Crisis could be right time for innovation

Posted by I-Blogger on 17/11/08

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In preparation of a talk I am going to give at ERRIN’s forthcoming marketplace on entrepreneurship on Tuesday, I have done a little Internet research on the financial crisis, entrepreneurship and innovation. Here are some thoughts and links:

New data from the US suggests that tech companies now get the full blow of the financial and economic crisis. The question that many ask now is “what will happen to innovation now that the world economy is in a tailspin”. Will businesses, governments and academia curtail their investments in innovation and scale back on risk-taking?

An article posted today by the Wharton school of Business suggests that the crisis could be the right time for innovation: “Loss of revenue and profit will at first instill a cost-cutting mentality, which is not good for innovation. But if the patient is bleeding, you need to stop that first. Then, however, a phase starts where leaders ask which parts of their business model are weak [and perhaps unsustainable] and that, in turn, can lead to restructuring and reinvention.”

Some people (see this blog entry) argue that crisis breeds innovation: “For entrepreneurs, financial uncertainty forces efforts to be streamlined. This is often when the best concepts arise as great innovators are excited by and step up to challenges much as great athletes reach deep within themselves to achieve peak performance.”

While proponents and opponents of more regulation of the world economy battle it out at the macro-economic level (the results of the recent G20 meeting seem to be still ambiguous, a probably more decisive follow-up meeting will take in April, after Obama will have taken office) Europe at the micro-economic level clearly needs to further upgrade its efforts in building a true culture of entrepreneurship in our regions, to address one of the underlying issues of Europe’s innovation gap.

On this I would like to quote Peter Jungen of the European Enterprise Institute, whom I had interviewed earlier this year: “The key for a higher innovation pace and more economic dynamics to increase growth and employment is a renaissance of the entrepreneurship culture in Europe. The poor pace of innovation results from a lack of new entrepreneurs. It is the birth of new firms that gives an economy its dynamics. This is the biggest deficit in Europe… “ (see the full article).

7 Responses to Crisis could be right time for innovation »»

  1. Comment by Orgalime | 2008/11/17 at 12:54:12

    Innovation is exactly what Orgalime industries have to offer! However, the recent economic slowdown does make for a bleak outlook….see http://orgalime.blogactiv.eu/2008/11/17/now-is-really-the-time-to-take-initiatives-for-growth-and-jobs/

    Electra, the Industrial policy initiative for the Electrical/Electronics sector is overflowing with R&D and Innovation – all this to help meet the 20/20/20 climate change goals of the EU……….see http://orgalime.blogactiv.eu/2008/09/08/electra-cnn-world-report-highlights-relevance-of-european-electrical-engineering-and-electronics-industries/

  2. Comment by KAlley | 2008/11/18 at 12:30:13

    Developing a culture of entrepreneurship and risk taking is a hurdle that Europe must finally address. The challenge does not seem to lie in EU support programs (there are plenty of these) or new “Lisbon Agendas” but in a cultural transformation that embraces ‘failure’ as an opportunity and not a mark of humiliation. To be an entrepreneur there are 3 minimum requirements: 1) an idea; 2) an incentive; and 3) the willingness to try again if it doesn’t work out the 1st time (which it often doesn’t). Innovation (and new inventions) will suffer in the economic downturn unless the incentives to innovate and create are protected and strengthened – not weakened. This means access to venture capital and more importantly, strong intellectual property protection. If leaders reinforce the basics that underpin risk taking – the economic downturn can turn into an opportunity for new advances to address today’s global challenges.

  3. Comment by I-Blogger | 2008/11/18 at 20:13:51

    Dear KAlley

    Thanks a lot for you comments. Great you are joining this debate.

    I tend to say I broadly agree but not on everything you say. I agree on the need for a mentality change. I just came back from a full day ERRIN seminar on entrepreneurship, where this was mentioned several times by people who are involved in concrete actions at the local and regional level to create this kind of mindshift in schools, in universities, in public administrations. I will report separately on some of these really interesting examples in my blog.

    We need to teach people that it is actually a blessing not sitting in an office and having a superior tell you what you have to do. And the current crisis is probably a chance, given that the market for secure jobs is getting smaller. So more people need to go out do their own thing. The companies being build now and those that survive will be better equipped to succeed. The crisis can be a chance, as every crisis does. Now is the time to introduce change.

    To bring that change about you need to support the change agents. It is not something you do with policy declarations but with fairly concrete steps, even small ones, in our communities and countries.

    Now we have halso heard from DG Education and DG Enterprise that will be increasing attention now at EU level for producing this kind of change. And the Lisbon process can be very useful here, if it is accompanied by measurable indicators. How else do you want to make sure there is a follow-up to any declaration of intent and that progress is measured and reported on regularly. So no new Lisbons or Ljubljana processes but including these challenges in the existing procedures.

    Another point you mentioned is risk. Although Entrepreneurship is not always about risk-taking (Bill Gates had not much to lose, when he founded Microsoft, nor did Marc Zuckerberg when he founded facebook or the Google boys), there is certainly scope for legislative change to be less punishing on the risk-takers if things go wrong. Also that was mentioned during our seminar today.

    Your other point on EU programmes. Yes, there are quite a number of programmes. But do they really deliver what we need? And do their programme rules allow for putting in the projects we need? I doubt it.

    Finally, I am not an expert on this, but I do generally not agree so much on seeing strengthening IPR as the solution to this crisis. I know there is quite a discussion going on, and it is certainly justified in some sectors, but not across the board. I would rather say that too much IPR kills innovation. We need more open standards and experimentation.

    Your i-blogger

  4. Comment by MTaylor | 2008/11/19 at 16:42:35

    It is important to be clear that the world is actually facing two economic challenges at the moment. The first challenge is the financial crisis which has been brewing for a while, but just started to show its effects in the middle of 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. The second challenge is represented by the projections of a protracted economic downturn for the most developed economies.

    There are quite a number of proposed “keys” to recovery circulating around. This thread focuses on the key of innovation and its relationship to entrepreneurialism and risk-taking as a necessary stimulus. What is the key to spurring innovation and thus economic growth? The key to innovation is incentivization and strong intellectual property rights are all about providing incentives to the creators, the inventors, the innovators, the risk-takers. Too much IPR does not kill innovation; rather strengthening IPR encourages the necessary innovation. Opponents of this principle often say what is needed is less IPR and more open models of innovation. It is not under what circumstances innovation occurs but under what circumstances innovation occurs best or is most likely. Yes there are those that will create or invent simply driven by their desire to do so without concern for risk or reasonable financial return, however, this does not happen at anywhere near the required level to spur economic growth sufficient to bring a country or region out of a recession or stabilize a financial market or put great numbers of people back to work. All of that comes only from a much larger scale of innovation with a much larger degree of risk and much greater financial demands for commercialization. The best IPR system balances the needs of society, the needs of the creator/risk-taker with the need for fair market competition. It sometimes may be challenging to strike the right balance here, but this is the approach that has proven most successful over time and it should not be discarded now when it is most needed.

  5. Comment by I-Blogger | 2008/11/19 at 20:39:21

    Dear MTaylor

    Thank your for your comment. No question that IPR is important to incentivise and reward innovation. I do not disagree on this. I am just arguing for a balanced approach, for instance with regard to publicly funded innovation. The EU through its different programmes, most notably the Research Framework Programmes funds research and innovation with public money. I think it is important that the fruits of this publicly funded activities go into the public domain and don’t become “cordoned off” by the patent system. This is of course easier said than done, since the EU rarely finances 100%, but whoever gets these subsidies, and there is often industry involved, also puts in some of their own money. Concerning Open Innovation it should probably be mentioned in this context that Open Innovation does not mean cost-free . In contrast to open source, for example, open innovation typically implies the payment of licence fees as well as other financial arrangements. From what I understand we should also distinguish between sectoral needs, for instance industries with with a rather long technology life cycle, where there is a strong need for protecting innovations due to the risk and resources going into funding innovation and those with rather short technology life cycles (e.g. ICT, electronics and telecommunications).
    Your I-blogger

  6. Comment by JULIE PEAR | 2008/11/27 at 05:55:50

    A lot of people who would like to start a business think the task is too daunting. But following a passion is not as high risk as you may think. Conventional wisdom about entrepreneurs being big risk takers and living on the edge is not all that realistic. In fact, there are ways to minimize the financial risk and emotional drama of going after your dreams. And, most of the skills you need to be an entrepreneur, you can teach yourself.

  7. Comment by I-Blogger | 2008/11/27 at 22:05:25

    Dear July

    Thanks for your comment. Some people do indeed say that risk taking is rather a romantic notion and that it is more about risk management. Some of the ICT or Internet businesses seem to validate that: Rather low risk but potential high reward if it takes off. But I guess it all depends on how much capital you need to realize your idea, or, if you want, your dream (it may be a nightmare, if you fail). There is also the notion that to be a good entrepreneur you have to go bust at least once. And that is usually not rewarded, but penalized by society and its institutions. The stigma of failure and the high risk premium (bankruptcy laws, credit history, etc.) are the real risk entpreneurs face. It also does take the courage to leave the traditional path and idea of how to make a living by trying to get a job, particularly in Europe, where we do not have an all permeating entrepreneurial culture like in the US and where we do not have so many role models, although that seems to be rapidly changing (let’s see what the financial crisis does to this on a psychological level). So it is also and perhaps more about psychology and sociology than about finance. I have to add, though, that recently I spoke to a young entrepreneur, who slightly changed my perception on the risk taking. He told me that one risk involved in seeking financing opportunities is related to IPR. He said he had learned that you have to be careful to disclose your business idea, your innovation, when you approach potential financiers. This you can do through starting a patent process (you don’t necessarily have to have the patent) and to have them sign an agreement that they will not take opportunity from your idea, before you even start negotiating about financing. And with financing there was also the risk, he said, that you may end up being just an employer in the company you founded, as the financing organisations often seek large shares in your venture and extend that share as they have to put in more finance. And depending on the amount of finance you need, there is always the risk of ending up with a mountain of debt, if things do not work out.

    Your i-blogger


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