Samenvatting
Summary Economics of Innovation (0SV30)
Summary of all relevant topics, lecture slides, and course materials for the course 0SV30 for the academic year 2020/2021.
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Samenvatting 0SV30Inhoud
Chapter 1 – The Nature of Innovation .................................................................................................. 2
Deployment Led Innovation – Frans Nauta........................................................................................... 5
Lectures Week 1 ................................................................................................................................... 5
Chapter 2 – The Nature and Role of IP .................................................................................................. 7
Chapter 6 – IPRs and Firms ................................................................................................................... 8
Lectures Week 2 ................................................................................................................................. 10
Chapter 5 – Innovative Firms and Markets ......................................................................................... 11
Battered Utilities Take On Start-ups In Innovation Race ..................................................................... 13
How Competitive Forces Shape Strategy ............................................................................................ 14
Lectures Week 3 ................................................................................................................................. 16
Chapter 3 – The Measurement of Innovation, Productivity and Growth, Lectures Week 4 ............... 17
Chapter 4 – The National Innovation System, Lectures Week 5 ......................................................... 19
The Economic Benefits of Publicly Funded Basic Research ................................................................. 23
Chapter 10 – Technology, Wages, and Jobs ........................................................................................ 23
Lectures Week 6 ................................................................................................................................. 24
Chapter 7 – Diffusion and Social Returns ............................................................................................ 25
Elements of Diffusion.......................................................................................................................... 26
Lectures Week 7 ................................................................................................................................. 28
,Chapter 1 – The Nature of Innovation
WHAT IS INNOVATION?
Innovation can be defined as the application of new ideas to the products, processes, or other aspects
of the activities of a firm that lead to increased “value.” This “value” is defined in a broad way to
include higher value added for the firm and also benefits to consumers or other firms. Two important
definitions are:
• Product innovation: the introduction of a new product, or a significant qualitative change in
an existing product. Tangible, Intangible or a combination of the two
• Process innovation: the introduction of a new process for making or delivering goods and
services. A combination of tangible and intangible inputs
Some authors have emphasized a third category of innovation, that of organizational change within
the firm, but we see this as being naturally included within the second category, as a type of process
innovation. Inherent in the above definitions of innovation is an element of novelty. The question then
arises as to how much novelty is enough to identify any change as “innovation.” A key issue here is to
distinguish innovation, the bringing to market of a truly novel item, from imitation, the adoption of a
new technique or design that is already in the market. A product or process can be new to the firm,
new to the domestic market, or new to the world market. Clearly, the last of these, global novelty, is
sufficient to qualify the product or process as an innovation. Thus we can see that innovation occurs
at the kernel of a complex process, preceded by inventions and succeeded by the widespread adoption
of the new genre of products by customers, or the adoption of best-practice processes in the majority
of firms. We call this final stage diffusion, and it is clear that the benefits of innovation to the economy
and its citizens are not fully realized until this has taken place.
Defining Knowledge and Technology
Knowledge is the whole body of scientific evidence and human expertise that is, or could be, useful in
the production and supply of commodities and in the invention and design of new products and
processes. (codified or tacit)
Human Capital: when knowledge is embodied in individuals
Technology encompasses the current set of production techniques used to design, make, package,
and deliver goods and services in the economy.
The Stages of the Innovation Process
Research and Development (R&D): The first stages (1–3)
of the innovation process produce basic scientific
knowledge, plans for new processes or blueprints, and
initial prototypes of new products or processes. This is
when we may talk of “inventions being made” and the
hard work, or genius, of inventors.
Commercialization: It is only when stage 4 is reached, at
the point where there is a marketable product or new
process, that innovation is achieved. This phase triggers
the start of another chain of events → Diffusion
Diffusion: covers the widespread adoption of the new product or process by the market. There is
feedback between the various stages of innovation.
Incremental innovation can be contrasted with drastic innovation. The first makes a small change to
an existing process or product. Drastic or radical innovation introduces a completely new type of
production process with a wide range of applications and gives rise to a whole new genre of innovative
products. Specialization and contracting-out of employees can occur in any part of the innovation
process, so as long as suitable contracts can be written and enforced.
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, THE MICROECONOMIC EFFECTS OF INNOVATION
Product and process innovation are not always independent: often it is the introduction of a new
process that permits the design and development of a range of new products, while the introduction
of a new intermediate product permits a purchasing firm to change its production process. Their
impact will, in turn, depend on the “market structure” in which the firm operates. Market structure
refers to the nature of competition between the firms in the market. The two polar cases are “perfect
competition,” where there are a larger number of firms, and monopoly, where one firm dominates
the market.
The Effects of Process Innovation
The process innovation is assumed to reduce the average or marginal cost of production. If the market
is perfectly competitive, all knowledge about production is assumed to be known by all firms (NO
IPRs). Hence, as soon as the process innovation occurs we assume that all firms immediately start to
use it. In such a case there is no financial incentive to undertake R&D targeted toward creating the
process innovation. Process innovations could occur if they originated by chance or were made by
those unmotivated by financial incentives. Consider now a world where IPRs exist and where any
process innovation could receive perfect protection. If one firm in the industry developed the process
innovation discussed above, and secured a patent on it, it would be possible for that firm to undercut
the price charged by any other firm. Introducing patents certainly increases the financial incentive to
innovate.
Perfect competition is unlikely to occur in many industries so economists are interested in studying
the other extreme form of market structure: monopoly. This finding assumes that monopolists will
always seek to maximize profits by cutting costs and making innovations, an assumption that many
economists think is too strong.
The Effects on Product Innovation
If we assume that the firm has an IPR that prevents imitators, the firm acts like a monopolist and
maximizes profits. By introducing a new product the firm aims to achieve an outward shift and steeper
slope to the demand for its product. Note that even though consumers are charged a higher price,
they buy more and have more consumer surplus.
Can Product and Process Innovations Be Distinguished?
Conceptually yes, but in practical measurement terms it is often difficult to make this distinction. The
basic reason is that in many cases of innovation, one firm’s finished product can become part of
another firm’s production process. Innovation measurement at the level of the firm suggests that
product innovations are in the majority while in the context of the economy they result in a large
amount of process innovation.
INTERACTION BETWEEN PRODUCERS AND USERS OF INNOVATION
Firms can be involved in some or all of the distinct stages but the sequence of activities appears to
flow strongly from left to right: from basic R&D to subsequent commercial application in one
innovating firm, and later spreading out via the diffusion process to many firms and customers. Once
these innovation supply relationships are established, there can be many instances where users of
innovations feedback information about the product’s performance, making suggestions for
improvements and in this way helping to create the next generation of products they will buy. Six
distinct groups of industries in terms of their technology acquisition and use:
• Those that are supplier dominated; importing new elements of process technology but
making little contribution via in-house R&D
• Scale intensive producers; who contribute quite a lot of their own innovations and work these
into profit through the operation of large-scale continuous production processes
• Specialized suppliers; whose main focus is the generation of product innovations in
intermediate goods or capital equipment for use in other sectors
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