Stacked up innovation: Individual, firm, policy

Innovation deserves special attention in economics for at least three reasons. First, innovation serves as a driver of economic growth via Schumpeterian creative destruction. Second, innovation reveals linkages to the impact that laws and regulations have on long term markets. Third, innovation is a means through which resources can be continuously moved to their best use. However economic models, even those with endogenous innovation, can send different signals depending on the level of the economic agent.

The objective of this study is to examine the connections among the economic determinants of innovation for different levels of economic agents: the individual level, the firm level and the government/policy level. The stacked up approach makes it easier to reconcile the differences observed in the literature both in describing innovation and the economic data and in the policy options available. It recognizes the similarities and differences between the production of a typical product and the “production” of an increase in innovation.

The “output” of innovation, at any of the levels, can be modeled as a production function which captures the physical tradeoffs among the inputs. The inputs include the usual capital and labor, but also less common inputs: knowledge, infrastructure and motivation. The inputs take on different context at each of the different levels of economic agents.

The theoretical model draws support from economic innovation literature in macro, micro, development and history. A framework is proposed that is useful in both descriptive and prescriptive ways. Examples are provided to illustrate the use and usefulness of the approach.