To create or to adapt?
Many people would perhaps associate innovation with ground-breaking technology – innovations that advance the global technological frontier. However, while firms constantly work to improve their products and introduce new ones, few of those products are truly new at the global level. Most new products stem from the adoption of existing technologies that have been developed elsewhere, possibly with some customisation in order to better serve the needs of the local market. Although these innovations do not advance the global technological frontier, they can still significantly improve firms’ productivity, thereby contributing to increases in aggregate productivity.
The adoption of such technology is particularly important for emerging markets and developing economies, where firms have considerable room for improvement relative to the technological frontier. With supportive policies in place, firms in emerging markets will invest, learn in an open economic environment and improve their productivity, gradually moving closer to the technological frontier. The resulting change in the structure of the economy needs to be accompanied by changes in economic institutions and policies supporting the overall structural transformation. For instance, as the economy approaches the technological frontier, the entry and exit of firms will play an increasingly important role in boosting overall productivity and policies will need to evolve to nurture economic creativity.6 That being said, even in the majority of advanced economies, the adoption of technologies that have been developed elsewhere continues to play a key role as a driver of productivity growth.7
So, an innovation is something that is new, original or improved which creates value. In order for a change in a firm’s products or processes to be considered an innovation, it must, at the very least, be new to the firm itself (rather than the global economy as a whole).