The Cardinal Sins of Innovation Policy
12 June, 2015 / Articles
It happens every time there’s a big announcement about a national or regional innovation policy that will lead us into the future: We are presented with schemes to strengthen intellectual property rights, enlarge the pool of risk financing, and upgrade the universities while pushing them to collaborate more with industry. If we are truly lucky, we are told about a new science park to be built just around the corner.
There is only one question that is never asked or answered: Why?
Why should a specific place — a region, a city, or even a country — want to have an innovation policy?
This is a nonsensical question, you might argue. It is perfectly clear why: Innovation is the main engine of sustained economic growth; therefore, if you want to ensure a vibrant economy you must excel in innovation.
This, sadly, misses the main difference between innovation policies and economic growth policies.
The aim of growth policies is to entice people or companies pursuing specific, well-developed activities to move to your locale or create businesses there. For example, when Singapore decided to bolster its economy by developing its information and communication industries, it created detailed plans aimed at products such as hard drives. Because the skills and capital equipment needed for these products were well understood, Singapore could strategically allocate resources to achieve its goals. Not only did Singapore achieve rapid economic development; it also was able to upgrade its economic infrastructure so that it could repeat the strategy in newer, more-sophisticated tech fields.
The aim of innovation policies, by contrast, is to foster the development of technologies that don’t yet exist and whose business models and markets are unknowable. Organizations capable of inventing these technologies must be attracted or built, and the result of their labors must be channeled into economic growth. That means we’re not talking about a process of long-term planning but one of continuous experimentation. Policy makers need to rapidly come up with new initiatives, kill those that don’t work, scale up those that do, and then, as a new industry grows, keep changing the incentives in a co-evolutionary process in order to keep pace with the industry’s dynamic needs and capabilities.
Israel is a case in point. In 1968, when Israel decided to build a science-based economy (the concept of high tech didn’t yet exist), there were only 886 R&D workers in Israel’s civilian sector and the country had an R&D intensity (the ratio of R&D investment to GDP) of 1%, the second-lowest in the OECD. Policy makers’ vision was not of specific industries but of an economy whose competitive advantage would be based on continuous invention of products to be sold around the world.
Over the course of more than 40 years of policy experimentation, the office of the chief scientist in the Ministry of Trade and Industry has aided in the creation and stimulation of companies capable of carrying out such invention. Officials identified bottlenecks as they arose and developed policies to relieve them. In the mid-1970s, for example, policy makers realized that entrepreneurs in a mostly poor, quasi-social-democratic society (as Israel was then) might not have the knowledge to develop, sell, and service products for the American market, so they created the Bi-national R&D foundation (BIRD) to finance the joint development of new products by American and Israeli companies, with the U.S. firms focusing on product definition, sales, and service, and the Israeli firms on R&D. Then, in the early 1990s, when Israel already had 4,000 companies with products and revenues but no financiers willing to invest in scaling them up, officials created the Yozma program to kick-start the Israeli VC industry by infusing it with foreign know-how and connections to NASDAQ.
No one in 1968’s Israel knew what technologies and innovations would allow Israeli companies to succeed in 2014. No one even dreamed that a new form of finance, called venture capital, which was taking it first steps in the United States, would prove crucial in changing the Israeli financial environment 30 years later. However, the creators of Israel’s innovation policies had a clear vision of the economy they wanted to develop, were very willing to tweak this vision and their actions to fit the evolving reality, and had a deep commitment to develop a thriving private industry, knowing that their own status and importance would diminish as the industry grew.
Over the past 40 years, each and every case of very successful economic growth based on rapid innovation has been rooted in policy makers’ clear vision of developing an innovation-based economy.
Thus the importance of the “why” question. You need to understand where you are, and where you want to be, in order to know which best practices to apply, where you need to experiment, and when you need to change policy as the industry evolves. If you don’t have a goal, and you are not sure where you are, then you will get nowhere in particular. Applying all the best practices approved by the world’s most prestigious consultancies to reach goals such as patent numbers and R&D intensity doesn’t show that you are an innovation leader. It shows only that yours is a risk-averse society enjoying too much capital.
Innovation needs risk taking and grand visions. The willingness to face multiple failures and undertake repeated experimentation to reach a vision is what separates those who succeed from those who do not.
It is a cardinal sin of innovation policy not to have a vision. It is a second cardinal sin not to be flexible and experimental in turning this vision into reality.
