The Measurement of Innovation,
Productivity, and Growth
The first part of this chapter explores the difficult question of how to observe and measure the innovation that is taking place in firms and industries. Before we can assess empirically the impact of innovation on economic activity we have to define and measure it using appropriate quantitative indicators. As we saw in chapter 1 (see figure 1.1), the innovation process is lengthy and complex. Some of the measures we develop will be snapshots taken at one point in the complex process from scientific invention to commercial innovation and, finally, to widespread diffusion. Some of the indicators will be of inputs into the innovation process, which is subject to a large amount of uncertainty in its output. Other indicators may be closer to measures of achieved output from innovative effort, but there are a variety of such proxy measures and each of these proxies has a varying degree of coverage across different sectors and industries. To gain anything approaching a full picture we shall have to look at a wide range of measures of innovation. Even then some elements of innovative activity will remain beyond our observation.
The second part of this chapter looks at the measurement of productivity and economic growth. Measurement issues at the firm, industry, and economy level are considered. One of the aims is to define the concepts (and jargon) relating to productivity and growth, as these can create confusion. For example, we discuss the meaning of total factor productivity and how quality adjustment affects our view of growth. There is also a comparison of the growth rates in major and emerging markets. The objective is to provide readers with a solid background in the definitions, measurement issues, and recent trends in productivity and growth.