INNOVATION

On Monday 7th of December 2015, Malcolm Turnbull, Australia’s Prime Minister, launched the National Innovation and Science Agenda the National Innovation and Science Agenda. In his address, he exhorted Australia’s economic actors to embrace new challenges and redirect their human capital to new paradigms centred on ideas, research and innovation which Mr. Turnbull described as a necessity to overcome the mining industry downturn and reinvigorate growth, competitiveness and agility across Australia’s economy.

“… Companies that embrace innovation, that are agile and prepared to approach change confidently and with a sense of optimism are more competitive, more able to grow market share and more likely to increase their employment. More jobs, more growth - that is the focus of my government…”

“… We want to be a culture, a national culture of innovation, of risk-taking, because as we do that, we grow the whole ecosystem of innovation right across the economy. We become more experienced, more innovative, more agile, more prepared to take on risk and become a culture of ideas because it is the ideas boom that will secure our prosperity in the future. It is believing in our human capital and remembering that the best assets we have, the most important assets we have in this country are not to be found under the ground, but walking around on top of it is the 24 million Australians, the men and women of Australia, these and their ideas are what secures our future…”

Mr. Turnbull’s re-orientation of economic policy, while new in Australia, echoes other world leaders’ who have placed the innovation theme at the centre of their presidential campaigns. In 2012 (Science Debate 2012: Research and the Future) the two candidates of the U.S. presidential election Barack Obama and Mitt Romney both highlighted the importance of innovation, not only to insure competitiveness of the US economy over other OECD nations, but as a unique way to set an environment prone to promote growth and flourishing economy which eventually would be of benefit to everyone.

“I believe that in order to be globally competitive in the 21st century and to create an American economy that is built to last, we must create an environment where invention, innovation, and industry can flourish. We can work together to create an economy built on American manufacturing, American energy, and skills for American workers.” (Barack Obama)

“Innovation is the key to economic growth and job creation and increasingly important to American competitiveness in the global economy. Three-quarters of all U.S. economic growth, and three-quarters of the U.S. productivity advantage over other OECD nations, is directly attributable to innovation, and wages in innovation-intensive industries have grown more than twice as fast as other wages in recent decades.” (Mitt Romney)

Even Europe’s states members consider innovation as the principal agent for long-term growth, prosperity and wealth. Europe is so committed to insure sustainable growth that in 2010 they launched their own “Innovation Union” program. In her foreword to the 2014’s “Innovation Union Progress at country level” booklet, which reports progress on innovation and research across Europe, Maire Geoghegan-Quinn, European Commissioner for Research, Innovation and Science began with a very clear statement regarding roles and benefits to expect from innovation.

“Four year ago, in June 2010, Europe’s leaders endorsed the Europe 2020growth strategy, our roadmap to get the EU’s economy back on track. Building Innovation Union became on the flagship initiatives of this strategy, given the wide consensus that research and innovation are the way for Europe to restore long-term sustainable growth”.

Not only did Europe consider Innovation as a major factor of growth and prosperity but Innovation is seen as a factor capable of overturning the consequences of the Great Financial Crisis by enabling economies.

Geoghegan-Quinn goes even further by highlighting the fact that to make the most of the enabler that is Innovation, economies must offer a proper environment to become knowledge-oriented and Innovation-driven.

“… the economic impact of our Research & Innovation investments and reforms ultimately depends on the capacity of our economies to become even more knowledge-oriented and innovation-driven”

Most of OECD countries have evolved their approach moving from a former economic model based on Economic Development, to instead embrace an innovation-driven model called Disruptive Innovation. To better understand why an Innovation-driven approach is now at the centre of most OECD economic policies, one must understand what makes Innovation such a differentiator.

Adam Smith who in 1776 wrote “An Inquiry into the Nature and Causes of the Wealth of Nations” and Karl Max with his contrasting views of the economic patterns underlying the capitalist mode of production in “Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production” were early contemporary economist who struggled to understand productivity growth. Robert Solow at the Massachusetts Institute of Technology advanced our understanding in 1956 through his work on the so called “production function” (http://faculty.georgetown.edu/mh5/class/econ489/Solow-Growth-Accounting.pdf). Mr. Solow formulated that the output of an economy depends on its inputs, in short capital and labour. Double the inputs and you get twice as much the output. Unfortunately, as helpful this formula was to explain productivity growth, it could not explain why for example, the United States, Europe and Japan’s returns on Input were higher in the second half of the 20th century than the first half. Neither could Solow’s finding explain why the gap between worlds’s rich and poor countries widened rather than narrowed.

It is not before the work of Professor Abramowitz of Stanford University, again published in 1956, that the real understanding of these anomalies could be explained. Abramowitz measured the growth of the US economy between 1870 and 1950. Then he measured the growth in inputs (of capital and labour) over the same period of time. He finally made what was at the time thought to be a reasonable assumption, based on Solow’s theory, of what should be input in a unit of labour and a unit of capital to get the measured output. Abramowitz made the surprising discovery that only 15% of the measured growth of inputs in capital and labour could account to the growth in the output of the economy. 85% of the growth output could not be explained!

It was then left to the Austrian economist Joseph Schumpeter who attributed the unexplained 85% growth output to innovation and then the Russian economist Nikolai Kondratieff who was the first to identify cycles in the economy. Schumpeter (Schumpeter, J.A. The theory of economic development : an inquiry into profits, capital, credit, interest, and the business cycle translated from the German by Redvers Opie (1961) New York) studied these cycles in depth and reached the conclusion that without innovation, economies are doomed to stagnate. In Schumpeter’s view, the different cycles of the economy that spanned from 1771 to 1971 were driven by different clusters of industries. Water, Power, Textiles and Iron in 1785 followed by Steam, Rail and Steel in 1845 , then Electricity, Chemicals and the Internal-Combustion Engine (1900), before Petrochemicals, Electronics, Aviation (1950) and finally Digital, Networks, Software, New Media (1990).

These long periods of economic boom were possible because of Innovation. Initially, innovation generates new investments which stimulate economies. Reaching its maturity phase, innovation starts to decrease return for investors, with opportunities starting to decline which in turn opens the door to new innovation to kick off yet another new wave. It is noticeable that economic cycles tend to shorten as innovations periodicity increases. Therefore, it is understandable that politics try to take control of the innovation process by simulating innovations.

Knowing that innovation is the definite factor that provides economies with sustainable growth and development in the long-term it is no surprise that big economies around the world are turning their resources to Research and Innovation, just as Europe began to in a comprehensive and structured way.