Wednesday, May 1, 2013

Measuring Innovation: National Value Management

The Science and Technology in Technology in China course has an interesting assignment on measuring an economy's innovation capacity:

Aside from the innovations systems approach (wikipedia), can you think of other methods for analyzing an economy’s innovation capacity and output (from a macro perspective)? If the answer is yes, explain the advantages/disadvantages of the alternative in comparison with the innovation systems approach.

My answer builds on Solow's Growth Model, I learnt about in the Model Thinking Coursera course:

1. A Value Growth Model to analyse an economy's innovation capacity 

My model, the Value Growth Model (VGM), is an extension of Solow's Growth Model with an added Value component. Solow, a Nobel Prize winner (pictured below) in Economics (1990), proposed a formula simplified to:

O = f(L, K, T)
Robert Solow, Nobel Prize winner 1990, Economics

Namely that an economy's output (O) or GDP, is a function of the inputs, labour (L), capital (K) and technology (T) or innovation. So technology allows more output from a given amount of workers and investment. T is really the intangibles left over after the tangible inputs are counted, including innovation, skills, intellectual capital and networks. I will consider T to substitute for innovation.

To O, I add V for value. Value is the intangible benefits consumers get from purchases above what they pay for goods. V can be measured relatively by asking the question of a product, firm, industry or country (X); does X provide more value than last year? A sample of say 1000 people are asked the question on a scale of 1-5, where 1 is much worse and 5 is much better.

Thus, O + V = f(L ,K ,T).

The macro innovation output (T) is thus solved as the residual in the formula after finding values for O, V, L, and K. The innovation capacity is the maximum value of T over time.

 2.Advantages and disadvantages of the VGM model

The advantage of VGM is that T can be found for a sector, firm, industry or nation. The VGM applies equally to services, like health, finance, media and government as well as more traditional manufacturing. The VGM also takes advantage of both tangible and intangible inputs and outputs, and is relatively straightforward to calculate.The VGM model is quite simple to understand. While T is not broken down, it provides a concrete measure of innovation.

The disadvantage of VGM is that the focus is really on output rather than capacity. Capacity is inferred from the maximum T over time, but this assumes that T does not vary randomly, which is not known. The model focuses on financial measures, but excludes the value of connections in the economy; these are included in T. The VGM is less a prescriptive policy guide than a measure like inflation, GDP or unemployment. The VGM is not an absolute measure, since value is measured relatively rather than absolutely.

3. Comparing the VGM with the innovation systems (IS) approach

The VGM is more simple, straightforward and concrete than IS. VGM is a measure whereas IS is a descriptive method of analysis. IS is complex, powerful, dynamic and interactive but it is also a little vague about where to begin since it includes a very wide range of possible information. IS is also more capacity oriented so makes more sense in manufacturing, mining and telecoms sectors where capacity is important, whereas VGM can be used to assess innovation in services, government and non-profits through understanding value created. IS focusses more on inputs to innovation and firms whereas VGM focusses more on outputs of innovation and benefits consumers get from innovation (value). The VGM is more simple, direct and thus quicker and more straightforward to calculate.


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