The Economic Impacts of Innovation

Innovation is all about disruption, but with disruption comes transformation that forces companies to adapt if they want to continue being relevant in today’s economy.

As a main factor in growth, innovation is essential for lasting economic prosperity.

“In economic terms, innovation describes the development and application of ideas and technologies that improve goods and services or make their production more efficient,” according to the European Central Bank (ECB).

Innovation is what keeps established enterprises from remaining stagnant, and it is what fuels the mission of any good startup.

With innovation comes not just more opportunities for job creation, but when done effectively, it can shift old paradigms, develop new ways of thinking, and add positively to the quality of life.

However, innovation cannot be implemented without access to financing, particularly on the Research and Development (R&D) front.

In 2000 the British government introduced the R&D Tax Relief Scheme for Small and Medium-sized Enterprises (SMEs) as the main source of state support in the UK for innovative companies.

The R&D tax relief for SMEs is available to any incorporated company conducting innovation, regardless of its sector of activity.

It consists of an R&D tax relief incentive for SMEs that allows enhanced deductions of 230% of eligible R&D expenditure from a company’s taxable income – providing an effective cost reduction of 26% after applying the corporate tax rate.

According to F. Initiatives, a consultancy firm specialised in financing innovation, there are three steps to the cycle of innovation, which starts with an idea that is developed into production, and from the production comes growth, and the cycle repeats.  

1) Development

New ideas are developed, which create new products or services that lead to efficiency gains or new markets being explored.

2) Productivity

Increased efficiency allows companies to generate greater output for the same input. For example; an innovation allows a baker to produce 12 loaves of bread instead of 10 for the same number of hours worked. This innovation has therefore led to a 20% gain in productivity.

3) Growth

Increased productivity means increased profits for the company which can then be reinvested to provide further growth, explore new markets or develop further innovations to provide more growth.

Innovation Stimulates the Economy

Out of this cycle, the ripple effect begins to take form on the economy as a whole.

The actual innovation or new ideas approach leads to new opportunities in productivity. Higher productivity can result in new employment opportunities, which in turn stimulate the economy.

A stimulated economy leads to higher growth. The company becomes more profitable, workers receive better pay, and the increase in capital can be used to finance more innovative ideas, and the cycle repeats.

In the digital age more and more work is being automated, which has fueled fears and speculation that more jobs are going to be lost.

However, while automation may not create new jobs initially, it does pave the way for areas of employment that were never thought possible before.

Last year VentureBeat reported, “A Deloitte study of automation in the U.K. found that 800,000 low-skilled jobs were eliminated as the result of AI and other automation technologies. But get this: 3.5 million new jobs were created as well, and those jobs paid on average nearly $13,000 more per year than the ones that were lost.”

In order for innovation to create new jobs, an educated workforce is essential.

For innovation to succeed, F. Initiatives identifies three key areas that need to be explored: improved education, increased spending on research and development and improved access to funding for entrepreneurs to bring innovations to market.

In the UK, R&D tax relief is eligible for SMEs that have:

– Less than 500 employees.
– Either: annual turnover < €100 million OR total balance sheet < €86 million.
– All entities within a group are included when calculating the threshold.

F. Initiatives’ extensive knowledge of the UK R&D tax relief schemes – and its on-going monitoring of changes in legislation – combined with a proven working methodology, ensures the maximum optimisation of its clients’ claims.