by Andrew White | December 8, 2016 | Comments Off on Are we Out of Big Ideas?
I was greeted yesterday morning with my two favorite newspapers, the FT and WSJ. Lo and behold I saw on the front page of the WSJ an article of the same name as this blog. The article was, of course, about my favorite topic: productivity and IT’s role in it.
First a refresher in the facts of the day:
- Productivity growth drives improved standard of living
- Productivity at a global level peaked somewhere between 1950 and 1970, depending on how you measure it. It has gradually leveled off and is now relatively flat; even declining slightly in a couple of industries
- Economists do not agree why this condition exists
- Even how we define productivity, how we measure it, may be part of the issue
The article brings together a number of fascinating points. He headline refers to one notable idea, that the kinds of innovation we develop these days are not as significant as was things like electricity or computers. There is concern that though we continue to innovate, maybe we have lost our edge for ‘big ideas’.
There are ample other aspects, some political and some economic, to the problem of productivity that we should not discuss here:
- Public sector investment in pure R&D is at a relative low compared to the last 50 years
- The number of start-up companies in several advanced economies (including the USA) is at an all-time low
- Fiscal policy (i.e. tax) impacts investment decisions between capital, labor, and other uses such as stock buy-backs and M&A
- Monetary policy (i.e. interest rates) impacts investment decisions too
But as a Gartner analysis I should avoid political topics since there is a good chance that data won’t be conclusive and so personal opinion rather than analysis will come to the fore. So let’s move past this part….
Interestingly the article does refer to a reports from the OECD that I read the other day. It is titled, “The Future of Productivity- Frontier Firms, Technology, and Public Policy: Micro Evidence from OECD Countries.” This report was interesting and it actually led to me updating my current thesis related to our productivity challenge.
The report confirms that although at the macro level total factor productivity (TFP, the main measure used) has flattened at the global level, the details are enlightening. If an average is zero, by definition some observations will be positive and some negative. The analysis looked at those firms that are really growing their productivity (e.g. referred to as frontier forms) and compared to all others. Such frontier firms exists at the global level (by comparing firms and ignoring country boundaries) as well as nationally (by comparing firms within a country). There some interesting conclusions.
It seems the big and successful firms are staying big and successful longer than in the past: success begets success. But of course, isn’t there a natural cycle of creative destruction that should keep shaking things up in order to assure the most efficient resource allocation routine? What, other than natural forces, is preserving the big firms and prevent new and smaller firms from challenging the bigger and replacing them?
Clearly we need to ignore the self-evident political aspects (excessive costs, red tape, lobbyist driven public policy etc.) and we need to look to the innovations and productivity-driving capability of such firms and ask, “Why are these capabilities to drive productivity not diffusing to non-frontier firms?”
Again, there are several issues in play – some political and some economic:
- Education being more aligned with industry needs (but changes here will take a long time to drive benefits)
- Fiscal policy to favor and reward new R&D (this may drive medium term benefits)
- Relaxed labor and business regulations to make it easier to start and grow a firm (this may have shorter term benefits)
But now I get to my main point that is not political or economic – it is technological. So I can talk about this topic safely: Perhaps the nature of innovation is more complex than we currently understand and some are more ‘diffusible’ across industries and regions.
If you read the WSJ article you notice that it calls out comparisons of electricity, computers, and smart phones. I myself have argued before that smart phones have not made as more productive with respect to email. And the WSJ article confirms that planes and trains and automobiles have not really changed the fundamentals of getting from A to B in the last 60 years. Even Uber has not really changed the laws of transportation – just who services it. So are our modern innovations such as smart phones, home cleaner robots and so on really improving productivity?
I am trying to connect the dots here – and currently I am thinking of using two dimensions. The first dimension seeks to understand the different kinds of innovation that emerge since some drive unaccounted for productivity (household work), some supports short-term productive improvements (think PC word processor versus typewriter) and some fewer create subsequent opportunities for innovations that cannot be accounted for until much later or even predictably. This latter is a kind of platform innovation.
The second dimension refers to the diffusion problem. This has been modeled before by others and most often looks like the following two parts, and the third is most often looked at as if it was not related, but I wonder:
- Product or Service Innovation (the innovation itself)
- Process Innovation (how the process is delivered)
- Distributive Innovation (how the process is learned and adopted over time and space)
Product or service innovation is the originally delivered to market innovation. The process innovation takes place typically later and represents the how the product or service is delivered. This the process does not change the innovation itself but represents the economic delivery of the innovation. But this does not explain the diffusive nature of the process. So the distributive innovation I added looks at how the process innovation itself diffuses across a region. In most research I have read these three elements are often separated but I think they are part of the same dimension.
- You innovate; you improve how you delivery the innovation; others copy you; repeat the cycle
So now we have a framework- what next?
I think that this framework can help inform and guide public policy as well as inform CEO’s as to where to place their company bets in terms of long- and short-term investments and resource allocation decisions. It might even help us understand which innovations we should seek.
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