Something new under the sun

Innovation, long the preserve of technocratic elites, is becoming more open. This will be good for the world, argues Vijay Vaitheeswaran (interviewed here)

A CRISIS is a terrible thing to waste," Vinod Khosla laments to Larry Page. The two Silicon Valley luminaries are chatting one evening at the Googleplex, the quirky Californian headquarters of Google. The crisis which Mr Khosla is concerned about is caused by carmakers' addiction to oil and the consequent warming of the planet. "The energy and car industries have not been innovative in many years because they have faced no real crisis, no impetus for change," he insists.

The two are plotting what they hope will be the next great industrial revolution: the convergence of software and smart electronics with the grease and grime of the oil and car industries. Mr Khosla is kicking around his plans for getting "chip guys" together with "engine guys" to develop the clean, software-rich car of the future. Such breakthroughs happen only when conventional wisdom is ignored and cross-fertilisation encouraged; "managed conflict", in his words.

Mr Page, co-founder of Google, had earlier hosted a gathering of leading environmentalists, political thinkers and energy experts to help shape an inducement to get things moving: the Automotive X Prize, to be unveiled in early 2008. The organisers will offer at least $10m to whoever comes up with the best "efficient, clean, affordable and sexy" car able to obtain the equivalent of 100 miles-per-gallon using alternative energy. The charitable arm of Mr Page's firm has already taken hybrid petrol-electric vehicles, like the Toyota Prius, and turned them into even cleaner "plug in" versions which can be topped up from an electric socket.

Mr Khosla believes clean cars, using advanced biofuels or other alternatives, will come about only through radical innovation of the sort that Big Oil and Big Autos avoid. Risk and acceptance of failure are central to innovation, he argues, but the dinosaurs typically avoid both. "Big companies didn't invent the internet or Google, and much of the big change in telecoms also came from outsiders," he adds.

Coming from almost anyone else such talk would sound preposterous. But Mr Khosla and Mr Page are not ordinary businessmen or armchair revolutionaries. Mr Khosla helped to found Sun Microsystems, a path-breaking information-technology firm, and he went on to become a partner at Kleiner Perkins, a venture-capital company that was an early backer of Amazon.com, America Online and many other pillars of the internet economy. Mr Page's Google is one of the internet's biggest success stories. At 34 he is a multi-billionaire.

But these men are from Silicon Valley; and Silicon Valley is not America. It is tempting to dismiss such breathless talk of revolution as just more hype from people who are seeing the world through Google goggles. After all, go beyond the rarefied air of northern California and the rules of gravity are no longer suspended. The well-established industries which they mock still move at their usual but reliably glacial pace, right?

Well no, actually. Rapid and disruptive change is now happening across new and old businesses. Innovation, as this report will show, is becoming both more accessible and more global. This is good news because its democratisation releases the untapped ingenuity of people everywhere and that could help solve some of the world's weightiest problems.

The seditious scene from the Googleplex also captures the challenge this presents to established firms and developed economies. For ages innovation has been a technology-led affair, with most big breakthroughs coming out of giant and secretive research labs, like Xerox PARC and AT&T's Bell Laboratorie.

It was an era when big corporations in developed countries accounted for most R&D spending. .

North America still leads the world in research spending (see chart 1), but the big labs' advantage over their smaller rivals and the developing world is being eroded by two powerful forces. The first is globalisation, especially the rise of China and India as both consumers and, increasingly, suppliers of innovative products and services. The second is the rapid advance of information technologies, which are spreading far beyond the internet and into older industries such as steel, aerospace and carmaking.

What is innovation? Although the term is often used to refer to new technology, many innovations are neither new nor involve new technology. The self-service concept of fast-food popularised by McDonald's, for instance, involved running a restaurant in a different way rather than making a technological breakthrough. However, innovation can involve plenty of clever gadgets and gizmos.

One way to arrive at a useful definition is to rule out what innovation is not. It is not invention. New products might be an important part of the process, but they are not the essence of it. These days much innovation happens in processes and services. Novelty of some sort does matter, although it might involve an existing idea from another industry or country. For example, Edwin Drake was not the first man to drill for a natural resource; the Chinese used that technique for centuries to mine salt. But one inspired morning in 1859, Colonel Drake decided to try drilling for oil in Titusville, Pennsylvania. He struck black gold and from his innovation the modern oil industry was born.

The men in white coats

The OECD, a think-tank for rich countries, says innovation can be defined as "new products, business processes and organic changes that create wealth or social welfare." Richard Lyons, the chief "learning officer" at Goldman Sachs, an investment bank, offers a more condensed version: "fresh thinking that creates value". Both hit the nail on the head, and will serve as the definition in this report.

According to popular notion, innovation is something that men wearing white coats in laboratories do. And that's the way it used to be. Companies set up vertically integrated R&D organisations and governments fussed over innovation policies to help them succeed. This approach had successes and many companies still spend pots of money on corporate research. But firms are growing increasingly disenchanted because the process is slow and insular. A global study across industries by Booz Allen Hamilton, a consultancy, even concluded that "higher R&D spending doesn't ensure better performance in terms of growth, profitability or shareholder returns."

Now the centrally planned approach is giving way to the more democratic, even joyously anarchic, new model of innovation. Clever ideas have always been everywhere, of course, but companies were often too closed to pick them up. The move to an open approach to innovation is far more promising. An insight from a bright spark in a research lab in Bangalore or an avid mountain biker in Colorado now has a decent chance of being turned into a product and brought to market

So why does the generation and handling of ideas matter so much? "We firmly believe that innovation, not love, makes the world go round," insists John Dryden of the OECD. Corny perhaps, but studies do show that a large and rising share of growth-and with it living standards-over recent decades is the result of innovation (see chart 2). Innovative firms also tend to outperform their peers. "We're not discovering new continents or encountering vast deposits of new minerals," Mr Dryden adds. Indeed, the OECD's experts believe that most innovation has been caused by globalisation and new technologies.

Analysis done by the McKinsey Global Institute shows that competition and innovation (not information technology alone) led to the extraordinary productivity gains seen in the 1990s. "Those innovations-in technology as well as products and business processes-boosted productivity. As productivity rose, competition intensified, bringing fresh waves of innovation," the institute explains.

That is why innovation matters. With manufacturing now barely a fifth of economic activity in rich countries, the "knowledge economy" is becoming more important. Indeed, rich countries may not be able to compete with rivals offering low-cost products and services if they do not learn to innovate better and faster.

But even if innovation is the key to global competitiveness, it is not necessarily a zero sum game. On the contrary, because the well of human ingenuity is bottomless, innovation strategies that tap into hitherto neglected intellectual capital and connect it better with financial capital can help both rich and poor countries prosper. That is starting to happen in the developing world.

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