Innovation and the Budget – Sustaining Progress During the Big Adjustment
In his latest monthly commentary on sustainability issues, Professor Frank J. Convery, Chairperson of Comhar Sustainable Development Council, “If money isn’t loosened up, this sucker could go down.” So spoke President Bush last week as he summarised the prospects for the US economy if Congress did not approve the administration’s bailout package for the financial institutions.
Whatever the long-term effects of US policy and the patchwork of supports put in place by governments around the world, economic growth for the next few years will slow for a few reasons. Caution is in the air: as companies, households and individuals adjust their spending to match their expected income, consumption will stabilise or fall. In countries with a substantial stock of unsold housing and commercial space, contraction in construction is inevitable, as demand catches up with supply. For those without their own cash, investment will become more expensive, as the heavy transactions costs of more intense regulation are passed on to borrowers, and as banks refuse credit for investments, some of which would heretofore have been funded.
Why Support Research and Development?
Falling tax revenues and falling profits will be the lot of most governments and companies. And, in that situation, it is very tempting to cut back on research, development and demonstration, and on innovation generally. But this would be a mistake, for the following reasons:
• Adaptation to extreme events requires innovation. In sailing, they say that races are won at night, in light winds. It is the firms that can show the most exceptional skills and innovations that will turn adversity into opportunity.
• There is evidence that companies that increased R&D during the economically stressed period of 2001 had stronger sales growth and profitability than their competitors in later years. Meanwhile, firms that cut R&D investment found that their range of new products and services compared less well with the competition when the upturn happened . Cutting back on R&D expenditure now guarantees lost markets and opportunities in the future, when the upturn occurs. One of the lost opportunities in Ireland is the fact that, while dozens of billions were spent on construction in the boom times, virtually none of this money was spent on construction-related research and development, so there has been no significant generation of new patents, materials, processes or techniques by firms in the sector that could help generate an income flow and sustain companies during a downturn.
• The same is true of countries. According to the World Business / INSEAD Innovation Index 2007, the US is the top country in generating new ideas, adapting them quickly and profiting from them. Germany was a distant second, followed by the United Kingdom, Japan and France . A number of small countries do well, with Switzerland (6), Singapore (7), Denmark, Sweden and Finland (11, 12, 13 respectively), Israel (18), Iceland (20) and Ireland (21) being notable. Ireland is a recent member of the modern innovation club, achieved by a substantial increase in R&D funding from a very low base, and a set of policies and institutional arrangements that provide coherence and predictability . Outside Europe, Singapore and Israel provide important benchmarks.
• Understanding research helps us make better decisions. One example: in an influential paper published in 1979 – for which he subsequently received the Nobel Prize in Economics – Daniel Kahneman (with Tversky) demonstrated that people under-weight outcomes that are merely probable in comparison with outcomes that are obtained with certainty . This explains NIMBYISM – people will typically favour the known status quo over a less certain change which might be good, but which might also be bad – and is also an important insight if we in Ireland are to revisit the decision to reject the Lisbon Treaty. Unless citizens are given a strong reason to vote for the Treaty, prospect theory tells us they will stick with what they think they know.
• Paul Davies points out that it is almost impossible for the non-scientist to discriminate between the legitimately weird and the outright crackpot. We need quality scientists who can communicate with us to provide such discrimination.
• We face manifold challenges for which we do not have the answers, but where research can show us the way. Supporting environmental and natural resource research that is linked to economic activity and social performance is especially important. Some examples of this include:
- Realising the potential of the Atlantic for oil and gas.
- Integrating nature (biodiversity), farming, forestry and urban development.
- Meeting very demanding climate change emissions, renewable energy and energy efficiency targets.
- Managing with 2C rise in temperature.
- Integrating science, engineering and policy as regards flooding.
- Managing land-use in ways that protect environmental quality; facilitate and enhance economic activity, and enrich quality of life.
• The most important predictor of research performance is the intellectual quality of those undertaking it. Recession is the ideal time for universities to expand and deepen their research activities, because they can attract the best and the brightest into the generation of new knowledge when other opportunities for these graduates are closed off. This builds a country’s capital stock and it will return many times the investment if we have the courage to hold our nerve and keep supporting its development.
Towards a Knowledge Society in Ireland
An innovation culture is taking hold in Ireland. The Programme for Research in Third-Level Institutions (PRTLI) is 10 years old this year. It funds major capital investment at universities to help them to begin to convert aspiration to achievement, especially as regards multi-disciplinary research.
In 2000, Science Foundation Ireland – modelled in part on the National Science Foundation in the US – was established to fast-track research in biotechnology, information and communication technology (ICT) and now sustainable energy and energy-efficient technologies. Research Councils support smaller-scale research and capacity-building. Research has become embedded in the policies and funding programmes of government agencies, focusing in particular on environment (EPA), marine (Marine Institute), agriculture (Teagasc) and forestry (Coford).
The development agencies – the Industrial Development Authority and Enterprise Ireland – have the development of the knowledge economy and society at the heart of their activities, and all of this is suffused with an ethos of investment in people, in partnership with Irish universities and business. And, because knowledge knows no frontiers, the past decade has also seen the globalisation of Irish innovation. All new staff at universities have the impulse to inquire in their DNA; they are beginning to make an imprint on the world of international scholarship; clusters of scholars with serious intellectual intent and achievement are emerging, and we also see the beginnings of innovation-led business.
We have work to do; there is nothing more exhilarating than to be taught by someone who is creating new knowledge through research, but still a misperception lingers that teaching and research are a zero sum game: the latter can only be done at the expense of the former. We need to design both teaching and research so that they are mutually re-enforcing. And we need to work at accelerating the conversion of knowledge with commercial potential into business.
In May of this year, I was invited to give a presentation in Sacramento to the California Air Resources Board, which has been asked by Governor Schwarzenegger to design the implementation plan for meeting the State’s greenhouse gas reduction targets. Europe has led the world in this area, and they asked me to fill them in on our experience with the successful creation of a market (emissions trading) for greenhouse gases.
Also on the programme was Bob Epstein of the Economic and Technology Advancement Committee and I wondered why he was there. Afterwards, I wondered why I was there: Bob provided the link between policy and the venture capital and innovation-oriented business community, and convinced me that this connection between new business, research and new policy was the essential lubrication that would give us the virtuous circle that would sustain an ambitious climate change agenda, growing businesses and a vibrant research community. Good policy (especially the right price signals), effective research, and risk-taking enterprise are the three legs of the innovation stool that will allow us to meet the climate change challenge in ways that also energise the economy.
The Massachusetts Institute for Technology (MIT) is the quintessential converter of ideas into business. More than 4,000 innovation-led enterprises have been started from there, employing over a million workers, with annual turnover of about $250 billion.
Two visitors to Ireland from MIT this past week – Bill Aulet of the Sloan School of Management and their Entrepreneurship Centre, and Loren Cox, founding director of their Centre for Energy and Environmental Policy Research – both provided insights into how to learn from them to improve our performance in this area. They emphasise the importance of culture – the willingness to fail, and the celebration of success – as being crucial. Churchill captures the essence: ‘Success is the ability to go from one failure to another with no loss of enthusiasm’.
Global networking; the support of entrepreneurs like Bob Epstein to bring research through the ‘valley of death’ to commercial reality; willingness by researchers to engage with industry on an ongoing basis in ways that do not compromise intellectual integrity; government development of environmental and other policies that reward innovation; support to help create the infrastructure and the capacities to support the innovation ecosystem, and financial incentives are important.
Thomas Alva Edison – inventor of the incandescent light bulb, the phonograph, and the motion picture camera, who in his lifetime acquired more than 1000 patents – famously observed: ‘Anything that won’t sell, I don’t want to invent’. At the other end of the spectrum was Einstein: ‘a respectable Federal ink pisser’, as he described himself. In seven months in 1905, while working 48 hours a week in the patent office in Zurich, he produced six research papers that changed our understanding of the world, without any preoccupation about converting his knowledge into patents and profits.
We are decades from rivalling MIT, but we have made a good start this past decade. As the budgetary noose tightens and we face hard choices, let’s not choke off this wonderful potential. To paraphrase President Bush, the Irish sucker won’t go down if we keep faith with our innovation culture.