THE ECONOMIC VALUE OF INNOVATION

Innovation in companies and administrations is a source of wealth creation and it is very important to understand the mechanism.

Innovation is an act of creating something (product, process, service, etc.) which did not exist before and which can be monetized in a market or whose value can be assessed (in the case of an administration or a public service). It is a definition that is very close to that of Value Added used in the national accounts for the calculation of the GDP.

A typical example is the introduction of the electric train which resulted in the outright disappearance of the manufacturers of steam locomotives. As the electric train is more efficient and more comfortable, railway companies and users have agreed to pay more to equip themselves and to travel. There is indeed a creation of net value despite the significant investment in infrastructure before its deployment.

Value creation can also be done “from below”, notably by improving the manufacturing process. The product is sold cheaper on the market but since it costs even less to manufacture, there is indeed a creation of economic value.  The creation of value can come from a new service that did not exist or from a smarter business model that facilitates access by lowering the price. The benefit for the citizens that we are seems quite obvious.

The collective economic value of innovation 

For an idea to become an innovation, people have to buy it. And they only buy it if they get satisfaction from it or a recurring problem is solved: performance, ease of use, pride, saving time or money, and even healing.

It is also important to consider the “volume” aspect of the question: an innovation that creates value will have to solve the problems encountered by a significant number of users, in short, a contribution of use-value and/or esteem on a Market.

We can also argue that an innovation that creates economic value for the citizen cannot go against the collective interest. Preserving the environment, living in better health and safety, getting around more easily… These are all collective aspirations that innovation must help to satisfy.

 Moreover, some innovations only add value if they are collectively adopted. i.e The volume of satisfied users is proportionally linked to the creation of value. If improving the energy performance of a machine is likely to satisfy its user, the amount of energy savings made by the X users is a real societal benefit. The latter will be an encouraging factor in the purchase, beyond the individual concern.

In this area, technological innovation should not be relegated to the background. Indeed, if it is necessary to give as much importance to service or business model innovations as to technology, it must be recognized that technology is very often the basis of innovation.

In conclusion, creating economic value begins by creating value (in use or esteem) for customers and then transforming this value into profit and/or assets for the company. It is, therefore, necessary to pay attention to two aspects: the creation on the one hand, and its valuation on the other.

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