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Calculating the Economy of Innovation

When organizations pursue innovation, there is a seemingly limitless list of internal and external economic factors that must be considered. The following, while perhaps only the tip of the iceberg, includes some of the key components that factor into the equation.

First, an organization must weigh the cost of developing an innovation against the potential rewards they will gain when it goes into the marketplace. This includes what they will be able to sell a product for, distribution, inflation, taxes and interest rates. They need to be aware of the kinds of innovations that competitors are investigating. An organization also needs to ensure that they have the physical and managerial mechanisms in place to carry an innovation through to completion—an organization may decide that the economic conditions or their internal make-up is not supportive of a specific innovation.

Additional factors affecting innovation are national and regional economic conditions. Globalization and the expansion of international trade has resulted in wide-scale changes in labour markets, regulations and other essential components in the production process. Some organizations are comprised of multiple shareholders, and their interests must be considered, as well as the needs and wants of the consumers. Companies are also constrained by environmental, health and safety regulations. An idea may be innovative, but it is still bound by the economic regulations and rules of the Canadian and international business communities.

Another component in calculating the cost of innovation is the range of skills needed for the development and production. World-renowned management consultant Peter Drucker coined the phrase "knowledge workers" to describe the broad group of people who work with information in order to define and solve problems, such as software developers, doctors, diplomats, lawyers and business managers. The ability to train and maintain knowledge workers has a significant impact on a country or region’s ability to foster innovation.

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