Innovation is defined as adapting a different approach to the workings of what is known as the normal proper procedure. In that, Joseph Schumpeter believes in the usefulness of creative destruction. This theory of creative destruction works on two aspect dynamic efficiency and state efficiency, while stressing that importance of dynamic efficiency over that of the state efficiency.
Dynamic efficiency is defined as the achievement of long term growth and technological improvement while state efficiency stresses on the optimal allocation of society’s resources at any given point of time.
Firms in the 20th century is always on the process to research and development, to add value to the products and services that they offer to their customers, so as to create sufficient competitive advantage to allow them to stay in the relevant industries. This aim also meant that firms have to spend much of their accounting budget into research and development. However, these costs are inevitable as firms stand to lose if they are not innovating enough.
The government provides firms with support and helps them innovate in many ways. Some of the examples where the government helps firms to be innovative would be in terms of the many patents that the government grants to protect the innovating firms from being replicated. This in a way helps secure the firm’s revenue after they have spent millions of dollars on research and development. Other than government aid as an incentive for innovation, firms that innovate will normally be able to enjoy the early-mover advantages. This not only increases a firm’s monetary value, but also their market share.
We see this in the case of Toyota when they launched their first batch of hybrid synergy drive. We do notice a shift in the futur ...