Innovate Out of Crisis

Professor Roy GreenWe must link short-terms boosts to demand with longer-term strategies for innovation and entrepreneurship, writes Professor Roy Green.

What part can innovation – and business education – play in addressing the world economic crisis?

Responses so far recall T.S. Elliott’s observation that “humankind cannot bear too much reality”. But it is clear that unless there is some measure of agreement on the causes of the crisis, there can be no effective or coherent global solutions, let alone national ones.

The only point of consensus is that while this crisis has the potential to assume a scale and depth comparable with the depression of the 1930s, the reality might be avoided through government intervention and re-regulation of financial markets. Already the theory of capitalism as a self-adjusting mechanism has been abandoned, or at least it is recognised that the cost of adjustment is too high.

At first, the crisis was viewed through the prism of monetary analysis, as the credit bubble burst and a process of ‘de-leveraging’ got underway. In this context, governments and central banks moved to lower interest rates, recapitalise financial institutions and neutralise “toxic debt”.

However, it soon became apparent that economies were caught in the ‘liquidity trap’ identified by Keynes, where the problem was not availability of finance but lack of effective demand. As a result, the attention of governments shifted from monetary policy to short-term fiscal stimulus measures, because “in the long run we are all dead”.

For Keynes, the long run was not just a time scale but a proxy for market equilibrium which could not be achieved automatically, or by the action of central banks, and even if it could, would not necessarily correspond with full employment or an optimal use of resources. This is the rationale provided for the government to operate directly on the level of demand in the economy, with a view to creating long-term growth and jobs.

Yet the problem facing the world’s economies is deeper than the perceived one of financial imbalances and demand deficiency. It has become a structural crisis of overproduction in relation to return on investment, promoted by an overexpansion of credit and a shift in the distribution of income from wages to profits – a crisis of a kind that was familiar in the 19th century but has returned today on a much more massive scale.

Consequently, the challenge is to link a short-term boost to demand with strategies for building the longer term capacity for innovation and entrepreneurship, which will enable enterprises to lead recovery through sustainable value creation. Here we draw from the Austrian economist Joseph Schumpeter, whose analysis of creative destruction also encompassed the sources of future growth and competitiveness.

There is an important role for governments to facilitate growth through ‘innovation systems’, but only if they build innovative capability within the enterprise. Nor should this role be focused exclusively on research and technology development, because we know that around two-thirds of innovation expenditure by firms is non-research and development.

This is “organisational innovation”, which may involve new study of management practices by the London School of Economics and McKinsey, now extended by UTS: Business and its university partners to Australia, found consistently that management and leadership were key factors in the differential productivity performance of firms, including their ability to undertake innovation.

Furthermore, the study argued, ‘Governments can play their part in encouraging the take-up of good management behaviour. Doing so may be the single most cost-effective way of improving the performance of their economies’.

A clear implication is that business education also has a major role in providing the foundations for a new approach to the management of organisations, which we fully recognise at UTS: Business.

While fiscal stimulus funding is inevitably limited, the evidence suggests that support for innovation is cost- effective, the more so when it involves collaboration with universities. And support for organisational innovation is particularly cost-effective because it addresses the challenge of linking short-term recovery to the longer-term development of a more dynamic and sustainable economy.

We must link a short-term boost to demand with longer-term strategies for innovation and entrepreneurship.