The Cycle of Innovation and its Economic Impact

By Sponsored Post June 29, 2018

Innovation is all about disruption, but with disruption comes change that forces corporations to adapt if they wish to remain relevant in the economy today.

As one of the most significant factors contributing towards growth, innovation is invaluable for sustained 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,” the European Central Bank (ECB) has stated.

Innovation is what stops established businesses from becoming stagnant, and it is at the very core of all successful startups.

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.

Naturally, of course, businesses cannot innovate without access to finance, especially when it comes to Research and Development (R&D).

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

The R&D tax relief for SMEs is available to any incorporated company conducting innovation, notwithstanding the sector in which it operates.

It comprises of an R&D tax relief incentive for SMEs that enables enhanced deductions of 230% of eligible R&D expenditure from a business’ taxable income – providing an effective decrease in cost of 26%, once the corporate tax rate has been applied.

According to F. Initiatives, a consultancy firm specialised in financing innovation, there are three key steps to the cycle of innovation. It starts with a concept, which, with time and investment results in production, which in turn leads to growth. This cycle then repeats.   

1) Development

New ideas are developed, which generate unique products or services that lead to improvements in efficiency or exploration of new markets.

2) Productivity

Improved efficiency makes it possible for businesses to generate improved output for the same input. For example; an innovation enables a baker to produce 12 loaves of bread rather than tenfor the same number of hours worked. This innovation has therefore brought about a 20% gain in productivity.

3) Growth

Improved productivity means improved profits for the company which can then be reinvested to create further growth, discover new markets or establish additional enhancements to offer more growth.

Innovation Fuels the Economy

Out of this pattern, the ripple effect starts to take form on the economy at large.

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

A stimulated economy leads to higher growth. The business becomes more financially rewarding, workers enjoy better pay, and the increase in capital can be used to fund more innovative ideas.

In today’s digital economy, jobs are increasingly automated, leading to fears that more jobs are going to be lost.

Conversely, while automation may not generate new jobs initially, it does pave the way for spheres of employment never before deemed possible.

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.”

To allow innovation to generate new jobs, an educated workforce is crucial.

For innovation to succeed, F. Initiatives recognises three key areas that must be explored: better education, enhanced spending on research and development and better 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 establishing the threshold.

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