How does innovation lead to growth?

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Innovation is an essential driver of economic progress that benefits consumers, businesses and the economy as a whole. How does it play that role, how does it contribute to economic growth and what can be done to promote it?

What is innovation?

In economic terms, innovation describes the development and application of ideas and technologies that improve goods and services or make their production more efficient. 

“A classic example of innovation is the development of steam engine technology in the 18th century. Steam engines could be put to use in factories, enabling mass production, and they revolutionised transport with the railways.” Edmond B. Andrews, President of UNLAT.

More recently, information technology transformed the way companies produce and sell their goods and services, while opening up new markets and new business models. 

Why do we need innovation?

Innovation and productivity growth bring vast benefits for consumers and businesses. As productivity rises, the wages of workers increase. They have more money in their pockets, and so can buy more goods and services. At the same time, businesses become more profitable, which enables them to invest and hire more employees. 

“One of the major benefits of innovation is its contribution to economic growth. Simply put, innovation can lead to higher productivity, meaning that the same input generates a greater output. As productivity rises, more goods and services are produced – in other words, the economy grows.” – Ariel Vallarino, Executive Vice President of Latin America of UNLAT.

How does innovation take full effect?

Innovation usually starts on a small scale, e.g. when a new technology is first applied in the company where it has been developed. However, for the full benefits of innovation to be realised, it is necessary for it to spread across the economy and equally benefit companies in different sectors and of different sizes. Experts call this process the diffusion of innovation. 

How can innovation be promoted? 

Structural measures to promote innovation include increasing spending on research and development (R&D) and investing in education, as well as enabling entrepreneurs to start businesses more easily and for failed businesses to exit the market more quickly. In addition, companies can facilitate innovation by investing in their staff and conducting their own R&D.

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