Innovation drives economic growth. This is one of the most consistent findings in macroeconomics, and it’s been true for centuries. Economists have calculated that approximately 50% of U.S. annual GDP growth is attributed to increases in innovation. The states and regions that lead the transformation to the knowledge- and technology-based economy currently have enormous advantages. “Innovation driven enterprises,” which include a wider universe of entrepreneurial firms whose competitive advantage might be a process, service, or business model, are also an important piece of the puzzle for states wanting to foster a more innovative economy. “Technology-based economic development” is the approach employed by states to help create a business climate and to enable an environment where an economy based on innovation and technology can thrive. Innovation is about putting a new idea or approach into action. Innovation is commonly described as 'the commercially successful exploitation of ideas.

We can make a distinction between:

  • Process innovation: This relates to improvements in production processes, the more efficient use of scarce resources - leading to better productive efficiency and a rise in productivity.
  • Product innovation: This is the emergence of new products which satisfy our needs and wants - leading to improvements in the dynamic efficiency of markets.

Innovation is a stimulus to long-run growth because:

  1. It is a catalyst(impulse) for investment which helps to shift out the production possibility frontier (PPF).
  2. It is a spur to productivity growth because of its impact on technological progress.
  3. Innovation also creates a demand for new products from consumers for example in industries where existing products are nearing the end of their product life-cycle.
  4. Effective innovation can establish a unique selling proposition (“USP") for a product– something which the customer is prepared to pay more for. This helps businesses move up the value chain.

The analysis suggests new approaches to innovations in open economies in many ways including the new monetary growth models. A specific focus is on the role of innovations in output, employment, and exchange rate developments. Innovation-driven technology-intensive businesses are viewed favorably for their potential and disproportionate impact on competitiveness, future economic growth, and prosperity because they often:

  1. create jobs that command above-average salaries;
  2. pay a high percentage of their income to their employees, rather than out-of-state capital equipment or out-of-state raw materials
  3. can be located almost anywhere because of the connective power of the Internet and improved transportation systems, particularly air travel;
  4. Create additional quality jobs that are not technology focused, both inside and outside the companies themselves; and serve markets that are outside the state, thereby bringing new wealth into the state.

Economic theories emphasize the critical importance of innovation in sustaining long-run economic growth. That the innovation-intensive industries created highly skilled jobs, had higher wages, were more productive, led exports, and enhanced competitiveness during the thick and thin of business cycles is now well established. The link between innovation and economic growth and the effect of innovation on productivity and income is examined. The raging debate on the impact of automation on employment is discussed. Finally, the seemingly waning influence of innovation is analyzed. Innovation is essential for sustainable growth and economic development. Several core conditions enable innovation and encourage economic growth. In the modern economy, innovation is crucial for value creation, growth, and employment and innovation processes take place at the enterprise, regional and national levels. Innovation will lead to new businesses as well as to the increased competitiveness of existing enterprises..

Innovation is an essential driver of economic progress that benefits consumers, businesses, and the economy as a whole. How does it play that role, how does it contribute to economic growth and what can be done to promote it?

In economic terms, innovation describes the development and application of ideas and technologies that improve goods and services or make their production more efficient. 

New ideas and technologies are developed and applied, generating greater output with the same input.

 One of the major benefits of innovation is its contribution to economic growth. Simply put, innovation can lead to higher productivity, meaning that the same input generates a greater output. As productivity rises, more goods and services are produced – in other words, the economy grows.

Innovation usually starts on a small scale, e.g. when a new technology is first applied in the company where it has been developed. However, for the full benefits of innovation to be realized, it is necessary for it to spread across the economy and equally benefit companies in different sectors and of different sizes. Experts call this process the diffusion of innovation.