How innovation can power a healthy economy

Just say "start-up" and the eyes of most aspiring entrepreneurs and not a few columnists will light up at once.

For them the term conjures up a vision of the dazzling wealth and global fame awaiting whoever leads the next phase of technological innovation.

But for more established corporate executives, the "start-up" label might carry overtones of threat. Put "start-up" together with "innovation" and you have the ingredients of what Michael Smith, writing in the Australian Financial Review on February 1, referred to as "creative destruction", borrowing a notion coined by the mid-20th century economist Joseph Schumpeter.


Creative destruction, Schumpeter argued, was "the fundamental impulse that sets and keeps the capitalist engine in motion".  His views were developed by business theorist Clayton Christensen, who warned of established companies losing market share as aggressive start-ups use innovative technology to tout cheaper, more accessible products.

These observations are hardly new. Karl Marx, writing almost a century before Schumpeter but every bit as impressed by capitalism's capacity to tear down and remake the conditions of human life, made the same case more eloquently:  "All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air ..." 

From Marx to Schumpeter and on to Christensen and Smith, the shape of the drama is the same: a story of rise and fall, as today's start-up gets overtaken in its turn to become tomorrow's dinosaur.

Fill in the details, however, and the plot thickens. The history of capitalism has indeed been one of continuous innovation. But the idea that this is essentially a matter of heroic start-ups tackling established firms – of plucky little Davids toppling sclerotic corporate Goliaths – is misleading.

Innovation, in the broadest sense, simply means doing things better. It may involve a new corporate entity bringing new technology to market – the Davids versus Goliaths scenario – but the process of innovation is not necessarily directly related to selling a new product.

Toyota, for example, revolutionised manufacturing around the world, not by developing new products, but by implementing lean processes and continuous improvement. 

And innovation isn't restricted to the private sector. When Labor was in government, we set up a program to encourage innovation in the operations of the public service. The more effective procedures that resulted did not necessarily deliver an immediate dollar gain but, in the wider context, a more efficient bureaucracy will have a positive impact on the economy because the activities of governments affect nearly every level of economic activity.

The point is this: the process of innovation is typically more complex, less glamorous and much less individualistic than the image of a battle between start-ups and established firms can convey.

Glib talk about start-ups and an emphasis on technological innovation alone too often leaves out the context, including government policy frameworks, that make the success of entrepreneurial start-ups possible.

To cite the best-known example: most people have heard of Steve Jobs and the revolution in personal computing ushered in by the Apple Macintosh.

But how many know the back story of the US Defence Department's role in the creation of the internet? And in developing the great concentration of technological capability, design expertise and accessible markets in California that made Jobs' achievements possible?

Governments that understand that innovation doesn't happen in a vacuum can devise an innovation policy that will drive economic growth.

Some commentators have a knee-jerk, unreflective response to the notion of innovation policy, which they deride as futile attempts to pick winners that really means saving losers.

In Australia the debate often gets stuck at this point, though the critics of innovation policy rarely have more to contribute to the argument than the "picking winners" slogan.

They ignore what an innovation policy actually comprises. In the words of the US economists Robert Atkinson and Stephen Ezell, it is "... a coherent approach that seeks to co-ordinate disparate policies towards scientific research, technology, commercialisation, IT investments, education and skills development, tax, trade, intellectual property, government procurement, and regulatory policies in an integrated fashion" (Innovation Economics: The Race for Global Advantage).

Successful innovation is the key to economic growth in the longer term, and fostering innovative economic activity is especially important in developed nations such as Australia. 

If developed nations do not innovate they find it increasingly difficult to compete with low-wage countries that produce goods and services for mass markets. Developed nations need to offer higher value-added products that low-wage countries can't make, or have less incentive to make. 

Again, this is crucial for Australia, which now faces the dual problem of falling commodity prices and a shrinking manufacturing sector.

To escape dependence on the vagaries of commodity exports, and to create high-wage, high-skill jobs, we need to reverse the decline in manufacturing – especially advanced, hi-tech manufacturing.

To do all that, Australia needs a comprehensive innovation policy. Yet the Abbott government has torn up Powering Ideas, the 10-year innovation agenda that Labor put into place, and slashed about $3 billion from the Industry Department programs that were implementing that agenda.

In their place, the government has announced a hodgepodge of tokenistic, underfunded programs with no coherent strategy to guide them.

And the government has goaded the motor vehicle producers, whose industry is the core repository of advanced manufacturing skills in this country, into announcing their departure from Australia.

There is still hope that those skills and some form of automotive industry may be retained if the local component makers can be integrated into other supply chains.

But if the Coalition government remains locked into its ideological straitjacket, refusing to acknowledge what a real innovation policy requires, Australia risks sliding into becoming only a farm and quarry, with an ever-growing pool of jobless citizens.


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