Models and contributions of innovation in firms

There are two main models of firm innovation: a “technology push” model and a “market pull” model. However, it is now widely accepted that innovation is a complex and interactive process, involving constant feedback loops between the different phases. Moreover, the process of firm innovation depends on multiple factors related to innovation characteristics, as well as firm characteristics, and framework conditions. Innovation output may differ along several dimensions, including the type of innovation and the impact of innovation. Moreover, a wide range of actors may be involved in the innovation process, such as suppliers, customers or universities. 
Actors of innovation
A wide range of actors are involved in firms’ innovation processes (see Key actors for innovation in firms). Confronted with increasing global competition, rising costs, the growing integration of different technologies, shorter life cycle, and increased pace of innovation, many companies collaborate with external partners, whether suppliers, customers or universities. These collaborations help them stay abreast of developments, expand their market reach, tap into a
larger base of ideas and technology, find complementary expertise, access specific skills and competences, and get new products or services to market before their competitors. Evidence shows that large firms tend to collaborate more on innovation than small- and medium-sized enterprises (SMEs) (OECD, 2011a).
Inputs to firm innovation
Key inputs for innovation include:
  • Finance (see Financing Innovation). Access to finance is a key driver of the creation, survival and growth of innovative businesses. 
Innovation process
Models of innovation processes
There are two main models of innovation processes:
  • The “technology push” model refers to a model in which the innovation process starts with a scientific discovery. This scientific discovery leads to technological development in firms, manufacturing, and then commercialisation and diffusion in the marketplace.
  • The “market pull” model refers a model in which the innovation process starts with the identification of a market opportunity. The identification of a market opportunity is then followed by development, manufacturing, and commercialisation.
Although both models are linear, innovation processes are often non-linear. Loops typically occur between the different phases of the process in order to overcome shortcomings. 
Variations in innovation process

The “technology push” model is particularly relevant for some industries, such as pharmaceuticals and chemicals. In these industries, the supply of novel or radical innovations is crucial. These science-based industries (Pavitt, 1984) typically run large in-house R&D programmes, or sponsor R&D activities in universities or at small firms (Malerba, 2005). For other industries, particularly platform or standards-based industries, such as computer operating systems, automobiles, machine tools or telecommunications, responding to changing demand through incremental innovations is more frequent. For this group of industries, incremental innovation around dominant designs and locked-in systems, with a greater focus on integrating new innovations into existing products and services, is more important than producing revolutionary innovations to replace the existing standards along which competition and innovation have evolved (Utterback and Suarez, 1993; Malerba, 2005).

Overall, the process of innovation may take multiple forms: firms may rely solely on internal assets and capacities, acquire external knowledge (e.g. through licensing and purchasing), externalize R&D (e.g. through contract R&D), and co-develop innovations with partners. These collaborations may be based on formal types of arrangements (e.g. joint ventures, strategic alliances, and sponsored research agreements) or on informal arrangements (e.g. collaborations of regionally close firms). Collaborations may also differ in terms of scope: they may concern the whole innovation process (e.g. co-development of an entire product) or only a part of it (e.g. co-development of a particular component). 

The process of innovation depends on multiple factors related to innovation characteristics, such as the type of innovation (e.g. product, process, organizational or marketing innovation) and the source of innovation (technological versus non-technological innovation); as well as firm characteristics (e.g. firm size, age, innovation strategy, organization, and culture), and framework conditions (e.g. regulatory framework, access to finance, access to external knowledge). For instance, small and medium enterprises (SMEs) tend to collaborate less on innovation activities than large firms. For more details on the specificities of models for innovative entrepreneurship see Models and contributions for innovative entrepreneurship.

Innovation output
Innovation output may differ along the several dimensions (see What is innovation?), including the following: 
  • The type of innovation (see Product and process innovation). The Oslo Manual defines four types of innovation: product innovations, process innovations, organisational innovations and marketing innovations (OECD/Eurostat, 2005).  However, many firm innovations may have characteristics that span more than one type of innovation.
  • The impact of innovation (see Radical and incremental innovation). A radical or disruptive innovation can be defined as an innovation that has a significant impact on markets and on the economic activity of firms in that market; while incremental innovation concerns an existing product, service, process, organization or method whose performance has been significantly enhanced or upgraded.
Evidence from firm innovation surveys suggests that the share of types of innovation varies significantly across countries  and depends on firm size and economic sector (Figures 1, 2 and 3) (OECD, 2011b).
Figure 4. Types of innovation in the manufacturing sector, 2006–08
(% of all manufacturing firms)
OECD (2011). “Mixed modes of innovation”, in OECD Science, Technology and Industry Scoreboard 2011, OECD Publishing. 
Source: OECD, based on Eurostat (CIS-2008) and national data sources, June 2011. See chapter notes.
Figure 1. Product and/or process innovative firms, % of total firms
Figure 2. Organisational innovative firms, % of total firms
Figure 3. Marketing innovative firms, % of total firms
What are the contributions of innovative firms?
Innovative firms play an important role in addressing socio-economic challenges (see Contributions to socio-economic objectives), including notably:
  • Economic growth and employment. (see Contributions to growth and jobs). Neoclassical growth models consider knowledge accumulation and technological progress as the only way to achieve long-run growth to reduce effect of diminishing returns to capital. Besides, innovation is often associated with the setting up of new enterprises to provide the market with new offerings and create new jobs. 
  • Social challenges. (see Addressing social challenges) Innovation can help alleviate social challenges, which encompass health and demographic challenges, and social exclusion and inequalities, among others. As an example, frugal or inclusive innovations that basically are cheaper and simplified versions of existing goods help reduce differences in living standards between groups in society. In addition to innovation addressing social exclusion social benefits arise by creating employment opportunities and addressing particular challenges faced by lower income groups.
  • Environmental challenges. (see Addressing environmental challenges). Innovation is increasingly perceived as crucial for tackling environmental challenges like limiting climate change and global greenhouse gas emissions and maintaining biodiversity.
  • Malerba, F. (2005), “Innovation and the evolution of industries”, Journal of Evolutionary Economics, Springer, Vol. 16(1), pp. 3-23.
  • OECD (2011a), "Collaboration in business value chains", in OECD Science, Technology and Industry Scoreboard 2011, OECD Publishing. doi: 10.1787/sti_scoreboard-2011-29-en 
  • OECD (2011b), “Mixed modes of innovation”, in OECD Science, Technology and Industry Scoreboard 2011, OECD Publishing. doi:  10.1787/sti_scoreboard-2011-44-en
  • OECD (2011c), Demand-side Innovation Policies, OECD Publishing. doi: 10.1787/9789264098886-en
  • OECD/Eurostat (2005), The Measurement of Scientific and Technological Activities—Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd ed., OECD Publishing. doi: 10.1787/9789264013100-en
  • Pavitt, K. (1984), “Sectoral patterns of technical change: Towards a taxonomy and a theory”, Research Policy, Vol. 13, Issue 6, December, pp. 343-373.
  • Utterback J.M. and F.F. Suárez (1993), “Innovation, Competition and Industry Structure”, Research Policy, Vol. 22, No. 1, February, pp. 1-21.
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Innovation in Firms

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