International Economics and Innovation

Question One
1 a. Difference between invention and innovation

Innovation is a common economic term and phenomenon describing the process of transforming a theoretical idea into practice and there by achieving the creation of new products and services. Often, innovation is mistaken with invention. According to Fagerberg (2004), invention refers to the first occurrence of an idea for creating new distinct products and services while innovation refers to the first successful attempt to putting the idea into practice. The difference between the two terms is that one is the simple occurrence of an idea while the other is the practical application of the idea. However, in certain industries such as Biotechnology invention and innovation are often closely linked to become almost indistinguishable.

1 b. Different Types of Innovation

Two main types of innovation are often recognized by economic and business studies including Architectural and Incremental innovation. According to Fagerberg (2004), incremental innovation is the most common among the two and basically refers to innovation processes that take advantage of existing resources and technology to impact a significant increase in value for the customer. For instance enhancing effectiveness of features and developing design changes. Architectural innovation on the other hand refers to taking up skills, resources and available technology and then applying them within a different setting: typically a different industry or a different market. Despite the popularity of these two innovation types, two other types have recently emerged and are significantly picking traction within the economic environment, including disruptive and radical innovation. Disruptive innovation involves the application of new technology within an existing market leading to the disruption of current technology in use and leading to increased productivity. Radical innovation on the other hand is a complete invention and practice of new technology and business processes leading to the development of new and unique industries, products and services.

1 c. Properties of the Innovation process

I do not agree with the view based on multiple mathematical models that innovation is a linear process. This premise is generally rooted on the claim that scientific research is the basis of innovation. That through effective scientific research, inventions are made, and these subsequently lead to innovation and the guaranteed achievement of the intended end product or goal. However, innovation is much more complicated involving circles of feedback in different aspects of the innovation process. Pavitt (2004) describes three major properties of the innovation process including innovation being a product of scientific and technological knowledge, translation of knowledge into working and viable artifacts as well as responding to and influencing marketing demands. As such development of new products or services that are suitable and successful within a given market is not only dependent on scientific research but also the level of technological advancement and available technological resources. A consistent circle of feedback between departments of science and technology is necessary to impact effective innovation. In addition the products and services provided are not guaranteed to be successful or even viable rather a continues analysis of consumer behavior and demand is necessary to further enhance the specialization of the product or service to eventually suit the market. The innovation process as such entails significant back and forth in terms of knowledge sharing, feedback application and effective alterations making it an extensively non-linear process.

Question 2
2 a. Technological and Social Capability

According to Fagerberg and Srholec (2009) Technological capability refers to the ability to search, identify, create and effectively use knowledge commercially in the development of unique products and services. Social capability on the other hand refers to the social context characteristics within the economy of market that different businesses and organizations share. Both of these capabilities (Technological and social) are significant for, and influence an organization’s innovation and development strategy, Technological capabilities are often internal to an organization and thus an organization can adjust them effectively, however social capabilities are external and as such organizations must learn to adjust its strategies to fit them.

2 b. Inclusiveness and Equality in opportunities

Based on the observed degree of importance for economic development, financial development is the most significant aspect of an organizations’ social capability as it ensures continued productivity and development and can be effectively controlled by the organization to impact required success. Favourable business regulations come up next then social capital. While social capital is significant among the customers within the market, favorable business regulations is the key towards developing and maintaining effective social capital. Ultimately, all these aspects are significant even in a closed trade set up, however they are much more effective in an open trade setup. Inclusiveness alongside equality of opportunities enables the accommodation of a wide variety of ideas from different individuals who are significantly diverse, and ensures each and every individuals contribution is considered and accounted for. This consequently leads to the development of a wide pool of resources, ideas and technological capabilities all of which impact the strengthening of the innovative capability of an economy. Different inventions and subsequent innovation in such an economy can be developed promptly and with significant ease.

2 c. Correlation between education system and economic development

Based on the curved line in figure 1, the relationship between education system and economic development is non-linear. However, the curve picking up a steeper slope on account of the greater improvement of the education system indicates that education systems indeed have significant impacts to a country’s economic development. For the low developed countries such as Tanzania, Nigeria and Kenya the advancement of the education system does not impact increased economic development significantly and this can be attributed to the lack of other effective social and technological capabilities such as financial systems and business regulations within such countries (Fagerberg and Srholec, 2009). However with an enhanced education system, emerging countries such as Chile and Uruguay, presumed to have other efficient social and technological capabilities can effectively leverage the education along with other social factors to impact an almost linear improvement of the economy as well. Developed countries on the other hand are assumed to already have effective social and technological capabilities in place as such any minor improvement in their education system significantly sparks extensive invention and innovation which subsequently triggers a larger economic development and gain.

Question 3
3 a. Channels for accumulating and transferring technological knowledge

Multiple channels exist currently with which firms in less developed countries can accumulate and transfer technological knowledge and innovation from developed countries including through linkages with foreign companies in such developed countries, exploration of exports, the use of Foreign Direct Investments (FDI) as well as through Global Value Chains (GVCs) (Pietrobelli and Rabellotti, 2010). In the highly globalized world economy with multiple ways of communication and connection, different firms and organizations in developing countries can develop significant linkages with foreign firms and companies. For instance, through inter-firm linkages and individual networks especially if the firms’ are involved in the production of similar products or services within similar industries. These linkages and connections can serve as significant challenges for importing technological knowledge and innovation and effectively applying them within the developing country’s market and economy for enhanced architectural innovation.

Foreign Direct Investment also provides a significant and a potentially most common channel for acquiring technological knowledge and innovation among firms in developing countries. Pietrobelli and Rabellotti (2010) advance that Foreign Direct Investments such as spillovers, innovation and direct innovation enables foreign companies to introduce new innovation and technological knowledge to developing countries and thereby enhancing their acquisition of the knowledge. Further Global Value Chains are currently one of the major channels for business and information acquisition among developing and developed countries. Recent literature including (Kapliansky, 2000, Giuliani et al., 2005 and Pietrobelli and Rabellotti, 2007) highlight that firms in developing countries are increasingly involving themselves in GVCs as suppliers of specialized material and input, and in return receive end product which facilitate the transfer of technological knowledge and innovation capabilities.

3 b. Forms of Technological Learning processes

Companies in developing countries may significantly learn from those in developed countries through the Global Value Chain in different ways and forms dependent on the pattern of governance within the GVC. For instance, according to Pietrobelli and Rabellotti (2010), a major form of technological learning process among developing firms in a GVC partnership with developed firms abroad is through consumer applied pressure. Lead firms within a GVC often from developed countries engage in coordinating business activities with organizations both upstream and downstream of the value chain. On account of the pressure from customers and consumers firms are forced to improve on both tangible and intangible quality of products leading to a significant technological learning process.

Another form of technological learning among developing country firms include direct support and involvement in knowledge transfer among companies in developing and developed countries (Pietrobelli and Rabellotti, 2010). In taking part in a GVC, companies in developing countries can benefit from technological learning processes provided deliberately by the lead companies to enhance the productivity and quality of the supply chain. Given that the ultimate products and services produced can be effectively linked to the lead company, deliberate sharing of technological information and innovation is often necessary to maintain a significant quality of output. This effectively benefits firms in the developing country. Also companies in developing countries can gain technological learning through unintended knowledge spillovers from the lead companies within meetings and collaborating activities.

Question 4
4 a. Leadership and Innovation

Different types of leadership models such as transformational leadership as well as democratic leadership can be adopted to stimulate innovation and manage innovative processes. Often these leadership models are those that take into account other employees ideas and contributions given the significance of information in effective innovation. However, the most preferable leadership model for use is the transformational leadership model. Not only does the leader in this model encourage individual contribution and consider all employees ideas and suggestions, transformational leaders are often forward thinkers who are mostly keen in constant transformation above all else. Through transformational leadership innovative processes can be effectively nurtured and guided to their ultimate outcomes, typically the development of new products and services.

Organizations involved in innovative processes are prone to a wide range of challenges according to Pavitt (2004) missed innovation strategies, lack of effective teamwork and collaboration towards the innovation process and limited employee motivation and empowerment towards innovation and transformation. Through the adoption of transformational leadership all these challenges can be effectively solved as transformational leaders will often inspire teamwork and dedication towards innovation to impact ultimate transformation which is the intended goal.

4 b. GVC governance Patterns

The most preferable form of GVC governance that I would develop with my different partners includes the Market-Based governance pattern. According to Pietrobelli and Rabellotti (2010), the market-based governance structure is characterized by low complexity of transactions, simple and easily codified product specifications and capable potential suppliers. The low complexity of transaction in addition to simple and easily codified products specifications enhances the possibility of learning and provides an increased opportunity for the supplier companies within less developed countries to learn fast and adopt thereby enhancing the efficiency of the global value and supply chain. On the other hand, I would move away from the relational chains given their characteristics of complex transactions and highly idiosyncratic relationships that are difficult and extensively time consuming to establish and re establish.

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Pietrobelli and Rabellotti (2010) highlights that in the relational chains, mutual dependence among the different companies within the GVC is regulated through social and special proximity, reputation as well as family and ethnicity and is therefore highly reliant on trust among the different countries. This leads to a significantly reduced opportunity for technological learning. While the complexity in transaction is low in the market based governance approach it is significantly high in the relational chain governance patterns, Further, codification of transactions is high in the market based approach compared to the relational chain ensuring a more effective opportunity for technological learning. In both governance patterns however the competence in suppliers is maintained at a significant high.


Fagerberg J. (2004). Chapter 1: Innovation, A Guide to the Literature, The Oxford Handbook of Innovation. Page 4

Fagerberg, J. and Srholec, M. (2009) Handbook of innovation systems and developing countries, Chapter 4: Innovation systems , technology and development: Unpacking the reletionships.

Guiliani E. Petrobelli C. and Rabellotti R. (2005). Upgrading in Global Value Chains: Lessons from Latin America Clusters,. World Development. 33(4), 549-573

Kaplinsky R. (2000). “Globalization and Unequalisation: What can be learned from Value Chain Analysis?” Journal of Development Studies, 37(2), 117-146

Pavitt K. (2004). Chapter 4: Innovation Processes, The Oxford Handbook of Innovation. Page 88.

Petrobelli C and Rabelloti R. (2007). Upgrading to Compete SMEs: Clusters and Value Chains in Latin America, Cambridge, MA: Havard University Press.

Pietrobelli C. and Rabellotti R. (2010). The Global Dimension of Innovation Systems: Linking Innovation Systems and Global Value Chains HANDBOOK OF INNOVATION SYSTEM AND DEVELOPING COUNTRIES, B.A. Lundvall, K.J. Joseph, C. Chaminade, J. Vang, eds., Edward Elgar, 2009, Available at SSRN:

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