Innovation

And building every nation’s “capacity
for innovation”, says Harvard Business School’s professor Michael Porter, is the global economy’s next big productivity challenge. Productivity determines nation’s wealth, Porter recently told the UK Institute of Management Services when delivering the prestigious Gilbreth Memorial Lecture. “What we face today are really the beginnings of the next competitiveness challenge, the next productivity challenge.”
Porter believes that building the capacity to drive productivity growth into the future — the capacity for innovation — is the next critical stage of development, particularly for advanced nations. And his recently researched blueprint contains pointers for New Zealand’s prevailing economic predicament.
A study of New Zealand’s 500 largest companies undertaken by Management magazine’s sister publication, NZBusiness, two years ago revealed that, although this nation’s largest enterprises understood how important being innovative was to their success and survival, most did little more than pay lip-service to their stated belief.
As we look at the failure of our largest companies to fire the imagination of share market investors, local and abroad, Porter’s latest findings take on an air of urgency. His research asked the question: what creates the innovative capacity of nation. Managers here should in turn be asking what they must do to create work environment that builds their individual organisation’s innovative capacity.
Porter points out that productivity determines wealth, wage levels, standard of living and, in short, national prosperity. But in thinking about productivity we must think as much about the value of the products as the efficiency with which they are produced. “What matters is the value you can create with day of work, or dollar of capital invested,” he said. For advanced nations like the US and UK it is the value side of the equation that is the essential determinant of success.
Porter also believes there is now no industry that cannot produce higher value products, and no industry that cannot exploit high technology. “There are no low technology industries, there are only low technology companies: companies that have not yet woken up to the potential of technology to transform what they do.” Some of that rhetoric might be viewed with scepticism by our obviously innovative primary industry-based businesses. They must still bash away at restrictive international trade practices or pray for the dollar to fall to reap the market benefits of their innovation.
Given that productivity really defines competitiveness, why is innovation so important? For start, an increasing number of countries are getting their respective houses in order through quality programmes, re-engineering and improvements based on identified best practice. For advanced nations in particular, just producing the standard product with the standard process will not support high and rising standard of living.
Workforce growth is slowing in advanced economies. So Porter argues that productivity will need to improve more than incrementally and through true innovative activity or the economies of advanced nations will not grow in the next 10-20 years. “Innovative capacity is our best opportunity to create really favourable world economic situation,” says Porter. “What we need in the world economy is an expanding pie, where new needs, new products, new services are being created all the time. Advanced nations can provide the innovative products and services, developing nations then have room to produce the perhaps somewhat less innovative products and services as diffusion take place. We have to keep the pie expanding and that fundamentally comes back to innovation.”
Why is it that some nations can relentlessly innovate over long periods of time?
There is now substantial body of knowledge about the constituents that contributes toward an innovative environment. After distilling the evidence Porter suggests four very different elements combine to create innovative capacity. These elements comprise:
• basic “inputs”,
• an attractive investment “climate”,
• abundant “competition” and
• “clusters” -– geographical concentration in country or region of group of related and supporting enterprises.
It is impossible to innovate without inputs such as high quality scientific and technical personnel; good basic scientific infrastructure within the higher education system; supply of risk capital. Inputs are not enough, however. According to Porter, innovation thrives on sophisticated needs. demanding local market is crucial. Customers help make nation innovative by demanding and looking for better products and services. “There is demand side to innovation, buyer’s side that we are beginning to understand better,” according to Porter.
The “right climate” encourages the investment required for innovative activity. And critical component here is intellectual property protection.
When it comes to rating the relative importance of competition Porter is emphatic. “If you don’t have to compete at home, there is almost no chance that you will be able to compete abroad –- much less be innovative,” he told his audience. “Innovation emerges increasingly out of local rivalry and so those nations that have not opened their internal environment to competition are not very innovative.”
Clusters and the concentration of knowledge and skill they nurture are also important to building innovative capacity. Porter used as his example the oil and gas cluster in Houston, Texas, where there is concentration of companies and research and development, suppliers and institutions — all in the energy, oil and gas business. In New Zealand we might consider Rotorua and its relationship with forestry, Marlborough and the wine industry or perhaps dairy farming and the Waikato. The concentration of common interest and the juxtaposition of suppliers, customers, skilled people and specialists in universities “is tremendous engine of innovation”. “Clusters create information flows, incentives, spin-offs, new companies — an innovative vitality,” according to Porter.
In the last year or so Porter and his colleagues have taken these broad principles of innovation and innovative capacity and tested them statistically across the leading nations in the world economy. They divided the innovation attributes into three broad categories:
• common innovation infrastructure — things about country that cut across all industries and affect innovative capacity such as university systems and intellectual property protection
• clustering factors
• the quality of the connection between the two — science and research infrastructure is good but unless it is connected to companies, it is not very useful.
The study took and measured statistics such as R&D personnel as proportion of total workforce, money spent on secondary and tertiary education, money spent on R&D and strength of intellectual property protection from wide array of countries over the past 20 to 30 years.
Porter concedes that measuring the cluster specific conditions for innovation in particular countries is difficult. They opted to measure the percentage of nation’s R&D that is actually funded by industry to establish an indirect measure of the vitality of the cluster specific innovation environment in the country. Conversely, if much of the R&D is being funded by government, it suggests “priming of the pump” to compensate for the lack of industry interest in R&D investment.
Measuring the quality of linkages was also difficult so the Porter team measured the percentage of R&D performed by universities — not funded by universities but conducted by them. “If you can get lot of innovative activity occurring within universities it tends to spread and diffuse widely throughout the economy.”
The Porter research came up with interesting findings, most of which support his basic hypothesis that innovation

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