This document discusses different aspects of innovation including the key differences between innovation and invention. It notes that innovation drives economic growth and can occur through new products or processes. Product innovations can help sustain existing products or disrupt markets through new technologies or business models. The document also discusses various thinkers like Joseph Schumpeter who saw entrepreneurial innovations as a driver of growth. It examines what drives innovation like recessions, tax incentives, entrepreneurship, trade and more.

1. Innovation in Markets A2 Micro Revision – May 2011

2. Innovation and Invention Innovation is “making changes to something established” (Nissan Innovation Video) Invention is the act of “coming upon or finding: discovery” Creative destruction: A process by which new business models, products and services replace outdated approaches - Dyson Films – You Tube Innovation drives economic growth - it has accounted for 63 per cent of annual labour productivity growth in the UK since 2000

3. Product and process innovation Product innovation Small-scale, subtle changes to the characteristics and performance of a particular product Process innovation Changes to the way in which production takes place or organised Change in cost structures especially for products where marginal costs are low

4. Product innovation A source of synergy demand Sustaining innovations Extending product life cycles Reinforcing brand loyalty Disruptive innovations Disruptive technologies Disruptive business models Contestability – threatening power of incumbents Often independent of the scale of production First mover advantage (e.g. eBay, Coca Cola)

5. Joseph Schumpeter “the opening up of new markets, foreign or domestic, and the organizational development [...] illustrate the same process of industrial mutation, that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Schumpeter: Entrepreneurial innovations are a key driver of economic growth

6. Innovation and Imitation “Competition drives innovation, but it also begets imitators, “swarms” of which copy their rival’s innovation, attracting investment, and leading to a boom. When the original innovator’s profit advantage is eliminated, investment moves elsewhere, and the sector may even shrink, until the next disruptive innovation, which restarts the cycle.”

7. William Baumol “As soon as quality competition and sales effort are admitted into the sacred precincts of theory, the price variable is ousted from its dominant position….. "“innovative activity—which in other types of economy is fortuitous and optional—becomes mandatory, a life-and-death matter for the firm.” Baumol: Contestable oligopolies might provide a fertile market structure for innovation

8. So what drives innovation? Google’s self-driving cars

9. Prizes: Proctor and Gamble P&G developed a radical open model of innovation. The business set a goal to acquire half of its innovations from outside the business. It estimated that for every P&G researcher there were 200 scientists or engineers elsewhere in the world who were just as good – a total of 1.5 million people whose talents it could potentially use to develop new products. Following this approach, P&G’s Connect + Develop strategy has already resulted in more than 1,000 agreements between the company and external collaborators

10. Drivers of innovation Recession (necessity the mother of invention?) Tax credits for R&D and lower corporation tax Entrepreneurship – an “agent of innovation” Creative clusters / external scale economies Open Global Trade and Investment Migration of skilled workers / diversity of pop Investment in science & tech (human capital) Decentralised management / willingness to take risks and survive failures Protection of Intellectual Property so that returns from innovation can be commercialised Horizontal co-operation between firms Innovation and invention prizes

11. NESTA website