2008 podcast prabhu innovation

Can innovation save the world?

3 November 2008

The article at a glance

Firms and governments across Europe and North America are banking on innovation, or the successful commercial exploitation of new ideas, to kickstart …

Firms and governments across Europe and North America are banking on innovation, or the successful commercial exploitation of new ideas, to kickstart economies and help save the West from the current economic crisis and looming recession. Professor Jaideep Prabhu, Jawaharlal Nehru Professor of Indian Business & Enterprise at Cambridge Judge Business School, challenges the consensus that legislation at country level is the best way to boost the ability to innovate within firms and countries. He argues instead that in today’s rush to innovate, the successful economies will be those whose firms have internalised attitudes and practices that foster innovation into their corporate culture.

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How will the west fight its way out of the current financial crisis and accompanying recession? Firms and governments in Europe and North America are banking on innovation to do the trick. Indeed, innovation, or the successful commercial exploitation of new ideas, has been a magic word for prime ministers, presidents and CEOs in the west since well before the current crisis. And the appeal of innovation does not stop there, but extends far beyond the developed world into emerging markets as well. Thus, China has a state innovation policy to match that of the EU’s Lisbon Strategy and the USA’s National Innovation Initiative.

There is considerable consensus, therefore, that innovation is crucial to the growth of firms and economies. Whether it be through new offerings that consumers willingly pay more for (product or service innovation), or new ways of producing and delivering these offerings to reduce costs (process innovation), or through new ways of reconfiguring entire businesses (business model innovation), firms at the leading edge of innovation dominate world markets and promote the competitiveness of their home economies.

Hence the mad rush to boost the ability to innovate within firms and countries alike. But what does it take to be more innovative?

Because of the importance of this question, authors in various social sciences have, over time, proposed various theories regarding the drivers of innovation. Sociologists believe that religious beliefs matters. For instance, Max Weber argued that northern Europeans were likely to more innovative than southern Europeans because of the “Protestant ethic”. Psychologists on the other hand believe in the role of national culture. Thus, individualistic cultures might be more likely to develop and implement new ideas than collectivistic ones. Legal scholars emphasise the importance of property rights. Countries that guarantee their citizens the fruits of their enterprising actions are more likely to be enterprising. Geographers think that the distance from the equator is crucial: colder climates motivate people to think about and plan for the future, an important ingredient of innovation. Finally, economists place their faith in the role of national inputs such as labour and capital. Thus, countries that invest more in providing advanced technical and scientific skills to their citizens will have more innovative economies.

What all these theories have in common is that they tend to emphasise country level drivers and believe that policy at the national level matters. Thus, investing more in R&D or higher education, changing tax policy or improving the country’s intellectual property laws are all expected to improve a country’s innovativeness.

In a forthcoming paper, my co-authors Gerard Tellis and Rajesh Chandy and I challenge these views. We contrast various country-level theories with one based on the internal culture of firms, and test our thesis using survey and secondary data from 759 public firms across 17 major economies of the world. The firms in our sample come from developed economies such as the US, UK, Germany and Japan, as well as developing economies such as China, India, Taiwan, Hong-Kong, Korea and Singapore, thus allowing us to compare the drivers of innovation across very different national contexts.

One of our key findings is that among all the factors proposed, the internal culture of firms is the strongest driver of innovation across nations. Corporate culture, we find, consists of three crucial attitudes and three related practices. The attitudes include the willingness to cannibalise existing products, a tolerance for risk and an orientation towards markets of the future. The practices are the empowerment of product champions, internal competition, and providing incentives for employees to be enterprising. A second finding is that the commercialisation of new products and services translates into a firm’s financial performance; such innovation is a stronger predictor of financial performance than other popular and widely used measures such as patents.

Our findings have important implications for managers and policy makers alike. First, a number of factors do not seem to be as important drivers of innovation in firms across nations as many researchers believe. Among these are frequently emphasised measures of government regulation, and country-level labour, capital, and culture. In contrast, a firm’s corporate culture is a more significant driver of innovation. A crucial implication of this is that all national attempts to spur innovation from the top down are doomed unless firms themselves embrace and foster a culture of innovation from within.

Second, we find that actual innovation in terms of new products and services translates into financial value to the firm even after controlling for patents, R&D, and other variables. This result underscores the importance of our measure of innovation, and suggests that current attempts to measure the relative innovativeness of countries by comparing the patents they generate or the amount they spend on R&D are misguided at best.

Certainly, innovation might save the world from the current crises, but doing so will not be as simple as waving the magic wand of legislation above. Rather, for economies to become more innovative, it will be necessary for the firms that operate within them to become more innovative first. And for these firms to become more innovative it will be necessary for them to adopt and embody attitudes and practices that foster such innovation.

Only when these daily battles are fought will the larger, more long-term economic war be won.

– This opinion piece by Professor Jaideep Prabhu was first printed in The Financial Express, India, 28 October 2008.