A2 Micro: Innovation and Economic Policies

Supply-side strategies are usually linked directly with attempts to promote more innovative behaviour. Indeed the focus of government policy is firmly focused on improvements in the microeconomics of markets. Which policies might encourage more innovation?

o Tax credits / capital investment allowances.
o Policies to encourage small business creation and entrepreneurship.
o Toughening up of competition policy to expose cartel behaviour, but to allow and promote joint ventures to fund research and development.
o Lower corporation taxes to encourage innovative foreign companies to establish in Britain.
o Increased funding for research in our universities.
o Lower corporation taxes on profits generated from the exploitation of patents – this is known as a Patent Box and is geared towards incentivising research and development

Important developments:

1. Increasingly most innovation is done by smaller firms and by entrepreneurs– indeed multinational corporations are now out-sourcing their research and development spending to small businesses at home and overseas – much is being shifted to cheaper locations “offshore”—in India and Russia.

2. Innovation is now a continuous process – in part because the length of the product cycle is getting shorter as innovations are rapidly copied by competitors, pushing down profit margins and (according to a recent article in the economist) “transforming today’s consumer sensation into tomorrow’s commonplace commodity” – a good example of this is the introduction of two major competitors to the anti-impotence drug Viagra!

3. Innovation is not something left to chance – the most successful firms are those that pursue innovation in a systematic fashion – it becomes part of their corporate culture.

4. Demand innovation is becoming more important: In many markets, demand is either stable or in decline. The response is to go for “demand innovation” - discovering fresh demand from consumers and adapting an existing product to meet them – the toy industry is a classic example of this.

5. The 2009 recession may well prove to be a stimulus to innovation; many of the successful ‘new’ products of today were developed and tested during the last recession.