Innovation: A Macroeconomic Perspective

Innovation and its Impact on National and Business Strategy

On 4th & 5th February, MDAE hosted Mr. Raghav Narsalay (Managing Director, Accenture Institute for High Performance) to deliver talks on ‘Innovation and its impact on national and business strategy’. On day 1, Mr. Narsalay gave an insight into Vectoring Innovation (directing innovation towards national growth) while on day 2, he raised the question as to why many innovators and businesses remain on the fringes of visibility?

These are some of the issues that Mr. Narsalay raised during his address:

He began the session by highlighting the immense value that nations attach to innovation but their failure to channelize it (vector it) towards the larger growth agenda. For instance, India’s small share of patent filings (a reasonable barometer for innovation) isn’t reflective of its massive pool of engineering talent.

He added that, innovation must not only be disruptive but also distributive – the benefits of which must accrue to the society at large. For example, when Apple started contract manufacturing, it led to a wave of innovation wave across the Chinese manufacturing industry. Bosch filed for several new patents as it helped in the creation of the Tata Nano, making cars affordable to the masses. When innovation is distributed, it demands a new variety of skill sets in order to drive it; thus generating novel employment opportunities for the nation. In turn, it helps trigger economic growth & development by way of:

1)      FDI growth
2)      Empowerment of SME’s
3)      Growth in financial inclusion
4)      Improved resource allocation & efficiency

Innovation, as he mentioned, is discontinuous (not routine) and does not follow any set pattern even in the most established businesses. He also highlighted the importance of theorising innovation; and the continued attempts to do so. From Joseph Schumpeter in 1942 to Daron Acemoglu in 2014, economists have strived to theorize the evolving phenomenon of innovation. Schumpeter famously coined the phrase “creative destruction,” stipulating that innovation leads to disruptive reallocation of factors of production. Take for instance Lenskart, the online optician. It has invested in technology as opposed to the labour investment made by brick & mortar opticians. Similarly, Paul Romer hypothesized that increasing economic growth lead to rise in imports, thereby increasing the number of competitors in the market. In such a situation, incumbent firms must either innovate to retain competitive advantage, or will be forced to exit the market completely.

Mr. Narsalay also mentioned how innovation has altered age-old economic concepts. While economists look at economies in terms of goods & services sold, innovators view the economy in terms of experience & sharing. Classical economic theories favour mass production to attain economies of scale. However, given the ability of innovation to potentially disrupt the need for mass production, firms are increasingly gravitating towards producing small quantities (distributed manufacturing) to avoid big losses. Innovation also challenges the law of diminishing marginal returns, allowing companies at the stagnant end of a business cycle, to innovate and jump to a higher S-Curve.

If innovations are so important, then why do nations fail to vector it? The following are the major constrains, governments face as they frame innovation policies

1)      Politicisation of incentives
2)      Lack of end-to-end perspective towards innovation policies
3)      Inability to quantify the return of innovation investment

Governments can overcome these challenges by:

1)      Holding each ministry accountable to develop policies to leverage innovation
2)      Put checks and balances in place to avoid unproductive innovation investments
3)      Create an independent ministry for innovation (like Malaysia)

On Day 2, Mr. Narsalay discussed potential reasons as to why some innovations remain on the fringes of invisibility.

Financial markets generally shell out a premium for innovative businesses & inventors. For example, the market capitalisation of the top 10 unique innovative digital businesses in America is significantly higher than that of more traditional businesses.

However, many technology businesses continue to remain on the fringes of invisibility. There are three preliminary barriers to visibility of such businesses:

1)      Insight – these businesses have not been able to completely address what the markets demands. For example, when Savlon attempted to overhaul the market leadership established by Dettol, it did so using an insight that people would shift preferences from Dettol to Savlon due to its ability to not cause a burning sensation. However, it failed to capture the other half of the insight that people associated the burning sensation with killing of germs.

 2)      Markets & Systems – In many cases, markets are just not ripe enough to absorb a particular innovations (markets are too niche or too small). For example, micro-insurance, was considered to be a significant policy innovation but failed to garner any traction.

 3)      Firm Specific / IndividualIn many firms, there is lack of involvement from the top leadership leading to a principal-agent problem. Additionally, some firms have unreasonable expectations from their investments (assigning profit targets) or excessively emphasize on achieving ROI goals in the short-term.

Mr. Narsalay then ended with an open discussion with the audience. He discussed several examples of Indian innovations which remained on the fringes on invisibility such as the Godrej ChotuKool (Portable refrigerator) which earlier was intended for rural purchase, but later became a gadget in urban cars due to the lack of constant electricity supply in villages. His session raised several thoughts on leadership, innovation & strategy in the minds of the audience.

 



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Date/Time
Date(s) - 04/02/2016 - 05/02/2016
4:00 pm - 6:00 pm

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