Is market-creating innovation riskier for companies than performance-improving innovation and efficiency-enhancing innovation? Give reasons to support your answer.

Answers will vary. While global companies often claim to invest in all three types of innovation, in fact most investment focuses on performance-improving or efficiency-improving innovation. This might seem odd, since most real economic growth comes from market-creating innovations. One possible explanation comes from the work of early economists such as Adam Smith and David Ricardo. According to their economic models, companies generate profits because they differentiate the performance of their product-and/or the efficiency of their product-in a way that generates higher profits than competitors earn. As a result, companies focus so much on performance- and efficiency-based innovation because traditional business models are effective at determining the value of these investments and interpreting those values for investors.
By contrast, market-creating innovations are much more difficult to evaluate because their potential for generating profits is ultimately uncertain. By definition, this kind of innovation results in products and services that cannot be tested in the market before release and for which demand is not obvious. For example, after incurring considerable costs and investing heavily in R&D, IBM developed the first smartphone in 1992. However, the company was so concerned that consumers wouldn't like the phone that it took two years to introduce it to the market. The phone was not successful. Many argued that there were too many problems with the phone and that its sheer size turned people away.
The section "Risks of Market-Creating Innovation" on page 215 discusses how companies deal with various types of innovations. Students can use this section to make their own interpretation and answer this question.