Innovation drives productivity. I understand that point. But what is the best way to drive innovation?
A much tougher question. Governments around the world are doing what governments typically do when they want to incent behaviours: use the lever of money.
A couple weeks ago, Canada threw $80M toward the problem, issuing a press release saying that it was “invest[ing] in Canadian business innovation [to make] Canada a global leader in the digital economy.”
But if money is the only lever that is being used, a country can only “lead” until some other region opens its wallet even more. Europe is now proposing to spend €80B (that’s right – B as in Billion – Euros) in funding for research and innovation, citing “a €120 million research investment by the EU enabled the 3G mobile market that we know today, worth €250 billion”. The implication being that the EU got a 2000 times return on its investment in 3G. That kind of economic analysis may be what makes Europe such a beacon of fiscal leadership that guides global markets today.
But that is not what I want to talk about. Nor will I look at whether the EU can actually write a cheque for €80B.
I’m just not convinced that we have the right approach in governments throwing money toward selected performers of research and innovation. It seems to me that application based programs have winners and losers. Some group of bureaucrats sit in judgment over projects and determine which are naughty and which are nice, which get funding and which get rejected. There are just so many problems with this approach, not the least of which is that governments are not known for making winning decisions.
Are innovation incentives rewarding the wrong kinds of companies? As I wrote earlier this week, if an innovation is going to result in a productivity improvement, why isn’t the business doing it on its own? Why wouldn’t the business be trying to improve its profitability without the need for cash from a government program?
Let’s not forget to look at where the government program is being funded – the source of those tax dollars. Profitable companies – including those that took the risks and innovated on their own prior to the program – are seeing their profits taxed so that companies with lower risk tolerance could get a handout. There seems to be something inherently wrong with the kind of Sherwood Forest code of justice, that takes taxes from winners and innovators and hands it over to their competitors who weren’t willing to innovate on their own.
Governments need to innovate in their approach to managing behaviour. Protective tariffs block competition, reducing incentives to innovate and increasing costs for consumers and businesses that use the goods as inputs. Restrictions on trade, investment, paperwork and more need reform to be part of government leadership in innovation. Government handouts aren’t innovative. Getting out of the way would be a novel approach for government.
Can we use the levers of increased competition, coupled with increased willingness and need to take risks, in order to more systemically drive an innovation economy?