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by Valentino Piana (2003)



1. Significance
2. The innovation circuit
3. Kinds of innovations
4. Determinants
5. Impact on other variables
6. Regularities in innovation
7. Long-term trends
8. Business cycle behaviour
9. Data

10. Formal models and papers


11. Books

A downloadable model of innovation in quality and costs

A model of innovation in variable and fixed costs (50 competing firms)





Innovation is the activity of people and organizations to change themselves and the environment. It means breaking routines and dominant ways of thinking, introducing new things and behaviours, launching new standards.

Focused by a creative orientation, it arises from unsatisfaction with the current state of art, by leveraging technological and social new opportunities.

It is together an individual stance, an organizational process, a social movement.

In terms of the macroeconomic policy-making innovation is a relevant change in policy variables, as taxation level or the reference interest rates.

The innovation circuit

Innovation is the complex development of discoveries (eg. new physical laws) and inventions (eg. a new machinery) brought in the business and social environment (eg. introduced on the market), hopefully leading to diffusion (adoption by new users).

During the diffusion path, improvements to both the idea and implementation often require futher innovation. Successful innovations are often imitated by other players in the same industry or applied - by analogy - in other industries.

Innovation is costly and uncertain, with the consequence that the innovation circuit comprehends financial institutions and that the problem of who finances innovation and how much is crucial.

Innovations are usually positive, in the sense of providing better ways to address human needs. However, damaging and dangerous innovations do exist and societies need protection against them, with a chain of social and scientific alarm leading to containement and elimination from the real world (but probably not from the repertoir of knowledge).

Kinds of innovations

Out of several cases, innovation can basically be:

1. a product innovation (e.g. new goods or services put on sale);

2. a process innovation, which changes the way a given good is produced within the firm or across a supply chain;

3. a behavioural innovation, when an organizational routine is replaced with new ones, including the main features of its "business model".

Quite often, the innovation turns out to be a mix of all three "pure" categories, as with the case of the introduction of a new product that require new productive competences and changes in the organization.

Furthermore, what is a product innovation for a supplier can be a process innovation for a user, as with the case of a new machine which revolutionizes the process of manufacturing. In this case, investment is the means by which innovation is spread over the economy.

In all these cases, innovation requires sufficient levels of complementary investments as well as other conditions of ex ante coordination among agents.

Although technology is often at the heart of an innovation, also marketing, finance, organization all can be sources and multiplier of innovation. In an elarged meaning, innovation embraces the introduction of known things in new markets or in different industries.

Relevant is also the environment with respect to which something is said to be an innovation. Thus, we have innovation with respect simply to past achievements of the innovator or to the (local) market or to the world frontier. In the first two cases, it is possible to obtain the innovation just by imitating world-class practises.

A useful distinction should be made between radical innovation and incremental innovation. A first-approximation evaluation of the difference between radical and incremental innovation may lead to the following table:

Feature Radical innovation Incremental innovation
Major novelty (e.g. entirely new products)
Minor improvements in existing products and processes
General guidelines
A fresh look on old problems: a different Weltanschauung
Determination in solving problems within a given framework
Knowledge base
Diversified, with unprecedented use of analogy and tools developed in other industries/contexts
Typical people triggering innovation

1.Critical individualists

2. Mission-oriented teams

Front-line workers
Organization where the innovation takes place
Outsiders and new entrants

Needless to say, this scheme is - by far - too mechanistic! At the same time, it's worth remembering that radical innovation often derives from a new understanding of the complex world in which we live in.

For an essay on market-driven local incremental process innovation and the related free software see here.

From the consumer's point of view, a purchase of a new good (new to the consumer or new to the market) involves some trust and willingness to try, possibly due to dissatisfaction with current products. Experience and its communication to others may either stabilize an habit of repurchasing the new good (which becomes "the new normal"), either to revert to the old good, or to try something else again from another competitor.

In broader terms, the world contains wholes and parts, to which human beings, organized in societies, social groups and individuals, give names. Economists tend to assume these names and categorize as "goods" all material things and as "services" all activities (verbs), usually expecting and assuming that property rights on the formers can lead to an exchange and a price and that the performer of the service can direct it to someone, who will pay a price for it. In this chains, many alternatives are dismissed and ignored (e.g. that animals or mountains on the Moon can well not be goods, that viruses are not goods, that a price may not exist, etc.).

Once underlined that such description is indeed limited only to a subpart of the whole world, we can say that innovation takes the form of new material objects and activities, with new values 1. in their material substance and shape, and 2. in known features (adjectives and dimensions for product differentiations) and new features altogether, potentially leading to new uses, which may appeal to the general public or being of particular interest for niches (which conversely raise the issue of the strategic niche management).

Innovation widens the number of products and services (varieties) within a category or introduce a new category altogether. Liquid definitions may create hybrid categories. It may take time for others to recognize that this is occurring.

By introducing a single product or a suite of products, specific producers (which for a while will be monopolists) can be at the origin of such innovations in the way we categorize the world. There is a connection between innovations and needs, as perceived by final consumers and by the reverted supply chains of producers, with the latter usually assuming that some demand will be redirected to the innovative products and services.

Conversely, economics as a science is called to analyse and propose motivators, facilitators and limitators for actions with complex temporalities, with due attention to innovations and their diffusion over time and space, including to the factors that prevent certain people in certain conditions to enjoy the common heritage of humankind.


The old linear model of innovation saw it as a one-way flow from science to technology, from business to market.

In fact, today, after e.g. the contribution of Nathan Rosenberg, it is clear that everything is linked to everything. Science, technology, economy and society are self-propelling complex systems where innovation is both endogenous in each one of them as well as the outcome of the interaction among them.

In other words, the crucial players in the innovation are, at least, the following:

In short, the first determinant of innovation is the innovative effort, measured by Research & Development expenditure, both in public and private institutions (including Universities and Research Centres), the number of researchers and their lab/machinery endowments - in short, tangible and intangible investment.

But innovation can be triggered also by the application of creativity and proper methods (e.g. kaizen) to normal production processes (learning-by-doing, innovation-by-doing). Innovation can arise internally to organizations but encounter resistances, as it might imply changes in power share across the board. Some say that "More than 90% of new product development projects proposed by R&D departments are not approved by other departments in subsequent stages, and as a result will never become new products".

Interaction with users and the implicit knowledge in the marketing departments often play a crucial role for innovation. Some innovations might be due to reactions to refusal to sell in too narrow market delivery conditions or by reflecting upon new package sizes for products (e.g. single portions of food for singles).

Education, learning and social rules are key determinants both in innovation and the diffusion phase, through dynamics sometimes called of "Triple Helix" among academia, governement and businesses, but that should include also non-profit organization, civil society, media, and non-academic innovators (e.g. the Makers Movement) (Quadriple Helix, Quintuple Helix, etc.).

More in general, a conducive environment for innovation is a large and diversified human capital, entrepreneurial spirit both in business and the academy, a wide consumption, a pluralistic, multi-polar open and free society.

Impact on other variables

Innovation is a pervasive phenomenon, whose effects are often ambivalent, i.e. leading to opposite direction, depending on the goals of the innovator, the technological opportunities as well as the society constraints.

In particular, innovation can exert an impact on the following variables:

  • fulfillment of law requests (e.g. about environmental protection),
  • costs (mainly if process innovation),
  • the use of inputs (e.g. energy savings),
  • the required skills of manpower (ambivalently both in the directions of standardization / simplification / reduction or of empowerment),
  • the employment structure, thus the relative weight of social groups;
  • productivity;
  • the quality of the produced good/service,
  • sales, since new needs could be matched the new good / service,
  • product differentiation;
  • variety of the goods/services available to both consumer and business user,
  • patterns of consumption,
  • exports, when the new good is desired also abroad and there has no adequate substitutes,
  • the number of firms operating on the market, ambivalently multiplying it if innovation is due to young start-up or reducing it if incumbents dominate the innovation trajectory, which becomes a barrier to entry,
  • profitability, potentially both through lower costs than competitors and higher quality;
  • the environmental-friendliness and the greenhouse-gases emissions of production, with green technologies being at the heart of green innovation systems to mitigation climate change;

Product innovations, when successful, tend to increase employment (by the innovator and in companies imitating it). If it reduces sales in competing products then a fall of employment there may occur. Net effects will depend on the relative labour intensity, the elasticity of substitution, and the localization of production across regions and countries.

Process innovation, including automation, tends to reduce the labour input per unit of output (but see this model for a broader understanding). Depending on the effects on the charged price and the elasticity of demand this can lead to an actual loss of employment (both at the innovators and its competitors).

Some effects are based on the asymmetry between the innovator and his competitors. Others depend on the large diffusion of the innovation, which in turn can be boosted by the presence of institutional arrangements, such as a pro-diffusion tax scheme.

Diffusion is, in turn, the result of the increase of the market share of the innovator as well as the imitation by others. Both forces are usually connected with investment. This micro-dynamics explain - at least in part - the strong and violent fluctuations in the aggregate investment.

The economy-wide effect of innovation are explored in this paper. In broader terms, innovation is the technological feasibility for the fulfilment of somebody's dreams that, if backed by finance and institutional support, will shape the world of tomorrow.

Regularities in innovation

Although innovations can often be seen as a punctual artefact or event, Giovanni Dosi has underlined that a flow of innovations tends to self-organize along "technological trajectories", i.e. tendencies of improvement along certain product features/performances by repeatedly using similar heuristics (e.g. the trend of faster and more powerful computer chips by miniaturization).

In some cases, it is even possible to forecast future developments of the successive waves of technologies by relying on past quantitative trends (e.g. the Moore's Law of doubling the speed every 18 months).

Innovations tend to cluster in time and space, since there is often a strong interdependency and complementarity among them. Silicon Valley is a typical example, as you can see in this important free book.

Innovation proceeds differently according to national and sectoral systems of innovation and production and multi-indicator technological regimes, e.g. defined by the conditions of wealth of opportunity, appropriability, cumulativeness.

If you are a manager concerned with the launch of a new product, you might consider to contact us for advice.

In more systemic terms, a country that would like to play a pivotal role in the international innovation system can gain from evolutionary policies and contact us for advice.

Long-term trends

The main differences in well-being across centuries have been due to superior product innovation which became affordable to the normal people.

Across countries, the determinant of differences in income and wages can be traced back to productivity and innovation.

Thus, it is exactly when and if useful innovative products become affordable to the general public that we can say that growth has taken place. This requires adequate level of per-capita GDP and a reasonally equitable distribution of knowledge and income.

Business cycle behaviour

Systematic innovation is a feature of a complex national system. Thus, to large extent, long-term elements prevail on short-run macroeconomic fluctuation.

Nonetheless, to the extent firms choose the timing of putting innovation on the market and in the production lines, a certain prevalence of the adoption of cost-reducing process innovation might better takes place during recessions, whereas higher-performance expensive innovative products are better sold during boom phases.


US and world data on diffusion of innovation

An international comparison of 13 key indicators of innovation: the European Innovation Scoreboard (2002)

Gross domestic expenditure on R&D by source of funds (71 countries)

Education of future workforce: an international comparison of skills

Formal models and papers

Dynamic competition with innovation, bi-directional product differentiation, bounded rational consumers, advertising, and finance

Useful to see how succesfully introduce a new product, how firms can increase productivity, which is the diffusion behaviour of consumers in case of a new product

The economics of ex ante coordination

Do R&D investments affect export performance?

Corporate Ventures: when the innovation team is kept independent from a "mother" organization to obtain radical innovations

Profitability and innovation: an empirical survey

Key Technological Trajectories and the Expansion of Mobile Internet Applications

Modeling Industrial Dynamics with Innovative Entrants

Innovation in the construction industry: study cases

Agriculture innovation system in Australia

From patents to marketplace: The Irish case

Innovation and technology trajectories in a developing country context: evidence from a survey of Malaysian firms

New Technologies, Workplace Organisation and the Age Structure of the Workforce: Firm-Level Evidence

Innovation science: the point of view of Industrial Engineering

Free books

How to tranfer knowledge to SMEs

Guidelines on effective knowledge and technology transfer activities to SMEs in the food sector with particular focus on traditional food manufacturers.

A path-breaking contribution from an original consortium of both trade associations and R&D providers, that delivers a far-reaching approach that should be followed in many further fields to enhance appropriate innovation and diffusion.

UK Innovation Strategy

Industrial Growth and Competition - The Role of Technology in Firm Success, Industry Evolution, and Regional and National Growth

Books at Amazon

Inside the Black Box: Technology and Economics - by Nathan Rosenberg

Innovation, Organization and Economic Dynamics: Selected Essays
- by Giovanni Dosi

Technology, Development and Democracy: Limits of National Innovation Systems in the Age of Postmodernism - by Haider A. Khan


Key concepts
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