Kingston University

Innovation and EvolutionWorking as an Economist: EC6001

Radoslav VelyovK1108346

Word Count: 5051

Table of Contents

Introduction: 3

Types of innovation 3

Theories of innovation 4

Evolutionary building blocks 6

Process of innovation 7

Patents 9

What drives innovation 11

Innovation through International Trade 14

Innovation of Apple PLC 14

Conclusion 15

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Introduction:

Innovation is a process that exists since early times and it can be defined as a process

where a new invention has been introduced or prevailing idea has been improved or

modified in a better way. In the history such inventions could be the fire, the wheel,

the car, the Internet and so on. In today’s time, innovation is a major foundation of

change and evolution of businesses, markets and people. It is at high importance not

only for businesses and people, but for economies and entire countries as well.

Moreover, the technological innovation is one of the most important drivers of

economic growth in developed countries, where wealthier states and firms rely on

more advanced technology and resources that enable them to have more innovative

incentives. Furthermore in this paper we will see how the meaning of innovation has

been exercised by economists such as Joseph Schumpeter and Nelson & Winter. And

how their theories of innovation and evolution have contributed towards

understanding innovation more precisely. Additionally we will see how technological

innovation is applied in todays business by using a case study from Apple Inc. and see

what strategies are used by the firm to justify all theories and models described by

theorists.

Types of Innovation:

Innovation can take two forms. One of which is when an individual or a firm

introduces a new completely different product or routine and it creates a new market

for it. This innovation is called Radical innovation. On the other hand the second type

of innovation is focusing on improving present products or routines and it is called

Incremental innovation (Queensland Gov. 2008). These two types of innovation can

sometimes be combined and this could perhaps be a very useful way of innovating.

Combination of Radical and Incremental innovation can happen when firms or

individuals combine new idea of a product with an existing product or production and

vice versa (Queensland Gov. 2008). For example, in the manufacturing sector more

and more firms use robots and advance computer technology on the production line to

cut down on cost and increase production compared to when using a human hand.

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This new way of production is still working towards producing the same product but

with a modified and improved production.

Firms with innovative incentives usually go through the stages of innovation, to

assess and establish a successful invention and evaluate whether it will be useful and

how it will contribute towards the business’s success. This process differs in different

sectors and with different firms, so occasionally innovative incentives can come from

different parts of the business or market.

Theories of Innovation:

As we mention above, the innovation is at high importance for the growth of an

economy and increasing number of politics and economists are interested in the

constant technological change as a driver of economic growth (Himmelweit, S. 2011).

The economist Joseph Schumpeter was interested in the firms, which constantly bring

technological change to the market they operate in or in the economy in general. He

believed that the state of capitalist economy is never stationary and firms often cannot

reach equilibrium due to the innovation and evolutionary change that is constantly

happening within the markets (Ruttan, V. 1959). Furthermore, Schumpeter argued

that the firms and individuals with the most innovative incentives are the

entrepreneurs, as they are the ones who enter the market with new ideas and the aim

of growth. Besides, they are very important contributors to radical innovation within a

market (Sweezy, P. 1943).

Additionally, Schumpeter argued that the level of competition in a given market

highly contributes for the innovative incentives of a firm (Ruttan, V. 1959). This is

due to the fact that firms are often aiming for profit maximization, higher market

share or reducing costs. Therefore they are important factor to bring the radical and

incremental innovation in order to achieve these aims (Hagedoorn, J. 1996).

Moreover, the firms, which are successful in presenting new product or new more

efficient way of production, are often the fit firms that have more resources devoted

for innovation. Some weak firms, which are not able to bring innovation to the

market, tend to get selected out of the market. This is called the Economic Selection

(Himmelweit, S. 2011). This is one very important factor as the economic selection

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acts as a motivation for innovation. For example, weaker firms will tend to have a

greater incentive for innovation or evolution of their products due to the fact that they

can be selected out of the market (Himmelweit, S. 2011). Schumpeter stated that

economic selection could also appear within the firm and on the production line. For

instance, when a firm introduces a new product that attracts a great amount of

consumers, it also becomes attractive to other firms too (Hagedoorn, J. 1996).

Therefore, in future other firms adopt the same invention in order to catch up with the

change and consumer demand, and then slowly some old inventions begin to wear-off

or selected out (Marsili, O. 2002).

Furthermore, another two economists Richard Nelson and Sidney Winter argued a

similar point of view to the Schumpeterian view on competition and innovation. They

pay close attention to the ‘nature of technology and focus on the nature of learning

that is exclusive to a specific technological environment rather than firm’s strategy of

entire technological change’ (Marsili, O. 2002). This environment is called a

Technological regime. Nelson and Winter argued similar point to Schumpeter’s point

of view on entrepreneurs, however they also compared the two sub factors of

technological regime, which are the entrepreneurial regime and routinized regime.

The two economists stated that technological change is influencing industrial

competition when they compared to the ability of new entrants (Entrepreneurial

Regime) to enter the market via innovation and already established firms (Routinized

Regime), which bring new innovation or improve on their existing inventions

(Marsili, O. 2002). Unlike Schumpeter, Nelson has come up with the argument that,

when comparing the two regimes, the routinized regime tends to have greater

innovation activity due to the fact that existing firms have more experience and this

allowed them to adopt better routines. Furthermore, entry of new firms would not be

able to occur in some industries where the knowledge is more ‘complex and systemic’

therefore, the larger firms with more resources and funds are the ones to innovate in

these markets (Marsili, O. 2002).

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Evolutionary building blocks:

Nelson and Winter as well as Schumpeter ‘place the firm at the center of the

evolutionary theory’ (Himmelweit, S. 2011). They have stated that the firms have to

adopt a specific procedure in order to determine their behavior. That is, they should

adopt specific routines that can help to identify core competencies. Routines are

usually adopted and can be improved through learning and tacit knowledge.

Moreover, as all firms differ due to their unique nature and capabilities, different

routines are usually developed. Some of the firms’ routines tend to be better than

others so in long run most firms try to develop similar efficient routines (Himmelweit,

S. 2011). Therefore Nelson and Winter argued that the firms behave in the same

manner over long run.

The evolutionary theories explained above include other characteristics that concern

firms and markets. One of these is the mutation, which is described as the innovation

process through which new variety of products or routines is created (Himmelweit, S.

2011). The mutation is an important process where firms usually search in the pool of

routines and adopt the most efficient. The second characteristic is, as described by

Schumpeter, selection. Selection process usually reduces variety, and as discussed

above, some units do not survive on the market. Selection process cannot exist

without mutation due to the fact that when creating variety of new efficient routines

some old routines get selected out through the Schumpeterian ‘creative destruction’

(Himmelweit, S. 2011). Additionally, the presence of selection drives the interaction

between mechanisms or firms and they compete for survival or for a greater share of

the market. Therefore the difference in the routines and nature of firms is the

characteristic that drives selection and evolution as stated in the neoclassical

economics (Himmelweit, S. 2011).

Similarly the second building block presents the firms with biological terms where

mechanisms and firms usually are created with the same genes (in biology) and

routines (in firms) respectively. This model was also stated in Alfred Marshal’s

‘Mecca of Economics’, comparing the firms to biological mechanisms, the genes to

routines and the sexual reproduction to innovation (Hodgson, G. 1993). However,

unlike biological genes that do not change completely overtime, firms can learn and

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adapt new routines and change over time. This suggests that firms are able to imitate

routines of other successful firms, which is not always easy or successful. The

adaptation of new routines or inventions sometimes requires research that is quite firm

specific and would help the firm to evaluate how effective this invention will be or

how useful the adaptation of new routine is. Some firms invest significantly large

amounts of investment in R&D. Furthermore, some new ideas for innovation are not

always successful and this can be assessed through the process of innovation.

Process of innovation:

In the process of innovation there are some stages that each firm can go through to

identify whether the innovation will be able to fit the firm’s specific nature and how

capable the firm is to create this invention. When having an incentive to innovate,

even having the uncertainty whether the innovation will work, there should be some

sort of process, which the firms can use to find out (Callahan, R. 2006). The process

can take both formal and informal form depending on what the scope of innovation is

and what the consequences will be.

The first stage is the finding of an idea for innovation, which usually occurs

after the firm answers a set of questions regarding the scale and scope of the

firm, the resources and capabilities and its mission and vision(Callahan, R.

2006).. Answering these questions could give the firm an idea of which part of

their business to innovate in. In some industries such as the Catering and

Hospitality industry, new firms (restaurants) enter the market with new ideas.

These could be new ways of customer service, new food and drink products,

and so on. In this case, the entrepreneurial regime tends to bring up with

radical or incremental innovation. In other industries, which are moderately

concentrated and entrepreneurs find it difficult to emerge with innovation,

well-established firms spent large amount of money into R&D to find new

ideas of innovation.

The second stage is the preliminary assessment in order to find out how the

idea will be approached by the firm. It also involves researching whether the

market really desires an invention of this kind should the invention be a new

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product or service. Then the firm needs to assess how the other firms and

consumers will react to such new invention, how the idea will affect the firm

and will it meet the firms aims and objectives in long run. This is one

important stage of the business due to the fact that the ideas are exercised and

evaluated and if they do not fit the objectives of the firm, they can easily be

changed before any costs of development are involved (Callahan, R. 2006).

The third stage involves the definition of the new idea or invention. In this

stage the firms are usually developing a strategy of how to realize the idea and

what resources the firm should involve for its creation. The firm is assessing

and planning and the costing of the new invention and meeting legal and

social requirements. This is one very important stage as the firms are now

putting the idea into a theoretical practice to find out the uniqueness and

strength of the invention and its contribution to the business’s success

(Callahan, R. 2006).

The next stage is the development and creation of the idea, which involves

processes such as assembling and putting all theoretical thoughts into practice.

In this stage the firm is usually testing the invention to see how it functions

and whether it meets the necessary requirements to be presented to the market

(Callahan, R. 2006).

After careful evaluation and testing, the new invention can go through the

stage of commercialization. In this stage the firm is looking for the most

effective way of presenting the idea into the market and capture a wider range

of audience. In this stage the firm is also legalizing and patenting the new

invention. This is a crucial step in the process of innovation as patenting,

which will be described later, will prevent other firms of appropriating the

idea and present it as their own (Callahan, R. 2006).

Finally after the idea has been successfully presented in the market and

customers have tested it, it is the time for feedback and review. In this final

stage the firm is assessing how this invention has contributed towards the

business’ success in terms of costs, profits, share on the market, reputation and

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so on. It is important stage as now firms can compare the predicted results of

the impact of the invention with the real results occurred after the feedback is

received (Callahan, R. 2006).

Some firms will have the needed resources and capabilities to go deep within each

stage of innovation and repeat it in order to find out exactly how it will affect their

business. However, other smaller firms, which have less resources could have a less

formal and not so extended process of innovation. This is not at substantial

importance as great innovative idea can occur from all parts of the business. One

critical example of how extensive and informational the innovation process can be is

reflected by the pharmaceutical industry, where firms are usually required to invest

large amount of money and time into the innovation process in order to find out how

the new invented, say, medicine will benefit the firm, will it be safe for consumers

and will it meet the legal standards. In this particular case these factors are really

important and such firms can use the full process of innovation and constantly repeat

it until reaching the desired result.

As mentioned it is not a necessary for a firm to follow all requirements as stated

above, however it is essential that some structure be followed in order to plan and

approach the innovation. Furthermore it will give the firm an idea of how desirable

the invention will be on the market (Callahan, R. 2006). Additionally, if successful,

the new invention is likely to attract the consumer demand, and therefore this demand

pull for the new invention will push the other firms in the market to adopt the same or

similar ideas and be actual on the market and meet consumers demand like explained

by the theory of innovation and evolution. Therefore, the firm can protect its

invention via the use of patent licensing.

Patenting New Invention:

Patents are documents issued by the state or country where the firm is operating, that

protects the intellectual properties of an individual or firm of being appropriated from

a third party. The patenting is a process, which usually requires time and resources in

order for the inventor to obtain one (USPTO. 2008). The patents can take several

forms; most common ones are the utility patents, which protects an individual’s

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inventions ‘that have a particular function’ (McGrath, J. 2009); (USPTO. 2008). For

example, these could be machinery or new technology on the production line. The

second common patent is Design Patent, which is usually related to non-functional

inventons such as design or shape of a particular product (USPTO. 2008). The third

most common patent is the Plant Patent, which ‘protects the inventions of asexually

reproduced plants’ such as hybrids, or mutation of some kind (Yang, J. 2010).

These patents are not easily obtained due to the fact that the idea of innovation needs

to be assessed by the patent office (McGrath, J. 2009). So, as described above, the

firm needs to undergo the process of innovation to find out as much information as

possible of the potential useful function of the invention, so they can use it to apply

for a patenting document. The patenting office is assessing information, such as if the

invention being patented already, how unique it is and whether it is actual. The

process of patenting is long due to the fact that the intellectual property office needs

time to assess this information. However, if the patent is obtained, the inventor will

have the intellectual property rights over the invention and will be protected from

other firms stealing the idea (Yang, J. 2010).

The fact that the patent protects new inventions, is really important factor that

encourages firms and individuals to innovate. It encourages innovative incentives as

the firm or individual will have in mind that its invention will benefit the firm in a

sense that it will be recorded as their own and thus increase reputation, profits and

possibly share on the market. However, if the power of a patent is too strong it may

discourage ‘learning by doing’ (Allred, B. 2007). For example, some firms on the

market, as described above, learn by imitating other firm’s technology and catch up

on the market. That is, when a new unique and powerful invention (or routine) is

created, most other firms (mechanisms) tend to imitate it. Therefore, if a patent is too

strong it can discourage other firms in the market from catching up in the market with

similar trends. Consequently, this gives a monopoly power to some innovative firms

and discourages innovation from other smaller firms (Allred, B. 2007). This implies

that the selection process, which is described by Schumpeter, will affect many firms,

who are not able to imitate or learn by doing. Therefore, less variety is created and the

evolution process will slow and this could slow economic growth in the particular

sector.

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What drives innovation:

Innovation can be inspired from all parts of the business starting from an idea that

came from an individual or a team, idea that is generated through careful research of

the R&D departments of firms or from the consumers in the market.

Motivation is one factor that can drive innovation. Firms that have relatively high

aims for success are usually the ones to employ expertise, train the employees and

create routines that motivate the personnel in a way that they can work towards the

firm’s desired success. Such motivation can also come from external to firm factors

such as, the nature of the market and competition. Therefore, individuals or teams

within the firm usually will have stronger incentive to innovate.

The consumer demand can play a big role in innovation. Consumers are the ones,

whom the firms innovate for and the consumer is at great importance for the firms’

choice of invention. Therefore, firms usually perform a research to find the consumers

needs and wants. This is a useful tool as sometimes the public can inspire the firm.

Constantly firms receive feedback on their performance, products or innovation by the

press and public. Besides, this feedback can sometimes give signs and information on

what the consumers desire. This information, if carefully assessed can help the

company to improve on their existing products. For example, the mobile industry

captures a wide range of consumers and its market is very large. In the recent years

constantly new mobile devices are coming on the market. Apple PLC introduced its

iPhone 4S, which is no more than two years old, however until then the firm has also

introduced iPhone 5, 5S and 5C in a period of only two years. If compared, these

devices look similar but have significant design and software improvements such as,

lighter and slim design, fingerprint recognition, better photo camera and so on. All

these improvements were made due to the information from consumers and feedback

that Apple received after each invention was tested in the market.

The industry and economical condition are also very important factors that drive

innovation. For instance, large economies such as US have moderately advanced

technology, strong political and regulatory systems and allow large firms to expand

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and small firms to set up on a constant basis. This economic stability generates variety

of many firms in many different sectors and this is key for having a large number of

innovators. Neil Foster reflected the innovation in each economy by stating the

number of patents applications in his document ‘Innovation and Technology transfer

across Countries’. He suggested that in US and Japan, patents applications were

between 50,000 -150,000 for the last 50 years. And in central and western Europe and

China it was 5,000 -50,000. Moreover, this indicates that these economically stable

regions are the ones with most innovative activities (Foster, N. 2012).

We mentioned above that competition is one very important driver of innovation. If

there is large number of firms in a particular sector, this suggests that the competition

level in this sector will be relatively high. As argued by Schumpeter, if all firms

compete with each other for a greater market share and higher profits, they will be

encouraged to a great extend to innovate. Additionally, the high number of firm on the

market suggests that there are a big variety of innovators. Furthermore, firms that do

not innovate enough can also learn from the variety of innovators and apply similar

routines and techniques to evolve. This creates a dynamic and constantly interacting

atmosphere within the market, where the firms constantly move towards a general

change and faster economic growth.

Innovation can be inspired from industries, which are less competitive as well. The

oligopoly markets, for example, have small number of large firms with relatively

large market share. As described in the Schumpeter’s theory, these are the fit firms.

Although their share on the market is big, they still compete with each other, but

when compared to other more competitive markets the firms in oligopoly markets are

bigger and have more resources to innovate. Such firms usually have relatively large

R&D sectors and invest millions into researching for new ideas and inventions. As

stated in the paper ‘Innovation and Economic Growth’ by Professor Nathan

Rosenberg, the amount of the investment in R&D reflects the incentive for innovation

by a firm (Rosenberg, N 2004). This is one very important factor as large firms in

wealthy OECD countries usually spend billions in total and these investments for

researching are highly likely to end up with a new and unique radical invention that

will contribute towards the economic growth in future (Rosenberg, N 2004).

However, the oligopoly sector does not create innovation through firms’ variety, due

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to the fact that it is difficult for entrepreneurs to set up with innovative incentives due

to lack of resources and greater cost. So sometimes this is a huge barrier to entry in

such markets and innovation cannot be created through variety. For example, in the

supermarkets industry, large firms such as Tesco, ASDA and Sainsbury’s, which

expand through economies of scale, innovate their service by giving out club cards or

loans, online shopping and home deliveries and so on. These factors are ones that

cannot usually be made by a small firm and entrepreneur due to the nature and size of

the firm.

In market structures such as Perfect competition, the innovation cannot be seen much

as it is seen in Monopolistic Markets and Oligopoly. This is due to the fact that in

Perfect competition, the number of firms is very large and each firm has a relatively

small market share. Moreover, as the firms are price takers on the market and operate

at the average cost level, this does not allow the firms to make any substantial profits

and thus not enough money can be spend into innovative activities. Another factor

that discourages perfect competition from intensive innovation is that the nature of the

market suggests that products and services are taking a simple form and are

homogeneous and this would not allow for much innovation to take place.

On the other hand in market structures such as Monopoly, where competition is scarce

or does not exist at all, innovation can also be discouraged. B. Sastry has made this

point in a paper from 2005, where he presented J. Arrows idea that firms operating in

a Monopoly markets, have fewer incentives to innovate (Sastry, B. 2005). He

explained that if a firm is dominating the totality of the market share, the firm is

already profitable enough and not challenged by other firms. So, the incentive to

innovate decreases. Additionally, if a firm in a Monopoly innovates, it simply

replaces one profitable product for another profitable innovaton, which Arrow called

‘the replacement effect’ (Sastry, B. 2005).

Innovation through International Trade:

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The model used to describe innovation in high economic growth countries differs

from countries with low economic growth and where firms have not got the sufficient

amount to invest in R&D (Foster, N. 2012). However, as stated earlier, economies can

also learn from each other just like firms and adopt similar techniques to encourage

innovation and therefore economic growth. This is due to the fact that even if an

invention is discovered and patented in one country, it can sometimes be adopted,

modified and patented by someone else in a different country depending on how

strong the patent is and what is the scope of the invention. Thus, firms can learn from

each other on international scale also and usually innovate through incremental

innovation.

Innovation of Apple Inc.:

Apple is one of the leading phone and computer manufacturing firms. It operates in a

dynamic market where firms are constantly bringing new technological invention that

attracts consumer demand. Apple is one of the oligopoly firms on the mobile

technology market and it gained its large market share in the last ten years mainly

through radical inventions such as the touch screen iPhone and iPod and iPad, the

Mac and App Store softwares, and so on. According to statistics presented by Apple

Insider, the company has spend $1.3bn in research and development in fiscal year

2012 and investments were to grow year after year (Hughes, N. 2013). These

investments suggest of how innovation orientated Apple is and that every year this

innovative incentive is increasing.

One factor that drives the firm to innovate is the competition in this industry. Other

firms such as Samsung and HTC are constantly bringing up new inventions and this

contributes towards the fast technology improving and dynamic market. Therefore

fast innovative activities are important if the firm wants to continue maintaining its

market position and this fact justifies the need of Apple to spend large amounts in

R&D in the near future (Hughes, N. 2013). Apples incentives to innovate are reflected

into their recently innovated products. For example, the firm invented the touch

screen iPhone and then in 2010 it invented the iPad, the following few years, it

invented the Apple TV hardware, and so on. These all-different radical innovations of

apple suggest how well the firm is routinizing its operations and to what extend the

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company understands the consumer needs and wants in order to bring these

innovations (Neilson, J. 2012).

The firm is using one indeed useful strategy, they have developed their products in a

way that can be interlinked. For example, the introduction of iPhone and Apple Store

that allows the customers to download softwares and programs for the touch screen

device, gives the firm the advantage of selling mobile phone devices that will

constantly access the unique Apple App Store and purchase programs. In this way the

company is increasing the chance of consumers spending money with App Store

products rather than general products from the internet.

The firm is one good example to show how innovative large firms are based on the

fact that large amount of money and resources are invested into researching for new

technology. If compared to smaller firms and entrepreneurs, who also bring

innovation, the large firms such as Apple are the ones that bring the evolutionary

radical change within their markets and the entire economy as well (Neilson, J. 2012).

Conclusion:

From this paper it is evident to argue that innovation can occur in any form and be

driven by competition, the ability to protect the innovation via patents and the stable

economic situation.

We have seen that firms operating in a competitive market are the ones that bring

innovation due to the fact that they are in constant pressure and competition from

other firms so they need to protect their profits and market share by bringing new

innovation. We can conclude that small firms and entrepreneurs are constantly

bringing up for the variety of innovative firms and thus drive the economic growth

through variety.

Additionally, we can conclude that the firms, which are bringing the evolutionary

radical innovation, are the ones that have the sufficient funds and resources to invest

and research for new ideas. As seen, Apple is one company with high market share in

Oligopoly market, which invests into R&D in order to innovate (Foster, N. 2012). As

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Nelson and Winter have pointed out that such firms have greater knowledge and

resources, stronger routines and more complex system that allow for a greater

technological change through the routinized regime. One important part of the

innovation as we have seen is the process of innovation itself. Moreover, firms such

as Apple are usually the firms, which have the relevant resources to perform the entire

process (Neilson, J. 2012). The process as seen is one very useful way that the firms

can use to find out how useful the innovation will be and to what extend it will

contribute to the market and to the firm.

Furthermore, it is evident that economies with high economic growth do allow for

higher innovation incentives due to the fact that the confidence of consumers and the

confidence of new firms to set up in a particular market is greater than economy with

low growth. As Schumpeter stated, new variety can be created if new firms constantly

set up, therefore innovative incentives are likely to increase with the presence of

mutation (Himmelweit, S. 2011).

References:

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