The term ‘innovation’ is widely used and abused. What do you imagine when you think of ‘innovation’?
- Something new?
- New technology?
- New drugs or the latest app?
Any or all of these could be innovations each of which will have very different impacts on society and the firms and consumers they touch. A new edition of Candy Crush may provide lots of pleasure but is not going to change the world. An innovative vaccine for the new Corona virus may do just that. And, innovation does not just relate to products and services. Digitisation is leading to changes in the way we buy and use products and services and changes in the way firms’ do business. On-line shopping or e-commerce is a boon for many but has high street consequences as we have seen.
In new ERC research published this week we look at the way innovation of different types influences firms’ growth and productivity. This turns out to be more complicated than you might imagine both because of the diversity of innovations but also because firm growth and productivity are only weakly linked. Typically, firms which are growing fast tend not to be increasing their productivity.
Timing is also critical in the innovation to firm performance link. Imagine a firm which introduces a new product to market. This may need people to make it and people to sell it but on day one there may be no new sales. So, jobs grow before sales meaning that we may see growth but a fall in productivity at least for a period.
Our research is based on survey data from around 10,000 firms and 60,000 years of innovation experience.
So, what do we find? It turns out that product or service innovation has a strong effect on growth in sales and employment two years later but either a negative or no effect on productivity. On the other hand, process innovation – changes to the way firms deliver products or services – increases both productivity and growth after two years. Changes in the way firms organise also have positive productivity effects but weaker effects on future growth.
Because of their very different effects, talking about ‘innovation’ here is not very helpful. Instead, we need to be much more specific: process innovation has very different benefits for firms than product or service innovation. Organisational change again has different effects. These differences should also shape the types of innovation which firms undertake. Firms with a strategic focus on scaling may indeed want to focus on product or service innovation. For firms with more of a focus on improving efficiency or productivity, the evidence suggests that process or organisational innovation is more worthwhile.
There are also implications for policy. Public grant and loan support for innovation in the UK has tended to focus on helping firms to the develop new leading-edge products and services. Our results suggest that this has probably boosted the growth of these firms but may have impacted negatively on their productivity. This is particularly striking given the poor productivity performance of the UK in recent years. Less policy attention has been paid to how we can best support process innovation in firms, although the Catapults are working in this space.
Looking forward, innovation of all types will be critical to our ability to effectively achieve future digital and net zero transitions. As our research has shown, however, different types of innovation can have very different consequences both good and less desirable. Some careful thought will be necessary both by firms and government to get the right innovation-mix to deliver sustainable productivity growth.
Stephen Roper, Director , ERC
Please note that the views expressed in this blog belong to the individual blogger and do not represent the official view of the Enterprise Research Centre, its Funders or Advisory Group.