The influence of market demand upon innovation: a critical review of some recent empirical studies

A number of recent empirical studies of technical change at the level of the individual firm have concluded that market demand is the dominant influence upon the innovation process, “calling forth” innovations in market economies. The pace of innovation in the private sector heavily influences the growth of national output and productivity, and these studies and their conclusions have therefore received much attention, having been extensively quoted in discussions of appropriate government policy for the encouragement of innovation. This paper reviews a number of these studies and concludes that their findings, and the interpretations of their findings in the secondary literature, are seriously flawed and, in many cases, invalid. The proposition that market demand governs the innovation process is by no means conclusively demonstrated in these studies, and they are therefore inadequate and inappropriate guides for the formulation of policy.
Most of the studies examined employ a working definition of “demand factors” which is so broad as to embrace a range of possible influences upon innovation which should more properly be classified elsewhere. The concept of demand utilized in these studies bears little resemblance to the more restrictive and precise definition of market demand found in economics. In addition, the phenomena analyzed in these studies are a very heterogeneous lot; the studies do not address identical empirical questions, and their findings are, as a result, neither uniform nor unambiguous.
Both demand and supply side influences are crucial to understanding the innovation process, and it is the exclusive preoccupation with only one set of these forces which is criticized in this paper. Some implications of the criticism for government policy toward innovation are discussed in the conclusion.