Michael Mandel has flagged a new National Science Foundation study that, based on a survey of firms, reports that only 9% of firms were engaged in product innovation between 2006-8, and only 9% of firms were engaged in process innovation. Mandel was surprised to find that only 10% of healthcare services report a process innovation over that period, which makes sense to me given the regulatory constraints. And companies that perform in-house R&D “exhibit far higher rates of innovation than do non-R&D companies.”
Because my views on innovation questions are informed by Amar Bhidé’s The Venturesome Economy, I decided to ask Professor Bhidé for his thoughts. He very kindly shared some tentative thoughts from Logan International Airport, based on a quick skim. I want to emphasize that these are just first-cut impressions. Professor Bhidé began by recounting the difficulties he’s encountered in surveying entrepreneurs, and he suggested that the NSF sample might be unrepresentative.
Let’s assume that this study is somehow immune to these problems. Now we get into two kinds of problems.
a) People have very different views of what is new or materially different and different interests in regarding their innovations to be so. Someone in an R&D lab is more likely to declare what they do to be “new” than someone whose new products are woven into their daily business struggle.
Given that the role of an R&D department is to generate “new” ideas and products, a failure to “innovate” would raise questions about the wisdom of continuing to fund the department. Keep in mind that the National Science Foundation faces similar incentives. (“Why, there’s an innovation crisis afoot! What can we do?” “Hmmmm. Perhaps more funding for the NSF?” I doubt that the NSF is so nakedly cynical. But there are pressures, biases, and assumptions that are always at work.)
b) There is a lot of work, to which I have also made a small contribution, that suggests that revolutionary advances are the accretion of many small steps and many great companies (Microsoft and Walmart come to mind) that have been created without any revolutionary innovations. Indeed, as innovation becomes more widespread that’s what you’d expect. You might say the same things about science too, by the way. When there were only a few scientists the proportion of their work that represented true breakthroughs was high. Now that there is a large cadre of scientists the proportion of incremental science is higher. [Emphasis added.]
I dont think the NSF would call that a crisis. I’d worry if people were asked “do you do exactly what you did last year — produce exactly the same products in exactly the same way?” and the answer to this question was overwhelmingly yes. But that wasn’t the question asked.
Food for thought. Ground-level innovation is vitally important, but it’s not about the “new.” It’s about small, subtle shifts that slowly accrete until you can finally notice them from a distance.
P.S. Almost forgot to add another thought: while perusing the work of Chicago Booth economist Chad Syverson, I noticed a striking finding in his paper on “What Determines Productivity?” [PDF]:
I found in Syverson (2004a) that within 4-digit SIC industries in the U.S. manufacturing sector, the average difference in logged total factor productivity (TFP) between an industry’s 90th and 10th percentile plants is 0.651. This corresponds to a TFP ratio of e0.651 = 1.92. To emphasize just what this number implies, it says that the plant at the 90th percentile of the productivity distribution makes almost twice as much output with the same measured inputs as the 10th percentile plant. Note that this is the average 90-10 range. The range’s standard deviation across 4-digit industries is 0.173, so several industries see much larger productivity differences among their producers.
This range suggests that a small number of highly productive firms are the ones that are pushing forward the boundaries of productivity in any given year, and other firms are forced to catch up or die over time. I’m actually not sure I’d be concerned if only 9% of firms were doing the hard work of creating path-breaking, productivity-enhancing innovations, providing other firms were doing a decent job of aping those no-longer-new ideas that worked.