Although many markets in reality are not entirely characterized by such idealized competition, they may well share at least some of its attributes that are critical for dynamic efficiency and innovation. Markets that enable their enterprise participants to expand their outputs with flexibility and fluidity, that is, without magnified costs or compressed revenues, when they have gained a competitive advantage, are conducive to incentives and ability for innovation, enhanced productivity, and consequent growth.

In such a competitive market, innovation that raises TFP likely lowers the marginal cost to a new level that creates or increases profit margins, thereby stimulating more output. Similarly, innovation that results in new or enhanced products may raise the value of firm output due to higher margins or more demand, and thereby induce expansion. The higher margins expected to result from successful innovation and elevated TFP alone provide incentive for business activities that are anticipated to promote dynamic progress, but especially high-powered incentives arise where the innovation is also expected to lead to significant growth of sales at the enlarged margins, and thus to substantially enlarged profits. Hence, markets that permit firms to expand with efficiency and flexibility foster heightened incentives for expenditure of efforts and investment to innovate and raise TFP, as well as fostering enterprise growth in response to their successful innovations.

For development to occur, innovation does not need to be focused on new-to-the-world technologies. In addition to the creation of new technologies, entrepreneurship facilitation can spur diffusion and adaptation of existing product, process, organization and marketing technologies. In general, innovation can be profitable without the growth of tangible outputs and inputs,<sup>8</sup> including by higher-value design products, and by lowered fixed production costs that raise profit but not output.

There are many ways that different imperfectly competitive markets in different settings can fail to accord enterprises access to the resources and market opportunities needed for their expansion in response to innovation. The general business environment can lack competitiveness, namely sufficient responsiveness on the part of the existing physical and other business infrastructure, legal system and governmental support that would yield to young or otherwise vulnerable enterprises access to essential local business services such as banking and related financial services, communications, transport and required energy services, gateways to export markets, open real estate markets, and professional and administrative support services

> 8 See the intangible assets framework and methodology applied to the U.K. in Haskel et al. (2011) for an alternate approach to the measurement of the contribution of innovation to overall economic growth, based on three main classes of intangible assets proposed by Corrado et al. (2009), namely computerized information (software and databases), innovative property (covering firm spending on R&D and intellectual property including architectural and engineering design), and economic competencies (consisting of firm investment in branding, human and organizational capital). See Dutz et al. (2011) for an application to Brazil.

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