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Economics of Innovation
Innovation is the introduction of new products and processes
Innovation is generally considered to be an important source of economic
growth (the rate of change in GDP) and of labor productivity
improvements (increases in GDP per capita)
Improvements in productivity are generally considered the main source of
welfare improvements over time; real output per person rises
As a result, public policies that affect innovation receive a lot of attention
from economists
Business strategists also emphasize the importance of innovation
Key Factors Affecting Innovation
The amount of innovation in an industry depends on three key factors
1.
Technological opportunities: it must be technically possible to
improve the products or processes
2.
Demand: there must be a market for the new product (product
innovations) or a desire for lower prices (process innovations)
3.
Appropriability Conditions: Innovation improves social welfare. The
more of this social return the innovator can appropriate, the higher
the investment in innovation
Public Policy
Public Policy can affect all of the three conditions
1. Governments support basic research that in the long run improves
technological opportunities
Firms often do not have the incentive to undertake basic research because
it is not appropriable
Universities, government labs, think tanks, and other non-profits can
pursue basic research
Sometimes, firms in an industry join together to form an independent
agency to conduct basic research (Sematech, for example)
Government Demand
2. Governments can create demand for new products and processes
In 1992 the federal government paid for 43% of the $151 billion spent on
R&D in the United States. Private industry paid for 54%
Evidence suggests that federal R&D does not crowd out private R&D, and
some government sponsored innovations have broad social benefits
Consider military R&D or the space program. In 1987, the U.S.
government spent 68.8% of its R&D on defense
The Internet was originally a Department of Defense project designed to
ensure communications during times of war
NASA keeps a database of all of the “spillovers” of NASA innovations
into society
Appropriability Conditions
3. Governments improve appropriability conditions by implementing legal
intellectual property protection
Intellectual property protection is designed to create property rights on
ideas and knowledge
A patent grants a monopoly on using or selling a new product or process
for a 20 year period after the date of filing the application
A copyright applies to works of authorship, such as books and musical
compositions
Trademarks are words, symbols, or other marks used to distinguish a good
or service provided by one firm from those provided by other firms
Appropriability
Most innovation policy analysis focuses on appropriability conditions
Appropriability is critical because if none of the social returns of the
innovation are appropriable the innovator has no incentive to innovate
Innovations have public goods properties: if A shares his idea with B, A
may not be able to prevent B from using it without legal protection
Government sponsored intellectual property rights may not be necessary
in all cases: secrecy and imitation lags may all the innovator to
appropriate a substantial amount of the social returns of the innovation