The state of innovation wasn't great, even before you threw a pandemic or recession into the mix. And while it's too early to tell the long-term implications that team isolation and rising interests rate might have on the research and development process, associate professor Kevin Bryan explores why our process of innovation might be in crisis, and what might be done to solve the problem.
The state of innovation wasn't great, even before you threw a pandemic or recession into the mix. And while it's too early to tell the long-term implications that team isolation and rising interests rate might have on the research and development process, associate professor Kevin Bryan explores why our process of innovation might be in crisis, and what might be done to solve the problem.
Show notes:
[0:00] "There's this worry that growth is slowing down. you might think, how could that be an era of like artificial intelligence and robots and like how growth is slowing down. But if you think back toward, the early 20th century, with airplanes, and electricity, and modern research labs, and automobiles, and home appliances, it seemed like the world was changing very quickly."
[0:45] Meet Kevin Bryan, an associate professor at the Rotman School of Management, and expert in innovation. He has concerns. Growth in innovation seems to have stalled. Add a pandemic into the mix, and you have to wonder if innovation is in crisis?
[2:12] How do you define innovation?
[2:22] There was lots of diffusion and transformation early in the pandemic, but it wasn't true innovation.
[2:55] The root cause: a breakdown of teamwork caused by everyone working from home.
[3:30] There are two ways of transferring knowledge between colleagues and co-workers: direct and indirect. Both are equally important, and both suffered during the pandemic.
[4:51] Our introduction to new people and ideas likely fell during the pandemic, which can have a further impact on the process of knowledge transfer.
[6:12] It's too early to say what the long-term impact will be, but Kevin doesn't think it'll be positive.
[6:50] Money - or lack-thereof - also plays a roll in our lack of innovation.
[7:17] Canada just doesn't spend as much on R&D as other countries.
[7:50] Canada's high tax rates and lower income inequality also makes us less appealing for inventors and innovators.
[8:39] Rising interest rates does not bode well for research and development.
[9:15] Companies need to be judicious with long-run, uncertain projects, which means less investment in unproven ideas.
[10:04] COVID-19 vaccines is a good case study for innovating in a crisis, and speaks to what needs to change more broadly if we want to solve the problems surrounding innovation pipelines.
[10:50] The first idea isn't always the best idea - just look at the Wright Brothers. And in a crisis, coming in second might be a losing proposition, even if your idea is better.
[11:38] So how do you incentivize innovation in a socially useful way?
[11:55] Governments and public institutions need to step up and support and incentivize basic innovation.
[13:30] Companies probably need to stop being so precious with their trade secrets. Good ideas are more likely to come from outside your organization than within.
[14:31] "You know, Emerson, Ralph Waldo Emerson says ideas are in the air, and they literally are in the air, like they're not all written down on a piece of paper. I guess all we can say is that we know it's important and things that would block that informal transfer of knowledge can be really damaging for your organization's ability to take advantage of new ideas in the world."
KB: There's this worry that growth is slowing down. You might think, how could that be an era of like artificial intelligence and robots and like how growth is slowing down. But if you think back toward, the early 20th century, with airplanes, and electricity, and modern research labs, and automobiles, and home appliances, it seemed like the world was changing very quickly. Whereas now, some people worry we're not seeing productivity grow as fast even though the amount of resources we put into innovation continues to grow. So the number of people doing scientific research is much higher today, partly just because of population growth than it was in the early 20th century. So you would think we would have 10 Edisons today for every one Edison we had then. But that's not the case.
MH: That’s Kevin Bryan, an associate professor of strategic management at the university of Toronto, and the academic director of partnerships for the Creative Destruction Lab, the world’s largest science-based entrepreneurship program founded at the Rotman School of Management.
Kevin studies innovation - and even before the chaos caused by the pandemic in March 2020, he had concerns about the global state of innovation across industries. Investment was going up; but breakthrough ideas weren’t keeping pace. We may have supercomputers in our pockets, but the number of society-changing innovations has fallen actually since the 20th century.
KB: So per dollar that we spend on R&D the amount of social value and innovation we get is lower now than it was in the past. It's kind of immediate to see this growth isn't 10% per year, and we're throwing way more researchers into science than we did 50 years or 100 years ago. So it has to be the case that they're producing less growth per researcher.
MH: Throw a pandemic into the mix - with teams decentralizing, company priorities shifting, and a continued uncertainty over the economy - and we have to ask, is innovation in crisis?
This is the Executive Summary. I’m Megan Haynes, editor of the Rotman Insights Hub.
Music fade in
MH: Let’s start with a simple definition. Kevin defines innovation as taking an idea or invention and creating a product or service that’s widely used through a process called diffusion.
MH: And there were some clear example of innovation and diffusion happening early on the in the pandemic. Offices rapidly shifted to telework technology; businesses retooled their plants to accommodate new consumer needs like masks and PPE, and companies from pharmaceuticals to clothing manufacturers turned their attention to solving the crisis. But despite this seeming wave of new activity, true innovation might not have fared particularly well.
So let’s start with the most obvious cause for concern when it comes to innovation: Team work.
KB: Even Thomas Edison, the supposed the lone inventor had a whole factory of researchers. But generally, innovation is happening in labs by groups. Even within academia, science papers are written by bigger and bigger teams every year than the year before. And in fields that are more advanced, team size and lab size is also growing.
MH: Teams are incredibly important to the innovation process. Sharing of information between colleagues has been proven to be an effective driver of discovery.
KB: The reason being, it's just hard to know all the stuff you need to know to make an improvement on the status quo.
MH: There are two ways to transfer knowledge – directed attempt, like me telling a colleague information I think she needs to know. And then there’s indirect. This can take the form of, say, a casual conversation with a peer that sparks an idea or unintentionally resolves a problem; or even bringing new talent into a company, that new programmer or project manager who helps introduce a different approach to a traditional process.
When the pandemic hit, both forms of knowledge transfer took a hit.
KB: We have some data on how teams are performing that work remotely. In some tasks, they perform fine. And of course, some workers prefer not to commute - that goes without saying so you can hire better workers, if you give them more flexibility in various aspects of the job. That said, the amount of time spent on meetings for a given team has gone up, every time people have looked at this, which you might think is a bit strange, like, how can it be that everything's formal and structured now, but yet we're spending more time talking to each other. It's because communication distance is a little bit degraded, if you can only communicate with text messages or by phone, the conversation is not as easy. You can't rely on verbal cues and nonverbal cues and the kinds of things that we do in person. The other thing we've noticed is that the number of new people you communicate with falls a lot.
MH: While some teams did become more tight knit, it likely came at the expense of interactions with other departments, which can be hugely beneficial to the innovation process. Kevin points to a study from Harvard, which tracked how many research papers professors at the medical school published before and during an office renovation. When faculty were kicked out of their offices and shunted to new floors and new buildings during construction, the number of papers they published – with new peers – shot up.
And it’s not just colleagues in the same company. Networking among peers outside of a company can be really beneficial to the innovation process generally.
KB: If you look at, say spill overs of ideas, one way we can track spillovers is if you write a patent, you'll have references to ideas you've drawn on the patent. I can kind of see that those references tend to be more local than not. if we're both in Toronto, versus you being in Vancouver, and my company in Toronto, you're more likely to refer to one of my papers or one of my patents, if we're both in the same city, and than if we're in different cities.
MH: Those serendipitous moments – meetings with colleagues from across the way, after work drinks, industry conferences – stopped, in some cases for 2 years, leaving, at least temporarily, a pandemic-sized hole where knowledge transfer used to take place.
KB: And It's really too early to say how COVID affected innovative performance, I suspect, the innovative performance is not going to look good. The reason being that informal communication is just so important for innovation. Knowing everything we know about the importance of in person or local communication for innovation, it's hard to believe that we could be performing at the same level, as we do on some of their tasks where maybe we can perform just as well.
Musical interlude
MH: While team work is one element of a potential innovation crisis. The other is money. Pre pandemic, Canada and some other OECD countries were already spending less on innovation compared to their peers. Canada for example, was spending half as much of its overall GDP on research and development when compared to countries like the US.
KB: Part of this is because other countries have been spending more on R&D over time, but part of it is that both in the private sector and the public sector, we don't devote as many resources to R&D as other countries. There's a big debate on why that is, in part is because our economy is based on things like real estate and resources that are just less R&S intensive. But also, in part, it's because the government made a choice to not spend as much.
MH: We’re heavily invested in low innovation fields, like real estate and grocery retail. Canada’s monopolistic industries like telecom are also pretty sheltered from the need to innovate, and our higher tax rates and lower income inequality make innovating here less attractive than say the US where big wins are going to have bigger pay offs.
KB: We do know actually though that today, countries that have lower tax rates, and higher income inequality tend to attract better inventors as immigrants. I guess this kind of makes sense. If, you want to kind of a quiet life as an engineer in the suburbs, doing great work, making a decent living, you know, a quiet, stable country is not a bad choice.
MH: But…
KB: The link between inequality innovation is almost unavoidable. So imagine them doing something that has a 1% chance of working, if it doesn't work, I get nothing.
MH: So, going into the pandemic, Canada was already at a disadvantage and, as Kevin sees it…
KB: It's gonna get worse. Not because of a recession, necessarily, but because of interest rates being higher.
MH: Low interest rates and a healthy economy means that companies can take risks with how they invest their mone y. Long-run projects tend to be easier to finance because the cost versus overall risk is lower.
KB: When interest rates go up, firms have to shift money from long term projects to short term revenue, because stuff that happens 5, 10 years in the future is just too discounted at the rate I’m able to borrow money.
MH: So in a rising rate environment, how should companies retool their innovation pipeline?
KB: You want to be really judicious about long-run projects, when the cost of capital is high, uh, because you just don't get as many shots. So I think you probably want to shift if you're not already doing it to an innovation system that has shorter term milestones so I can cut off projects that are not progressing more quickly, that allows me to try really high variance really long run things without having to sink five years, 10 years of capital into those projects early on.
MH: Given the state of affairs, and the fact that innovation wasn’t exactly booming in the before times, perhaps it’s time for companies to innovate their approach to innovation.
Musical interlude
MH: The race for COVID-19 vaccines gives us a really nice look into the world of crisis innovation – and speaks to some broader issues that need to be addressed if we want to build a robust and stable pipeline.
KB: When something becomes really critical, we have to find the solution to a problem - It's a war, it's a pandemic, or maybe there's a new technology most ideas can be developed in many different ways. You can develop it in a way that's pretty quick and pretty shoddy, but it'll work. Or you can develop it in a way that if I took my time and thought about what's the easiest way to build on this invention, maybe we would do it a totally different way.
MH: The first idea isn’t necessarily the best idea, but in a crisis, with everyone rushing to find the answer first, those second – but sometimes better – ideas aren’t as likely to get the big pay off.
The Wright brothers, for example, were credited with inventing the first plane able to stay in the sky – but we don’t use their pully systems on planes anymore. We use Ailerons – those flaps that go up and down on the wings - which came shortly after the Wright bother’s famous flight.
Markets can and do allow for best ideas to come forth, eventually. But in a race to find a solution to a crisis – coming in second doesn’t end up meaning very much.
KB: Once people have a vaccine, the next vaccine is just not as valuable, even if it's 10%, or 20%, or 30% better. I've already got a vaccine in my arm.
I mean this is a general problem how do I incentivize people to do innovation in the most socially useful way. I want people who make the biggest contributions to society, from their ideas to be compensated for it. Certain things are very hard to get compensated for it.
MH: As companies stare down a recession and rising rates, and look critically at their R&D spend, Kevin says it’s time for governments and other public institutions to step up. Places like universities, which facilitate basic research – things on which other research can be based – are crucial.
KB: I come up with like, a mathematical algorithm that's very useful for, say, machine learning. Obviously, it's not patentable. Once people see the algorithm, they can go develop their own businesses with it. It can be the most important algorithm, it can be the equal MC squared competition, I'm not going to make much money from it. So how much incentive do you figure many people have to do that type of work, it's not going to be that high. For certain types of innovation, we find it’s really important to use non-market mechanisms. The existence of university research is essentially saying there's a bunch of research we don't think would happen outside of the university, the market’s not going to provide it, because no one has the incentive to do that research, it's just going to spill over too broadly. We can use this whole tool set of innovation policies, everything from the existence of universities and do basic research, to patents, to prize contests, to just normal market mechanisms where firms try to invent things and then sell a product in combination, they can help us make sure that we don't have too much innovation, on say, very applied very shoddy, not particularly good inventions, and we have a more optimal mix of the type of research we want in society. Unfortunately, the market works really well, in some cases, in innovation, it doesn't work perfectly. The laissez faire market just does not function.
MH: And companies probably need to start rethinking team dynamics. As businesses bring employees back to the office – and those serendipitous moments begin again – it’s worth remembering that amazing ideas don’t just come from a small team of people working in a lab…it’s the other people at a company, and those from outside an organization’s walls who help contribute to the innovation process… So maybe it’s time for companies to stop being so precious with their trade secrets.
KB: Good ideas are probably more likely to come from outside your company than inside, there's a lot more smart people who don't work for your company, then who work for it. So, it's really important that you're able to draw on those good ideas when you hear them. And that requires a certain amount of openness. So very secretive, research and development means your ideas don't leak out. But also, no one knows even talk to you or no one hears about the things you're doing and offers you good ideas in return, whether from academia or from just independent people, or even other firms.
You know, Emerson, Ralph Waldo Emerson says ideas are in the air, and they literally are in the air, like they're not all written down on a piece of paper. I guess all we can say is that we know it's important and things that would block that informal transfer of knowledge can be really damaging for your organization's ability to take advantage of new ideas in the world.
Music fade out
MH: This has been the Rotman Executive Summary, a podcast bringing you the latest insights and innovative thinking from Canada's leading business school.
Special thanks to associate professor Kevin Bryan. We’ll be back in a few weeks with Professor Ming Hu to talk about the future of the sharing economy and gig workers.
This episode was written and produced by Megan Haynes and Jessie Park. It was recorded by Dan Mazzotta, and edited by Avery Moore Kloss.
For more innovative thinking, head over to the Rotman Insights Hub, and subscribe to this podcast on Spotify, Apple Podcasts, Google podcasts, or Soundcloud.
Thanks for tuning in.