Innovation involves the introduction of new or significantly improved goods and services, or the use of new inputs, processes, organisational and marketing methods. These innovations can be new to the firm, new to the sector, or new to the world (OECD and EUROSTAT Oslo Manual, 2005). Firms innovate to improve productivity and profitability.

While specific forms of innovation can be easy to quantify in terms of adoption (e.g. the number of firms using solar-powered water pumps), it is far more difficult to develop general measures of innovation. For any given firm, industry or country, there are many possible forms of innovation that can interact in a myriad of ways. As such, aggregating different forms of innovation into a single measure is difficult. Given that increasing productivity is often the outcome of innovation, TFP growth is often used as a quantifiable measure of innovation in a firm, sector or country. However, innovation can help pursue objectives other than productivity growth, in particular in terms of product quality, diversity and safety, sustainability and animal welfare, which are generally not measured in volumes of agricultural outputs or inputs. This report considers specifically in Chapter 5 the impact of R&D on productivity growth, in addition to providing a brief overview of the nature of R&D.


  • 1. However, it is difficult to compare TFP estimates from different studies, which are likely to rely on different data types and methods.
  • 2. This notion of efficiency refers to the neoclassical efficient allocation of resources and the Pareto optimality criterion. Considering a firm that uses several inputs and produces several outputs, it is efficient in the way it allocates its resources if a reduction in any input requires an increase in at least one other input or a reduction in at least one output (Lovell, 1993).
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