Do we need Business Innovation – or Common Innovation? By Peter Swann

Bundesarchiv_Bild_183-54440-0001_Altgolßen_Bau_eines_Stalls_für_LPG_cropped

What is the best way to create and share prosperity in a society? Professor Peter Swann argues that common innovation is about ordinary people creating the wealth of nations, and that business has no monopoly over innovation or wealth creation.

                             —

When I started to study the economics of innovation, as a PhD student in the late 1970s, there was great optimism about innovation. First, it was seen as a very powerful force, usually of considerable value to the end-user. Second, although the record of innovation in solving social and economic problems was mixed, there was optimism that future innovation would make a better job of it.

As I look back, it seems that some of that optimism was misplaced. In some areas, at least, the value of innovation to the end-user is showing diminishing returns. It also seems that business innovation offers no solution to many social and economic problems. But while I have become more pessimistic about business innovation (especially by big business), I am much more optimistic about what common innovation can offer to economy and society.

What do I mean by this distinction? To date, most of the economics of innovation has been concerned with business innovation – the innovations made by businesses in order to improve their performance. Often, better performance is achieved by offering end-users a better deal than they can get elsewhere, and then innovation can create value for end-users as well as for innovators. But it is important to remember that with business innovation, the innovator and the end-user are often different from each other, and have different interests.

By common innovation, on the other hand, I mean something quite different. These are innovations made by ordinary individuals, households and communities for their own use and benefit. Here there is usually no distinction between the innovator and the end-user.

Why have I become more pessimistic about (big) business innovation? Let us start with the issue of diminishing returns.

As a PhD student, I studied the business innovations in microprocessors that made the PC revolution possible. I would say that these innovations were hugely wealth-creating. Just compare the limitations of a batch computing service using punched cards (my experience as an undergraduate), with what could be done on the PCs of 1995 (running Windows 95 on an Intel Pentium system). The computing power available and affordable to the user had changed out of all recognition, and many users learnt to make very good use of it.

But now, consider the PC user who runs office software. How much does this user benefit from the subsequent business innovations between 1995 and 2014? Have we not run into diminishing returns? The new hardware and software offers many new features, but many users really do not need or want this additional functionality.

Indeed, this is just one example of a more general phenomenon of diminishing returns. It seems that an ever-greater difference is emerging between the sorts of business innovation that best enhance the performance of the business and the sorts of innovation which would create value for end-users. Many business-enhancing innovations are organisational innovations, outsourcing innovations, restructuring innovations or financial innovations. They are very valuable to the innovator, and the financial services industry, but do little or nothing of value to the end-user. Indeed, some of these innovations (especially financial innovations) create profit for the innovator mainly by, ‘robbing Peter to pay Paul’.

By contrast, diminishing returns are rare in the case of common innovation because the innovator and the end-user are usually the same. There is no distinction between the value to the innovator and the value to the end-user. So if a common innovation offers little value to the innovator/end-user, then it will not happen.

What then of the capacity for innovation to address social and economic problems? Take the ever-topical example of de-industrialisation in England and its effect on economy and society in many northern towns. The advent of globalisation meant that many towns dependent on a traditional manufacturing industry saw their income and employment decline as production was relocated to lower-wage economies. This led to many social and economic problems in depressed towns.

Take a specific example: the emergence of districts dominated by entire streets of derelict terraced housing. What has business innovation done to reverse this problem? Nothing much. In aggregate, big business has tended to withdraw from these depressed towns rather than re-invest. And, moreover, this business reluctance to re-invest seems to have rubbed off on government too.

47200508A controversial example of this attitude emerged at the end of 2011, when some government papers relating to Mrs Thatcher’s first term as Prime Minister were made public under the ‘Thirty Years Rule’. One of her most senior Conservative colleagues advised her that it did not make sense to concentrate public spending on urban renewal in Liverpool, because this would be an attempt to ‘make water flow uphill’ and would fail. He argued instead that she should give serious consideration to ‘managed decline’ of that city. The underlying argument seemed to be that if a town or city is not a fertile soil for business, then it is not of much economic use, and ‘managed decline’ is in order. The alternative argument – that business at large is not fully fit for purpose if it cannot serve the needs of our cities and citizens – was probably not considered by a government that had total faith in business.

The good news, however, if that even if big business has withdrawn from towns and cities with these problems, even if business innovation does not offer any solution, and even if central government is wary about solving these problems by public expenditure, common innovation by committed local citizens can provide a solution.

A recent article in the Observer describes such an example of common innovation which has revived formerly derelict streets in Stoke-on-Trent. This city (or, historically, six separate towns), known as the Potteries, was the centre of the ceramics industry in England and, in its prime, a great hive of ceramics production. But now, much of the production has relocated to China and elsewhere in Asia. The City Council introduced a policy where they would sell off derelict houses for £1 each, and provide loans to local buyers who could commit to restoring the properties, to making a positive contribution to the community, and to repaying the loans. This particular initiative has been remarkably successful at reviving that district of the city.

As I look about around, I see many examples of how common innovation contributes to wealth creation. My book, Common Innovation, describes some of these and develops a framework in which to understand them. This does not mean that common innovation is simply a substitute for business innovation. There are some things that can only be achieved by big-business innovation. And as we have just seen, there are some things that business innovation does not do which common innovation can do. Nonetheless, the two can compete with each other. And that competition should encourage business to offer innovations of value to end-users, and not just innovations of value to the innovator. For if it does not, common innovation will start to drive out business innovation, and few ordinary citizens will regret that.

 

Peter Swann is Emeritus Professor of Industrial Economics at the University of Nottingham. His latest book Common Innovation: How We Create The Wealth Of Nations is published by Edward Elgar.

, , , , , , ,

Subscribe

Subscribe to our RSS feed and social profiles to receive updates.

One Comment on “Do we need Business Innovation – or Common Innovation? By Peter Swann”

  1. arijitbanik Says:

    Reblogged this on Arijit Banik and commented:
    From Peter Swann’s post:
    Many business-enhancing innovations are organisational innovations, outsourcing innovations, restructuring innovations or financial innovations. They are very valuable to the innovator, and the financial services industry, but do little or nothing of value to the end-user.

    The advent of globalisation meant that many towns dependent on a traditional manufacturing industry saw their income and employment decline as production was relocated to lower-wage economies. This led to many social and economic problems in depressed towns.

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: