Innovation, Intellectual Property, and Economic Growth

1. Innovation, Intellectual Property, and Economic Growth Lecture outline: Overview of course Introduction to innovation Definitions Nature of innovation Microeconomics Questions Readings

2. Overview of course • Details of course • Teaching • Resources • Assessment

3. What is course about? • Applying economic analysis to the understanding of the innovative process • Determinants • Consequences • Market failure (are optimal resources devoted to innovation) • Some key questions • What drives innovation? • How does intellectual property influence innovation? • Which market structures yield more or better innovations? • Why are some countries rich and some poor? • Is economic regulation good or bad for innovation?

4. What is the ‘economics of innovation’? Microeconomics – understanding processes, including how incentives affect firms Macroeconomics – ‘innovation’ drives economic growth.. and economic growth drives living standards, environmental, political… Economic Policy – are there market failures in the innovation process and what, if anything, should the government do? Business Strategy – this is not a course on advising firms how to innovate, but does include some insight into this

5. Definition of innovation Basic definition Introduction of new ideas that add ‘value’ to a firm’s activities OECD The Oslo Manual (1997, p.28) • introduction of a new product or a qualitative change in an existing product • process innovation new to an industry • the opening of a new market • development of new sources of supply for raw materials or other inputs • changes in industrial organisation

6. Innovation and business Some students may benefit from a brief comment on why innovation is so important to business Some example of quotes • "Business has only two functions, innovation and marketing." Peter F Drucker • “Creativity is thinking up new things. Innovation is doing new things.”Theodore Levitt (management guru) • Innovation distinguishes between a leader and a follower.“ Steve Jobs

7. The innovation process Figure 1.1 Greenhalgh and Rogers (2010)

8. Invention, Innovation, Diffusion(Schumpeterian trilogy) • Invention: creation of an idea to do or make something (profitability not yet verified) • Innovation: new product/ process commercially valuable i.e. successfully developed inventions. • Diffusion: the spread of a new invention/innovation throughout society or at least throughout the relevant part of society. • Without this cannot gain full benefits • Some of this represents ‘spillovers’ or ‘positive externalities’

9. Scientists, Knowledge and Technology Scientists • Discover knowledge by research • Disseminate knowledge (open science?) • Knowledge is public good(non-rival in use), hence created externalities • Universities, government labs, some large firms • It may represent the basis for technological advances Technology • Application of knowledge to ‘production’ • Firms driven by profit incentive • Private good: investment (R&D) projects, appropriate, use of intellectual property

10. Product and process innovations Product innovations • product used by consumers • Microwaves, computers, mobile phones, etc • Products use by firms • Shipping containers, computers, robots, etc Process innovations • Used by consumers • Fast food, air travel • Used by firms • Assembly lines, software

11. Defining an innovation • Can be defined as new to • Firm • Market (industry) • World • No universal agreement of which • Radical vs incremental • Radical (steam, internal combustion engine, computers, internet) • Incremental (constant improvements) • Both important in driving economic growth

12. Further ideas • Can extend the introduction by considering • Further examples of specific innovations, including cases studies of famous innovations • Look at country / state / city comparisons of innovativeness • Can provide overview of productivity, economic growth, etc

13. Microeconomic effects of innovation • Following slides could be part of introduction or separate lecture • Can expand formality of this topic, including introducing maths-based questions relating to consumer surplus changes, optimal subsidies, public goods

14. Figure 1.2 Process innovation in perfectly competitive market

15. Figure 1.3 Process innovation for a monopoly

16. Figure 1.4 New product demand curve

17. Figure 1.5 A product innovation represented by a shift in existing demand curve

18. Innovations and Market Failure • Innovation as a public good • Non-rival and non-excludable • Externalities from innovative activity • R&D spillovers • Indivisibilities, uncertainty, and capital markets • Fixed costs, uncertainties • Do capital markets cope with these? • Patent races and duplication

19. Restoring incentives to invent and innovate • Public provision of a public good • Club provision of a local public good • Pigovian subsidies • Definition of property rights • The trade-off between incentives and monopoly power

20. Subsidies for R&D

21. Questions for discussion • How would you distinguish between an invention and an innovation? • What are the key characteristics of a public good? Is all new knowledge a public good? • What is a positive externality? How does this differ from a public good? • How does innovation create positive externalities? Why are they a problem? • What are the key market failures surrounding investment in innovation? • Does the creation of intellectual property rights help or hinder the markets for innovative goods and processes?

22. References • Key textbook for this course is • Greenhalgh, C and Rogers, M (2010) “Innovation, Intellectual Property and Economic Growth”, Princeton University Press • For this week read Chapter 1 • Future lectures will follow each of the chapters of the book • Additional articles will be given each week