Soft Innovation Towards a More Complete Picture of Innovative Change
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Research report: July 2009 Soft innovation Towards a more complete picture of innovative change Soft innovation Towards a more complete picture of innovative change Foreword Over the past three years NESTA has published a series of reports documenting the extent of innovative activities in the UK that are ‘hidden’ from the traditional metrics used by policymakers. In this report, the economist Paul Stoneman uncovers a picture of rapid innovative change of an aesthetic nature – what he terms ‘soft innovation’. Current policy, he argues, distorts the economy by supporting innovation of a technological and functional nature, and neglecting innovation of a soft kind. In the creative industries, Professor Stoneman points to estimates suggesting very high and increasing rates of soft innovation: for example, about one-half of the titles in the UK Top 40 album chart change each month. And the bestselling video games now spend on average less than three weeks at the No. 1 position. Professor Stoneman argues that there are high – albeit less rapid – rates of aesthetic innovation outside the creative industries too, in sectors as wide-ranging as pharmaceuticals and foods. Stoneman recognises the increased levels of support governments have given to the creative industries in recent years. But, provocatively, he argues for an ‘overhaul’ of innovation policy to recognise soft innovation activities both within and outside the creative industries. No doubt this thesis will have its critics as well as its supporters. As ever, NESTA looks forward to participating in the debate. Hasan Bakhshi Director, Creative Industries, NESTA July, 2009 NESTA is the National Endowment for Science, Technology and the Arts. Our aim is to transform the UK’s capacity for innovation. We invest in early-stage companies, inform innovation policy and encourage a culture that helps innovation to flourish. 3 Executive summary Nobel prize-winning economist Robert Solow and, with that, product differentiation. in 1957 was the first to argue that the major Emphasising product differentiation allows that determinant of changes in labour productivity innovation may involve differences from the in the US economy was technological progress. status quo and not just improvements, which His conclusion has now been extended to is quite different from the standard approach many other countries and is widely accepted. where innovations in functionality require As a result, a significant academic literature any new product to be an improvement; soft on innovation has developed, and there is a innovations may involve reductions in quality growing policy concern in most economies rather than just improvements (if price falls about how best to stimulate innovation in order more than quality), as with budget airlines. to improve growth and economic well being. We identify two main types of soft innovation. Most previous studies of innovation have The first involves changes in products in the assumed innovation to be functional, scientific creative industries, which are worth 6.4 per or technological. OECD manuals guiding the cent of UK gross value added, and include collection of data on innovation have largely new books or movies. The second relates to reflected this perspective, with an emphasis on aesthetic innovation in goods and services that product and process (TPP) innovation in new are primarily functional in nature, such as new goods and, more recently, services (although furniture or a new car model. organisational and marketing innovation have also been identified). But while the emphasis Soft innovation and technological on functionality has been economically innovation are interrelated valuable, it ignores a considerable body of Although we distinguish between ‘soft’ and innovation. ‘technological’ innovation, we recognise that they are interrelated. Many improvements Soft innovation is a concept that reflects in aesthetic goods are the result of new aesthetic changes technological products and processes – the We define ‘soft innovation’ as a concept that iPod and other portable music players have reflects changes of an aesthetic nature. Such changed the way we consume music, and have changes are considered significant if they increased demand for downloads. Equally, are economically important. We show how demand for new products may be a result of important are new books, films, plays and aesthetic innovations: demand for DVD players video games in markets which exhibit regular is in part dependent on the quality of films novelty. Such innovations can also encompass available. a new line of clothing or the redesign of a car or a new advertising campaign. No-frills Traditional models of innovation tend to budget airlines or cosmetic surgery are further assume (often implicitly) that innovation must examples of markets in which firms rely on be vertical – all buyers will prefer the new changes in aesthetics more than changes in product to the old at a given price because it technology to thrive or survive. is inherently better than the old product. But this ignores two other possibilities: horizontal In short, we are concerned with changes in innovation where some consumers may prefer goods and services that primarily impact on the new and other consumers the old even sensory or intellectual perception and aesthetic when the new is priced similar to the old; and appeal rather than functional performance. Soft vertical innovation which doesn’t involve an innovation mainly concerns product innovation improvement in quality but may involve a lower 4 price. Soft innovation may include both the painted by TPP indicators alone, innovation above possibilities. appears to be more balanced across different economic sectors when soft innovation is Only soft innovations with high market included. Our analysis of registered trademarks share are considered significant and design rights suggests also that future Many aesthetic innovations have little macroeconomic research in this field should economic significance. In the absence of other be broadened beyond traditional measures of measures, we use the market share for new innovation. aesthetic products – e.g. new books, films and video games – to assess their overall There are high rates of soft innovation in contribution. In general, the more units sold the creative industries or the greater the market share gained by A study of the bestselling charts for books, the new product, the greater its significance music and video games reveals the extent of is considered to be. This differs from the novelty among the top sellers that account approach in traditional guidelines, such as the for a substantial proportion of all sales. Book Oslo Manual, which use increased functionality publishing is worth almost £2.8 billion to the to judge which markets are important. UK economy with over 200,000 new titles each year; there are over 33,000 new music albums; Non-traditional metrics are needed to and around 830 new video games are published measure soft innovation each year worth £1.5 billion. Research and Development (R&D) and patenting activities are traditional measures By looking at how long bestselling books spend of innovation. But they focus largely on the in the charts, we show the importance of new scientific and technological to the exclusion of titles (or product variants) to the market. The the aesthetic. We need alternatives, if we are 205 books in the New York Times bestseller to gain a truer picture of the total extent of lists in one six-month period accounted for 84 innovative activity in the economy. per cent of all book sales. Sales of bestselling books usually peak early after launch and then By taking information from a number of gradually fall down the charts. A similar pattern sources we can get a consistent picture is seen in the music charts, where about half of of the extent of soft innovation, despite the titles in the UK Top 40 album chart change problems with individual indicators. These each month. include measures of innovation in the creative industries, taken from the Community Innovation in video games is not just Innovation Survey (CIS); core creative dependent on new titles, but also reflects employment in the creative industries; creative console changes such as new versions of employment in other industries; design Playstation. There are fewer new games than activities in all industries; and copyright and books each year, but even among the top ten trademark applications (although the latter also bestsellers between 1995 and 2007, only four capture some TPP innovations). spent longer than ten weeks at No 1. CIS and design activity data suggest that Many new titles are launched in these soft innovation is extensive across the whole industries each year, indicating high rates of economy, and is particularly important in the soft innovation. Of the new products launched non-manufacturing sectors. The survey data very few sell many copies. The most successful also suggest that the rate of innovation in the products sell in very large quantities though creative industries may be faster than in other sales quickly decline with sales ranking. sectors. The employment data suggest that There is evidence – at least for books and seven times as many people are employed in video games – that product lifecycles are also activities encompassing both soft and TPP becoming shorter and these markets exhibit innovation in creative and other industries greater and greater churn with more and more than are estimated to work in R&D, a common bestsellers each year. Taken together, the three measure of innovative activity. industries studied reflect rates of innovation that are much greater than the rates of (labour) A useful measure of soft innovation is some productivity growth of about 2.5 per cent per indicator of the difference between the level annum often quoted as a measure of the rate of trademark activity and the level of R&D or of TPP innovation in developed economies. patenting activity. This shows extensive and increasing soft innovations in most industries.