11 - Innovation as the principal source of growth in the global economy

Summary

Introduction

I will divide my discussion into three sections. First, I will explain why innovation matters to the growth and competitiveness of firms and wider economies, and to the trade balances of national economies. I argue that with globalisation, innovation is exercising a steadily increasing influence upon economic performance. I advance this argument in the context of two very different perspectives on profits and economic growth, each of which can be found in the extensive historical literature on these issues.

Second, I deal with a possible counter-argument, which says that in a global world the rewards from innovation cannot be kept by the originators within national boundaries, and therefore it becomes less important as a source of profits and growth. This is known in the literature as the ‘appropriability’ argument – the view that it is difficult for innovating firms or countries to appropriate a full return on their investments in innovation. I show instead how, in the light of a newly emerging consensus among economists about the nature of technological change (a consensus especially, although not exclusively, among non-neoclassical economists), the appropriability argument has been overplayed, and need not be of undue concern.

Third, I contend that national systems of innovation and states continue to have an important role to play in a global economy. Far from collapsing with globalisation (as some writers have imagined), national systems of innovation have been consolidated, and I explain why. There is also a role for policy support for innovation by national states, despite the fact that the justification for that policy cannot rest entirely on the appropriability argument, as it has done traditionally in the economics literature since about 1960.