Innovation and economic growth

The literature on economic growth has identified knowledge expansion as a key propellant. Early research derived this conclusion from the residual that remained after the growth contributions from capital and labour had been accounted for. Later modifications expanded the concept of fixed capital to include intangible capital. The underlying drivers of innovation have, meanwhile, been explored by the endogenous growth literature. Together, these efforts have reconfirmed the role of knowledge and innovation in growth. But they also point to the importance of competition and firm entry and exit as key motivators for firms to innovate. Policies aiming to boost growth must therefore look beyond the amounts invested in R&D and also provide for wellfunctioning labour, product and financial markets.