Case 2: the economics of innovations
Problem statement: What is the economics of innovations?
Brainstorm:
Innovations:
o service products process
o 4 conditions: new, applicable in the field,
Innovation theories
Classical, schumpeterian, Arrovian, evolutionary and new institutional economic
approaches of innovation.
Factors influencing innovations (demand, supply, quality, competition)
Competition leads to innovation
Cost-effectiveness → new innovations should be cost-effective.
Learning goals:
1. What do economists mean by innovations?
Defining and characterizing innovation in general’, chapter 2 from: Ferrandiz, JM, A Mordoh,
J. Sussex (2012). The many faces of innovation. London: Office of Health Economics, pp.
12-16.
Innovation is generally defined as a process concerning ‘the search for, and the discovery,
experimentation, development, imitation, and adoption of new products, new process and new
organisational set-ups’ (Dosi, 1988). It covers a variety of disciplines, including science, economics,
corporate management and marketing, as it proceeds through ‘the exploration and exploitation of
opportunities for a new or improved product, services or processes’. Thus a discovery or invention
drawing from basic and applied research becomes an innovation if it is implemented in the market or
used within the production process, and is adopted by other parties beyond the discoverers.
Innovation implies an advance that is not merely technological but which also brings social and
economic consequences.
Further, the concept of diffusion of innovation relates to the efforts of buyers and competitors to
introduce the new products, processes or services; and diffusion generally leads to further innovation
on the part of developers and users
Swann:
According to economist, an innovation is the commercial application of an invention. An invention is
a generation of new ideas through research or other forms of creativity (Swann, 2009). It should be
an idea in terms of value, profit or be bought and sold on the market. According to economics, an
innovation is the successful exploitation of new ideas!
- Swann: successful exploitation of new ideas (2009).
Invention: generation of new ideas through research or others forms of creativity Innovation: the
commercial application of invention. So you need to have an invention to generate an innovation
An invention that not has been brought to the market, is no innovation.
Difference innovation vs. invention
,It is also common to differentiate between invention and innovation, the latter being characterized
by its diffusion: an invention with no market, is thus not an innovation
Invention = generation of new ideas through research or other forms of creativity.
Uncertain and successive improvements when innovating
- Innovating is an uncertain activity since you never know how the innovation is evaluated by
the customers/society and what the exact impact is
- The fact that new technologies come into the market in a primitive/embryonal form which
can be improved and widely adopted only after its first introduction highlight
Innovation = the successful exploitation of new ideas (commercial application). Innovation results
from these three steps:
1. Research and creativity (obtain new knowledge) Creativity = process or an action, difficult to
describe due to lack of rules
2. Invention = result of creativity, new ideas
3. Design and development (development = a channel in the creativity process, besides the design)
4. innovation
Technological change: a type of innovation – technological change is always an innovation, but
innovation is not always a technological change
Meaning of Technological Change: Technological change means the technical knowledge used
in the production of capital and machinery. The various changes in technology leads to an
increase in the productivity of labour, capital and other production factors.
Pouvourville, G. de (2001), Innovation as a major research issue in health economics,
HEPAC, 2, 139-141 (Springer Verlag)
, The path from the production of knowledge to innovation is far from being straightforward, with an
easyflow from upstream to downstream. Each part of the process, fundamental re- search, industrial
research and development (R&D), and diffusion, has its own dynamic, with more or less autonomy
from each other
At one end, there are organizations and institutions dedicated to fundamental research and the
production of knowledge.
- From an economic analysis perspective, knowledge is a public good: it cannot easily be
appropriated by one agent, because to be validated it needs the openness to the critique of
the scientific community and because its diffusion creates positive externalities, it is a non
rival good: who uses it does not "consume" it, and thus does not deprive someone else from
using it finally, it is cumulative, with increasing returns.
- Be- cause of this, but also because of the strategic aspects of scientific knowledge for military
and economic power of nations, public organizations play a major role in science, in all
developed countries.
In most developed countries, there also exists fiscal incentives for firms to invest in R&D. It is a
particularity of the health care sector that this development is under tight public control for safety
reasons. It requires close cooperation with the prescribers of such goods and services, i.e., health
care professionals, to finalize the products through a long experimental process.
Looking at health care, another actor is involved in the diffusion of the innovation before it gets to
the final user, the patient. Insurers, public or private, act as the patient's agent since they will decide
what innovations to buy and at what price. The final user, the patient, is the last link of the chain
Aspects of this process; health economists contributed to the process of diffusion:
1) Rationalization of the allocation of resources in the absence of a
price signal on a free market
2) Diffusion process; how structural inefficiencies in health care delivery
can either hinder the diffusion of an innovation or lower it’s
collective benefits, because part of the innovation rent is captured
by different actors in the system.
3) Studies the financing of clinical research in large teaching hospitals
and it’s impact on costs.
4) Hot debate about the pricing and reimbursement of drugs and other
medical devices in either national health systems or social security
systems.
Health economists did a tremendous amount of research work in economics on innovation in the
health care service sector. Research on innovation opens new field for health economists that
traditionally been covered by industrial economics or economics of R&D.
As suggested here briefly, this in- vestment could take three aspects: theoretical, to import and adapt
the conceptual tools of other fields of economics to innovation in health, institutional, to describe
the prevailing situations and understand its economic rationale, and empirical, to evaluate the
outcome of different settings on efficiency. In this effort for innovative research, Europe could be at
the same time an opportunity for cooperation and a rich reservoir for empirical analysis allowing the
com- parison of different regulatory contexts
1. Which types of innovations exist?
Problem statement: What is the economics of innovations?
Brainstorm:
Innovations:
o service products process
o 4 conditions: new, applicable in the field,
Innovation theories
Classical, schumpeterian, Arrovian, evolutionary and new institutional economic
approaches of innovation.
Factors influencing innovations (demand, supply, quality, competition)
Competition leads to innovation
Cost-effectiveness → new innovations should be cost-effective.
Learning goals:
1. What do economists mean by innovations?
Defining and characterizing innovation in general’, chapter 2 from: Ferrandiz, JM, A Mordoh,
J. Sussex (2012). The many faces of innovation. London: Office of Health Economics, pp.
12-16.
Innovation is generally defined as a process concerning ‘the search for, and the discovery,
experimentation, development, imitation, and adoption of new products, new process and new
organisational set-ups’ (Dosi, 1988). It covers a variety of disciplines, including science, economics,
corporate management and marketing, as it proceeds through ‘the exploration and exploitation of
opportunities for a new or improved product, services or processes’. Thus a discovery or invention
drawing from basic and applied research becomes an innovation if it is implemented in the market or
used within the production process, and is adopted by other parties beyond the discoverers.
Innovation implies an advance that is not merely technological but which also brings social and
economic consequences.
Further, the concept of diffusion of innovation relates to the efforts of buyers and competitors to
introduce the new products, processes or services; and diffusion generally leads to further innovation
on the part of developers and users
Swann:
According to economist, an innovation is the commercial application of an invention. An invention is
a generation of new ideas through research or other forms of creativity (Swann, 2009). It should be
an idea in terms of value, profit or be bought and sold on the market. According to economics, an
innovation is the successful exploitation of new ideas!
- Swann: successful exploitation of new ideas (2009).
Invention: generation of new ideas through research or others forms of creativity Innovation: the
commercial application of invention. So you need to have an invention to generate an innovation
An invention that not has been brought to the market, is no innovation.
Difference innovation vs. invention
,It is also common to differentiate between invention and innovation, the latter being characterized
by its diffusion: an invention with no market, is thus not an innovation
Invention = generation of new ideas through research or other forms of creativity.
Uncertain and successive improvements when innovating
- Innovating is an uncertain activity since you never know how the innovation is evaluated by
the customers/society and what the exact impact is
- The fact that new technologies come into the market in a primitive/embryonal form which
can be improved and widely adopted only after its first introduction highlight
Innovation = the successful exploitation of new ideas (commercial application). Innovation results
from these three steps:
1. Research and creativity (obtain new knowledge) Creativity = process or an action, difficult to
describe due to lack of rules
2. Invention = result of creativity, new ideas
3. Design and development (development = a channel in the creativity process, besides the design)
4. innovation
Technological change: a type of innovation – technological change is always an innovation, but
innovation is not always a technological change
Meaning of Technological Change: Technological change means the technical knowledge used
in the production of capital and machinery. The various changes in technology leads to an
increase in the productivity of labour, capital and other production factors.
Pouvourville, G. de (2001), Innovation as a major research issue in health economics,
HEPAC, 2, 139-141 (Springer Verlag)
, The path from the production of knowledge to innovation is far from being straightforward, with an
easyflow from upstream to downstream. Each part of the process, fundamental re- search, industrial
research and development (R&D), and diffusion, has its own dynamic, with more or less autonomy
from each other
At one end, there are organizations and institutions dedicated to fundamental research and the
production of knowledge.
- From an economic analysis perspective, knowledge is a public good: it cannot easily be
appropriated by one agent, because to be validated it needs the openness to the critique of
the scientific community and because its diffusion creates positive externalities, it is a non
rival good: who uses it does not "consume" it, and thus does not deprive someone else from
using it finally, it is cumulative, with increasing returns.
- Be- cause of this, but also because of the strategic aspects of scientific knowledge for military
and economic power of nations, public organizations play a major role in science, in all
developed countries.
In most developed countries, there also exists fiscal incentives for firms to invest in R&D. It is a
particularity of the health care sector that this development is under tight public control for safety
reasons. It requires close cooperation with the prescribers of such goods and services, i.e., health
care professionals, to finalize the products through a long experimental process.
Looking at health care, another actor is involved in the diffusion of the innovation before it gets to
the final user, the patient. Insurers, public or private, act as the patient's agent since they will decide
what innovations to buy and at what price. The final user, the patient, is the last link of the chain
Aspects of this process; health economists contributed to the process of diffusion:
1) Rationalization of the allocation of resources in the absence of a
price signal on a free market
2) Diffusion process; how structural inefficiencies in health care delivery
can either hinder the diffusion of an innovation or lower it’s
collective benefits, because part of the innovation rent is captured
by different actors in the system.
3) Studies the financing of clinical research in large teaching hospitals
and it’s impact on costs.
4) Hot debate about the pricing and reimbursement of drugs and other
medical devices in either national health systems or social security
systems.
Health economists did a tremendous amount of research work in economics on innovation in the
health care service sector. Research on innovation opens new field for health economists that
traditionally been covered by industrial economics or economics of R&D.
As suggested here briefly, this in- vestment could take three aspects: theoretical, to import and adapt
the conceptual tools of other fields of economics to innovation in health, institutional, to describe
the prevailing situations and understand its economic rationale, and empirical, to evaluate the
outcome of different settings on efficiency. In this effort for innovative research, Europe could be at
the same time an opportunity for cooperation and a rich reservoir for empirical analysis allowing the
com- parison of different regulatory contexts
1. Which types of innovations exist?
