Chapter 11:

Managing Technological-Based Managing Technological-Based InnovationInnovation

WHAT is innovation

An innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations.

Innovation takes many forms

There is no universally accepted definition of the terms product innovation or new product

Instead, approaches to define the term have taken place within certain contexts:

• Firm-oriented definitions

• Market-oriented definitions

• Consumer-oriented definitions

• Product-oriented definitions

Product-oriented definitions

This approach focuses on the features inherent in the product itself and the effects these features are likely to have on consumers’ established usage patterns

Robertson identified three types of product innovations:• Continuous innovation

• Dynamically continuous innovation

• Discontinuous innovation

Continuous innovation

Introduction of a modified product rather than a totally new product

Little or no change in technology

Has the least disruptive influence on established usage patterns

Symbolic innovations tend to be continuous

Dynamically continuous innovation

May involve a new product or modification of an existing product

Some technical advances

Still does not disrupt or alter consumer buying and usage patterns

Discontinuous innovation

Introduction of a pioneering product

Involves a major technological advance

Consumers must learn new behavior patterns

May be difficult to market initially

Is rare

Chain-linked model of innovation (Rosenberg & Kline, 1986)

Types of innovations

Product innovation: introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics.

Process innovation: implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software.

Marketing innovation: implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing.

Organisational innovation: implementation of a new organisational method in the firm’s business practices, workplace organisation or external relations.

Degree of novelty

Diffusion

New to the firm

New to the market

New to the world

Disruptive innovations

1. Diffusion is the way in which innovations spread, through market or non-market channels, from their first worldwide implementation to different consumers, countries, regions, sectors, markets, and firms. Without diffusion, an innovation will have no economic impact. The minimum entry for a change in a firm’s products or functions to be considered as an innovation is that it must be new (or significantly improved) to the firm.

2. New to the firm: A product, process, marketing method, or organisational method can already have been implemented by other firms, but if it is new to the firm (or in case of products and processes: significantly improved), then it is an innovation for that firm.

3. New to the market: 1. the firm is the first to introduce the innovation onto its market. 2. The market is defined as the firm and its competitors. 3. The geographical scope is subject to the firm’s own view of its

operating market and thus can include both domestic and international firms.

4. New to the world: 1. the firm is the first to introduce the innovation for all markets and

industries, domestic and international. 2. implies a qualitatively greater degree of novelty than new to the

market.5. Disruptive innovations:

1. an innovation that has a significant impact on a market and on the economic activity of firms in that market.

2. focuses on the impact of innovations as opposed to their novelty. 3. These impacts can, for example, change the structure of the

market, create new markets, or render existing products obsolete. However, it might not be apparent whether an innovation is disruptive until long after the innovation has been introduced.

Innovation activitiesare all scientific, technological, organisational,

financial and commercial steps which actually, or are intended to, lead to the implementation of

innovations. Some innovation activities are themselves innovative, others are not novel activities

but are necessary for the implementation of innovations. Innovation activities also include R&D that is not directly related to the development of a

specific innovation.

Innovation activities for product and process innovations

1. Intramural (in-house) R&D: This comprises all R&D conducted by the enterprise, including basic research.

2. Acquisition of R&D (extramural R&D): R&D purchased from public or private research organisations or from other enterprises (including other enterprises within the group).

3. Acquisition of other external knowledge: Acquisition of rights to use patents and non-patented inventions, trademarks, know-how and other types of knowledge from other enterprises and institutions such as universities and government research institutions, other than R&D.

4. Acquisition of machinery, equipment and other capital goods: Acquisitions of advanced machinery, equipment, computer hardware or software, and land and buildings (including major improvements, modifications and repairs), that are required to implement product or process innovations.

5. Other preparations for product and process innovations: Other activities related to the development and implementation of product and process innovations, such as design, planning and testing for new products (goods and services), production processes, and delivery methods that are not already included in R&D.

6. Market preparations for product innovations: Activities aimed at the market introduction of new or significantly improved goods or services.

7. Training: Training (including external training) linked to the development of product or process innovations and their implementation.

Innovation activities for marketing and organisational innovations

Preparations for marketing innovations: Activities related to the development and implementation of new marketing methods. Includes acquisitions of other external knowledge and other capital goods that are specifically related to marketing innovations.

Preparations for organisational innovations: Activities undertaken for the planning and implementation of new organisation methods. Includes acquisitions of other external knowledge and other capital goods that are specifically related to organisational innovations.

Kinds of innovation activities

Successful in having resulted in the implementation of a new innovation (though they need not have been commercially successful).

Ongoing, work in progress, which has not yet resulted in the implementation of an innovation.

Abandoned before the implementation of an innovation.

Classifying firms by degree of innovativeness

The innovative firm is one that has introduced an innovation during the period under review. The innovations need not have been a commercial success – many innovations fail.

An innovation active firm is one that has had innovation activities during the period under review, including those with ongoing and abandoned activities. In other words, firms that have had innovation activities during the period under review, regardless of whether the activity resulted in the implementation of an innovation, are innovation active.

A potentially innovative firm is one type of “innovation active firm”, that has made innovation efforts but not achieved results. This is a key element in innovation policies: to help them overcome the obstacles that prevent them from being innovative (converting efforts into innovations) – Annex for developing countries.

Factors influencing innovation

Objectives: Identifying enterprises’ motives for innovating and measuring their importance

Hampering factors: reasons for not starting innovation activities at all, or factors that slow innovation activity or have a negative effect on expected results. These include economic factors, such as high costs or lack of demand, enterprise factors such as lack of skilled personnel or knowledge, and legal factors such as regulations or tax rules. The ability of enterprises to appropriate the gains from their innovation activities is also a factor affecting innovation.

Objectives and effects of innovation

Competition, demand and markets

• Replace products being phased out• Increase range of goods and services• Develop environment-friendly products• Increase or maintain market share• Enter new markets• Increase visibility or exposure for

products• Reduced time to respond to customer

needs

Production and delivery• Improve quality of goods and services• Improve flexibility of production or

service provision• Increase capacity of production or

service provision• Reduce unit labour costs• Reduce consumption of materials and

energy• Reduce product design costs• Achieve industry technical standards

• Reduce production lead times• Reduce operating costs for service

provision• Increase efficiency or speed of

supplying and/or delivering goods or services

• Improve IT capabilities

Workplace organisation• Improve communication and interaction

among different business activities• Increase sharing or transferring of

knowledge with other organisations• Increase the ability to adapt to different

client demands• Develop stronger relationships with

customers• Improve working conditions

Other• Reduce environmental impacts or

improve health and safety• Meet regulatory requirements

Factors hampering innovation activities

Knowledge factors:• Innovation potential (R&D, design, etc.)

insufficient• Lack of qualified personnel: Within the

enterprise / In the labour market• Lack of information on technology / markets• Deficiencies in the availability of external

services• Difficulty in finding co-operation partners

for: Product or process development / Marketing partnerships

• Organisational rigidities within the enterprise: Attitude of personnel/ managers towards change, Managerial structure of enterprise

• Inability to devote staff to innovation activity due to production requirements

Institutional factors:• Lack of infrastructure• Weakness of property rights• Legislation, regulations, standards, taxation

Cost factors:• Excessive perceived risks• Cost too high• Lack of funds within the enterprise• Lack of finance from sources outside the

enterprise: Venture capital / Public sources of funding

Market factors:• Uncertain demand for innovative goods or

services• Potential market dominated by established

enterprises

Other reasons for not innovating:

• No need to innovate due to earlier innovations

• No need because of lack of demand for innovations

Impacts and outcomes

Impacts of innovations on firm performance range from effects on sales and market share to changes in productivity and efficiency. Important impacts at industry and national levels are changes in international competitiveness and in total factor productivity, knowledge spillovers of firm-level innovations, and an increase in the amount of knowledge flowing through networks.

The outcomes of product innovations can be measured by the percentage of sales derived from new or improved products.

Linkages The innovative activities of a firm partly depend on the variety and structure of

its links to sources of information, knowledge, technologies, practices, and human and financial resources. Each linkage connects the innovating firm to other actors in the innovation system: government laboratories, universities, policy departments, regulators, competitors, suppliers, and customers. Innovation surveys can obtain information on the prevalence and importance of different types of linkages, plus the factors that influence the use of specific linkages.

Types of external linkages: • Open information sources provide openly available information that does

not require the purchase of technology or intellectual property rights, or interaction with the source.

• Acquisition of knowledge and technology are purchases of external knowledge and capital goods (machinery, equipment, software) and services embodied with new knowledge or technology that do not involve interaction with the source.

• Innovation co-operation is active co-operation with other firms or public research institutions for innovation activities (which may include purchases of knowledge and technology).

Sources for transfers of knowledge and technology

Open information

sources

Sources for purchases of knowledge

& technology

Co-operation partners

Internal sources within the enterprise: R&D Production Marketing Distribution

*****

Other enterprises within the enterprise group * * *

External market and commercial sources:Competitors Other enterprises in the industry Clients or customersConsultants/consultancy firms SuppliersCommercial laboratories

***

**

**

***

******

Public sector sources:Universities and other higher education institutionsGovernment/public research institutesPrivate non profit research institutesSpecialised public innovation support svcs

****

****

****

General information sources:Patent disclosures / Professional conferences, meetings, literature and journals / Fairs and exhibitions / Professional associations, trade unions / Other local associations / Informal contacts or networks / Standards or standardisation agencies / Public regulations (i.e. environment, security)

*

Data collection: The survey approach

The “subject” based approach starts from the innovative behaviour and activities of the firm as a whole. The idea is to explore the factors influencing the innovative behaviour of the firm (strategies, incentives and barriers to innovation) and the scope of various innovation activities, and above all to examine the outputs and effects of innovation. These surveys are designed to be representative of all industries so the results can be grossed up and comparisons made between industries.

The “object” approach involves the collection of data about specific innovations (usually a ‘significant innovation’ of some kind, or the main innovation of a firm). The approach involves collecting some descriptive, quantitative and qualitative data about the particular innovation at the same time as data is sought about the firm.

Innovation & R&D surveys

R&D and innovation are related phenomena which can lead some countries to consider the combination of R&D and innovation surveys. There are a number of points for and against:

•Overall response burden of the reporting units will be reduced.•Length of questionnaire could lead to a decline in response rates.•Possibility of analysing the relations between R&D and innovation activities at the unit level.

•Units not familiar with the concepts of R&D and innovation can confuse them.•Efficient method of increasing the frequency of innovation surveys.•The frames for the two surveys will generally be different. For example, the frame population for innovation surveys may cover industrial classifications (and small units) that are not included in R&D surveys. Combining them might involve sending questions about R&D to a large number of non-R&D performers that are included in the frame population for the innovation survey, and this would increase the cost of the joint survey.

In principle, other business surveys can also be merged with innovation surveys, including surveys on the diffusion of ICTs, and on the adoption of knowledge management practices.

Expenditures

Total expenditure for innovation activities comprises current and capital expenditure incurred for the innovation activities defined above. Current innovation expenditures are composed of labour costs and other current costs. Capital expenditures for innovations are composed of gross expenditures on land and buildings, on instruments and equipment and on computer software. Capital expenditures that are part of R&D are included in intramural R&D, while non-R&D capital expenditures linked to product and process innovations are included in acquisition of machinery, equipment and other capital goods. Non-R&D capital expenditures specifically linked to marketing or organisational innovations are included in preparations for marketing innovations and preparations for organisational innovations, respectively. The remaining categories of innovation activity consist solely of current expenditure.

Classification by main economic activity

Statistical units of innovation surveys can be broken down by different classifications. The most important classification is the principal economic activity of the statistical unit (“industry”). The International Standard Industrial Classification (ISIC Rev. 3.1) is the appropriate international classifications for this purpose. Countries that use a national industrial classification system rather than ISIC Rev. 3.1 should use concordance tables to convert their industrially classified data to ISIC Rev. 3.1.

Classification by size – detailed: number of employees

0

1 - 9

10 - 49

50 - 99

100 - 249

250 - 499

500 - 999

1 000 - 4 999

5 000 and above.

Classification by type of institution

Private enterprise:• National (no Controlled Affiliates (CA) abroad)

• Multinational:» Foreign-controlled affiliates (where the affiliate does not control

any other affiliates abroad).» Foreign-controlled affiliates with CAs (parent companies under

foreign control).» Parent companies with CAs abroad (parent company not under

foreign control).

Public enterprise, • Resident non-financial corporations and quasi-

corporations that are subject to control by government units.

Annex to the Oslo Manual

After the publication of the 2nd Oslo Manual, also developing countries started conducting innovation surveys.

The design of the surveys was intended to comply with Oslo Manual standards, with adaptations for capturing the particular characteristics of innovation processes. Adaptations were prepared by each country separately and with different approaches.

Bogotá Manual published by RICYT (Ibero American Network on S&T Indicators) first effort to compile particularities and guide the design of cross-nationally comparable innovation surveys.

Annex to Oslo Manual 3rd edition: Innovation surveys in developing countries

UIS circulated a base document prepared by RICYT to a vast network of experts in the developing world covering China, Thailand, Singapore, Malaysia, Hungary, India, Lebanon, South Africa, and Tanzania.

UIS drafted the final annex based on this input.

Characteristics of innovation in developing countries

Size and structure of markets and firms: - SMEs, Large firms (operate sub optimal production scale, higher unit cost, less efficiency) - Competitiveness (based on cheap labour, exploitation of natural resources. Not on efficiency, differentiated products) leads to fewer R&D and innovation projects.

Instability: - wide difference in potential for innovation limits long term innovation activity.

Informality: - rely on informal practices lack of systematic application not favourable for innovation

Particular economic and innovation environments: - prevalence of state-owned enterprises, para-statal enterprises lack of competitiveness discourage innovation. Some state-owned enterprises technological leader - S&T policies in countries with less developed economic system more impact on innovation than strategise of private enterprises. - Innovation in agriculture sector high economic impact.

Reduced innovation decision-making powers: - externally controlled or multinational organization. Technology transfer is a fundamental source of innovation.

Weak innovation systems: - fewer resources to innovation activities. - Government perform and finance R&D. - low level of resources are devoted to R&D by businesses reduce innovation potential of enterprises. - weak linkages (Uni/R&D Inst/BE) challenge capabilities to overcome technology related problems in BE.

Characteristics of innovation: - acquisition of embodied technology (equipment); Incremental changes; organizational changes.

Innovation measurement in developing countries

The definition of innovation needs to remain unchanged, as well as those concerning its subtypes.

The concept of potentially innovative firm is incorporated.

Measurement priorities:• Innovation capabilities (Human resources, Linkages, Quality

assurance systems, ICTs)• Expenditure on innovation activities• Organizational innovation

Principal adaptations

ICTs in innovation surveys• strategic use of new technologies (“Front office” vs “Back office”)

Linkages • To understand firm’s different linkages matrix of ‘linkage agents’ and ‘types of

linkage’ • geographical location of linkages; local, regional, national

Innovation Activities • “Hardware purchase”, and “Software purchase”• “Industrial design”, and “Engineering activities”• “Lease or rental of machinery, equipment and other capital goods”• “In-house software system development”• “Reverse engineering”

Human resources (by qualification, occupation, gender)

+ training Quality and environmental management

Methodological issues for developing country contexts

Information systems specificities – relative weakness of statistical systems – weak linkages between ‘surveys’ and ‘data sets’ prevent use of info. from other surveys in the design of innovation surveys. – lack of business registers problems in the sample frame. – Involvement of NSO experience in the design of industrial surveys; registers and background info.; higher response rate; wider-ranging analysis. – no basic info. on firms’ performances (sales, investment, exports) relationship between action taken by the firm for innovation and market performance.

Application of the survey - interviews made in person; trained staff

Questionnaire design – separate sections (economic data; finance div., innovation process; product/plant manager). – include guidelines, definitions, present in more than one language

Frequency – 3 to 4 years, high cost

Publication – results should be published and distributed widely. Increase further participation and awareness.

Difficulties – lack of appreciation of the importance of innovation. – Managers are secretive about finance. – lack of adequate legislative base.

Thinking ahead

The role of entrepreneurs and their attitudes towards innovation.

The intention to capture innovations driven by factors other than market forces, and in particular innovations conducted by the public sector.

The adaptation of methodology to measure innovation in the primary sector (particularly in agriculture).

The need for better measuring minor or incremental changes, including innovative applications of existing products or processes, and the so-called 'backwards integration' of technological capability.

The development of indicators reflecting sub-national (regional) innovation systems.

Innovation Diagnoses: Innovation Diagnoses:

3 Big Questions3 Big Questions

1. Do we have an innovation problem or another distortion?

The TFP is a measure of our ignorance, nothing more

Allocation of production factorsMicro rigidities that prevent the entry of more

productive companies?Haltiwanger– poor allocation could reduce the EU's

GDP by EU 40%Hsieh and Klenow (2007) India and Chile 35-60%

more productive with a good allocation Allocation within the company (labor markets?)

Chile– new restrictions cost .5% in annual growthTechnological progress (innovation):

knowledge accumulation.

00.5

11.5

22.5

33.5

44.5

5

0 1 2 3 4

Source: Rodriguez and Maloney (2005)

2. Is it a question of knowledge accumulation or of accumulation in general?

K/L

R&D and K/L

R&D

Returns on R&D vs. Distance to the Frontier:Complementary factors are key

Distance to the economic frontier (z)

Poor countries: low complementarity

Medium income: imitator/innovative

Advanced: innovative

Source: Goñi, Lederman and Maloney (2008)

Distance to the technological frontier

3. What kind of innovation is required?

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

4 5 6 7 8 9 10 11

Pred

icted

and

Obs

erve

d R&

D/GD

P (%

)

Log GDP per Capita

Israel

Finlandia

India

China

Corea del Sur

LAC-5 España

ArgentinaMéxico

Brasil

Chile

2

21&

CAPGDP

CAPGDP

GDPDR

Source: Goñi, Lederman and Maloney (2008)

We should look at the PRODUCTIVITY system as a

wholeWe should place innovation in the context

of accumulation in general with the company at the centerFinancial markets? Entrepreneurship?

Marketing? Other barriers?Kiwis– how to leave the island

Without this, there is a risk that increasing the C&T would be "pushing on a thread"

Universities/Research centers/

Technology extension

The company

•Macro Framework•Competitive Structure•Trade Regime•International Trade•Entrepreneurial Spirit

Innovation Supply Demand

A

Accumulation/Allocation

Barriers for accumulation/allocation:•Financing •Entry/Exit barriers•Regulatory/investment climate

Barriers to knowledge accumulation:•Market failures (&IP)•Venture capital (VC)•Restrictions (employment, etc.)

•Human capital•Quality systems•Dissemination of best practices/processes •Science and technology system•International links

K

Innovation System Structure

How do we know if the How do we know if the system is working? system is working?

The raw material of innovation: Education Performance

ArgentinaChile

Uruguay

Tunisia

Thailand

M acao-China

Latvia

Indonesia

HongKong,China

Brazil

United States

Turkey

Switzerland

Sweden

Sp ain

Slovak Republic

Portugal

PolandNorway

New Zealand

Netherlands

Mexico

Japan

Italy

IrelandIceland

Hungary

Greece

GermanyFrance

Finland

DenmarkCzech Republic

Belgium

Austria

Australia

300

350

400

450

500

550

0 5 10 15 20 25 30 35 40

2003

PIS

A M

ath

Scor

e (M

ean)

2001 Expenditure per student, primary (% of GDP per capita)Education Expenditure / Per capita GDP

Stan

dard

ized

mat

hem

atic

s tes

ts

2.6 2.8 3 3.2 3.4mean of management

USGermanySweden

JapanCanadaFrance

ItalyGreat Britain

AustraliaNorthern Ireland

PolandRepublic of Ireland

PortugalBrazilIndia

ChinaGreece

New Measurements of Management Quality

Source: Bloom & Van Reenen (2009) – Definition: “Average country management score, (monitoring, targets and incentives management scored on a 1 to 5 scale)”

The efficiency of generating knowledge

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

AR

G

BRA

CH

L

CO

L

CR

I

MEX

PER

UR

Y

VEN

TWN

KO

R

ISR

FIN

NO

R

Patents = B1R&D + Bp Country*R&D

Source: Bosch, Lederman and Maloney (2009)

University/Business Cooperation is low...

(business interviews - rating from 1 to 7)

Coop. Univ/Business

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Arg Bra Chi Col CR Mex Chn Esp Cor Ind Irl Aus Sw e Isr Fin EUA

Calidad de Inst. Cientif icas Colab. Uni/EmpresasQuality of scientific inst.

Source: Maloney (2009)

Students Abroad per Million Tertiary Enrolled

0200400600800

10001200140016001800

Austra

liaBraz

ilChil

e

New Zea

land

China

Vietna

m

Colombia

Mexico Ind

ia

Malays

ia

Taiwan

Korea

Canad

a

Students studying in the US / Tertiary Students

... And the Links between University/Global Knowledge Centers are Weak