The new Innovation Index shows that the UK is more innovative than thought. The challenge, says NESTA's Jonathan Kestenbaum, is to ensure it stays that way
Somewhere between Peter Drucker, Tom Peters and Michael Leboeuf, ?what gets measured gets done? has become one of the world?s most famous performance management maxims. Unfortunately, an extension is also true: what does not get measured does not get done; and what is measured wrongly gets done wrongly.
As world economies will be shaped by their ability to commercialise and profit from investments in new knowledge and services, the need to have a better understanding of how this leads to growth is essential. But while innovation is a subject that is increasingly moving into the mainstream, there remains a poor understanding of the link between innovation and growth.
Consider, for example, how innovation has traditionally been measured. It has been based on a mid-20th century view of manufacturing-based economies and a ?linear? model of innovation defined by R&D spend and patent production. This implies that innovation emerges from a process of formal research and development undertaken in a university or industrial laboratory before being commercialised by far-sighted management in business.
This is wrong on two counts: it?s an outdated view of how businesses innovate and it?s certainly not reflective of the innovation that matters to the modern UK economy. Most obviously, traditional metrics fail to adequately capture ?hidden innovation? ? factors that contribute to innovation such as product design, organisational innovation, developing new customer offerings and brands, and copyright.
There is no first step in the innovation system. Innovative businesses rely as much on networks and collaborations as on in-house research. It encompasses not only the development of new components and products, but also new services, technical standards, business models and processes. It is as much a feature of developments in the public and non-profit sectors as in the private sector. Furthermore, much of the economic benefit from innovation comes from incremental innovations arising from the wide diffusion of knowledge and technology rather than from the creation of that knowledge in the first place.
In recent years. NESTA?s call for a wider definition of innovation to better understand its contribution to the economy and in particular to productivity has increasingly been heeded both here and in the US. This has led to the development of a new measure to capture innovation performance ?in the round? ? The Innovation Index. We?ve worked with world-leading innovation researchers and economists, businesses and innovators to design the Index. What have we found? Two key things: first, innovation is a key driver of productivity. Private-sector businesses invested £133bn in innovation in 2007, representing 14% of private-sector output. This compares favourably with the more preliminary data available for countries like France and Germany and is similar to levels seen in the US. This may account for why the UK has enjoyed higher productivity growth in recent years than France or Germany: 2.0% compared to 1.3% and 1.1% respectively.
Second, this innovation was responsible for the lion?s share of the UK?s productivity growth from 1990-2007. Since 2000 two-thirds of UK private-sector productivity growth or 1.8 percentage points of productivity growth per year was a result of these investments in innovation.
So the UK is more innovative than we thought, which is great news. But accurate measurement presents us with a new challenge. If innovation is, as the Index suggests, strongly linked to business growth across a range of sectors, then it is innovation that will make the difference between a company failing or growing. Innovative software firms, for example, enjoyed a much faster growth rate than non-innovative ones (13% average revenue growth per year compared to just over 1%). And this relationship held true even in sectors like legal services, where innovative firms enjoyed average revenue growth of over 10%, while non-innovative firms revenues shrank on average.
The challenge, therefore, is to make sure that the UK creates the best possible environment for innovation to occur. And this doesn?t only apply in the private sector. We are now working to develop an Index for public services, which will help ensure that we make full use of innovation to meet the urgent challenge of delivering better public savings for less public money.
The Index does what it says on the tin ? it?s a measure by which to analyse the investment we make in innovation, and its effect on productivity. The challenge will be to use the Index not just to define our national accounts, but our narrative of a country which puts innovation at its heart to improve both our economic and societal performance. Only then will this measure really count.
Jonathan Kestenbaum is Chief Executive of the National Endowment of Science, Technology and the Arts (NESTA)
To find out more about The Innovation Index, visit: www.nesta.org.uk
Added the 26 April 2010 in category Innovation UK Vol6-1