I had an interesting conversation with someone from the government sector whose job is to support innovation and increase the number of innovating firms in the economy. While I can see why governments want to foster innovation, I think that his job is extremely difficult because he is actually trying to affect the strategy of companies and how their boards and managers view innovation. Given that there are so many firms in the economy (about 80,000 in the Brisbane region alone), this is going to be a Herculean task. I don’t know how else to convince firms to innovate because in the end it is the people in the firms that decide to pursue innovation as a means to create value.
My own opinion is that what governments can actually do to promote innovation is somewhat limited. There is very little international evidence that R&D tax breaks can encourage innovation. There is a good deal of evidence that it results in more R&D spend but the relationship between this expenditure and innovation output is unclear. I recall getting a phone call from somebody asking me to provide evidence that tax breaks supported R&D. It turned out that he was from an accounting firm who had a specialist group of people working on maximizing the tax refunds for R&D. He wasn’t impressed when I showed him the studies that were unable to point to a clear link between tax breaks and innovation.
Another government tactic is what Professor Alan Hughes at Cambridge University calls the “cargo cult”. The original south pacific cargo cults were developed by islanders after the second world war. When the US brought wealth and materials to the islands through their military operations it was accompanied by airfields, planes and soldiers. After the war, some islanders tried to bring back the cargo by carrying out rituals with artifacts that looked like the planes and airfields.
Alan says that a lot of government innovation strategy isn’t very different from a cargo cult. If we can see a thriving and innovative region such as Silicon Valley, all we need to do is replicate the conditions and it will happen. While this doesn’t mean building planes out of sticks and leaves, it usually means spending money to create institutes and attracting companies from a particular sector (usually biotech or software) to create a cluster without really understanding what made the original cluster so successful in the first place.
The problem with cluster theory is that there is very little evidence that firms in clusters do any better than firms that aren’t part of clusters. We also know that innovation is widely spread throughout the economy and many “old” industries are just as innovative as the fashionable new ones.
Well… enough criticism… so what actually works? In a comparative study of the UK and US economies, Professors Alan Hughes and Andy Cosh (MIT) found that the US government’s procurement program was successfully acting like a venture capital fund. Governments face a range of significant long term challenges in critical areas such as health, education, power, and water. Identifying areas for breakthrough technology and challenging innovative firms helped to support these firms and at the same time create valuable innovations. This is quite different from a development grant. Firms usually say that these are too small and too slow with costs incurred in putting the grant together. Far better to challenge a firm with a real project.
While this works in the US, I also know that Brisbane City Council have a similar program (albeit on a smaller scale) and it is paying off for the council and for the firms that are involved in the procurement program. This morning the Lord Mayor, Campbell Newman, announced that council would fund its own renewable energy project to meet its strategic targets. He also said that this was part of kick-starting the industry in South East Queensland.
Firms don’t need innovation welfare. They need sophisticated partners and customers.
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John Steen is a Lecturer in Innovation Management in the University of Queensland Business School. He blogs about innovation at the Innovation Leadership Network.
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Lesson…say “no” to gov’t intervention. Gov’ts make an emotional appeal for supporting innovation–just another confiscation of free capital. Any funding and legislation is really just an exercise in “picking winners and losers.” This is NOT the business of gov’t! For example, how can gov’t justify a tax break to a company for hiring people they otherwise would not. Not only is this bad for business (really?, hire someone you don’t need and who’s costs you cannot support when you cannot justify their ability to impact growth????). How can you justifiably direct funds (direct funds in grants or tax “credits”) to this company and do nothing for the other business ’round the corner who’s owner has scraped and clawed through the recession to sustain employment for their existing employees and making personal and profit sacrifices in the process. Stooopid!
A recent article in the UK Computer Weekly agrees with you: http://ow.ly/2rpea. Now more than ever, something needs to be done to enable the SME to partner with Government. Diversity can bring much needed innovation and strengthen the DNA of collaborative programmes.
This is an excellent article. I have often bemoaned government efforts to replicate “the Cambridge phenomenon”, (doh! – there’s a reason why they called it a phenomenon), or Silicon Valley, and their unquestioning belief in cluster theory. I had never previously heard of the “Cargo cult”, but it is an excellent metaphor about the futility of those efforts.
As Todd says above isn’t it crazy how some government schemes will only support things you were not going to do without their support. If you weren’t going to do it without their support, ask yourself when it became the right thing to do!
As for Government procurement as a tool for stimulating small businesses, I agree that it should be. Sadly in the UK the very measures that have been introduced to make procurement fairer and more transparent are making life more difficult for SME’s, and putting more power into the hands of larger “prime contractors”.