Innovation: Economic Change and the Competitiveness of Firms and Nations

Table of Contents

1 INTRODUCTION

2 INNOVATION DEFINED

3 INNOVATION AND ECONOMIC CHANGE

4 INNOVATION AND THE COMPETITIVENESS OF FIRMS

5 INNOVATION AND THE INTERNATIONAL COMPETITIVENESS OF NATIONS

6 CONCLUSION AND CONCLUDING REMARKS

LIST OF REFERENCES

1 Introduction

The following paper aims to address and highlight the importance of innovation as a driving factor of economic change. It will also be shown that innovation is crucial to the competitiveness both at the micro- and at the macro-level of companies and nations respectively. While limited in scope and certainly not claiming comprehensiveness, it attempts however to highlight the main issues in the innovation debate within these dimensions.

Specifically, chapter two will offer a brief but thorough overview of existing definitions of innovation. Chapter three will link innovation to economic change, with a brief discussion of the concepts of creative destruction and dominant designs. Chapter four and five will highlight the significance of innovation at the firm and the national level respectively. Finally, chapter six will summarise the main findings of this paper.

2 Innovation Defined

Even a brief look into the topic of innovation reveals a variety of different, mostly complimentary, definitions of innovation.

Kuczmarski (1996) regards innovation very broadly as a way of ‘thinking focused beyond the present into the future’, as ‘intangible and intuitive, … a mindset’. The Encyclopaedia Britannica (2002) defines it somewhat more specific as the introduction of something new, a ‘new idea, method or device’. The concept of newness is also referred to by authors such as Vesper (1988): ‘new entry’ - Gartner (1998): ‘new organisation’ - and Stevenson and Jarillo (1990): ‘organizational renewal’. Slappendel (1996) sees the perception of newness as ‘essential to the concept of innovation as it serves to differentiate innovation from change’. The European Green Paper on Innovation (European Commission 1995) takes a broader stance and defines it as ‘the successful production, assimilation and exploitation of novelty in the economic and social spheres’. Zaltman et al.’s (1973) definition of innovation also refers to ‘ideas, practices or material artefacts perceived to be new’.^[1]

Extending the above, Walsh (2002a) adds that an innovation is only accomplished after the first ‘commercial transaction’ has been conducted; Edquist (1997) confirms this, seeing innovations as new creations of economic significance. On a different note, Porter (in Donlon and Pellet 1998) notes that innovation tends to occur where interested parties such as suppliers, related businesses, service providers, and university are concentrated in close proximity, so as to be able to interact with each other in ‘unstructured ways’.^[2] Furthermore, Hage (1980) points to the distinction between radical and incremental innovations, associating radical with revolutionary (i.e. paradigm building), whereas incremental relates to innovations within an existing paradigm (Dosi 1982). Finally, Drazin and Schoonhoven (1996) speak of the dominant design,^[3] and note that the emergence of such often leads to additional innovation, ‘bringing new approaches and technologies in its wake’.

Referring specifically to companies, Damanpour (1991) argues that innovation is ‘the generation, development, and adaptation of novel ideas on the part of the firm’. Nohria and Gulati (1996) extend this view by including any policy, structure, method, process, product, or market opportunity that the ‘manager of an innovating unit perceives to be new’. Relating the concept of innovation to success at the firm-level, Nonaka and Takeuchi (1995) speak of innovation as the key element of business success, in line with Kanter who as early as 1985 identified innovation as one of the main ingredients to create and maintain competitive advantage for a company.

For the purpose of this paper then, innovation in general will be defined in the light of the above definitions focusing on newness and economic significance, with innovation at the company level regarded as one of the keys to competitive advantage. Further, it is assumed that increasing competition is likely to require companies and even nations to focus even harder on being innovative in order to create and sustain competitive and comparative advantages respectively. In line with Drucker, who observed in 1993 that society is becoming increasingly knowledge-based,^[4] it is expected that innovation plays a central part at both the firm and the national level, as will be explored in subsequent chapters.

3 Innovation and Economic Change

Edquist (1997) reports that innovations are the most important sources of ‘productivity growth and increased material welfare’. In terms of economic change, Edquist observes that they are at once responsible for the destruction of old jobs, as well as for the creation of new employment. Economists, argued Freeman in 1982, cannot afford to ignore innovation as an essential ingredient of economic success. As such, it can have a direct effect on the wealth of nations in the form of increased quality of life. Indeed, Smith (1991) introduced the concept in his Wealth of Nations by recognising the importance of technological innovation. Innovation, then, is seen by Freeman as ‘critical … to accelerate or sustain the rate of economic growth’.

Traditional trade theories often explain trade along classical or neo-classical lines, ignoring exogenous factors such as transportation or technology, arguing that their influence is not significant enough to warrant inclusion into the theories. ‘Newer’ theories, notably Posner’s ‘Technology Imitation Lag’ in 1961 and Vernon’s ‘Product Life Cycle’ in 1966, take innovation as a major contributing factor into account, recognising that competitive and comparative advantage, and as such economic change both at micro- and macro-level level, are strongly influenced by technology and innovation (McDonald and Burton 2002).

Ahmed (1998) explicitly regards innovation as the ‘engine of change’ in today’s fiercely competitive environment. He argues that it would be dangerous for companies to ignore the possibility of change through innovation. While acknowledging that innovation is invariably linked to a certain degree of risk, innovation and the change it brings are seen to create opportunities that have the potential to far outweigh the mentioned risk. In short, Ahmed views innovation as the ‘key driver of the organisation’s ability to change’.

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^[1] Taking the problem of measuring innovation into account, Daft and Becker (1978) refer to the number of innovations implemented within a specific timeframe; Miller and Friesen (1978) look at the amount of new product and service introductions; Miller (1987) later also considers the amount spend on R&D; and Blau and McKinley (1979) investigate the number of patents registered.

^[2] Porter refers to these places as clusters.

^[3] Dominant design is commonly referred to as the adapted design after innovation takes place. Chapter 3 of this paper will investigate this aspect in more detail.

^[4] Note that Drucker refers mainly to the United States in his work.