Rotman School of Management, University of Toronto

Main Content

Why Companies Have to 'Routinize' Innovation

A University of Toronto innovation expert gives his views on innovation and inequality in the midst of the world's third globalization.

Q&A with Dan Breznitz, Innovation Policy Lab, Munk School of Global Affairs

Interview by Karen Christensen

You have said that we are in the midst of the world’s third globalization. Please explain.

The first globalization ended with World War I, in 1918. After that, we didn’t reach the same level of globalization — in terms of trade, people and ideas — until the 1990s. To paraphrase John Maynard Keynes, on the eve of World War I, what an Englishman could do from his bed while sipping orange juice from Africa and using the wire to do financial transactions, was not repeatable until the beginning of the 1990s.

The second globalization was led by the Americans and ran from 1990 to 2007. The third globalization is underway now, and much of it is happening in virtual reality. Just look at the daily transfer of exchange rates, which is around $13 trillion — more than almost all of global GDP. And that’s just people moving money from one currency to another in order to make a few bucks.

The other important aspect of this era is the globalization of services. Supposedly, that is what the Trans Pacific Partnership (TPP) is all about. The fact is, now that we can move things into the ‘cloud’, we will start to see things moving around that we never thought were tradable.

I think part of the reason for the political turmoil we are seeing right now is that this third globalization has an odd feature: it allows bits of data and money to move around the world very rapidly, while people are actually more limited in their ability to move around than they were before World War I. We are living in a world in which jobs and wealth move around very rapidly, but human beings cannot.

Many business leaders around the world would love to create their own version of Silicon Valley. But in your view, it isn’t the best model for innovation. Why?

It is one model of innovation, but it is certainly not the only one, and it is probably not the best model for most of the world. If you think about what Silicon Valley really does, it doesn’t create new technologies — it creates new companies. It’s all about finding cheap companies, buying them, and selling them for a large amount of money — whether or not they actually create sustainable products or employment.

Silicon Valley is one model of innovation, but it is probably not the best model for most of the world.Tweet this

This tells you something about who is gaining the most  from Silicon Valley: it’s the people who can play this game, who are highly-skilled and know how to develop technology at an extremely high-level; also, skilled financiers, and the people that cater to these people — like the highest-quality sushi chefs and inferior designers. These people get a lottery ticket: if they bet on the right start-up, they can become billionaires; if not, they still get paid a very nice salary — which is required in Silicon Valley, if you don’t want to have to sleep in your car.

In short, what we have there is a system that perpetuates inequality and gives a massive premium to ‘skill-based training’. STEM graduates from places like Stanford, MIT, Harvard and Berkley basically get the lottery ticket; and the people who work in restaurants, hotels, and the people who clean all of those big houses, never get a chance at the lottery. This creates a very unequal society.

Remember, Silicon Valley was given that name because it once made silicon: it once fabricated real, tangible products. Companies like Apple and HP employed a lot of people in California producing their ‘things’ — but that is no longer the case. The new companies of Silicon Valley do the development and design at their headquarters, but somebody else — usually the Taiwanese, Koreans or the Chinese — actually produces the components and assembles the products. Taxpayers in Silicon Valley should not expect to see any great job creation or manufacturing any time soon: what they will continue to get is moderate job creation of very, very good jobs for the extremely high-skilled. If this is your only model for innovation, you will end up like Israel. With all of its great success over the last two decades — when it became known as a start-up nation — Israel also moved from being the second-most egalitarian society in the OECD to the second-most unequal. Right now, Israel looks more like Mexico: one out of every five households is under the poverty line.

You have said that countries should try to emulate South Korea and Germany, rather than the United States and Israel. Please explain.

The reason we all care so much about innovation is that it’s the only path to sustained growth. However, innovation is not just about inventing new products. The reason why our lives are so much better today than 50 years ago is not because someone invented the car, and we’re all still driving around in Ford Model Ts: it’s because every year, we are constantly innovating and improving, changing, recombining ideas about what the car could be. And the same goes for refrigerators, air conditioning — and everything else.

Every year, without us even noticing, we are seeing Moore’s Law personified in three ways: first, in terms of memory, or how much you can store; second, in the speed of a CPU; and third, in software efficiency. All of this allows people who develop software to do things that we couldn’t even dream about five years ago. Basically, your iPhone is equivalent to what used to be a supercomputer 20 years ago.

As indicated, at the moment, we have places like Silicon Valley and we have places like Taiwan. But then we also have places like Korea, which excels in specific niches, like memory, and the touch screen on your iPhone. And then we have places like China, which has figured out how to take those 10,000 components and assemble them inside of a small device. Germany does the same thing, but with automobiles; a BMW is actually one of the most sophisticated ICT machines that you can buy. In order to manufacture these products, you need innovation of a specific kind — let’s call it incremental innovation or process innovation. The bottom line is, if you do it the way the Germans and the Danes are doing it, you can create a lot more jobs for factory workers that are highly-skilled, and encourage productivity by constantly educating them. This route to wealth is much more equitable.

Canada needs to decide whether it wants to be successful at innovation ‘Silicon-Valley style’ — which we already know will increase inequality — or whether it can excel at the type of innovation that will create a lot of high-quality jobs for Canadians.

You have said that the Canadian banks largely innovate within their own ‘silos’, and should be focused on building a ‘financial-tech ecosystem’. What would this look like?

First, I must say that what the Canadian banks have already done is pretty amazing. Interac is a great example: when the banks faced the dawn of this new technology, and it became obvious that collective action was the only way forward, they proved to be very agile, flexible and successful in making that happen. With fin-tech, the banks now have to figure out how to do that again. The landscape has changed a bit, and any new tools must be built as platforms.

Think about it like a Windows or Android operating system. The banks would create the infrastructure around which a lot of things could happen. They could involve businesses in the core solution, but they could also create an infrastructure on which individual apps could be created, so that the banks can differentiate themselves. Startups could then have lots of opportunities to develop. The key areas to look at, in my view, are mobile payments and security. The fact is, if the banks cannot solve this together, it will be solved for them by the likes of Google.

Business leaders should be demanding that the government create an environment in which it actually makes sense (from a profit point of view)
to invest in innovation.Tweet this

The banks do invest a large amount in vigorous incubation centres, but they tend to be spread out geographically. It would be vastly more efficient if this work could happen in big spaces right next to the banks. If it takes more than five minutes for two human beings to walk from place A to place B, those two human beings will never meet; and the same goes for building a collaborative environment at work.

What would be your advice for the Canadian government in terms of innovation policy?

I will put it this way: it is high time that we actually have an innovation policy. We have great research policy, scientific policy and education policy, and we have industrial policy; but we have never had an innovation policy. The government seems to assume that if we get education policy or research policy right, magically, innovation will happen; obviously, that hasn’t happened.

What is really striking in Canada is that it is one of the best countries in the world in terms of potential for innovation. We are doing amazing things in science, particularly in the early stages — but in a capitalist economy, innovation happens in the business sector. If we want economic growth, innovation must take place in the marketplace, improving on or creating new products and services. It’s very nice to invent and discover stuff, but if it doesn’t translate to the ability of our companies to compete, it’s meaningless, economically speaking.

Right now, you and I are sitting in a lovely café with lots of young baristas who hold degrees. I would advise the Canadian government to create an environment in which these smart young people can actually use their skills to make good things happen for Canada — and for the world.

Regardless of industry, innovation entails a lot of risk. What is your advice for embracing risk?

Over the past 15 years, the commodity boom has masked the fact that Canada has become the failing student of the OECD. We are now worse than all of Europe in terms of our innovation, and that is partly because most of our business sector does not invest in it. I think the reasons for this go beyond risk. Our business leaders should be demanding that the government create an environment in which it actually makes sense (from a profit point of view) to invest in innovation.

Then, businesses will have to figure out how to routinize innovation, and make it a core part of their business that they invest in year after year. Right now, most Canadian businesses don’t even realize that they should have an R&D department. If innovation is the output you desire, then your policy aims should be to spur growth by stimulating companies and individuals to develop products, processes and services that we cannot, by definition, predict in advance.

Dan Breznitz holds the Munk Chair of Innovation Studies and is co-director of the Innovation Policy Lab at the University of Toronto’s Munk School of Global Affairs. He is the author of Innovation and the State: Political Choice and Strategies for Growth in Israel, Taiwan and Ireland (Yale University Press, 2011).

This article originally appeared in The Global Mindset Issue (Spring 2016)

Rotman Management magazine offers the latest thinking on leadership and innovation and is published three times a year by the University of Toronto's Rotman School of Management. 

Invest in yourself.
Subscribe today. Be smarter tomorrow. >>



© Rotman School of ManagementAASCB