3.1.4.8 - Technological change and innovation

From invention to innovation

A technically new idea affects production and consumption only if someone develops and uses it. Invention is the creation of a new idea, product or process; innovation is putting a new or improved idea into practical economic use.

In an original illustrative case, an engineer designs a sensor that detects spoiled food. That is an invention. A manufacturer develops a reliable version, installs it on its packing line and uses it to reduce waste: that is process innovation. Selling a consumer version embedded in food-storage containers is product innovation. The same underlying invention can therefore support different innovations.

Process innovation changes how something is produced or delivered. Product innovation creates a new or improved good or service. They can overlap: a new product may require a new production method, while a cheaper process can make an existing product affordable to new customers.

Commercial adoption requires more than a working prototype. Finance, testing, complementary equipment, trained workers and customer acceptance can determine whether an invention is used. An invented product that customers will not buy may never become commercially successful. Innovation can also improve an existing method rather than begin with a wholly new scientific discovery.

Production, productivity and costs

Technological change can let a firm produce more output from the same inputs or the same output from fewer inputs. Greater output per unit of input is higher productivity; it is not simply a larger total output achieved by hiring proportionately more workers.

Suppose an illustrative packing business uses 80 worker-hours per day. Before automation it produces 400 acceptable packs at a full daily cost of £4,000. After adopting a sensor-assisted line, it produces 600 acceptable packs with the same 80 worker-hours at a cost of £4,500:

Average cost falls from £10 to £7.50 per pack even though total cost rises. Extra equipment and maintenance cost £500, but output increases sufficiently to spread the total cost over more packs. Fewer rejected packs can improve resource efficiency too. If customer demand is insufficient to sell the additional output, these potential savings may not be realised.

At a given scale, successful process innovation can shift LRAC down. This differs from moving down an unchanged LRAC by expanding the firm. Technology may also change the scale needed for efficient production: a flexible machine may remove the cost advantage of a very large production line.

Lower cost is a possibility, not a guarantee. Purchase, training and disruption costs may dominate initially; unreliable equipment can lower productivity. Technical efficiency means avoiding wasted inputs for the chosen method. Economic efficiency also considers input prices, so the technically fastest method need not be the least costly. Assess the savings against the full adoption cost and over an appropriate time period.

New markets and creative destruction

Innovation can change what consumers buy as well as how firms produce it. A new product may satisfy a previously unmet need, and lower cost or improved convenience may bring new customers into a market. It can also reduce demand for older substitutes.

Consider an original town in which a firm introduces a reliable digital navigation service. It sells subscriptions to drivers who previously bought no navigation product, creating a new service market. Some existing buyers switch from printed street maps, reducing demand for that older product. Firms supplying location data gain demand, while printers specialising in street maps may lose sales. Not all new sales displace an old sale; some satisfy additional wants.