Diffusion and Social Returns
To realize the full benefits of an innovation requires its widespread adoption across the economy. A new technical process needs to be adopted by other producers in the industry to achieve increased productivity everywhere. Equally, new products have to be supplied to other firms if these are intermediate goods and services, or to a wider range of consumers if the innovations are novel final products. As noted in chapters 1 and 2, even where a market price is paid for the good, or a license fee is paid for technology, there will be positive externalities for the buyers and users of innovations. It is these externalities that underpin the economic justification for policy intervention, such as allowing IPRs and/or subsidizing R&D to correct for the market's underinvestment in innovation. The first part of this chapter explores how the diffusion of innovation takes place and examines evidence concerning the speed of diffusion. Then it reviews evidence concerning the sectoral origins of innovation, and the destinations of its use, to identify the sectors and firms that generate social benefits from their innovations. We also explore the econometric evidence for the existence of beneficial spillovers between firms and industries.
Regardless of the sector of production in which the innovation occurs, the stages in the diffusion process will include:
Transfer of information to potential customers.
Decisions to adopt the innovation.
Eventual saturation of the market.
The first of these, which is an information flow about the availability of the new process or product, is hard to monitor across a wide range of innovations. For any particular innovation, potential customers can be surveyed to explore whether or not they have any knowledge of the new product or process, but this involves expensive market research. Still, this can be very useful information: if a product is widely known