Innovation:DefinitionsandMeasurementDr.MScBertSadowskiTechnischeUniversiteitTUeEindhovenUniversity of TechnologyWhere innovation starts
Innovation: Definitions and Measurement Dr. MSc Bert Sadowski
AgendaInnovationmodels:Fromlinearto interactivemodelsFormsofinnovation:Incrementalvs.radicalinnovationsAssumptionsofinnovation:UncertaintyandEvolutionMeasuringinnovations:The role of indicesTechnischeUniversiteitTUEindhoveneUniversityofTechnology9/5/2013EconomicsofInnovation2013
9/5/2013 1 Agenda • Innovation models: From linear to interactive models • Forms of innovation: Incremental vs. radical innovations • Assumptions of innovation: Uncertainty and Evolution • Measuring innovations: The role of indices Economics of Innovation 2013
Example:OlympicGames2012VolkskrantTechnischeUniversiteitTUEindhoveneUniversityofTechnology9/5/2013PAGE2EconomicsofInnovation2013
Example: Olympic Games 2012 Economics of Innovation 2013 9/5/2013 PAGE 2 Volkskrant
TheProblem:FinancingR&DprojectR&Dmanager:E2million to continue with a particular researchproject.Thesuccessoftheproject(asmeasured by obtainingapatent)notassured(7o%chance).(Why?)IfPatentawarded,Licensethepatent(estimated25million)ORInvestinproductionandmarketing(anadditional E1omillion).Withownproduction,uncertainty of demandandassociatedprofitfrom sales:Highdemand:Estimated25%chanceof55millionprofitfromsales.Mediumdemand(probability55%),E21millionprofitsfromsales.Lowdemand (probability2o%),profitsfromsalesjustE3million.Technische UniversiteitTUEindhovenUniversity of Technology9/5/2013PAGE3EconomicsofInnovation2013
The Problem: Financing R&D project • R&D manager: €2million to continue with a particular research project. • The success of the project (as measured by obtaining a patent) not assured (70% chance). (Why?) • If Patent awarded, • License the patent (estimated €25 million) OR • Invest in production and marketing (an additional €10 million). • With own production, uncertainty of demand and associated profit from sales: • High demand: Estimated 25% chance of €55 million profit from sales. • Medium demand (probability 55%), €21 million profits from sales. • Low demand (probability 20%), profits from sales just €3 million. Economics of Innovation 2013 9/5/2013 PAGE 3
DecisiontreeforR&DinvestmentTRUE70,0%Licence Techndogy25.000.0002300000070,0%DecisionPatent Awarded0230000025,0%0,0%Demand High430000005500000FALSEChanceDevelop Directly-10.000.000,00139000000,0%55,0%Demand Mediur2100000090000000,0%20,0%Demand Low-90000003000000ChanceTRLContinueDevelopment2.000.000155000030.0%30,0%Patent not awarded0-2000000DecisionR&D decision of company155000000,0%FALSEStop Development0Technische UniversiteitTUEindhovenJUniversity of TechnologyEconomicsofInnovation20139/5/2013PAGE4
Decision tree for R&D investment Economics of Innovation 2013 9/5/2013 PAGE 4 TRUE 70,0% € 25.000.000 23000000 70,0% Decision 0 23000000 25,0% 0,0% 55000000 43000000 FALSE Chance € -10.000.000,00 13900000 55,0% 0,0% 21000000 9000000 20,0% 0,0% 3000000 -9000000 TRUE Chance € -2.000.000 15500000 30,0% 30,0% 0 -2000000 Decision 15500000 FALSE 0,0% 0 0 R&D decision of company Stop Development Continue Development Patent not awarded Licence Technology Patent Awarded Demand High Demand Medium Demand Low Develop Directly
MODELSOFINNOVATIONEMORETHANR&DTechnischeUniversiteitTUEindhoveneUniversity of Technology9/5/2013PAGE5EconomicsofInnovation2013
MODELS OF INNOVATION: MORE THAN R&D Economics of Innovation 2013 9/5/2013 PAGE 5
Terminology"Innovation" in daily lifeTerminology:-Google:"lnnovation"(406.000.000hits),"lnvention"(120.000.000hits),"Diffusion"(131.000.000hits).In contrastto commonlanguage:-WebsterDictionary("lntroductionofsomething new;new ideas,method or device")Britannica:"Somesocial changesareresultofinnovation"Differentdisciplines:Economics,Sociology,Law,Management (Strategic and Innovation Management)Technische UniversiteitTUEindhovenUniversityofTechnology9/5/2013PAGE6EconomicsofInnovation2013
Terminology "Innovation” in daily life • Terminology: − Google: "Innovation" (406.000.000 hits), "Invention" (120.000.000 hits), "Diffusion" (131.000.000 hits) • In contrast to common language: − Webster Dictionary (“Introduction of something new; new ideas, method or device") − Britannica: "Some social changes are result of innovation" − Different disciplines: Economics, Sociology, Law, Management (Strategic and Innovation Management) Economics of Innovation 2013 9/5/2013 PAGE 6
Schumpeter's definition ofinnovationDefinition:“Carryingout of new combinationsIntroduction ofanewgoodIntroductionofanewmethodofproductionOpeningofanewmarketOpeningofanewsourceofsupplyCarrying out of new organization of industry,likethe creationor breach of monopolyDefiningthe stagesoftechnological change:Invention(Generationofnewideas)Innovation(Developmentofnewideasintomarketableproductsandprocesses)Diffusion(Newproductsandprocessesspreadacrossthepotential market)TechnischeUniversiteitTUEindhovenUniversityof Technology9/5/2013EconomicsofInnovation2013
Schumpeter’s definition of innovation • Definition: “Carrying out of new combinations − Introduction of a new good − Introduction of a new method of production − Opening of a new market − Opening of a new source of supply − Carrying out of new organization of industry, like the creation or breach of monopoly • Defining the stages of technological change: − Invention (Generation of new ideas) − Innovation (Development of new ideas into marketable products and processes) − Diffusion (New products and processes spread across the potential market) Economics of Innovation 2013 9/5/2013 7
Linearmodel ofinnovationDesignResearchandandInventionInnovationDevelopmentCreativityCommercializationldeaGenerationTechnischeUniversiteitTUEindhovenJUniversityof Technology9/5/20138EconomicsofInnovation2013
Linear model of innovation 9/5/2013 8 Research and Creativity Invention Design and Development Innovation Idea Generation Commercialization Economics of Innovation 2013
Linearmodel ofinnovationFrombasicresearchandcreativity>inventiongoesfrom stageof idea generationtostage ofcommercializationStageof commercializationincludesdesignstageCommercializationmeansinnovationisinthemarket"TechnischeUniversiteitTUEindhoveneUniversityofTechnology9/5/2013PAGE9EconomicsofInnovation2013
Linear model of innovation • From basic research and creativity > invention goes from stage of idea generation to stage of commercialization • Stage of commercialization includes design stage • Commercialization means innovation is “in the market” Economics of Innovation 2013 9/5/2013 PAGE 9