Innovation Failure

The NSF has just come out with its latest report on innovation, and it’s a doozy.  Basically, the NSF asked companies whether they engaged in product and/or process innovation, and here’s what they found out.

  • Only 9% of companies engaged in product innovation in 2006-08. Only 9% of companies engaged in process innovation over the same period.
  • Some industries were surprising low. Only 10% of healthcare services firms reported a process innovation from 2006-08.
  • Only 8% of finance/insurance firm reported a product or process innovation in 2006-2008
  • “Companies with R&D (either performing R&D or funding others to perform R&D) exhibit far higher rates of innovation than do non-R&D companies.”

The last result is extremely interesting. It means that the concentration of R&D is in fact a good proxy for the concentration of innovation. According to the NSF survey, only 7% of the companies without R&D report a product innovation over the past 3 years. But 66% of the companies with R&D report a product innovation. The gap for process innovations  is almost as big.

You can’t be an innovative economy if only 9% of your companies are innovating.

 Added 10/7/10:  Reihan Salam at the National Review has a nice post asking  Amar Bhidé for his response to the NSF survey, and why, perhaps, we shouldn’t be concerned.  Ezra Klein picks up the survey as well.  Surprisingly, it does not seem to have received much press….perhaps because it is too depressing.  

 

Comments

  1. Assuming the report is accurate, that really is a huge wake-up call for the US competitiveness story.

  2. Yes, you can, because those few companies sell their innovations to the rest. :) First off, to suggest that everyone or even a significant minority should be coming up with “significantly improved methods” for production or processes is ridiculous: most companies don’t even understand their current process well, forget about innovating on it. ;) However, simply by integrating a new operating system like Windows 7 in their offices or the voice-recognition technology in Android phones, they can take advantage of outside innovation to improve their processes, which I doubt is being counted in these surveys. These surveys are inevitably ridiculously broad and too subject to interpretation, so where one company may list their brand new tablet computers as a grand innovation, others might not. Innovation is the most overused word in business these days (an engineer told me when doing his MBA that whenever he heard one of his fellow MBA students use the term “outside the box,” what followed was inevitably a silly idea) because almost nobody innovates, as almost nobody is capable of it. A very small minority of companies experiment, ie they have no idea if what they’re trying makes sense but they try something different just for the hell of it, and sometimes a few of those experiments randomly pay off.

    • I’m inclined to agree with most of what you say here. But what is interesting about this post to me is that a lot of the backing I hear for conservative economics is predicated by the idea that America is the most “innovative” economy in the world because we are so free. And so we should care what wacky economic strategies other nations use to try to increase employment because “we’re #1! Whoop whoop whoop!”, and we can always keep moving up the economic chain faster than our competitors. I think that’s pretty optimistic.

    • I don’t think it’s just “conservative economics” making the innovation argument, the term “innovation” has a lot of currency across the spectrum these days, though obviously not as much on the leftist-labor side. But it is still true that the US is the most innovative. The innovation in the last two bubbles, the dot.com innovation in the ’90s and financial innovation this last decade, was primarily focused in the US. American companies dominate high-tech: Microsoft and Google in software, Intel, Apple, Cisco, and other mostly US companies in hardware. The US has largely made the transition to a service economy, whereas even other rich countries like Germany cling to manufacturing. This advantage will dissipate over time as the rest of the world inevitably catches up, but their onerous regulations are a big obstacle for them. At best what we’ll see over the next decade or two is pockets of success in mostly backwards countries, like a BYD in China or computer programmers who collaborate virtually with international teams, but it won’t spread in those countries because of the regulations that choke the growth off. This is why even what is considered a backwards US state like Alabama has a higher GDP per capita than Germany or England. Freedom works and it is a sign of unremitting stupidity that those other countries don’t use it, or that we don’t get more of it in the US.

  3. Mike I am inclined to buy your broader innovation deficit story but given that this survey is a snapshot, I don’t see how you can draw any conclusions from it, at least in isolation.

    Yes, impressionistically 9 percent seems low, but compared to what? What do international surveys with similar methodology show? What to similar past surveys say?

    I agree with Ajay that ‘innovation’ is overused to the point of meaninglessness in American business-speak.

    • Mike Mandel says:

      Here’s the thing. This is the first survey anywhere, as far as I know, that asked the right questions. We’re getting genuinely new data on the way that innovation workers.

      • If you would have read the NSF brief until the end, you could have read that innovation surveys have been carried out since the 90s, in particular in European countries, but many have also been carried out in Latin American countries, as well as in places like China, Thailand, South Africa, and now even some sub-Saharan African countries. So this is hardly the first survey anywhere that asked these questions. The only difference I can see is that the US survey limits process innovation to “for manufacturing or production; logistics, delivery, or distribution; support activities”.

        The numbers for the US are (very) low, compared to some of the EU countries, but you also have to look carefully at which industries are covered, as the propensity to innovate varies widely from sector to sector. The US overall result is very much influenced by the large amount of companies in “non-manufacturing nec” industries (which comprises mining, utilities, construction, wholesale, retail, transport, accomodation and non-market services) which are not very innovative and many of these industries are not covered in the EU Community Innovation Surveys.

  4. I’ve always wondered what the definition of innovation is, or more so, how do you quantify it. Seems like a great MBAspeak word for motivational speakers to get speaking fees. But using R&D expenditures as a proxy for innovation here’s what I got for two presumably innovative companies:

    2009 numbers R&D/(OperatingCosts+Taxes)
    IBM=5,820/82,333= 7.1%
    Intel=5,653/30,758=18.4%

    So 9% seems like a reasonable number for these companies. And they’re hi-tech companies. 9% over all industries seems a pretty good, not depressing, number to me.

    • Mike Mandel says:

      You misread the numbers. 9% is the percentage of companies that report innovation in products over past three years, not R&D as a percentage of operating costs.

  5. Someone else making the “innovation is broken” argument today and he’s been making it for awhile I think (click on the first link to read the article for free). He’s wrong, akin to Solow’s famous 1987 quote “You can see the computer age everywhere but in the productivity statistics”, partly because he artificially sets the bar too high- flying cars, really?- but mostly because he’s apparently not smart enough to see how the internet upends everything.

  6. Charlie Alter says:

    Just more verification that the US economy is in big trouble in terms of established businesses, who have been in Hunker Down mode for so long it’s become the new normal. On the other hand, many aspiring entrepreneurs world-wide aspire to come to the US because of our relative freedom and rewards for innovation. Sort of a Catch-22 don’t you think? The message here to me is that the action in terms of innovation is with small companies and start-ups who see nowhere to go but up and innovation, creativity and growth is a path to success.

  7. A few years ago, one of our local residents, Mac Vorce, who is also a bicycle enthusiast
    petitioned for the development of bicycle
    paths and trails. Think of this as a way to document your improvements over time, and eventually
    it will be a very effective PR tool. Brad Garret is a stand-up comedian but also well known for his acting career.

Trackbacks

  1. [...] Michael Mandel parses the depressing numbers from the latest NSF report on innovation: “According to the NSF survey, only 7% of the companies without R&D report a product innovation over the past 3 years. But 66% of the companies with R&D report a product innovation. The gap for process innovations is almost as big. You can’t be an innovative economy if only 9% of your companies are innovating.” [...]

  2. [...] 9% of America’s companies are innovating Tweet Michael Mandel summarizes the findings of a National Science Foundation report on innovation. They’re not pretty: -Only [...]

  3. [...] Mandel summarizes the findings of a National Science Foundation report on innovation. They’re not pretty: -Only [...]

  4. [...] 9 percent of American companies reported any “product innovation” from 2006 and 2008, according to a new study from the National Science [...]

  5. [...] 2006 and 2008. Of manufacturing firms, 22% innovated. In non-manufacturing, a mere 8% innovated. As economist Michael Mandel has observed, “you can’t be an innovation economy if only 9% of your companies are [...]

  6. [...] had any product, service, or process innovation between 2006 and 2008, economist Michael Mandel observed, “you can’t be an innovation economy if only 9 percent of your companies are [...]

  7. [...] 2006 and 2008. Of manufacturing firms, 22% innovated. In non-manufacturing, a mere 8% innovated. As economist Michael Mandel has observed, “you can’t be an innovation economy if only 9% of your companies are [...]

  8. [...] had any product, service, or process innovation between 2006 and 2008, economist Michael Mandel observed, “you can’t be an innovation economy if only 9 percent of your companies are [...]

  9. [...] service, &#959r process innovation between 2006 &#1072n&#1281 2008, economist Michael Mandel observed, “&#1091&#959&#965 &#1089&#1072n’t b&#1077 &#1072n innovation economy &#1110f [...]

  10. [...] had any product, service, or process innovation between 2006 and 2008, economist Michael Mandel observed, “you can’t be an innovation economy if only 9 percent of your companies are [...]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Archives

Follow

Get every new post delivered to your Inbox.

Join 64 other followers

%d bloggers like this: