What is innovation?

Before introducing the definition of innovation, it is important to make the distinction between innovation and invention.

It is important to be clear that innovation is NOT invention. An innovation is the extension of an invention. If an inventor discovers "the next big thing" but is unable to find anyone to produce it, then "the next big thing" remains undiscovered to the world.

While inventions can be carried out anywhere, for example in universities & research institutes, innovation occurs mostly within firms, although they may also occur in other types of organizations. To be able to turn invention into innovation a firm normally needs to combine several different types of knowledge, capabilities, skills and resources. For instance, the firm may require production knowledge, skills and facilities, market knowledge, a well functioning distribution system, sufficient financial resources, etc.

One of the strongest characteristics of innovation shows that the innovation is a continuous process.

(Figure 1: Innovation process)

The innovation definition proposed by the Organization for Economic Co-operation and Development (OECD) and European Commission (EC) in the guidelines for collecting and interpreting innovation data (Oslo Manual1) read as follows:

An innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations.2

This broad definition of an innovation covers a wide range of possible innovations. The minimum requirement for an innovation is that the product, process, marketing method or organisational method must be new (or significantly improved) to the firm.3

A common feature of an innovation is that it must have been implemented. A new or improved product is implemented when it is introduced on the market. New processes, marketing methods or organisational methods are implemented when they are brought into actual use in the firm's operations.4

Innovation activities vary greatly in their nature from firm to firm. Some firms engage in well-defined innovation projects, such as the development and introduction of a new product, whereas others primarily make continuous improvements to their products, processes and operations. Both types of firms can be innovative: an innovation can consist of the implementation of a single significant change, or of a series of smaller incremental changes that together constitute a significant change.5

An innovative firm is one that has implemented an innovation during the period under review.6

For a better understanding of what is innovation and what is not innovation, Oslo Manual defines changes in firms, which are NOT considered as innovation:

  • Trading of new or improved products is generally not a product innovation for the wholesaler, retail or transport and storage firm.7
  • The purchase of identical models of installed equipment, or minor extensions and updates to existing equipment or software, are not process innovations. New equipment or extensions must both be new to the firm and involve a significant improvement in specifications.8
  • Firms engaged in custom production make single and often complex items according to customers' orders. Unless the one-off item displays significantly different attributes from products that the firm has previously made, it is not a product innovation.9
  • A change in the price of a product or in the productivity of a process resulting exclusively from changes in the price of factors of production is not an innovation. For example, an innovation does not occur when the same model of PC is constructed and sold at a lower price simply because the price of computer chips falls.10
  • It is not an innovation to stop doing something, even if it improves a firm's performance. For example, it is not an innovation when a television manufacturer ceases to produce and sell a combined television and DVD player, or a property development agency or construction company stops building retirement villages. Similarly, ceasing to use a certain marketing or organisational method is not an innovation.11
  • In certain industries such as clothing and footwear there are seasonal changes in the type of goods or services provided which may be accompanied by changes in the appearance of the products concerned. These types of routine changes in design are generally neither product nor marketing innovations. For example, the introduction of the new season's anoraks by a clothing manufacturer is not a product innovation unless the anoraks have significantly improved characteristics. However, if the occasion of seasonal changes is used for a fundamental change in product design that is part of a new marketing approach used for the first time by the firm, this should be considered a marketing innovation.12


1 Oslo Manual, 3rd Edition. (2005). Guidelines for collecting and interpreting innovation data.
2 Ibid., 146, p.46
3 Ibid., 148, p.46
4 Ibid., 150, p.47
5 Ibid., 151, p.47
6 Ibid., 152, p.47
7 Ibid., 204, p.57
8 Ibid., 199, p.56
9 Ibid., 201, p.56
10 Ibid., 200, p.56
11 Ibid., 198, p.56
12 Ibid., 203, p.57