How to cultivate innovation? – part 2

Innovation is often seen solely through a business lens, as a tool for companies to secure their competitive advantage. That explains the large volumes of business literature on managing innovation, but it’s also missing an essential point: the societal context of both, business and innovation. Businesses, and the economy in general, are embedded in society; they are society’s means to organise the exchange of goods and services. Innovation on the other hand, whether pursued by individuals or in a business environment, always fulfils a purpose, thus creating value for society.

It shouldn’t come as a surprise that cultivating innovation must reach beyond the narrow business context, and must actually be seen in the overarching context of what society needs and how society can shape the rules of the game for successful innovation. As indicated in an earlier post, I’ll build that argument around Why Nations Fail? by Daron Acemoglu and James Robinson, who had a thorough look at 400 years of economic and political history of some failed and some successful nations to derive their own original story of how societies can create the conditions for prosperity.

This story is impressively simple, and it is focused on the economic and political institutions of a society. Institutions are the traditions, customs, practices, and codes of conduct a society employs to organise its affairs. You might say that institutions are the explicit and implicit rules of the game, they are “the way we are doing business around here“. This concept of institutions comprises written and unwritten rules, and it’s a lot broader than just the visible organisations and formal structures a society creates to pursue its goals.

From their analysis, Acemoglu and Robinson derived the key characteristics that are common to the  institutions of prospering societies. They observe that political institutions should be sufficiently centralised to enforce the rule of law, including equality before the law. At the same time, society must ensure the legitimacy of its political decision-making through encouraging the broad participation of a large number of individuals. By the same token, economic institutions should:

… allow and encourage participation by the great mass of people in economic activities that make the best use of their talents and skills and that enable individuals to make the choices they wish. To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provide a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers.

Such political and economic institutions are mutually reinforcing, they promote the spirit of participation and freedom of choice, while providing a reliable framework for the exchange of goods, services and ideas.

Acemoglu and Robinson go on to identify three engines of prosperity: markets, innovation (sic!), and education. In their own words:

The ability of economic institutions to harness the potential of inclusive markets, encourage technological innovation, invest in people, and mobilize the talents and skills of large numbers of individuals is critical for economic growth.

At first glance, this statement of course confirms the relevance of innovation for economic growth. But it does far more than that. It presents economic institutions (and political institutions, by extending the previous quote) as the means that society uses to harness the potential of innovation. And it points out that innovation is not the only key ingredient for prosperity: markets and education play significant roles as well. If you consider the importance that markets and education themselves have for innovation (for the exchange of ideas and the diffusion of innovation, and for developing and maintaining the skill and talent base to draw from), I hope you can appreciate the truly central role that institutions play in cultivating innovation.

Acemoglu and Robinson provide a solid framework to discuss how society can create the conditions for successful innovation. Though this is on the abstract side, I’m convinced it is helpful when taking a more detailed look at the innovator’s needs. Seen through the lens of institutions: how does society supply what is needed? That’s my objective in the upcoming post.