Innovation, Intellectual Property, and Economic Growth

Lecture outline:• Overview of course• Introduction to innovation

• Definitions• Nature of innovation• Microeconomics

• Questions• Readings

Overview of course

• Details of course• Teaching• Resources• Assessment

What is course about?• Applying economic analysis to the understanding of the

innovative process• Determinants• Consequences• Market failure (are optimal resources devoted to innovation)

• Some key questions• What drives innovation?• How does intellectual property influence innovation?• Which market structures yield more or better innovations?• Why are some countries rich and some poor?• Is economic regulation good or bad for innovation?

What is the ‘economics of innovation’?

Microeconomics – understanding processes, including how incentives affect firms

Macroeconomics – ‘innovation’ drives economic growth.. and economic growth drives living standards, environmental, political…

Economic Policy – are there market failures in the innovation process and what, if anything, should the government do?

Business Strategy – this is not a course on advising firms how to innovate, but does include some insight into this

Definition of innovation

Basic definitionIntroduction of new ideas that add ‘value’ to a firm’s activities

OECD The Oslo Manual (1997, p.28)• introduction of a new product or a qualitative change in an

existing product• process innovation new to an industry• the opening of a new market• development of new sources of supply for raw materials or

other inputs• changes in industrial organisation

Innovation and businessSome students may benefit from a brief comment on why innovation is so important to business

Some example of quotes

•"Business has only two functions, innovation and marketing." Peter F Drucker •“Creativity is thinking up new things. Innovation is doing new things.”Theodore Levitt (management guru) •Innovation distinguishes between a leader and a follower.“ Steve Jobs

The innovation process

ACTIVITIES

OUTPUTS

Basic research

DiscoveriesIdeas

Applied researchInformation collation

InventionsBlueprints

Plans

DevelopmentTesting

PrototypesBeta-versions

Investment

Innovation(product or process)

FIRM-LEVEL INITIATIVES

EXTERNAL-OR FIRM-LEVEL

INITIATIVES

MARKET-LEVELPROCESS

DIFFUSIONCOMMERCIALISATIONRESEARCH AND DEVELOPMENT

Adoption or purchase decision

Market penetration

AdaptationImprovement

STAGE

AGENTS

21 2 3 4 5

Figure 1.1 Greenhalgh and Rogers (2010)

Invention, Innovation, Diffusion(Schumpeterian trilogy)

• Invention: creation of an idea to do or make something (profitability not yet verified)

• Innovation: new product/ process commercially valuable i.e. successfully developed inventions.

• Diffusion: the spread of a new invention/innovation throughout society or at least throughout the relevant part of society.– Without this cannot gain full benefits– Some of this represents ‘spillovers’ or ‘positive

externalities’

Scientists, Knowledge and TechnologyScientists• Discover knowledge by research• Disseminate knowledge (open science?)• Knowledge is public good(non-rival in use), hence created

externalities• Universities, government labs, some large firms• It may represent the basis for technological advances

Technology • Application of knowledge to ‘production’• Firms driven by profit incentive• Private good: investment (R&D) projects, appropriate, use of

intellectual property

Product and process innovationsProduct innovations

• product used by consumers• Microwaves, computers, mobile phones, etc

• Products use by firms• Shipping containers, computers, robots, etc

Process innovations• Used by consumers

• Fast food, air travel

• Used by firms• Assembly lines, software

Defining an innovation• Can be defined as new to

– Firm– Market (industry)– World

• No universal agreement of which• Radical vs incremental

– Radical (steam, internal combustion engine, computers, internet)

– Incremental (constant improvements)– Both important in driving economic growth

Further ideas

• Can extend the introduction by considering– Further examples of specific innovations, including

cases studies of famous innovations– Look at country / state / city comparisons of

innovativeness– Can provide overview of productivity, economic

growth, etc

Microeconomic effects of innovation

• Following slides could be part of introduction or separate lecture– Can expand formality of this topic, including

introducing maths-based questions relating to consumer surplus changes, optimal subsidies, public goods

Figure 1.2 Process innovation in perfectly competitive market

Q1

P1

demand curve

Price (p)

quantity (Q)

Initial consumersurplus

P2

Q2

MC1=AC1

MC2=AC2

Figure 1.3 Process innovation for a monopoly

Q3

P3

demand curve

Price (p)

quantity (Q)

P4

Q4

MC1=AC1

MC2=AC2

marginal revenue (MR)

Figure 1.4 New product demand curve

new demand curve

Price (p)

quantity (Q)

P1

Q1

MC1=AC1

marginal revenue (MR)

Q*

a b

c d e

Figure 1.5 A product innovation represented by a shift in existing demand curve

Quantity (q)

Price (p)

MC=AC

qnew

Dnew

pnew

pold

qold

Dold

Innovations and Market Failure

• Innovation as a public good– Non-rival and non-excludable

• Externalities from innovative activity– R&D spillovers

• Indivisibilities, uncertainty, and capital markets– Fixed costs, uncertainties– Do capital markets cope with these?

• Patent races and duplication

Restoring incentives to invent and innovate

• Public provision of a public good• Club provision of a local public good• Pigovian subsidies• Definition of property rights• The trade-off between incentives and

monopoly power

Subsidies for R&D

Questions for discussion1. How would you distinguish between an invention and an

innovation?2. What are the key characteristics of a public good? Is all

new knowledge a public good? 3. What is a positive externality? How does this differ from

a public good?4. How does innovation create positive externalities? Why

are they a problem?5. What are the key market failures surrounding investment

in innovation?6. Does the creation of intellectual property rights help or

hinder the markets for innovative goods and processes?

References

• Key textbook for this course is– Greenhalgh, C and Rogers, M (2010) “Innovation,

Intellectual Property and Economic Growth”, Princeton University Press

• For this week read Chapter 1• Future lectures will follow each of the

chapters of the book• Additional articles will be given each week