The importance of innovation: Financial Express 14th October 2025

 

he future of growth models will be driven by innovation, and this is both a challenge and an opportunity, as reflected in this year’s economics Nobel winners

The story of Kodak is now well-known to all—how the leader in the business of cameras became outdated. The same story was witnessed in areas such as music, where cassettes gave way to CDs that have now been replaced by the virtual delivery of content. Businesses built on these edifices have closed or had to innovate to remain viable. A similar wave can be seen in the electric vehicle or renewable spaces where the future of a petrol-driven car can be uncertain given how the world is moving. The oil-producing nations are cognisant of these change.

At a more macro level, AI has swarmed all businesses, and everyone is trying to balance its use with the given skill sets. Job losses are being spoken of in hushed tones. This is something which was never envisaged and jobs done by AI—starting from a rudimentary search on the Internet—have changed the way in which business operates. What does all this mean?
The future of growth models will be driven by innovation, and this is both a challenge and an opportunity. This is what Joel Mokyr, Philippe Aghion, and Peter Howitt have studied for decades. Their work on the subject has been rewarded with the Nobel Prize in Economics this year.

The role of innovation in driving economic growth is not new, though its importance is greater today. Innovation was also highlighted by economists such as Robert Solow who spoke of the importance of technology in getting out of the low-productivity trap. There were limits to productivity of labour and capital, which tended to come down beyond a point. The only way forward was to bring in technology to improve productivity given the same levels of factors of production (land and labour) and eschew the economic process of diminishing returns.

The Nobel winners have worked on this subject more at the macro level with mathematical models showing how progress in terms of growth can be accelerated with the use of innovation. The underlying concept, however, is the same.

Quite significantly, they draw a lot from Joseph Schumpeter’s concept of creative destruction where a natural process for obsolescence comes in. Economic evolution begins with inventions that take countries by storm, just like the Industrial Revolution did in the mid-19th century. But, after a point of time, there is a tendency to imitate where it becomes difficult to distinguish superiority or quality of products. Thus, monopolies turn to what economists call “imperfect competition”. With innovation, there would be a natural process of creative destruction—those who innovate move ahead, while the others wither away. This engenders subsequent growth cycles, seen when innovative products in automobiles, electronics, engineering, etc. replace existing ones. Innovation has driven the East Asian story or the ascent of China. The same held for Japan in the ’60s and ’70s and the Asian tigers subsequently..

Mokyr, Aghion, and Howitt did not just stop at these principles but also emphasised the role of the state. This is critical because countries need to have systems that encourage such creative processes. For that, countries need to invest a lot in R&D which can happen if there are high savings. Mokyr specifically spoke of distinguishing between what he called propositional knowledge, which is theoretically sound but not practically feasible, and prescriptive knowledge, which is what really works in the real world. So to derive the best results there is a need for support from the financial system that provides funds at competitive interest rates even as cost of experimentation can be high and results uncertain. This is probably why some economies of the West and East have galloped at high growth rates for sustained periods while those in say Africa, or even Latin America, have seen slower progress.

The question that comes up is how India stacks up in this theory of innovation-led growth. Significant strides have been made in several sectors, manifested not just by innovative products and processes but also in start-ups that have leveraged technology to contribute to growth. India is considered a pioneer in start-up founders. Also, in a globalised setting, borrowing technologies is easier than when the world economy was not flat. The fact that Indian manufacturing has done well can be judged from the fact that almost all products that were earlier imported at the consumer end are manufactured within the local economy. Further, with a favourable business environment being created, foreign direct investment has poured in. This has been the most convenient way to bring in innovation as technology comes along with such investment.

Funding too has become universal where besides investment, it is easy to borrow from external sources that can fill the gap in financing innovation. The government has had several schemes that offer direct support to start-ups. In fact, the performance-linked incentive scheme is another incentive provided by the government to encourage innovation and production.

Therefore, the importance of innovation in the growth process is extremely high. This is probably the only way to excel growth. A globalised world makes it easier to borrow both ideas and funds to prune the time taken to grow faster. At the micro level, firms have to constantly innovate as there are always new ones with new ideas that have an advantage over legacy companies which find it hard to dislodge outdated shibboleths.