3 February 2011

The book that everyone should read before the European Council

And some other people may also find it useful before the upcoming European Council on Energy and Innovation (4th of February). Currently all eyes are on energy and the Eurozone economic governance, while innovation is a rather unjustly forgotten agenda item in the press (not in the HU Presidency). Thus, I can’t avoid starting my blog with reference to a now classic work on innovation, ‘The Venturesome Economy’ by Amar Bhidé that I picked up last year at Columbia University. (Thomas J. Peters referred to it as “The book that the next US President should read”.)

In his book, Bhidé destroys a few icons (or at least makes a convincing case of it) from Schumpeter to modern ‘techno-nationalist’ demands on more research spending. He does it with impeccable credentials as an ex-McKinsey consultant and a Columbia professor and by using strong empirical data from analyzing venture-capital backed enterprises to find out how innovation really happens.

He argues that prosperity arises not from creating new technological breakthroughs but from the capacity to use these breakthroughs by companies and customers.

“This 'capacity to benefit' is a higher order capacity that includes elements such as the ability to create products based on those technological breakthroughs, the ability to market those products well, the ability to take risk and freedom from over-regulation. In particular, "venturesome consumption" - the propensity of consumers to embrace products based on new technologies - is vital.”

An early example is the transistor, whose basic idea was invented by an Austro-Hungarian and a German physicist, further developed by Bell Labs in New Jersey and licensed to Texas Instruments, which manufactured the first transistor radio, but never achieved the breakthrough commercial success. Another company to obtain license for Bell Labs’ patent was the then tiny Japanese company Sony, which started mass producing transistor radios. The rest you know.

The story repeats itself with the iPod. Creative Technology of Singapore was selling a similar product two years before Apple, but the fame and profit belongs to Apple. (Apple paid to Creative Technologies USD 100 million in a later court case.) The actual iPod was a rather international effort: the English company ARM has developed the CPU or the brain of the system, Frauenhofer Institute of Germany licensed MP3 technology, the hard-drives first came from Toshiba, the audio codecs by Wolfson Electronics in Edinburgh, etc. Where Apple excelled was creating the design, the marketing, the hype, the dedicated customers (who serve as free testers for the first generation products), the complex legal structure for iStore, etc.

The conclusion is not that Bhidé would argue against public spending on research. Neither does he say that the technical development of Asia poses no threat to the West. Rather he argues that innovation is a multiplayer, multidimensional game, where simply putting more money into research will not create more prosperity for the country.

Bhidé quotes Adam Smith at the end from 1779, who says it all: “Should the industry of Ireland, in consequence of freedom and good government, ever equal that of England, so much the better would it be not only for the whole British Empire, but for the particular province of England. As the wealth and industry of Lancashire does not obstruct but promote that of Yorkshire, so the wealth and industry of Ireland would not obstruct but promote that of England.”

At that time, no one could have foreseen the current state of Europe, still in many ways the observation of Adam Smith still resonates today.

Without innovation friendly economic environment, that considers the real nature of innovative processes, I don’t see how we could maintain our European economic and social model. This is the real competitiveness pact for Europe. We should pay more attention to innovation this Friday and not let it be overshadowed by debates that seem more important on the short term.

- Kováts

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