Innovation grows economic activity

I was invited by PNE Group to be one of five speakers at an event in November intended to think about Advancing the North East. Speakers covered topics such as productivity, growing talent and exporting. I focused on innovation, drawing inspiration from the history of the north east and from a current project.

Tyneside’s pioneers

I was born in Newcastle and am passionate about the north east of England. Arguably the north east of England was the centre of the industrial revolution, with many inventors, innovators and pioneers. I want to mention just two. One of the buildings occupied for 15 years by PNE Group was Hawthorn House in Newcastle.hawthornHouse This was originally built by Robert Hawthorn, who filed 84 patents whilst in the building and built railway engines for Robert Stephenson, whose father built the first locomotive, and who had the site on the other side of our car park. Across the river in Gateshead, Joseph Swan invented the incandescent light bulb, lighting not only his shop in Newcastle, but the whole street, so that Newcastle became the first city in the world to light a street with electric light. This is of particular interest to me because one of my forbears was the first retailer anywhere to use electric lighting in his shop window for advertising purposes.

But the north east seeemed to lose its way. It forgot about the entrepreneurship and innovation that had made Tyneside great and, by the end of the 1970s, it had one of the lowest levels of self-employment in Europe, an insignificant number of large companies and a total lack of enterprise.

David Grayson and I founded Project North East as a response to that problem and, over the years, PNE has been able to innovate in its approaches to supporting entrepreneurship, with the first Youth Enterprise Centre, with Design works, with Business Information Online, long before the internet, and with the first televised business competition. But my objective is not to eulogise PNE; rather it is to explore how PNE can stimulate more businesses to innovate.

Innovate to compete

As long ago as 1955, Peter Drucker was arguing that the purpose of business is to create a customer, and therefore that there are only two entrepreneurial functions, marketing and innovation. New businesses foster competition and economic growth. Entrepreneurail activity supports job creation. Small businesses are flexible, innovative and responsive. Between 1945 and the 1990s, 50 per cent of all innovation and 95 per cent of all radical innovation came from new and smaller businesses (Spinelli et al. 2012). Economies with a high proportion of smaller and medium sized businesses are more resilient to external shock and will have a greater likelihood that more businesses will grow into large businesses. But we need to encourage them to start.

How do we do that? I have recently bought a state of the art HP laptop. Bill Hewlett and Dave Packard started their business in a garage in 1939. Steve Jobs and Steve Wozniak did not have their own garage. They started Apple Computers in Jobs’ parents’ garage in 1976.

But many of the most innovative, most entrepreneurial businesses in the US, certainly the technology ones, emerged fro research institutes and large company research labs where bored and stifled researchers and middle managers realised that the only way to ‘do their own thing’ was to resign and find a garage. Fairchild Semiconductor, founded in 1957, spawned 10 new ventures in its first 8 years; indeed, most of the 31 semiconductor firms founded in Silicon Valley in the 1960s could trace their roots back to Fairchild including Intel, Advanced Micro Devices and Raytheon.

In the absence of applied research labs with bored staff, though, is there an alternative approach?

Exploiting the innovations of others

In an effort to encourage more innovation, and perhaps spurred by large companies innovating but not knowing how to exploit their innovations, a number of initiatives have focused on increasing the ‘supply’ of innovative ideas. There are some interesting examples of companies recognising for themsleves the value in sharing ideas that they did not wish to pursue themselves. In the late 1970s, for example, General Electric in the US started to publish newsletters with their innovations and then offered to license them to firms who wished to exploit them. In the UK, there have been a number of ideas newsletters, though all independent of large firms, and none has been particularly successful. One difficulty is that firms cannot always see the potential in a new product or process, especially when it is peripheral to its main activity. Universities and research institutes have tried to encourage both their own staff and others to take up their research ideas, with mixed success.

Promoting demand rather than supply

Possibly the most successful has been MIT, which encourages businesses looking for specific innovations to come into the university once a year to see what is available. In other words, businesses are looking for an innovation that might satisfy a need, rather than universities offering a solution that is looking for a problem. This has been a remarkably successful approach. Indeed, it has been estimated that MIT’s spin outs, both companies and innovations, would constitute the world’s 24th largest gross domestic product (Schramm 2004).

The nature of innovation

Innovation needs to create value for which customers will pay. On that basis, I have concluded that that there are four types of innovation, of which three are important to business: (i) the product that does something completely new for the consumer (for example, the original Sony Walkman, the now ubiquitous mobile phone, kite-surfing, drones);Kitesurfing (ii) the product that delivers an existing requirement in a new way (for example, LED lightbulbs, digital radio, electric cars); and (iii) a change in the manufacturing or delivery process that delivers a product more efficiently or more cheaply (for example, use of robots in manufacturing, renewable energy). The fourth, by the way, is blue sky thinking.

Connect to Grow

I am currently managing a programme, funded by DFID India, which we call Connect to Grow. It is a three year programme, which started in May 2015, with the objective of supporting SME growth that might lead to development impact in the agriculture and health sectors in sub-Saharan Africa and south Asia. Connect is unique because it focuses on demand.

It does this by facilitating partnerships between enterprises in sub-Saharan Africa and south Asia that have identified a market need and are seeking to grow and enterprises in India with an innovation that could address that need and a desire to enter new markets.

Connect supports the enterprises from sub-Saharan Africa and south Asia to articulate their market and their oportunity clearly and then provides bespoke technical assistance and grant funding to find suitable Indian enterprises; to develop a partnership; to implement a pilot venture and test the concept; and to access finance and create a plan to scale up and deliver greater social impact.

Connect has supported 20 pilot projects altogether and we have examples of all three type of innovation. These include:

Agromite, in Ghana, that has been experimenting with laser land levelling to support rice farmersAgromite

Pure Products in Uganda, that has introduced water ATMs, to provide purified water at low costsparkles

SokhiPad in Bangladesh that is manufacturing low cost santitary padssohkipad

Nzua and Msigani Farms in Tanzania that are importing a hybrid chicken known as Kuroiler to offer a faster growing, high yielding chicken to poultry farmerskuroiler

Masole Ammele in Malawi that is expanding its aquaculture business to be able to hatch fish and sell fingerlings to other fish farmsfish

Agriaccess in Ghana that is ingtroducing drip irrigation to increase the yields of sorghum of all its farmers to meet growing demand from the breweriessorghum

We have learned a great deal from the project and have already published some learning snapshots (available from the Connect website). Four lessons that might resonate with PNE and its work with new and growing businesses in the north east of England are that (i) business tend not to ‘envisage the future’, or at least not far enough ahead; (ii) businesses struggle to describe precisely their current market and the market opportunities and thus their business needs; (iii) partnership can offer many benefits, including the faster introduction of innovation and reduced risk, but it is not the right strategy for everyone; and (iv) individual enterprises may need support beyond their specified need (for example, improving the production capacity to increase the availability of a product may have ramifications for the acquisition of the raw materials and may also require more working capital) and all need to be addressed to make a difference.

The challenge

For me, this presents two interesting and complementary opportunities for PNE: what can it do to stimulate innovation amongst businesses in the north east of England – in particular, is there scope to learn from Connect and promote partnerships for innovation in the north east; and what can it do to persuade government to reform public policy to encourage more innovation?

The Brazilian entrepreneur, Ricardo Semler, in his great book, Maverick, says that “a turtle may live for hundreds of years because it is well protected by its shell, but it only moves forward when it sticks out its head”, so my challenge to PNE is to stick out your head.

 

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Does the UK Government want more entrepreneurs?

The Sunday Times of 15 April reported on limited liability partnerships and the fact that people try to avoid tax. They seem to be equating the two – arguing that some high profile business people offset losses in business ventures against personal tax. But, I would like to know, what is wrong with that.

The Sunday Times reports that there are over 76,000 limited liability partnerships – of which around 4,000 are making a loss. Let’s put that in the context of more than 4 million businesses in the UK. Many of them will be making losses as well – but the Sunday Times thinks we have a probem because 0.1 of UK businesses are making a loss. We need to separate two completely separate issues.

The first issue is that everyone will do their best to avoid tax. Why should they not? Avoidance is perfectly legal. It is evasion – lying or misreporting – that is illegal. If the government does not like the loopholes that people exploit, then it can close them, but there is nothing wrong with using them. A classic case is those large multi-national companies who manage to make money out of UK consumers but which are registered offshore so we are unable to tax their profit. But don’t forget that consumers pay VAT on the products (mostly) and that they, and their supply chains,¬†employ people who pay income tax – so the picture is not as black and white as teh press paints it.

The second issue is whether we want to encourage entrepreneruship. The whole point of allowing a business to write of losses against other profits is to encourage them to invest and innovate. Some times, those ventures will fail, but some times they will be a roaring success – and the government will generate a high tax revenue from the roaring successes.

Stopping people from writing off their losses will simply discourage them from trying in the first place – or encourages them to try in a country where they get a better deal. Instead, we should be encouraging much more entrepreneurship. We should be haling success. We should be proud of our entrepreneurs – not forever kicking them – and we should be writing positive stories. And we should be looking at taxation much more strategically – rather than a hit here and a hit there to remove some loophole that was probably deliberately created in the first place specifically to encourage more entrepreneurship.