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Where do innovations come from?

09.03.2013
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With most major companies, and indeed most major economies, seeking to use innovation as a source of revenue growth, it seems sensible to explore fully just how innovation occurs.  That was the aim of a report produced by economic sociologists Fred Block and Matthew Keller.

The report looked at the major innovations in the US between 1970 and 2006 to see where they originated from, and whether there were any noticeable changes in these trends over that time frame.

For instance, the report wanted to test the heuristic that most innovations emerge from either large companies research and development, or alternatively individual inventors toiling away in their garage.  The role of government in such a picture is merely to stay out of the way.

Was that the case though?  Surprisingly not.  The researchers compiled the top 100 innovations each year from R&D magazine and dug deep into each one to determine its origin.  They found that innovations typically emerged from one of seven unique entities:

  1. Large companies
  2. Small and medium enterprises
  3. Collaborations among private entities
  4. Government labs
  5. Universities
  6. Spinoffs originating from government or university labs
  7. Various other public/non-profit agencies

The report is very detailed, but a couple of things standout as particularly noteworthy.  The first of which is that the number of innovations originating from large companies has fallen dramatically.  Whilst in the 1970′s an average of 44% of innovations each year originated from big firms, by the noughties that had plummeted to just 9%.

What’s equally interesting is that it seems that the public sector was picking up some of that slack.  Government or university labs produced just 18% of innovations in the 1970s, but by the noughties this had risen to 49%.

The researchers are at pains to point out however that governments should not take heart at these figures and begin centrally planning technological change, but rather that of a venture capitalist.

“Private sector venture capitalists, such as the famous ? rms in Silicon Valley, have an open door policy for scientists and engineers who have a bright idea for a new business. Of every hundred pitches they hear, they might decide to invest in 20 with the idea that if even one or two of
the 20 are successful, then they make vast amounts of money that they can recycle into new rounds of initial investments. But the key assumption behind venture capital is that even after careful screening, most of these new business ventures will fail. Some won’t be able to develop the promised technology, some won’t ?nd a market for their particular innovation, and some won’t be able to build an organization capable of exploiting the market. Nevertheless, the enormous gains from the small percentage of winners are more than enough to cover the losses from the others.” they say.

It’s clear that companies are beginning to use social technologies to adopt a similar approach.  Rather than requiring innovative ideas to emerge in house, they are increasingly utilising external networks to solicit innovation from wherever they may reside.  In such an environment the company isn’t required to bet on particular individuals to come up with great innovations, but can instead source the best solutions to particular challenges.

It will be interesting to see if this more distributed approach to innovation will see big companies regain their places as engines of growth.

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