ddoonie@sympatico.ca
Darryl Doonie
Pg. 01
Innovation In The New Economy
Dirk Pilat
Terms
ICT’s – Information and communications technologies
R&D – Research and development
MFP – Multi-factor productivity; mix of labour, capital, and technology usage
Thesis
There is growing evidence that innovation and technological change (ICT) plays an increasingly important role in
economic growth.
Economic growth can be achieved through increased or improved use of labour and capital or through a rise in
MFP.
1
Drivers increasing or improving the use of labour and capital.
a. Improvements in labour productivity and labour utilization at the same time.
b. Improvements in the quality of labour; human capital.
c. Investment in physical capital.
2
Drivers causing a rise in MFP.
a. MFP reflects rapid technological progress in the production of ICT’s.
b. MFP reflects the effects of competition; new firms typically use a more efficient mix of
labour, capital, and technology than existing firms.
c. R&D, foreign and domestic, and technological changes are important drivers of MFP growth.
d. Use of ICT in the production process; increases overall efficiency of capital and labour.
Trends pointing to the growing importance of innovation.
1
2
3
Investment in innovation is rising.
Data on patents granted indicate that the ratio of patents to GDP has increased considerably.
The innovation process is more widely spread across sectors.
Changes occurring in the innovation process.
1
The manner in which the innovation process is being financed; more need for well functioning equity
markets.
2
Firms must increasingly co-operate with other firms to share the cost of bringing innovative products
and services to the market and to reduce uncertainty. Channels of this co-operation:
a. Strategic alliances.
b. Mergers and acquisitions.
c. Increased knowledge intensive business services.
d. International co-operation in patenting and scientific research.
e. Increased human capital mobility (spill-over effects).
3
Growing importance of scientific progress to innovation, basic scientific research is the source of many
of the technologies that are transforming society (internet).
a. ICT’s have played an important role in making science more efficient and linking it more
closely to business.
4
Mechanisms such as venture capital have allowed small startup firms to gain prominence in the
innovation process, as they are important sources of new ideas and innovations.
5
Average R&D project times have shortened, as firms appear to wish to obtain more concrete results
from their expenditure in shorter times.
a. ICT’s have helped to speed up the innovation process and reduce cycle times resulting in a
closer link between business strategies and performance.
ddoonie@sympatico.ca
Darryl Doonie
Pg. 02
Key policy recommendations for aiding the advancement of innovation.
1
Stregthen economic and social fundamentals.
a. Ensure macroeconomic stability.
b. Improve functioning of markets and institutions.
2
Facilitate the diffusion of ICT.
a. Increase competition in telecommunications and technology.
b. Make electronic government a priority
3
Foster innovation.
a. Give greater priority to fundamental research.
b. Improve effectiveness of public R&D funding.
c. Promote flow of knowledge between science and industry.
4
Invest in human capital.
a. Strengthen education and training.
b. Improve links between education and the labour market.
5
Stimulate firm creation.
a. Improve access to high-risk finance.
b. Reduce administrative regulations.
c. Instill positive attitudes towards entrepreneurship.
Conclusion
While innovation may be rapid in the new economy, it can take several years to create the kind of dynamic
environment in which it might take place, let alone see the results. This relates to the course as the article focuses a
great deal on ICT’s and their importance in the innovation process. This increased reliance on ICT’s causes the
material covered in the course to be more relevant as we move to a ‘new economy’. Networking effects also come into
play at a much greater extent as innovation shifts focus to ICT’s.