Innovation and Productivity: What’s the Relationship and How Does it Happen?

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In a featured presentation at the ATSE Forum, Rob Atkinson stresses the relationship between innovation and productivity. All nations need an innovation-productivity strategy because addressing complex and systemic challenges–such as achieving affordable health care, combating global climate change, achieving sustainable energy production, deploying digital infrastructure, etc.–requires coordinated strategies leveraging the resources of firms, government, academia. And, in contrast to what the conventional neo-classical economic doctrine holds, markets alone will produce societally sub-optimal levels of innovation.

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Innovation and Productivity: What’s the Relationship and How Does it Happen?

  1. November 11, 2011Innovation and Productivity:What’s the Relationship and HowDoes it Happen?ATSE ForumPresented by:Rob Atkinson, President, ITIF
  2. The Information Technology and Innovation Foundation (ITIF)is a Washington, D.C.-based think tank at the cutting edge ofdesigning innovation policies and exploring how advances intechnology will create new opportunities to boost economicgrowth and improve quality of life. ITIF focuses on: Innovation processes, policy, and metrics; E-transformation (e.g., commerce, government, health); IT and economic productivity; Science and technology policy related to economic growth; Manufacturing and innovation-based competitiveness; and Innovation and trade policy. 2
  3. Productivity Growth is Critical
  4. A productivity strategy is different than innovation strategy.The latter tend to focus on:  “creative”, not “creative destruction” and  traded sectors, rather than all sectors. 4
  5. Especially As the Australian Population Ages45.040.035.030.025.020.015.010.0 5.0 0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 Dependency Ratio: 65 and older/20 to 64 year olds 5
  6. Today’s Presentation 1 “New Growth” Theory and Innovation 2 Why We Need an Innovation-Productivity Policy General Purpose Technologies and Productivity: the 3 Role of IT 4 Three Paths to Productivity Through Innovation Comprehensive IT-Based Productivity-Innovation 5 Policies 6 The Political Economy of Innovation/Productivity 6
  7. Innovation Drives Growth
  8. Today’s Presentation 1 “New Growth” Theory and Innovation 2 Why We Need an Innovation-Productivity Policy General Purpose Technologies and Productivity: the 3 Role of IT 4 Three Paths to Productivity Through Innovation Comprehensive IT-Based Productivity-Innovation 5 Policies 6 The Political Economy of Innovation/Productivity 8
  9. Why Do Nations Need an Innovation-Productivity Strategy?1. Because addressing complex and systemic challenges– such as achieving affordable health care, combating global climate change, achieving sustainable energy production, deploying digital infrastructure, etc.– requires coordinated strategies leveraging the resources of firms, government, academia. 9
  10. Why Do Nations Need an Innovation-Productivity Strategy?1. Because addressing complex and systemic challenges–such as achieving affordable health care, combating global climate change, achieving sustainable energy production, deploying digital infrastructure, etc.–requires coordinated strategies leveraging the resources of firms, government, academia.2. Because, in contrast to what the conventional neo- classical economic doctrine holds, markets alone will produce societally sub-optimal levels of innovation. 10
  11. Because innovation is not as a market
  12. It is a system, that under-performs without innovation policy 12
  13. Why Do Nations Need an Innovation-Productivity Strategy?Markets alone will produce societally sub-optimal levels ofinnovation. Systemic market failures around innovation include:  High levels of risk  Time horizons  System interdependencies (e.g. chicken or egg)  Externalities (e.g. spillovers from research)  Private RoR from R&D is 7%; but the RoR to society from R&D is 28%  Need for technology platforms 13
  14. Today’s Presentation 1 “New Growth” Theory and Innovation 2 Why We Need an Innovation-Productivity Policy General Purpose Technologies and Productivity: the 3 Role of IT 4 Three Paths to Productivity Through Innovation Comprehensive IT-Based Productivity-Innovation 5 Policies 6 The Political Economy of Innovation/Productivity 14
  15. This is a Sophisticated Mobile Information Factory
  16. Why Is IT Driving Productivity-Innovation?IT is what economists call a General Purpose Technology (GPT).  Most innovations come incrementally, with modest changes in products, processes, and business models.  But approximately every half century a new technology system emerges that changes everything.  Steam power  The Railroad  Electricity  Steel  IT 16
  17. GPT’s Have 4 Main Characteristics1. They undergo rapid price declines and performance improvements.2. They are pervasive and a part of most industries, products and functions.3. They enable innovation in products, processes, business models and business organization.4. They drive productivity growth and profitability. 17
  18. GPT Driver Periods in American and European Economic HistoryPeriod Years Technology SystemMercantile/craft 1840s to 1890s Iron, SteamFactory-based industrial 1890s to 1940s Steel Electro-mechanical,Mass-production, corporate 1940s to 1990s chemicalsEntrepreneurial, knowledge-based 1990s to ?? ICT 18
  19. Today’s Presentation 1 “New Growth” Theory and Innovation 2 Why We Need an Innovation-Productivity Policy General Purpose Technologies and Productivity: the 3 Role of IT 4 Three Paths to Productivity Through Innovation Comprehensive IT-Based Productivity-Innovation 5 Policies 6 The Political Economy of Innovation/Productivity 19
  20. Three Paths to Productivity Through Innovation1. Expanding high productivity industries faster than lower productivity ones.  In the U.S., average compensation per employee in innovation-intensive sectors increased 50 % between 1990 and 2007—nearly 2.5 times the national average.  Jobs in the U.S. technology industry pay 70 percent more than average jobs. 20
  21. Three Paths to Productivity Through Innovation1. Expanding high productivity industries faster than lower productivity ones.  In the U.S., average compensation per employee in innovation-intensive sectors increased 50 %between 1990 and 2007—nearly 2.5 times the national average.  Jobs in the US technology industry pay 70 percent more than average jobs.2. Expanding high productivity firms faster than low.  One study of Canadian manufacturing found that plant turnover from entry and exit contributes from 15% to 25% of manufacturing-labor productivity growthSource: John R. Baldwin and Wulong Gu, “Plant Turnover and Productivity Growth in CanadianManufacturing,” Statistics Canada, No. 11F0019MIE, No. 193 (April 2003): 9. 21
  22. Three Paths to Productivity Through Innovation1. Expanding high productivity industries faster than lower productivity ones.  In the U.S., average compensation per employee in innovation-intensive sectors increased 50 %between 1990 and 2007—nearly 2.5 times the national average.  Jobs in the US technology industry pay 70 percent more than average jobs.2. Expanding high productivity firms faster than low.  One study of Canadian manufacturing found that plant turnover from entry and exit contributes from 15% to 25% of manufacturing-labor productivity growth3. Helping all firms expand productivity 22
  23. Today’s Presentation 1 “New Growth” Theory and Innovation 2 Why We Need an Innovation-Productivity Policy General Purpose Technologies and Productivity: the 3 Role of IT 4 Three Paths to Productivity Through Innovation Comprehensive IT-Based Productivity-Innovation 5 Policies 6 The Political Economy of Innovation/Productivity 23
  24. A Framework for Productivity-Innovation Policies1. Macro 24
  25. A Framework for Productivity-Innovation Policies1. Macro2. Factor Inputs/Framework Conditions (e.g., education levels, science support, etc.) 25
  26. A Framework for Productivity-Innovation Policies1. Macro2. Factor Inputs/Framework Conditions (e.g., education levels, science support, etc.)3. Sector Studies/Policies  Hotels  Construction  Music  Health care  Government  Education 26
  27. Service Blueprinting 27Source: V. Zeithaml, M.J. Bitner, D. Gremler, “Services Marketing: Integrating Customer Focus Across the Firm,” 4th ed., McGraw Hill, 2006
  28. Finland’s Omena Hotelli: A Vision of the Future? “A modern hotel for the Internet age.” Customers book online and the key code is transmitted to the door lock and customer’s email. Eliminates the need for receptionists, sales personnel, and concierges. Offers the core product of hotel operations—high-quality accommodations—without expensive auxiliary services. 28
  29. Applying IT Prior to the Customer’s Visit, Pre Check-In1. Social media and phone-based applications2. Trip Advisor and Facebook  Engage potential customers online.  Be active on hotel comment boards. 29
  30. Applying IT at Check-In: Kiosks“Our Customers Won’t Use Kiosks” …But They’re: 1. Not advertised; 2. Not initially deployed with the proper functionality; and 3. Have no rewards for use. 30
  31. Applying IT at Check-In: Room-Key Alternatives Alternatives to the plastic room key card.  RFID-enabled guest loyalty card as the room key.  Mobile phone  Using near-field communications (NFC) technology.  Openwave allows mobile phone to play audio file to open door. 31
  32. Applying IT to Concierge Services/Social Spaces Surface computing can bring interaction, connectivity, and a social experience to the lobby. • 360-degree satellite maps/tools allow guests to search for local restaurants and bars, recreation, etc. • Download and view photos, order food/drinks from menus, play games, watch videos, etc. 32
  33. Applying IT to the In-Room Experience1. Have an in-room electronic concierge.  Print-on-demand jogging maps.  iPod/iPhone software that has hotel lay-out in it.  Application that give links/info/discounts to merchants in a neighborhood.2. High-definition television.  Should be able to act as a computer and leverage IPTV.  Link to movie reviews.3. Connect rooms to Bluetooth-enabled wireless printer to let guests print. 33
  34. Applying IT to Operations1. Equip bell hops, concierges, room service, and repair personnel with handheld devices informing them and allowing them to confirm fulfillment of specific room service requests.  Puts knowledge of customer needs into the hands of your professionals, provides method to validate that customer service needs have been met. 34
  35. Applying IT to Restaurant/Conference Facilities1. Electronic self-serve ordering would boost throughput in restaurants.2. Restaurant staff use a handheld to take order (including room number).  Provide customer the bill by iPhone and let them pay by iPhone.  Could have an electronic pad to sign the receipt.3. Strive to digitize processes with regard to conferences and event management, make it easier for event planners to share information on a central Website. 35
  36. A Framework for Productivity-Innovation Policies1. Macro2. Factor Inputs/Framework Conditions (e.g., education levels, science support, etc.)3. Sector Studies/Policies4. Functions (e.g., processing information; processing money; moving people; growing foods-fiber; etc.) 36
  37. A Framework for Productivity-Innovation Policies1. Macro2. Factor Inputs/Framework Conditions (e.g., education levels, science support, etc.)3. Sector Studies/Policies4. Functions5. Tool Development (e.g., faster computers; voice recognition; expert systems [e.g, IBM’s Watson]; flexible displays, etc.); 37
  38. A Framework for Productivity-Innovation Policies1. Macro2. Factor Inputs/Framework Conditions (e.g., education levels, science support, etc.)3. Sector Studies/Policies4. Functions5. Tool Development6. Platform Development (e.g., smart grid; health IT; broadband; mobile payments; electronic IDs; ITS, etc.) 38
  39. A Framework for Productivity-Innovation Policies1. Macro2. Factor Inputs/Framework Conditions (e.g., education levels, science support, etc.)3. Sector Studies/Policies4. Functions5. Tool Development6. Platform Development7. Firms’/Organizations’ Adoption (e.g., R&D tax incentives; capital equipment investment incentives) 39
  40. IT Has Outsized Impacts on Organizations In large U.S. firms, every dollar of IT capital is associated with $25 of market value.  However, $1 of non-IT capital is associated with only $1 of market value. IT workers contribute significantly more to productivity than non-IT workers and the difference has grown over time. IT has 3 times more impact on productivity than non-IT capital. 40
  41. But Applying IT is Not Enough… 41
  42. Organizational Change is Also Required Firms that adopt digital organization tenets and simultaneously invest more in IT have disproportionately higher performance than firms that do not. MIT’s Erik Brynjolfsson: “Something unique happens when human capital and other workplace practices are combined with technology.” 42
  43. The Seven Practices of Digital OrganizationsA distinct corporate culture and organizational practices arefound in most corporations that make extensive use of ITand the Internet. They are:1. Move from paper-based to digital business processes2. Empower front line service personnel3. Foster open information access4. Link incentives to performance5. Maintain focus and communicate goals6. Hire the best people Erik Brynjolffson7. Invest in human capital 43
  44. Higher Profitability Accrues to Firms That Get Both Right Profitability 44
  45. A Framework for Productivity-Innovation Policies1. Macro2. Factor Inputs/Framework Conditions (e.g., education levels, science support, etc.)3. Sector Studies/Policies4. Functions5. Tool Development6. Platform Development7. Firms’/Organizations’ Adoption8. Individuals 45
  46. Today’s Presentation 1 “New Growth” Theory and Innovation 2 Why We Need an Innovation-Productivity Policy General Purpose Technologies and Productivity: the 3 Role of IT 4 Three Paths to Productivity Through Innovation Comprehensive IT-Based Productivity-Innovation 5 Policies 6 The Political Economy of Innovation/Productivity 46
  47. Need the Right Economic Policy Framework - Innovation Economics  Puts innovation and growth at center of economic policy.  Focuses on institutions (e.g., firms, universities, governments) and not just market exchanges mediated by price.  Maximizes growth with proactive and strategic public policies to spur innovation.
  48. Don’t give into Luddites 48
  49. Thank YouRobert Atkinson ratkinson@itif.org Follow ITIF: facebook.com/innovationpolicy www.innovationpolicy.org www.youtube.com/user/techpolicy www.itif.org Twitter: @robatkinsonitif

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