Sunday, August 17, 2014

17/8/2014: Disruptive Innovation, Experimentation and Entrepreneurship

Last week I highlighted several studies relating to human capital and entrepreneurship. Here, continuing with the theme, couple more.

First, a paper by Acemoglu, Daron and Akcigit, Ufuk and Celik, Murat Alp, titled "Young, Restless and Creative: Openness to Disruption and Creative Innovations" (February 1, 2014, MIT Department of Economics Working Paper No. 14-07: Per authors: the study argues that "openness to new, unconventional and disruptive ideas has a first-order impact on creative innovations" where such innovations are defined as those "that break new ground in terms of knowledge creation". The problem, of course, is not that this is something new - if anything, this is trivial - but that we (as society and managerial systems, firms, enterprise ownership structures etc) have a very hard time managing disruptive innovation to achieve 'openness' to the ideas and the generators of such ideas that deliver true disruption.

"After presenting a motivating model focusing on the choice between incremental and radical innovation, and on how managers of different ages and human capital are sorted across different types of firms, we provide cross-country, firm-level and patent-level evidence consistent with this pattern. Our measures of creative innovations proxy for innovation quality (average number of citations per patent) and creativity (fraction of superstar innovators, the likelihood of a very high number of citations, and generality of patents). Our main proxy for openness to disruption is manager age. This variable is based on the idea that only companies or societies open to such disruption will allow the young to rise up within the hierarchy. Using this proxy at the country, firm or patent level, we present robust evidence that openness to disruption is associated with more creative innovations."

All of the above is fine. All is neat and well-argued and empirically backed. But, now, try and tell your average HR manager that the firm they work for should hire someone who breaks consensus and bends rules of logic, thinking and creativity?.. Or try telling them that standard CV/interview/test metrics they employ make hiring disruptive talent actually impossible, let alone difficult… And try telling them that majority of people graduating with 'right' degrees and offering 'right' references and credentials are actually deeply conformist, rather than disruptively innovative…

The second paper of interest is by Kerr, William R. and Nanda, Ramana and Rhodes-Kropf, Matthew, titled "Entrepreneurship as Experimentation" (July 28, 2014, Journal of Economic Perspectives: argues that "…entrepreneurship is about experimentation: the probabilities of success are low, extremely skewed and unknowable until an investment is made." The most interesting bit in the above is the unknowable nature of the probability of success ex ante actual investment. This really cuts across the entire notion of angel financing…

"At a macro level experimentation by new firms underlies the Schumpeterian notion of creative destruction. However, at a micro level investment and continuation decisions are not always made in a competitive Darwinian contest. Instead, a few investors make decisions that are impacted by incentive, agency and coordination problems, often before a new idea even has a chance to compete in a market."

Another interesting issue is that the authors "contend that costs and constraints on the ability to experiment alter the type of organizational form surrounding innovation and influence when innovation is more likely to occur. These factors not only govern how much experimentation is undertaken in the economy, but also the trajectory of experimentation, with potentially very deep economic consequences."

The reason why it is go interest from my point of view is nine years ago, I tried to formulate some of these exact fundamentals in relationship between ability to take risks, experiment, innovate and the macro-economic policy environments in the paper available here:

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