How We Create the Wealth of Nations
Chapter 5: The Values of Innovation
The object of this chapter is to clarify what is meant by the ‘value of an innovation’. There are at least three ‘values’ in common use. The first is the value of an innovation to the innovator. The second is the value of an innovation to the customer. And the third is the overall social value. When we are talking of business innovation (B-innovation), certainly, it is unlikely that these three values are all the same. But when we are talking of common innovation (C-innovation), it is quite possible that the three values are the same or similar. Let us start with B-innovation. Recall Schumpeter’s concept of innovation as creative destruction. Part of the value of innovation to the innovator is that it increases the size of the market, but much of the value to the innovator may be that it takes market share away from a rival. How does it do this? By offering the customer a better deal – perhaps only a slightly better deal – than the rival can offer. In this case, therefore, we have a big positive value for the innovator, a more modest positive value for the customer, and a big negative value for the rival. The social value of the innovation is the sum of these three – assuming that we can neglect any influence on third parties. In the special case where the value to the innovator is exactly offset by the cost to the rival, then social value would equal customer value.1 But when part of the value to the innovator is the increase in market size, then this special case does not apply. In general, therefore, innovator value, customer value and social value are all different from each other.
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