ABSTRACT
It is a well-established notion that innovation plays a vital role in the modern world in boosting economic growth and improving consumers' well-being. The task of accurately evaluating a potential innovation is strategically important. Nevertheless, the economics literature consists mainly in ex post evaluations of product innovations based on the observed economic changes in the marketplace (e.g. Hausman 1997; Hausman and Leonard 2001; Nevo 2003; Petrin 2002). Studies on emerging process innovations are rare. The main difficulty of this study is that a new technology embodied in process innovation does not lead to directly marketable products, which can be evaluated through investigating the pattern of substitution among alternative products in the market. The second difficulty is due to the lack of data — no observed prices and sales in a market of varieties of similar technologies. At the early stage of an innovation, only experimental information on the technology is available. In response to these challenges, this chapter proposes a practical approach where a process innovation is evaluated ex ante by its application to the final product marketed to consumers.
