutions. In this sense

it is based on the notion that it is only through actions taken

by workers, companies, entrepreneurs, research institutions, and

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governments that an economy’s productive and innovative power is

enhanced.

The doctrine of innovation economics helps the political

diplomats for a host of economic policy challenges both broadly

cutting across issues (e.g., tax policy, regulatory policy,

spending and investment policy, and trade policy) and

specifically to particular substantive areas (e.g., energy

policy, retirement security, housing, anti-trust, and

competitiveness policy). We believe that such a project is

critical if nations are to reshape their economic policies to

effectively spur widely shared growth in the 21st century.

Indeed, it is critical to the long term welfare of nations’

citizens.

Over 70 years ago, as policymakers were in the grasp of outmoded

economic doctrines that hindered them from effectively responding

to the Great Depression, John Maynard Keynes famously stated,

"Practical men, who believe themselves to be quite exempt from any intellectual

influences, are usually the slaves of some defunct economist.2" These words are as

true today as when Keynes wrote them, and our challenge today is

to open up the dialogue over economic policy to include a new

doctrine of innovation economics.

2 John Maynard Keynes, was a British economist whose ideas have been acentral influence on modern macroeconomics, both in theory and practice.His ideas are the basis for the school of thought known as Keynesianeconomics, and its various offshoots.19 | P a g e

CONCLUSIONHow to conclude on a concept that is constantly moving, and

reinvented? Instead of doing so, it seems then interesting to

open some tracks towards important related notions, giving

another dimension to this notion.

 

1. WHERE DO INNOVATIONS COME FROM? IDEAS... 

What is an idea? An idea is simply “something” that is

unrealised, unproven or untested. It can take many subtle forms.

It could be an unrealised goal: “let's go to Mars”. It could be

an unrealised product: “let's build a Mars ship”. It could be an

unrealised service: “let's lay on charter flights to Mars”. It

could be an unproven insight into the nature of things:

“maybe there is a stream of particles flowing out from the sun".

Or it could be a new unproven concept of how something might work

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based on new knowledge of a natural, social or business

phenomenon: “the solar wind could power the ship”.

 

The realisation of an idea may be vision driven: “This is our

goal. Let's identify and develop new knowledge to achieve it”.

For example, “Let's put a man on the moon by the end

of the decade.” Or it may be knowledge driven: “We have new

knowledge. How can we apply it to the development of new products

or services?” For example, “We understand the workings of the

atom. Based on this knowledge could we build a nuclear powered

electricity generation plant”. Both forms are valid and both are

visionary in their own way.

Sir William Bragg is quoted as once saying – “The important thing

in science is not so much to obtain new facts as to discover new

ways of thinking about them”. I think the same applies to

business and our everyday work life – much of the time we don't

need more information or brilliant new ideas - what we need is to

think about the information and knowledge that we already have in

abundance in new ways.

 

2. WHAT ARE INNOVATIONS DIRECTED TO? CREATE VALUE. 

The notion of value knows a perpetual migration movement towards

a better fit between the business expectations and the evolution21 | P a g e

of the economic environment. Innovation, as any new product or

service, leads to the creation of three values. Managers should

always keep it in mind while thinking about launching a product.

The first one is the value of exchange, defined by the rareness

of a product and the market. For a particular new service,

consumers will have to pay a certain amount of money.

The second type of value is the symbolic or perceived value.

Through the purchasing process, consumers estimate or imagine

in their mind that the innovation purchased will have certain

characteristics. Consumers “appropriate” the product or

service they buy, and through this process, they humanize it.

The third and last one is the value of use. After having

seen the economic value, and attributed to the product a

perceived value, they will use it. This process will give birth

to a new type of value, said “value of use”, different

from the previous ones.

 The value of a product or service is the sum of three

distinctive sub-ones that are composing it.

Regarding the commercialization of an innovation, this means

innovators have to match the good mix between the three values.

And adapt their ideas to the “contemporary market spirit”...

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BIBLIOGRAPHY1. http://en.wikipedia.org/wiki/Innovation_economics

2. http://www.innovationeconomics.org/

3. http://economics.about.com/library/weekly/aa060204a.htm

4. http://www.nif.org.in/chairperson_nif_selected

 

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