What creates competitiveness? How does a company, a region, or a country get an edge? The question is of concern for the European Union, since the US of A and parts of Asia typically outperform the EU in innovation. However, it is of even greater concern for a third world country. What is a country such as Honduras to do to catch up with the industrialized nations? Obviously there is no point in just copying what they have done, since the target is moving. The ambition must be to be ahead of the pack, and for that innovation is necessary.
Today I stumbled upon an interesting book, “The Innovation Platform – Enabling balance between growth and renewal” (VINNOVA Report VR 2009:25, by Niklas Arvidsson & Ulf Mannervik). The key concept is that the business cycle has two phases, exploration and exploitation.
Most of the time the economy is in an exploitation phase, gradually refining itself to maximize profitability. This is the part of the business cycle when the profits are raked, the conservative, cautious phase. However, if it stays too long in this phase it will stagnate, and the risk is that another actor, region, or country will out-compete it with a novel innovation. So every now and then the cycle has to shift to the explorative phase.
In the explorative phase more money is spent on pursuing ideas, trying novel things, not just in technology but also in rearranging the market, and generally in disassembling and recreating the structures in a part of the economy. The book mentions some examples from Sweden, including a new strategy for developing medicines, and the development of titanium screws for dental implants.
The authors write that policy-makers have to become aware of the two different modes of operation, because if they aren’t, they will typically end up inadvertently strengthening status quo when they try to stimulate innovation. They also argue that the key is the switching between the exploitation and the exploration phase, and back again, and point to the crucial role that social networks played in their case studies.
It is hardly surprising that in all three case studies the innovation was met with a significant resistance from established actors. It is rather self-evident that companies that are making a profit and are in the exploitation phase do not wish for change to come (nor do the trade unions for that matter, they have a vested interest with their employers). The ones to challenge the existing order are the entrepreneurs, one or at most a couple of persons who had the vision of a better solution, and who were fortunate enough to have access to the financing required to carry out their vision. Because it is not cheap. Innovation of a scale that changes a market model takes many years, it is not comparable to a simple invention of a new product, something that can be done within a year.
Spill Monitoring and the SediMeter
One reason I enjoyed reading this book so much was that I recognize my own situation, in a much more modest context, of course. Three factors combined to make me realize a few years back that an innovation was called for, and that I was in the position to make it happen.
First, I had been an expert for the Swedish government in auditing the sediment spill measurements from the largest and most ambitious such project in the world, the building of the Öresund Bridge between Sweden and Denmark. This had taught me the details of the measurement challenge, the statistics, and the regulatory implications. It had also made me realize that the present method of doing things was not optimal from a cost-benefit point of view.
Second, I had invented an instrument that would be useful for monitoring the siltation that sediment spill causes, the SediMeter. It was on the market but the model was not optimized for the task, having been developed for a different purpose.
Third, after coming to Florida, where I taught Environmental Science and Oceanography, and studied up on the local issues and regulations, I realized that change was needed. The Clean Water Act says that the turbidity shall be measured at a distance of 150 m (500 feet to be precise) in the center of the plume with a specific design of instrument. The method is highly subjective, cannot be audited, and since it is established in the law (not regulation, but law) there is no room for development. let alone innovation. At the same time, it seems clear that sediment spill has indeed caused environmental damage, e.g. to the coral reefs in southern Florida (the world’s third largest coral reef tract). The law benefits the polluters at the expense of the environment.
What I did was to start from the opposite end, looking at how biotopes can be affected by the spill. Based on that, and on an understanding of the regulation and auditing requirements, I designed a way to regulate that involves measuring as close to the impact as possible – and that uses stationary monitoring instruments rather than ships, since ship time is very expensive. With that regulatory framework defined, I went to the next step, to develop a SediMeter and software based on the requirements that followed from the specification.
With distributors around the world, this solution is now being actively marketed in many countries. Fortunately, in most countries implementing a new method can probably be made without legislative change. However, the U.S. is an exception.
Why does the U.S. have even the instrument design in the law? It is an obvious case of locking down technology for an exploitation phase. It allowed manufacturers to invest in a specific technology and optimize that for profitability. This created a de facto U.S. standard that is different from the international (ISO) standard. When it comes to the requirement for measuring 150 m away that is rather logical; the law was apparently written with rivers in mind, and there it is a reasonable rule. It was subsequently applied also in the ocean, even though the rule is, as I have said, quite inappropriate there. Thus the need for change.
Some conclusions that can be drawn, and that may be of use for policy-makers, are the following:
Laws should deal with principles, not details. Details should be left for the regulating agency, so that they can be modified as innovation takes place, and so that the law does not stifle development. The significance of this is to not put up obstacles for moving from an exploitation phase to an exploration phase.
For innovation to take place two things are required: An entrepreneur, and resources. Resources is more than capital, it is also information, communication, supplies, machines, raw materials, and access to people to ask advice from. Still, there must be risk capital available for the entrepreneur in this exploration phase, since there is a significant risk involved, and it may be many years before the full payoff comes.
For the switch back from the exploration to the exploitation phase the entrepreneur must be able to get acceptance for the novelty. This can be done by scientific publication. The implication for a third world country is that it is important to have qualified scholars who can get published in appropriate journals. In all three case studies in the Swedish book there were university scholars involved.
Finally, for the exploitation phase to be successful it is beneficial to have a social network with companies that can complement each other, and cost-optimize the service of the market. As the book I mentioned initially says, in at least one of the case studies the original developer company later specialized, which opened the field for a range of other companies that each one serviced a narrow segment, plus companies that serviced these companies. This created an environment, a cluster, which in turn leads to more chances for development.
If we look at Honduras, I believe the main problem is that the country is firmly locked in an exploitation phase, with virtually no possibility for shifting to an exploration mode; partly for administrative reasons, partly for economical reasons. Those that are making money today have made sure that the system does not change. If the country is to become a developed nation, and not an impoverished emigrant nation, permitting innovation is the first thing to do.