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This week's Wiki-Wednesday topic is Innovation. An excerpt of the Wikipedia page on this topic is below, but if you would like to read the entire article, you can click here to connect to Wikipedia. We chose this topic because of a series of posts being done this week by BMP mentor Jon Hansen on his blog Procurement Insights. He is addressing a growing debate over the benefits of using procurement contests - particularly in public procurement - to innovate without absorbing the direct costs of a major R&D investment. Come read today's post on our own blog "The Point" for more on that topic.


The term innovation derives from the Latin word innovatus, which is the noun form of innovare "to renew or change," stemming from in-"into" + novus-"new". Although the term is broadly used, innovation generally refers to the creation of better or more effective products, processes, technologies, or ideas that are accepted by markets, governments, and society. Innovation differs from invention or renovation in that innovation generally signifies a substantial positive change compared to incremental changes.

Business and Economics

In business and economics, innovation is the catalyst to growth. With rapid advancements in transportation and communications over the past few decades, the old world concepts of factor endowments and comparative advantage which focused on an area’s unique inputs are outmoded for today’s global economy. Now, as Harvard economist Michael Porter points out competitive advantage, or the productive use of any inputs, which requires continual innovation is paramount for any specialized firm to succeed.[2] Economist Joseph Schumpeter, who contributed greatly to the study of innovation, argued that industries must incessantly revolutionize the economic structure from within, that is innovate with better or more effective processes and products, such as the shift from the craft shop to factory. He famously asserted that “creative destruction is the essential fact about capitalism.”[3] In addition, entrepreneurs continuously look for better ways to satisfy their consumer base with improved quality, durability, service, and price which come to fruition in innovation with advanced technologies and organizational strategies. [4]

One prime example is the explosive boom of Silicon startups out of the Stanford Industrial Park. In 1957, dissatisfied employees of Shockley Semiconductor, the company of Nobel laureate and co-inventor of the transistor William Shockley, left to form an independent firm, Fairchild Semiconductor. After several years, Fairchild developed into a formidable presence in the sector. Eventually, these founders left to start their own companies based on their own, unique, latest ideas, and then leading employees started their own firms. Over the next 20 years, this snowball process launched the momentous startup company explosion of information technology firms. Essentially, Silicon Valley began as 65 new enterprises born out of Shockley’s eight former employees. [5]

And a little bonus... from the Wikipedia page on Innovation Economics

Historical Origins

If Adam Smith is the patron saint of classical economics and Keynes of Keynesian economics, it is Joseph Schumpeter who is the patron saint of innovation economics, especially with his classic 1942 book Capitalism, Socialism and Democracy. Writing around the same time as Keynes, Schumpeter had a decidedly different take on the economy and on economics. For Schumpeter it was evolving institutions, entrepreneurs, and technological change that were at the heart of economic growth. He argued that creative destruction is crucial in capitalism.[1]

But it is only within the last 15 years that a theory and narrative of economic growth focused on innovation that was grounded in Schumpeter’s ideas has emerged. Innovation economics attempted to answer the fundamental problem in the puzzle of total factor productivity growth. Continual growth of output could no longer be explained only in increase of inputs used in the production process as understood in industrialization. Hence, innovation economics focused on a theory of economic creativity that would impact the theory of the firm and organization decision-making. Hovering between heterodox economics that emphasized the fragility of conventional assumptions and orthodox economics that ignored the fragility of such assumptions, innovation economics aims for joint didactics between the two. As such, it enlarges the Schumpeterian analyses of new technological system by incorporating new ideas of information and communication technology in the global economy.[2]

Indeed, a new theory and narrative of economic growth focused on innovation has emerged in the last decade. Innovation economics emerges on the wage of other schools of thoughts in economics, including new institutional economics, new growth theory, endogenous growth theory, evolutionary economics, neo-Schumpeterian economics– provides an economic framework that explains and helps support growth in today’s knowledge economy.

Leading theorists of innovation economics include both formal economists, as well as management theorists, technology policy experts, and others. These include Paul Romer, Elhanan Helpman, W. Brian Arthur, Robert Axtell, Eric Beinhocker, Richard R. Nelson, Richard Lipsey, Michael Porter, Christopher Freeman.


Innovation economists believe that what primarily drives economic growth in today’s knowledge-based economy is not capital accumulation, as claimed by neoclassicalism asserts, but innovative capacity spurred by appropriable knowledge and technological externalities. Economics growth in innovation economics is the end-product of knowledge (tacit vs. codified); regimes and policies allowing for entrepreneurship and innovation (i.e., R&D expenditures, permits, licenses); technological spillovers and externalities between collaborative firms; and systems of innovation that create innovative environments (i.e., clusters, agglomerations, metropolitan areas).[3] [4]

In 1970, famed economist Milton Friedman said in the New York Times that a business’s sole purpose is to generate profits for their shareholders and companies that pursued other missions would be less competitive, resulting in fewer benefits to owners, employees, and society. Yet data over the past several decades shows that while profits matter, good firms supply far more, particularly in bringing innovation to the market. This fosters economic growth, employment gains, and other society-wide benefits. Business school professor David Ahlstrom asserts: “the main goal of business is to develop new and innovative goods and services that generate economic growth while delivering benefits to society.” [5]