What is innovation?

The world is changing at a fast pace, industries are disappearing and others are emerging in their place. An economy in which many companies rest on their laurels and do not develop new production branches or new products and technologies in existing production branches will have difficulty competing in the global market. Therefore, an economy that wishes to maintain its competitive advantage must encourage companies to constantly engage in “creative destruction”, that is, in the search for new products and technologies that will form its future competitive anchor.

Why is government involvement needed in promoting innovation?

Innovation is a key to economic growth in the modern economy. However, some of the characteristics of research and development (R&D) activity – such as technological spillover and a high level of risk – mean that the economic benefit to a business that invests in research and development is lower than the economic benefit. As a result, the private investment in R&D may be lower than the optimal investment from an economic point of view. In order to overcome these market failures and reduce the risk faced by the companies, government intervention is needed to “compensate” companies and encourage them to invest in R&D to the extent desired. The main market failures are as stated:

Knowledge and technology spillover