0.2 21st century economic development  (Page 2/13)

Innovation has often been approached as a linear process taking an idea through development and production to market, as in [link] (OECD 1996). Each of the phases in this model itself draws upon a variety of disciplines as illustrated in the ‘Innovation Bridge’ representation of Clement (2004) ( [link] ).

Such a model implies that innovation is only ‘initiated’ by invention or discovery (OECD 1997). This sits at odds with von Hippel’s observation that the most important source of innovation is ‘ end-user innovation ’ (von Hippel 1988) where users’ needs rather than supply side factors drive the development and exploitation of knowledge. The ‘chain-link model’ of innovation by contrast allows for numerous stimuli and feedback to be incorporated from various stages between identifying market potential and actual sale ( [link] ).

Innovation at the firm level

Innovation has been cited as a key determinant of macroeconomic growth, but does it relate to the microeconomic level? It has been shown by various studies that innovative firms outperform their peers who do not engage in the activity (Geroski and Machin 1992, Heunks 1996, Leadbeater 1999, Freel 2000).

This improved performance relates to growth in employment, turnover and profitability. Each of the studies listed above supported this broad linkage between innovation and performance, though each shed further light on different aspects. Freel (2000), in a survey of 228 small firms, found that innovation created growth in employment though not necessarily in profitability. This, as Freel explains, is understandable for the sunk costs of innovation will impact upon young firms prior to them enjoying returns on route to becoming larger firms. The earlier work of Geroski and Machin (1992) focused on larger companies. An interesting result from this study was that the fortunes of innovative firms were less cyclic than those of other firms. This runs against the hypothesis that cyclical introduction of new products would have a corresponding cyclical effect on performance.

Innovation can be difficult for businesses as it often involves change, the scale of which is generally related to how radical the innovation may be. This makes it especially challenging for larger businesses where practices are more embedded and changes more difficult to effect (Keeble and Tomlinson 1999, Todtling and Trippl 2005).

Research and development (r&D)

R&D is often used as a proxy measure for innovation activity (Leadbeater 1999, WAG 2001) though it is in effect simply an input to the process. Outputs require inputs and this measure has readily available data for comparison at national and international levels. The importance of R&D in driving innovation and economic development cannot be overstated. In 2002, at least a quarter of the UK productivity gap with the US was linked to lagging investment in R&D (DTI 2003).