A literature review of Innovation Theory

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This report was funded by BP and forms part of the Technology Innovation workstream of BP‟s Energy Sustainability Challenge (ESC) project. The aim of the report is to provide a review of the academic literature that focuses on innovation theory, especially in the low carbon arena, with a view to applying innovation concepts to environmental remediation and adaptation to climate change.

The workstream includes a particular focus on (i) the industrial exploitation of water arising from meeting the demand for energy goods and services and (ii) use and scarcity of potable water, especially the impact on energy demand arising from
the need to pump, transport and/or desalinate water due to the impacts of climate change.

Innovation theory is not rooted in a single discipline or school of thought. Rather, conceptual strands are drawn from a variety of academic disciplines and research areas. Beginning in the 1930s, early theoretical perspectives viewed the innovation process as a relatively simple, one-directional journey from basic research to applied research to technology development and diffusion. This so-called„ linear model‟ suggests that advances in science determine the rate and direction of innovation and that the optimal way to increase the output of new technologies is to increase the input of new inventions by simply putting more resources into R&D.

This is the process of technology-or supply-push. An alternative perspective, demand-pull, gained traction in the 1950s, arguing that demand for products and services is more important in stimulating inventive activity than advances in the state of knowledge. Both the technology-push and demand-pull perspectives have since been challenged as over-simplistic, and
more recent theoretical approaches accept the importance of both.

In the second half of the 20th century innovation theory was in particular furthered by three approaches to understanding technological change: induced innovation, the evolutionary approach, and the path-dependent model. The evolutionary and path dependency approaches stress the importance of past
decisions which may constrain present innovation whilst the induced innovation perspective emphasises the importance of changes in relative prices in driving the direction of technical change.

These approaches are associated with several concepts that are fundamental to contemporary innovation theory. The evolutionary model includes the concept of „uncertainty‟ at various levels – technological, resource, competitive, supplier, consumer and political – and also the idea of „bounded rationality‟ which
emphasises that decision makers have a limited ability to gather and process information. The suggestion is that both bounded rationality and uncertainty result in mindsets that in general favour incremental innovations to current products or processes rather than radical and disruptive ones.

The path dependent model is underpinned by the idea of increasing returns to adoption whereby the more a technology is taken up by users or the more an institution becomes established, the more likely it is to be further adopted. The process is supported by factors such as scale effects and learning by doing and
will typically give rise to cost reductions and incremental improvements.

However, at both a technological and an institutional framework level, path dependency can result in technological dominant design, institutional inertia, and the „lock-in‟ of incumbent technologies and systems and the „lock-out‟ of innovations that may be more optimal. The latter years of the 20th century saw an increasing theoretical interest in developing the older linear model of innovation into something which more accurately reflected the complexity and interdependency of the innovation process. This evolving „systems perspective‟ has been characterised by a number of related approaches but each has tended to emphasise the importance of knowledge flows between actors; expectations about future technology, market and policy developments; political and regulatory risk; and the institutional structures that affect incentives and barriers. One of the most developed theories
is the Technological Innovations Systems approach. This emphasizes the importance of recognising not only the structural components of a system i.e. the overall framework conditions and the multiple entities involved within it but also the dynamic interactions of those actors with each other and with the knowledge flows.

Another important development has been the research into transition dynamics where technological change is more than simply incremental but represents a radical, possibly even disruptive, shift in products and processes. Here, the
importance of technological and market niches is emphasised by which an innovation can be protected from normal market conditions and nurtured for a period of time. One of the most significant outcomes of the evolution in innovation theory has
been the recognition that innovation should not simply be fostered via technological R&D but also implies a role for policy to improve the institutional framework and the opportunities for interactions so as to better incentivise innovation. This correcting for „systems failures‟ in the innovation system is particularly pertinent to the low carbon arena where the incumbent, carbon-intensive energy system displays very substantial increasing returns, path
dependency and lock-in. Here, assets are long lived and capital intensive, incumbent fossil-fuel technologies have benefited from decades of development, and the system has co-evolved into compatible networks of fuels, end use devices, vehicles, delivery infrastructure and institutions. These factors provide a
formidable barrier to entry for low carbon technologies and substantial disincentives for radical, low carbon innovation – at both the technological and systems level.

Advances in innovation theory have afforded insights into the structures and processes of energy systems and have proposed theoretical approaches with which to further eco-innovation and the radical transition to more sustainable energy systems. By contrast, the relative paucity of literature addressing
remediation and adaptation to climate change from the perspective of innovation theory suggests that more research in these areas could be equally valuable.

Despite obvious differences, energy and remediation/adaptation share important common ground in terms of their relevance to environmental care and sustainability. Innovation theory has been successfully applied to the energy arena and might also be usefully applied to remediation and adaptation. It is therefore worth investigating how key concepts from innovation theory might be
brought to bear on remediation and adaptation innovation.

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