Topic 1: Basic Concepts

WHAT IS INNOVATION?
Invention is the creation of a novel device, method or process for the first time (up to a
prototype), while innovation is the process of using knowledge to solve a problem. Innovation
is more than an invention: it implies that device, method or process makes a significant
contribution towards solving a problem and has some economic relevance (utility, impact and
exploitation).
During the Renaissance, inventors came up with several new ideas, inventions, which did not
become innovations until much later, because they were not technically feasible at that time.
Technology is the application of tools, materials, processes and techniques to human activity,
and it consists of information technology, biotechnology (biologically based technologies),
mechanically based technologies and new materials.
However, technological innovation is the act of applying new knowledge for commercial or
practical objectives (new device, method, or material).
Non-technical innovations do not directly involve technology, but knowledge: new ways of
organizing the distribution of goods (e.g., dell computer), new financial products (e.g., new
types of bank accounts), new marketing approaches (e.g., viral marketing through social
media), new organizational forms (“Kaizen” in jap. Firms) or new business models (low-cost
flights, sharing).
There is not necessarily a one-to-one relationship between technological change and new
products or processes.
Most innovative ideas do not become successful new products (e.g., in the pharmaceutical
industry, 1 out of 5,000 compounds succeeds as a new drug). Innovation occurs in two ways:
- Planned: companies invest in R&D with the goal of coming up with an innovative new
product or process that will give them an advantage over their competitors.
- Accidental: not the result of a deliberate attempt to solve a particular problem, but by
serendipity (e.g., Penicillin-Fleming).

TYPES OF INNOVATION
Product innovations are embodied in the output of an organization in its goods and services:
technical specifications and quality improvements (e.g., hybrid car, tablet computer, new
medical drug, etc.). Process innovations are innovations in the way an organization conducts
its business, such as in the techniques of producing or marketing goods or services (with and
without use of technology). New product innovations and process innovations often occur in
tandem.
Radical innovation is a very new and different innovation from prior solutions. Incremental
innovation makes a relatively minor change from (or adjustment to) existing practices.

There are other further distinctions btw innovations:

- Architectural vs. Modular: is the entire architecture (i.e., how different components
are set up and interact) of a product changed or just the individual components?
- Competence-enhancing vs. Competence destroying : is an innovation building on my
existing competences, or are completely new competences required?
 Topic 1: Basic Concepts

- Disruptive vs. Sustaining innovations: does innovation first create a new market and
subsequently cannibalizes existing ones?

WHY IS TECHNOLOGICAL INNOVATION IMPORTANT?

According to Gregory Daines of Cambridge University, “innovation has become the industrial
religion of the late 20th and early 21st centuries. Business sees it as the key to increasing
profits and market share. Governments automatically reach for it when trying to fix the
economy. Around the world, the rhetoric of innovation has replaced the post-war language of
welfare economics. It is the new theology that unites the left and the right of politics”.
It creates value for customers: it allows for the creation of products and services that meet
needs that were not previously satisfied (e.g., new medical treatments, smartphone).
It creates value for companies (entrepreneurs and shareholders): it can be source of
competitive advantage.
- Many firms earn more than 1/3 of their sales from new products.
- It allows to protect from imitators: global competition increases price competition.
- It is a source of product differentiation.
- Process innovations allow for a more efficient manufacturing.
It creates value for society: it enables a wider range of goods and services to be delivered to
people worldwide (e.g., more efficient food production, improved medical technologies
leading to higher life-expectancy, transportation, etc.). In fact, innovations have positive
impact on GDP: use of technology make the use of labour and capital more efficient, allowing
for higher overall output levels.
However, innovation has negative externalities as well:
- Substitution of labour: more efficient production with fewer labour input;
obsolescence of jobs in firms with traditional products.
- Environmental impact: e.g., production of biofuels, extraction of metals (like mining of
bauxite for aluminium production).
- Competition: monopoly pricing.
- Consumer: privacy issues due to increasing data collection.
In the 20th century, the overall effect of innovation can be certainly regarded as being positive
(life expectancy, increasing wealth, etc.). In fact, according to the economic historian Robert
Gordon, the great inventions already took place in the 20th century, and contemporary
innovative activity falls behind.