Innovation is now widely acknowledged to be a prerequisite for sustainable economic growth. Whether the changes are profoundly disruptive, or merely provide incremental improvements in products, services, or business models, the results boost an economy’s long-run productivity. Innovation is necessary not only for developed economies, but also for emerging markets, which are receiving diminishing returns from simply transposing advanced economies’ best practices. However, while every country needs to innovate, the tried and tested approaches do not work for all markets.
Clayton Christensen of Harvard Business School has identified three broad forms of innovation that make firms — and ultimately economies — stronger.
Firms can make incremental changes to existing products, thereby becoming more competitive in an existing market segment; they can introduce products, like Sony’s iconic Walkman or Apple’s iPhone, that create new market segments; or they can develop a product — such as electricity, the car, or an Internet search engine — that is so disruptive that it renders an entire sector or way of doing business almost obsolete.
The challenge for governments is to devise ways to encourage firms or individuals to engage in more such innovation to bolster economic growth. Much of the research in this area, influenced by the work of Harvard’s Michael Porter, has been dominated by “cluster studies,” which typically focus on improving productivity in emerging economies and regions within advanced economies.
As a result, over the past two decades, policymakers’ attention has shifted from trying to understand Asia’s so-called tiger economies toward recreating the successful clusters of Taiwan’s Hsinchu Park, Silicon Valley, Boston’s Route 128, South Korea’s Daedeok Science Town and Israel’s Silicon Wadi.
Such clusters often have attributes that cannot be replicated easily elsewhere. Silicon Valley’s achievements are, arguably, a function of a unique cultural legacy rather than government policy (though government has indirectly underpinned some of its most successful startups). Likewise, the early strategic government intervention — including planning, subsidies and state ownership — that has underpinned innovation-led growth models in Taiwan, Israel and South Korea is simply not available in many countries.
Fortunately, there is a third approach, evident in the numerous innovation successes in Europe, Asia, the Middle East and elsewhere that neither had state backing nor occurred within a uniquely creative business culture. Consider, for example, the Internet-based telecoms firm Skype, created in Estonia; Rovio’s “Angry Birds” video game, made in Finland; the TomTom GPS navigation system, developed in the Netherlands; Navigon, another navigation system, and SoundCloud, a music download service, both made in Germany; Maktoob, an Arabic Internet service provider, and Rubicon, a burgeoning animation educational company, both established in Jordan; and Infosys and Wipro, two of many successful technology ventures in India.
In studying these and other cases, the Innovation and Policy Initiative at INSEAD has identified four factors — the “Four Cs” — that support technological innovation and entrepreneurship: cost, convenience, caliber and creative destruction.