PARIS – 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. And 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. But, 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 Silicon Valley, Boston’s Route 128, Taiwan’s Hsinchu Park, South Korea’s Daedeok Science Town, and Israel’s Silicon Wadi.
Such clusters, however, 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 Israel, South Korea, and Taiwan 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. Success lies in the ability of firms to combine these factors either in a single country or across several markets.
For example, Niklas Zennström and Janus Friis left their native Sweden and Denmark, respectively, for low-cost, talent-rich Estonia to create Skype. Thus, the two Scandinavians’ creative-destructive thinking was combined with Estonia’s low-cost, enterprise-friendly environment.
The Swedish founders of SoundCloud, Alexander Ljung and Eric Wahlforss, decided that they were better off in relatively cheap Berlin, at the heart of Europe’s underground music scene. Similarly, Samih Toukan and Hussam Khoury, who created Maktoob (now owned by Yahoo), were able to combine the comparative advantage of Jordan’s creative talent and low costs with the quality and convenience of Dubai’s infrastructure and business networks.
Sometimes, the overwhelming benefits of one or more factors are decisive. The caliber of Finland’s infrastructure, workforce, and domestic networks overrode the concerns of Rovio’s Finnish founders about their country’s high costs and inconvenient location, so they decided to start their new business at home.
But, increasingly, innovative startups operating in a mobile, globalized world will find that they can circumvent constraints in one location by shifting some or all of their assets or operations to another. The challenge for governments is to improve those less mobile factors of innovation – cost, caliber, and convenience – in order to attract, retain, and encourage free-flowing capital and the most creative citizens.