Tuesday, September 30, 2008

Influencing innovation

Should we worry about innovation?  The Venturous Australia report to the Minister for Innovation, Industry, Science and Research ought to tell us that innovation is no business of the government -- but it does not.

It is a politically correct document that mentions the workplace and climate change but a word search has found no mention of working families.

Australia in the last 15 years has experienced steady growth placing it among the top performers in the OECD.  It is not clear that this growth has very much to do with our innovations, science or research policies in any direct way.

The urge to innovate by politicians is both long lasting and bi-partisan.  Indeed it is an OECD wide urge.  Professor Alan Hughes from Cambridge University has diagnosed the original condition.  The urge progresses through emphasising the importance of research and development, promoting the exploitation of science from research institutions through licensing and spinning out innovations and establishing new entrepreneurial spin-off companies

The popularity of this model arises from the view that this is the basis of the superior economic performance of the United States.  It is a cargo cult approach as it is picks out and emphasises selective elements and ignores others.

A study of productivity growth in the United States shows most of the growth in the last seven years came in "low-tech" activities.  "High-tech" activity is a small part of the US economy.  It is a minute part of the Australian economy.  However what is thought to be happening is that there is a spread of high technology applications enabling productivity improvements in the "low-tech" sectors of an economy.

In Australia the mining and agricultural sectors benefit from the dispersion of "high-tech" products.  It the use that counts but the innovations may be sourced world-wide.

Research institutions can be put in context by looking at university patenting, licensing and spin-offs and by comparing the scale of this to the actions within industry.  As an example, IBM registered 2,941 patents in 2005 while the University of California state system in the same period registered 388.  As far as spin-offs are concerned, some 500,000 new firms are started each year while in 2004 462 US university spin-offs were established.

Even more interesting are the sources of innovation for companies.  There are even Australian statistics for this which show the key sources of ideas are within business, customers, suppliers, meetings and competitors.  Universities score about 10 per cent and R&D enterprises or even less!

Entrepreneurial spin-off companies are, in general, not as important as established companies.  It is only in sectors where "destructive" technological change is creating opportunities that they have a chance to grow and prosper.  The spread of the Internet is an obvious example where established businesses are battling with newcomers for news, music, film and the general delivery of information.

However the universities and public R&D do play a contributing part.  It is the supply of human capital, making a key contribution in producing graduates who will invent, implement and deploy innovations for the benefit of their companies.  The published research enables a spreading of information that is a public good.  But most importantly the direct network of contacts from universities to companies and from companies to universities at many different levels provides what may well be the key link.

Perhaps the urge to innovate was seeded by universities.  Academics are very good at sensing what makes governments fund research.  There are also very persuasive in argument and innovation is a fascinating and important process.  If national economic growth could be coupled to innovation and as directly as possible to the role of the university in the community then policy makers and politicians would be more generous in their funding of research.

So where is Venturous Australia leading the Minister?  It looks like the same old troughs will be renamed and then refilled.  There is a gentle admission that innovation was not well understood in the 1980's and 90's.  The commercial pipeline is found to have S bends and even manifolds.  Now it is clear that collaboration is the key.  Most of this explanation is sheer nonsense as the complications of innovation should have been well known to any informed policy maker.

The spirit of picking winners still moves among the people.  There are National Needs, Innovation Councils and a review of the "Innovation System".  Policy makers should ponder the relevance of this to innovation following the American painter Barnett Newman's famous remark about art critics that "Art criticism is to art as ornithology is to the birds".

How does innovation happen?  In our own lifetime we have seen the arrival of the PC and the Internet.  Both of these developments have the characteristics of a random walk.  There are hardware and software contributions from many sources:  scientists, engineers, marketers, professional and of course amateurs -- who are often the first customers.  As the innovation develops the mighty are humbled, new businesses emerge and the products find increasing application that in turn creates new opportunities.

How much does government policy influence innovation?  Directly there is no influence but subtly it can make a difference through education, research support and buying power.  These three are obvious but what about business culture?

In a seminal book, Regional Advantage, Annalee Saxenian, a Professor of City Planning at UC Berkeley, discussed the growth of Silicon Valley and compared it to Route 128 around Boston back in 1994.  The lesson was the importance of culture.  In Silicon Valley the model was co-operation among firms while in Boston businesses were defensive castles and silos with the enemy beyond.

Who set the culture was also discussed -- as Saxenian is a sociologist.  It is probably, alas, beyond government.  It might emerge, as it has in the mining industry, if there are examples of success.  You need clusters of business and experience and clusters spring up in some university cities.  Universities attract students who often stay after graduating to work and some will found new businesses and some will cluster near a university.  So universities are important but it needs more than that.

Markets determine success and one of the difficulties in Australia is the small local market.  It is hard enough in California to get going in a big market where there are many imitators and predators so how can you do it in Australia?

Perhaps mining provides a clue.  Miners have the sole right to physically use their licensed property.  Patents provide the equivalent for inventions, but again it is not enough.  You need access to skills to take and shape a product through development and marketing.  Not all these skills are available in Australia but as we grow we learn and add to our abilities.  But patents might give us enough protection to occasionally win out.

None of the above has much to do with government.

Venturesome Australia calls for more development funding but this carries an opportunity cost for the taxpayer.  So what about some innovation in funding?  What about company R&D vouchers redeemable at universities or government labs?  Give the customer buying power and researchers get government funding only when there is sufficient outside interest to trigger funding.  Oh and forget about CRCs (Cooperative Research Centres).

Innovations have an ability to come from unexpected directions and the greatest contribution by a government would be to ensure that we have a well educated and technically literate community.  But remember that many innovations have nothing to do with new technology!


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