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HPI4001 Economics of healthcare case 2
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Economics of healthcare (HPI 4001)Tutorial group 2 13-09-2019
Case 2: The economics of innovations
Articles and books
‘Successful exploitation of new ideas’ (Swann, 2009)
Exploitation: in terms of value, profit or sold on the market.
Innovation economics is about how innovation determines economic growth. Whether innovation
leads to economic growth and social welfare. Innovation is a major factor in the healthcare services +
might allocate the resources better.
Innovation: when it is first put to commercial use. New ideas and commercial exploitation:
commercial application of invention.
Invention: new ideas, whether by research or other forms of creativity. Culmination of research
activity.
A discovery or invention drawing from basic and applied research becomes an innovation if it is
implemented in the market or used within the production process, and is adopted by other parties
beyond the discoverers.
Swann (2009)
Chapter 2 – Innovation in the history of economic thoughts
Innovation and wealth creation (Classical theory)
The earliest perspectives, those of Adam Smith and John Rae, saw innovation as something that lies at
the heart of wealth creation.
o Adam Smith: division of labour → specialization. When everybody has more knowledge, we can
innovate more.
Example: surgical robots, computers enrol patients.
o Marx: labour vs. capital. Computers make it possible to shift from hand to machinery. When
labour is more expensive → innovate more in capital and vice versa.
Institution: process innovation
Patient: product innovation
Innovation and competitiveness (Schumpeterian theory)
In innovation, the innovator’s primary aim is to win a competitive battle.
o Schumpeter: competitiveness exists when there is more innovation. But in healthcare there is no
free market.
Example: AVL are monopolist in their field, so they don’t have a lot of competitiveness.
Innovation and sustainability (Arrovian theory)
The question of whether innovations helps to achieve sustainability or, on the contrary, is partly
responsible for the unsustainable trajectory on which economic development has embarked.
o Arrow: knowledge is an input for creation innovation
Example: nurses have to take a course about a new way of working (that is the knowledge they
gain) and that is part of the innovation. Learning is the driver of innovation!
Non excludability/non-rivalry: everybody can access the knowledge (knowledge is quasi-
public)
Innovation, unexpected side effects and paradoxical non-effects (Evolutionary economic
approach)
Innovation sometimes has unexpected (and possibly undesirable) side effects. Innovations sometimes
has no effects when we would expect that it would have an effect
, o Nelson & Winter: learning from the past, people are motivated to change something when
something goes wrong in their field. They focus on routines.
Example: before the computers, two nurses were not even enough, so they looked at a better
way. The ‘semmelweis theory’ (washing hands).
Through which channels does innovation work (NIE)
The firm is not the only innovator in the economy. Innovative activity is much more widespread, and
by no means in the monopoly of the innovative producer. Many of the effects on innovation pass
through what may seem to be unexpected channels
o Doward, Mordoh, Ferrandiz and Sussex: the real world is not always rational. Interactions
between institutions (government and hospitals). An informal rule becomes a formal rule.
What laws are hurdles for innovations?: patterns, safety, law, ethical
Example: doctor don’t have dirty hands (Says a doctor), it was routine → it became a formal rule
to wash hands.
Chapter 3 – Basic concepts in innovation
Linear model
It means that research and creativity lead to
innovation and wealth creation in a ‘straight
line’/a one-way process. It is a huge
simplification.
Linear model of innovation:
o Research and creativity: this process or activity results in an invention. Creativity is:
Autonomy: the creative mind neither knows nor cares what critics may say.
Combinatorial theory of creativity: asserts that exceptional creativity calls for an ability
to bring together incompatible ideas and combine them in a way that gives new insights.
o Invention: ideas, sketches or models for a new product of process.
o Design and development: design is a vision, design is a process, design is a result. Design
adds the extra dimension to any product. Development is the channel for creativity in the
innovation process. Development takes the knowledge of the research.
o Innovation: the new idea is used in the market, so it is the commercial application of the
invention.
Research & Development
o Basic research: produces new scientific knowledge, hypotheses and theories and these are
expressed in research papers.
o Development: takes this stock of knowledge and patentable inventions as its raw materials
and develops blueprints, specifications and samples for new and improved products and
processes.
All technological changes are innovations, but not all innovations involve technological change.
Product & Process innovation
1. Product innovation: the development and market introduction of a new, redesigned or
substantially improved product without any change in the production process.
Characteristics approach
i. Product innovations that affect only one characteristic
ii. Product innovations that affect several characteristics
iii. Product innovations that introduce just one new characteristic
iv. Product innovations that introduce so many new characteristics that we may wish to call
the innovation a completely new product
Product proliferation
Special type of innovation: we fill up a product space (or characteristics space) with lots of
slightly different versions of the same product. Two reasons:
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