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Innovation economics is new and growing field of
economic theory Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyze ...
and applied and experimental economics that emphasizes innovation and entrepreneurship. It comprises both the application of any type of innovations, especially technological, but not only, into economic use, in classical economics this is the application of customer new technology into economic use; but also it could refer to the field of innovation and experimental economics that refers the new economic science developments that may be considered innovative. In his 1942 book '' Capitalism, Socialism and Democracy'', economist Joseph Schumpeter introduced the notion of an innovation economy. He argued that evolving institutions, entrepreneurs and technological changes were at the heart of economic growth. However, it is only in recent years that "innovation economy," grounded in Schumpeter's ideas, has become a mainstream concept".


Historical origins

Joseph Schumpeter was one of the first and most important scholars who extensively tackled the question of innovation in economics. In contrast to his contemporary
John Maynard Keynes John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...
, Schumpeter contended that evolving institutions, entrepreneurs and
technological change Technological change (TC) or technological development is the overall process of invention, innovation and diffusion of technology or processes.From ''The New Palgrave Dictionary otechnical change by S. Metcalfe.  •biased and biased tech ...
were at the heart of
economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
, not independent forces that are largely unaffected by policy. He argued that "capitalism can only be understood as an evolutionary process of continuous innovation and '
creative destruction Creative destruction (German: ''schöpferische Zerstörung'') is a concept in economics which since the 1950s is the most readily identified with the Austrian-born economist Joseph Schumpeter who derived it from the work of Karl Marx and po ...
'". It is only in the 21st century that a theory and narrative of economic growth focused on innovation that was grounded in Schumpeter's ideas has emerged. Innovation economics attempted to answer the fundamental problem in the puzzle of
total factor productivity In economics, total-factor productivity (TFP), also called multi-factor productivity, is usually measured as the ratio of aggregate output (e.g., GDP) to aggregate inputs. Under some simplifying assumptions about the production technology, grow ...
growth. Continual growth of
output Output may refer to: * The information produced by a computer, see Input/output * An output state of a system, see state (computer science) * Output (economics), the amount of goods and services produced ** Gross output in economics, the value of ...
could no longer be explained only in increase of inputs used in the production process as understood in
industrialization Industrialisation ( alternatively spelled industrialization) is the period of social and economic change that transforms a human group from an agrarian society into an industrial society. This involves an extensive re-organisation of an econom ...
. Hence, innovation economics focused on a theory of economic creativity that would impact the
theory of the firm The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market. Firms are key drivers in eco ...
and organization decision-making. Hovering between
heterodox economics Heterodox economics is any economic thought or theory that contrasts with orthodox schools of economic thought, or that may be beyond neoclassical economics.Frederic S. Lee, 2008. "heterodox economics," ''The New Palgrave Dictionary of Economics' ...
that emphasized the fragility of conventional assumptions and
orthodox economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to h ...
that ignored the fragility of such assumptions, innovation economics aims for joint didactics between the two. As such, it enlarges the Schumpeterian analyses of new technological system by incorporating new ideas of information and communication technology in the
global economy The world economy or global economy is the economy of all humans of the world, referring to the global economic system, which includes all economic activities which are conducted both within and between nations, including production, consumption ...
. Innovation economics emerges from other schools of thought in economics, including
new institutional economics New Institutional Economics (NIE) is an economic perspective that attempts to extend economics by focusing on the institutions (that is to say the social and legal norms and rules) that underlie economic activity and with analysis beyond earlier ...
,
new growth theory Endogenous growth theory holds that economic growth is primarily the result of endogenous and not external forces. Endogenous growth theory holds that investment in human capital, innovation, and knowledge are significant contributors to economic ...
,
endogenous growth theory Endogenous growth theory holds that economic growth is primarily the result of endogenous and not external forces. Endogenous growth theory holds that investment in human capital, innovation, and knowledge are significant contributors to economic ...
,
evolutionary economics Evolutionary economics is part of mainstream economics as well as a heterodox school of economic thought that is inspired by evolutionary biology. Much like mainstream economics, it stresses complex interdependencies, competition, growth, stru ...
and neo-Schumpeterian economics. It provides an economic framework that explains and helps support growth in today's knowledge economy. Leading theorists of innovation economics include both formal economists as well as management theorists, technology policy experts and others. These include
Paul Romer Paul Michael Romer (born November 6, 1955) is an American economist and policy entrepreneur who is a University Professor in Economics at New York University. Romer is best known as the former Chief Economist of the World Bank and for co-recei ...
,
Elhanan Helpman Elhanan Helpman (Hebrew: אלחנן הלפמן, born March 30, 1946) is an Israeli economist who is currently the Galen L. Stone Professor of International Trade at Harvard University. He is also a Professor Emeritus at the Eitan Berglas School ...
, Bronwyn Hall, W. Brian Arthur,
Robert Axtell Robert Axtell is a professor at George Mason University, Krasnow Institute for Advanced Study, where he is departmental chair of the Department of Computational Social Science. He is also a member of the External Faculty of the Santa Fe Institute ...
, Richard R. Nelson,
Richard Lipsey Richard George Lipsey, (born August 28, 1928) is a Canadian academic and economist. He is best known for his work on the economics of the second-best, a theory that demonstrated that piecemeal establishing of individual first best conditions w ...
, Michael Porter, Keun Lee and
Christopher Freeman Christopher Freeman (11 September 1921 – 16 August 2010) a British economist, recognised as one of the founders of the post-war school of Innovation Studies. He played a lead role in the development of the neo-Schumpeterian tradition focusin ...
.


Theory

Innovation economists believe that what primarily drives economic growth in today's knowledge-based economy is not
capital accumulation Capital accumulation is the dynamic that motivates the pursuit of profit, involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return whether in the form o ...
as
neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
asserts, but innovative capacity spurred by appropriable knowledge and technological externalities. Economic growth in innovation economics is the end-product of: * knowledge (tacit vs. codified); * regimes and policies allowing for entrepreneurship and innovation (i.e. R&D expenditures, permits and licenses); * technological spillovers and
externalities In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either c ...
between collaborative firms; * systems of innovation that create innovative environments (i.e. clusters,
agglomerations An urban area, built-up area or urban agglomeration is a human settlement with a high population density and infrastructure of built environment. Urban areas are created through urbanization and are categorized by urban morphology as cities, ...
and metropolitan areas). In 1970, economist Milton Friedman said in the '' New York Times'' that a business's sole purpose is to generate profits for their shareholders and companies that pursued other missions would be less competitive, resulting in fewer benefits to owners, employees and society. Yet, data over the past several decades shows that while profits matter, good firms supply far more, particularly in bringing innovation to the market. This fosters
economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
, employment gains and other society-wide benefits.
Business school A business school is a university-level institution that confers degrees in business administration or management. A business school may also be referred to as school of management, management school, school of business administration, or ...
professor David Ahlstrom asserts that "the main goal of business is to develop new and innovative goods and services that generate economic growth while delivering benefits to society". In contrast to neoclassical economics, innovation economics offer differing perspectives on main focus, reasons for economic growth and the assumptions of context between economic actors: Despite the differences in economic thought, both perspectives are based on the same core premise, namely the foundation of all
economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
is the optimization of the
utilization * Rental utilization - economy * Capacity utilization - load on some process * Utilization management Utilization management (UM) or utilization review is the use of managed care techniques such as prior authorization that allow payers, particular ...
of factors and the measure of success is how well the
factor Factor, a Latin word meaning "who/which acts", may refer to: Commerce * Factor (agent), a person who acts for, notably a mercantile and colonial agent * Factor (Scotland), a person or firm managing a Scottish estate * Factors of production, su ...
utilization is optimized. Whatever the factors, it nonetheless leads to the same situation of special endowments, varying relative prices and production processes. Thus, while the two differ in theoretical concepts, innovation economics can find fertile ground in mainstream economics, rather than remain in diametric contention.


Evidence

Empirical evidence worldwide points to a positive link between technological innovation and economic performance. The drive of
biotech Biotechnology is the integration of natural sciences and engineering sciences in order to achieve the application of organisms, cells, parts thereof and molecular analogues for products and services. The term ''biotechnology'' was first used ...
firms in Germany was due to the R&D subsidies to joint projects,
network Network, networking and networked may refer to: Science and technology * Network theory, the study of graphs as a representation of relations between discrete objects * Network science, an academic field that studies complex networks Mathematic ...
partners and close cognitive distance of collaborative partners within a
cluster may refer to: Science and technology Astronomy * Cluster (spacecraft), constellation of four European Space Agency spacecraft * Asteroid cluster, a small asteroid family * Cluster II (spacecraft), a European Space Agency mission to study th ...
. For instance: * These factors increased patent performance in the biotech industry. * Innovation capacity explains much of the
GDP Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
growth in India and China between 1981 and 2004, but especially in the 1990s. Their development of a National Innovation System through heavy investment of R&D expenditures and personnel, patents and high-tech/service exports strengthened their innovation capacity. By linking the science sector with the
business Business is the practice of making one's living or making money by producing or buying and selling products (such as goods and services). It is also "any activity or enterprise entered into for profit." Having a business name does not separa ...
sector, establishing incentives for innovative activities and balancing the import of technology and indigenous R&D effort, both countries experienced rapid
economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
in recent decades. * The
Council of Foreign Relations The Council on Foreign Relations (CFR) is an American think tank specializing in U.S. foreign policy and international relations. Founded in 1921, it is a nonprofit organization that is independent and nonpartisan. CFR is based in New York City ...
also asserted that since the end of the 1970s the U.S. has gained a disproportionate share of the world's wealth through their aggressive pursuit of
technological change Technological change (TC) or technological development is the overall process of invention, innovation and diffusion of technology or processes.From ''The New Palgrave Dictionary otechnical change by S. Metcalfe.  •biased and biased tech ...
, demonstrating that technological innovation is a central catalyst of steady economic performance. Concisely, evidence shows that innovation contributes to steady
economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
and rise in per capita income. However, some empirical studies investigating the innovation-performance-link lead to rather mixed results and indicate that the relationship is more subtle and complex than commonly assumed. In particular, the relationship between innovativeness and performance seems to differ in intensity and significance across empirical contexts, environmental circumstances and conceptual dimensions. All of the above has taken place in an era of data constraint as identified by
Zvi Griliches Hirsh Zvi Griliches ( ; 12 September 1930 – 4 November 1999) was an economist at Harvard University. The works by Zvi Griliches mostly concerned the economics of technological change, including empirical studies of diffusion of innovations and ...
in the 1990s. Because the primary domain of innovation is commerce, the key data resides there, continually out of campus reach in reports hidden within factories, corporate offices and technical centers. This recusal still stymies progress today. Recent attempts at data transference have led not least to the positive link (above) being upgraded to exact algebra between R&D productivity and GDP allowing prediction from one to the other. This is pending further disclosure from commercial sources, but several pertinent documents are already available.


Geography

While innovation is important, it is not a happenstance occurrence as a
natural harbor A harbor (American English), harbour (British English; see spelling differences), or haven is a sheltered body of water where ships, boats, and barges can be docked. The term ''harbor'' is often used interchangeably with ''port'', which is a ...
or natural resources are, but a deliberate, concerted effort of
markets Market is a term used to describe concepts such as: *Market (economics), system in which parties engage in transactions according to supply and demand *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an ...
, institutions, policymakers and effective use of geographic space. In global economic restructuring, location has become a key element in establishing
competitive advantage In business, a competitive advantage is an attribute that allows an organization to outperform its competitors. A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled ...
as regions focus on their unique assets to spur innovation (i.e. information technology in Silicon Valley, or digital media in Seoul). Even more, thriving metropolitan economies that carry multiple clusters (i.e. Tokyo, Chicago and London) essentially fuel national economies through their pools of
human capital Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial ...
, innovation, quality places and infrastructure.
Cities A city is a human settlement of notable size.Goodall, B. (1987) ''The Penguin Dictionary of Human Geography''. London: Penguin.Kuper, A. and Kuper, J., eds (1996) ''The Social Science Encyclopedia''. 2nd edition. London: Routledge. It can be de ...
become "innovative spaces" and "cradles of creativity" as drivers of innovation. They become essential to the system of innovation through the supply side as ready, available, abundant
capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used fo ...
and
labor Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the labour ...
, good infrastructure for productive activities and diversified production structures that spawn synergies and hence innovation. In addition, they grow due to the demand side as diverse population of varying occupations, ideas and skills, high and differentiated level of
consumer demand In economics, demand is the quantity of a goods, good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specifi ...
and constant recreation of urban order especially infrastructure of streets, water systems, energy and transportation.


Worldwide examples

* Semiconductors and information technology in Silicon Valley in California * High-technology and life sciences in
Research Triangle Park Research Triangle Park (RTP) is the largest research park in the United States, occupying in North Carolina and hosting more than 300 companies and 65,000 workers. The facility is named for its location relative to the three surrounding cities ...
in North Carolina * Energy companies in
Energy Corridor The Energy Corridor is a business district in Houston, Texas, located on the west side of the metropolitan area between Beltway 8 and the Grand Parkway. The district straddles a stretch of Interstate 10 (the Katy Freeway) from Kirkwood Road we ...
in Houston, Texas * Financial products and services in New York City *
Biotechnology Biotechnology is the integration of natural sciences and engineering sciences in order to achieve the application of organisms, cells, parts thereof and molecular analogues for products and services. The term ''biotechnology'' was first used by ...
in
Genome Valley Genome Valley is an Indian high-technology business district spread across /(3.1 sq mi) in Hyderabad, India. It is located across the suburbs, Turakapally, Shamirpet, Medchal, Uppal, Patancheru, Jeedimetla, Gachibowli and Keesara. The Genom ...
in
Hyderabad, India Hyderabad ( ; , ) is the capital and largest city of the Indian state of Telangana and the ''de jure'' capital of Andhra Pradesh. It occupies on the Deccan Plateau along the banks of the Musi River, in the northern part of Southern India. ...
and
Boston Boston (), officially the City of Boston, is the state capital and most populous city of the Commonwealth of Massachusetts, as well as the cultural and financial center of the New England region of the United States. It is the 24th- most p ...
, Massachusetts * Nanotechnology in
Tech Valley Tech Valley began as a marketing name for the eastern part of the U.S. state of New York, encompassing the Capital District and the Hudson Valley. Originating in 1998 to promote the greater Albany area as a high-tech competitor to regions such a ...
, New York (
College of Nanoscale Science and Engineering The College of Nanoscale Science and Engineering is the college of nanotechnology at the SUNY Polytechnic Institute campus in Albany, New York. Founded in 2004 and formerly a component of the University at Albany, SUNY, the college underwent rap ...
) *
Precision engineering Precision engineering is a subdiscipline of electrical engineering, software engineering, electronics engineering, mechanical engineering, and optical engineering concerned with designing machines, fixtures, and other structures that have excep ...
in
South Yorkshire South Yorkshire is a ceremonial and metropolitan county in the Yorkshire and Humber Region of England. The county has four council areas which are the cities of Doncaster and Sheffield as well as the boroughs of Barnsley and Rotherham. In N ...
, United Kingdom *
Petrochemical Petrochemicals (sometimes abbreviated as petchems) are the chemical products obtained from petroleum by refining. Some chemical compounds made from petroleum are also obtained from other fossil fuels, such as coal or natural gas, or renewable so ...
complexes in Rio de Janeiro, Brazil * Train locomotive and
rolling stock The term rolling stock in the rail transport industry refers to railway vehicles, including both powered and unpowered vehicles: for example, locomotives, freight and passenger cars (or coaches), and non-revenue cars. Passenger vehicles can b ...
manufacturing in
Beijing } Beijing ( ; ; ), alternatively romanized as Peking ( ), is the capital of the People's Republic of China. It is the center of power and development of the country. Beijing is the world's most populous national capital city, with over 2 ...
, China *
Automotive engineering Automotive engineering, along with aerospace engineering and naval architecture, is a branch of vehicle engineering, incorporating elements of mechanical, electrical, electronic, software, and safety engineering as applied to the design, manufac ...
in
Baden-Württemberg Baden-Württemberg (; ), commonly shortened to BW or BaWü, is a German state () in Southwest Germany, east of the Rhine, which forms the southern part of Germany's western border with France. With more than 11.07 million inhabitants across a ...
, Germany * Digital media technologies in
Digital Media City Digital Media City (DMC; ko, 디지털미디어시티) is a high-tech complex for digital technologies, housing ubiquitous networked offices, apartments, exhibitions, conference halls, television network headquarters and cultural centers in Seo ...
in Seoul, South Korea


See also

*
Business cluster A business cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and glo ...
* Economic development *
Keynesian economics Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output ...
* Knowledge economy * Innovation *
International Innovation Index The International Innovation Index is a global index measuring the level of innovation of a country, produced jointly by The Boston Consulting Group (BCG), the National Association of Manufacturers (NAM), and The Manufacturing Institute (MI), t ...
*
Metropolitan economy A metropolitan economy refers to the cohesive, naturally evolving concentration of industries, commerce, markets, firms, housing, human capital, infrastructure and other economic elements that are comprised in a particular metropolitan area. Rat ...
*
Neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...


References


Further reading

*


External links


Innovation Economics: The Economic Doctrine for the 21st Century

Books and Journal Articles on Innovation Economics

Innovation Economics: The Integration and Capitalization of Knowledge





Business Models Innovation

Innovation Economics in practice for city/regional growth and economic development
{{DEFAULTSORT:Innovation Economics Economic growth Macroeconomic theories Innovation