The EBRD defines a knowledge economy as an economy that is able to grow through innovation or, in other words, by increasing total factor productivity.
A knowledge economy is also characterised by technological dynamism and covers sectors, such as agribusiness or heavy industry, not necessarily associated with cutting edge innovation.
To thrive, the knowledge economy relies on an adequate institutional framework, good education, strong communications infrastructure and a supportive financing environment.
The term ‘knowledge economy’ may conjure up images of Silicon Valley, hi-tech start-ups and ‘digital natives’ living their lives online via citywide Wifi. But those are just some aspects of a concept that includes a wide range of activities that foster growth.
Innovation can be described loosely as the development or adaptation of new (or significantly improved) products or service, processes, marketing methods or organisational structures which are new to the firm, new to the market or new to the world. The ability to innovate is a sector-neutral concept – it does not require an economy to specialise in hi-tech sectors.
Depending on the stage of development of a particular country, innovation can be mostly the result of absorption of globally available technology, processes and products (innovation by imitation), rather than pushing the global frontier (innovation in the sense of invention).