What the innovator needs …

There’s an abundance of management literature offering advice on how to foster innovation in a business context. However, there is very little discussion on how the innovator’s success critically depend upon the boundary conditions defined outside the business context. This larger societal context is what I addressed in previous posts (part 1 and part 2). Today, I’ll focus on how that larger context is directly relevant for the innovator’s success.

I’d guess we all agree that innovation requires perseverance and a decent level of frustration tolerance. It rarely offers instant gratification. On the contrary, innovation demands the commitment of significant resources over considerable periods of time. Innovation is an investment. Therefore, we can view the innovator as an investor, bringing to bear personal skills, resources, and –no doubt– resourcefulness. And he rightfully expects a pay-off, a return on investment as a compensation for the efforts, the troubles, the many sleepless nights he invested to pursue his idea and make it a success.

However, the innovator’s success is built upon many elements that are beyond his personal ownership and control. He will need skills that he does not have himself, he will need to employ assets that he does not own; he will need more money than he has in the bank. And last but not least, he will need a market place in order to sell his innovative product to as many customers as possible. All of these elements are of course important in the business context. Yet all of them are defined outside the business context; they are defined by society. And that is when economic and political institutions come into play as society’s means of setting the conditions for the innovator’s success. Let’s see how that works.

• Skills – The innovator usually starts his endeavour from a smart idea that he tries to elaborate step by step. The details of those steps will likely require skills beyond his individual competence. So he needs access to more skills, and institutions have major influence on the quantity and quality of skills the innovator might reach out to.
  One aspect is education: Acemoglu and Robinson rightfully named education one of three engines of prosperity, and many nations pay significant attention to national education. Not just in defining the curricula, but in many cases providing education as a public service, sometimes even free of charge. Education does not only maintain the skill base necessary for mastering existing technologies. Especially higher education pays direct dividend to society’s innovation capacity, providing the intellectual agility for developing, promoting, adopting, and ultimately exploiting new and emerging technologies.
  A second aspect is the choice of career: Skills cannot simply be imposed on any individual. Rather, individuals will experience greater satisfaction and reach higher levels of performance if they are free to choose their vocation according to their own desires.
• Assets – Of course the innovator will first seek to overcome his challenges with the assets he owns. Yet again, most likely that won’t suffice. Some useful assets might be offered as public service, but more often, the necessary tools or facilities will be privately owned by somebody. That is when property rights, freedom of contract, and the rule of law become important. Imagine a situation when the “owner” of a machine is considered to be its “user”. If you currently use (hence own) that machine, would you let anybody else use it? Of course not, because you want to keep ownership. But if the concepts of “user” and “owner” are clearly separated by law, and if that law is properly enforced, then you have no problem to agree to lending that machine to an innovator in need, for an agreed price. The law therefore becomes a critical underpinning to give innovators access to assets they need.
• Access to skills and assets comes at a price – money is therefore the third dimension of innovators’ needs. Many great ideas consumed fortunes before the underlying dream came true. But what can an innovator do if he is not a fortunate rich heir? Historically, he would need to find a wealthy sponsor and accept the direct dependence on that sponsor’s arbitrary moods. Today, he might just go to a bank. Or seek some venture capital. Or find a business partner. All of that is possible, because the economic institutions have developed to facilitate the free flow of financial assets. And let’s not forget that the stability of currency is the foundation of longer-term lending arrangements; hyperinflation kills any innovation.
• Spanning across skills, assets, and money is the general question of market access. From the innovator’s perspective, this has many facets: he needs access to the goods and services he uses as inputs to his innovative product, he needs access to skills, assets, and money, and of course he needs access to potential customers of his new product. For all those facets, market accessibility is foundational. No wonder that inclusive markets are on Acemoglu and Robinson‘s list of engines of prosperity.

By now it should be apparent how deeply the innovator depends upon the prevailing economic and political institutions. Essentially, innovation will flourish in a society that provides clear rules of the game (transparency) that are the same for everybody (equality before the law). The rules most be appropriately enforced (sufficient centralisation of power) while ensuring broad participation of individuals and their freedom of choice (pluralism and inclusiveness). Last but not least, we must not forget that innovation is an investment; in the long run, it most pay off for the innovator. Therefore, he will rightfully expect some predictability, and usually he would hope for stability of the rules of the game.

That leads to yet a different challenge: Within the prevailing institutions, how can the innovator position himself to succeed in his endeavour? What are the choices? More to follow …