Innovation and the smart economy

David Jacobson09/09/2009

David Jacobson: Innovation is universally accepted as extremely important for economic competitiveness. However, there is frequently confusion as to what is meant by innovation. The word ‘innovation’ appears 114 times in the recent policy document on the Smart Economy (Building Ireland’s Smart Economy: A Framework for Sustainable Economic Renewal, December 2008); that’s an average of more than once for every page. Yet nowhere in the document is there a clear definition.

Focusing only on the Smart Economy document, there are a number of different meanings that could be attributed to ‘innovation’.

• It seems to be used as a synonym for ‘ideas’: “The Smart Economy combines the successful elements of the enterprise economy and the innovation or ‘ideas’ economy…”
• Innovation is also associated with research and commercialisation. The three together make up the ‘ecosystem’ of the Smart Economy. A ‘key objective… is to make Ireland an innovation and commercialisation hub of Europe’, that is, an attractive base for R&D intensive multinationals and for the incubation of Irish and other entrepreneurs. This it is hoped will generate economic development and quality, well-paid jobs. But what are the differences between research, innovation and commercialisation and how will the various policy instruments achieve these different results?
• Among the instruments is the ‘Innovation Fund – Ireland’. Its function is “to support early stage R&D-intensive SMEs”. This suggests that innovation is what is done by start-up businesses based on R&D.
• Another proposed instrument is the ‘Manufacturing Forum’. This will support an increasing focus in manufacturing on competitive advantage “through innovation, R&D and design”. So, in addition to undertaking R&D and design, our manufacturing firms must be innovative, whatever that is.

Elsewhere in the Smart Economy document, Ireland is said to be above average in innovative processes and products but behind in the “transformation of innovation into commercialisation”; the USA is said to be ahead in “innovation in terms of technology and services”; and Irish higher education is exhorted to produce more graduates “in key areas of Science, Engineering and Technology, while also nurturing an interest in innovation and setting up their own businesses”. Again, it is not clear what is meant by innovation.

Defining Innovation

Over the last 20 years or so, policy-focused economists in the Schumpeterian tradition have come to agree on a broad definition of innovation: an innovation is a new product, process or way of organising that is new to a place, or even to a particular firm, even though it may not be new to the world. Innovative firms are those that are good at creating, introducing or implementing such new products, processes or ways of organising. On the basis of this definition, how does innovation differ from R&D? R&D is generally a formal process, measured by the amount of money that goes into the department or unit that is undertaking either the attempt to find a new product or way of making a product (research) or, if one of those has already been found, fine-tuning it for use or for market (development). R&D is an input, innovation is an output. But, and this is frequently not understood by Science, Technology and Innovation (STI) policy makers, the output of R&D is not necessarily innovation; even more importantly, innovation can – and frequently does – come out of various activities other than R&D.

What activities other than R&D can create innovation? At the simplest level a worker in a factory might see a better way of doing whatever she does. An office employee might process documents more efficiently by noticing distinct groupings. If this better way is introduced it is an innovation. He is innovative; his company, if it can quickly and smoothly implement the change, is innovative. This also applies to changes in the way a service company operates. And innovative people, firms, regions and countries can also express their innovativeness in these ways. A firm, region or country can as a result be highly innovative without having high levels of R&D. This does not mean that we should ignore R&D. High levels of R&D can be associated – as in Sweden and Israel – with innovativeness. But some successful regions, like Emilia Romagna in Italy, are highly innovative with low levels of R&D.

What about commercialisation? This focuses on the process of bringing innovations to the market. It applies most directly to new products. Successful commercialisation is where, for example, a new product – or some new variation on an existing product – can be protected by a patent, then brought into production and marketed in such a way as to meet its target sales. But many product variations, processes of production and ways of organising are not amenable to patent or other protection. Let us take such innovations as Just-In-Time – very important since the early 1990s. Groups of firms capable of introducing JIT and deriving all the benefits of reduced inventory, significantly improved their competitiveness. They could not commercialise this innovation because it is generally available, unprotectable knowledge. In relation to such innovations, success for an economy comes from the absence of such protection, from the rapid diffusion of the new way of organising.

Another concept used in Smart Economy in association with innovation is entrepreneurship. There is nothing wrong with entrepreneurship, and we could do with a lot more of it in Ireland. But again, it is not the same as innovation. Many innovative activities can clearly take place in existing businesses and don’t need new start-ups in order to be implemented.

In response to the kind of thinking inherent in the Smart Economy, substantial funding has been allocated to universities and institutes of technology under the PRTLI (Programme for Research in Third Level Institutes). The McCarthy report is quite dismissive of this programme, questioning its results. It may have improved academics’ publications and universities’ ranking but, McCarthy asks, what about innovation and commercialisation.

This article shows that confusing misconceptions of innovation seem to pervade the government’s STI policy. Clarity will hopefully result in the development of new policy instruments better focused on achieving real innovation. It may also help to address the criticisms in the McCarthy report. Rather than adopting the short-termist strategy of removing funding for innovation, government should allocate the funding more appropriately to real innovation.

Posted in: Fiscal policyEconomics

Tagged with: smart economyinnovation

Professor David Jacobson     @davidjacobson48

David Jacobson

David Jacobson is Emeritus Professor of Economics at Dublin City University Business School. He is the Chair of Commission on Industrial Policy in TASC since 2011. He has written and lectured on various aspects of industrial policy and political economy in Ireland. In the 1990s he was an independent member of the National Economic and Social Council. He has also worked in many other countries, most recently Cyprus and China.


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