0.2 21st century economic development

“Innovation has become the new theology, reports Nicholas Valéry. Yet there is still much confusion over what it is and how to make it happen” The Economist (US), February, 1999

Innovation has become the industrial religion of the late 20th century. Business sees it as the key to increasing profits and market share. Governments automatically reach for it when trying to fix the economy. Around the world, the rhetoric of innovation has replaced the post-war language of welfare economics.

“It is the new theology that unites the left and the right of politics”, Gregory Daines, Cambridge University.

Innovation: nothing new?

Recent years have seen much focus on how innovation can lead to improvements in productivity assisting in economic development (DTI 2003). However, while the term innovation often conjures up images of electronics, test tubes and new products the much wider-reaching nature of the concept has been understood for some time (Schumpeter 1934) to include:

• The introduction of a new good – one with which consumers are not yet familiar, or the quality of a good.
• The introduction of a new method of production – which is not necessarily founded upon a new scientific discovery but can be a new way of handling an existing commodity.
• The opening of a new market.
• The conquest of a new source of supply – such as raw materials or half-manufactured goods.
• The carrying out of the new organisation of any industry – such as creation or breaking up of a monopoly position.

Attempts to understand the effects of technological progress on economic growth pay homage to Joseph Schumpeter, an Austrian economist best remembered for his views on the ``creative destruction'' associated with industrial cycles 50-60 years long. Arguably the most radical economist of the 20th century, Schumpeter was the first to challenge classical economics as it sought (and still seeks) to optimise existing resources within a stable environment - treating any disruption as an external force on a par with plagues, politics and the weather. Into this intellectual drawing room, Schumpeter introduced the raucous entrepreneur and his rambunctious behaviour. As Schumpeter saw it, a normal, healthy economy was not one in equilibrium, but one that was constantly being ``disrupted'' by technological innovation.

Innovation at the macro and firm levels

Innovation is described more succinctly as the ‘ the transformation of knowledge into new products, processes, and services… ’ (Porter and Stern 1999) and in the definition provided by the DTI in the Innovation Review as:

“ …the successful exploitation of new ideas… ”

Information and knowledge (though of varying value and exclusiveness) are relatively abundant. However its potential is limited by ‘ the capacity to use them in meaningful ways ’ (OECD 1996). The knowledge-based economy therefore applies ‘Innovation’ to turn knowledge into wealth.

Innovation is central to driving up productivity and delivering economic growth. Porter and Stern (1999), outlining how innovation not only provides a mechanism for improving productivity through efficiency, but also creates higher value goods for which businesses (subsequently amalgamated to industries and economies on a national scale) can command higher prices in comparison to the inputs required. If unskilled labour and land are cheaper in Asia and access to markets from these locations is relatively easy then it is through innovation , and the development of higher value-added goods and services that developed nations can compete (Porter 2000).