Creating jobs – and transforming the economy

A long essay by Andy Groves (former head of Intel) in BusinessWeek (How America Can Create Jobs) is causing something of a stir. Groves message is straight forward enough: economic prosperity depends on more than invention. It also requires commercialization and production – what Groves calls the ability to scale:

Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.
The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

(See also comment s by Why is the American Jobs Machine Broken? by Tim Duy and Andy Grove on the Need for US Job Creation and Industrial Policy by Yves Smith of the “naked capitalism” blog.)
As readers of this blog will quickly note, this is also an ongoing diatribe of mine. The I-Cubed Economy is not about just producing intangibles and undertaking innovation. It is about doing something with those assets. Intangibles and knowledge are the fuel, innovation the process and the outcome is economic activity. That means production of both goods and services here in the US.
Many have been seduced by the misunderstanding of the intangible economy. They argue that we can simply move to knowledge activities in the believe that only these are higher value added activities. They point to economic history to bolster their claim, specifically the evolution from agriculture to manufacturing to services.
As I’ve noted many times before, this is a oversimplified version of history. When the economy moved from agriculture to manufacturing (to use the simplistic model) we did not get rid of agricultural production. We mechanized (industrialized) it. The same shift is occurring with respect to knowledge and manufacturing. Manufacturing is becoming a much more knowledge intensive activity. In fact, manufacturing companies are complaining that they cannot get the skilled workers they need.
The question is what to do to correct the situation.
Many complain that the Administration is not focused on the issue. Even Steven Pearlstein of the Washington Post has gotten in on the act in his latest column

Without retreating on other initiatives, the administration could also win back some business support by devoting more resources and high-level attention to winning those competitions for big new plants and research facilities that, increasingly, are winding up someplace else. Americans may be unaccustomed to presidents and Cabinet secretaries acting as glorified economic development directors, but in a globalized economy this is how the game is played and won.
Snaring multibillion-dollar projects with a midnight meeting at the White House or a last-minute pitch from a won’t-take-no-for-an-answer secretary of commerce — a few wins like that would generate more votes and goodwill from the business community than those set-piece presidential factory visits peddling the latest version of “jobs, jobs, jobs.”

In a recent in the FT, Richard Florida makes the case that we need to upgrade services jobs. America needs to make its bad jobs better. That is certainly part of the equation. But simply upgrading services doesn’t solve the larger problem.
Likewise, getting companies to invest more is another part. As Yves Smith and Rob Parenteau point out in a piece in the New York Times (Are Profits Hurting Capitalism?):

public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on.
Rather than incur such expenses, companies increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in purely financial speculation. But this means they also short-circuit a major driver of economic growth.

But again, this deals with the invention and commercialization part of process — not the scaling concern raised by Groves. We need to think more broadly about transforming the production base (see previous posting).
The key is not the output (“agriculture,” “manufacturing,” “service”). It is the production process that is important. During the industrial revolution, machine power replaced human and animal power. The key input was energy. Today, knowledge has become the key input (factor of production).
Transforming manufacturing will take more than restructuring a couple of companies. It will take restructuring the entire production process. One of transformations is through a “high road” strategy that puts its emphasis on all upgrading of the inputs to the production process: technology, worker skills and cooperative/collaborative organizational structures (see previous posting).
It also means changing the manufacturing mindset. As I have argued many times before, the line between manufacturing and services has blurred. But many companies seem still fixed in the industrial age mentality of turning out a large volume of a commoditized product. The very nature of the supply chain forces 3rd and 4th tier suppliers in to this mode. These companies are not involved in product design and innovation; they simply respond to specs and price. Changing that structure will be painful and disruptive. Trying to revive that structure will be futile.
Thus, one of the major tasks for our new manufacturing policy needs to be focused on the lower tiers. How does the policy help these small companies re-orient themselves to the 21st Century?
Let me suggest two sets of activities. First, we need more research on the transformation. This means a greater understanding of how to create a high road strategy — including helping companies better manage and utilize their intangible assets. It also means developing a better understanding of the service-manufacturing linkage.
Second, we need to find creative ways to help companies utilize that understanding. We especially need to help the smaller supplier move up the value-chain to take advantage of this shift. Here we have a valuable tool in the Manufacturing Extension Partnerships. The MEPs were on the front lines helping small and medium size companies during the quality revolution. They need to be on the front lines of the intangible asset, innovation and “customer solution” revolution.
Broadening and expanding the MEPs is on small step. I’m sure there are a thousand more we can come up with. But first of all we need to recognize the problem. Andy Grove’s essay – and all the others like it — are leading in the right direction.

Open innovation and the oil spill – part 2

In an earlier posting, I talked about how BP and the government were using open source innovation process to look for ideas to cap and clean up the Gulf oil spill. I also mentioned how easy it was to denigrate or make fun of such efforts. Over the weekend, the Washington Post continued that tradition with a front page story on how supposedly BP is not listening to the ideas. The story echoes the complaints of some of 120,000 of people whose ideas were not looked at.
In fairness to the Post reporters, the story does go on to explain the difficulties of sorting through the ideas. As the story notes later on:

But the reality is that nearly all are impossible, impractical, obvious or likely to make things worse.
. . .
The low pass rate is almost certainly the product of a naiveté about what BP is confronting.

As the story points out, some of the good ideas may not surface until the “after-action” evaluation. At that time, the promising ideas can be looked at more carefully and added to the toolkit for future incidents.
I would suggest that the process will also make an important after-action case study on the open sourcing innovation process. The one disturbing point of the Post story was the fact that BP is not looking at the suggestions posted to the open innovation service InnoCentive “because an agreement with InnoCentive would be ‘too complex and burdensome.'” So there are a lot of questions to be asked about the proverbial process of separating the wheat from the chaff that go beyond either the wheat or the chaff or the separating process. A broad case study needs to look at not only the evaluation process but also the entire organizational infrastructure for a successful process. I’m sure that such a case study would open up new insights on the innovation process well beyond disaster preparedness.

June employment

At first glance, this morning BLS data on employment looks bad — a loss of 125,000 jobs. However, that was mostly due to a 225,000 decrease in the number of temporary Census employees workers. The all important private-sector employment increased by 83,000 and the unemployment rate declined slightly to 9.5%. That, however, was not quite as good as economist expected – the WSJ poll estimate was about 114,000 private sector jobs created.
As the chart below shows, the number of involuntary underemployed (part-time for economic reasons) declined in June. This is good news as this is a coincident indicator. However, the number of workers involuntarily underemployed because of slack work increased. That is not good news, as it indicates a slight slowdown in production.
Also of interest is the trend in voluntary part time. As the second chart shows, voluntary part time is continuing its decline from what was a stable level. As I noted before, this is a new phenomena that may be due to a crowding out of part time workers by those who want full time work but can’t get it. In any event, this should be looked at more closely.

New studies on innovation – from ONRIS

This morning I am going to shameless cherry pick from the most recent Ontario’s Regional Economic Development and Innovation Newsletter (published by the Ontario Network on the Regional Innovation System – ONRIS). If you are interest in innovation and don’t subscribe to the ONRIS Newsletter, do so immediately.
[And Happy Canada Day to our friends up north.]
The following is a list (with links) of some of the new studies as compiled by ONRIS:

High Technology and Regions in an Era of Open Innovation

Darrene Hackler, ITIF
Open innovation, or the process where R&D occurs outside of the commercializing firm, has become a boon for small businesses and entrepreneurs but the effects on new firms has not been fully studied. In this paper, ITIF Senior Analyst, Darrene Hackler utilizes the largest longitudinal study of new businesses, the Kauffman Firm Survey (KFS) and finds high-technology firms disproportionately rely on open innovation networks.
Culture of Innovation
Seemingly a paradox exists in the arts: creativity and novelty lie at the heart of all artistic endeavor, yet funders call on arts and cultural organizations to be more innovative. Understanding this paradox is one of the reasons why NESTA embarked on the research on which this report is based. Working with one of the world’s leading cultural economists and two of the UK’s premier cultural institutions, the report proposes a framework for innovation that can be used by both arts funders and arts organizations. It describes the rich ways that arts and cultural organizations. innovate in audience reach, push out artistic frontiers and create economic and cultural value.
The Future of Small Business Entrepreneurship: Jobs Generator for the US Economy
The Brookings Institution
This brief examines policy recommendations to strengthen the small business sector and provide a platform for effective programs. These recommendations draw heavily from ideas discussed at a conference held at the Brookings Institution with academic experts, successful private-sector entrepreneurs, and government policymakers.
Innovation, Competition and Incentives for R&D
Martin Wörter, Christian Rammer and Spyros Arvanitis
Exploring the links between the type of innovation and the type of competition is essential to understand the mutual impacts of competition policy and innovation policy. This is of particular importance for countries which rely on innovation as a competitive advantage such as Germany and Switzerland, which are the focus countries of the empirical analysis. The paper investigates three research questions: Is there a relationship between past innovation output and the type of competition? Do product and process innovation exert different impacts on the type of competition in the sales markets? Does the type of competition affect incentives for future investment in innovative activities?
The Role and Structure of Local Strategic Governance in a Multilevel Polity
Tijs Creutzberg, Hickling Arthurs Low Corporation
This paper contributes to the growing body of research concerning the role of local governance in supporting innovation. Drawing on a case study of Guelph, Ontario, it examines the challenges of building a local strategic governance capacity that can engage and mobilize the necessary stakeholders in support of cluster goals as part of broader efforts to diversify the local economy.
Knowledge Dynamics, Regional Development and Public Policy
Henrik Halkier, Margareta Dahlström, Laura James, Jesper Manniche & Lise Smed Olsen
This report is a result of the project Regional Trajectories to the Knowledge Economy: A Dynamic Model (EURODITE). The main objective of the EURODITE project was to investigate knowledge dynamics; that is, how knowledge is generated, developed and transferred within and among firms or organizations., and their regional contexts.
SMEs, Entrepreneurship and Innovation
Small firms are playing an ever-increasing role in innovation, driven by changes in technologies and markets. Some spin-offs and high growth firms are having remarkable success. However, the broad bulk of small firms are not capitalizing on their advantages. This book explores how government policy can boost innovation by improving the environment for entrepreneurship and small firm development and increasing the innovative capacities of enterprises. Policy findings and recommendations are presented in three key areas: embedding firms in knowledge flows; developing entrepreneurship skills; and social entrepreneurship. In addition, country notes present statistics and policy data on SMEs, entrepreneurship and innovation for 40 economies, including OECD countries, Brazil, China, Estonia, Indonesia, Israel, the Russian Federation, Slovenia and South Africa.
Major findings and messages
• The importance of new and small firms to the innovation process has increased;
• SMEs are playing new roles: they upgrade and aggregate the productivity of the economy by displacing firms with lower productivity, they enable the commercialization of knowledge, are often active in breakthrough innovation, and participate strongly in the flow of knowledge within innovation systems;
• SMEs are significant contributors to the economy: Across the OECD they represent a major share of all firms (99%), all employment (about two thirds), and all value added (over one half);
SMEs and Knowledge Flows
• SMEs do not innovate alone: but rather in collaboration with others, including suppliers and customers, and with universities and research organizations. Collaboration is an important element in the strategies of innovation of SMEs to overcome some of the barriers they face;
• Spatial clustering of SMEs is strong: especially in knowledge-driven sectors i.e. those where R&D intensity, basic university research and highly-skilled workers are most important;
• Connecting to global knowledge flows is equally important;
SMEs and Skills
• Entrepreneurship training: SMEs have been helped in part by higher education initiatives to provide entrepreneurship training, especially to innovative faculty;
• Small firms provide less in-house training: and there is a gap between training opportunities for young, better-educated workers in highly-skilled occupations versus less skilled workers;
• SMEs can boost entrepreneurship skills: through use of Knowledge Intensive Service Activities (KISA) – the use of external consultants and other experts – to help implement change or strategies;
• SMEs exist within local skills ecosystems: These involve regional and industry-specific networks that bring together public and private training providers, employers, industry representatives, unions, labour market and training intermediaries, and community representatives in order to develop skills strategies and deliver training.
The main recommendation of this report is that policies to strengthen entrepreneurship and increase the innovation capabilities of SMEs should be one of the main planks of government innovation strategies. Governments should target SMEs and entrepreneurship as a major potential source of new jobs in the recovery and recession. To realize these benefits, governments should introduce an innovation strategy for SMEs and entrepreneurship. It should stress action in four main areas:
• Promoting conducive entrepreneurship cultures and framework conditions;
• Increasing the participation of new firms and SMEs in knowledge flows;
• Strengthening entrepreneurial human capital;
• Improving the environment for social entrepreneurship and social innovation.

Forex as Innovation

(Over the past few years, we’ve highlighted some of the pro’s and con’s of financial innovation. For example, intangible asset monetization is one example of a financial innovation that Athena Alliance has advocated. There have been others. But we have also been concerned about the downside of financial innovation (for example, see posting from February). A major reason for our interest in the subject is our strong believe that innovation needs to be understood and promoted in the broadest sense — it is not just technology and new gadgets. In that vein, we are posting this guest piece from Cesar Zambrano over at ForexFraud).
The past two decades have witnessed an explosion in innovation, spurred on by advances in technology and a willing public’s grasp of the ever-present electronic age. The standard variety of minor technical changes to improve product performance will always be part of the mix, but electronic innovation is fast-paced with every technological breakthrough promising the potential of transforming an industry nearly overnight.
The Internet has been the greatest enabler of our time, transforming the way we conduct business, communicate, market new products, and yes, innovate. The Internet was not confined by geographical limits, nor was it tied to physical manufacturing techniques. The components were ideas, protocols, standards, programming languages, and software. Access, coupled with advances in data management and telecommunications, converged to transmute our global world of commerce to a radically higher vibration level.
A textbook case of innovation has been the dramatic growth and popularity of foreign currency trading in the past decade. Prior to the 1990’s, retail forex, as it is called, did not exist. Currency trading was the purview of large international banks and financial institutions. Electronic modems connected corporate treasurers with a trading platform, but phone confirmations were generally required to execute trades. Transaction sizes were from 1-5 million units of currency, well beyond the limits of even the wealthiest of investors to consider. Banks internally aggregated cross-border wire transfers and net-settled with their international branches, thereby reducing the necessity for entering the market.
However, the Internet revolutionized banking and global communication. Large forex brokers saw the opportunity for a retail business and began aggregating trades to permit smaller lot sizes for trading. With access to the market assured, it was only a matter of time to develop software trading platforms to analyze streams of data, produce real time charts, and enable the actual automation of trading orders. This period of innovation primarily benefited businesses and those individuals that were on the periphery of the industry.
Retail forex trading exploded onto the scene in 2004. Benefiting from innovations in a complementary industry, namely stock trading, foreign exchange offered all the same online benefits but also flexibility of trading “24X7”. Regulations, education tutorials, training seminars, and free demo accounts raced quickly to catch up with the amazing growth curve. Today, ads touting every facet of the business appear not only on the Internet, but also on national television networks. Retail forex trading has arrived.
Innovation now focuses on improving analytic techniques and making the trading experience less risky and more “user friendly” for the general consumer. Open source code has fostered innovation in the customized application segment for the more popular operating platforms, and automated trading systems, usually the domain of large banks and hedge funds, are now available from numerous vendors. An interesting sidebar is the annual “trading robot” challenge. Recently, a Croatian programmer walked away with the $100,000 prize when his robot recorded a 150% return in one month’s trading results. If you not like “black boxes”, you can also “mirror trade” by observing other trading experts and their performance. With the click of a switch, the trades of your chosen expert can be applied instantly to your portfolio.
The industry has had its problems with fraud, but the criminal element always gravitates to where the money is. The industry has responded to risk issues by policing brokers and educating users on the basics of risk management. All in all, forex trading has been an excellent example of how quickly innovation, coupled with information management and intangible software, can transform a single industry, even during a recession, beyond anyone’s initial expectations.