An Innovation Agenda

Stephen DeAngelis

December 22, 2009

Readers of this blog know that one of my favorite topics is innovation. I have been especially keen on this topic during the recession because I believe that innovative entrepreneurs remain the best hope of getting us out of it. I link innovation and entrepreneurship together because an idea can’t be considered really innovative unless someone figures out how to bring it to life. Krisztina Holly, vice-provost for innovation and executive director of the USC Stevens Institute for Innovation at the University of Southern California, and Jim Clifton, chairman and CEO of Gallup, insist that “focusing on unemployment isn’t the key to fueling innovation and job growth” [“It’s Not the Economy, Stupid,” BusinessWeek, 17 August 2009 print issue]. I agree with them. As noted above, I have stated on more than one occasion that focusing on innovation and entrepreneurism is the key to tackling unemployment — it’s not, as Holly and Clifton note, the other way around. They write:

“How can we be expected to grow and create jobs, many executives wonder, when we are shrinking? … Policymakers and citizens alike are concerned with how we can reduce the rate of unemployment—no easy feat when balanced with the need to slash expenses. However, focusing on unemployment is exactly the wrong thing to do. Yes, the numbers are staggering. But they only tell part of the story, and they do not offer a solution for relieving the economic chaos. Instead, there is a more effective way to grow—a way that is free, does not rely on a government bailout, and has the potential for massive societal impact. American executives should turn to the 140 million who have jobs, and find practical ways to inspire them in their work, to empower them to innovate us out of a mess.”

In past posts on innovation, I have written that not all people are creative. You simply can’t take a pedestrian thinker and make him or her creative by telling to them to come up with bright ideas. I have also noted, however, that everybody occasionally has a good idea. Holly and Clifton are arguing that companies need to empower their employees so that they are anxious to come forward when they have a good idea. They continue:

“Based on extensive, long-term research, Gallup has determined that less than 30% of the corporate workforce is truly engaged in its work. That’s less than 30% of employees who work with passion and feel a profound connection to their companies. Yet employee engagement leads to increased customer engagement, which leads to real revenues and, eventually, more job opportunities for others. Unfortunately, it seems that amid the crush of an urgent economic reality, executives and managers have overlooked some elementary tasks, such as making sure employees know what is expected of them and allowing them to use their talents in their roles. Yet the need to engage employees better is especially crucial during a recession, when mantras such as ‘do more with less’ can madden employees who must pick up extra duties after their colleagues are laid off, but who are offered no tangible financial incentive to innovate. Engagement serves as an intangible incentive — one that can be more valuable than any money can provide.”

To make their point, Holly and Clifton provide a case study.

“Take, for example, one store in the multibillion-dollar electronics retail chain, Best Buy. Executives evaluated employee engagement and discovered the store was middling at best. The poor score was affecting morale, employee turnover, and store profits. After polling the employees for solutions, the management implemented some significant institutional changes, like a ‘team close,’ so all team members felt jointly responsible for the nightly store closing, and not just an unlucky few. As a result of management’s listening and making some bold decisions, employee engagement improved, and the store substantially lowered employee turnover and increased profits. Then, the changes were scaled across the 1,200-store chain. For every one-tenth-of-a-point increase in employee engagement, each Best Buy store increased profits by $100,000 a year. So consider all of those who aren’t inspired to put their hearts into their work. Worse, nearly 20% are ‘actively disengaged,’ trying to undermine others’ productive work. This is not merely a caricature of Office Space or Dilbert. Tens of millions of people deliberately clock in every day with the intention of holding back U.S. corporations’ ability to compete and innovate. This is a shame—and yet it is an opportunity too. … Imagine the results if we were to double employee engagement at our organizations within 18 months, from 30% to 60%. Through a disciplined effort to increase the connection and commitment of our employed workers, our organizations can innovate and create new solutions. This is the surest way to lower those devastating unemployment numbers. And we have no excuse—not even a bad economy.”

You might call Holly’s and Clifton’s call to action an innovation agenda for business. New York Times‘ op-ed columnist David Brooks calls for an even broader national agenda [“An Innovation Agenda,” 8 December 2009]. He writes:

“The economy seems to be stabilizing, and this has prompted a shift in the public mood. Raw fear has given way to anxiety that the recovery will be feeble and drab. Companies are hoarding cash. Banks aren’t lending to small businesses. Private research spending is drifting downward. People are asking anxious questions about America’s future. Will it take years before the animal spirits revive? Can the economy rebalance so that it relies less on consumption and debt and more on innovation and export? Have we entered a period of relative decline? The first thing to say is, let’s not get carried away with the malaise. The U.S. remains the world’s most competitive economy, the leader in information technology, biotechnology and nearly every cutting-edge sector. The American model remains an impressive growth engine, even allowing for the debt-fueled bubble. The U.S. economy grew by 63 percent between 1991 and 2009, compared with 35 percent for France, 22 percent for Germany and 16 percent for Japan over the same period. In 1975, the U.S. accounted for 26.3 percent of world G.D.P. Today, after the rise of the Asian tigers, the U.S. actually accounts for a slightly higher share of world output: 26.7 percent. The U.S. has its problems, but Americans would be crazy to trade their problems with those of any other large nation.”

Although it is arguable as to whether the U.S. is world’s most competitive nation (some indexes give that spot to Switzerland), the optimism expressed by Brooks is both refreshing and needed. Once he raises America’s chin, he goes on to write about what it needs to do now that it is once again looking at the horizon.

“There’s a straightforward way to revive innovation. In an unfairly neglected white paper on the subject, President Obama’s National Economic Council argued that the U.S. should not be in the industrial policy business. Governments that try to pick winners ‘too often end up wasting resources and stifling rather than promoting innovation.’ But there are several things the government can do to improve the economic ecology. If you begin with that framework, you can quickly come up with a bipartisan innovation agenda.”

I love to hear that word “bipartisan.” Divisive political agendas have exacerbated progress in America. The innovation agenda recommended by Brooks contains nine items. They are:

First, push hard to fulfill the Obama administration’s education reforms. Those reforms, embraced by Republicans and Democrats, encourage charter school innovation, improve teacher quality, support community colleges and simplify finances for college students and war veterans. That’s the surest way to improve human capital.

Second, pay for basic research. Federal research money has been astonishingly productive, leading to DNA sequencing, semiconductors, lasers and many other technologies. Yet this financing has slipped, especially in physics, math and engineering. Overall research-and-development funding has slipped, too. The U.S. should aim to spend 3 percent of G.D.P. on research, as it did in the 1960s.

Third, rebuild the nation’s infrastructure. Abraham Lincoln spent the first half of his career promoting canals and railroads. Today, the updated needs are just as great, and there’s widespread agreement that decisions should be made by a National Infrastructure Bank, not pork-seeking politicians.

Fourth, find a fiscal exit strategy. If the deficits continue to surge, interest payments on the debt will be stifling. More important, the mounting deficits destroy confidence by sending the message that the American government is dysfunctional. The only way to realistically fix this problem is to appoint a binding commission, already supported by Republicans and Democrats, which would create a roadmap toward fiscal responsibility and then allow the Congress to vote on it, up or down.

Fifth, gradually address global imbalances. American consumers are now spending less and saving more. But the world economy will be out of whack if the Chinese continue to consume too little. The only solution is slow diplomacy to rebalance exchange rates and other distorting policies.

Sixth, loosen the so-called H-1B visa quotas to attract skilled immigrants.

Seventh, encourage regional innovation clusters. Innovation doesn’t happen at the national level. It happens within hot spots — places where hordes of entrepreneurs gather to compete, meet face to face, pollinate ideas. Regional authorities can’t innovate themselves, but they can encourage those who do to cluster.

Eighth, lower the corporate tax rate so it matches international norms.

Ninth, don’t be stupid. Don’t make labor markets rigid. Don’t pick trade fights with the Chinese. Don’t get infatuated with research tax credits and other gimmicks, which don’t increase overall research-and-development spending but just increase the salaries of the people who would be doing it anyway.

I know I personally saluted those ideas when Brooks ran them up the flag pole. At one time or another, I have recommended almost every one of those agenda items in my posts on reviving the economy. Brooks concludes:

“This sort of agenda doesn’t rely on politicians who think they can predict the next new thing. Nor does it mean merely letting the market go its own way. (The market seems to have a preference for useless financial instruments and insane compensation packages.) Instead, it’s an agenda that would steer and spark innovation without controlling it, which is what government has done since the days of Alexander Hamilton. It’s the sort of thing the country does periodically, each time we need to recover from one of our binges of national stupidity.”

If you think your representative or one or both of your senators is suffering from a case of political stupidity, you might want to forward Brooks article to him or her. The country needs to get back to work and the best way to do that is to innovate our way out of the current crisis.