Wednesday, 9 September 2009

Innovation and the smart economy

David Jacobson: Innovation is universally accepted as extremely important for economic competitiveness. However, there is frequently confusion as to what is meant by innovation. The word ‘innovation’ appears 114 times in the recent policy document on the Smart Economy (Building Ireland’s Smart Economy: A Framework for Sustainable Economic Renewal, December 2008); that’s an average of more than once for every page. Yet nowhere in the document is there a clear definition.

Focusing only on the Smart Economy document, there are a number of different meanings that could be attributed to ‘innovation’.

• It seems to be used as a synonym for ‘ideas’: “The Smart Economy combines the successful elements of the enterprise economy and the innovation or ‘ideas’ economy…”
• Innovation is also associated with research and commercialisation. The three together make up the ‘ecosystem’ of the Smart Economy. A ‘key objective… is to make Ireland an innovation and commercialisation hub of Europe’, that is, an attractive base for R&D intensive multinationals and for the incubation of Irish and other entrepreneurs. This it is hoped will generate economic development and quality, well-paid jobs. But what are the differences between research, innovation and commercialisation and how will the various policy instruments achieve these different results?
• Among the instruments is the ‘Innovation Fund – Ireland’. Its function is “to support early stage R&D-intensive SMEs”. This suggests that innovation is what is done by start-up businesses based on R&D.
• Another proposed instrument is the ‘Manufacturing Forum’. This will support an increasing focus in manufacturing on competitive advantage “through innovation, R&D and design”. So, in addition to undertaking R&D and design, our manufacturing firms must be innovative, whatever that is.

Elsewhere in the Smart Economy document, Ireland is said to be above average in innovative processes and products but behind in the “transformation of innovation into commercialisation”; the USA is said to be ahead in “innovation in terms of technology and services”; and Irish higher education is exhorted to produce more graduates “in key areas of Science, Engineering and Technology, while also nurturing an interest in innovation and setting up their own businesses”. Again, it is not clear what is meant by innovation.

Defining Innovation

Over the last 20 years or so, policy-focused economists in the Schumpeterian tradition have come to agree on a broad definition of innovation: an innovation is a new product, process or way of organising that is new to a place, or even to a particular firm, even though it may not be new to the world. Innovative firms are those that are good at creating, introducing or implementing such new products, processes or ways of organising. On the basis of this definition, how does innovation differ from R&D? R&D is generally a formal process, measured by the amount of money that goes into the department or unit that is undertaking either the attempt to find a new product or way of making a product (research) or, if one of those has already been found, fine-tuning it for use or for market (development). R&D is an input, innovation is an output. But, and this is frequently not understood by Science, Technology and Innovation (STI) policy makers, the output of R&D is not necessarily innovation; even more importantly, innovation can – and frequently does – come out of various activities other than R&D.

What activities other than R&D can create innovation? At the simplest level a worker in a factory might see a better way of doing whatever she does. An office employee might process documents more efficiently by noticing distinct groupings. If this better way is introduced it is an innovation. He is innovative; his company, if it can quickly and smoothly implement the change, is innovative. This also applies to changes in the way a service company operates. And innovative people, firms, regions and countries can also express their innovativeness in these ways. A firm, region or country can as a result be highly innovative without having high levels of R&D. This does not mean that we should ignore R&D. High levels of R&D can be associated – as in Sweden and Israel – with innovativeness. But some successful regions, like Emilia Romagna in Italy, are highly innovative with low levels of R&D.

What about commercialisation? This focuses on the process of bringing innovations to the market. It applies most directly to new products. Successful commercialisation is where, for example, a new product – or some new variation on an existing product – can be protected by a patent, then brought into production and marketed in such a way as to meet its target sales. But many product variations, processes of production and ways of organising are not amenable to patent or other protection. Let us take such innovations as Just-In-Time – very important since the early 1990s. Groups of firms capable of introducing JIT and deriving all the benefits of reduced inventory, significantly improved their competitiveness. They could not commercialise this innovation because it is generally available, unprotectable knowledge. In relation to such innovations, success for an economy comes from the absence of such protection, from the rapid diffusion of the new way of organising.

Another concept used in Smart Economy in association with innovation is entrepreneurship. There is nothing wrong with entrepreneurship, and we could do with a lot more of it in Ireland. But again, it is not the same as innovation. Many innovative activities can clearly take place in existing businesses and don’t need new start-ups in order to be implemented.

In response to the kind of thinking inherent in the Smart Economy, substantial funding has been allocated to universities and institutes of technology under the PRTLI (Programme for Research in Third Level Institutes). The McCarthy report is quite dismissive of this programme, questioning its results. It may have improved academics’ publications and universities’ ranking but, McCarthy asks, what about innovation and commercialisation.

This article shows that confusing misconceptions of innovation seem to pervade the government’s STI policy. Clarity will hopefully result in the development of new policy instruments better focused on achieving real innovation. It may also help to address the criticisms in the McCarthy report. Rather than adopting the short-termist strategy of removing funding for innovation, government should allocate the funding more appropriately to real innovation.


SlĂ­ Eile said...

@David Thanks for this very thoughtful post. There is a lack of clear thinking in official responses about innovation and what it means for businesses, colleges, Government and civil society. Overlooked in the current slash and burn environment is the role of key knowledge infrastructure including education, training and research. None of these guarantee innovation but they are important ingredients. It is interesting that the OECD has cautioned Governments to be careful about what they cut back on.,3343,en_2649_34223_42983708_1_1_1_1,00.html
The report urges governments and business to limit cutbacks in spending on R&D and innovation, and mitigate as far as possible the negative impact of the crisis on innovation. It points to the governments of Finland in the early 90s and Korea in the early 2000s which both increased investment in R&D during those downturns and the role this played in making their economies more competitive and innovative.

There is an EU target of R&D spending of 3% of GDP. In 2007 the EU27 average was 1.8% of GDP (and 1.3% in the case of Ireland). Proportionately more spending comes from higher education than industry in Ireland – however the higher education figure for Ireland is still lower than the OECD or EU averages.

Ed said...

Good thought provoking post.

On the definition of innovation. I see that innovation can be a result, that result being something both new & valuable. Innovation can also be a process, a way of achieving that result.

The one off miracle teeth whitener or whizzy dizzy food slicer can surely be seen as innovations. Probably not wise to trust your economy to chance or trial & error though.

Innovation processes are properly about being able to make the innovative product or service less a result of blind luck or "blue skys" thinking but more of following paths and processess to guide and focus the imagination.
Sli Eile mentions Korea as an example of government investment in R&D. Korean industries ,such as Samsung & LG, have invested in learning processes such as TRIZ to improve their innovation processes.

As to whether Innovation and R&D are the same. The answer is yes and no. The Kirton Adaptor-Innovator (KAI) scale is a useful model to consider. At one end is your Academic/R&D pure research type folks, at the other end the adaptors, the transformers. We all fall somewhere on the scale but both ends create new value & innovation, you just can't use the same metrics. Einstein ,at the innovator end, never sought or was granted a patent. Edsion at the other end, with 1093 patents, always worked on things there was existing models for.

There is a need for a more sophisticated understanding of the processes and metrics required for innovation in Ireland. Experts on customer experience, product design, creative problem solving & innovation are out there in the Irish economy I don't believe we have to look very far to find the raw potential for ideas either.

You are right to identify the ambiguity of the language in the report. I join you in hoping for more clarity in the future.

The management of the innovation process is not that weird, esoteric or magical in nature that we should ignore the knowledge out there in favour of spending cash to just to meet an OECD or EU average in the hope it that will bring a knowledge economy to Ireland.

Michael said...

Hi David,
you're right. 'Innovation' is the new apple pie. We all love it. However, every cooks apple pie is a bit different!
The definition I like is:
'finding new ways to add value to your customers'. I like this one because it focusses on market and customer satisfaction and implies that , an innovation, by delivering greater value to the customer, will result in more income/profit for the firm. Also it is a counterbalance to the view, which you refer to, that innovation is only done by people in white coats in labs, refined by people in suits in offices and sold to an expectant and appreciative world.
Well, that might be the norm (although I doubt it) if you're IBM or P&G but it isn't really a model for an SME or start up.
For this group, many of the new product and service ideas they develop are innovative. (One of the current positives is the number and variety of enterpreneurial teams forming start up ventures in Ireland today.)
However, to make the innovation journey from 'idea to invoice'there has to be a customer who wants it and will pay for it. The sooner a firm can involve such a customer in the development of the new idea as part of the innovation process, the more likely it is that they will end up with something that makes it in the wider market. Unfortunately many firms leave this too late and overfocus on the development and refinement of their idea.
This costs them in time, money and unmet expectations. The fact is that few new products/services survive their first contact with the market intact. It's therefore better to do this sooner rather than later.

David Jacobson said...

If we focus only on market-based, for-profit production of goods or services, then I agree with everything in Michael's post. However, innovation is possible, and, arguably essential, in many other areas as well. Let us take for example the public service. The many departments, agencies, service providers including educational institutions, that are part of the public service are probably not innovative enough. In the context of the current financial crisis innovations that can improve productivity and quality of service can contribute more than ever. Add to the public service not-for-profit organisations, for example charities, and you have a very significant proportion of the Irish workforce and an equivalent range of opportunities for innovation. Focusing on innovation to increase income or profit is important, but it is not the only application of innovation, both in the sense of improvements in goods and services, and in the sense of how to go about achieving those improvements.