Innovation dictates future of companies and countries

INNOVATION has been accelerating since the invention of the steam engine, and the pace is increasing. Consider the telephone: it took 56 years for Alexander Graham Bell's invention to reach half of US households; by comparison, smartphones took seven years to hit the same adoption rate.

Innovation could be defined as the application of invention (think about the 12-year gap between the accidental discovery of penicillin and the first patient treatment with penicillium). Today's low-growth disinflationary period mirrors the great deflation of 1873-96, a period of high innovation as entrepreneurs sought to lower costs and widen markets.

Why should investors care about innovation? Technological change is at the intersection of employment, nominal economic growth and inflation risk - the focus areas of global policy makers. Innovation is disinflationary (suppressing wages and prices) but can hurt employment (producing more with fewer people).