Productivity and Creative Destruction
The whole issue of innovation productivity is getting more and more one of the key arguments for re-gaining economic growth. The problem becomes the real impact of ‘creative destruction’ that can often go with this.
I recently wrote in a blog called ‘The Risks of Dampening Down Innovation Productivity” that with contracting economic performance, innovation performance suffers as well. I’d like to look at a few of the hidden or even darker sides to this, not because it is simply a Monday blues sort of thing, but there are growing implications if we don’t clarify why ongoing innovation investment is really needed and what it can often cost on society even more if it is not made.
At a very recent World Economic Forum in Dalian, China, the former Foreign Minister of Singapore, Mr George Yeo Yong-Boon, called for “a bout of “creative destruction” in the West, warning of “very painful” times as American and European workers learn to compete toe-to-toe with educated Asians willing to put in longer hours for much lower pay. This may test political systems to breaking point.”
The tough economic times we are presently facing
We are faced with some tough times; markets are contracting, business performance is struggling to maintain its previous levels, there is increasing argument we are heading for a double dip recession, although I feel we are already in this. Jobs are tough to hold onto and even harder to find.
Presently economic policy is driven by the need to hang on to what we have got. Is this the right approach? Does this really deliver a growth strategy that generates new jobs or simply try to hold onto the ones we have? Many people feel the later and anyone in a job that feels vulnerable or concerned for their immediate future, welcomes any economic stimulus that helps protect them. The concern though is the ill wind we all feel, blowing in from the east and its global competition effect requires us to become more productive to compete. We can’t stagnate. We can’t simply tread water.
We need a clear set of growth strategies not just stimulation packages
For a growth strategy, needed for attracting new jobs it is going to be tougher, far more politically unattractive. Many of the bigger organizations recognized within our economies are already part way into a risk-adverse approach, not really experimenting or pushing aggressively for new growth opportunities that involve higher than normal investments.
Talking around a number of different issues and opportunities recently with Drew Marshall of Primed Associates (http://thinkprimed.com), he further confirmed that it seems ‘Scarcity’ has become something of a touchstone conversation with organizations recently; even those sitting on large capital reserves are framing all their innovation efforts in this context. Large ‘chunks’ of the economic stimulus being announced in different countries presently will go into these organizations, to further strengthen their balance sheets but to create new jobs is more questionable. Scarcity can be viewed in many ways- of markets, of opportunities, of qualified people, of fresh capital, informal panic, reacting to worrying news by reducing activities.
There is a strong argument for a more dynamic growth distribution.
Innovation calls for strong experimentation, for investment, for seeking out new bolder opportunities. If we lose this real investment appetite for innovation, we lose our business dynamism and productivity growth. Economies become increasingly ‘static’, the organizations that were inefficient either have to change their ways to expand their current capabilities, or shrink and exit.
It is the increased competitive pressures of a ‘stalled’ economy in the West, increased global competition that will create this further disruption. If everyone hangs-in and settles for a shrinking share of the markets we simply lower the productivity growth as investments get cut back, saving are sought out and then offers of economic stimulus support are gratefully taken to help in this. All of this ‘negative’ activity creates longer term prosperity problems. We ‘play’ into someone else’s hands who are making appropriate investment and we simply can’t afford to do that.
Creative destruction comes in many different forms
- Policies that support ‘selective’ industrial policies skews existing producers interests even more and often at the expense of the consumer. In a global economy others that are better equipped, more modern, more efficient can make a more competitive offer. If you selections for support are really subsidised favours you often don’t improve the competitive climate, only competition does that. If you don’t invest in advancement and keep active in offering consumers improvements (not necessarily lower prices) you lose market share…..eventually. Others see these times as opportunities and invest appropriately.
- Ploughing increased investment in R&D also has a very limited short term effect. The horizons from research are longer in distance than the immediate need. By offering for example economic credits to R&D has value in the longer term but less for immediate impact. It is the value of deepening the intangible capital that need the focus but ‘stimulus packages’ don’t target the specifics, just often the generalities.
- When we invest and support a number of our less than dynamic industries we are passing up the chance to invest in the future. New high growth firms account for a disproportionate share of job creation and can have up to a 2.5 multiplier effect over three years. Of course these firms are contributing small economic share to the economy but are the very seeds of our future. We need to accelerate the entrepreneurial climate, not hold it back by starving it of capital or its share of any stimulus package. Policies tend to favour the ‘mature’ not the young at heart.
- The more we can support organizations willing to invest in innovation activity, the more the uneconomical ones in the same industry shrink, this adds growth and new economic activity that is a much healthier position. This enables organizations to withstand and re-equip for this increased growing global competition but this does comes at a price of disruption. We need a greater ‘selective’ survival of the fittest otherwise we prolong the survival of organizations that actually create a drag on the industry they operate within. We do need real Darwin-ism here not prolonging inefficiencies.
- As increasingly more calls will be made for deeper structural reform and reducing barriers to trade even further, you will get growth but at a cost, the cost of destruction of many of the existing organizations. Greater disruption and increased uncertainty.
- This has its ‘knock-on’ effects, the ones that become even more politically unpalatable; the shifting job market where people and their families get uprooted, in search of a new job.
- Society is facing a tough set of challenges- if organizations do not innovate, create new growth, new products and compete effectively we fail to get what some call ‘creative destruction’.
- It is the need for rapid diffusion of new technologies, new methods and designs that facilitates ‘creative destruction’ as it equips those that invest with the ‘capital’ to compete better.
- Livelihoods, established communities, institutions and economic security all get caught up in these tough decisions that have an inevitable occurrence for many, at some time. Seeing destruction is extremely hard when it has these very personal impacts on our lives and politicians often get caught in the middle.
Subsidies, tax credits and lower taxes it is argued never quite generate the solutions promised.
There can be both ‘productive’ and unproductive churn taking place.
The need of any crafting of policy in times like these, is to look well beyond the ‘knee-jerk’ effect, we need to have clear job creating purpose underlying economic stimulus. Innovation needs to be clear, is it the means to economic ends? More jobs, better jobs, greater productivity. The answer is yes but the real-world trade offs does have higher destruction than we would want.
Sometimes innovation in the short term is neither giving us societal or economic good. I recall recently an article by Michael Schrage where he suggests innovation has “perverse and unpredictable impact on nations and employment.” He points out “innovation comes with risk and costs attached.” Innovation ensures creative destruction.
We seemingly need innovation in all its different forms and we need to continue to invest in it, otherwise we reap the rewards for even more destruction. We are facing much uncertainty as we see these job losses continue from many less than ideal organizations simply shedding to survive.
It is through appropriate investment in innovation productivity we can see the rise and potential for growth. We are traveling down a hard road at present with social and political costs. Managing innovation investment correctly today is critical but it has to be continued, even with all the disruptions it provokes. As Michael Schrage poses in his conclusion in his article “what kind of growing economy do we want to have?” We sometimes pay a high price for innovation.
Paul Hobcraft runs Agility Innovation, an advisory business that stimulates sound innovation practice, researches topics that relate to innovation for the future, as well as aligning innovation to organizations core capabilities.