12 June, 2017 – Blog #8
How to get more innovation?
In an earlier blog, I asked if we had too much innovation or not enough. The answer was that some areas had too much and some too little. Which raises the question what can be done to increase innovation. In fact, there are quite a number of proven approaches to increasing innovation. Here is a short list:
- Competition. This is one of the effective ways of getting innovation as it uses the ingenuity of large numbers of people who want to make a profit. The economist Willian J. Baumol captures this well in the title of one of his books – “The free market Innovation Machine.” Baumol goes on to explain that “the prime weapon of competition is not price but innovation. As a result, firms cannot afford to leave innovation to chance. Rather, managements are forced by market pressures to support innovative activities systematically and substantially… The end result is a ferocious arms race among firms in the most rapidly evolving sectors of the economy.”
- Prizes. Cash prizes have a long history of stimulating innovation. One of the earliest examples is the Longitude prize, offered by the British government in 1714 to anyone who could determine longitude accurately. That prize was eventually won by John Harrison, for an accurate clock. The XPrize is a more recent example, which was set up to bring about “radical breakthroughs for the benefit of humanity”. The XPrize has stimulated numerous other prizes, including one in Alberta run by the Climate Change and Emissions Management Corporation (CCEMC) to find commercially viable applications for waste gas.
- Military spending. This is a very wasteful way of generating innovations, but it can produce very significant results. Mariana Mazzucato has shown that many of the technologies in the iPhone were originally developed and used by the US military before being “re-purposed” and incorporated into the iPhone. The internet is another example, which was originally funded by DARPA (Defense Advanced Research Projects Agency) in the US.
- Government funded megaprojects. There are a few examples of megaprojects that have developed significant innovations. One is the man on the moon project in the 1960’s. This was a political, not scientific project that occurred at the height of the cold war. NASA considers Landsat satellite imagery to be a direct result of this megaproject. However this is a very wasteful way of getting innovations. Another example might be the Chinese government’s initiative – the Belt and Road project – to spend significant resources to enhance trade across Eurasia.
Because of the magnitude of resources required, this will always be a very minor contribution to overall innovation.
- Surprisingly, regulation can sometimes stimulate innovation. A classic example is the role of the California Air Resources Board (CARB), which imposed stringent fuel economy standards for all automobiles sold in California, in 1967. This led automakers to develop innovations to significantly improve fuel economy, not only for cars sold in California but everywhere else as well. There have been numerous other similar examples. Carbon taxes and cap and trade systems are intended to stimulate innovation by the same mechanism. Nobody wants to pay taxes and people and companies work to reduce emissions and so pay less tax.
- Sometimes innovations just happen without any apparent motivation. The “learning by doing”, “experience curve” or “learning curve” effects are based on a series of often very small changes which cumulatively have a powerful effect. When a routine task is repeated, each cumulative doubling of repetitions typically leads to a reduction of 10-20 % in cost per unit.
- New Technology. The classic example of a new technology stimulating innovation in the old technology it aims to replace is the sailing ship. In the 30 years after the introduction of the steam power in the 19th century, sailing technology improved more than it had in the previous 300 years. This is termed the “Sailing Ship effect”, which has been well documented in numerous other cases.
None of these approaches include current hot topics such as research and development spending, venture capital, crowdfunding, tax credits or other popular ideas. This is not at all to say that these approached don’t work, but just to remind us that there are many paths to innovation.