14-1190b-innovation-managing-risk-evidence

14
INTRODUCTION
In today’s globalized, rapidly-changing world, innovation is
becoming ever more important as changes in technology,
skills and knowledge increasingly affect countries’
competitiveness externally and the well-being of their
people internally. In the UK, innovation will continue to be
a key source, perhaps the key source, of economic growth.
However, competition is becoming ever more fierce, vital
global resources are dwindling, and environmental problems
are mounting, making innovation an ever-present challenge.
Indeed, there is some evidence to suggest that the UK is
falling behind many of its major trade competitors when it
comes to research and development, which is closely linked
to innovation (see Table 1).
In shaping growth, innovation touches on all sectors and
institutions. It is sometimes portrayed as the process of
going from research laboratory to physical product, but
that is much too narrow a view, particularly in advanced
countries where the service sector is 70-80% of the
economy. We can hope to sustain economic growth, and
continue improving quality of life, by changing the way we
do things. But doing things differently involves embracing
risk and uncertainty — risk of failure is an intrinsic aspect
of innovation — and numerous market failures constrain
potential innovation. Yet policies to foster innovation can
be hard to get right and interpreting evidence about what
works can be difficult; governments can fail, too.
Nevertheless, through good theory, rigorous analysis and
rich examples, we have learnt much that can provide useful
guidance. By examining some important lessons and insights
from economics and other social sciences, this chapter looks
at the interplay between innovation and risk, and how social
interactions between public and private actors are critical in
fostering innovation and determining its effectiveness.
Part A is conceptual in nature. It contains an overview
of the defining characteristics of innovation, and its
relationship to economic growth and to risk. In Part B, we
discuss insights into innovation from the social sciences,
providing real-world examples as much as possible. Finally,
in Part C, we set out some broad recommendations for UK
government policy that draw on the insights discussed. From
our analysis, we identify pillars or foundations for first-class
‘innovation infrastructure’: a high-quality, merit-based system
of education and training; substantial investment in basic
research; a system of government-managed incentives that
promote innovation via markets and entrepreneurship; and
setting and investing in national innovation priorities. We
also suggest associated policymaking guidelines.
A. INNOVATION, GROWTH AND RISK
(i) Defining Innovation
Innovation is about changing the way we do things. It is
about pushing the frontier of what we know in the hope
of generating new and useful ideas, and then putting them
into practice. Successful innovation raises productivity and
living standards, expanding the range of goods and services
available for individuals and society as a whole, and allowing
us to live longer, healthier lives.
Joseph Schumpeter provides a classic definition of
innovation as the development of new ideas (which he called
“inventions”) into products and processes, which are then
spread across the market in a process he called diffusion 2 .
Innovation, as we shall use the term, encompasses the full
chain from basic research to the diffusion of ideas, goods
or services across an economy. Schumpeter envisaged
this occurring in a linear way, in the sense of a distinct
time sequence. In reality, these different stages overlap
and interweave, as parts of a complex system that feeds
back to and influences future developments 3 . Nonetheless,
this model provides one starting point for thinking about
innovation.
Some additional features of the definition and scope of
innovation,
as we understand it, are as follows 4 :
• Innovation is more than invention alone. Some of the
greatest innovators imitate, borrow or adapt new ideas
from other people, firms or places. The ideas that are put
TABLE 1
GROSS DOMESTIC
EXPENDITURE ON
RESEARCH & DEVELOPMENT
2.79%
UNITED
STATES
1.73%
UNITED
KINGDOM
(% OF GDP, 2012)
2.40%
OECD
AVERAGE
1.98%
EU-28
AVERAGE
4.36%
KOREA
3.35%
JAPAN