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Global innovation and economic value

India Studies in Business and Economics

Vijay Kumar
R.P. Sundarraj

Global
Innovation
and Economic
Value


India Studies in Business and Economics


The Indian economy is considered to be one of the fastest growing economies of the
world with India amongst the most important G-20 economies. Ever since the
Indian economy made its presence felt on the global platform, the research
community is now even more interested in studying and analyzing what India has to
offer. This series aims to bring forth the latest studies and research about India from
the areas of economics, business, and management science. The titles featured in
this series will present rigorous empirical research, often accompanied by policy

recommendations, evoke and evaluate various aspects of the economy and the
business and management landscape in India, with a special focus on India’s
relationship with the world in terms of business and trade.

More information about this series at http://www.springer.com/series/11234


Vijay Kumar R.P. Sundarraj


Global Innovation
and Economic Value

123


Vijay Kumar
Faculty of Management Studies
PES University
Bengaluru
India

R.P. Sundarraj
Department of Management Studies
Indian Institute of Technology Madras
Chennai
India

ISSN 2198-0012
ISSN 2198-0020 (electronic)
India Studies in Business and Economics
ISBN 978-81-322-3758-7
ISBN 978-81-322-3760-0 (eBook)
https://doi.org/10.1007/978-81-322-3760-0
Library of Congress Control Number: 2017948612
© Springer (India) Pvt. Ltd. 2018
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Preface

The task seemed daunting. The world outlays billions of dollars on innovation, but
there has been no holistic assessment of its outcome. Do we have the answer to the
question: have investments in innovation paid off? Outlays are not outcomes. This
book is a study aimed at providing a comprehensive asses sment of the impact of
innovation and should count as a pioneering effort.
How does this book provide a wholesome appraisal of value created by innovation? It captures the societal value that innovation delivers to humanity, the
economic value that it endows to nations and the financial value that it provides to
innovating firms. Each of these values must be positive to conclude that innovation
pays. The book has a truly global canvas and accentuates innovation in the
Technology and Pharmaceutical sectors, the two largest bastions of innovation. Big
data and analytics underpin the development of the material used. Datasets include
86 million patent records and 8 million financial records. This is one of the largest
datasets analysed for developing a book. Such rich data drawn globally, annulls
region-specific idiosyncracies and make the findings robust.
Anecdotal examples of innovation point to value accrual. America spends the
most on innovation which partly explains why it is the wealthiest nation in the
world. IBM’s IP licensing is worth more than $1 billion. TI fully exploited the DSL
patents that they acquired almost three decades ago. The Gillette shaver protected
by a fortress of 57 patents has a dominant 75% market share. Apple’s recent design
patents have enabled them to become the most valuable company in the world.
With cumulative sales of more than $120 billion, Pfizer’s IP protected Lipitor was
the biggest selling branded drug ever; when the patents expired in November 2011,
sales dropped a whopping 42% the next month. The ‘One-click-ordering’ patent
catapulted Amazon to become a leading e-commerce company. A whole new
industry was born when Xerox patented the photocopying technology. Equally
important has been the creation of societal value of innovation (decreased infant
mortality due to new medicines, for example) and economic value (such as increase
in per capita income and productivity due to innovation). The book is replete with
real-world examples of innovation creating value, a recurring theme that runs
through the book. The book is developed in the backdrop of the period 1990–2016,
v


vi

Preface

a period of frenzied innovation and economic distress which saw the disruptive
advent of Internet, an upsurge in mobile communication and a paradigm shift in
personal computing.
Chapter 1 deals with the various facets of Innovation. The evolving global
innovation theme over the last 25 years bring in useful insights. Innovation as a
creator of intangible assets and its ability to create value are discussed. The two
bastions of innovation, Technology and Pharmacy, are profiled, while we take a
peek into innovation at the Silicon Valley. Chapter 2 is focused on the economic
impact of innovation. Studies have established that innovation-intensive industries
create highly skilled jobs, have higher wages, are more productive, lead exports and
enhance competitiveness through thick and thin of business cycles. The link
between innovation and economic growth and the effect of innovation on productivity and income has always been under intense gaze. The raging debate on the
impact of automation on employment is discussed. Chapter 3 is an analysis at the
firm level. That innovation impacts firm performance is not widely disputed.
Several examples of successful IP deployment strategies adopted by global companies point to wealth creation. The paradox of India, while being low on innovation but high on firm performance, is seemingly counter-intuitive. The vital
societal value created by pharmaceutical innovation is discussed in Chap. 4. Drug
innovation has had a profound effect on human life. The impact of new medicines
on mortality and the control of endemic diseases and their attendant economic gain
buttresses the gains from medical innovation. The impact of disruptive innovations
(Internet, Social media, Internet of Things, Autonomous driving) in the digital
world is discussed in Chap. 5. The consumer surplus generated by the ubiquitous
mobile phones in the connected world is staggering, while the social media platform has become a way of life. The overwhelming impact of IoT to connect all
inanimate things (and human beings) has become truly transformative. Finally, the
disruptive nature of autonomous vehicles and their ability to create social upheaval
is examined. Chapter 6 is devoted to an empirical study of value created by the
process of Schumpeterian creative destruction. The study examines whether innovation patterns explain firm performance and investigates whether innovating firms
are better in withstanding economic stress. Given the turbulent business environment that is here to stay, the moot point is whether innovating firms can cope better
with adversarial business periods.
I must mention people who helped me in the preparation of this book. Prof.
Krishna Sundar of IIM-Bangalore helped me with research material which has
clearly enriched the book that much more. I am grateful to Vasanta Kottapalli, a
senior professional in the Silicon Valley, who had the difficult task of reviewing the
raw version of the book. I am deeply indebted to her. I am equally thankful to
Vinayak who also went through the first version of the book and helped me clean
up the contents. My wife Rekha and daughter Malavika watched me banging on my
laptop with trepidation, wondering aloud whether I would ever finish the book (it
has taken 2 years), but shared my joy when the book was completed.


Preface

vii

Writing a book on innovation is a double-edged sword; while one admittedly
deals in cutting edge, the canvas is so large that one faces the risk of being pilloried
for not covering specific aspects of innovation. In my humble defense, I submit that
this book is focused on answering the question: has it been worth it (investing on
innovation)?
Bengaluru, India

Vijay Kumar


Contents

1 Facets of Innovation . . . . . . . . . . . . . . . . . .
The Idea of Innovation . . . . . . . . . . . . . . . . .
The Value of Innovation . . . . . . . . . . . . . . . .
The Spark of Innovation . . . . . . . . . . . . . . . .
Global Innovation . . . . . . . . . . . . . . . . . . . . .
Who’s Spending on Innovation? . . . . . . . . . .
Innovation Trends . . . . . . . . . . . . . . . . . . . . .
The Dominance of Technology Innovation . .
Innovation in the US . . . . . . . . . . . . . . . . . . .
A Special Place—The Silicon Valley . . . . . .
Chinese Innovation . . . . . . . . . . . . . . . . . . . .
References . . . . . . . . . . . . . . . . . . . . . . . . . . .

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1
4
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6
10
15
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23
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41
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2 The Economic Impact of Innovation . . . . .
The Economics of Innovation . . . . . . . . . . . .
Innovation and Productivity . . . . . . . . . . . . .
Income Rises with Innovation . . . . . . . . . . . .
Innovation Improves Standard of Living . . . .
Impact of Automation on Employment . . . . .
Is the Impact of Innovation Waning? . . . . . .
References . . . . . . . . . . . . . . . . . . . . . . . . . . .

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49
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3 Monetizing Innovation . . . . . . . . . . . . . . . .
The Rise of Intangibles . . . . . . . . . . . . . . . . .
Patenting and Value Creation . . . . . . . . . . . .
Extracting Value from IP . . . . . . . . . . . . . . .
Are Patents Detrimental for Innovation? . . . .
R&D and Value Creation . . . . . . . . . . . . . . .

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95
97
100
109
121
123

ix


x

Contents

Innovation Pays Off at Apple . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
The Curious Case of India—Low on Innovation,
but High on Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
4 The Societal Value of Pharmaceutical Innovation. . . . . . . . . . . .
Societal Value of Medical Innovation . . . . . . . . . . . . . . . . . . . . . . .
Infectious Diseases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chronic Diseases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Economic Impact of Pharmaceutical Innovation . . . . . . . . . . . . . . .
Life Expectancy Is Correlated with Income. . . . . . . . . . . . . . . . .
Has Pharmaceutical Innovation Been Financially Remunerative? . .
The Evolving European Pharmaceutical Innovation . . . . . . . . . .
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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147
156
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5 The Value of Disruptive Innovations . . . . . . . . . . . . .
The Internet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Economic Impact of the Internet . . . . . . . . . . . .
The Consumer Surplus Generated by the Internet . . .
Sectoral Impact of the Internet . . . . . . . . . . . . . . . . . . .
The Value of Mobile Internet . . . . . . . . . . . . . . . . . .
The Oligopoly in the Internet . . . . . . . . . . . . . . . . . .
Social Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facebook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internet of Things (IOT) . . . . . . . . . . . . . . . . . . . . . . . .
The Economic Impact of IOT . . . . . . . . . . . . . . . . . .
The IOT Landscape. . . . . . . . . . . . . . . . . . . . . . . . . .
Autonomous Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . .
The World of Driverless Vehicle . . . . . . . . . . . . . . .
Fewer Accidents, Saving Lives . . . . . . . . . . . . . . . . .
Collateral Impact of Autonomous Vehicles . . . . . . . .
The Economic Impact of Autonomous Vehicles . . . .
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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189
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6 The Economics of Creative Destruction . . . . . . . . . . . . . . .
Is Creative Destruction a Better Value Creator? . . . . . . . . . .
Preceding Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Theory and Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Firm Performance Measures . . . . . . . . . . . . . . . . . . . . . . .
The Link Between Innovation and Firm Performance . . . .
Schumpeterian Patterns and Innovation-Firm
Performance Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Coping with Turbulent Times . . . . . . . . . . . . . . . . . . . . . .
Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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257
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.........
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Contents

Selection of Schumpeterian Firms . . . . . . . . . . . . . . . . . . . . . . . . . .
Knowledge Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consistency of Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Concentration of Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Churn Among Innovators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Panel Regression Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results, Analysis and Interpretation . . . . . . . . . . . . . . . . . . . . . . . .
Additional Validation for H4a–H4c (M-I, M-II Firm Performances
Are Different) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Validation for H6a–6c (Economic Stress Analysis) . . . .
Implications of the Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Managerial Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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274
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About the Authors

Vijay Kumar is an IT corporate professional turned researcher. He has had a
successful 25-year corporate tenure of building and managing world-class technology companies in India. He was the Corporate Product Marketing Manager at
Wipro, one of the top Indian IT firms. Subsequently, he was the India Center Head
of Tektronix Engineering, a wholly owned subsidiary of Tektronix, USA. He later
became COO of Raffles Software, a global software firm and CEO of Mindteck, a
listed software company promoted by a global investment bank. As M.D. of
Manystreams, a US-based video streaming product company, and as M.D. of Citec
India, a subsidiary of Citec Finland, he led the formation and growth of these
companies in India. As President of IP consulting at Bizworth, an Intellectual
Capital and Valuation advisory, he advised companies on IP strategy and patent
valuation. He currently holds the position of Professor and Dean of Faculty of
Management Studies at PES University, Bangalore. Dr. Kumar’s interests are in
investigating the financial and economic outcomes of innovation. He is an
Electronics Engineer with an MBA from Rensselaer Polytechnic Institute, USA. He
obtained his Ph.D. from Indian Institute of Technology Madras, India.
Email: vijay.kumar@pes.edu
R.P. Sundarraj is currently Professor of Information Systems at the Indian
Institute of Technology Madras in India. He has over 25 years of international
academic experience, including stints at Qatar University in Doha, as well as
tenured faculty positions at the University of Waterloo, Canada and Clark
University, USA. Professor Sundarraj obtained his Bachelors in Electrical
Engineering from the Regional Engineering College, Trichy, and his M.S. and
Ph.D. in Management Science from the University of Tennessee, Knoxville, USA.
Professor Sundarraj has guided several doctoral and master’s students, and has
authored/co-authored over 70 research works in leading international conferences,

xiii


xiv

About the Authors

and published in journals such as Mathematical Programming, European Journal
of Operational Research, Decision Support Systems, and various IEEE/ACM
Transactions. In addition, he has wide industry-consulting experience in providing
e-commerce solutions for marketing and inventory-management problems arising
in Fortune 100 companies.


Chapter 1

Facets of Innovation

The role of innovation in today’s world, it’s profound impact, and its ability to create
wealth for firms and nations are discussed. Creation of diverse values (Economic,
Financial, Social) and the evolving global innovation theme over the last 25 years
are portrayed. Spatial and sectoral innovations are profiled. The US dominance in
electronics and software and Asia’s supremacy in semiconductors are now established themes. The two bastions of innovation, Technology and Pharmacy dominate
the patenting space. A peek into innovation at Silicon Valley rounds off the chapter.
If Norman Borlaug had not introduced the disease-resistant wheat seeds in 1965,
then yields in the developing world would have been 17% lower. It would have also
meant 37 million more malnourished children and people in developing nations
would have consumed 13% fewer calories. An area of the size of Oregon state would
have been additionally needed for farming just to main current food production
levels [1]. Since 1970, world’s population has doubled, with 3.7 billion additional
people to be fed. During this same period, the acreage for agriculture has increased
by only 5%. Thanks to agriculture innovation and genetic engineering, what could
have been a catastrophic global famine has been avoided (in fact, 33 per capita
consumption of food has gone up). The world grows many times more food per acre
of land compared to 50 years ago, especially staple grains. Rice, corn, and wheat
yields per acre have doubled since then [2]. The significant innovation in 1960, the
pill, allowed women to delay marriages and invest in their education leading to
higher women employment rates and better careers. A Harvard study found that the
pill (oral contraceptive) had a singularly profound effect in promoting women’s
economic freedom [1]. Longevity in the US is currently increasing by 3 months per
year which is expected to accelerate to one-year increase per year by 2036. Thanks to
medical innovation, life spans of more than 100 years is in the realm of possibility
[3]. Solar energy will become incredibly cheap and a source of clean energy. In
2015, more solar energy was installed than fossil energy. There is a real possibility
that use of coal might be discontinued in a decade. With cheaper energy source,
desalination becomes economically viable leading to widespread availability of
drinking water [3]. The synthetic veal produced in a petri dish will become cheaper
© Springer (India) Pvt. Ltd. 2018
V. Kumar and R.P. Sundarraj, Global Innovation and Economic Value,
India Studies in Business and Economics,
https://doi.org/10.1007/978-81-322-3760-0_1

1


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1 Facets of Innovation

than the real one by 2018 disrupting the diary business and a significant reduction in
the need for agricultural land (30% of farm land is used for cattle rearing) [3].
Innovation permits us to use resources more frugally and efficiently and is a key
driver of productivity and a crucial engine of growth. The function of innovation is
not just economic growth and producing more; it is eventually about improving
quality of life, it is about improving communication and making the world flat, it is
about clean energy keeping the world healthier. Innovation and wealth creation go
hand in hand: high marks in innovation standings are strongly associated with high
levels of per capita incomes. Technological innovation together with commensurate
accumulation of intangible capital in the US explained more than half of the
increase in productivity over the last few decades [4]. Beyond the world of sterile
economic metrics, innovation is a source of elixir. In the 45 years from 1947 to
1992, the Japanese life span grew 20 years and it is estimated at least half of this
growth was due to newly developed patent-protected pharmaceuticals [5].
High-frequency traders look for arbitrage deals and leverages on tiny difference in
prices on two different exchanges. Traders are placing microwave antennas close to
futures exchange data centres to shave a microsecond from network latency:
enough to separate a winning from a losing bid [6]. Air traffic control towers need
not be located at the airports. In Sweden, one ATC controls 32 airports through the
creation of virtual images of the airports. The development of innovative analytics
tools to mine large datasets has yielded stupefying results. In the world of big data,
the three dimensions of data, the 3V (Volume, Variety, Velocity) are exponentially
increasing. A fully deployed self-driving car generates data at the rate of 100 GB
per sec. Innovative Artificial Intelligence techniques extract enhanced value from
the mined data. Predictive analytics tool can predict when a person is ready to buy,
forecast a maintenance schedule for a jet engine or can draw the risk profile of a
person likely to contract a disease. Industrial giants such as Siemens and GE now
position themselves as data firms [7]. Uber, the taxi-hailing company is valued at
$68 billion, the highest among the Unicorns. This stratospheric valuation is partly
because it generates and owns the biggest pool of data about supply (cab drivers)
and demand (clients) for personal transportation [8].
In the realm of AI, new inventions in facial recognition are galloping. Some of
the heady applications include tracking worshippers’ attendance in churches,
spotting shoplifters, catching suspects trying to enter public events, establishing
identity of raid-hailing customers and automating tourist entry into attractions.
Facial recognition technology can also be threatening. Stanford researchers have
proved that facial recognition algorithms when exposed to a gay man and a straight
one could correctly call out his sexuality 81% of the time. Humans could do it only
61% of the time. In prudent societies, this could cause enormous social tension [9].
The famed researcher Joseph Schumpeter first implied ‘innovation’ in 1939 to
mean commercializing and introducing novel products to the market. This specific
connotation of innovation diffused slowly that too only in niche journals of


1 Facets of Innovation

3

economics and business. The widespread usage of the word ‘innovation’ began to
percolate beyond niche works in the 90s and became a household word at the turn
of the century [6]. One yardstick of the popularity of the word was that between
2011 and 2014, The New Yorker, Time, Forbes, Times Magazine, and even
Gardens and Better Homes brought out special ‘innovation’ issues, originally
known as ‘sketches of men of progress’ a 100 years back [10].
Innovation results in economic performance at different levels; at the individual
level (increased longevity), at the firm level (better profits, increased market capitalization) at the industry level (better employment, capital investments), at the
consumer level (generating consumer surplus) and at the nation level (GDP growth,
increase in per capita income). The introduction of the newly invented mode of
transport, the railroad had a stunning economic effect in India. Between 1853 and
1930, the British Raj laid 67,000 km of railroad across India. Real annual incomes
rose by 16% compared to an average 0.4% per year between 1870 and 1930 [11]. In
recent times, the bullet trains provide a good example of innovation reshaping a
nation’s economy. Less than a decade ago, there were no bullet trains in China.
Today, 20,000 km of high-speed rail lines dot the country, more than the rest of the
world combined. Equally astounding is urban growth alongside the tracks. In the
thickest parts of China, high-speed rail has been a boon: it has facilitated the creation
of a deeply connected economy [12]. Little wonder: house prices in satellite towns
and cities have become much cheaper, as much as 70%. Bullet trains have thrown up
options for people to stay in suburbs and escape the high costs of large towns like
Shanghai. There are now 75 m people residing within an hour of Shanghai by
high-speed rail. The fallout is that these trains are expanding the labour pool and
consumers around China’s most industrious cities, while guiding investment and
technology to poorer ones. ‘Bullet trains are becoming just like buses,’ is the
common refrain. The World Bank says the gains of high-speed rail could potentially
boost the productivity of businesses in China’s coastal regions by 10% [7].
Firm-level innovations aggregate resulting in economic gains to a nation.
A rising body of studies demonstrate the link between innovation and economic
gains. Empirical studies have largely pointed to the better performance of innovative firms compared to the non-innovative ones [13]. Innovations make it possible for a firm to offer a larger portfolio of products leading to better firm
performance [14]. Innovation typically increases customer value [15] and is critical
to firm’s well-being or even to its survival [16, 17]. Countries such as the US which
houses a large body of innovating firms have better economic outputs. As firms
grapple with a rapidly changing global economy, innovating companies are likely
to survive and even dominate the market place. Notwithstanding the current turmoil, firms in highly innovation-centric countries like the US, Japan, Korea and
Taiwan have continued to make great strides. Innovating firms invest relentlessly
regardless of the economic conditions and there is evidence that innovating firms
invest more on innovation in times of economic turmoil. During periods of economic distress, the top-100 global innovators enhanced shareholder value to their
stakeholders and their nations [18].


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1 Facets of Innovation

In fact, higher R&D investments induce higher economic output. United States
is the biggest spender on innovation in the world with its R&D budget larger than
the combined economies of Argentina, Denmark, Greece and Taiwan. Investment
in innovation was primarily responsible for the secular growth in several industries
not only in the US, but also in emerging economies as well [19]. During 1960–
2007, the U.S. spent an average 9% of its GDP a year on R&D helping its economy
to grow at 3.3% annually resulting in significant economic gain [20]. In China, new
product innovation yielded 12% return which are about three times the returns
obtained on fixed-production assets [21]. In fact, studies have concluded that
investing around 2.5% of gross domestic expenditure on R&D maximizes productivity growth [22].

The Idea of Innovation
Innovation is broadly defined as ‘a new idea, method, process, or device that creates
a higher level of performance for the adopting user’ [23]. Yet, there is no unanimity
on the precise definition of innovation in the engineering, marketing and management communities. Innovative activity is ‘any incremental or radical change in
technology embodied in product and process.’ [24]. OECD has an overarching
definition that captures the spirit of innovation: Innovation is an iterative process
initiated by the perception of a new market and/or new service opportunity for a
technology based invention which leads to development, production, and marketing
tasks striving for the commercial success of the invention [25].

Often, the terms innovation and invention are used interchangeably. There is,
however, a subtle difference between the two. When an idea is tangibly realized, it
becomes an invention while market introduction of the invention is termed innovation [26]. Thus, innovation process is a two-step process that stretches from
conception to market introduction. Companies protect their innovation legally
through patents. Most of the value appropriation of innovation happens through
patent-protected inventions.
In many cases, the idea behind one revolutionary invention leads to a series of
similar inventions. The two-part pricing model adopted by replaceable razor blade


The Idea of Innovation

5

allows users to pay for the razor and pay later for the consumable blades.
Subsequently, this model was successfully deployed in the case of printers and
cartridges, espresso machines and coffee refills and many more [27].

The Value of Innovation
The key output of innovation is intellectual capital (or intangibles) which is
responsible for creating value. Intellectual capital could manifest as patents and/or
enhance the existing knowledge capital. Intellectual capital is defined as an asset
that is not physical or financial. Much of the intellectual capital is tacit knowledge
that resides in the minds of people. Intellectual capital is ephemeral and must be
captured, preserved, catalogued and legally protected to make it secure as
Intellectual Property. Intellectual capital is non-additive, meaning that use of
intellectual capital does not diminish the intrinsic value of the asset. For example, if
patents are licensed to multiple companies concurrently, the intrinsic value of
patents will not diminish. On the other hand, a financial asset like cash is additive in
nature; any expense will decrease the cash balance. The new generation of
knowledge companies have almost no physical assets and the only asset that they
possibly hold will be in the form of intangibles. Several airlines do not own even a
single plane; the revenue generator in most cases is the landing rights that these
airlines own [28]. Uber has become the biggest taxi company without owning any
vehicle, while Airbnb has no property of its own. Apple, one of the most iconic
names in the world is bereft of any factory of its own. Facebook does not create any
content nor does Alibaba, the largest retailer in the world, own any inventory. Most
start-ups have only intangible assets on their balance sheet, usually in the form of
patents, often used as collateral to raise funding. With intangible assets now
accounting for more than 80% of the S&P 500 market value, intangibles, rather than
physical assets, have become critical value drivers.

What kind of value does innovation create? Innovative products and processes
generate increased ‘value’. That innovation creates value is now reasonably
understood. Value realized through innovation can be stratified into three layers—
Societal, Economic (including Consumer Surplus) and Financial. The societal
impact of innovation (for example, improved infant mortality due to new medicines) is perhaps the most important output of innovation. Second, the ability of


6

1 Facets of Innovation

innovation to endow economic value to nations (increase in per capita income and
productivity of innovation-centric countries) largely explains the heterogeneity in
the relative prosperity of countries. An offshoot of the economic value is the
generation of consumer surplus, a benefit that the consumer enjoys due to innovation. Finally, innovation is the key reason for improved financial performance of
firms (the link between patenting intensity of a firm and its market value is well
established).
Innovation brings value to all the participating players. Innovation delivers better
quality of life to customers through improved products coupled with enhanced
service. Happy customers result in profitable companies. To customers, innovation
implies products of better quality and better service, which together mean a better
quality of life. For the businesses, innovation means greater profitability and sustainable growth. For the employees, innovation can mean a more intellectually
challenging job and higher pay. From the aspect of the economy, innovation
translates to improved productivity and prosperity [29]. Innovation usually results
in novel, wholesome and more optimized production processes, translating to
value-driving business models. The absence of concerted innovation can be devastating leading to dormant business activity and severe unemployment. Innovation
is key to a healthier environment, reducing carbon footprint and lowering waste
discernibly [30]. And innovation need not be driven within the organization. The
top generator of new ideas at IBM are its employees, business partners and through
collaborations with clients; in fact, its own R&D is ranked a poor eighth when it
comes to creation of new ideas [24].

The Spark of Innovation
Historically, Thomas Edison would have to rank as one of the greatest innovators of
all time. His contribution to the world: the lightbulb, the movie camera, the disc and
cylinder phonograph, highly developed fluoroscopy, a commercial stock ticker (still
in vogue, but now electronic) and a vote aggregator. For sheer number of innovations, Edison is way ahead of illustrious names like Graham Bell, Leonardo da
Vinci, Steve Jobs and Einstein. Edison also had 1093 patents to his credit! [31]
Edison’s country, the US, has clearly led the global innovation efforts during the
twentieth century borne by the sheer number of innovations that came of the
country (the airplane, the telephone, the zipper, the PC, the modern automobile, the
oil well, the Internet, the motorcycle, the laser, the smoke detector). While there is
recognition that the last century belonged to the US, the next century may not
belong solely to the US; Japan, China, India and S Korea will join the bandwagon
of innovation aggressively [31]. However, predicting the likely path of innovation
is akin to double guessing man’s creativity. Twenty years ago, the world did not
know Internet, but now Internet rules the world. Sixty years ago, man had never
heard of DNA: now that knowledge is the prime mover for medical progress.


The Spark of Innovation

7

Given the frenetic pace of innovation in the last few decades, it is easy to take
the modern-day digital edifice for granted and forget that the human incumbents of
our planet stand on ‘the shoulders of giants’, tellingly exemplified by Bell Labs. In
the last century, Bell Labs was a company nonpareil. In 1947, it gave us the
transistor, the crux of all digital products in use today. Millions of transistors go into
making microchips that reside in the hearts of mobile phones and PCs. Since the
advent of transistors, a deluge of innovations has followed—the silicon solar cell,
the first functioning laser beam, digital communication theory, satellites, the cellular
network, UNIX and C—the most essential computer operating system and language
even today. During its golden period, more than 25,000 people worked in Bell
Labs, including some 3,300 Ph.D.s. Today, if the world is driven by mobile phones
and the Internet is made possible through seamless computer networks, thanks to
two men who invented the transistor in a suburban New Jersey lab during the icy
winter of 1947. Or that in 1971 a group of Bell Labs scientists were driving in a
camper filled with sensitive radio equipment through Philadelphia for many endless
nights, trying to establish the first working cellular network [32].
Yet, there is a danger of oversimplifying yesteryear innovations. As the
well-known innovation guru Hargadon said ‘Many people still believe a better
mousetrap is all it takes. But of the 2000+ mousetraps patented, only two have sold
well, and they were both designed in the 19th century. A good idea doesn’t sell
itself although most ‘lone inventors’ make the mistake of thinking it will.’ [33]. To
be sure, the industry has also its share of innovation-sceptics who feel that the
global innovation efforts are overblown and their payoffs are, at best, dubious.
Innovation in the US is ‘somewhere between dire straits and dead’ echoed Peter
Thiel, co-founder of PayPal. While a time traveller from circa 1900 appearing in
1950 would be astounded by the radical innovations like electricity, phones, planes,
cars, fridges, radio, TV, penicillin, a similar traveller from 1950 to present day
would find little to stun him beyond the Internet, mobile phones, PCs, except to
wonder how old technologies had become markedly more reliable. Technological
developments of the past 50 years could not have presented benefits akin to what
washing machines and vacuum cleaners did to unshackle housewives from drudgery. In some ways, we have retreated: since Concorde was phased out, the speed
of air travel has slowed and is no better than when Boeing launched its 707 in the
late 50s [34].
However, history is also replete with instances of breakthrough innovations not
being spotted. In 1895, Charles Duell, the Director of USPTO purportedly said ‘….
everything that can be invented has been invented’. When Television was invented,
New York Times wrote it off and said: ‘Television will never be a serious competitor
for radio, because people must sit and keep their eyes glued on a screen; the
average American family hasn’t time for it’ AT&T concluded in 1999 that the
mobile subscriber base will not go beyond one million. And this was their invention! The prophecy went horribly wrong with the subscriber base exceeding 70
million in that year itself and crossing 3 billion 20 years later [35]. Ford and GM
lobbied against airbags in the 70s citing lack of consumer interest and that they
were not practicable or appropriate. In a telling rebuttal to their forecast, 3.3 million


8

1 Facets of Innovation

bags were fitted in the cars just in the US during the 90s resulting in 7000 lives
being saved with hundreds of traffic related accidents averted. In WW I, the US
military lost nearly seven million days of active duty to sexually transmitted diseases because condoms were not know at that time. During WW II, the army
mandated the stores on its bases to stock them [36].

What are the greatest inventions ever? To come up with such a list can be, at
best, a hazardous task. A Time poll listed The Wheel, Internet and Electricity as the
most important inventions ever. What about the most useful inventions of all time?
Seventy-one percent of people polled voted the cell phone as the most important
invention in human history [26]—something the unknown inventors of the wheel
and fire may very well disagree (Figure source: Time [26]). The next best: The
Disposable Diaper.
The relentless innovation over the last few decades has made world’s hunger for
computing power gargantuan. It is estimated business and consumers added 40
exaflops (1018 flops) in 2014, up from 5 exaflops in 2008 and 20 in 2012. Equally,
the world seems to be packed with communication power. Twenty years ago, only
3% of world’s population had a mobile phone and just 1% of the population had
access to the Internet. Half of India’s population had never made any telephone call.
Today, the picture has dramatically changed: two-thirds of world’s population have
a mobile phone and the world has become more connected, with one-third of
human population having access to the Internet. Soon, nearly every living person
will have at least one mobile phone and there would be very few places where
Internet would not be available [37].


The Spark of Innovation

9

The colossal impact of innovation has decisively changed the status quo, and
continues to do so at an accelerated pace. At crucial periods, innovation has been
disruptive: from the invention of the spinning jenny in the eighteenth century which
altered the landscape of the textile mills, to the factories that facilitated mass manufacturing and to the most disruptive invention (probably of all time), the harnessing
of electricity. In recent times, the design and manufacture of ultra-dense semiconductor chips, the pervasive Internet and the indispensable mobile phone have
completely transformed the economic performance of businesses and nations.
Because it is a connected world, the difference today is the sheer ubiquity of innovation in and the sheer speed of transformation. ‘There have been slightly more than
thirty-two doublings of performance since the first programmable computers were
invented during World War II’ futurist Raymond Kurzweil has noted. Facebook saw
enormous intrinsic value in WhatsApp, a company barely five years old and with
fewer than 400 employees, and acquired it for a stunning $19 billion [38].
With advances in technology, the need for human involvement in decisionmaking has been coming down thereby reducing human error. The number of
patients who die due to misdiagnosis exceed 40,000 each year in the US, rivalling
the number of fatalities due to breast cancer. Taken together with other diagnostic
errors, the cost per malpractice claim is more than $300,000 resulting in higher
healthcare expenses. Big data and analytics will result in reduced costs, enhance
medical efficiency and improve patient care by reducing subjectivity in the diagnosis. It is predicted that computers will eventually replace 80% of what the doctors
do, while amplifying their skills. A transition to big data based decision-making has
already happened in other areas, too, where human judgment was thought imperative. Almost all commercial flying is now carried out by auto-pilot, not by the
captain. Most stock market volume is now driven by algorithmic high-frequency
trading. In the US, Google’s autonomous car has had a flawless record with zero
accidents driving 300,000 miles on normal roads [39]. (The first fatal accident took
place in 2016 with a semi-autonomous Tesla car.)
There are several reasons why innovation is critical to most businesses for
long-term sustainability [25]. First, markets have become more open (notwithstanding the recent rhetoric of protectionism). Businesses get new opportunities to
expand trade which allows them to optimize their manufacturing/delivery locations
thereby creating a more level-playing field. However, well-established firms in
developed countries face severe pressure from low-wage economies. Second, the
precipitous drop in the costs of communication and transportation have allowed new
markets to flourish. Sea freight charges have fallen by more than 67% since 1920 and
air cargo expenses have dropped by more than 80% since 1930. Phone calls on the
Internet are free [40]. The world has truly become ‘flat’. Faster and cheaper global
communications mean that the customers are up on the latest fashions and trends.
Companies which keep pace with this rapidly changing world and are in tune with
the customers’ demanding needs will not only survive but flourish as well. Third,
advances in science and technology allow firms to leverage on their skill and


10

1 Facets of Innovation

knowledge to go up the value chain. New industries like biotechnology are taking
shape while the traditional ones like telecommunication are being morphed. Since
innovating industries bank on knowledge and skills, high cost developed economies
can nullify wage arbitrage of low-cost economies. Finally, services which accounts
for more than 70% of the economy is now almost completely technology intensive.
Technology savvy services are now being deployed to reengineer business workflows, and in customer-centric areas such as retail, hospitality and banking services.
Many high technology manufacturers like IBM now find services more lucrative
than products [41]. In the fiercely competitive business environment, innovation has
become a strategic imperative. As a decisive prime mover of growth and competitiveness and as a creator of shareholder value, innovation is central to companies’
success. And innovation drives macro-benefits as well, with advanced nations
experiencing higher incomes and better quality of life and the less robust nations
enjoying higher standard of life [42].

Global Innovation

The global innovation profile has been indelibly altered in the last three decades
and has become more secular. Innovation that used to be primarily driven by the
US, Europe and Japan is now more equitably distributed among a larger number of
countries. In the global corporate echelons through, the top 100 innovating firms list
remains an exclusive club. Just two countries, Japan and the US account for 70% of
the list, making them the true innovation bastions of the world (Figure source:
Thomson Reuters [14]). ‘We will bring about a nation founded on intellectual
property’ the Japanese Prime Minister vowed, making the country the second
largest innovator in the world (by number of patents granted at USPTO). Japan does
more patenting than all of Europe combined. Much of the reason why US has


Global Innovation

11

become an innovation powerhouse is due to Silicon Valley in California. That the
Silicon Valley in the US houses the very best technology companies is a known
fact. It also has the highest per capita GDP in the US at $74,815, 30% more than
London and 70% more than Singapore. In the global GDP pecking order, San Jose
has the third highest per capita GDP of $77,440, behind only Zurich and Oslo [14].
A significant reason for China’s faint appearance in the top-100 innovators is
because most of its innovation endeavours are inward looking and therefore fails to
impact worldwide; just 6% of China’s innovation efforts is legally protected and
commercialized outside China and only a sliver of its domestic patents is granted at
the USPTO [14].
The seeds of globalization of innovation started when US firms established
offshore R&D units and manufacturing hubs in China and other Asian countries.
The most important trend due to US offshore investments has been the growth of
innovative competencies in China, India, Taiwan, and South Korea, none of which
was on global R&D radar in 1960s and 1970s. And in these countries, the increase
in the innovation intensity has largely been led by key technology hubs such as
Bangalore, Shanghai, and Hsinchu in India, China, and Taiwan respectively (much
like the Silicon Valley, Dallas, Seattle and Boston in the US). These strategic
actions helped the growth of foreign competitors in automobiles and semiconductors whose innovative output and superior-quality products threatened the very
viability of US firms. The US no longer is the undisputed leader in innovation,
although it continues to be the largest R&D spender in the world [43]. The centre of
gravity of core microchip innovation, the bedrock of today’s knowledge economy
however, has remained steadfast in the US [39].
An increasingly sophisticated Asian user and a faster market growth have been
responsible in critical R&D activities moving away from the US in high technology
areas (software, semiconductors and PCs). Demand for mobile communication and
digital devices in South Korea with more advanced features is outstripping the
demand in the US. New and advanced products are now routinely developed and
released in Asia and in other developed economies concurrently [44]. In several
areas, innovation and manufacturing seem mutually exclusive; while one part of the
world innovates (mostly US), another part of the world manufactures (mostly Asia).
Vertical specialization has had a profound impact on locating R&D activities. In
pharmaceutical industry, while drug discovery happens usually in the US, Asia is
involved in clinical trials, post-approval marketing and manufacturing. The design
and development of semiconductor components (mostly in the US) is almost
de-coupled from manufacturing (mostly in Asia). Similarly, the systems architecture, electronics, and the OS for electronic products are almost exclusively designed
in the United States, but the factories to produce such products are in Asia.
Industries like flat displays, semiconductors and PCs have thus intensified innovation in one place (primarily US) leaving manufacturing to another (mostly Asia).


12

1 Facets of Innovation

The global advances in the last 150 years is captured in the patenting trends in
the US. It is said ‘Innovation without protection is philanthropy’ [45]. By and large,
the economic benefit of innovation is realized only if the innovation is protected
through patents. For more than a century, patenting has kept pace with technological breakthroughs. Since 1870, US patenting activity has risen in sharp bursts in
tandem with radical innovations in telegraphy, electricity, automobiles, airplanes,
synthetics, aerospace and more recently, high tech sectors including computers,
computer software and Internet [46]. When measured against previous patent cycles
in US history, it is remarkable how unremarkable the current patenting stampede
has been (Figure source: [42]). The first rush of patents occurred during in the
1880s, when Edison and Graham Bell came up with life-changing inventions. The
number of new patents that were granted rose sharply each year by nearly 60% and
touched 20,000 [47]. The subsequent patent bursts coincided with swift advances in
deploying steam engines for mass transport, the usage of wireline telegraphy and
telephony and the harnessing of electric power, heralding the era of rapid industrialization of the US. The advent of automobiles and airplanes saw a concomitant
upsurge in patenting, followed by intense innovations in plastics and computing in
the 60s. The mid-1980s saw the dawn of personal computer beginning to power the
US economy and propelling the world steadily toward the age of Internet [43].


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