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George W. Bush's proposal to increase federal government R&D spending is revealing on two levels. It suggests a growing sense of urgency about the need for the U.S. to strengthen its innovation capability. At the same time, it provides insight into the mindsets that are making the U.S. more vulnerable to global competition.
While executives of large Western companies and policy-makers of Western governments continue to view innovation through 20th century lenses, entrepreneurial companies in Asia are harnessing the opportunities of the flat world to pursue broader forms of innovation appropriate for the 21st century.
In the West, we still confuse invention with innovation. Even worse, we tend to focus narrowly on breakthrough technology or product invention -- that's what really gets the adrenaline going. Anything else is marginal and uninteresting.
THE REAL DRIVER. In the 20th century, scale and efficiency became key sources of economic value. Companies spent a lot on R&D and standardized and automated the rest of their operations, constraining opportunities for creativity outside the lab. As competition intensified, companies squeezed their R&D budgets in the quest for cost savings, while still looking for the "silver bullet" that would insulate them from competitive pressures. Given that mindset, it's understandable that CEOs hammer on the government to spend more to help them find the next breakthrough.
But if we shift our attention from invention to innovation, we begin to see a much broader horizon. Innovation -- the ability to create and capture economic value from invention -- is what really drives both the economic prosperity of nations and the shareholder value of corporations.
Innovation isn't just confined to commercialization of new products. It can also build upon creative new practices, processes, relationships, or business models, and even institutional innovations such as open-source computing -- invention occurs in all these domains. And while breakthrough innovations can generate significant economic value, sustaining that value requires a capacity for continual incremental innovations.
R&D GHETTO. From this perspective, Western executives may want to spend a little less time lobbying Washington for more government spending on their pet R&D projects and more time trying to boost their own innovation capability. When the horizon broadens from invention to innovation, Washington becomes more marginal.
As barriers to entry erode on a global level in the 21st century, economies of speed, scope, and skill begin to overwhelm economies of scale. In this environment, innovation must be freed from the ghetto of the R&D department and the tyranny of the breakthrough mindset. It also needs to expand beyond the boundaries of the enterprise and tap into rich networks of relationships encompassing a growing number of specialized business partners and lead customers. We need to discover and master the new management techniques required to sustain distributed innovation initiatives and create even more economic value.
In this context, Western executives may want to shift their travel plans. Rather than flying to Washington, they might consider flying to China to better understand some of the innovation-management techniques emerging there in industries as diverse as apparel, consumer electronics, and motorcycles.
FLAT HEADS. Entrepreneurial, privately held companies in China have responded to limitations such as restricted access to financing and poor IP protection and come up with creative management approaches designed to accelerate and expand the scope of innovation activity. They haven't yet generated breakthrough product innovations, but the relative pace of incremental innovation is impressive, and it's creating significant economic value. Rapid and sustained waves of incremental innovation cumulatively can lead to more radical changes.
These same techniques could be harnessed by Western companies to compete more effectively in global markets. But doing so will require a significant shift in mindset. Few Western companies even see, much less appreciate, the power of these new management techniques. Instead, they appear intent on applying the same efficiency mindset to their global supply chain networks that squeezed out much of the innovation activity within large enterprises -- shrink the number of supply-chain participants, tightly integrate and automate their activities, and focus on predictability of operations. By viewing everything as a zero-sum game, this mindset inevitably spawns adversarial relationships that undermine any real potential for innovation.
By broadening their view of innovation, Western executives may open up the opportunity to strengthen their innovation performance. From this vantage point, the flat world described by Thomas Friedman begins to look much less like a challenge and much more like an opportunity.
THE NECESSARY SHIFT. There's now an opportunity to connect with creative talent wherever it resides and build relationships that enable all parties to innovate more rapidly and to get better faster by working with each other. Fully exploiting this opportunity will require a fundamental re-think of our approach to mobilizing resources, creating much more scalable pull platforms to support large numbers of participants, in place of the push approaches that constrain our innovation opportunities.
Of course, this is a very different vision from the one embedded in the proposal to increase federal spending on R&D programs. Rather than centralizing spending on a national level, this vision sees the potential created by more distributed approaches to innovation management on a global level. If Western executives don't embrace this vision more aggressively, they will become increasingly vulnerable to competition from companies that do. No amount of spending on R&D by Washington will save them from this fate. Only a shift in mindset will.
Without this broader perspective on innovation, any increase in R&D spending by the federal government will only yield marginal results at best. The benefits of any inventions generated from this activity are likely to be captured by companies that have focused on deepening their innovation capability. A well-meaning effort to strengthen our domestic innovation capability may have the unintended consequence of subsidizing another wave of innovation initiatives by Asian companies.
Hagel and Brown co-wrote The Only Sustainable Edge, which discusses some of the innovation management techniques emerging in Asia. Hagel (www.johnhagel.com) is an independent management consultant who spent 16 years with McKinsey & Co. Brown (www.johnseelybrown.com), Xerox's former chief scientist, is now a visiting scholar at the University of Southern California
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