This is my fourth post in this series looking at the misuse of competitive pressure as a driver of innovation. I am not suggesting competition never drives innovation, but that it is only weakly related, often produces counter-productive results, and really describes a market dynamic that comes from decisions, not a driver of them.
In Part I of this series I looked at the Prisoner’s Dilemma and how the incentives (rewards and punishments) affect the effectiveness of competition. Part II looked at comparative advantage. Part III looked at various analyses of government support for innovation and productivity in Canada. Canada has dropped relative to other countries. Some organizations suggest greater competitive pressure despite their own data showing symptoms of the very same counter-productive competitive outcomes we saw in Part I.
Parts I and II focused on principles, Part III on analysis. Part IV is about action. I want to apply the prior discussions towards policies. Appropriate policies help facilitate and reward activities that support more a more productive innovation process and/or avoid or punish processes that lead to unproductive outcomes. To do so, I think it is first necessary to re-frame innovation.
I’ll start by presenting what appears to be a more common view of competition-driven innovation. The story goes something like this:
- Companies attempt to take customers from competitors while trying to keep competitors from taking their own customers. If they do not, they will perform worse as a business or fail to improve by acquiring opportunities.
- In order to accomplish #1, companies must make their products more efficiently or attractive, with some combination of (a) reduced costs and (b) improved quality.
- In order to accomplish #2(a), companies must improve their business processes such as manufacturing, distribution, or overhead. To accomplish #2(b), companies must design a better product. Both of these are considered innovations, the first being about productivity and the second about functionality and/or quality, and both improve standard of living.
- In order to accomplish #3, companies must invest in such innovations.
Based on this competitive version of innovation, increased competition drives increased efficiency, innovation, and productivity as a form of “survival of the fittest”. Appropriate policies would seem to be those that increase competitive pressure, provide incentives for companies developing new capabilities (aka, R&D), and assist in connecting companies with researchers who can provide them with new products and efficient capabilities to beat competitors. Improvements in supply chains, manufacturing, distribution, and overhead methods would also be beneficial, although such technological improvements tend to help all competitors equally. Still, if one company were to take advantage of these improvements then others would have to follow to simply to maintain their position within this competition.
If you have read the previous parts of this series, you should begin to see the problem with the above reasoning. Increased competition, innovation, and output does not necessarily translate into the ultimate goal of improved useful productivity and standard of living. Part I explicitly examined this faulty thinking. The Naval squadrons described in that post all increased their metrics in these areas yet ended up in much worse flight readiness. Part III showed that the metrics for Canada’s own productivity and competitiveness show a similar pattern. We are among the most competitive and labour intensive regions of the world and yet our productivity is below the global median.
The fundamental problem of this approach is the very logical falsehood I started with in Part I: affirming the consequence. Just because competition can improve standard of living does not mean that all competition does increase standard of living, nor does it mean that the only thing competition creates is improved standard of living.
As with the Naval Air base, many bad outcomes are possible. Competitive pressure also provides incentive for all sorts of counter-productive activities (in terms of standard of living) including, but not limited to, branding, misleading advertising, bribery, fraud, self-interested legislative lobbying, industrial espionage, attacking the competition, unwarranted litigation, protectionism, monopolistic behaviour, and predatory pricing. Essentially, anything that makes a company look better and their competitors look worse become relevant activities. Even illegal activities become relevant if their associated risks are lower than the benefits they generate. Yet none of these activities improve standard of living.
Survival of the fittest is not a very good means towards improvement. You do not make people better swimmers by dumping them into the water and seeing who survives. You do not make a flourishing garden by throwing more seeds to fight for scant resources. The principle of survival of the fittest doesn’t even describe how natural selection works, being only an indirect contributor to facilitating reproductive success and secondary driver to the primary means of selection via filling empty ecological niches.
Our ultimate goal is to improve standard of living. Innovation and productivity only have value in this context. To re-frame innovation, let us turn the thought process around. This version of the innovation story goes something like the following:
- Through heavy networking and collaborative discussions, an innovator sees an opportunity to make an improvement or create a new capability (aka, a productive innovation, filling an empty niche).
- Risk analysis shows that the opportunity saves more money than it costs, or generates a market that people would be willing to pay more than it costs. This analysis includes calculation of risks that include technical risks and commercialization risks, including competitors and commitment of those who would benefit from it.
- This innovator seeks investment to (a) generate the improvement and (b) demonstrate it to those who would benefit from it.
- The improvement is developed and the savings or new profits are recognized, a portion of which go to the investors and creator of the improvement.
Note that in this version of innovation there is no mention of competition. The driver here is efficient value. Of course, the improvement could very well make the beneficiary more competitive. It may give them a competitive advantage. But these are outcomes of the process, not drivers of it. Part III discussed this definition of competitive advantage at length, that of being an result of chasing efficient value rather than chasing the competition.
Ah, but this efficient value version of innovation still has the same problems as the competitive version; if there are opportunities for “bad” behaviour that have net value, they are still sought after. If misleading your customers pays more than it costs, there is net value. Of course this is to be expected. Re-framing innovation as driven by efficient value rather than competitive pressure doesn’t change the cost-benefit analysis; it changes the policies. It re-writes the innovation equation in terms of direct cost-benefit inputs explicitly, and these can be evaluated, rewarded, or penalized based on whether they are aligned with the ultimate goals or not, i.e., in the left or right circle above. When viewed from the competitive perspective, there is no means for evaluating alignment with ultimate goals, only proximate ones of competition.
Efficient value based policies look different. Instead of focusing on making companies more competitive, they focus on making them more collaborative. They aim to bring ideas from different groups together more often. (Matt Ridley describes this process as ideas having sex.) Rather than making the Naval Air squadrons (Part I) waste effort fighting each other for top spot, they create incentives to help each other improve. All individuals gain net value and all effort goes towards the ultimate goal. Rather than pressure all companies to get better at making both bows and arrows (Part II), they help companies maximize their comparative advantage and acquire multiplicative effects of such improvements.
There are many policies that work in this direction. Here are some such examples:
- Support collaborative networks. Create, support, and promote collaborative networking infrastructure whereby companies can more easily identify potential opportunities for improvements. These might include conferences, meetings, website, or any place that ideas can get together.
- Improve protections for openness. The more open a company is about their processes, the more able others are to see opportunities for improvement and to calculate the net value they can generate. If kept secret, the company is less likely to find out about potential improvements and the less likely other companies are able to propose them. This forces companies to become experts at both their products and at production technologies for their products. Facilitating openness means reforming the way patents and trade secrets are handled. Inexpensive protection and enforcement is a must. Template agreements might help, as well as agencies to police agreements and remove the risk and cost from the companies.
- Provide standardized collaborative templates for funded programs that benefit all. Most programs now leave up to partners to develop agreements from scratch, often well after much effort has been spent on setting up the collaboration. Some are a mess now. Some universities seek to own all IP outright and license it out to make money, even though private companies contribute to the collaboration. Government organizations, universities, and private industries often have conflicting requirements. Some agreements I’ve been involved in have taken over 2 years to write and others have required threats of withdrawal. This can be far better organized.
- Mitigate risk where the risk is. Efficient value is only generated if the risks are sufficiently low. In the efficient value formulation of innovation, the highest risks are around the development of demonstrable prototypes and acquiring commitments from potential customer companies. Yet funding usually focuses on front-end proof-of-concept research at universities. This is not an efficient use of funding to drive innovations and conflates training students with investing in innovation.
- Facilitate international collaboration. International relationships should focus on, or include a significant component of collaborations between organizations in each country. Exploit the comparative advantage effect and combine the functions best performed in each country. Trade is not just between products or supply chains, it is also between ideas.
- Subsidize overhead structures for start-ups. There is no inherent value in getting, say, engineers to struggle through learning law, accounting, business administration, and so on. Comparative advantage actually suggests that is highly inefficient. Instead, they should spend all of their time on the technical work. Organizations that provide generic business services cheaply, for free, or awarded by review boards based on technical merits, even for limited times, help innovative start-ups succeed. (For example, Invest Ottawa provides some of these services.)
- Directly fund start-ups. This is, of course, what venture funding and angel investment does. However, that kind of funding aims to earn a profit for investors and allows them to control the company. When taxpayers are the investors, the profit comes from jobs, income tax, and corporate tax on successful businesses and therefore the funding can aim to be fiscally neutral, essentially acting as a low-risk loan program.
This focus on building a strong collaborative model is particularly key to Canadian success as it is strongly dominated by SMEs. The Conference Board of Canada’s 2008 report, Canadian SMEs and Globalization: Success Factors and Challenges, notes that 97% of goods-producing establishments and 98% of service-producing establishments in Canada have fewer than 100 employees. It also provides a list of factors affecting SME exports, derived from surveys:
- The product or service offered is not exportable.
- The firm perceives foreign markets as too risky.
- The firm does not feel it has the skill set or resource capability to internationalize.
- The firm is not interested in expanding its customer base because of a desire to stay small and keep its operations manageable.
It further goes on to conclude that “Larger companies have more resources than smaller companies and can therefore spread the [management of foreign opportunities] burden over more individuals”, and that Canadian research suggests that “owners of SME export firms in Canada are more than twice as likely to indicate a desire to grow their firms as owners of non-exporting enterprises”. Distribution of risk and manageability appear to be key limiting factors. With respect to innovative ventures, a collaborative innovation model addresses both of these factors by creating larger pseudo-organizations that spread both risk and manageability across partnering businesses.
It is for these reasons that I firmly believe the proximate goal of improvements to innovation policy should focus on collaborative means and let competitive pressure fall where it may. What is needed is more hand-holding, not less. To mix metaphors, innovation comes from a diverse meme pool of ideas combined with fertile conditions to grow from seeds. Providing better support while weeding out the bad actors and letting the memetically poor ideas fail despite the support are all means to improve the innovation picture. This means teaching, helping, funding, and leading are means towards flourishing by aligning proximate and ultimate goals. Throwing the seeds to the wind to fight for survival via increased competitive pressure just results in poor growth, weeds, and parasites.
More competitive pressure is not the answer.