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Innovation And Economic Stability

New research published in the latest issue of the Economic Journal shows that a stable economic environment is important for firms looking to introduce new innovations. British companies have been more willing to invest in high-tech products and processes when their market conditions are more predictable. In particular, in conditions of economic stability, higher patenting activity has a stronger effect on firm''s labour productivity. Greater economic stability in recent years could have increased the uptake of new innovations by British firms, promoting the ''new economy''.

Report co-author Nick Bloom, a Senior Research Economist at the Institute for Fiscal Studies, comments:

''When market conditions are stable, firms are willing to gamble on introducing new technologies. But when conditions deteriorate and their outlook looks uncertain, they delay making high-tech investments for fear of a downturn. Our research highlights an important effect of firms'' uncertainty on their incorporation of innovative patented ideas into new products and processes.''

The research findings have implications for the government''s innovation policy. It may well turn out that the biggest single boost to the new economy and innovation brought about in recent years will have been measures to ensure greater macroeconomic stability.

''Patents, Real Options and Firm Performance'' by Nick Bloom and John Van Reenen is published in the March 2002 issue of the Economic Journal.