The Nature of Innovation

The Nature of Innovation

Over the past 50 years the study of innovation has been of major interest to practitioners, governments and researchers. By examining the nature, sources and determinants of innovation, it has been possible to gain a greater understanding of how innovation happens, and its impact on economic development.


This is far from a linear development however, and during this time new ideas have continually cast doubt on existing ‘facts' or challenged perceived notions of innovation, such as shifting attention from ‘the firm' as the central actor in the innovation process and looking instead at distributed or community-based models of innovation.


Professor Eddie Obeng, founder of Pentacle Business School, talking about innovation at Innovate 2011:


Below we outline a set of statements about the nature of innovation that summarise five decades of empirical research and are applicable to most settings.


Fact 1: Innovation plays a major role in shaping productivity growth

It is now widely accepted that innovation is one of the main driving forces of economic growth.


In the last 20 years scholars have been trying to more effectively measure the contributions of major technological changes to productivity, and in the last 10 years scholars have focused on ‘intangibles' such as R&D, organisational change and marketing, capturing firms' investment in these and linking these to economic growth


Fact 2: Most innovation involves new combinations of existing elements, bodies of knowledge or technology

Joseph Schumpeter - the father of the study of innovation – showed that most innovations are not novel in themselves; rather they are new combinations of existing elements.


Scholars now convincingly argue that the history of (almost) every innovation is a series of previous ideas, attempts and failures. A single innovation is not, therefore, an isolated event but it springs from the body of materials, experiments and ideas resulting from previous innovative efforts.


Fact 3: Innovation is pervasive throughout the economic system

It has been supposed that innovation is concentrated in the technology sector but research has shown evidence of innovation across the economic system.


The pace and direction of innovation varies across sectors, but even slow-moving ones can be transformed by innovative efforts in products, processes and ways of working.



Fact 4: Most innovative change is evolutionary – incremental adaptations of existing elements, products and technologies

Although radical innovation generates attention and excitement, most corporate investment and management effort focuses on incremental innovation.


As developments in knowledge and technology are usually evolutionary, and firms are risk-averse, they focus on the tried and tested, directing their innovative efforts to short-term, near market innovations that leverage past investments.


Fact 5: Radical changes are rare and largely unknowable - most changes in knowledge and technology are evolutionary

Although radical innovations can spur a generation of new industries and lead to a long sequence of incremental innovations, the instances of this are rare – only every 30 years in most industries.


The difficulty of anticipating and recognising a radical innovation means firms are often unprepared or unwilling to change their structures in order to reap the benefits.


Fact 6: Innovation is relational and usually involves collaboration between two or more parties

Successful innovation is primarily a relational activity, requiring interaction between different people, teams and functions. An individual's ability to generate good ideas is, therefore, profoundly shaped by their social capital - goodwill and resources they can draw from their network.


Firms able to draw upon these resources externally have greater potential to develop innovations and capture value from these efforts. Crucially, it is recognised that innovation is only successful and valuable in terms of the consumer or business demand that it creates.


Fact 7: Creativity and invention are inter-related, but are separate and distinct elements of the innovation process

Creativity comes from personal skills and abilities with some individuals being more likely to achieve innovative outputs.


Yet much of this ability is based on personal experience, motivations, training and effort, as well as the perception of a supportive climate. Creativity is, therefore, part of the process, whilst invention is the practical application of novel ideas.


Fact 8: Most innovators fail to capture returns from their efforts as this requires different skills than creating innovations 

A very small number of activities, projects or events comprise the lion's share of innovation returns.


Many innovators find that profits of their innovations are captured by others. Skilled competitors, who control of complementary assets, are often in a better position to profit from the innovation.


Fact 9: There are a vast array of different types of innovation

Innovations come in many different forms and types. As well as radical and incremental innovation there is also a classic distinction between product innovation, the creation and launch of goods and services, and process innovation, a silent focuses on operations and ways of working.


Architectural innovation alters how elements are brought together whilst modular innovation changes a single component. 


Fact 10: There are ‘regular' patterns in innovative activity over time

Some scholars have focused on how patterns of economic growth relate to innovative activity, and within individual technology developments. The Product Life-Cycle shows how firms vary their emphasis on product and process innovation according to the life-stage of a technology. 


Fact 11: Innovation is a ‘sticky' activity in which geography matters

Innovation investments and outputs are still concentrated in particular global centres, allowing leading actors to congregate, mingle and compete. This is because, to some degree, innovation remains a face-to-face business in which geography plays a crucial role. 


Fact 12: Advanced organisational practices help firms to manage the innovation process effectively

Firms have been challenged by the need to build organisational routines that not only support the creation and development of new ideas but also their execution and delivery.


Research shows that separate internal structures can support innovative ambidexterity; one unit for exploring creative, radical new ideas and another for the exploiting and developing incremental improvements in existing ideas. Important developments include autonomy for inventors to support creativity, and creating tools to judge, compare and manage a portfolio of R&D projects.



The study of innovation is a growing and changing field. Although originally driven by technical change and ways to measure innovative activity, there has been recent scope to focus on non-technical innovations such as new ways of bringing information together and developing creative routines. There is also growing recognition that the firm is not always the principal actor in the innovation process, and does not control its own destiny. Innovations are increasingly the result of collaborations between parties including users, universities, firms and governments – success is thus determined not by the assets and knowledge firms hold, but by their ability to draw upon the resources, knowledge and skills of others.


This is an abridged version of Ammon Salter and OliverAlexy, ‘The Nature of Innovation' chapter in the Oxford Handbook of Innovation Management, editors Mark Dodgson, David Gann and Nelson Phillips, Oxford University Press, 2013.