The Two Innovation Economies

For 250 years, technological innovation has driven economic development. But the economics of innovation are very different for those at the frontier and followers who are striving to catch up.

HONG KONG – For 250 years, technological innovation has driven economic development. But the economics of innovation are very different for those at the frontier versus those who are followers striving to catch up.

At the frontier, the innovation economy begins with discovery and culminates in speculation. From scientific research to identification of commercial applications of new technologies, progress has been achieved through trial and error. The strategic technologies that have repeatedly transformed the market economy – from railroads to the Internet – required the construction of networks whose value in use could not be known when they were first deployed.

Consequently, innovation at the frontier depends on funding sources that are decoupled from concern for economic value; thus, it cannot be reduced to the optimal allocation of resources. The conventional production function of neoclassical economics offers a dangerously misleading lens through which to interpret the processes of frontier innovation.

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