The definition and Measurement of Innovation

At firm level innovation is the process of introducing new ideas to the firm which result in an increased firm performance. Innovation differs from invention as invention may not be directly associated with commercialization. The basic definition of innovation is quite simple but there is no precise definition that can apply to all firms.

Joseph Schumpter drew attention to the importance of innovation and he defined five types of innovation in the 1930’s.

• Introduction of a new product or a qualitative change in an existing product.

• Process innovation new to an industry.

• The opening of a new market.

• Development of new sources of supply for raw materials or other inputs.

• Changes in industrial organization.

A technological product innovation can involve either a new or improved product whose characteristics differ slightly from previous products. The reason for these differences could be due to new technologies, knowledge or material. On the other hand a technological process innovation is the adoption of new or significantly improved production or delivery methods. When new or improved is referred to its not necessarily meaning a completely new approach, system or product, it refers to something new to the particular firm embarking on the innovation, regardless of who else is doing similar. So innovation can combine both the creation of entirely new knowledge as well as the diffusion of existing knowledge. The level of growth in an economy overall may be contributed in part to incremental improvements or innovations.

3.5.1 Measuring Innovation

Innovation is difficult to measure because of the broad scope and nature of its activities.

In order to try to assess the results of innovation a distinction between the outputs of innovative activity and the inputs of innovation activity must be measured. The key

measurement of innovative activity is the success of the firm. So to measure the success of the firm it’s essential to look at profits, revenue growth, share performance, market capitalization, productivity etc. Measuring these however may be difficult as these factors can be affected by other influences, making the true measurement of innovation difficult. Another approach is to create variables for the number of new or improved products introduced. Companies assess the percentage of their sales that can be attributed to new products, improved products and unchanged products. Firms that are highly innovative would be expected to have higher sales from new and improved products.

The evaluation of improved processes is a little harder to measure so the result relies on the company’s ability to estimate the percentage of product sales accounted for by new or improved processes.

Intellectual property statistics are also a measure of innovation. Intellectual property innovation can include patents, trade marks and designs. The existence of patents implies that the firm has a feeling that they have managed to create some new knowledge that they need to protect. Furthermore the fact that the firm has incurred a cost in the efforts to keep this knowledge protected means that they perceive it as having value. Therefore the very application for these patents can be seen as innovative behavior at the inventive stage of the process. The problem with this measurement however is the fact that this measure does not represent a commercially exploited innovation. So some researchers have concluded that patent and other intellectual property data are indicators of inputs to an innovation process rather than actual outputs.

Input measures of innovation have mainly relied on the level of research and development expenditure as the indicator for the level of innovative effort. It has its advantages as there is an actual dollar figure for the amount spent on R&D and therefore it makes it easier to analyze. Intellectual property can also be considered a measure of input into the innovation process.

Innovation can occur in the managerial methods and organizational structure of a firm.

Marketing and training involves he entire resources of a firm in developing and

extracting value from new ideas. Marketing of ideas becomes key in realizing the value from the innovation.

The various output and input methods of analyzing the innovation of a firm are not conclusive by themselves. In many cases the units of measurements are not equal. One way to overcome this problem is to group some of the elements together to get a more comprehensive picture. Or alternatively relate the various innovation measures to the overall performance of the firm using econometric techniques. This can allow the value of the different innovation activities as well as an overall assessment of the activities involved in innovation. Some studies have measured patent data in place of R&D data or some have taken them together. But the problem with this measurement is that patents may have a limited value or they may never be commercially used. Another problem with patent data is that the proportion of commercial patents varies across firms and industries and also is liable to change over time.

Innovation in conclusion is changes to firm’s activities over time that will improve firm performance. The changes can relate to new or improved products or processes, marketing spending, investment in new machinery or technology, training or intellectual property. The many layers of innovation makes a complete concise measure of innovation impossible. Companies will not only change how they measure innovation over time but also adapt new methods of innovation throughout its lifecycle. In saying this innovation is still considered to be a fundamental determinant of firm performance and no one measure can stand alone in its evaluation of the level of innovation.

3.6 The Global Entrepreneurship Monitor 2005 The Irish Report