I had an interesting conversation with someone from the government sector whose job is to support innovation and increase the number of innovating firms in the economy. While I can see why governments want to foster innovation, I think that his job is extremely difficult because he is actually trying to affect the strategy of companies and how their boards and managers view innovation. Given that there are so many firms in the economy (about 80,000 in the Brisbane region alone), this is going to be a Herculean task. I don’t know how else to convince firms to innovate because in the end it is the people in the firms that decide to pursue innovation as a means to create value.
My own opinion is that what governments can actually do to promote innovation is somewhat limited. There is very little international evidence that R&D tax breaks can encourage innovation. There is a good deal of evidence that it results in more R&D spend but the relationship between this expenditure and innovation output is unclear. I recall getting a phone call from somebody asking me to provide evidence that tax breaks supported R&D. It turned out that he was from an accounting firm who had a specialist group of people working on maximizing the tax refunds for R&D. He wasn’t impressed when I showed him the studies that were unable to point to a clear link between tax breaks and innovation.
Another government tactic is what Professor Alan Hughes at Cambridge University calls the “cargo cult”. The original south pacific cargo cults were developed by islanders after the second world war. When the US brought wealth and materials to the islands through their military operations it was accompanied by airfields, planes and soldiers. After the war, some islanders tried to bring back the cargo by carrying out rituals with artifacts that looked like the planes and airfields.
Alan says that a lot of government innovation strategy isn’t very different from a cargo cult. If we can see a thriving and innovative region such as Silicon Valley, all we need to do is replicate the conditions and it will happen. While this doesn’t mean building planes out of sticks and leaves, it usually means spending money to create institutes and attracting companies from a particular sector (usually biotech or software) to create a cluster without really understanding what made the original cluster so successful in the first place.
The problem with cluster theory is that there is very little evidence that firms in clusters do any better than firms that aren’t part of clusters. We also know that innovation is widely spread throughout the economy and many “old” industries are just as innovative as the fashionable new ones.
Well… enough criticism… so what actually works? In a comparative study of the UK and US economies, Professors Alan Hughes and Andy Cosh (MIT) found that the US government’s procurement program was successfully acting like a venture capital fund. Governments face a range of significant long term challenges in critical areas such as health, education, power, and water. Identifying areas for breakthrough technology and challenging innovative firms helped to support these firms and at the same time create valuable innovations. This is quite different from a development grant. Firms usually say that these are too small and too slow with costs incurred in putting the grant together. Far better to challenge a firm with a real project.
While this works in the US, I also know that Brisbane City Council have a similar program (albeit on a smaller scale) and it is paying off for the council and for the firms that are involved in the procurement program. This morning the Lord Mayor, Campbell Newman, announced that council would fund its own renewable energy project to meet its strategic targets. He also said that this was part of kick-starting the industry in South East Queensland.
Firms don’t need innovation welfare. They need sophisticated partners and customers.