The Importance of National Innovation Systems

One topic that I’ve done quite a bit of academic research on is Innovation Systems (National, Regional and Sectoral), but strangely, I haven’t written much about it here. However, over the weekend I saw a recent report released here in Australia called Management Matters in Australia (the summary is here, and you can also download the entire report from that page). The report is part of an international study of management skills across countries, run by the London School of Economics and McKinsey internationally, and a group headed up by Roy Green at University of Technology Sydney here in Australia.

The study looks at eighteen different areas of management skill in three broad categories – operations, management performance, and people management. The scores are based on surveys of firms of all sizes and across all industries, and each area is scored on a scale from 1 to 5. The averages for Australia are shown in this diagram from the report:

That rings true to my experience with Australian firms – they tend to be very strong on operational stuff, but less good on big picture thinking and people management. From an innovation standpoint, these results are a bit alarming. As you might expect, there tends to be strong correlations between innovation performance and overall management skills, particularly people management. This figure shows just how strongly correlated management skill and innovation were in this study:

Flexible people management is shown to be a key element of successful management, and well-managed firms tend also to exhibit superior innovation capabilities

The chart shows this pretty clearly – firms with higher scores on managements skills are vastly more innovative (at least in terms of formal IP outputs) than those that are less skilled. Differences in innovation performance actually explain about 8% of the differences in overall management performance – in a study like this, that is a huge number.

The final important point that the report makes is that innovation and management skills drive economic growth. One very interesting figure compares the breakdown of firms with particular scores from China and India versus those in Australia:

This shows that the top 27% of firms in China and India have higher levels of management skill than the bottom 50% of Australian firms. Other studies have shown similar results for innovation. Boston Consulting Group just released their annual report on the 50 most innovative companies in the world – there are two each from China and India on that list. There are also plenty of firms from Japan, Taiwan and South Korea on the list – three other countries that used to viewed as imitators rather than innovators (an issue that I looked at with Mark Dodgson and John Matthews in my first research publication).

There are important lessons to take from this report, including:

  • The innovation system within which a firm works has a big impact on their ability to innovate. Policy issues like infrastructure, education and innovation policy all drive performance in this area. The idea that this is one area where government policy can have a substantial impact on firm performance is a robust research finding that has been replicated many times over the years, in studies all around the world. As the report puts it:

    In today’s rapidly changing economic environment, governments play a key role in harnessing the creativity of their people, their enterprises and the economy as a whole. Through the national innovation system and links between stakeholders, government can instil, drive and support the development of good management practices and behaviour, especially targeted towards small and medium sized firms. The LSE study not only concluded that “Governments can play their part in encouraging the take-up of good management behaviour” but it also maintained that “Doing so may be the single most cost-effective way of improving the performance of their economies”.

  • Strength in people management skills is a critical part of innovation. If you are going to sustain innovation performance over time, you need to be able to attract and retain good people. This is true even if you are pursuing an open innovation strategy – you still need good people in your firm to evaluate and integrate ideas that come from the outside.
  • Personally, I find the Australian results alarming.
  • Finally, do not underestimate the innovation capability in developing countries. Often when I hear people discount firms from China and India as “imitators” it seems like they are using this as an excuse for not being innovative themselves. This is dangerous. There is a lot of innovation going on in these countries, especially in all of the green technologies. We’re only a few years away from seeing the impact of these innovations start to spread more widely.

Innovation systems are important. They often determine how effective the firms within them can be in innovation, because they can both enable innovation and also constrain the ability and vision of firms. Australia has recently been putting quite a few resources into programs like Enterprise Connect, which are designed to spur innovation. Wherever your firm is, it helps to gain a better understanding of the resources available to you there. Developing this understanding can have a big impact on your firm’s ability to innovate.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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