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Innovation economics is a growing field ofeconomic theory andapplied/experimental economics that emphasizesinnovation andentrepreneurship. It comprises both the application of any type of innovations, especially technological but not only, into economic use. Inclassical economics, this is the application of customer new technology into economic use; it could also refer to the field of innovation and experimental economics that refers the new economic science developments that may be considered innovative. In his 1942 bookCapitalism, Socialism and Democracy, economistJoseph Schumpeter introduced the notion of an innovation economy. He argued that evolving institutions, entrepreneurs, and technological changes were at the heart of economic growth; however, it is only in the early 21st century that "innovation economy", grounded in Schumpeter's ideas, became a mainstream concept.[1]
Joseph Schumpeter was one of the first and most important scholars who extensively tackled the question of innovation ineconomics.[2] In contrast to his contemporaryJohn Maynard Keynes, Schumpeter contended that evolvinginstitutions,entrepreneurs andtechnological change were at the heart ofeconomic growth, not independent forces that are largely unaffected by policy. He argued that "capitalism can only be understood as an evolutionary process of continuous innovation and 'creative destruction.'"[3][4]
It is only in the 21st century that a theory and narrative of economic growth focused on innovation that was grounded in Schumpeter's ideas has emerged. Innovation economics attempted to answer the fundamental problem in the puzzle oftotal factor productivity growth. Continual growth ofoutput could no longer be explained only in increase ofinputs used in the production process as understood inindustrialization. Hence, innovation economics focused on a theory of economic creativity that would impact thetheory of the firm and organization decision-making. Hovering betweenheterodox economics that emphasized the fragility of conventional assumptions andorthodox economics that ignored the fragility of such assumptions, innovation economics aims for joint didactics between the two. As such, it enlarges the Schumpeterian analyses of new technological system by incorporating new ideas of information and communication technology in theglobal economy.[5]
Innovation economics emerges from other schools of thought in economics, includingnew institutional economics,new growth theory,endogenous growth theory,evolutionary economics andneo-Schumpeterian economics. It provides an economic framework that explains and helps support growth in today'sknowledge economy. Leading theorists of innovation economics include both formal economists as well as management theorists, technology policy experts and others. These includePaul Romer,Elhanan Helpman,Bronwyn Hall,W. Brian Arthur,Robert Axtell,Richard R. Nelson,Richard Lipsey,Michael Porter,Keun Lee, andChristopher Freeman.
Innovation economists believe that what primarily drives economic growth in today'sknowledge-based economy is notcapital accumulation asneoclassical economics asserts, but innovative capacity spurred by appropriable knowledge and technological externalities. Economic growth in innovation economics is the end-product of:[5][6]
In 1970, economistMilton Friedman said inThe New York Times that a business's sole purpose is to generate profits for their shareholders, and companies that pursued other missions would be less competitive, resulting in fewer benefits to owners, employees, and society;[7] however, 21st-century data shows that while profits matter, good firms supply far more, particularly in bringing innovation to the market. This fosterseconomic growth,employment gains, and other society-wide benefits.Business school professorDavid Ahlstrom asserts that "the main goal of business is to develop new and innovative goods and services that generate economic growth while delivering benefits to society."[8]
| Economic thought | Focus | Growth | Context |
|---|---|---|---|
| Neoclassical | Market price signals in using scarce resources | Productive factor accumulation (capital, labor) | Individuals and firms behaving in vacuum |
| Innovation | Innovative capacity and free enterprise to create more effective processes, products, business models | Knowledge/technology (R&D, patents) | Institutions of research, government, society |
In contrast to neoclassical economics, innovation economics offer differing perspectives on main focus, reasons for economic growth and the assumptions of context between economic actors. Despite the differences in economic thought, both perspectives are based on the same core premise, namely the foundation of alleconomic growth is theoptimization of theutilization of factors and the measure of success is how well thefactor utilization is optimized. Whatever the factors, it nonetheless leads to the same situation of specialendowments, varying relativeprices andproduction processes. Thus, while the two differ intheoretical concepts, innovation economics can find fertile ground inmainstream economics, rather than remain in diametric contention.[5]
Empirical evidence worldwide points to a positive link between technological innovation and economic performance. For instance:
Concisely, evidence shows that innovation contributes to steadyeconomic growth and rise inper capita income;[8] however, some empirical studies investigating the innovation-performance-link lead to rather mixed results and indicate that the relationship is more subtle and complex than commonly assumed.[13] In particular, the relationship between innovativeness and performance seems to differ in intensity and significance across empirical contexts, environmental circumstances and conceptual dimensions. This has taken place in an era of data constraint as identified byZvi Griliches in the 1990s.[14] Because the primary domain of innovation is commerce, the key data resides there, continually out of campus reach in reports hidden within factories, corporate offices and technical centers. This recusal still stymies progress today. Recent attempts at data transference have led not least to the positive link being upgraded to exact algebra betweenR&D productivity andGDP, allowing prediction from one to the other. This is pending further disclosure from commercial sources, but several pertinent documents are already available.[15]
While innovation is important, it is not a happenstance occurrence as anatural harbor ornatural resources are but a deliberate and concerted effort ofmarkets,institutions,policymakers, and effective use ofgeographic space. In globaleconomic restructuring, location has become a key element in establishingcompetitive advantage as regions focus on their unique assets to spur innovation (i.e.information technology inSilicon Valley, ordigital media inSeoul). Even more, thrivingmetropolitan economies that carry multiple clusters (i.e.Tokyo,Chicago, andLondon) essentially fuel national economies through their pools ofhuman capital,innovation,quality places, andinfrastructure.[16]Cities become "innovative spaces" and "cradles of creativity" as drivers of innovation. They become essential to the system of innovation through thesupply side as ready, available, abundantcapital andlabor, goodinfrastructure for productive activities, and diversified production structures that spawnsynergies and hence innovation. In addition, they grow due to thedemand side as diverse population of varying occupations, ideas and skills, high and differentiated level ofconsumer demand, and constant recreation of urban order especially infrastructure ofstreets,water systems,energy, andtransportation.[6]
