Thursday, February 22, 2007

Nobelist Polanyi on Innovation

In a followup to a Globe and Mail article last week, Nobelist John Polanyi makes the argument that what's stopping innovation isn't either the lack of engineers/scientists as advocated by Bill Gates, or even business people as argued by Roger Martin and James Milway. Polanyi argues that, in fact, it's over/poor management:

The damage is done when the manager takes ownership of the pig before whisking it off to the market. The health of the pig, we are told, is to be assured by rules of husbandry. Research, in order to qualify for support, should abide by a multitude of rules.
Ignoring for a moment that the case as made by Martin & Milway wasn't that there wasn't adequate management at the government level, Polanyi errs by ignoring where innovation comes from. What started it all, was Bill Gates' assertion that America's prosperity was dependent on innovation. Where he goes wrong is in thinking that this innovation must come from scientists and engineers, Martin and Milway go wrong thinking that it's the business grads and Polanyi goes wrong thinking that innovation must happen at universities - or even driven by universities.

There's little doubt that innovation drives prosperity. It's easy to see that a given product is worth more than the sum of its parts, and the difference, after taking into account the cost of capital is almost always the direct result of innovation. But innovation isn't always as radical as the development of the lightbulb, the microchip or hopefully, eventually, fusion. The vast amount of innovation is incremental - or evolutionary, as pointed out in a study in 2000, for Duke Law Professor Lewis Branscomb by Booze, Allen, Hamilton. It's adding a new menu item at McDonald's, or making cars in colors other than black.

In fact, Booz Allen makes the observation that:
Almost all GDP growth is due to evolutionary growth of existing markets, services, and production processes. $200 billion in R&D was funded by private industry. Of this only about $16 billion funded R&D for radical innovators.
From this innovation was economic activity (gross profitability for an economy) of nearly 10 trillion dollars. So to recap: prosperity is the result of profitability measured by GDP (as an aggregate) which in turn is the direct result of largely incremental innovations. Understanding the problem is probably the first step to building a solution. As in the case of labor markets, in promoting innovation in private industry, governments need to learn less is probably more.

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