Innovation – catalyst for recovery


  • Business
  • Saturday, 25 Apr 2009

Hard times are good for innovation because it forces new ways of doing things better.

History teaches that spending on innovation must be sustained through tough times in order to better compete when recovery resurfaces.

Otherwise, companies will emerge from the recession with obsolete products or services – with nothing new in added-value and no initiatives in modernisation, automation and intellectual property to compete for markets.

General Electric (GE), for example, failed to keep up in the 2001–03 recession, and its rivals developed more efficient LED lighting technology that now competes with incandescent bulbs.

Investments sow the seeds of innovations, including software in new/improved systems, processes and methods that enhance their competiveness globally. Innovative products like iPod (Apple) and RAZR cell-phone (Motorola) were hatched during the downturn of the early 2000s.

Despite plunging sales, GE spent billions following the end of the Cold War to develop new engines with blades lighter than titanium. This paid off handsomely in the 2000s, with the company earning billions more from servicing these engines.

Of particular interest is Corning’s “rings of defence” strategy in the face of the current recession – innovation spending was placed in the innermost ring, making it the last to be cut.

With growing interdependence, the United States and euro-zone face keen competition from China, India, Japan and South Korea, which have continued to invest. According to the latest private US survey, research and development (R&D) spending in 2008 rose by 4% in North America, 2% in Japan but fell 1% in euro-zone. In India and China, it rose by 7% each.

The US Battele Memorial Institute (which tracks R&D outlays) estimates that such spending by government, companies and universities will rise more than 3% in this year, perhaps slowing in 2010. Indications are that Japanese, Chinese, Indian and South Korean R&D spending will remain aggressive despite recession.

HR is critical

Sure, economic conditions are bad and are not getting better anytime soon. Still, many consider this to be the best time to innovate. That’s what is needed to drive growth coming out of the downturn.

According to Professor Clayton M. Christiansen, the Harvard Business School guru on innovation (“The Innovator’s Dilemma”), hard times are good for innovation because it forces innovators not to waste so much scarce resources on innovative endeavours (especially R&D).

Also, in an environment where there is growing pressure to push innovation “out of the gate” fast and keep the cost of such activity down, the chances of success increases. Christiansen argues that under normal circumstances, 93% of all innovation that ultimately becomes successful, started off in the wrong direction.

In addition, breakthrough innovations often come when pressure is greatest at a time when resources are limited. That’s when innovators and entrepreneurs become more realistic and more open to promptly rethink their business model to best translate new ideas into commercial viable ventures.

Of course, things won’t happen overnight. It will take two to three years to notice the difference, and perhaps, four to five years to see real successes.

But the opportunity presents itself now to generate a new wave of innovation initiatives to spur business investment, job creation, productivity gains, wealth accumulation and sustainable gross domestic product (GDP) growth. But important pre-conditions for success need to be met.

Government needs to foster a more hospitable environment including: (a) good education fundamentals; (b) high levels of technological readiness and information and communication technology (ICT) savviness; (c) innovation and ICT diffusion capabilities; and (d) clear fiscal incentives for public-private partnership to deliver.

Above all, the availability of human resources is critical. The nation will need a reliable and steady flow of good quality personnel from tertiary and vocational education facilities, and imported talent (when needed).

Indeed, hard times offer the best opportunities to acquire, train, retrain, upgrade and retain the broadest range of skills. This will need – at this time – broad-ranging and generous incentives to hold and acquire technically competent staff, and aggressively promote R&D and ICT innovation initiatives – especially in process engineering, systems design, and software computing and development.

The main objective is to build capacity when others are retrenching and cutting spending.

Stakeholders must ‘buy in’

The focus of public policy in this time of crisis must be to create more higher and higher paying value-added jobs for all Malaysians. This is vital especially in occupations where Malaysians have preferred not to participate (unskilled labour intensive jobs).

We see this in land development, plantations, agriculture, construction, public works and many services industries. This is understandable, especially in menial jobs.

Nevertheless, that is why spending on innovation and R&D is so critical. Unskilled occupations can be readily retrained and transformed to higher and higher paying jobs through systematic value adding.

This can be done through the application of even simple technology, mechanisation and automation (from the simplest to the most complex); process engineering and the adoption of new methods, systems, procedures and processes (that is, new and better ways of doing old tasks and doing new and better things to replace old ways); including turning services into software.

The opportunities for these initiatives are wide-ranging. Moreover, Moore’s law and its flipside (that is, today’s sophisticated computing technology and software are available at an ever lower price – half every 18 months) do offer a cost-effective way to do so.

If needed, talent should be imported to accelerate the process of change.

Of course all stakeholders need to be persuaded to “buy in”, and implementation of the entire process will take time. More important, the political will to change and hold the course is vital.

Change, in practice, may require a transitional period to bring about. But it is vital that the objective of public policy is held steadfast and politicians are sufficiently convinced and committed to withstand outside pressures to keep the status quo.

Indeed, expect strong vested interests to put lots of pressure to bear to keep the comfortable old ways. A practical way out during transition is to tie companies to progressively wean themselves (within a committed time frame) from importing unskilled labour.

It should be based on a definite plan to restructure and to adopt innovative ways to significantly add-value to their processes (and employ more and more Malaysian labour). Besides, many of them already depend on subsidised gas and government incentives.

For the nation to compete and grow, this is the only viable option left to raise incomes and lift living standards.

Resolve to change

The centrepiece to promote recovery and quality growth during hard times is to drive innovation. It is comforting to note that the first and second stimulus programmes have embodied significant elements of spending on training, restructuring and funding (at this time with government as the lender of first and last resort).

Indeed, hard times are also the best time to revitalise, restructure and rebuild. However, realistically, such stimulative spending (and lending) will only raise productivity over the medium and long term. Above all, they have to be effectively implemented.

It must be recognised that these are not intended to be government consumption, that is, one-shot pump priming. Their attendant multipliers can be expected to raise private spending, create value-added jobs and, ultimately, raise incomes.

And, to the extent that imported unskilled labour is no longer needed, they also strengthen the nation’s external payments position and even the federal budget (since their claims on more social services will be significantly reduced).

The key element has to be the Government’s will to make these fundamentally vital changes – involving not just the commitment of substantial funding (which the nation can well afford), but also, a stubborn resolve to change mindsets in order to instil and build (and effectively put on the ground) a creative and innovative culture, and a national entrepreneurial spirit, especially among the young.

What’s next? We see today a worldwide wave of new innovation that present opportunities of a lifetime: green technologies, nanotechnology, VoIP (voice over Internet protocol) virtualisation, cloud computing, wireless broadband mobility, software to value-add in the services sector, and social networking.

The financial and social benefits that can flow through will be wide-ranging. If done well, they will propel us to become more competitive, especially when we are being “squeezed in the middle” between India and China.

Restructuring the economy

We need to recognise that creating good paying jobs is worth pursuing as an object of public policy. The only way is to restructure the economy.

This involves persistence and commitment by the civil service, in particular, to stand steadfast behind the cause to give it their all to support the government of the day. Above all, it may involve new commitments of funding and incentives if what’s already in the stimulus plans prove insufficient.

It will be monies well spent (up to the civil service to see to this) since it raises the economy’s capacity to produce more, more efficiently.

This is doubly worthwhile if it also reflects an understanding of shared responsibility and opportunity with investors and entrepreneurs to meet this bold challenge together. What remains to be done now is to pick up from the national innovation roadmap and operationalise it for early implementation in all its facets.

Start by integrating the key strategies into the two stimulus programmes, including an “early bird” attraction to create green-collar jobs. After all, there is much to be said for a “blue ocean” strategy that’s also green.

● A former central banker, Dr Lin is a Harvard-educated economist who now spends time promoting the public interest. Feedback is welcome at starbizweek@thestar.com.my

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