Innovation and Its Role in the Economy

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Innovation and its role in the economy
Literature review project

Since at least the 18th century the world has experienced new standards of living. The economic growth was not provided only by simple exploitation of natural resources anymore. Advancing technology has become a source of the growth in the world’s standard of living. The interest in this growth became the main topic for the researchers from 1950s. The economists were aimed to answer such questions as what are the key reasons for the growth in incomes over the time and why are some countries richer than others. Nowadays there are numerous theories explain the influence of technological progress on the economic growth. (Simon Kuznets: Modern Economic Growth: Findings and Reflections, 2012) Robert Solow, the Nobel laureate, was the first who introduced the relationship between technology and economic growth into formal economic growth model in 1957. He characterized the economic growth as a growth in GDP per hour of labor. He referred the primary determinant of the growth to the increase in capital and, more precisely to investments in equipment, machinery and tools. Nonetheless, it amounted to less than quarter of the whole growth. Further Solow’s researches showed the connection between the growth and “technical change”. Since his findings, many theories proving the same principle were developed. One of the most famous was the concept of human capital (Lucas) in 1988 and the concept of knowledge spillovers (Romeo) in 1990. They divided the capital by human capital (education, knowledge) and physical capital. Today the development of human’s knowledge, its accumulation and its spread provide us with new opportunities we did not have before. Everyday we use some products or services that we were not able even to imagine ten years ago, for example. The same will happen in the next ten years when all the things that we are so used to today will be replaced with new highly technological and advanced ones. This all is a result of inventions and innovations development. We suppose that it is not even necessary to mention how the invention of such devices as radio, telephone, automobile and many others changed the usual life of people, their standard of living. In the other hand, economic progress itself requires the development of new ideas, which in their turn give birth to new ones. Nowadays, companies invest significant amount of money into R&D (research and development), make licensing agreements, joint ventures and etc. to reduce their costs, to make the production more efficient, to increase their market shares and so on. Different alliances between companies give them opportunities to learn and adopt new technology, methods and knowledge to have an advantage and become more competitive. Governments usually apply special policies to encourage and stimulate the growth of inventions and innovations by financing the activities directed to the technology development, special tax policies, participate in joint research and development projects with private firms and educational establishments. Let us have a deeper insight in “innovation” and “invention” terms to understand clearly what they do mean and the role of each of them in the economy. There is a significant difference between these words. Invention is a method of creating a new idea, product or technological process. An invention that achieves a completely unique function or result may be a radical breakthrough. Therefore, the acts of inventions appear much more seldom compared to innovations. Regarding to innovation process, it includes the launch of improved products (or service) to the market and finding more efficient ways of producing things. Research-derived invention is based on unpredictable new technologies, new capabilities, with an uncertain outcome. By contrast, commercial innovation identifies needs, describes outcomes and then works towards it.  In other words, research ends at the...
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