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: http://ssrn.com/abstract=2392109). 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: http://ssrn.com/abstract=2473226) 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: http://www.tcd.ie/Economics/TEP/2005_papers/TEP2.pdf

19/7/2014: Global Innovation Index 2014: Ireland vs 'Periphery'

In the previous post I gave detailed breakdown of Ireland's performance in Global Innovation Index 2014. I used small open economies and Switzerland (the world's highest ranked economy) as a reference group.

Here, primarily for the reason of convention, are the comparatives of Ireland's performance relative to the Euro area 'peripheral' states:

Clearly, Ireland is a much stronger performer in Innovation than all other 'peripheral' states. This is neither surprising nor unexpected. Crucially, the gap is wider today than in 2007-2008 and the gap is rather persistent over time. Average ex-Ireland 'peripheral' state rank was 34st in 2014 against Ireland's 11th, this is a very significant gap. This gap increased from 16-19 points on average for 2007-2010 period to 32 points in 2012 and 23 points in 2014.

Furthermore, it appears that even if we are to abstract away from the metrics very heavily influenced by the tax optimising MNCs, Ireland (under such a metric closer to 20th-23rd position in the World rankings) would still post a stronger performance than any other 'peripheral' state (best - Spain at 27th).

19/7/2014: Global Innovation Index 2014: Ireland's Performance

Global Innovation Index is out this week and the 2014 edition focus is on Human Capital (here) a topic close to my heart (see my TEDx talk on this here).

Here are some interesting comparatives taken over the Index history for Ireland and its core peers.

Firstly, in 2014, top 20 ranks are:

Ireland shows good performance, with 11th place in 2014, slightly down on 10th place in 2013 and significantly down on 7th place in 2012 rankings, but still better than historical average of 16th rank.

Here is evolution of Irish rankings over time, compared to other small open economies of Europe that rank in top 25 this year:

Not a bad performance for Ireland, I must say, though we should be aiming for a place in the top-10.

However, over longer time horizon our performance is second best in the group of peer economies:

The above chart highlights top 3 performers in terms of rankings dynamics (green bars) and worst 3 performers (red bars).

It is worth noting that Luxembourg is, in my view, an economy that simply should not be ranked due to massive distortions in its rankings induced by large share of the companies operating in the country only as post-box offices and due to huge proportion of its workforce not being residents of the country. In Ireland, there are some distortions as well, and these are very significant, but of magnitude they are much smaller than those in Luxembourg.

Here are some Ireland vs Switzerland comparatives in specific sub-indices:

Institutions:

The above shows relatively strong performance for Ireland, except for:

• Political Stability and Environment
• Government Effectiveness

Ireland leads Switzerland strongly on

• Business Environment metrics

Human Capital and Research:

Overall, we have a strong lead compared to Switzerland in:

• Education, when it comes to Spending on Education and on School Life Expectancy (so we spend more and our students stay in school longer, on average)
• Tertiary Enrolment (we have more student-age people in tertiary education)

We significantly lag Switzerland in:

• Tertiary Inbound Mobility (ability to attract students into Ireland)
• R&D
• Researchers
• Spending on R&D
• University Rankings (quality of education)

 Infrastructure:

We outperform Switzerland in nothing, save for GDP per unit of energy use, which is of course consistent with the fact that a larger share of our GDP accrues to tax optimisation than in the already low-tax Switzerland.

We lag Switzerland in everything else...

Market Sophistication:

We lead Switzerland in Credit, thanks to allegedly greater ease of getting credit in Ireland (I am not sure what the Index analysts mean by that, given that our credit supply is negative). Despite beating Swiss in 'credit' we lag them in Investment, which, presumably means that while we borrow more and easier, we do not invest what we borrow... may be it is because our businesses are buying BMWs and Mercs instead of machinery and technology? I have no idea...

Business Sophistication:

Remember that Ireland beats Switzerland on Ease of Doing Business. But with all that 'Ease' around, we are really not that far up on Switzerland in actual Business Sophistication... and if we strip out FDI inflows and imports of high tech equipment and inputs (a proxy for how many ICT MNCs we have 'operating' from here), we are probably actually ranked lower than Swiss.

Knowledge & Technology Outputs:

When it comes to actual Knowledge & Tech outputs, all of the above 'advantages' of Ireland over Switzerland vanish. Just as Savings vs Investments, we are good on inputs, but much less good on deriving anything meaningful from them. Control for tax optimisation activities of ICT services MNCs in Ireland and we sink even further below Switzerland.

Creative Outputs:

We are keen on painting Ireland as a Creative Land, while the Swiss are, as we often note, boring and 'Germanic' - aka not creative and too stringent. Right? Not really. Swiss beat us hands down on Creative Output metrics. We only outperform them in terms of Wikipedia edits and YouTube uploads - presumably due to the need to control our reputation by editing out unpleasant references to our social and industry and politics 'stars' from the public domain and down to our 'craic' in pubs and bars that get mistakenly posted on-line... I am, of course, being slightly sarcastic.

So net conclusions (on serious note):

1. We are getting better and are strong performers when it comes to many 'inputs' into Innovation; but
2. We are not that great in deriving 'outputs' from the 'inputs' we commit.
3. Much of the performance upside for Ireland is down to distortionary activities of a handful of MNCs trading from Ireland; and
4. Much of the performance downside for Ireland is down to indigenous activities of the rest of our economy.