Innovative Firms and Markets
The last chapter discussed how the process of innovation relied on the interaction between three main actors: business, universities, and government. This chapter focuses on the business sector as this is generally regarded as the most critical. It is the business sector that often conducts the majority of R&D; it also supplies new capital goods to consumers and producers. We also take a much more detailed look at the way competition in markets interacts with the process of innovation. The overall aim is to provide a framework for understanding whether the market system produces the optimal level of innovation. In order to do this the chapter discusses various aspects of the market system and asks questions such as: What role do entrepreneurs play in the process of innovation? What problems do innovative new firms face? How do market conditions impact on rates of innovation?
In answering these questions we take a predominantly economic approach by focusing on the incentive structures facing firms and the competitive interaction between firms. However, we also cover some of the management and legal issues surrounding innovation. The later part of the chapter reviews how empirical work can assess the private value of innovation and evaluates how market structure affects the propensity to innovate. We also draw attention to how such empirical work can inform our understanding of markets and contribute to innovation policy debates.
We have already mentioned inventors and entrepreneurs in previous chapters and it is now time to be explicit about their role in innovation within firms. An inventor is defined as someone who generates the new ideas on which innovations are based. For a firm to be innovative it