Innovation Economics 1 Introduction PDF

Innovation economics
Introduction
Summer term 2015
Dr. rer.pol. M. Sc. (Empirical
Economics) Inz Labucay
Course outline
What is innovation? Introduction
What are the underpinning aims of innovation and what types of
innovation do firms generate?
Why do some firms innovate while others do not? Linkages between

drivers and outcomes of innovative activities, role of human capital and
organizational structure
What is the net outcome of innovation? Impact of innovation:
economic, social, socio-economic outcomes, critical assessment of
adverse effects of innovation activities (suboptimal investment levels,
knowledge leakage , congestion etc.)
Dr. rer. pol. I. Labucay Summer term 2015
Course outline
What is new? collective innovation and geography of innovation,
innovation as a means of catching-up, service-innovation, co-innovation
What means of effective innovation governance are there?
Governance of innovation: Intellectual Property Rights, R&D and cluster
policies
Management of Innovation: How can innovation processes be managed
International research and policy perspectives
general policy implications for different governance regimes,
sustainable innovation, Social Entrepreneurship, smart specialization
Dr. rer. pol. Inz Labucay WS 2014/2015
Course outline
Course material
Slides
accompanying source material such as journal articles and practical
examples as a means of illustration and to provide rich background
information (no need to go further into that)
Application of acquired knowledge to practical cases (to be read in
advance and solved in class)
The knowledge taken away from these (case discussion) will also be part
of the test preparation
Preliminary schedule
Innovation Economics
Summer term 2015
Dr. I. Labucay
topic
Date
Content and preparation
Introduction to innovation economics
08.04.
General introduction
Types, aims, external and internal drivers

of innovation
Strategy-making and examples from
different industries
15.04.
Short assignment
22.04.
Case study
Linkages between drivers and outcomes:

industry variation
29.04.
Short assignment
Linkages between drivers and outcomes:

role of human capital and organizational
structure
06.05.
Case study
Outcomes: economic, socio-economic

effects
13.05.
Short assignment
Outcomes: (un)intended side effects
20.05.
Case study
Preliminary schedule
Innovation Economics
Summer term 2015
Dr. I. Labucay
topic
Date
Content and preparation
27.05.
03.06.
Short assignment
Case study
Discussion of new developments I:

networks, clusters, catching-up
Discussion of new developments II:
Service innovation,
co-innovation
10
11
Governance of innovation
Management of innovation
10.06,
17.06.
Short assignment
Case study
12
13
International research and policy

perspectives (Social Entrepreneurship,
Sustainable innovation, smart
specialization,)
24.06.
01.07.
Short assignment
Summary
14
Test preparation session
08.07.
15
Q&A
Test
15.07.
29.07.
What is innovation?
What practitioners and economic policy makers have to
say about innovation
The writings of Joseph Schumpeter in the first half of
the century pushed economists to appreciate the
fundamental role of techological progress in affecting
economic growth and social welfare [].
It is now common to hear that a firms, an industrys, or
even a nations capacity to progress technologically
underpins its long-run economic performance
Source: Cohen 2010, p.131 in a survey of fifty years of empirical studies of innovative activity and performance
(Picture source: Microsoft).
What is innovation?
Creative destruction is the process by which old
sources of competitive advantage are destroyed and
replaced with new ones.
In Schumpeters theory of innovation the innovative
role of the entrepreneur is to exploit the shocks or
discontinuities that destroy existing sources of
advantage.
Source: Sengupta 2014
(Picture source: Microsoft).
What is innovation?
A Dearth in Innovation for Key Drugs
JULY 22, 2014
Dr. Mikael Dolsten, who oversees worldwide research and development at Pfizer,
points out that if progress in the 15 years until 2010 or so looked sluggish, it was
just because it takes time to figure out how to turn breakthroughs like the map of
the human genome into new drugs. The pipeline today, which includes tailored
treatments for cancer, newfangled vaccines and therapies for tough diseases like
hepatitis C, is robust
With New Chief, Microsofts New Mantra Is
Innovation, Over and Over
Source: http://bits.blogs.nytimes.com/2014/02/04/the-new-microsoft-is-less-developer-and-moreinnovation/?_php=true&_type=blogs&_r=0 Innovation economics
What is innovation?
Innovation race between countries
In France, industrial
companies have
seen their margins
decrease from 30 %
to 21 % in the last
10 years The only
way out is
innovation
Louis Gallois, The

Innovation Commissioner
to the then French Prime
Minister, Jean-Marc
Ayrault (March 2013) who
was followed by Manuel
Valls (April 2014)
10
What is innovation?
Innovation race between countries
Foremost the USA and to a less[er] extent the EU still have their competitive
advantage in the field of innovation. But for how long? While the West is busy
putting out the fire of crises, they may also be putting out their innovation
strength.
At the same time, the Chinese government is rolling out innovation policies
supported by wide-open money taps and favorable social, business, and legal
conditions for innovation.
The Chinese enterprises are outgrowing their image of the factory of the world
and becoming world players in, for example, renewable energy,
telecommunication, high-speed trains, and air- and space crafts.
Source: Someren/Someren-Wang 2013, p. 1.

11
What is innovation?
First ideas and associations
An innovation is something new
e. g. new way of organization your daily schedule
e. g. writing a piece of poetry
e. g. a product new to the market
Is novelty a sufficient criterion?
New to whom?
Impact matters
Source: Mars 2013
12
What is innovation?
New to both
Innovation
New to the market
New to the firm
Already in the firm
innovation
minimum
requirement
No innovation
13
What is innovation?
Is every new practice/product/process that is new and
makes a significant impact an innovation?
e. g. breakthrough in oncology, more generally
enhancements in medical capacities
e. g. new forms of cyber crime
e. g. new strategies of accessing private user data
e. g. service innovation UberPop and UberX
Positive impact must outweigh harm done
Source: Mars 2013
14
Source: http://www.bild.de/geld/wirtschaft/taxifahrer/berlin-london-paris-mega-taxi-streik-in-europas-metropolen-36340208.bild.html
Taxi driver protest against Uber and Wundercar in Berlin

15
Source: http://www.washingtonpost.com/blogs/wonkblog/wp/2015/01/22/now-we-know-many-drivers-uber-has-and-how-much-money-theyre-making%E2%80%8B/
16
What is innovation?
Is every firm capable of innovating provided it has
access to resources and state of the art technology?
e. g. discovery of penicillin by Alexander Fleming
no innovation without individuals ingenuity and
creativity
Human capital
Source: Mars 2013
17
What is innovation?
Does it suffice to have the best human capital on
board?
e. g. discovery of penicillin by Alexander Fleming
Breakthrough made possible through funds organized
by a former fellow student (Winston Churchill)
No innovation without adequate funding
Financial capital
18
What is innovation?
Will a firm (or a network of firms) automatically
innovate when these factors are present?
e. g., human capital, financial capital, superior technology,
conducive environment (laws, infrastructure, resource
access),..
Incentives necessary
e. g. IPR protection
Patent battles: e. g. Nokia vs. Apple
19
What is innovation?
Working definitions
Innovation:
"innovation processes involve the exploration and
exploitation of opportunities for a new or improved
product, process or service, based either on an advance in
technical practice or a change in market demand, or a
combination of the two. (Pavitt 2003, cited after Le
Bas/Latham 2006, p. IX).
Entrepreneurship is a
process that does the lifting required to put innovation
into practice (Mars 2013, p. 7)
20
Introduction and discussion:

stylized facts of innovation
Innovation is a risky endeavour:
History of product and process innovations littered with
examples of apparently good ideas which failed
dramatically:
failure rates between 30 and 95 %, accepted average
of 38 % of failed innovations
recent Harvard Business School study: 90 % failures
Even widely recognized innovaters have a history of
failures: Apple, Danone, Google, Renault,
Source: Tidd, J./Bessant, J. R./Pavitt, L. R. (2005), pp. 37ff.
+ http://theinnovationandstrategyblog.com/2013/06/innovation-failure-probable-and-costly-12/
21

Apple: launched its application for maps, which caused
controversy, leading Tim Cook, its CEO, to publicly apologize
(http://www.apple.com/letter-from-tim-cook-on-maps/)
Danone, has invested millions in developing a new kind of
yogurt, one that claimed to offer benefits to the skin. The
result? Essentis was retired from the market
Google, often considered to be a paragon of innovation, has
failed many times: its product meant at competing against
Wikipedia, Knol, has been discontinued. Most of its successful
innovations were in fact start-up acquisition, such as YouTube.
Renault, has also failed to penetrate the high-end market

segment with its VelSatis
Source: http://theinnovationandstrategyblog.com/2013/06/innovation-failure-probable-and-costly-12
22

Innovation diffusion is pervasive:
e. g. General Purpose Technologies (GPTs) characterized by
their potential for pervasive use in a wide range of sectors
and by their technological dynamism (Bresnahan, T.
F./Trajtenberg, M. (1995), p. 84)
Examples: electricity, information technology, electronic
semiconductor
Similar: platform innovations
Examples: car components, Walkman (and follow-up
products: CD, DVD, MP3 players)
cover initial R&D costs through variety of market fields
23
General vs. special purpose technologies

Innovation diffusion is pervasive:
General purpose technologies (GPT) have significant
scale effects
SPT is very frequent in the pharmaceutical industries
(specific drugs developed for specific diseases)
GPT more prominent in manufacturing (has expanded
even more)
Shorter product life cycles + hypercompetition have
forced firms to increase both flexibility and
productivity (through automated production and
distribution processes)
Source: Sengupta 2014
Example from practice: platform innovation

Closer look:
Procter and Gambles detergents based on

cyclodextrin development
Recover costs of initial R&D by deploying technology

across number of market fields
whole seemingly unrelated product family: soaps,
fragrances, bleaches and sale to non-competing
product areas, e. g. industrial carpet care
Source: Tidd/Bessant/Pavitt 2005, p.14; Procter&Gamble :
http://pgbeautyscience.com/assets/files/newsletters/BeautyScience_Newsletter_11.pdf
P&G Beauty Prestige

Products has
filed 12 patents in
connection with the
proprietary use of
cyclodextrin in luxury
fragrances, five of which
have been
granted to date. Additional
research
projects with further
applications
of cyclodextrin are being
considered.
With new formulations
that include
the time-release
technology on the
horizon, fragrances will
soon have a
whole new essence.
Source: P&G
25

Innovation is imperative: Not to innovate is not an
option
Evolutionary economics claim that firms survival
depends on constant adaptation to environment
(birth and death of companies, e. g. Start up
firms survival rates)
26

Innovation is imperative: Not to innovate is not an
option
Even big players show signs of mortality: out of
the top 12 companies in Dow Jones Index in 1900,
only one survives today: General Motors
Dramatic change necessary in some cases in order
to stay in business: Nokia
Not a question of whether or not but how to
innovate
Source: Tidd/Bessant/Pavitt 2005, p.40.
27

Innovation does not work in isolation anymore:
Collective innovation (not entirely new but on the
rise) is widespread (and risky), e. g. clusters in Silicon
Valley, Shenzhen cluster in China
Innovation is an inherently social phenomenon:
service innovation, networks and clusters, coinnovation
28

Innovation is not always intentional:
accidental innovation examples include photography,
Teflon, stainless steel, PVC, x-rays, corn flakes
accidental value creation
Innovation has unintended side effects
paradoxical nature of innovation: not only winners
firm: managerial costs imposed by disruptive
innovations
economy: poverty alleviation and price
equalization not as expected
Source on side effects: Swann 2009
29

no one best way of governance of innovation:
Firm/sector/regional variation, government regulated
vs. self-organized cluster innovation (Chinese vs.
American model)cultural embeddedness
30
References
Bresnahan, T. F./Trajtenberg, M. (1995): General purpose technologies. Engines of growth? In: Journal of
Econometrics. 65, S. 83-108.
Cohen, W. M. (2010): Fifty years of empirical studies of innovative activity and performance. In:
Handbooks in Economics, Vol. 1, pp. 129-213.
OECD/Eurostat (2005): Oslo Manual. Guidelines for collecting and interpreting innovation data. 3rd
edition. Paris.
Feldman, M./Kogler, D. F. (2010): Stylized facts in the geography of innovation. In: Hall, H. B./Rosenberg, N.
(2010): Handbook in economics, Vol. 1, pp. 381-410.
Le Bas, C./Latham, W. (2006): Persistence in innovation. Definitions and current development of the field.
In: Le Bas, C./Latham, W. (eds.): The economics of persistent innovation. An evolutionary view. Springer:
Wiesbaden, pp. 1-18.
Mars, M. M. (2013): A cross-disciplinary primer on the meaning and principles of innovation. Advances in
the study of entrepreneurship, innovation and economic growth, Vo. 23, 1-12. Emerald Group Publishing.
Sengupta, (2014): Theory of innovation. A new paradigm of growth.
Someren, T. C. R./Someren-Wang, S. (2013): Innovative China. Innovation race between East and West.
Management for professionals. Berlin/Heidelberg.
Swann, G. M. P. (2009): The Economics of Innovation. An introduction. Cheltenham/Northampton.
Tidd, J./Bessant, J. R./Pavitt, L. R. (2005): Managing innovation. Integrating technological, market and
organizational change. Wiley: Chichester.
31

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Innovation economics

Why do some firms innovate while others do not? Linkages between

Summer term 2015

Content and preparation

Introduction to innovation economics

Types, aims, external and internal drivers

Linkages between drivers and outcomes:

Linkages between drivers and outcomes:

Outcomes: economic, socio-economic

Outcomes: (un)intended side effects

Summer term 2015

Content and preparation

Discussion of new developments I:

International research and policy

Test preparation session

Louis Gallois, The

Source: Someren/Someren-Wang 2013, p. 1.

New to the market

New to the firm

Already in the firm

Taxi driver protest against Uber and Wundercar in Berlin

Introduction and discussion:

Introduction and discussion:

Renault, has also failed to penetrate the high-end market

Introduction and discussion:

General vs. special purpose technologies

Example from practice: platform innovation

Procter and Gambles detergents based on

Recover costs of initial R&D by deploying technology

P&G Beauty Prestige

Introduction and discussion:

Introduction and discussion:

Introduction and discussion:

Introduction and discussion:

Introduction and discussion:

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