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Vijay Kumar R.P. Sundarraj •
Global Innovation and Economic Value
Vijay Kumar Faculty of Management Studies PES University Bengaluru India
R.P. Sundarraj Department of Management Studies Indian Institute of Technology Madras Chennai India
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The task seemed daunting. The world outlays billions of dollars on innovation, but there has been no holistic assessment of its outcome. Do we have the answer to the question: have investments in innovation paid off? Outlays are not outcomes. This book is a study aimed at providing a comprehensive asses sment of the impact of innovation and should count as a pioneering effort. How does this book provide a wholesome appraisal of value created by innovation? It captures the societal value that innovation delivers to humanity, the economic value that it endows to nations and the ﬁnancial value that it provides to innovating ﬁrms. Each of these values must be positive to conclude that innovation pays. The book has a truly global canvas and accentuates innovation in the Technology and Pharmaceutical sectors, the two largest bastions of innovation. Big data and analytics underpin the development of the material used. Datasets include 86 million patent records and 8 million ﬁnancial records. This is one of the largest datasets analysed for developing a book. Such rich data drawn globally, annulls region-speciﬁc idiosyncracies and make the ﬁndings robust. Anecdotal examples of innovation point to value accrual. America spends the most on innovation which partly explains why it is the wealthiest nation in the world. IBM’s IP licensing is worth more than $1 billion. TI fully exploited the DSL patents that they acquired almost three decades ago. The Gillette shaver protected by a fortress of 57 patents has a dominant 75% market share. Apple’s recent design patents have enabled them to become the most valuable company in the world. With cumulative sales of more than $120 billion, Pﬁzer’s IP protected Lipitor was the biggest selling branded drug ever; when the patents expired in November 2011, sales dropped a whopping 42% the next month. The ‘One-click-ordering’ patent catapulted Amazon to become a leading e-commerce company. A whole new industry was born when Xerox patented the photocopying technology. Equally important has been the creation of societal value of innovation (decreased infant mortality due to new medicines, for example) and economic value (such as increase in per capita income and productivity due to innovation). The book is replete with real-world examples of innovation creating value, a recurring theme that runs through the book. The book is developed in the backdrop of the period 1990–2016, v
a period of frenzied innovation and economic distress which saw the disruptive advent of Internet, an upsurge in mobile communication and a paradigm shift in personal computing. Chapter 1 deals with the various facets of Innovation. The evolving global innovation theme over the last 25 years bring in useful insights. Innovation as a creator of intangible assets and its ability to create value are discussed. The two bastions of innovation, Technology and Pharmacy, are proﬁled, while we take a peek into innovation at the Silicon Valley. Chapter 2 is focused on the economic impact of innovation. Studies have established that innovation-intensive industries create highly skilled jobs, have higher wages, are more productive, lead exports and enhance competitiveness through thick and thin of business cycles. The link between innovation and economic growth and the effect of innovation on productivity and income has always been under intense gaze. The raging debate on the impact of automation on employment is discussed. Chapter 3 is an analysis at the ﬁrm level. That innovation impacts ﬁrm performance is not widely disputed. Several examples of successful IP deployment strategies adopted by global companies point to wealth creation. The paradox of India, while being low on innovation but high on ﬁrm performance, is seemingly counter-intuitive. The vital societal value created by pharmaceutical innovation is discussed in Chap. 4. Drug innovation has had a profound effect on human life. The impact of new medicines on mortality and the control of endemic diseases and their attendant economic gain buttresses the gains from medical innovation. The impact of disruptive innovations (Internet, Social media, Internet of Things, Autonomous driving) in the digital world is discussed in Chap. 5. The consumer surplus generated by the ubiquitous mobile phones in the connected world is staggering, while the social media platform has become a way of life. The overwhelming impact of IoT to connect all inanimate things (and human beings) has become truly transformative. Finally, the disruptive nature of autonomous vehicles and their ability to create social upheaval is examined. Chapter 6 is devoted to an empirical study of value created by the process of Schumpeterian creative destruction. The study examines whether innovation patterns explain ﬁrm performance and investigates whether innovating ﬁrms are better in withstanding economic stress. Given the turbulent business environment that is here to stay, the moot point is whether innovating ﬁrms can cope better with adversarial business periods. I must mention people who helped me in the preparation of this book. Prof. Krishna Sundar of IIM-Bangalore helped me with research material which has clearly enriched the book that much more. I am grateful to Vasanta Kottapalli, a senior professional in the Silicon Valley, who had the difﬁcult task of reviewing the raw version of the book. I am deeply indebted to her. I am equally thankful to Vinayak who also went through the ﬁrst version of the book and helped me clean up the contents. My wife Rekha and daughter Malavika watched me banging on my laptop with trepidation, wondering aloud whether I would ever ﬁnish the book (it has taken 2 years), but shared my joy when the book was completed.
Writing a book on innovation is a double-edged sword; while one admittedly deals in cutting edge, the canvas is so large that one faces the risk of being pilloried for not covering speciﬁc aspects of innovation. In my humble defense, I submit that this book is focused on answering the question: has it been worth it (investing on innovation)? Bengaluru, India
Vijay Kumar is an IT corporate professional turned researcher. He has had a successful 25-year corporate tenure of building and managing world-class technology companies in India. He was the Corporate Product Marketing Manager at Wipro, one of the top Indian IT ﬁrms. Subsequently, he was the India Center Head of Tektronix Engineering, a wholly owned subsidiary of Tektronix, USA. He later became COO of Raffles Software, a global software ﬁrm and CEO of Mindteck, a listed software company promoted by a global investment bank. As M.D. of Manystreams, a US-based video streaming product company, and as M.D. of Citec India, a subsidiary of Citec Finland, he led the formation and growth of these companies in India. As President of IP consulting at Bizworth, an Intellectual Capital and Valuation advisory, he advised companies on IP strategy and patent valuation. He currently holds the position of Professor and Dean of Faculty of Management Studies at PES University, Bangalore. Dr. Kumar’s interests are in investigating the ﬁnancial and economic outcomes of innovation. He is an Electronics Engineer with an MBA from Rensselaer Polytechnic Institute, USA. He obtained his Ph.D. from Indian Institute of Technology Madras, India. Email: email@example.com R.P. Sundarraj is currently Professor of Information Systems at the Indian Institute of Technology Madras in India. He has over 25 years of international academic experience, including stints at Qatar University in Doha, as well as tenured faculty positions at the University of Waterloo, Canada and Clark University, USA. Professor Sundarraj obtained his Bachelors in Electrical Engineering from the Regional Engineering College, Trichy, and his M.S. and Ph.D. in Management Science from the University of Tennessee, Knoxville, USA. Professor Sundarraj has guided several doctoral and master’s students, and has authored/co-authored over 70 research works in leading international conferences,
About the Authors
and published in journals such as Mathematical Programming, European Journal of Operational Research, Decision Support Systems, and various IEEE/ACM Transactions. In addition, he has wide industry-consulting experience in providing e-commerce solutions for marketing and inventory-management problems arising in Fortune 100 companies.
than the real one by 2018 disrupting the diary business and a signiﬁcant reduction in the need for agricultural land (30% of farm land is used for cattle rearing) . Innovation permits us to use resources more frugally and efﬁciently and is a key driver of productivity and a crucial engine of growth. The function of innovation is not just economic growth and producing more; it is eventually about improving quality of life, it is about improving communication and making the world flat, it is about clean energy keeping the world healthier. Innovation and wealth creation go hand in hand: high marks in innovation standings are strongly associated with high levels of per capita incomes. Technological innovation together with commensurate accumulation of intangible capital in the US explained more than half of the increase in productivity over the last few decades . Beyond the world of sterile economic metrics, innovation is a source of elixir. In the 45 years from 1947 to 1992, the Japanese life span grew 20 years and it is estimated at least half of this growth was due to newly developed patent-protected pharmaceuticals . High-frequency traders look for arbitrage deals and leverages on tiny difference in prices on two different exchanges. Traders are placing microwave antennas close to futures exchange data centres to shave a microsecond from network latency: enough to separate a winning from a losing bid . Air trafﬁc control towers need not be located at the airports. In Sweden, one ATC controls 32 airports through the creation of virtual images of the airports. The development of innovative analytics tools to mine large datasets has yielded stupefying results. In the world of big data, the three dimensions of data, the 3V (Volume, Variety, Velocity) are exponentially increasing. A fully deployed self-driving car generates data at the rate of 100 GB per sec. Innovative Artiﬁcial Intelligence techniques extract enhanced value from the mined data. Predictive analytics tool can predict when a person is ready to buy, forecast a maintenance schedule for a jet engine or can draw the risk proﬁle of a person likely to contract a disease. Industrial giants such as Siemens and GE now position themselves as data ﬁrms . Uber, the taxi-hailing company is valued at $68 billion, the highest among the Unicorns. This stratospheric valuation is partly because it generates and owns the biggest pool of data about supply (cab drivers) and demand (clients) for personal transportation . In the realm of AI, new inventions in facial recognition are galloping. Some of the heady applications include tracking worshippers’ attendance in churches, spotting shoplifters, catching suspects trying to enter public events, establishing identity of raid-hailing customers and automating tourist entry into attractions. Facial recognition technology can also be threatening. Stanford researchers have proved that facial recognition algorithms when exposed to a gay man and a straight one could correctly call out his sexuality 81% of the time. Humans could do it only 61% of the time. In prudent societies, this could cause enormous social tension . The famed researcher Joseph Schumpeter ﬁrst implied ‘innovation’ in 1939 to mean commercializing and introducing novel products to the market. This speciﬁc connotation of innovation diffused slowly that too only in niche journals of
1 Facets of Innovation
economics and business. The widespread usage of the word ‘innovation’ began to percolate beyond niche works in the 90s and became a household word at the turn of the century . One yardstick of the popularity of the word was that between 2011 and 2014, The New Yorker, Time, Forbes, Times Magazine, and even Gardens and Better Homes brought out special ‘innovation’ issues, originally known as ‘sketches of men of progress’ a 100 years back . Innovation results in economic performance at different levels; at the individual level (increased longevity), at the ﬁrm level (better proﬁts, increased market capitalization) at the industry level (better employment, capital investments), at the consumer level (generating consumer surplus) and at the nation level (GDP growth, increase in per capita income). The introduction of the newly invented mode of transport, the railroad had a stunning economic effect in India. Between 1853 and 1930, the British Raj laid 67,000 km of railroad across India. Real annual incomes rose by 16% compared to an average 0.4% per year between 1870 and 1930 . In recent times, the bullet trains provide a good example of innovation reshaping a nation’s economy. Less than a decade ago, there were no bullet trains in China. Today, 20,000 km of high-speed rail lines dot the country, more than the rest of the world combined. Equally astounding is urban growth alongside the tracks. In the thickest parts of China, high-speed rail has been a boon: it has facilitated the creation of a deeply connected economy . Little wonder: house prices in satellite towns and cities have become much cheaper, as much as 70%. Bullet trains have thrown up options for people to stay in suburbs and escape the high costs of large towns like Shanghai. There are now 75 m people residing within an hour of Shanghai by high-speed rail. The fallout is that these trains are expanding the labour pool and consumers around China’s most industrious cities, while guiding investment and technology to poorer ones. ‘Bullet trains are becoming just like buses,’ is the common refrain. The World Bank says the gains of high-speed rail could potentially boost the productivity of businesses in China’s coastal regions by 10% . Firm-level innovations aggregate resulting in economic gains to a nation. A rising body of studies demonstrate the link between innovation and economic gains. Empirical studies have largely pointed to the better performance of innovative ﬁrms compared to the non-innovative ones . Innovations make it possible for a ﬁrm to offer a larger portfolio of products leading to better ﬁrm performance . Innovation typically increases customer value  and is critical to ﬁrm’s well-being or even to its survival [16, 17]. Countries such as the US which houses a large body of innovating ﬁrms have better economic outputs. As ﬁrms grapple with a rapidly changing global economy, innovating companies are likely to survive and even dominate the market place. Notwithstanding the current turmoil, ﬁrms in highly innovation-centric countries like the US, Japan, Korea and Taiwan have continued to make great strides. Innovating ﬁrms invest relentlessly regardless of the economic conditions and there is evidence that innovating ﬁrms invest more on innovation in times of economic turmoil. During periods of economic distress, the top-100 global innovators enhanced shareholder value to their stakeholders and their nations .
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In fact, higher R&D investments induce higher economic output. United States is the biggest spender on innovation in the world with its R&D budget larger than the combined economies of Argentina, Denmark, Greece and Taiwan. Investment in innovation was primarily responsible for the secular growth in several industries not only in the US, but also in emerging economies as well . During 1960– 2007, the U.S. spent an average 9% of its GDP a year on R&D helping its economy to grow at 3.3% annually resulting in signiﬁcant economic gain . In China, new product innovation yielded 12% return which are about three times the returns obtained on ﬁxed-production assets . In fact, studies have concluded that investing around 2.5% of gross domestic expenditure on R&D maximizes productivity growth .
The Idea of Innovation Innovation is broadly deﬁned as ‘a new idea, method, process, or device that creates a higher level of performance for the adopting user’ . Yet, there is no unanimity on the precise deﬁnition of innovation in the engineering, marketing and management communities. Innovative activity is ‘any incremental or radical change in technology embodied in product and process.’ . OECD has an overarching deﬁnition that captures the spirit of innovation: Innovation is an iterative process initiated by the perception of a new market and/or new service opportunity for a technology based invention which leads to development, production, and marketing tasks striving for the commercial success of the invention .
Often, the terms innovation and invention are used interchangeably. There is, however, a subtle difference between the two. When an idea is tangibly realized, it becomes an invention while market introduction of the invention is termed innovation . Thus, innovation process is a two-step process that stretches from conception to market introduction. Companies protect their innovation legally through patents. Most of the value appropriation of innovation happens through patent-protected inventions. In many cases, the idea behind one revolutionary invention leads to a series of similar inventions. The two-part pricing model adopted by replaceable razor blade
The Idea of Innovation
allows users to pay for the razor and pay later for the consumable blades. Subsequently, this model was successfully deployed in the case of printers and cartridges, espresso machines and coffee reﬁlls and many more .
The Value of Innovation The key output of innovation is intellectual capital (or intangibles) which is responsible for creating value. Intellectual capital could manifest as patents and/or enhance the existing knowledge capital. Intellectual capital is deﬁned as an asset that is not physical or ﬁnancial. Much of the intellectual capital is tacit knowledge that resides in the minds of people. Intellectual capital is ephemeral and must be captured, preserved, catalogued and legally protected to make it secure as Intellectual Property. Intellectual capital is non-additive, meaning that use of intellectual capital does not diminish the intrinsic value of the asset. For example, if patents are licensed to multiple companies concurrently, the intrinsic value of patents will not diminish. On the other hand, a ﬁnancial asset like cash is additive in nature; any expense will decrease the cash balance. The new generation of knowledge companies have almost no physical assets and the only asset that they possibly hold will be in the form of intangibles. Several airlines do not own even a single plane; the revenue generator in most cases is the landing rights that these airlines own . Uber has become the biggest taxi company without owning any vehicle, while Airbnb has no property of its own. Apple, one of the most iconic names in the world is bereft of any factory of its own. Facebook does not create any content nor does Alibaba, the largest retailer in the world, own any inventory. Most start-ups have only intangible assets on their balance sheet, usually in the form of patents, often used as collateral to raise funding. With intangible assets now accounting for more than 80% of the S&P 500 market value, intangibles, rather than physical assets, have become critical value drivers.
What kind of value does innovation create? Innovative products and processes generate increased ‘value’. That innovation creates value is now reasonably understood. Value realized through innovation can be stratiﬁed into three layers— Societal, Economic (including Consumer Surplus) and Financial. The societal impact of innovation (for example, improved infant mortality due to new medicines) is perhaps the most important output of innovation. Second, the ability of
1 Facets of Innovation
innovation to endow economic value to nations (increase in per capita income and productivity of innovation-centric countries) largely explains the heterogeneity in the relative prosperity of countries. An offshoot of the economic value is the generation of consumer surplus, a beneﬁt that the consumer enjoys due to innovation. Finally, innovation is the key reason for improved ﬁnancial performance of ﬁrms (the link between patenting intensity of a ﬁrm and its market value is well established). Innovation brings value to all the participating players. Innovation delivers better quality of life to customers through improved products coupled with enhanced service. Happy customers result in proﬁtable companies. To customers, innovation implies products of better quality and better service, which together mean a better quality of life. For the businesses, innovation means greater proﬁtability and sustainable growth. For the employees, innovation can mean a more intellectually challenging job and higher pay. From the aspect of the economy, innovation translates to improved productivity and prosperity . Innovation usually results in novel, wholesome and more optimized production processes, translating to value-driving business models. The absence of concerted innovation can be devastating leading to dormant business activity and severe unemployment. Innovation is key to a healthier environment, reducing carbon footprint and lowering waste discernibly . And innovation need not be driven within the organization. The top generator of new ideas at IBM are its employees, business partners and through collaborations with clients; in fact, its own R&D is ranked a poor eighth when it comes to creation of new ideas .
The Spark of Innovation Historically, Thomas Edison would have to rank as one of the greatest innovators of all time. His contribution to the world: the lightbulb, the movie camera, the disc and cylinder phonograph, highly developed fluoroscopy, a commercial stock ticker (still in vogue, but now electronic) and a vote aggregator. For sheer number of innovations, Edison is way ahead of illustrious names like Graham Bell, Leonardo da Vinci, Steve Jobs and Einstein. Edison also had 1093 patents to his credit!  Edison’s country, the US, has clearly led the global innovation efforts during the twentieth century borne by the sheer number of innovations that came of the country (the airplane, the telephone, the zipper, the PC, the modern automobile, the oil well, the Internet, the motorcycle, the laser, the smoke detector). While there is recognition that the last century belonged to the US, the next century may not belong solely to the US; Japan, China, India and S Korea will join the bandwagon of innovation aggressively . However, predicting the likely path of innovation is akin to double guessing man’s creativity. Twenty years ago, the world did not know Internet, but now Internet rules the world. Sixty years ago, man had never heard of DNA: now that knowledge is the prime mover for medical progress.
The Spark of Innovation
Given the frenetic pace of innovation in the last few decades, it is easy to take the modern-day digital ediﬁce for granted and forget that the human incumbents of our planet stand on ‘the shoulders of giants’, tellingly exempliﬁed by Bell Labs. In the last century, Bell Labs was a company nonpareil. In 1947, it gave us the transistor, the crux of all digital products in use today. Millions of transistors go into making microchips that reside in the hearts of mobile phones and PCs. Since the advent of transistors, a deluge of innovations has followed—the silicon solar cell, the ﬁrst functioning laser beam, digital communication theory, satellites, the cellular network, UNIX and C—the most essential computer operating system and language even today. During its golden period, more than 25,000 people worked in Bell Labs, including some 3,300 Ph.D.s. Today, if the world is driven by mobile phones and the Internet is made possible through seamless computer networks, thanks to two men who invented the transistor in a suburban New Jersey lab during the icy winter of 1947. Or that in 1971 a group of Bell Labs scientists were driving in a camper ﬁlled with sensitive radio equipment through Philadelphia for many endless nights, trying to establish the ﬁrst working cellular network . Yet, there is a danger of oversimplifying yesteryear innovations. As the well-known innovation guru Hargadon said ‘Many people still believe a better mousetrap is all it takes. But of the 2000+ mousetraps patented, only two have sold well, and they were both designed in the 19th century. A good idea doesn’t sell itself although most ‘lone inventors’ make the mistake of thinking it will.’ . To be sure, the industry has also its share of innovation-sceptics who feel that the global innovation efforts are overblown and their payoffs are, at best, dubious. Innovation in the US is ‘somewhere between dire straits and dead’ echoed Peter Thiel, co-founder of PayPal. While a time traveller from circa 1900 appearing in 1950 would be astounded by the radical innovations like electricity, phones, planes, cars, fridges, radio, TV, penicillin, a similar traveller from 1950 to present day would ﬁnd little to stun him beyond the Internet, mobile phones, PCs, except to wonder how old technologies had become markedly more reliable. Technological developments of the past 50 years could not have presented beneﬁts akin to what washing machines and vacuum cleaners did to unshackle housewives from drudgery. In some ways, we have retreated: since Concorde was phased out, the speed of air travel has slowed and is no better than when Boeing launched its 707 in the late 50s . However, history is also replete with instances of breakthrough innovations not being spotted. In 1895, Charles Duell, the Director of USPTO purportedly said ‘…. everything that can be invented has been invented’. When Television was invented, New York Times wrote it off and said: ‘Television will never be a serious competitor for radio, because people must sit and keep their eyes glued on a screen; the average American family hasn’t time for it’ AT&T concluded in 1999 that the mobile subscriber base will not go beyond one million. And this was their invention! The prophecy went horribly wrong with the subscriber base exceeding 70 million in that year itself and crossing 3 billion 20 years later . Ford and GM lobbied against airbags in the 70s citing lack of consumer interest and that they were not practicable or appropriate. In a telling rebuttal to their forecast, 3.3 million
1 Facets of Innovation
bags were ﬁtted in the cars just in the US during the 90s resulting in 7000 lives being saved with hundreds of trafﬁc related accidents averted. In WW I, the US military lost nearly seven million days of active duty to sexually transmitted diseases because condoms were not know at that time. During WW II, the army mandated the stores on its bases to stock them .
What are the greatest inventions ever? To come up with such a list can be, at best, a hazardous task. A Time poll listed The Wheel, Internet and Electricity as the most important inventions ever. What about the most useful inventions of all time? Seventy-one percent of people polled voted the cell phone as the most important invention in human history —something the unknown inventors of the wheel and ﬁre may very well disagree (Figure source: Time ). The next best: The Disposable Diaper. The relentless innovation over the last few decades has made world’s hunger for computing power gargantuan. It is estimated business and consumers added 40 exaflops (1018 flops) in 2014, up from 5 exaflops in 2008 and 20 in 2012. Equally, the world seems to be packed with communication power. Twenty years ago, only 3% of world’s population had a mobile phone and just 1% of the population had access to the Internet. Half of India’s population had never made any telephone call. Today, the picture has dramatically changed: two-thirds of world’s population have a mobile phone and the world has become more connected, with one-third of human population having access to the Internet. Soon, nearly every living person will have at least one mobile phone and there would be very few places where Internet would not be available .
The Spark of Innovation
The colossal impact of innovation has decisively changed the status quo, and continues to do so at an accelerated pace. At crucial periods, innovation has been disruptive: from the invention of the spinning jenny in the eighteenth century which altered the landscape of the textile mills, to the factories that facilitated mass manufacturing and to the most disruptive invention (probably of all time), the harnessing of electricity. In recent times, the design and manufacture of ultra-dense semiconductor chips, the pervasive Internet and the indispensable mobile phone have completely transformed the economic performance of businesses and nations. Because it is a connected world, the difference today is the sheer ubiquity of innovation in and the sheer speed of transformation. ‘There have been slightly more than thirty-two doublings of performance since the ﬁrst programmable computers were invented during World War II’ futurist Raymond Kurzweil has noted. Facebook saw enormous intrinsic value in WhatsApp, a company barely ﬁve years old and with fewer than 400 employees, and acquired it for a stunning $19 billion . With advances in technology, the need for human involvement in decisionmaking has been coming down thereby reducing human error. The number of patients who die due to misdiagnosis exceed 40,000 each year in the US, rivalling the number of fatalities due to breast cancer. Taken together with other diagnostic errors, the cost per malpractice claim is more than $300,000 resulting in higher healthcare expenses. Big data and analytics will result in reduced costs, enhance medical efﬁciency and improve patient care by reducing subjectivity in the diagnosis. It is predicted that computers will eventually replace 80% of what the doctors do, while amplifying their skills. A transition to big data based decision-making has already happened in other areas, too, where human judgment was thought imperative. Almost all commercial flying is now carried out by auto-pilot, not by the captain. Most stock market volume is now driven by algorithmic high-frequency trading. In the US, Google’s autonomous car has had a flawless record with zero accidents driving 300,000 miles on normal roads . (The ﬁrst fatal accident took place in 2016 with a semi-autonomous Tesla car.) There are several reasons why innovation is critical to most businesses for long-term sustainability . First, markets have become more open (notwithstanding the recent rhetoric of protectionism). Businesses get new opportunities to expand trade which allows them to optimize their manufacturing/delivery locations thereby creating a more level-playing ﬁeld. However, well-established ﬁrms in developed countries face severe pressure from low-wage economies. Second, the precipitous drop in the costs of communication and transportation have allowed new markets to flourish. Sea freight charges have fallen by more than 67% since 1920 and air cargo expenses have dropped by more than 80% since 1930. Phone calls on the Internet are free . The world has truly become ‘flat’. Faster and cheaper global communications mean that the customers are up on the latest fashions and trends. Companies which keep pace with this rapidly changing world and are in tune with the customers’ demanding needs will not only survive but flourish as well. Third, advances in science and technology allow ﬁrms to leverage on their skill and
1 Facets of Innovation
knowledge to go up the value chain. New industries like biotechnology are taking shape while the traditional ones like telecommunication are being morphed. Since innovating industries bank on knowledge and skills, high cost developed economies can nullify wage arbitrage of low-cost economies. Finally, services which accounts for more than 70% of the economy is now almost completely technology intensive. Technology savvy services are now being deployed to reengineer business workflows, and in customer-centric areas such as retail, hospitality and banking services. Many high technology manufacturers like IBM now ﬁnd services more lucrative than products . In the ﬁercely competitive business environment, innovation has become a strategic imperative. As a decisive prime mover of growth and competitiveness and as a creator of shareholder value, innovation is central to companies’ success. And innovation drives macro-beneﬁts as well, with advanced nations experiencing higher incomes and better quality of life and the less robust nations enjoying higher standard of life .
The global innovation proﬁle has been indelibly altered in the last three decades and has become more secular. Innovation that used to be primarily driven by the US, Europe and Japan is now more equitably distributed among a larger number of countries. In the global corporate echelons through, the top 100 innovating ﬁrms list remains an exclusive club. Just two countries, Japan and the US account for 70% of the list, making them the true innovation bastions of the world (Figure source: Thomson Reuters ). ‘We will bring about a nation founded on intellectual property’ the Japanese Prime Minister vowed, making the country the second largest innovator in the world (by number of patents granted at USPTO). Japan does more patenting than all of Europe combined. Much of the reason why US has
become an innovation powerhouse is due to Silicon Valley in California. That the Silicon Valley in the US houses the very best technology companies is a known fact. It also has the highest per capita GDP in the US at $74,815, 30% more than London and 70% more than Singapore. In the global GDP pecking order, San Jose has the third highest per capita GDP of $77,440, behind only Zurich and Oslo . A signiﬁcant reason for China’s faint appearance in the top-100 innovators is because most of its innovation endeavours are inward looking and therefore fails to impact worldwide; just 6% of China’s innovation efforts is legally protected and commercialized outside China and only a sliver of its domestic patents is granted at the USPTO . The seeds of globalization of innovation started when US ﬁrms established offshore R&D units and manufacturing hubs in China and other Asian countries. The most important trend due to US offshore investments has been the growth of innovative competencies in China, India, Taiwan, and South Korea, none of which was on global R&D radar in 1960s and 1970s. And in these countries, the increase in the innovation intensity has largely been led by key technology hubs such as Bangalore, Shanghai, and Hsinchu in India, China, and Taiwan respectively (much like the Silicon Valley, Dallas, Seattle and Boston in the US). These strategic actions helped the growth of foreign competitors in automobiles and semiconductors whose innovative output and superior-quality products threatened the very viability of US ﬁrms. The US no longer is the undisputed leader in innovation, although it continues to be the largest R&D spender in the world . The centre of gravity of core microchip innovation, the bedrock of today’s knowledge economy however, has remained steadfast in the US . An increasingly sophisticated Asian user and a faster market growth have been responsible in critical R&D activities moving away from the US in high technology areas (software, semiconductors and PCs). Demand for mobile communication and digital devices in South Korea with more advanced features is outstripping the demand in the US. New and advanced products are now routinely developed and released in Asia and in other developed economies concurrently . In several areas, innovation and manufacturing seem mutually exclusive; while one part of the world innovates (mostly US), another part of the world manufactures (mostly Asia). Vertical specialization has had a profound impact on locating R&D activities. In pharmaceutical industry, while drug discovery happens usually in the US, Asia is involved in clinical trials, post-approval marketing and manufacturing. The design and development of semiconductor components (mostly in the US) is almost de-coupled from manufacturing (mostly in Asia). Similarly, the systems architecture, electronics, and the OS for electronic products are almost exclusively designed in the United States, but the factories to produce such products are in Asia. Industries like flat displays, semiconductors and PCs have thus intensiﬁed innovation in one place (primarily US) leaving manufacturing to another (mostly Asia).
1 Facets of Innovation
The global advances in the last 150 years is captured in the patenting trends in the US. It is said ‘Innovation without protection is philanthropy’ . By and large, the economic beneﬁt of innovation is realized only if the innovation is protected through patents. For more than a century, patenting has kept pace with technological breakthroughs. Since 1870, US patenting activity has risen in sharp bursts in tandem with radical innovations in telegraphy, electricity, automobiles, airplanes, synthetics, aerospace and more recently, high tech sectors including computers, computer software and Internet . When measured against previous patent cycles in US history, it is remarkable how unremarkable the current patenting stampede has been (Figure source: ). The ﬁrst rush of patents occurred during in the 1880s, when Edison and Graham Bell came up with life-changing inventions. The number of new patents that were granted rose sharply each year by nearly 60% and touched 20,000 . The subsequent patent bursts coincided with swift advances in deploying steam engines for mass transport, the usage of wireline telegraphy and telephony and the harnessing of electric power, heralding the era of rapid industrialization of the US. The advent of automobiles and airplanes saw a concomitant upsurge in patenting, followed by intense innovations in plastics and computing in the 60s. The mid-1980s saw the dawn of personal computer beginning to power the US economy and propelling the world steadily toward the age of Internet .