Topics: Innovation, Economics, Economic growth Pages: 16 (5407 words) Published: May 3, 2013
The importance of innovation
Corporations must be able to adapt and evolve if they wish to survive. Businesses operate with the knowledge that their competitors will inevitably come to the market with a product that changes the basis of competition. The ability to change and adapt is essential to survival.

Today, the idea of innovation is widely accepted. It has become part of our culture – so much so that it verges on becoming a cliché. For example, in 1994 and 1995, 275 books published in the the United States had the word ‘innovation’ in their title (Coyne, 1996). But even though the term is now embedded in our language, to what extent do we fully understand the concept? Moreover, to what extent is this understanding shared? A scientist’s view of innovation may be very different from that of an accountant in the same organisation. The GlaxoSmithKline story in Illustration 1.1 puts into context the subject of innovation and new product development. Innovation is at the heart of many companies’ activities. But to what extent is this true of all businesses? And why are some businesses more innovative than others? What is meant by innovation? And can it be managed? These are questions that will be addressed in this book. ‘. . . not to innovate is to die’ wrote Christopher Freeman (1982) in his famous study of the economics of innovation. Certainly companies that have established themselves as technical and market leaders have shown an ability to develop successful new products. In virtually every industry from aerospace to pharmaceuticals and from motor cars to computers, the dominant companies have demonstrated an ability to innovate (see Table 1.1).

A brief analysis of economic history, especially in the United Kingdom, will show that industrial technological innovation has led to substantial economic benefits for the innovating companyand the innovating country. Indeed, the industrial revolution of the nineteenth century was fuelled by technological innovations (seeTable 1.2). Technological innovations have also been an important component in the progress of human societies. Anyone who has visited the towns of Bath, Leamington and Colchester will be very aware of how the Romans contributed to the advancement of human societies. The introduction over 2,000 years ago of sewers, roads and elementary heating systems is credited to these early invaders of Britain.

The classical economists of the eighteenth and
nineteenth centuries believed that technological
change and capital accumulation were the
engines of growth. This belief was based on the
conclusion that productivity growth causes population growth, which in turn causes productivity to fall. Today’s theory of population growth is
very different from these early attempts at understanding economic growth. It argues that rising incomes slow the population growth because
they increase the rate of opportunity cost of having children. Hence, as technology advances productivity and incomes grow. Joseph Schumpeter was the founder of modern growth theory and is regarded as one of the world’s greatest economists. In the 1930s he

was the first to realise that the development and
diffusion of new technologies by profit-seeking
entrepreneurs formed the source of economic
progress. Robert Solow, who was a student of
Schumpeter, advanced his professor’s theories in
the 1950s and won the Nobel Prize for economic
science. Paul Romer has developed these theories further and is responsible for the modern theory of economic growth, sometimes called
neo-Schumpeterian economic growth theory,
which argues that sustained economic growth
arises from competition among firms. Firms try
to increase their profits by devoting resources to
creating new products and developing new ways
of making existing products. It is this economic
theory that underpins most innovation management and new product development theories. Source: Adapted from M. Parkin et al. (1997) Economics,...
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