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
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.
You might also like
Supply side: UK to launch new 'high risk' science agency
19th February 2021
51st thing that made the modern economy
25th September 2017
Innovation Clusters as Drivers of Innovation
22nd February 2016
Supply-side Economics: Commercialising University Research
10th November 2015
Shazam turns to image recognition
30th May 2015
Building the Entrepreneurial State
2nd April 2015
Market structures and innovation
Study Notes
Recommended

Exam support for 2022
Online Grade Booster Courses for A-Level Exams in May & June 2022
Exam technique, advance information support, live revision and more from the tutor2u subject specialist teams