An Innovative Economy

Traditional economics viewed economic growth in terms of investment levels and relationships among the three factors of production — land, capital and labour — and considered that competition between organizations is based on prices. Innovation economists argue that, in a market economy, innovation rather than price is the primary competitive dimension. Since the late 1980s, the economic literature1 suggests that R&D, innovation and spillovers are actually key factors driving self-sustained economic growth and that these factors are generated from within the capitalist system by responding to economic incentives. The turn of the century saw not only developed economies, but also most of the emerging economies, including China, India, Russia and Brazil, accepting the idea that innovation will drive further progress in economic growth and is essential to the survival of firms. This change in thinking forms much of the basis for justifying public support of R&D spending and established policies to promote innovation. One of the key objectives of the EU during the last decade has been to encourage increasing levels of R&D investment, in order to provide a stimulus to the EU’s competitiveness.