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Innovation, Intellectual Property,
and Economic Growth
Lecture outline:
• Overview of course
• Introduction to innovation
• Definitions
• Nature of innovation
• Microeconomics
• Questions
• Readings
Overview of course
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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
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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 definition
Introduction 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 business
Some 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
AGENTS
EXTERNALOR FIRM-LEVEL
INITIATIVES
ACTIVITIES
Basic research
OUTPUTS
Discoveries
Ideas
MARKET-LEVEL
PROCESS
FIRM-LEVEL INITIATIVES
Applied research
Information collation
Inventions
Blueprints
Plans
Development
Testing
Prototypes
Beta-versions
Investment
Innovation
(product or process)
Adoption or
purchase decision
Market penetration
Adaptation
Improvement
STAGE
RESEARCH AND DEVELOPMENT
1
2
Figure 1.1 Greenhalgh and Rogers (2010)
32
COMMERCIALISATION
DIFFUSION
4
5
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 Technology
Scientists
• 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 innovations
Product innovations
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product used by consumers
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Microwaves, computers, mobile phones, etc
Products use by firms
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Shipping containers, computers, robots, etc
Process innovations
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Used by consumers
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Fast food, air travel
Used by firms
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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
Price (p)
Initial consumer
surplus
MC1=AC1
P1
P2
MC2=AC2
demand curve
Q1
Q2
quantity (Q)
Figure 1.3 Process innovation for a monopoly
Price (p)
P3
P4
MC1=AC1
MC2=AC2
demand curve
Q3 Q4
quantity (Q)
marginal revenue (MR)
Figure 1.4 New product demand curve
Price (p)
P1 a
b
c
d
e
MC1=AC1
new demand curve
Q1
Q*
quantity (Q)
marginal revenue (MR)
Figure 1.5 A product innovation represented by
a shift in existing demand curve
Price (p)
pnew
Dnew
pold
Dold
qold qnew
MC=AC
Quantity (q)
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
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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 discussion
1.
2.
3.
4.
5.
6.
How would you distinguish between an invention and an
innovation?
What are the key characteristics of a public good? Is all
new knowledge a public good?
What is a positive externality? How does this differ from
a public good?
How does innovation create positive externalities? Why
are they a problem?
What are the key market failures surrounding investment
in innovation?
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