Incentives, Innovation,

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Incentives, Innovation, the Role of
Institutions
EFL Lesson 6
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Review Lesson from history Economic growth is
the answer to poverty.
Why? Productivity
1750
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Markets Are Dynamic

• List items you are now buying you were not buying
  10 years ago.
• List items you are not buying now that you were
  buying 10 years ago.

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http//www.livinghistoryfarm.org/farminginthe50s/l
ife_11.html
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ERP-3 People respond to incentives in
predictable ways.

• Choices are influenced by incentives, the rewards
  that encourage and the punishments that
  discourage actions. When incentives change,
  behavior changes in predictable ways.

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Innovation Can be products OR processes
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Cell Phone Use in Africa on the Rise as Mobile
Carriers Return By Narayan Bhat TMCnet
Contributing Editor, June 25, 2007

• A few years ago, it was believed that mobile
  services were a luxury for the poor, who make up
  most of the population in Africa. But now
  millions of people are being added to the lengthy
  list of cell phone consumers.African farmers
  once faced long journeys, braving potholed roads
  and bandits, to check export prices for their
  goods. Now they just phone the port to ensure
  they get a fair price, says the Reuters
  report.More than anything else, analysts say,
  the availability of mobile services and devices
  has really increased productivity in Africa.For
  people working in the informal sector, mobile
  phones allow them to stay in touch with each
  other and thereby organize work smoothly.

http//internetcommunications.tmcnet.com/topics/br
oadband-mobile/articles/7910-cell-phone-use-africa
-the-rise-as-mobile.htm
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Role of the Entrepreneur

• Perceives profit opportunities.
• Innovates Creates new product (provides a
  supply and hopes it will generate demand).
• Assumes the risk concerned with the uncertainty
  of providing a new product.

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Successful Entrepreneurs

• Organize land, labor, capital to produce goods
  and services
• Assume the risks of production
• Different from labor
• residual claimant

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Unsuccessful Entrepreneurs
FAIL
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How entrepreneurial are you?
?
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Profit attracts resources
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Top 25 (non-medical) Innovations of the Last 25
years

• ATM
• Advanced batteries
• Hybrid car
• OLEDs
• Display panels
• HDTV
• Space shuttle
• Nanotechnology
• Flash memory
• Voice mail
• Modern hearing aids
• Short Range, High Frequency Radio

• The Internet
• Cell phone
• Personal computers
• Fiber optics
• E-mail
• Commercialized GPS
• Portable computers
• Memory storage discs
• Consumer level digital camera
• Radio frequency ID tags
• MEMS
• DNA fingerprinting
• Air bags

http//www.cnn.com/2005/TECH/01/03/cnn25.top25.inn
ovations/
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Two to Tango

• Inventors/innovators can solve a technical
  problem.
• Entrepreneurs make inventions marketable.

The Innovator
The Businessman
The Result
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Two to Tango

• Inventors/innovators can solve a technical
  problem.
• Entrepreneurs make inventions marketable.

The Innovator
The Businessman
The Result
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Two to Tango

• Inventors/innovators can solve a technical
  problem.
• Entrepreneurs make inventions marketable.

The Innovator
The Businessman
The Result
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ERP-4 Institutions are the rules of the game
that influence choices.

• Laws, customs, moral principles, superstitions,
  and cultural values influence peoples choices.

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When Institutions Dont Provide Incentives for
Innovation

• Soviet Social Indicators, 1990
• Acute shortages of medical supplies
• Fewer than one-half of draft age men were fit for
  military duty
• Illness kept an average of 4,000,000 workers from
  their jobs each day (as opposed to 287,000 in the
  US)
• Infant mortality rates had risen from 22.9 deaths
  per thousand in 1971 to 33 deaths per thousand in
  1989
• In rural areas, where one-third of Soviets lived,
  half the hospitals had no sewer connections, and
  eighty percent had no hot water.

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Soviet Line for Shoes
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Soviet Line for Oranges
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Ease of Doing Business
Source http//www.doingbusiness.org/economyrankin
gs/
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The Big Ideas from Lesson 6

• New ideas, inventions, products and processes
  that pass the test of the market are considered
  innovations.
• Innovation is the key to increased productivity
  and economic growth.
• Institutions that reward entrepreneurship create
  incentives for more innovation.
• The economic changes that result from ongoing
  innovation impose costs and create benefits.
  Historical evidence, in the form of the
  increasing wealth of nations that support
  entrepreneurship, supports the contention that
  the benefits greatly outweigh the costs.