Janamitra Devan: The Innovation Imperative

Overcoming the Myths and Recognizing the Realities of Innovation, Job Creation and Prosperity

By Janamitra Devan

Innovation drives competitiveness, and maximizing competitiveness is indispensable to achieving sustainable job creation. Any economy with a weak innovation capacity will see its competitiveness erode, and will thus be doomed to weak job creation. Those are simply basic laws of economics, shaping the destiny of countries at every stage of development.

Business leaders and policymakers are wisely eyeing the innovation imperative – a focus on continuously strengthening every economy’s capacity to create new products, processes and techniques – at the center of their economic agenda. Focusing on innovation is a necessity rather than a luxury: It is the only way to prosper in the relentlessly competitive global economy, in which every country is buffeted by forces that economist Joseph Schumpeter called perpetual “gales of creative destruction.”

“Any economy with a weak innovation capacity will see its competitiveness erode, and will thus be doomed to weak job creation.”

As World Economic Forum participants will learn as they explore this year’s Davos theme of “resilient dynamism,” empirical evidence suggests that as much as half of the difference among countries’ long-term growth rates is driven by increases in productivity due to innovation and technology enhancements. Innovation is therefore a pivotal factor in ensuring the success of every economy, large or small: The most productive firms, industrial sectors and countries are destined to reap the greatest rewards – and any laggard in innovative capacity is likely to stagnate in low value addition.

The good news, however, is that the world’s knowledge-base about building economies’ innovation capacity has been steadily growing. Innovation occurs locally, but knowledge is transferable globally: Promising pro-growth approaches can be adapted to fit countries’ specific circumstances, even if there is no “one size fits all” strategy that can guarantee stronger innovation and competitiveness.

Focusing on developing countries, the development community and the World Bank – along with its private-sector arm, the International Finance Corporation – have recently intensified their efforts to help client countries build their innovative capacity. The lessons learned about promoting innovation and strengthening competitiveness are now spurring many countries’ performance. The World Bank is helping countries encourage entrepreneurship; promote technology adoption; make R&D more targeted, effective and relevant to what the real economy needs; enhance collaboration among universities and industry; channel investment toward innovative industries; and incubate new technologies.

Myths and misperceptions, however, continue to cloud some policymakers’ thinking about innovation. Six dangerous misperceptions must be dispelled, if economies are to maximize the upside of innovation.

Myth # 1: Innovation – especially game-changing “disruptive” innovation – kills jobs through increased productivity, which reduces the need for human labor. Displacements may occur in the short run, but job losses do not necessarily persist over the long run. Granted, the creation of Automatic Teller Machines has eliminated the jobs of many bank tellers, and the ability to book your own airplane tickets online has reduced the need for travel agents. Yet technological improvements liberate human capital from routine tasks and allow workers to move into higher-value jobs – with the help of job-retraining programs and safety-net safeguards that help the displaced prepare for the higher-skilled jobs of the future.

Myth #2: The quest for stronger productivity growth requires every economy to focus on creating glitzy new high-tech inventions. Pursuing prosperity does not require every country to try to leapfrog the Apple iPad or the Samsung smartphone, or to come up with a game that’s even more addictive than “Angry Birds.” Innovation can involve better processes as well as higher-technology products. Higher-yielding soybean production has helped Brazil and Argentina win a stronger share of new export markets. Higher-quality wine production has helped Chile and New Zealand increase their share of a high-value category. Decades of agricultural research, quality upgrading and training of small-scale farmers in advanced farming practices have led Colombia to develop a world-leading coffee industry. Consistent investment in the agriculture value chain, in the transportation infrastructure and in efficient distribution networks has helped Ethiopia expand its exports from the flower industry to a broader range of higher-value agricultural products. Higher-technology mining techniques have helped Australia and South Africa prosper by building their minerals and mining sector – and have allowed them to export their know-how to other nations that need more efficient mining.

“Pursuing prosperity does not require every country to try to leapfrog the Apple iPad or the Samsung smartphone…”

Myth #3: Innovation is a one-off effort. Once a company or a country has achieved success in a chosen sector, it will easily dominate that sector for years or decades to come. Getting the start-up process right is important, but the constant upgrading of industries and entire innovation ecosystems is essential. For business leaders as well as policymakers, the challenge requires keeping your eye on the ball – all the time, not just every now and then – to ensure continuous adaptation. Is an industry (say, in shoes or in apparel) investing to make sure its designs are moving with the times? When should an industry (for example, in advanced technologies) upgrade its systems, reinvent itself and thus “creatively destroy” its current products? Are an industry’s skills (for instance, in food processing) adapting to ever-higher levels of technology? History is filled with examples of former market leaders – from America’s Oldsmobiles to Canada’s BlackBerries to France’s Minitel computers – that faltered when they decided to rest on their laurels. Complacency or hubris can doom any firm, sector or country that fails to continuously adapt.

Myth #4: Every country needs to create its own version of Silicon Valley in order to achieve success. Continuous innovation is essential for economic survival – yet not every country can or should attempt to recreate the conditions that gave rise to Silicon Valley. In fact, simply imitating the economic growth models that have succeeded in other innovative economies – without taking account of each region’s unique conditions – is a recipe for disappointment. Many countries have dreamed of achieving the high-tech successes of Israel and California, or the financial-services prosperity of Singapore and Hong Kong, but have found that other nations’ blueprints cannot be simply “taken off the shelf” and duplicated.

Instead, any country that aspires to long-term wealth should envision building a local economic ecosystem that builds on its particular local areas of strength. That calls for business and government leaders to shape a holistic approach, making a candid assessment of each local economy’s ability to support innovation and entrepreneurship. It requires each country to adopt modern legal frameworks; to strengthen institutions that help ideas thrive and allow “spillover effects” to spread; and to create supportive environments that promote technology transfer, spur networking among entrepreneurs and encourage the mentoring of innovators. It also requires each country to identify opportunities, and create agile financial mechanisms, that allow private investment to flow efficiently to small and medium-sized enterprises (SMEs) whose growth will create the jobs of the future.

Myth #5: Government should simply stay out of the way, leaving growth strategies to be designed by the private sector alone. Sure, the private sector drives economic growth and job creation, yet public policy has a vital and constructive role to play in helping shape stronger innovation ecosystems. The public sector can stimulate investment in R&D and is indispensable in providing such public goods as education, knowledge- and technology-building institutions and hard infrastructure. When the private sector is unwilling or unable to invest – because, for example, a market still seems too risky to justify a large investment (for instance, in alternative energy technologies) – governments can step in and accelerate the process. Time and again, history has shown that wisely targeted government intervention – if it is effectively managed to avoid regulatory capture and rent-seeking – is an important tool that can help ignite innovation, transform faltering industries and develop new industrial sectors.

If aspiring countries seek role models, two nations offer instructive examples of how investing in innovation ecosystems can produce strong results. Consider Finland, which has long committed exceptionally strong resources to investment in human capital through its world-leading education system. In addition, through TEKES – the National Technology Agency, founded in the 1980s – Finland has guided “applied R&D” investment toward commercial applications, emphasizing collaboration between academic researchers and private firms. With a highly integrated innovation ecosystem, Finland invests Europe’s highest percentage of GDP in R&D. Consider, also, the Republic of Korea. Since emerging from a war that left its economy in ruins, the Korean government has devoted enormous resources to building a “knowledge economy.” Education, advanced job-skills training and innovation-focused R&D have helped Korea climb from postwar poverty to wealthy-country status. One critical element has been the country’s commitment to a robust information infrastructure linked to industry. In both of these success stories, targeted public-sector interventions have been critical in driving private-sector innovation.

Governments must also strike the right balance at the macro level. In addition to maintaining a sound fiscal and monetary policy and a strong education system, wise public policy must create an investment climate conducive to the needs of the specific industries in which a country has (or can achieve) a comparative advantage; promote workforce skills that are well-matched with the needs of those specific industries; ensure access to finance for the SMEs within its industrial ecology; maintain a strong infrastructure matched to the needs of the players in the industrial ecosystem; and encourage the creators of innovative technologies.

“Time and again, history has shown that wisely targeted government intervention … is an important tool that can help ignite innovation, transform faltering industries and develop new industrial sectors.”

Recognizing that innovation is critical in improving competitiveness and growth, the development community and the World Bank are increasingly helping clients focus on their innovative capacity. Facilitating early-stage investment in innovative firms in Lebanon is helping encourage start-up industries (notably, in such sectors as IT and design) and promote a more entrepreneurial, risk-taking culture. A promising innovation program is getting under way in the Western Balkans, bringing together seven countries to explore sharing R&D capabilities and university research facilities, aiming to make the most of regional synergies.

Myth #6: Innovation inevitably favors those who are already wealthy, overlooking the needs of the excluded or the interests of the environment. This is indeed a short-sighted and destructive myth. “Green innovation” and “inclusive innovation” are significant trends that will shape the world we live in.

In the “green innovation” field, technological enhancements are developing rapidly. The World Bank recently worked with our development partners to locate our first “climate innovation center” in Kenya, and six other countries are poised to welcome additional centers – which will seek solutions that may, in turn, trigger entirely new industries in such sectors as energy and agribusiness. Efforts for green solutions are also under way in Indonesia, where the World Bank is piloting a new approach to spark innovation in clean energy technologies. As it explores exciting approaches to open innovation and human-centered design, that program is developing commercially viable clean-energy solutions that are tailored to the needs of low-income rural communities.

In the “inclusive innovation” realm, innovators are pursuing ways to create a more broadly shared prosperity – a priority that is inspiring a new mindset about inclusion. The World Bank’s goal of eradicating poverty is not only about increasing incomes: It is also about providing equal opportunities. Innovative thinking is imagining new ways to help increase the number of people at “the base of the pyramid” who can gain affordable access to basic services.

Development institutions and NGOs – along with more and more for-profit corporations – are focused on serving lower-income people who, collectively, represent a vast and untapped market. Investments in innovative micro-irrigation systems in rural India are helping save water, produce stronger crop yields and build a diversifying manufacturing industry. Supporting the manufacture of low-cost limb prostheses in India is helping aid the injured, strengthen a specialized medical-device industry and develop advanced medical knowledge. Support for mobile money-transfer systems in Kenya is revolutionizing the financial-services industry while broadening financial inclusion.

The movement for inclusive innovation as a driver of sustainable growth is poised to take a strong step forward in April 2013 at a Global Inclusive Innovation Summit at Harvard University. The World Bank is now collaborating with Harvard, the Omidyar Network and Growth Dialogue on the summit, which will convene leaders from poor and emerging countries – along with policymakers, entrepreneurs, foundations executives and NGO leaders – to shape the direction of innovation-led growth and the inclusion agenda.

The challenges involved in strengthening economies’ innovative capacity and competitiveness are certainly daunting. If we dispel the misconceptions that now mar the debate, then cooperative efforts by business leaders, policymakers and entrepreneurs will promote stronger innovation ecosystems and broader social inclusion. This month’s Davos discussion on the economy’s “resilient dynamism” – and this spring’s Harvard conference on inclusive innovation – will reinforce the World Bank in our commitment to tailoring pro-growth programs that meet the specific needs of our client countries. By surmounting the myths and misconceptions about innovation, more vibrant private-sector growth will strengthen competitiveness and lead the way toward broadly shared prosperity.

Janamitra Devan is a Vice President of the World Bank and International Finance Corporation, leading its network on Financial and Private Sector Development.