Chapter 1. The Innovation Economy...
Take a look around you. Most of us live our everyday existence in routines that acquire a familiar rhythm. Our homes, transportation, work, and activities with friends and family seem to continue much as they always have. Sure, we might own a hand-held device and find it more useful than a paper pocket calendar. Many of us check in with e-mail and find both the expanded access to people and the quickened speed of communication convenient. These technologies that we as individuals see and experience do not appear to be either radical or life-changing. Yet, the convergence of innovative technologies, being introduced and integrated in certain world regions with a rapidity never seen before, will dramatically change the way we live, work, and relate to one another. It will also provide opportunities for generating regional wealth in new ways that we are just beginning to understand.
Think about the advances in medicine and healthcare, based on the integration of technology with international research and development in the life sciences that may extend the typical human life span over the next several generations to biblical ranges of 100 to 120 years.
Consider product and service development that operates 24 hours a day, 365 days a year, and relies on integrated teams who defy the accepted workday routine and have groups in San Jose, California; Bangalore, India; Herzliya, Israel; and Dublin, Ireland, all working to accelerate innovation to spawn new industries, products, services, and business opportunities.
One of the long-term significant changes at the turn of this millennium is the rapid expansion of a phenomenon called the "New Economy." We prefer to call it the Innovation Economy, because at the core of the new wealth being created is the rapid acceleration of change through innovation. This Innovation Economy is being developed with the combination of financial capital and what the Swedish theorist Leif Edvinsson calls "intellectual capital": the ever-expanding knowledge resource that lies at the core of producing new wealth.
This Innovation Economy is largely driven by the intersection of technological innovation, globalization, and deregulation.
Technological innovation is identified most closely with the Internet, but is not exclusively defined by it. Satellites, telecommunications, biotechnology, advances in microchip technology and applications embedded in products, digital technology, optics, and major breakthroughs in renewable and portable energy are all integrating elements of this rapidly changing environment. In this Innovation Economy, rapid innovations in these categories have begun to create wealth and economic advantage for businesses and regions, which have adapted to the principles of this rapidly changing marketplace. This phenomenon may have revolutionary implications in the shifting of economic advantage and power among regions. Those who "plug in" (that is, invest in the education and skills of their people as the greatest resource for wealth) will thrive. Those regions not developing the intellectual capital of their people, and whose institutions of government, industry, universities, and non-government organizations are dysfunctional, as in much of Latin America, the Arab Middle East, and Africa, will continue to decline.
Sir Peter Hall, author of Cities in Civilization, provides a useful perspective on the transition from an industrial to an informational era.
Peter Hall |
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There are four elements, all technologically driven. The first is the development of a new infrastructure of communication, commonly called the Internet, and its probable successor, the information superhighway. The second is the increasing interconnectivity of different electronic machines -- telephones, computers, faxes, modems -- both in terms of numbers of connections, and the bandwidth of connections. The third is perhaps the most fundamental: the fact that almost all information is becoming digital. The fourth is the development on this basis of new applications -- the so called killer applications that will constitute the new basic industries of the information age." 1 |
The fast-growing Innovation Economy is not a fantasy. It is largely driven by massive amounts of investments in innovative information technology. The United States has been the primary driver of this investment, enabling U.S. financial markets, governments, and corporations to cut costs and increase flexibility and efficiency. The result is long-term faster growth and lower inflation.
Table 1-1 illustrates the dramatic difference in cumulative annual growth rates (CAGR) between the total and the Internet segment of the U.S. economy.
| TABLE 1-1
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The New Internet Economy
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|---|---|---|---|
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|
1995 |
1999 |
CAGR Growth |
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U.S. GDP |
$6,762 b |
$7,801 b |
3.6% |
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Internet Economy |
$5 b |
$507 b |
213% |
Source: Center for Research in Electronic Commerce, University of Texas. |
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This dynamic is even more dramatic in smaller countries such as Ireland, which has seen 9% to 10% growth in GNP from 1995-2000. The Irish have figured out how to adapt to the new economy and are emulated by small regions throughout the world. Smaller nations, such as Ireland, Israel, and Taiwan, tend to have the most global orientation because these countries acquire goods, services, and capital not easily generated domestically.
But just throwing money at technology is not enough. To translate technology into faster productivity growth, financial markets have to be able to fund innovation, provide more flexibility in corporations and labor markets, create a faster pace of deregulation, and increase competition. In addition, the roles of national and local government, industry associations, higher-education institutions, and emergent linking/networking organizations will make a critical difference in the ability of a region to accomplish these needed changes to effectively integrate into the worldwide Innovation Economy.
Knowledge Without Borders
Globalization of the work process happens through technology. This is key to understanding how swiftly the world is changing. New industries and companies are being created based on international operations linked by technology. Alongside this, a new class of knowledge entrepreneurs who are international in background and business perspective is emerging.
One such example is Davidi Gilo, CEO of DSP Communications. Headquartered in Cupertino, California, DSPC's engineers are in Israel and its customer base is in Japan. In October 1999, DSPC was acquired by Intel Corp. to be run as a subsidiary. DSPC signal processing technology originated through the Israeli military and is useful in answering and dictation machines.
Davidi Gilo |
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The high-tech revolution is significantly different from the industrial revolution. When you talk about the global economy or technology, the model may involve, for example, product definition and innovation from the United States, engineering and development efforts could be done in Europe, and manufacturing could be performed in the Far East perhaps. So in that sense, it's very, very different, because a certain level of knowledge is moving from here to Israel, enabling the engineer to design the product, and then on to Japan, enabling them to make the product. Now you have multinational companies opening offices in Israel and other places. They move people from location to location, who then return to Israel. And while they're here, they learn a lot of the discipline and the technology that they later on employ back in Israel. We live in a very mobile world today and you can see this phenomenon; it's very good, because that's how knowledge, product development, and marketing ideas get transferred between people and help young companies become more successful. People in Israel who work on a major project at Intel get the same training as they would in Santa Clara. So basically a company like Intel, Texas Instruments, or IBM that has research centers in Israel operates on a global basis. Every multinational company doing business in different countries and using the same standard that made them successful in those countries helps bring the professionalism from engineering, management, and marketing, which is very significant. When you have American companies setting up in other countries, then they are tapping human resources, which can be very good. It can be cheaper. The Internet, networking, and optic technology enable you to transfer files in a few minutes. Technological innovation enables all these things to happen. This is huge! " |
Investment in innovation is risky, which creates great anxiety and doubt. Certainly, the recession of 2000-2001, the meltdown of the dot-com industry, and the economic roller-coaster ride in core industries such as telecommunications and semiconductors are just a few of the major calamities that have shaken world confidence in the "New Economy" model. Deregulation by nations to open up their markets and industries to international competition is a necessary condition for participation in the global economy. But as evidenced by the recent default on its huge national debt by Argentina, and the bankruptcies of leading large multinational corporations such as Enron and Global Crossing, deregulation sometimes leads to much greater instability. When fraud, corruption, and mismanagement go unchecked, companies that expand too quickly are also more prone to spectacular failures. But the price of the quest for regional riches seems to be to accept the risks of a U.S.-style freewheeling economy with its huge uncertainty and gyrations of boom and bust built into the high-tech-driven economy.
This globalization, deregulation, and attendant risk is not always enthusiastically received. Many see this as Americanization and a new form of economic imperialism. Indeed, it is quite threatening to the established order. François Mitterand, the late President of France, said, "France does not know it, but we are at war with America. Yes, a permanent war, a vital war, a war without death. Yes, they are very hard, the Americans -- they are voracious, they want undivided power over the world." 2
Speed to product development and market is driving the Innovation Economy and changes the way we work and evaluate success. This is one of the reasons the role of federal, state, and municipal government becomes far more critical to regional success for wealth creation. Government can either slow down or speed up the process of business. It can provide the necessary infrastructure and resources, so technological innovation can thrive. Government investment in educational institutions, technology parks, and transportation, combined with enlightened regulatory policies, can enable regions to respond strategically to a fast-changing marketplace, attract multinational corporate investment, and nurture start-up businesses.
Hot spots for innovation all over the world present an historic opportunity for new career paths for individuals and strategic directions for companies, regions, and countries to participate in a global economic revolution, which is now just at its inception.
Peter Hall suggests that throughout history, technological innovation has always been developed in regions that share very similar characteristics. His observations are reinforced through the perspectives of the "entrepreneur champions" in the regions we profile.
Peter Hall |
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These regions are characterized not by an abundance of fixed resources, but rather by a set of developed social and cultural structures that are favorable to conceptual advances. They may be old, established, cosmopolitan, liberal, metropolitan cities, but are often emerging city regions that serve as entrepots (intermediary centers) between the already-developed world and a frontier beyond it. Their economies are expanding rapidly through imports of goods from that developed world; and they have a high rate of immigration, predominantly of young people, who are highly experimental and untraditional in their outlook. They have strong but often very informal structures for exchange of technical knowledge and conceptual ideas. There is a constant search for the novel. Levels of synergy, not only between like-minded individuals but also between quite disparate socio-economic-cultural groups, are very high; this is the archetype of an open society. 3 ■ |
Universal Adoption of English and Free Access to Information is Transforming the World
A major issue for the creation of regional wealth at this stage of the Innovation Economy is the use of English as the universal language for knowledge workers everywhere. Israeli-born Davidi Gilo suggests that English is the international language of engineers; there is now a mobile world of business in which there is work being conducted 24 hours per day, seven days a week, by programmers and engineers in Silicon Valley, Israel, India, Taiwan, etc. Peter Hall observes that even in Continental Europe, the common language of young Europeans is now English. English-speaking regions, workers, and enterprises have an enormous advantage of being able to access the largest pool of knowledge workers worldwide.
At the same time, freedom of information and perspectives, and the promise of commercial egalitarianism threatens established regional and cultural ways of thinking. During this period of tension arising from the struggle with Islamic fundamentalist terrorism, this aspect of the Innovation Economy takes on even greater significance.
Consider what effect this has on India. Kailash Joshi, President of the Silicon Valley chapter of TiE (The IndUS Entrepreneurs), suggests that one of the reasons the Indian government has been moving to open its markets and eliminate, or at least diminish, the bureaucracy and corruption that have so impeded India's economic development, is that Indians now have access to international broadcasts such as CNN and BBC, as well as a host of indigenous private TV channels. At last, they know how others live and are governed. Joshi believes the popular movement to cut Indian bureaucracy and corruption is inexorable, because the "genie of information is out of the bottle." The government can not hide its own ineptitude and must meet the rising expectations of the people.
Global business and entrepreneurial opportunity accelerate the removal of regulatory barriers between countries and regions. The threat is a great expectation for change that is difficult to implement.
But we are just at the beginning of this change. The implications for the regions of the world to not only catch up, but to adapt, change, and apply these technologies in their own way as part of a greater whole worldwide experience is one of the most exciting parts of the Innovation Economy promise. Every country need not develop its own wine industry, but can import from Europe, California, Chile, Australia, or other regions better suited for wine cultivation. In the same way, every region does not have to graduate all its own programmers and engineers (India can best do that), nor develop from scratch its own mobile telecommunications industry (Finland and Sweden can best do that), nor develop all its own high-tech R&D (Silicon Valley, Germany, and Israel can best do that), nor set up manufacturing foundries and fabs for the semiconductor industry (Taiwan can best do that).
The Innovation Economy dynamics of rapid technological innovation combined with globalization and deregulation will continue to grow, despite the fits and starts of market capitalization bubbles bursting and whole sectors of the Innovation Economy being disrupted.
While beginning as a primarily American experience that seems exported, we believe the Innovation Economy will become even more multifaceted, diverse, and integrated. The hope and promise of this Innovation Economy is that countries and regions of the world, both developed and developing, will all benefit from the application of technologies to increase wealth and improve the quality of life for people everywhere.
Endnotes
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