Innovation is a word like democracy.  Everyone is in favour of it, but different people attach different meanings to the same word.  Sometimes the term is used to describe anything that differentiates one product or process from another.  At other times, innovation is the product of men in white coats who conduct rarefied experiments in biotechnology or electronics.

Is Easyjet an innovative company?  Along with Ryanair, the company transformed the European aviation market.  But everything the company did was already done by someone else, and the entire product and process were close to those South West Airlines had successfully pioneered in the United States.

There is no purpose in arguing about what is the correct definition of innovation.  What matters is that people understand what they are saying when they talk to each other.  The frequent, often unnoticed, shift between wide and narrow definitions of innovation may be seriously misleading.  Generalities about the importance of innovation in creating competitive advantage in business are translated into specific policies to subsidise research and development and the promotion of particular kinds of scientific education.

Such policies are described as techno nationalism in an important recent book by Amar Bhidé.  Techno nationalism is derived from the belief that economic growth depends on high technology and that we will benefit fully from it only if it is our own high technology.  Techno nationalism is as common in Europe, which believes it is falling behind, as in America, which fears it may be overtaken. But the fear that western economic prosperity is endangered by China’s flood of engineering graduates is not only exaggerated: it may be the reverse of the truth.

The central fallacy of the New Economy bubble was that most of the benefits of new technologies would go to pioneering firms.  But the repeated experience of economic history is that competition ensures that the larger part of the benefits of these technologies accrue to users.  (And another lesson is that in the absence of competition there is rarely much technological advance in the first place).  In an admittedly speculative calculation, the American economist Bill Nordhaus has suggested that consumers get more than 97% of the value of innovations.

What is true of firms is also true of states.  The United States has a world leading position in information technology but the products of that technology are available everywhere with minimal delay.  And cheaply:  the profits of Microsoft, though large in absolute terms, are less than 0.1% of the national income of the US and Europe.  

That is how Paul Romer can observe that ‘In 1985, I paid a thousand dollars per million transistors for memory in my computer.  In 2005 I paid less than ten dollars per million, and yet I did nothing to deserve or help pay for the windfall’.   But Bhidé is not so sure that Romer did nothing to deserve it, and nor am I.

What distinguishes the United States is not just its innovative technologists, but its innovative manufacturers, retailers and consumers.  Discoveries are made in an environment which is responsive to ideas, ready to embrace change, and always willing to try out something new.  People who are likely to invent things want to be part of a culture that is open to novelty, and cultures that are open to novelty are those that will reward innovators’ best.  That is why there are so many entrepreneurs of Chinese and Indian origin in the United States – and Britain – even as more and more mundane jobs are outsourced to China and India.  

The pesky American students who are ready to challenge every assertion the instructor makes contrast with students from other cultures who believe their aim is to transcribe every authoritative statement that is delivered.  These voluble business students are the bane of the MBA teacher’s life.  They are also the people who make American business great.

Commercial and economic success, even in technological industries, depends not on the quality of technology, but on the match between technology and the needs of its customers.  That is why the growing technological capabilities of China and India create more commercial opportunities than threats for American and European businesses.

Amar Bhidé, The Venturesome Economy, Princeton 2008