Innovation and Economic Growth

Innovation is not a new phenomenon. Arguably, it is old as mankind itself. There seems to be something inherently ―human about the tendency to think about new and better ways of doing things and to try them out in practice. Innovation is a major factor of economic growth and performance in the globalized economy.

The relationship between innovation and economic growth has been well studied. However, that is not to say that it is well understood. Innovation brings new technologies and new products that help address global challenges, new ways of producing goods and delivering services boost productivity, create jobs and can help improve citizen’s quality of life.

Innovation is the throbbing heart of the twenty-first century economy, consistently pumping new revitalizing activity through the system. The opposing force is commoditization—probably the single most powerful force in business today which rapidly takes what was distinctive and profitable and rapidly makes it commonplace and marginal, sucking out the vitality and profitability.

Economic growth is most commonly measured using changes in the total value of goods and services produced by a country’s economy or what is known as Gross Domestic Product (GDP). Of course, since the size of countries varies this number is adjusted for the size of the population which provides a crude measure of the average individual’s well-being (1).

The capacity and the ability to create economic value is critical to competitive advantage and growth for firms, industries and countries. The question then becomes how to best organize resources to create, diffuse and sustain innovation and, moreover, how to leverage investments made in science and technology, research and development and related capabilities with the ultimate goal of reaping rewards in terms of wealth creation and increased standards of living.

Growing role of innovation in economic and social development, and how governments can help ensure that innovation is translated into new products and techniques that can help society meet the global challenges of the 21st century. Government officials and commentators have recognized this reality and have called for a variety of different substantive incentives for stimulating innovation.

Several core conditions enable innovation and encourage economic growth:

  • Strong standards and effective enforcement of intellectual property protection.
  • Vigorous competition and contestable markets.
  • A strong and sustainable fundamental research and development infrastructure.
  • Encouraging Information and technology communication developments.
  • A strong emphasis on education at all levels.

Competition is the critical driver of performance and innovation. It benefits everyone by enabling to choose from an array of excellent products at affordable prices. Competition encourages the adoption of innovation as companies evolve and offer new ideas in order to flourish in the marketplace.

Products should compete on their own merits, and consumers everywhere should have the ability to easily choose the best products available for purchase. Fair and open competition dictates that the best product wins, and market forces prevail. Competition among firms generally works best to achieve optimum prices, quantity, and quality of goods and services for consumers.

Competition can stimulate innovation. Competition among firms can spur the invention of new or better products or more efficient processes. Firms may race to be the first to market an innovative technology. Companies may invent lower cost manufacturing processes, thereby increasing their profits and enhancing their ability to compete.

Competition can prompt firms to identify consumers ‘unmet needs and develop new products or services to satisfy them. Research and development, resulting in new goods, new processes and new knowledge, is a major source of technical change. R&D is a fundamental input into the innovation process and innovation is an important factor that influences productivity, productivity growth and competitiveness. As defined by the Frascati Manual(2), “R&D comprises creative work under-taken on a systematic basis in order to increase the stock of knowledge and the use of this stock of knowledge to devise new applications”.

The relationship between R&D and innovation is a complex, non-linear one. However, it is recognized also that it is difficult for substantial advances in technology to occur without work undertaken on a systematic basis (even serendipity tends to develop in such a context), and R&D is a good indicator of this broader phenomenon.

Innovation driven economic growth is a process of continual transformation. The economy expands into new materials, new sources of energy, new processes and new products, and it contracts from old ones requires a mobile labour force. People have to be ready to move from one occupational position to another maybe several times within a generation. This is not possible without the support of a system of education and training, which provides both general purpose and learning skills and diversified specialization possibilities as the national educational systems supervised by the state, has done for years. There are some tendencies towards international integration of education, but this is mainly on the post graduate level and as a supplement to national systems.

A large number of literature’s suggest that education’s contribution to economic growth has been variable across countries over time, and it is proven to have made a substantial contribution to growth.

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