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Summary lectures economics of innovations
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Summary lectures Economics of InnovationWeek 1: introduction and basics
Part 1: Introduction of the course
Content of the course
The course is about innovation. We have four pillars we will discuss during this course regarding
innovation:
- Basics: basic characteristics of innovation, which theories there are
- Actors: firms and entrepreneurs, consultants, academic researchers etc.
- Strategic decisions: are you going to collaborate, export the product, hire people with
specific knowledge etc.
- Context: de industry, market structure (how many competitors are there?), public policy etc.
Exam count for 70% of the grade and there is an assignment that counts for 30%. Regarding the
exam, the lecture slides are the main thing you should study. In addition, you need to read the
articles that are provided on Canvas. It is advised to read the articles after you have watched the
lectures, so you have a better idea of what is important from the article. At the end of the course,
sample exam questions will be published. You have to know the following form the articles:
- The main questions asked and the relations investigated and rationale logic
- What measures for innovation are used
- Interpret main findings in result tables focus on + and – and significance
- Able to assess how these findings can be explained (findings that deviate form the author’s
expectations)
The assignment consists of two parts, first you need to select a country and then a company that
originates from that company. It has to be a company that is innovative. You need to analysis the
innovation of that company. The deadline for the report in on the 20 th of October.
Part 2: Concepts, characteristics and measures
The example of Dyson
We take Dyson as example here. Dyson is a company that introduced a new type op vacuum cleaner.
Besides vacuum cleaners, they expanded their business to for example fans and hand dryers. Dyson
came up with his idea with being unhappy about the current vacuum cleaners he had. The had a bag
within which collected the dust, however according to Dyson the vacuum cleaner did not collect the
dust very well. Once (1978), he came up with the idea to use that technology of a sawmill for vacuum
cleaners. Sawmills had a special technology to collect dust, Dyson thought that if he would apply this
technology to vacuum cleaners, they would collect much better the dust. He made 5000 prototypes
before he had a vacuum cleaner that he could commercialize.
He first strategy was to license his technology to existing vacuum cleaner producers. But they were
not enthusiastic about his idea. So in 1993 he started his own company and produced the vacuum
cleaners himself. Within the first year the Dyson vacuum cleaners became the best sold product in
the UK. The other vacuum cleaner producers started to imitate the technology Dyson used and
copied his success. Regarding his strategy in innovation, he started to apply his technology on other
products within the same field such as hairdryers. Moreover, he started to invest in new areas such
as robotics and A.I.
,Innovative concepts
Invention refers to the first generation of a new idea. This is not the same as innovation. When you
multiple invention with commercialisation, you get innovation. So until an invention is brought to the
market, we cannot speak of innovation.
Invention Commercialisation Innovation
There is often a lot of time between the invention and the innovation. This, because it take a lot of
time to turn the invention into innovation, there a multiple steps and knowledge needed. You need
knowledge of the market, you need a distribution centre etc. this is also the reason why a lot of
inventions do not turn into innovations.
When an innovation is successful, imitators often follow fast. Imitation has often a negative image,
but it has not to be negative at all for innovation. This because of two reasons:
- Imitation may help to spread or to diffuse an innovation, it may provide legitimacy for a new
product or service
- Imitators often become innovators themselves, so they contribute by improving the original
innovation which leads to better products for customers.
The most famous types of innovation are product innovation and process innovation. Product
innovation refers to what is being made and process innovation refers to how it is being made. Most
often firms are involved in both types of innovation. This is this case because often when you make a
change to a product, this requires changes in the production process. There is also business model
innovation, this refers to developing the way you do business. You create and deliver value to the
consumers is a new way, a good example of a company who did this is Coolblue. Coolblue was
started by 3 students of the EUR, when they started this webshop it was nothing new, competitors
already existed. Their slogan is, ‘everything for a smile’. They help consumers in a different way then
their competitors. One way they do this is by providing very extensive product information. On the
other had they also focused on faster and better delivery of the products to consumers. They won
many awards for this innovation.
There is a difference between radical and incremental innovation. Radical innovation is about
creating a completely new product or service, or by fundamentally changing the existing product or
service. An example of radical innovation is the Dyson vacuum cleaner, since this cleaner had a total
different new type of technology. Incremental innovation is about a steady steam of improvements
to a product or process. An example of incremental innovation is for example Iphones.
Innovation characteristics
The first feature of innovation is that innovation is often clustered in certain time periods, areas or
industries. This because when an innovation is successful, it often triggers new innovations.
Moreover, certain areas specialize in certain innovation projects. The second characteristic of
innovation is path dependent. This means that there is often a tendency to keep using old practises,
even if better alternatives are available. So path dependence means that previous choices that were
made or events that did happen can have enormous consequences for the development of the
economy of a market. The options a firm have are often determined by choices made in the past.
,Another feature of innovation is that most of the time new combinations are being made that did not
exist before. If we look at our example of Dyson, there an existing technology of sawmill was
combined with a vacuum cleaner, leading to innovation. Next, innovation is uncertain. It is uncertain
whether the investments will lead to a successful outcome in the end. Another uncertainty is about
how the market will respond, will customers like it and will other companies follow? The last
uncertainty is about the possible future uses. If you have one successful product, is does not mean
that the next product will be a success as well. The final characteristic is that it meets inertia. People
do not like change, people often resist to do things another way.
Summary of the characteristics of innovation:
- Innovation is most often clustered in certain time periods, areas or industries.
- Innovation is path dependent.
- Innovation is most often a new combination of things that already exist.
- Innovation is uncertain.
- Innovation meets inertia.
Innovation measures
There are three groups of measures for innovation:
- Input (innovation effort)
Reflects the effort that is put into an innovation by the firm or country (depending on
your analysis). The must used measure is the amount that is invested in R&D.
furthermore, you could also look at the number of employees that have the knowledge
about the invention.
- Intermediate output
Are close to the output, but it does not necessarily has to lead to actual innovations.
Examples of this measures are the number of patents the firm has or the times the
patent has be cited by other firms.
When the firm ask for a patent, this patent is most often based on other existing patents.
This intermediate output rather reflects the input of new ideas (inventions) then real
innovation.
- Output (actual innovations)
Really reflects the introduction of the product or service into the market.
Most often surveys are used to ask whether a firm has introduced new things to the
market.
Output measures are preferred because the refer to the real output of the innovation. However, a
disadvantage is that it is difficult to measure adequately (often self-assessed or observed information
is used). Input measures and intermediate output measures have the advantage that the information
is widely available, that is why in practice these measures are used more often. But, it’s disadvantage
is that is does not always result in actual innovations.
These innovation measures can relate to the different type of innovation strategies firms may
pursue:
- Focus on investments in R&D (input): not all innovations start with R&D
- Focus on patenting (intermediate output): some firms may prefer secrecy , when you file for
a patent your idea will become publicly available.
- Focus on introducing completely new products in the market or improving existing products
(output)
, Part 3: Models and perspectives
Models for describing innovation
In the earliest models where innovation played a role, are the so called black box models. These
models were developed in 1950’s. Economist where before 1950 not that interest in innovation, until
a economist saw that innovation is one of the primary drivers for economic growth. You have
technological change as input leads to a black box which leads to economic growth as output.
We call the in between the black box, because in the model it is unexplained how exactly
technological change exactly leads to economic growth. It is not addressed how innovation takes
place. Economist used to see innovation as something that was exogenous, so something that is
determined by the external environment. That is why they did no emphasize how innovation
occurred.
Overtime academic people became more interested in how innovation takes place. Linear models
were developed that focused on how the process of innovation takes place. It’s called linear models,
because innovation was seen as a one-way process. This process consisted of the following stages:
Research (science) development production marketing sales
There is some critique on these linear models:
- Innovation does not always start from science, it may also start for a market need (demand
pool)
- Stages may be skipped
- Innovation does not have to be a one-way process, there may be interaction or feedback
between the different stages
After linear models, interactive models were developed to allow for more complexity. Overtime in de
1990 more complex models emerged, like the system models. These models are still leading today
for describing innovation. The system model looks at innovation as a complex process, involving:
- Emphasize on the different actors that can be described, such as differ types of firms,
universities, bank, venture capitalist etc. Furthermore, their activities and interaction can be
described as well
- Context: institutions, culture, infrastructure, political system etc
The system in the system model may refer to for example a country, region or industry. These
models are useful to detect bottlenecks to innovation within a system. Such bottlenecks are for
example certain actors missing, or is something wrong with the interaction? Do cultural values hinder
innovation?
Invention perspectives
There are two leading perspectives on invention. This perspectives are part of a long standing debate
whether for a invention to be successful, it is better to work independently/autonomous or to work
together with others, so you combine different ideas from different people.
The first theory is the autonomous theory, which votes for working independent. When working
alone, you are not concerned about the approval of others, you can freely pursue your ideas.
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