At first glance, it may seem like risk and innovation are two concepts with no connection. Risk perception is the subjective judgement a person makes about the risk involved with the dangers an activity or object poses, while innovation refers to the upgrading of market goods and services.

However, according to a new research collaboration between the Rotman School of Management and Harvard Business School, risk perception is an important factor in driving market innovation. Risk perception can influence a product’s demand and further stimulate the innovation of that product.

The mechanism for innovation

The effect of risk perception on a product’s innovation is powerful. An increase in percived risk may affect public demand for a product, which in turn influences how and when technological developments are made.

The researchers discovered this correlation during an empirical analysis on the series of changes in the computerized tomography (CT) scanner market after a scandal in 2009, in which a high-level radiation leak affected consumers’ perceived risk of the hospital equipment.

According to the study, after media coverage revealed the scandal, CT manufacturers saw an increase in patents for risk-mitigating technologies (RMT) of radiation diagnostic devices — compared to non-RMT types of radiation diagnostic devices. Also, the number of diagnoses by CT scanners reduced, while hospitals’ propensity to upgrade CT systems increased significantly.

The joint presence of a decline in usage and an increase in equipment upgrades, along with the innovation responses by CT manufacturers, shows that risk perception increased consumers’ willingness to pay for safer CT scanners and suppressed the demand for existing ones. This, in turn, increased the investment in innovation by pushing firms to develop RMT that would satisfy customers’ demands.

The researchers explain that whether risk is an important driver or not depends on the nature of the hazard, the demand involved, and the technological possibilities. For example, the Japanese government stopped supporting nuclear technologies after the Fukushima accidents, restricting the development of RMTs on the nuclear station in Japan.

The risk perception effect beyond innovation

Rotman Professor Dr. Alberto Galasso, the co-author of the study, wrote in an email to The Varsity that risk perception can affect innovation in many industries.

“Take for example the automobile industry where many important technologies, such as seatbelts and airbags, are, in fact, risk-mitigating technologies that reduce the probability of negative events or the severity of their consequences,” Galasso wrote.

“My collaborator and I think that risk perception is an important driver of innovation, which has been understudied in previous management research.”

Galasso acknowledged that risk perception has an ambiguous effect on innovation. However, he stressed that the value of the study is not the degree of the effect that risk perception has on innovation, but rather that it helps recognize the impact of this mechanism beyond the innovation being studied.

According to Galsso, RMTs are widespread and important for firms, employees, and customers. He wrote that RMTs create value for businesses because they not only make products much safer and healthier for users — which is considered a “first-order importance” for firms — but they also reduce the risk of product liability litigation.

He further emphasized that the liability damages the government sets to protect customers from defective or dangerous products shape technological innovation. “It is important for policy makers to understand that these policies have effects on innovation incentives that go beyond their impact on health and safety.”

Risk and the pandemic

The current COVID-19 pandemic also gives us a lot of examples of how risk perception affects daily life.

“The current pandemic has pushed firms to experiment with a variety of risk-mitigating technologies,” wrote Galasso. He noted that a recent example of RMT developed by firms is the widespread use of Amazon’s Just Walk Out technology in many retail stores. This technology allows the company to bill customers directly without checking them out by combining computer vision and artificial intelligence, which helps customers maintain a safe physical distance.

“Innovation was not only implemented by existing firms. Many new innovative entrepreneurial ventures have emerged as well,” added Galasso.

“At UofT we had a new stream of the Creative Destruction Lab, CDL Recovery, which focused on start-up solutions to accelerate the world’s recovery from the COVID-19 crisis. One of these start-ups is the British firm Crowdless which developed a mobile app to avoid queues and crowds in supermarkets.”

In light of this research, as the pandemic continues, we may continue to see more companies alter their products and services in response to risk and safety concerns.