How innovation can fulfil our future

By Peter Winsley, 15 February 2017

Malaise[i] in developed countries can be countered through productivity growth.  This creates wealth for those working productively, and for social transfers and expanded services.  However, people want meaningful work and empowered lives, not compensatory afterthoughts.  If there is no “we” in a shared journey on the same timetable, there is only “them and us”, and future fears.

Monetary and fiscal policy[ii] lacks traction, and productivity growth can only come from innovation that delivers wider spill-over benefits.  There are positive correlations between innovativeness and social mobility, driven by new entries more than incumbents[iii].  However, network returns, market power, intellectual property and tax regimes mean innovation often leads to “winner take all” effects.

Innovation “superstars” reinforce myths that a few private individuals working in isolation drive innovation.  In fact, most transformative technologies now depend on public funding[iv] and social learning, not individual “genius”.

None of us in the developed world deserve what we have.  Our wellbeing largely results from luck – when and where we were born, and history’s physical and intellectual gifts to us.  The technologies we use were developed by others, from different times, countries and cultures.

While business responds to today’s demands, government needs to address long-term societal challenges.  These include aging populations, health, and resource management.

A business can be like a hedgehog that knows just one or a few big things.  However, a government must be like a fox that knows and does lots of things.  It must play a large and multi-faceted role in innovation, including steering private investment in ways that support a wider social flourishing[v].

Government needs to invest in human capital, infrastructure such as roads and broad band, and systems to manage sustainable distributed energy generation[vi].

Corporate and incumbent welfare[vii] stifles innovation, while new business entries foster it.  Institutions and policy settings therefore need to foster competition and innovation.  For example, patent thickets, trolling, and excessive vagueness and duration of intellectual property rights impede innovation.  Government should shorten intellectual property protection, and let entrepreneurs exploit grey areas where rights are unclear.

The US FDA illustrates how excessive regulatory hurdles impose social costs[viii]. Its processes are ill-suited to some personalised medicine, combinational therapies and low risk devices.  New Zealand could do better[ix] through agile institutions and greater tolerance of high salient risk to deliver low visibility but high impact health advances[x].

New Zealand needs increased domestic savings rates[xi] to lift capital intensity and labour productivity, to reduce real interest and exchange rates, and to improve tradeable sector performance[xii].  Compulsory savings schemes and fine-tuning the tax system could encourage savings and investment that underpin the productive sector.

Shifting social policy transfers from consumption subsidies to capability development investment could build human and financial capital to drive innovation and productivity growth[xiii].

Risk capital is needed for innovation, and patient capital to retain benefits in New Zealand.  Private investors focus on privately-captured benefits, while the state should focus on long-term benefits for New Zealand[xiv].

Venture capitalists often support serial entrepreneurship where investments are realised and reinvested.  However, New Zealand struggles to retain long-run benefits from knowledge-intensive manufacturing and services (KIMS) businesses[xv].  State agencies could use investment stakes to anchor some core activities in New Zealand.  These could relate to head office, design, IT and R&D functions.  When a KIMS business reaches international scale, has core competencies embedded in New Zealand, and is financially self-sustaining state investors can exit and reinvest in new businesses[xvi].

New Zealand has exceptional opportunities for technology adoption and extension.    There is a rising productivity gap between global frontier and other businesses[xvii].  Innovators need to connect to businesses on the global technological production possibility frontier and learn from them.

New Zealand “innovation” is essentially extension of international advances.  It must start with documenting prior art and international understanding[xviii].  This both drives technology adoption and seeds new ideas for innovation.  A focus on long-term innovation therefore pays short-term technology adoption dividends.

Research clutter and duplication, “outcome switching”, unreproducible and trivial results and methodological weaknesses blight research internationally[xix].  Research can focus on what fits the methods recognised in peer review, not what needs to be understood or done[xx].  Publication counts and author attributions are inflated to lift “box ticking” ratings[xxi].

New Zealand is too small to capture benefits from its own science-push research.  It should specialise in the rapid adoption, extension and commercialisation of international basic science. This is not free-riding, since our international contribution is applied technology that delivers consumer surpluses and wider spill-over benefits[xxii].

Curiosity-driven research within time-frames that suit researchers will not lead in a linear way to innovation[xxiii].  Innovation requires external engagement, user focus, two-way learning, and a drive to create technology that improves people’s lives.  In longitudinal and in some biological and ecological studies long time-frames are inevitable.  However, as evidenced in the Manhattan Project and the Apollo Programme, technology can answer to deadlines.

Our publicly-funded research should deliver technological solutions, and the results should then be codified in publications that show how impacts were made[xxiv].  This is more holistically challenging than unfocused research as it requires more social engagement and interactive learning.  Technological achievements, not promises, should drive academic standing and institutional rankings.

New Zealand can succeed in innovation in differentiated as well as commodity-based industries[xxv].  Its businesses do well in “hard to research” industry good markets, and in customised short production runs.  Many leverage economies of scope rather than scale.  IT facilitates disintermediation and integration into global value chains.  It mitigates economic geography and engineering scale economy constraints.  It has transformative capacity in fields as diverse as “Internet of Things” enablers, precision agriculture, social media and digital finance.

Freeman Dyson in The Sun, the Genome, and the Internet[xxvi]envisages sustainable energy, biotechnology and the Internet ending rural intellectual isolation and economic stagnation.  These capabilities, together with small-scale 3D manufacturing and natural environment assets can create opportunities within provincial New Zealand.

The US is reducing emphasis on climate change mitigation and sustainable energy in favour of greater fossil fuel dependency.  Fossil fuels are capital-intensive resources that concentrate power and create few knowledge-intensive jobs or wider innovative and entrepreneurial opportunities.

New Zealand should do the opposite to the US.  It has among the world’s highest per capita natural resource endowments.  Climate change response and sustainability shifts create opportunities in agriculture, renewable energy, timber engineering and biomaterials innovation.  Much of this is differentiated[xxvii], capital-light and knowledge-intensive innovation that creates opportunities for many New Zealand businesses and regions.

In such a tale of two countries New Zealand would do better socioeconomically and environmentally, and benefit more from the longer-term sustainability upside.

Manufacturing sector productivity frees up resources to expand service sector employment.  This is often low paid, low status work.  However, labour market policy settings can change to value the deeply human skills that automation cannot replace.  Service sector jobs can evolve to build new working life identities and social standing[xxviii].

Social investment approaches and data analytics can lift service sector productivity directly, and through interventions that avoid future costs from crime and benefit dependency.

Health and education sector productivity is low, partly because it requires voluntary patient and student cooperation.  The challenge is to make working with people as efficient as manipulating physical objects, while fostering respectful relationships and the meaning and self-worth that come with them[xxix].

Innovation will only fulfil our future if we socially mandate it.  People need such survival traits as prudence, tact, and frugality.  They also need expansive traits of courage, truth-telling, and generosity that create opportunities for others.

We need to value our risk takers and innovators more than our sportspeople and celebrities.  Then our entrepreneurial spirits will flourish, and innovation will fulfil our future.

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[i] Malaise as described in: https://winsleys.wordpress.com/2017/01/15/what-caused-the-mess-we-are-in-and-how-do-we-get-out-of-it/

[ii] Near zero interest rates seem to be having no effect in countering economic stagnation.  Keynesian expansion succeeded dramatically from the late 1930s due to recovery from the Great Depression, long waves of technological innovation dating from the 19th century, war stimulus followed by meeting pent-up consumer demand from deferred consumption, followed by a  baby boom.  These conditions are unusual and unlikely to be repeated.  The US economy had high employment and productive capacity utilisation in the lead up to the 2016 Presidential election.  Given this, growth from high Keynesian multipliers through fiscal expansion seems unlikely, even if through massive infrastructure investment.  See Glaesar, E. 2016: If you build it…Myths and realities about America’s infrastructure spending.  City Journal.

[iii] Aghion, et al 2015: Innovation and top income inequality  NBER Working Paper No. 21247

[iv] See Mazzucato, M. 2015: The Creative State.  RSA Journal Issue 2, pp. 12-17.

[v] See Phelps, E. 2013: Mass Flourishing.  Princeton University Press.

[vi] An example is ways to manage the integration of distributed and intermittent energy sources into a reliable national system.

[vii] For example, government bail-outs, grants or special deals for existing businesses, overly tight intellectual property protection, regulatory restrictions on new housing, and protection of professional rent-seeking.

[viii] These include the size and duration of clinical trials.

[ix] An example would be giving patients, under personalised clinical guidance, access to drugs that have passed safety trials but have yet to be approved.

[x] The FDA’s risk aversion avoids a visible death at the cost of “invisible graveyards” due to delays in therapeutic advances.  See Madden, B. 2010: Free to choose medicine.  National Center for Policy Analysis.

[xi] It matters where investment is sourced and where revenue is earned.  Dollars earned from exports are different to those borrowed offshore.  The former create wealth, net worth and capability, the latter a rising debt servicing burden.  Likewise, income from gainful employment is more valuable sociologically than benefit payments.

[xii] See OECD 2016: OECD structural mission to New Zealand 29 August – 2 September 2016.  OECD.

[xiii] One approach might be to give all children a capability development account to be used only for education and investment in assets that enhance productive capacity and build net worth.  Social policy transfers that subsidise adult consumption could instead be channelled into these accounts.

[xiv] For an interesting discussion of the state’s role in innovation see Mazzucato, M.; Perez, C. 2014: Innovation as growth policy: the challenge for Europe.  SPRU, Working Paper Series 2014-13.

[xv] KIMS businesses enrich product diversity and therefore product space opportunities.  See Hausmann, R. Hidalgo, C. et al, The Atlas of Economic Complexity: Mapping Paths to Prosperity. Published jointly Harvard Kennedy School and Center for Economic Development; and MIT Media Lab, 2011. http://atlas.media.mit.edu/book/ Also see Hidalgo, C. et al  2007: The product space conditions the development of nations.  Science 27 July 2007.

[xvi] Such state investments could turn “intellectual putty” into “clay” embedded into New Zealand’s productive base on a longer-term basis.

[xvii] Andrews et al, 2015: Frontier Firms, Technology Diffusion and Public Policy: Micro Evidence from OECD Countries.  OECD.

[xviii] Some New Zealand researchers and innovators put too little effort into this.

[xix] Sarewitz, 2016: Saving science.  The New Atlantis.  Spring-Summer 2016.

[xx] See Deaton, A.; Cartwright, N. 2016: Understanding and misunderstanding randomised controlled trials.  NBER Working Paper No. 22595.  See also Hausmann, R. 2016: The problem with evidence-based policies.  Project Syndicate 25 February.

[xxi] These behaviours reflect the bad incentives that are created for scientists, and should not be blamed on scientists themselves.

[xxii] Examples include Fisher and Paykel’s healthcare innovation, Graham Liggins’ development of steroid solutions to foetal lung maturation challenges, and Hayward Wright’s development of the international kiwifruit industry based on imported plant material.

[xxiii] Taylor (2016) argues that New Zealand appears “to be far more focused on scientific research than on technological innovation”. See Taylor, M. Z. 2016: The politics of innovation.  Why some countries are better than others at science and technology.  Oxford University Press.

[xxiv] Much basic science is a spin-off from applied research and technological development.  Pasteur’s research on applied health and agricultural problems helped create microbiology science.  Karl Jansky founded much of radio-astronomy while exploring practical telecommunications problems for Bell Labs.

[xxv] R&D in commodity-based industries can be of exceptionally high productivity as its costs are spread over large product volumes.  There can therefore be an inverse relationship between R&D productivity and R&D intensity as measured by R&D expenditure as a proportion of total business revenue.

[xxvi] Dyson, F. 1999:  The Sun, the Genome and the Internet.  Oxford Books.

[xxvii] Such differentiated businesses may be small, however this can be an advantage.  Smaller, knowledge-intensive businesses have a higher ratio of external surface area to mass and therefore greater potential for a higher proportion of staff to be interacting with and learning from external parties.

[xxviii] People value personal relationships in market transactions and in their wider lives.  This is influenced by national and cultural context.  German trades people have higher standing that their Anglophone counterparts.  French waiters demand more respect than US or New Zealand ones.  Recreational and community services are often driven by people’s desire for esteem based on a sense of indispensability or self-worth in a specialised field.

[xxix] A good start would be banning the instrumentalist term “human resources”.

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About Peter Winsley

I’ve worked in policy and economics-related fields in New Zealand for many years. With qualifications and publications in economics, management and literature, I take a multidisciplinary perspective to how people’s lives can be enhanced. I love nature, literature, music, tramping, boating and my family.
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2 Responses to How innovation can fulfil our future

  1. David Lillis says:

    Hi Peter.

    A thoughtful essay. I agree with most of what you say, but I disagree with the notion that none of us in the developed world deserve what we have. Apart from Paris Hilton (and others like her who inherited their wealth with little effort), and those who defraud our welfare systems, many of us do deserve our relative prosperity. Admittedly, the current prosperity of Europe and North America has derived partly from exploitation and sometimes enslavement of other countries, but that is in the distant past now and, in any case, almost every culture has exploited others at some stage in their history.

    Saudi Arabia and other middle-eastern countries are rich by virtue of an accident of geology – their good luck to sit on vast oil reserves. Do they deserve it? Your call. And who is welcoming migrants from North Africa and the Middle East? Today it’s Germany, Sweden and other European nations. Possibly, we are seeing genuine compassion here that we are not seeing from Saudi Arabia and other oil-rich nations. Perhaps the West is trying to give something back, however naive it may be to invite huge numbers of migrants from completely different cultures and ideologies, and commit to housing them, providing education, social welfare and healthcare.

    Several friends of mine have become wealthy through buying property and getting tenants to pay their mortgages. They are millionaires now with little effort, but they took the opportunity, whereas I and others like myself did not. They deserve it by virtue of their foresight and willingness to take the initiative.

    You say that New Zealand is too small to capture benefits from its own science-push research and that we should specialise in the rapid adoption, extension and commercialisation of international basic science. I agree in principle, but I feel that you may overstate the case. Some New Zealand science-push research may lead to economic or environmental benefit. However, we need blue skies researchers to focus on the kinds of basic research that potentially can be applied here, but also to train the next generations of researchers.

    David

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