Business Magazine

Institutions for Innovation

Posted on the 06 October 2011 by Center For International Private Enterprise @CIPEglobal

Institutions for innovation

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As the world reflects on the legacy of Steve Jobs, “genius” and “innovation” appear to be towards the top of the list of words that defined his life. Yet, the success story of Steve Jobs – and the success story of Apple and Disney – is as much about his intellectual ability and vision as it is about the system that provided the opportunities for his skills not to go to waste.

Simply put, innovation is not just a product of human capital; it is also a product of the institutional environment within which it takes place. And although the developing world is increasingly a stronger player  in the global innovation movement, institutional barriers prevent many developing country innovators from becoming major players globally.

One limitation to innovation in many of the emerging markets is the dominance of monopolies (or, alternatively, a lack of true market competition.) So while some major firms can be effective in adopting technology or making improvements at the margins, many of the developing countries are still far behind their potential in creating new markets and products through “disruptive innovation.” Apple didn’t improve upon existing products - it created new ones.

Apple thrived because it had to compete with others and its market position wasn’t granted to the company by government regulations or special relationships with decision-makers. For the company to survive, Steve Jobs pushed the boundaries of what was imaginable. Yet it is not uncommon to see domestic firms in many of the emerging markets take a different approach, seeking government protection against competition as a means of survival or a way of improving their market position (think car manufacturers in Russia or high speed rail network suppliers in China.)

There are many different institutional barriers that undermine innovation: weak intellectual property rights protection creates disincentives to innovation. Corruption undermines the creation of new firms and technological advances by squandering resources and cementing the status quo. Poor bankruptcy procedures (not just the lack of start up capital) prevent would-be entrepreneurs from trying to open businesses. Dysfunctional court systems make contracting in business transactions unpredictable. Red tape diverts investments.

The bottom line is that much of the commentary on innovation often neglects the importance of a strong institutional environment. We hear about creating a culture of innovation within companies, utilizing the newest technologies, questioning and rejecting what’s considered “normal,” taking risk and failing, etc. But not enough about the environment within which all this happens.

Those trying to replicate Steve Jobs’ story in their own countries will be the first one to tell you that they encounter many obstacles on their path to success. And while some obstacles will always be there, innovation can benefit greatly from simple improvements in the business climate. An entrepreneur’s time can be better spent on creating new products and business models than dealing with conflicting regulations, corrupt courts, an unpredictable macroeconomic environment, or vested interests that seek to protect the status quo.

Steve Jobs was an exceptional individual that most say was one of a kind. But I wonder how many more Steve Jobs do not even get a chance to succeed in countries where political and economic structures protect vested interests and create disincentives to innovation and creativity. And how many of them leave their countries in search of a better business climate that will reward their skills and ideas.

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