The death of innovation has been greatly exaggerated
14 January 2013
As we approach half a decade since the collapse of Lehman Brothers and the start of the Credit Crunch the US and European economies continue to struggle for growth. Many are starting to question whether growth and prosperity will ever return.
There appears to be increasing concern about our ability to innovate. Many rightly recognise that in order for a knowledge economy, such as the UK, to be successful, sustainable growth can only come from innovation. But Tyler Cowen suggests that we have run out of good ideas. Robert Gordon goes further suggesting that this started happening some time ago and arguing that the latest set of big technological advances (computers, the internet, mobile phones) simply aren’t as useful as previous ones (things like steam power and indoor toilets), and many others are taking this position.
While understandable, we think that these concerns are misplaced for several reasons. Firstly it looks like we aren't very good at valuing the benefits brought by recent high-tech devices, especially those which don't save us labour. We should be very interested in the apparently growing group of people in the developing world who would rather pay for a mobile phone than basic sanitation. This is a revealed preference for the networked benefits of a mobile phone over the flushing toilet. For these individuals it is clear which is the more important innovation.
Secondly it may be that we are trying to measure the effects of recent inventions too soon. Rather than petering out the economic effects of digitisation appear to be dramatically increasing - the Internet of things for example has the potential to transform economic relationships. As my colleague Andrew Sissons argued last year, what today may look like single modest advances may in a few years turn out to be multiple, pervasive, general purpose technologies.
Finally, and perhaps more importantly, the fact there are multiple opportunities for innovation in the global economy at present should be cause for optimism. In the UK it is very clear that healthcare, the low resource economy, the experience economy, the digital economy and business services all present huge chances for growth. Over the coming decade each of these five growth areas (and others) will present incredible demands for and opportunities for innovation.
So my heart sank a little when I saw cover of this week's economist. On a picture of a toilet it asks 'Will we ever invent anything this useful again? '. The leader article however reaches a broadly sensible conclusion, calling for government to support innovation through an agenda to “get out of the way of entrepreneurs, reform the public sectors and invest wisely”.
This sentiment is easy to agree with, but incredibly tough to implement. Innovation appears to be an increasingly complex exercise, more reliant on the open interaction between multiple parties. As the complexity of our innovation system increases, so must the sophistication of the public sector role. The challenge is that many of the key investments needed to build a well functioning innovation ecosystem are in effect the antithesis of a ‘small state’ approach advanced in The Economist piece.
The overall priority must be for state investment to provide a framework for innovation within our economy through investment in higher education, the science and technology base, and through creating a network of well-funded innovation intermediaries. For us, three essential starting points for this would be:
A focus on market making to de-risk new technologies – Truly innovative products and services don't just displace existing offerings, they create totally new demands and build new markets. For example mobile phones didn’t only displace land lines, they made new types of activity possible. But, markets are incredibly complex public and private social institutions, which often fail to form effectively. The challenge for a modern government should be to consider how to ensure that markets in each of the five opportunity areas identified above actually develop. We have set out the role of an enterprising state within this agenda in more detail here.
A smart regulation agenda – rather than simply viewing regulation as the enemy of enterprise we need to find ways to deliver regulatory regimes which can drive growth. At the very least IP reform needs to not only consider the ease of use for businesses, but also the broader economic perspective. But, good regulations can go further than this. They can set standards that allow markets to flourish. For example, if the UK could develop a standard for 3D printing designs and regulation (in a similar way to which we set the screw gage in the industrial revolution) we would have an incredible first mover advantage in this market.
Financial investment which can de-risk innovative companies – Small innovative companies often have very few physical assets on their balance sheets, but incredible intangible resources (human capital, business models, intellectual property). This presents a real challenge when trying to access funding. There is real potential for frameworks such as the Business Investment bank to start to turn this around and by reducing the bank balance sheet risks associated with this type of activity.