Innovation and Society

Innovation and Economy

Innovation has a significant impact on the economy. On the one hand, it can destroy existing businesses, harming the economy. An example of this is the spread of computers, which has eliminated many administrative jobs now performed by machines.

On the other hand, innovation creates new businesses and can improve the efficiency of existing ones, generating positive effects. In general, negative effects occur in the short term, while positive effects persist in the long term. For this, economists and politicians often consider that the positive effects outweigh the negative ones.

Innovations, especially in products and underlying technologies, also influence long-term economic development. In the early 20th century, Nikolai Kondratiev developed a theory about 50-year waves in the economy caused by technological development.

General-purpose technologies, such as steel production, impact numerous industrial sectors and generate strong economic growth until it stagnates and enters a recession, after which new technologies drive a new growth cycle. Although the theory is appealing for its simplicity, it lacks sufficient evidence to be widely accepted.

Innovation for Society

Innovation has a deep impact on society. It is a key tool for solving social issues. The United Nations considers innovation essential to address global challenges such as poverty, inequality, and climate change, including it in the Sustainable Development Goals (SDGs), specifically in Goal 9: “Build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation.”

For example, electric cars solve problems of pollution from vehicle emissions and if electricity is generated sustainably, they also reduce CO2 emissions. Innovations in business models, such as car-sharing, can reduce the use of materials and the space required for parking in urban areas.

Many companies today integrate sustainable development into their innovation strategies. Food companies, for example, are developing packaging technologies that preserve products and have a lower environmental impact, as well as vegetarian alternatives to meat products that reduce the consumers’ environmental footprint. A recent example of the social impact of innovation is the development of products and services to address the COVID-19 crisis, such as vaccines and other technological solutions.

However, innovation can also have negative impacts. Past innovations, such as cars and the use of natural resources for energy, have contributed to the current climate crisis. There are also ethical concerns with technologies such as artificial intelligence, which can perpetuate biases if trained on historical data. The challenge for innovators and governments is to identify and mitigate these negative consequences early on, by adapting the technology or implementing complementary measures, such as privacy regulations.

Public Policies

Due to the strong impact of innovation on the economy and society, governments generally encourage this activity. They offer direct subsidies for R&D at universities and research institutes, as well as tax benefits for R&D investments in companies. In some countries, companies pay lower taxes on profits from patented products. Recent research has shown that strong intellectual property protection and good contractual compliance policies also encourage R&D investment, as they provide assurances that companies will benefit from their investments.

Policies that support innovation are justified by the externalities of innovation for the economy and society. Innovators tend to capture only a portion of the benefits generated, leaving the rest to society. To compensate for this, governments support innovators with subsidies and tax breaks. There is debate about whether these subsidies replace companies’ own investments or stimulate them. Recent publications suggest that government subsidies increase companies’ innovation spending, especially in industries that would otherwise innovate at a low level.

In today’s global economy, it makes sense for governments to focus on specific industries. Each country or region has its sectoral strengths, and governments can reinforce these areas. For example, India has specialized in information technology and software, Germany in the automotive industry, and China in electronics manufacturing. Each country can focus on specific industries to maintain its position and retain wealth for its population.

Country Innovation

Given its economic and social importance, governments and companies compare their innovative performance with others. The Global Innovation Index compares countries worldwide, considering innovation as a national process with three main categories of indicators:

1. Input Index: Quality of institutions, availability of human capital and infrastructure for innovation, and market and business factors.
2. Output Index: Knowledge and technology products, such as patents, and creative products, such as, design patents
3. Efficiency: Measures how effectively a country converts inputs into innovation outputs

Switzerland, Sweden, the United States, the United Kingdom, and Singapore were the five most innovative countries in the world in 2023, according to this index.

Source: Global Innovation Index - 2023

The European Innovation Scoreboard focuses on indicators directly related to innovation, classifying them into conditions for innovation, R&D activities in companies, and actual market outcomes. Although both scorecards have slightly different approaches, they reflect the importance of measuring and comparing the innovative capacity of nations to drive economic growth and social well-being.