Economics

Study Notes

Innovation and Government Policy

Level:: A Level

Board:: AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

Supply-side strategies are usually linked directly with attempts to promote more innovative behaviour. Indeed the focus of government policy is firmly focused on improvements in the microeconomics of markets

Which policies might encourage more innovation?

Tax credits / capital investment allowances
Policies to encourage small business creation and entrepreneurship
Toughening up of competition policy to expose cartel behaviour, but to allow and promote joint ventures to fund research and development
Lower corporation taxes to encourage innovative foreign companies to establish in Britain
Increased funding for research in our universities
Lower corporation taxes on profits generated from the exploitation of patents – this is known as a Patent Box and is geared towards incentivising research and development
Government spending might be geared towards smaller more innovative businesses – for example UK government announced plans in 2014 to switch from Microsoft Office to open source for the software bought by large government departments

Technology Mechanism	How It Creates an Business Advantage	Example
A new process	Produce faster, at lower cost or better quality	Internet banking
Solve a complex problem	Do something competitors find hard to master	Google search engine
A new product	The first product to market	The iPod
Protect a valuable idea	Have something others can only sell if they pay for a licence	Pfizer's Viagra
Rewrite the rules	A completely new approach which makes other products and markets redundant	Digital cameras

A plan to fit all new cars sold in the European Union from March 2018 with technology to contact emergency services after an accident - this will be known as e-call technology

BBC News (March 2015)

Important Developments:

Increasingly much innovation is done by smaller firms and by entrepreneurs– indeed multinational corporations are now out-sourcing their research and development spending to small businesses at home and overseas – much is being shifted to cheaper locations "offshore"—in India and Russia. See this article on entrepreneurship in the Economist.
Innovation is now a continuous process – in part because the length of the product cycle is getting shorter as innovations are rapidly copied by competitors, pushing down profit margins and (according to a recent article in the economist) "transforming today's consumer sensation into tomorrow's commonplace commodity"
Innovation is not something left to chance – the most successful firms are those that pursue innovation in a systematic fashion – it becomes part of their corporate culture.
Demand innovation is becoming more important: In many markets, demand is either stable or in decline. The response is to go for "demand innovation" - discovering fresh demand from consumers and adapting an existing product to meet them – the toy industry is a classic example of this.
The recession and slow recovery may be a stimulus to innovation; many of the successful 'new' products of today were developed and tested during the last recession.