Innovation and Economic Growth

It is widely recognised that the innovation process is a fundamental driver for economic growth, due to its role in increasing output and productivity. This is particularly true for the advanced economies, which are increasingly reliant on innovation and entrepreneurship for their sustained growth (Bottazzi et al., 2001).Technological change, resulting from innovative activities including investments in intangibles such as R&D, impacts positively, in the long term, on both employment rates and incomes. Therefore at the macro level, a country\u2019s ability to innovate supports its long-term growth. The most advanced economies are depending to an ever-greater extent on factors such as knowledge, information and high skill levels, and have a growing need for rapid access to these, in the \u2018knowledge-based economy\u2019, of which innovation is seen as the main driver.The reinforcement of innovation is one of the pillars of the strategy adopted to achieve the aim set by the Lisbon Council of Europe in March 2000: to make the European Union the world\u2019s most competitive, dynamic knowledge-based economy by the end of the decade. The European Commission (2002) has already underlined that a lack of innovation is one of the key factors behind Europe\u2019s disappointing results with regard to growth in productivity.Policy-makers therefore have an obvious interest in adopting policies which create the conditions in which technological change can develop at the micro level, in individual firms, through innovative activities and investments. R&D has a key role in achieving this, by enhancing a firm\u2019s capacity to absorb and make use of new knowledge of all kinds, not just technological knowledge.The chapter is structured as follows. First of all, we focus on the problem of defining innovation and innovative activities and on the factors influencing innovation. In the second paragraph, we analyse the mechanisms by which innovation is spread through the economy, by means of knowledge spillover and entrepreneurship capital, to influence economic growth. Finally, after pointing out that the financing gap is particularly large for new and innovative small and medium-sized enterprises (SMEs), we will analyse venture capital as a further mechanism of economic growth