What Is the Relationship between Innovation and Economic Development?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 02 December 2019
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The relationship between innovation and economic development lies in the manner in which innovation can be applied to the economic development of a country. One of the links between innovation and economic development is the fact that innovation creates new entrepreneurial opportunities with the attendant avenues for economic development. The most direct link between innovation and economic development is the leveraging of the knowledge or human capital required for higher incidence of innovation to the benefit of the economy.

An analysis of the connection between innovation and economic development will lead to the conclusion that a country blessed with a significant number of innovators will reflect the benefits from such a wealth through the development of the economy. Innovation requires the application of knowledge toward the creation of opportunities, which may not be apparent to those who lack the same quality of human capital. In this sense, there is a link between innovation and education. Countries with well-developed educational systems usually have a higher number of people with the human capital necessary for high levels of innovation in comparison to those countries that do not. The economic benefit to the country can be seen in the way in which the citizens of the country use their knowledge to develop the economy.


Entrepreneurship is a direct offshoot of innovation due to the fact that most of the new ideas need some sort of business structure to implement them. For instance, an innovative entrepreneur who decides to apply his or her ideas to a business venture will need to hire employees, rent a place of business, and generally make other types of property and human capital investments, including the payment of taxes to the government. Where the idea is a solid one, the business will grow, leading to the establishment of other subsidiaries, partnerships with foreign investors, reduction of unemployment, and other avenues for the development of the economy.

Some countries with fewer natural resources, especially Asia, rely to a large extent on their abundance of human capital as a means to achieving economic development. The innovative spirit of the citizens of such nations can be seen in their achievements in many areas, including science and technology. An application of this innovation combined with entrepreneurial opportunities is a formula that has led to the great economic achievements evident in the perception of such countries as some of the economic powerhouses in the world.


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Post 4

@SkyWhisperer - The only caveat I would offer is to beware of those things that stifle innovation. In my opinion, it’s excessive government regulation and taxation.

That has killed many good ideas and left would be entrepreneurs sitting on the sidelines, unwilling to step out boldly with their ideas and plans. Government should significantly deregulate and set the private sector free.

The free market needs to have a chance to work and determine who the ultimate winners and losers will be in innovation, rather than killing it before it has a chance to start.

Post 3

@David09 - Regardless of what problems we face in the United States, the fact remains that there is no better place in the world to build a better mousetrap, and start your own business.

I think this is still true even in good times and in bad. You can start an office from your home and provide some good or service that people need.

It’s certainly true that the more educated you are, the greater well of knowledge you have to draw on, but I don't think you need to have a PhD to have something valuable to offer the marketplace. All you need to do is to find a need, and fill it, as the old saying goes.

Post 2

@miriam98 - I think that education is the key here in the United States for innovation. However, I don’t always see the direct correlation between education at the K-12 level and innovation at the business level.

It’s still lamented that our kids are doing poorly in math and science compared to students in other nations, and colleges are often having to provide remedial courses to get the kids up to speed.

Smart kids get into good colleges like Harvard, MIT and CalTech, and there I think you find the breeding ground for a lot of innovation. Still, it’s a fact that too many technology companies are hiring talent from overseas in order to meet their needs.

Post 1

I would have to say that Asian nations, in addition to having an abundance of human capital as the article says, also have real capital. I’m talking about money.

China has a lot of it, and that’s why it’s been able to underwrite a lot of innovation. When I lived in Indonesia it was the Chinese businessmen who were bankrolling a lot of the major businesses and financial institutions, and helping to spur the creation of new entrepreneurial enterprises.

This was especially true in the poorer parts of the nation, which had not been fully developed but had an abundance of natural resources that could be used for commercial purposes. Money definitely makes it possible for an idea to leave the drawing board and make it into the commercial sector.

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