Innovation is already an important driver of growth in some countries. Firsm in several OECD countries now invest as much in intangible assets, such as research and development (R&D), software, databases and skills, as in physical capital, such as equipment or structures.
The objective of government policy should not be innovation as such, but the application of innovation to make life better for individuals and society at large.
Human capital is the essence of innovation. Empowering people to innovate relies on broad and relevant education as well as on the development of wide-ranging skills that complement formal education.
Entrepreneurs are particularly important actors in innovation, as they help to turn ideas into commercial applications. In the United States in 2007, firms less than 5 years old account for nearly two-thirds of net new jobs.
Internationally mobile talent contributes to the creation and diffusion of knowledge, particularly tacit knowledge.
Given the increasingly central role of innovation in delivering a wide range of economic and social objectives, a whole-of-government approach to policies for innovation is needed.
In the aftermath of the financial and economic crisis, society – including business – is looking to government to create frameworks that encourage experimentation and growth but also provide some security in case of failure.
The diversity of innovation actors, learning processes, linkages, knowledge bases, institutions and organization needs to be carefully considered when formulating policy.
The question of what drives economic growth and how to sustain it in the long run is at the core of economics. Neoclassical growth models assert that growth results from the input of physical capital, i.e. the stock of machinery, equipment and building, labor, and “knowledge” in the production process. However, because of diminishing returns to capital, long-run growth cannot result from the simple accumulation of physical capital, which can only guarantee growth in the short run. Long-run growth can only be achieved by knowledge accumulation and technological progress.