Measuring innovation: it needs some innovation

This is a lengthy post, but it’s a thorny subject.  I’d really welcome your thoughts.

Is it easy to measure innovation and its impact?  It depends. 

If you want to measure innovation within one organisation, it should be relatively straightforward.  You make sure you’re clear on your definition of innovation, you define the impact you believe your innovations will have (increased sales growth, decreased costs, happier customers); and then you measure.  

If you want to measure innovation within an entire nation or region, then you’ve got some big hurdles to get over.  The most significant of these hurdles is the out-dated dogma still to be found in well-worn government policy in many nations, which says that innovation can only be science-based and product-based.

An increasing number of nations are acknowledging this is a problem.  It not only affects the quality of innovation indices and the conclusions drawn from them – but it can also have a deleterious effect on policy-making itself.  Policy all too often gets shaped around what can be measured easily, rather than what’s actually important.

The classic approach for governments is to rely on two big measures when it comes to innovation: traditional forms of R&D expenditure, and the number of patents filed.   While they do have their uses, there are serious limitations with both measures:

  • R&D expenditure is an input.  It indicates intent to innovate, but not the whole innovation journey ending with practical application/commercialisation of the idea.  You could spend a lot of money on R&D but not actually produce an innovation.  And the R&D measured is often only science-based – which excludes development of substantial innovations in the creative and service-based industries.
  • Patents filed: again it’s really an input.  It gives an indication of invention, not innovation.  You could file a patent but never get it as far as the market.  And it’s only relevant for some sectors – pharma and manufacturing live on the patent system, but it’s often irrelevant to other industries.

This approach doesn’t reflect modern global understanding of what innovation is and how it happens.  Nor does it reflect modern economies in the west, which are increasingly service-based.  Science and technology-based innovation will always be a vital part of our economies, but we need a system that better reflects how the world works in the 21st century.

In the UK, NESTA (The National Endowment for Science, Technology and the Arts) is conducting research for the UK government to produce a new Innovation Index.  Although the work will not be complete until the end of 2010, they’ve produced an interim report with some interesting results:  

1.       How much does the UK invest in innovation, and what’s the economic impact of this?

Taking a much broader view of investment in innovation than simply R&D expenditure, the headline results are:

(i) UK firms invest almost half their total investment in innovation in staff training and organisational improvement.  R&D was only 11% of total investment.

(ii) Investment in innovation is responsible for two thirds of productivity growth.

2.       How much innovation is going on in UK firms? And how about a sector breakdown?

The research followed a widely used academic framework[1], which looks separately at firms’ ability to access, build, and commercialise innovation.  They took care to extend the scope of the survey to accommodate things like the ways in which companies acquire knowledge, a key theme within Open Innovation.  Research continues and we’ll see more results at the end of 2010, but the interim results include:

(i) Generally, innovative firms show higher sales growth than non-innovators.  Not surprising – but there are interesting variations between sectors: in law firms, it makes all the difference between sales growth and decline, but in the energy production sector there wasn’t much difference between innovators and non-innovators.

(ii) Small and large firms show significant differences.  In legal services, small firms are less innovative than their larger competitors; in consulting services, it’s the small companies that innovate more.

 3.       What’s the national environment for innovation like in the UK?  How does it compare with other leading innovator countries?

NESTA has looked at seven key factors in the innovation ecosystem, wrapped them into a simple model of innovation, and compared the UK with six leading comparators in innovation – Finland, Sweden, USA, Germany, France and the Netherlands.  The headline results for the seven factors are:

(i) On Entrepreneurship, and Competition, the UK is putting in a good performance.  By comparison to the other nations, there’s a dynamic culture for enterprise and strong competition.

(ii) On Openness, and on Public Research, we’re struggling a bit.  The UK is perceived as being less open to ideas from elsewhere, and public research collaboration with industry is on the low side.

(iii) On Skills, Access to Finance, and Demand for innovation, we’re doing badly.  Firms say that they still struggle to recruit people with the right skills (which must be why they’re investing so much in training). They seem reluctant to buy high tech equipment; and access to credit and local equity markets is worse than in the comparator nations.

The best things about this research for me are, firstly, that it incorporates a great deal that’s been missing from government policy on innovation; and secondly, it keeps the link between the investment and its ultimate purpose, productivity growth.  (At least, that’s the typical purpose today.  In a world of finite resource, we need to think seriously about prosperity without growth – but that’s for another post.)  But the most important thing is that it shines a stronger light on organisational improvements and human capital – which suggests that it can support more effective policy-making that’s fit  for the 21st century. 

In your organisation, what’s the most important type of investment in innovation – people, R&D, connectivity? Something else? What do you think are the problems with current public methods of measuring innovation? 

[1] Hansen M & Birkenshaw J (2007) The Innovation Value Chain. Harvard Business Review, vol. 85, No. 6, pp 121-130

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One Response to Measuring innovation: it needs some innovation

  1. Robert van Aalst says:

    Clare, interesting post. The defining of innovation at regional, national and international levels has been an issue of growing concern over recent years, especially across developed economies that are moving from production based to service based economies.
    In Australia there is a range of work being undertaken – although at relatively early stages – looking at ways in which ‘service’ economy innovation can be more effectively measured. You are right when you say that traditional measures of innovation have focussed purely on ‘traditional’ industries that make up a 20th century economy. The 21st century advanced economy is highly service focused.
    Government policy is driven by what can be measured. Governments won’t spend political dollars (or pounds/euros) on initiatives that can not show a positive outcome.
    I am aware that the OECD is also undertaking a range of work around the measuring of innovation in service-based economies. It is now critical that these measures be developed and implemented so they can properly inform policy. The alternative is that innovation policy across developed nations will stagnate due to this lack of measurement capability and lack of governments’ ability to address identified market failures.
    The only up side is that innovative private firms will innovate regardless — as long as they can measure a financial outcome (sales/profits etc). However translating this to a national or international context is currently problematic.

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