4, October 2023

Many pathways to success.

Innovations come in all shapes and sizes. Some are radical innovations that could radically change the structure of the economy (such as electricity and most likely Artificial Intelligence), some are incremental changes to existing processes (such as a new generation of chips, or automatic transmissions versus manual transmission of cars.)  some are improved business models (such as online sales or franchising).  Each type of innovation is different and requires a different type of policy support to help it get established and grow. A food truck in Vancouver, a high-tech startup in Waterloo and an oil company working on carbon capture and storage require very different kinds of support.

Where the innovation takes place is also a major factor.  Each ecosystem has its own strengths and weaknesses, and its own history. Similar companies tend to cluster together. Think of Calgary or Houston for oil and gas or London for financial services.

Pity the policymaker who has to decide what to support (i.e., what has the best chance of succeeding in their jurisdiction) and how best to do so. This task is made much more difficult as there haven’t been any really good ways to classify innovations, or the ecosystems that support them.

This is why a classification system developed by Dan Breznitz is so interesting (Innovation in Real Places, by Dan Breznitz, Oxford University Press) It could really help policymakers match policy approaches to the different types of innovation.

He sees four categories of innovation:

Stage 1:  Novelty.  Silicon Valley and Israel are two exemplars of this stage of innovation.  The stage is characterized by high technology startups, extensive use of venture capital, extensive research and development and a strong global or export orientation.

The strength of the Stage 1 model is that it expedites the development of new technologies by providing intense financial and mentorship support.

However, a downside of the Stage 1 model is that it creates a very unequal society. In Israel, for example, there is a very prosperous high-tech sector, but the rest of the economy is almost third world and 20% of the population live in poverty.

This model has become so much talked about that many people see it as the only type of innovation.  Canadian examples include the high-tech startups in Toronto, Montreal, Vancouver, and Calgary, including pharmaceutical and medical devices and software engineering.

Stage 2: Design, prototype development and production engineering.

Significant parts of the economy consist of a series of similar “one off” projects. Examples include large engineering companies, the fashion industry, the construction industry, etc.  A large factor in the success of these companies is having well-established procedures in place and highly skilled people. Reputation is very important as it is the key to getting new business.

There is no venture capital in this Stage, which relies on traditional bank financing to a large extent. Developing a Stage 2 company is a long slow process. There are no startups here.

Canadian examples include the major engineering and construction companies.

Stage 3: Second generation product and component innovation.

In this stage firms improve, expand, and redefine a product or critical component either by applying incremental and process innovation or by recombining and expanding the product’s use and utility. This is the typical “incremental innovation” that creates a large part of the economic impact of innovation on the economy.

Most large manufacturing and service companies would fall into Stage 3 innovation. Think of the gradual improvement of automobiles over the last 100 years, or the different generations of cell phones.

Canadian examples include the automotive, automotive parts and aerospace sectors as well as telecommunications companies.

Stage 4: Production of goods and services.

Breznitz sees stage 4 innovators finding ways to produce goods and services at scale. Examples are Shenzhen in China (that is home to many final assembly plants, including Foxconn’s plan that assembles the Apple iPhone) and the Model T Ford, where the production line dramatically reduced costs.

A key difference between Stages 3 and 4 is that in Stage 3 the product is constantly improving, while in Stage 4 the product stays the same, or is specified by someone else.

The resource sector in Canada falls into this category. All sectors have significantly reduced costs through innovation. The agricultural sector has doubled yields since the 1950s; the oil sands sector has reduced costs dramatically since they started up; and the conventional oil and gas sectors have improved performance using technologies such as fracking and directional drilling. Railways have also significantly reduced costs using approaches such as unit trains.

Conclusion.
1. It is interesting to note that Stages 1 and 3 innovators are by far the largest users of R&D. So, if you use R&D as a measure of innovation you will miss entirely the other two categories of innovation.

  1. Venture capital is exclusively for Stage 1 innovators.
  2. Classifying innovations in this way should help policymakers balance their support across the four sectors. It is likely that Stages 2 and 4 are currently underserved.
  3. Stage 4 innovators are a dominant part of the Canadian economy, and their innovation activities should be more widely appreciated.

 

Peter Josty