The Hidden Hindrance to Innovation
Fredrik Erixon & Björn Weigel—
What’s ailing Western economies?
They are suffering from multiple problems: declining growth in GDP per capita; a slower pace of productivity and corporate investment growth; a workforce that is generally unhappy with their jobs; and a general reduction of economic opportunity. However, there is one factor that binds these problems together—and it is about culture, or our habits of the heart. The West has grown addicted to an economic culture of predictability, certainty, and control that simply cannot be married with dynamic markets and an economy that thrives on innovation.
Corporate leaders boast about their ability to innovate and disrupt markets, but the reality is rather that there are far too few exciting technologies breaking through market-entry barriers and enabling everyone to behave more productively. Large corporations are boosting the culture of managerialism rather than entrepreneurialism. Corporate bureaucracy, argues the Boston Consulting Group, has grown annually by 7%—for the past fifty years!
The investment institutions that have taken ownership over much of western corporate life behave as rentiers: they demand predictable returns, but shun investees that work with the long investment and innovation cycles that characterize radical innovation. All too often they appoint corporate technocrats to boards and management teams, and shower them with rules and guidelines about their behavior that leaves no space for experimentation, imagination, and investments with uncertain outcomes.
Politicians are no better. While our elected representatives nominally embrace innovation and competition, they erect ever greater barriers to those innovators and entrepreneurs who bring game-changing technology and want to contest markets. Classic business and market regulations have been growing in the past fifteen years; there are more restrictions to business and markets today than in the late 1990s.
Equally damaging, the desire for predictability and control has led politicians to craft regulations that are opaque and, quite often, impossible to understand for entrepreneurs. The growth of regulation has created so much regulatory confusion that it is not unusual for innovators to have to violate one regulation in order to comply with another.
The late economist Joseph Schumpeter, the doyen of the study of entrepreneurship, pointed to the force of “creative destruction” as the central dynamic of wealth generation in economies. For new things to grow, the old must wither. And an economic ecology for innovation has to allow space for eccentric individuals with unconventional ideas and a desire to experiment with markets and products. That is what innovation is all about. What happens in science and tech labs, or the levels of expenditures on higher education, are all important to enable societies to create and adopt new technologies. However, they are still only inputs to the economy. For scientific breakthroughs or new inventions to generate output there have to be entrepreneurs that contest markets with the new technology.
Unfortunately, that seldom happens. While there is an unnerving anticipation about Western economies standing on the doorstep of fast-and-furious innovation, the market reality is profoundly different. Entrepreneurship is declining throughout the Western world. The share of young firms in the economy is going down while the average age of companies is going up. People stay longer at their jobs than they did before. Big firms are getting bigger and increase their market power. Markets are increasingly concentrated, and large companies have far more sophisticated tools to protect their market positions and incumbency advantages.
New technologies offer astonishing opportunities to revive the capitalist engine of innovation and prosperity. However, the culture of predictability, certainty, and control is clogging the economic arteries. And it is tonic for populists and those who are propelling fear or defensive habits. They want to shield Western societies for competition from abroad—and from new technology. If Western countries cannot gradually shift its economic culture and accept experimentation and uncertainty, they will be able to fight neither economic stagnation nor political populism.
Fredrik Erixon is the director and cofounder of the European Centre for International Political Economy (ECIPE), an international economics think tank based in Brussels. Björn Weigel is a business strategist and investor/entrepreneur with extensive experience in working with innovative companies and start-ups. He began his career as a management consultant for Booz Allen Hamilton. They both live in Sweden.