Part 1 - What is innovation?
From idea and invention to implementation, application and value creation
Innovation is used to refer to everything from new products and technological breakthroughs to improved services, work processes and business models. But not everything that is new is innovation. An idea is not necessarily an innovation. Nor is an invention automatically an innovation. Through the work of Joseph Schumpeter and Peter Drucker to today's international definitions in the OECD's Oslo Manual, understanding has evolved, but one distinction is crucial: Innovation requires that something new or significantly improved moves from idea and development to actual application.
Innovation is a technical term
The word innovation is used so broadly today that it easily loses precision. Businesses refer to themselves as innovative. New ideas are presented as innovations. New technology is described as innovation before anyone has used it. Creative processes, development projects and experiments are also often placed under the same heading.
In innovation research, the term is more precise.
Innovation is about something new or significantly improved, but novelty alone is not enough. There must also be a transition from idea, knowledge or development work to a solution that is actually made available or put into use.
This distinction makes it possible to distinguish innovation from several related concepts.
An idea is a notion of something that can be done.
Creativity is about the ability to develop new and relevant ideas.
An invention can be a new technical solution, method or construction.
A prototype can demonstrate how a possible solution works.
Innovation activities can include research, development, testing, financing, design and commercialization with the aim of generating innovation.
But only when a new or significantly improved solution has been implemented do we move to innovation in the sense used, among other things, in modern international innovation statistics.
The difference is fundamental.
Innovation is not just about creating something new. It is about putting the new into practice.
Joseph Schumpeter – innovation as new combinations
Joseph Alois Schumpeter is one of the most important figures in the development of modern innovation theory.
Already in the early 20th century, he described economic development as something more than gradual growth within existing structures. Development could occur when entrepreneurs implemented new combinations of resources, knowledge, products, and methods of production.
Schumpeter's understanding of innovation was therefore considerably broader than technological inventions.
He described new combinations that could include the introduction of new goods or new qualities of goods, new methods of production, the opening of new markets, new sources of supply, and new ways of organizing business or industry.
The key was the implementation of the new combination.
This gives us an important distinction between the inventor and the innovator . The inventor may develop new knowledge or technology. The innovator ensures that the knowledge is combined with other resources and brought into economic and practical activity.
Schumpeter's perspective thus makes innovation a driving force in economic development.
In later works, this was linked to his famous description of creative destruction : economic development not only creates new businesses, products and markets. It can also weaken or destroy the value of existing technologies, competencies, products and business models. Innovation can therefore both create and destroy value.
Peter Drucker – innovation can be worked on systematically
Peter F. Drucker represents another important development in innovation thinking.
Where popular culture often portrays innovation as the result of the sudden idea of the ingenious inventor, Drucker argued that innovation can be treated as a systematic discipline .
Innovation opportunities can be searched for, analyzed and processed.
Drucker identified unexpected events, mismatches, process needs, changes in industries and markets, demographic changes, changing perceptions and new knowledge as sources of innovation opportunities, among other things.
The perspective is important because it moves innovation away from the notion that businesses primarily need particularly creative individuals.
Human creativity is important, but innovation also requires observation, knowledge, analysis, organization, prioritization, experimentation, and implementation.
Thus, innovation also becomes a management and organizational issue.
Businesses can develop greater or lesser innovative capacity depending on how they work with knowledge, people, customers, technology, experimentation and changes in the environment.
Oslo Manual – an operational definition of innovation
When innovation is to be examined statistically across businesses, industries and countries, it is not enough to describe innovation as "new ideas" or "new ways of doing things".
The concept must be delimited and measurable.
The OECD and Eurostat's Oslo Manual have therefore taken on a central role in the international understanding and measurement of innovation.
The Oslo Manual 2018 defines an innovation as a new or improved product or process, or a combination of these, that differs significantly from the actor's previous products or processes, and that has either been made available to potential users or put into use.
This definition contains several important criteria.
First, there must be novelty or improvement .
Second, the difference must be significant . Small routine changes are not sufficient.
Third, novelty is initially assessed in relation to the relevant actor's previous products or processes. The innovation therefore does not necessarily have to be new to the entire world.
Fourthly – and perhaps most importantly – implementation is required .
A product must be made available to potential users. A process must be implemented.
This establishes a clear boundary between innovation and idea, invention or prototype.
How new does something have to be?
This is one of the most interesting questions in the concept of innovation.
A common notion is that innovation must involve something the world has never seen before. This is not necessary according to the Oslo Manual definition.
A solution can be new to the business without being new to the market or the world.
If a business adopts a significantly improved process that is already used by other businesses, this may still be an innovation for the business implementing it.
This means that innovation and diffusion can be linked .
Innovation systems are not developed simply because someone is first. Great economic and societal value can arise when knowledge, technology and working methods spread and are adopted by many.
At the same time, there must be a lower limit.
Routine updates, identical replacement of equipment or minor aesthetic changes are not normally innovations. The difference from the existing must be significant in the relevant context.
It also means that innovation always has a reference point .
The question is not only:
Is this new?
The correct question is:
New compared to what – and for whom?
An idea is not an innovation
This distinction is so important that it deserves to be repeated.
An organization can have hundreds of good ideas without having implemented a single innovation.
A research project can produce new knowledge.
A designer can develop a new concept.
An engineer can construct a prototype.
An employee can find a better way of working.
A customer may identify a need the business has never previously understood.
All of this could be the start of innovation.
But if the idea is never developed, the solution is never put into use, or the product is never made available to users, the innovation has not been realized.
This is also why it is useful to distinguish between innovation and innovation activity .
A business can work seriously on innovation without all projects being successful. Research, experiments, prototypes and development projects can be completed without implementation.
That doesn't make the activities worthless.
On the contrary, failed attempts can create knowledge that later contributes to other innovations.
But we should be technically precise:
Innovation work is not necessarily the same as realized innovation.
Innovation does not have to be a success
Another important distinction is between innovation and successful innovation .
Just because something meets the criteria for innovation does not mean that it necessarily creates financial success.
A new product can be introduced to the market and fail.
A new work process may be implemented without providing the productivity improvement the business expected.
A digital service can be innovative and at the same time be rejected by customers.
This is important because innovation involves uncertainty.
The outcome cannot always be known in advance. If we only call successful solutions innovations, we risk defining the term based on the outcome in retrospect.
Innovation and value creation are therefore closely related, but they are not the same concept .
Innovation and value creation
Here the Innovation series meets the subject series on Value Creation.
Innovation can be a very important mechanism for value creation. New products can provide greater benefits to customers. New services can make previously inaccessible solutions available. New work processes can free up time and expertise. New treatment methods can improve health. New public services can provide citizens with better services. New business models can create markets that did not previously exist.
But value creation does not occur because we label something innovation.
It arises through the consequences of the innovation being put into use.
This gives us an important connection:
Knowledge and experience can create ideas. Ideas can be developed into solutions. Solutions can be implemented as innovations. Innovations can create value when they do something better, enable something new, or solve problems in ways that actually benefit people, businesses, or society.
This means that people are central throughout the entire process.
People develop knowledge. People discover problems. People create ideas. People assess risks. People collaborate. People invest. People implement solutions. And people use, evaluate, and further develop the results.
Innovation is therefore also part of the story of value-creating people .
Innovation in practice – three simple examples
A new drug that only exists as a promising research result is not necessarily an innovation yet. When the knowledge is further developed into a treatment that is approved, made available and put into use, it has moved from research and invention to innovation.
A new digital ordering solution that is designed and tested internally is a development project. When the solution is implemented and changes how the business handles orders, it can represent a business process innovation.
A working method that is already common in one industry may be new to a business in another. If it represents a significant change from the business's previous practices and is actually implemented, this too can be innovation.
The examples show why innovation is not just about spectacular technological breakthroughs.
Innovation can be world-first.
But it may also be new to the organization that uses it .
Innovation, e-commerce and digitalization
Digitalization provides a good example of why the concepts must be kept separate.
Digitizing something is not automatic innovation.
Replacing paper with a digital document can be digitalization without it involving significant innovation. Nor is establishing an online store necessarily innovation just because sales are made digitally.
But digital technology can enable innovations.
E-commerce has contributed to new customer interfaces, distribution methods, payment solutions, business models and ways to combine physical and digital channels. Artificial intelligence similarly opens up new opportunities for analysis, knowledge work, customer interaction and automation.
The technology is not necessarily the innovation itself.
Innovation lies in how technology is combined with people, knowledge, processes and needs – and actually put to use.
A precise working definition
Based on innovation research and the operational definition in the Oslo Manual, we can use the following working definition throughout this course series:
Innovation is the implementation of a new or significantly improved product, service, process or a combination of these, which represents a significant difference from what the actor previously offered or did, and which, through application, can create or change value.
The last wording is important.
We say can create value , not must create value .
Innovation involves uncertainty. Not all innovations are successful. Not all value can be measured financially. And an innovation can create value for some while reducing value for others.
Thus, we have also established the starting point for the rest of the series.
We now know what innovation is.
The next question will be:
From theory to practice - BI, Oxford and San Francisco
The understanding of innovation is not developed solely through one theory or one textbook. Innovation lies at the intersection of research, technology, economics, people, organizations, customers and practical implementation.
At The Invisible Capital, this academic exploration is also linked to experiences from Innovation and Commercialization at BI , academic seminars in Oxford , and study trips and seminars in San Francisco .
These experiences do not replace research. They provide another dimension: the opportunity to see how theories about innovation meet businesses, technology communities, entrepreneurs, markets and people in practice.
Recommended literature
Innovation is a comprehensive field of research that has developed through contributions from economics, strategy, organizational theory, entrepreneurship, technology, and research on people and organizations. For those who wish to delve deeper into the theories and concepts covered in this series, there are a number of key original works and textbooks.
Among the most important contributions are Joseph A. Schumpeter's work on innovation, entrepreneurship and creative destruction, Peter F. Drucker's research and writings on systematic innovation, Clayton M. Christensen's theory of disruptive innovation and Henry Chesbrough's work on Open Innovation. Eric von Hippel's research on user innovation and lead users provides important perspectives on the role of users, while James G. March, Michael Tushman and Charles O'Reilly have been of great importance for the understanding of exploration, exploitation and organizational ambidexterity.
Teresa Amabile's research on creativity and organizations and Amy Edmondson's research on learning and psychological safety contribute to the understanding of the human and organizational prerequisites for innovation. The OECD and Eurostat's Oslo Manual is also a key international reference for how innovation is defined, classified and measured.
Through the individual articles in the Innovation series, relevant literature and research are presented in more detail. The goal is to return to key original sources where possible, while also using more recent research to show how the theories have developed, been challenged, and are applied today.
The Innovator's Solution: Creating and Sustaining Successful Growth
Authors: Clayton M. Christensen and Michael E. Raynor
Short review
In this sequel to The Innovator's Dilemma, Clayton Christensen shows how businesses can translate innovation theory into practical strategy. The book explains how companies can identify new growth opportunities, develop disruptive innovations, and build organizations that thrive in rapidly changing markets.
Why we recommend the book
While The Innovator's Dilemma explains why established businesses are often challenged, The Innovator's Solution provides concrete advice on how to meet the challenges. The book is therefore a natural next step for anyone who wants to understand innovation, strategy and long-term value creation.
The Innovator's DNA: Mastering the Five Skills of Disruptive Innovators
Authors: Jeff Dyer, Hal Gregersen and Clayton M. Christensen
Short review
What characterizes people who create groundbreaking innovations? The authors identify five key skills – observation, questioning, experimentation, networking and association – that are common to the world's most innovative leaders and entrepreneurs.
Why we recommend the book
This book shifts the focus from organizations to the people behind innovation. It shows that creativity and innovation can be developed through deliberate training and experience. The perspectives align well with the philosophy behind Invisible Capital, where human competence and curiosity are the most important drivers of development.
Competing Against Luck: The Story of Innovation and Customer Choice
Authors: Clayton M. Christensen, Taddy Hall, Karen Dillon and David S. Duncan
Short review
In this book, Clayton Christensen further develops the theory of Jobs to Be Done – the idea that customers do not primarily buy products, but "hire" them to solve specific needs. Through practical examples, the authors show how businesses can develop products and services that address customers' real-world challenges.
Why we recommend the book
For anyone working in customer experience, service design, and innovation, this is one of the most insightful books ever written. It reminds us that value creation always starts with understanding the people we are developing solutions for – a fundamental principle of Invisible Capital.
The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail
Author: Clayton M. Christensen
Short review
The Innovator's Dilemma is considered one of the most influential books on innovation and technological change. Clayton M. Christensen introduces the theory of disruptive innovation and explains why even the most successful businesses can fail when new technologies and business models challenge established markets. Through a series of examples, he shows how companies often focus on today's customers and incremental improvements, while overlooking innovations that later change entire industries.
Why we recommend the book
This is one of the books that has had the greatest impact on modern innovation thinking. When I first read it, it gave me a whole new perspective on why some businesses succeed in transformation, while others lag behind – even when they are well led. The insight has been an important part of my own understanding of digitalization, innovation and change management, and many of the reflections in The Invisible Capital build on the ideas Clayton Christensen presents in this classic. The book is as relevant today, in the face of artificial intelligence and digital transformation, as it was when it was published.
Open Innovation: The New Imperative for Creating and Profiting from Technology
Author: Henry Chesbrough
Short review
Henry Chesbrough introduced the concept of Open Innovation and changed the way many businesses think about research and development. He shows how companies can create more innovation through collaboration with customers, universities, start-ups, suppliers and other external partners.
Why we recommend the book
Open Innovation has had a major influence on modern innovation thinking and was also an important topic during the seminars in Oxford and San Francisco. The book shows why future value creation occurs in the interaction between people, businesses and knowledge environments – not within closed organizations alone.
Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant
Authors: W. Chan Kim and Renée Mauborgne
Short review
Blue Ocean Strategy challenges businesses to shift their focus away from fierce competition and instead create new markets with little or no competition. The authors present strategies and models that help organizations develop innovative products, services, and business models.
Why we recommend the book
This book has inspired leaders around the world to rethink strategy and innovation. Instead of competing for the same customers, it shows how businesses can create new value through creativity and differentiation. The perspectives align very well with the themes of innovation, digitalization, and long-term value creation in Invisible Capital.
Outside Innovation: How Your Customers Will Co-Design Your Company's Future
Authors: Patricia B. Seybold
Short review
Patricia Seybold shows how businesses can create better products and services by actively involving customers in the innovation process. The book describes how dialogue, co-creation and close collaboration with users can provide better solutions and stronger competitiveness.
Why we recommend the book
Customers often hold the most important insights into how products and services can be improved. This book emphasizes the importance of listening, involving, and learning from users – a perspective that is echoed in many of the articles on The Invisible Capital. Innovation rarely happens alone; it is created in the interaction between people.
Blown to Bits: How the New Economics of Information Transforms Strategy
Authors: Philip Evans and Thomas S. Wurster
Short review
This book analyzes how digital information is changing competitive conditions, markets, and business strategies. The authors explain how the internet is disrupting established structures and creating new opportunities for businesses that are able to think differently.
Why we recommend the book
Although written early in the internet revolution, the book describes many of the developments that still characterize business today. It provides valuable perspective on how digitalization affects value chains, competition, and innovation – themes that are central to Invisible Capital.
Wikinomics: How Mass Collaboration Changes Everything
Authors: Don Tapscott and Anthony D. Williams
Short review
Wikinomics shows how openness, sharing and collaboration across organizations create new forms of innovation and value creation. Through a number of international examples, the authors describe how digital networks make it possible to develop products, services and knowledge together.
Why we recommend the book
This book was groundbreaking when it was first published, and many of the ideas have since become a natural part of everyday digital life. The perspectives on collaboration, knowledge sharing, and open innovation processes align very well with the philosophy behind Invisible Capital, where people and networks are at the center of value creation.
The Competitive Strategy: Techniques for Analyzing Industries and Competitors
Author(s): Author: Michael E. Porter
Short review
Competitive Strategy is Michael E. Porter's classic work on how companies can understand the competition they find themselves in and develop a position that provides a basis for long-term profitability. Porter shifts the focus from the individual competitor to the structure of the entire industry and shows how competition is affected by customers, suppliers, new entrants, substitutes and the rivalry between existing companies. This forms the basis for what has later become known as Porter's Five Forces. The book is also about how companies can choose a competitive strategy on the basis of this analysis. It thus established an analytical language for strategy that has gained great importance in both research, teaching and practical strategy work.
Why we recommend the book
We recommend Competitive Strategy because it provides the analytical foundation for much of the thinking Porter later develops in What Is Strategy?. If a company is to choose a unique strategic position, it must also understand the competitive forces, the industry structure and the factors that affect the ability to create and retain value. The book is particularly useful because it reminds us that strategy is not just about internal goals, plans and ambitions. Strategy must be developed in the face of customers, competitors, suppliers, technology and structural changes in the market. Together with What Is Strategy?, the book therefore provides a much richer picture: First, the company must understand the competitive arena. Then, it must choose how to be different.
Competitive Advantage: Creating and Sustaining Superior Performance
Author(s): Author: Michael E. Porter
Short review
In Competitive Advantage, Porter moves the analysis from the industry to the business itself. The main question is how competitive advantage is actually created. One of the book's most important contributions is the value chain, where the business is understood as a system of activities that collectively develop, produce, market, deliver and support a product or service. Competitive advantage cannot therefore be understood only through products or overall strategies; one must examine the activities that create costs, differentiation and value. This understanding later becomes central to Porter's argument about strategic fit: the activities must not only be good in isolation, but also fit together and reinforce each other.
Why we recommend the book
We recommend Competitive Advantage because it brings strategy right down to where value is actually created: in the activities the business performs. This makes the book particularly relevant together with What Is Strategy?. When Porter argues in 1996 that strategy consists of performing different activities than competitors, or performing similar activities in other ways, this builds on the thinking he developed here. For our perspective on value creation, this is particularly interesting. Value does not arise because the business has formulated a strategy on a document, but through people, expertise, technology, processes, collaboration and activities that together enable the business to create something that customers value. The book therefore provides an important connection between strategy, competitive advantage and actual value creation.
The Competitive Advantage of Nations
Author(s): Author: Michael E. Porter
Short review
In The Competitive Advantage of Nations, Porter raises the perspective from business to countries, regions and business environments. The book is based on extensive studies of the competitiveness of ten leading trading nations and examines why certain countries and business clusters are particularly successful in certain industries. A central premise is that national prosperity is not simply something a country inherits through natural resources or other given conditions. It is created, and productivity, innovation, competence, competition and the quality of the environment in which businesses operate are crucial. Here, Porter also develops the well-known diamond model to explain how different national and regional conditions can interact and stimulate competitiveness.
Why we recommend the book
We recommend The Competitive Advantage of Nations because here Porter extends the strategy perspective to the ecosystem surrounding the business itself. Value creation does not occur in a vacuum. Businesses develop in societies with education, research, infrastructure, capital, suppliers, demanding customers, competing businesses and public institutions. This makes the book particularly interesting for understanding value creation as an interaction between people, businesses and society. It also provides an important corrective to the notion that a country's competitiveness can mainly be understood through low costs or access to natural resources. Innovation, productivity and the ability to continuously develop are far more central to Porter's explanation.
Understanding Michael Porter: The Essential Guide to Competition and Strategy
Author: Joan Magretta
Short review
Understanding Michael Porter brings together and explains the most important parts of Michael Porter's strategic thinking in one accessible whole. Joan Magretta herself worked on strategy at the Harvard Business Review and organizes Porter's ideas around two fundamental questions: What is competition, and what is strategy? She explains, among other things, the Five Forces, competitive advantage, the value chain, value creation, trade-offs, fit, and strategic continuity. This makes the connection between Porter's various works clearer than when the concepts are studied separately. The book also includes an interview with Porter.
Why we recommend the book
We recommend Understanding Michael Porter because it helps the reader see the whole picture of Porter's understanding of strategy. Porter is often reduced to the Five Forces or a few models used in isolation. Magretta shows why this is too simple. Competition, value creation, strategic positioning, trade-offs, activity systems, fit and continuity are interconnected. This makes the book a particularly good supplement after reading What Is Strategy?. It makes it easier to understand why Porter does not view strategy as a plan or a collection of goals, but as a coherent system of choices about how the business will create value and compete over time.
HBR's 10 Must Reads on Strategy
Authors: Harvard Business Review, Michael E. Porter, W. Chan Kim, Renée A. Mauborgne and more
Short review
HBR's 10 Must Reads on Strategy brings together some of Harvard Business Review's most influential writings on strategy. The original collection from 2011 features Michael E. Porter's What Is Strategy? as its main article and combines it with works on competitive forces, Blue Ocean Strategy, the organization's vision, business models, strategy execution, and the Balanced Scorecard, among others. The result is not one unified theory of strategy, but multiple perspectives on how organizations can develop, formulate, and execute strategy.
Why we recommend the book
We recommend HBR's 10 Must Reads on Strategy because it places Porter in a broader strategic context. After reading What Is Strategy?, it will be interesting to encounter other central perspectives and see how they complement, challenge, or extend Porter's understanding. The collection also shows why strategy cannot be reduced to a single model. Competitive position, choice, innovation, business model, execution, priorities, and measurement must be seen in context. For the reader who wants to move on from Porter and into the strategy discipline more generally, this is therefore a very good introduction.
Creating a Learning Society: A New Approach to Growth, Development, and Social Progress
Author: Joseph E. Stiglitz and Bruce C. Greenwald
Short review:
Creating a Learning Society examines how knowledge, learning, and technological development contribute to economic growth and long-term value creation. Joseph E. Stiglitz and Bruce C. Greenwald challenge the notion that economic development is primarily about accumulating more physical capital. They argue that society’s ability to create, disseminate, and apply knowledge is crucial to productivity growth and improved living standards. A key point is that learning does not only occur in schools and universities. It also occurs in businesses, through work, production, innovation, and interaction between people and organizations. Knowledge can also spread from one business and one part of the economy to others.
The book thus provides an important perspective on why human capital, competence, innovation and learning must be understood as central parts of a society's ability to create value over time.
Why we recommend the book
We recommend Creating a Learning Society because it expands the understanding of what lies behind economic value creation.
Machines, technology and financial capital are important, but they do not create productivity growth alone. Behind the development are people who learn, develop knowledge, improve work processes, share experiences and find new solutions.
This makes the book particularly relevant to Invisible Capital and our perspective on value creation: A significant part of society's value-creating capacity is found in the knowledge, competence, and learning ability of the people who participate in the economy.
Stiglitz and Greenwald thus provide an academic foundation for one of the most important relationships in modern value creation:
The Value of Everything: Making and Taking in the Global Economy
Author: Mariana Mazzucato
Short review
In The Value of Everything, Mariana Mazzucato asks a fundamental question: What exactly is value – and who creates it? Mazzucato returns to the historical discussions of value in economics and shows how the understanding of value creation has changed. She challenges the notion that high income, high prices or large profits necessarily mean that correspondingly large values have been created. One of the book's most important contributions is the distinction between value creation and value extraction . Mazzucato examines the financial sector, the pharmaceutical industry, innovation and the public sector, among others, and argues that we must become better at distinguishing between activities that actually create new values, and activities that primarily extract values that have already been created.
The book also challenges the traditional notion that the private sector creates value while the public sector mainly consumes or redistributes it. Innovation and economic development often arise through a complex interaction between public investment, research, businesses, capital and people.
The Power of Creative Destruction: Economic Upheaval and the Wealth of Nations
Author: Philippe Aghion, Céline Antonin and Simon Bunel
Short review
The Power of Creative Destruction is about one of the most important drivers of long-term economic growth: innovation.
Philippe Aghion, Céline Antonin and Simon Bunel build on Joseph Schumpeter's classic idea of "creative destruction" – the process by which new technologies, businesses, products and ideas challenge and replace existing solutions.
But the book is not just about the disappearance of the old. The authors examine why some economies manage to create continuous innovation and productivity growth, while others stagnate. Competition, entrepreneurship, research, education, institutions and public policy thus become important parts of the explanation.
Creative destruction also comes at a cost. New technologies and businesses create opportunities and jobs, but can also make existing skills, tasks and business models less relevant. The challenge is therefore to create societies that both promote innovation and enable people to participate in the transition.
Why we recommend the book
We recommend The Power of Creative Destruction because it shows why innovation is a fundamental driver of value creation .
Value creation is not just about producing more of what we already produce. It also occurs when people develop new ideas, technology, and ways of working that enable us to solve tasks better than before.
This makes the book particularly relevant to The Invisible Capital. Behind innovation are people with knowledge, expertise, creativity and experience. But Aghion's perspective also shows that human capital must be part of a larger system where competition, institutions, research, investment and policy create the conditions for new ideas to actually turn into economic and social development.
The book thus provides an important context in our understanding of value creation:
Knowledge → new ideas → innovation → productivity growth → long-term value creation.
Institutions, Institutional Change and Economic Performance
Author: Philippe Aghion, Céline Antonin and Simon Bunel
Short review
Institutions, Institutional Change and Economic Performance is one of Douglass C. North's most important works on why some societies are more successful than others in creating economic development over time.
North shifts attention from traditional factors of production such as capital and labor to the institutions that shape how people, businesses, and governments act and cooperate. Institutions are society's formal and informal rules of the game – including laws, regulations, norms, traditions, and established ways of organizing interaction.
These rules of the game affect the incentives that people and organizations face. They also affect investments, knowledge development, cooperation, transaction costs, and which economic activities emerge.
North also shows that institutions develop over time. History therefore matters: Today's economic opportunities are influenced by institutional choices and development paths that can stretch far back in time.
Why we recommend the book
We recommend Institutions, Institutional Change and Economic Performance because it explains a crucial aspect of value creation that easily becomes invisible:
Value creation needs good rules of the game.
People may have knowledge. Businesses may have capital. Entrepreneurs may have great ideas. A society may have natural resources and advanced technology. But outcomes are also influenced by the institutions that determine how people can collaborate, invest, compete, make deals, and develop businesses.
This makes North particularly interesting for our understanding of trust as part of invisible capital. Trust is not the same as institutions, but stable rules of the game, credible agreements, and well-functioning institutions can reduce uncertainty and make economic interaction easier.
North thus gives us another important part of the value creation picture:
Institutions → predictability and incentives → cooperation and investment → productive activity → long-term value creation.
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