Warwick Business School

Key learning objectives  Understand the key terms and measures in innovation  Be able to evaluate key explanations for how innovation occurs  Be able to discuss how business size impacts on innovation

Warwick Business School Invention and Innovation  Invention is ‘the first occurrence of an idea for a new product or process’  Innovation is ‘…the first commercialisation of the idea’ (Fagerberg, 2003: 3)  Mousetrap inventions and innovations  Astebro (2003) suggests that the returns from invention are often likely to be minimal  Invention and innovation critical to economic development: need ‘creative destruction’

Warwick Business School Schumpeter’s five types of radical innovation 1. Introduction of a new method of production (Production lines) 2. Opening up of new market (East India Company) 3. The conquest of a new source of supply of raw materials or half manufactured goods (steel) 4. The creation of a new type of industrial organisation (franchise) 5. Introduction of a new good or significant improvement (PCs)

Warwick Business School Measuring innovation: input measures  R&D expenditure or the number of R&D ‘workers’ employed  Not necessarily correlated with innovation output  Biased towards the large business Small business innovation spread throughout business rather than restricted to the R&D department  Limited measure of innovation

Warwick Business School Measuring innovation: intermediate output measures  Measures can be patents applied for, granted or number of new product announcements  Patents are a negative right which ‘shelter’ the innovator  Governments agree to patent protection to foster innovative activity (otherwise entrepreneurs may not innovate) and to promote ‘spillover’ benefits  Advantages: Better measure because patents are costly so minimises ‘trivial’ patents Better measure of innovation output than R&D expenditure/workers

Warwick Business School Problems with patents  Not the only type of IPR: Design rights Copyright Trademarks  Cost of patenting  Difficulties in enforcing IPR rights  Use of alternative strategies (e.g. trade secrets, reverse engineering)

Warwick Business School Large businesses make more use of IPR

Warwick Business School Problems with intermediate measures  Large businesses more likely to use IPR  New product announcements are not always a reliable measure of product innovation  Patents/product announcements more a measure of technological activity than innovation

Warwick Business School Direct measures of innovation  Involves asking businesses about their innovation  Advantage is that an innovation fertility measure (innovation/employment) can be constructed  But problems of subjective opinions and hindsight bias  No measure is perfect

Warwick Business School How does innovation occur?  Not just about inputs (exogenous) but also being ‘smart’ (endogenous)  Spillover effects – incremental changes to product and process innovations  Path dependent and context specific

Warwick Business School Kondratieff waves

Warwick Business School Technological paradigm approach

Warwick Business School Steam, electricity and petrol

Warwick Business School Schumpeter Mark I and II Behaviour is key Creative destruction Economic change - Achieved by dynamic entrepreneurs Mark I Resources are key Creative accumulation Economic change - Achieved by large firms making changes to price/quality Mark II

Warwick Business School Evidence on Mark I and II  Superficially, evidence tends to support Mark II - Large businesses much more innovative than smaller businesses

Warwick Business School Evidence on Mark I and II  Evidence now suggests that innovation is dependent on Sector (concentration) Life cycle stage of sector (new vs mature)  Mark II perspective ignores innovation rate (innovation/employment) of small businesses  Spillover effects (Cambridge)

Warwick Business School Conclusions  Measuring innovation is difficult  Can delineate broad patterns of innovative activity but still cannot ‘pick winners’  Innovation amongst small and large businesses is context (sector) specific and assessments need to account for dynamic (spillover) activities