Case 2: The economics of innovations
After their breakfast, Susan, Mike and George have their first conference day ahead. They will attend
a general introduction and two presentations today.
Susan looks at the program. She sees that this day will start with a general introduction on the
economics of innovation. She is looking forward to this introduction, as she has no idea of what an
innovation is. Is it a new medication? Is it a new way of organizing health care? Are inventions also
innovations or not? She hopes to find the answers to these and related questions so that the
definition and description of innovation becomes clearer to her.
Mike is more interested in the second presentation. This presentation is about how and why
economists look at innovation. In this presentation, an economist from France provides a brief
overview of why innovation is a major research issue in health economics. Before the start of this
presentation, Mike tries to make a list of features of innovation that seem interesting for economists.
This presentation is followed by a lecture by an Italian professor. He discusses different economic
theories on innovation. These theories provide different explanations as for why innovation occurs,
which factors stimulate innovations and what the (economic) effects of innovations are. Susan and
Mike are a bit lost when the professor is talking about classical, Schumpeterian, Arrovian,
evolutionary and new institutional economic approaches of innovation. To George, however, this
lecture is quite a treat. He tries to make a list of differences and similarities between these theories.
COVID-19 Task for Post-discussion
Please read the following news article and respond to the question:
“Foster recovery from Covid-19 through science, technology and innovation”
https://iap.unido.org/articles/foster-recovery-covid-19-through-science-technology-and-innovation
Based on the article, describe the potential role that innovation can play in stimulating economic
growth.
Innovation can play a role in stimulating the economic growth because it may lead to progresses in
the fight against COVID-19, like a vaccine, solutions to the challenges associated with the virus and
better technology.
Aims
- What is innovation, according to economists?
- Why is innovation important from an economic point of view?
- How do economists look at innovation? Which economic theories on innovations are there?
What is innovation, according to economists?
What is innovation?
According to economists, innovation: successful exploitation of new ideas
- It is not just about the generation of new ideas (invention); it is about their commercial
exploitation (exploitation)
Simple model of innovation
Innovation vs invention
- Invention: generation of new ideas through research or other forms of creativity
- Innovation: the commercial application of invention (Swann, 2009)
Types of innovation
, - Product innovation: creates a new or improved product for sale without any change in the
production process – except that more inputs (labor, machine time and materials) may be
required (e.g. new drug)
o Types
Product proliferation: the idea that we fill up a product space with lots of
slightly different versions of the same product
Innovative pricing: a new way of charging for a product or service
- Process innovation: simply changes the way in which a product is made, without changing
the product itself (except perhaps the price at which it will be sold) (e.g. buying and selling
drugs in the pharmacy of the hospital, which is a new way of distributing drugs; new way of
distributing drugs to patients)
o Types
Organizational innovation
Supply chain innovation
Marketing innovation
Innovations in the ‘business model’
- Organizational innovation: changes in the way an organization functions (e.g. getting the
pharmacy out of the hospital to outsource)
Why is innovation important from an economic point of view?
Why is innovation important from an economic point of view?
Economic point of view?
- What is economics? It is a science studying scarcity and the efficient allocation of resources
- Scarcity: tension between unlimited needs and limited possibilities to fulfill these needs
Scarcity
Scarcity choices
- How do I allocate my scarce resources?
- Choice where you have the least opportunity costs: the cost of the alternative that you did
not choose
- Efficient allocation of scarce resources
Economics as a science
- 1776: Adam Smith (Wealth of Nations)
o Macroeconomic welfare/economic growth
- 1776 – 1920: Neoclassical economic framework
o Consumer and scarcity
o Producer and scarcity
o Market and scarcity (invisible hand)
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