The Benefits of Incremental Innovation

Technological innovation is widely understood to be a major stimulus to real economic growth and to improvements in society’s standard of living. Hence, it is unsurprising that policy makers in Canada and elsewhere have long been focused on promoting innovation through policies such as tax incentives and intellectual property legislation. While less attention has been paid to the nature of innovation, there has been recent criticism that private-sector organizations are excessively focused on incremental innovation at the expense of so-called breakthrough innovation. Incremental innovations encompass relatively modest improvements to existing products and production processes, whereas breakthrough innovations are characterized by their scientific and commercial novelty, along with higher associated financial risk. The premise underlying calls for firms to focus more on breakthrough innovations is that the social benefits of breakthrough innovations dwarf those realized from incremental innovations.

Scepticism about the benefits of incremental innovation has arguably been most pronounced in the context of the pharmaceutical industry. Regulators in a growing number of countries are exhibiting increasing reluctance to approve so-called “me-too” drugs for sale on the grounds that they offer no significant benefits to patients. In fact, incremental innovations undertaken by drug companies provide great value for both physicians and patients. Specifically, they provide physicians with the flexibility to treat the individual needs of diverse patients with precision while improving patient compliance by eliminating adverse drug reactions and side effects. Incremental innovation also promotes increased price competition among drug manufacturers, thereby generating cost savings in the health-care sector.

The benefits to society from incremental innovation are documented in other industries besides pharmaceuticals. Indeed, incremental innovation is typically a critical stage of technological change in which the commercial value of scientifically novel inventions is greatly enhanced, thereby expanding the number of potential adopters of the new technology. Furthermore, the knowledge and experience gained from incremental innovation often provides the basis for the future development of relatively novel innovations.

The history of technological change in pharmaceuticals and other industries should serve as a caution against public policies that seek to discourage incremental innovation in favour of initiatives to create breakthrough innovations. While critics argue that incremental innovation represents a waste of resources and conveys only minor improvements upon existing products and production processes, the evidence indicates that they are misguided. This is arguably particularly true in the case of pharmaceuticals where there is abundant evidence documenting the benefits to society from incremental innovation.