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.

 

Advertisements

Need for dialogue to improve competitiveness

Sub-saharan Africa has seen economic growth rates averaging more than 5 per cent for the last 15 years. However, economies are largely agrarian bolstered by extractive resources and usually with a large informal economy, which largely focuses on local trading. The Africa Competitiveness Report 2015 makes the assumption that increased competitiveness is a critical driver of structural transformation and broad based growth. However, as we learn from WEF’s Global Competitiveness Index, most countries in Africa are not competitive. Indeed, the move by many from agriculture to services rather than to manufacturing suggests that their current growth is unsustainable. But, WEF suggests, to support manufacturing and to become more sustainable, they need better infrastructure – energy, roads, ports, irrigation – as well as improved education, and a more conducive business enabling environment. In particular, WEF sees a need for reduced barriers to trade a strengthened regulatory framework (especially for rules of origin, competition policy, intellectual property rights and dispute resolution). They argue for the removal of both tariff and non-tariff barriers and improved access to finance. They suggest that the “success of reform agenda will also depend on active dialogue among key stakeholders” (p82) between countries, not least to promote knowledge sharing and peer learning, but I would argue that more dialogue is needed between public and private sectors as well.

Influencing legislators

For those of you interested in how research influences legislators (ie, Parliamentarians), you should read a recently published ODI working paper by Ajoy Datta and Nicola Jones: Linkages between researchers and legislators in developing countries.

The authors argue that legislators need access to good research to address the typical imbalance with the executive branch which usually has easier access to appropriate information (though I have to say that I often get the impression that the executive branches, at least in the countries in sub-Saharan Africa in which I work) could also benefit from access to better research.

The authors note that CSOs (and I would include business associations), especially in sub-Saharan Africa, have a strong role to play to representing ordinary people in the legislative process – and that many Governments hold legislative committee hearings which provide a ready mechanism for researchers’ voices to be heard, though that is not the only way for researchers to communicate with legislators. They assert that good research can move debates to more strategic levels and narrow areas of disagreement. However, they stress the importance of research being timely, relevant and independent. The authors say that legislators are looking for a “compelling story with practical policy recommendation”. They stress that policy proposals targeting legislators need to be short and easy to understand, though note that their staff teams may require more detail.

This neatly sums up what I propose to the business associations with which I work: prepare short, succinct and compelling policy positions papers, of no more than four pages, clearly built on solid evidence, but don’t try to include all the evidence. The detailed evidence can, instead, be included in a much more extensive research report, which should also review a range of policy options, and the likely implications of each of those options, for the people who need all the detail.

Doing Business 2012

The eagerly awaited Doing Business 2012, the latest in a long line of Doing Business reports, has just been published by the World Bank. The Bank reiterates its assertion that “enabling private sector growth and ensuring that people can participate in its benefits requires a regulatory environment where new entrants with drive and good ideas … can get started in business and where firms can invest and grow”.

Over the last year, the Bank says that 125 economies implemented 245 reforms affecting indicators measured by Doing Business. In sub-Saharan Africa, 36 of 46 governments improved their regulatory environment – which is extremely encouraging but also reflects their generally low rankings and need to take more action. Even more encouragingly, three of this year’s top ten reformers are African: Sao Tome e Principe, Cape Verde and Burundi. All are small, two are islands, but one is important as a constituent of the East African Community – and its neighbour, Rwanda, continues to impress, rising a further five places to 45th. Tanzania is at 127, down from 125, and Mozambique is at 139, down from 132, so they still have all to play for – and with the help of development partners such as DANIDA and DFID are trying hard to make a difference. The real need, I suspect, is for these governments to change the culture within government. Tanzania, for example, has worked hard to change the culture within its Ministries. It has one key reform that affects its DB rank: it has made it easier to get good through the ports. But too many government agencies are looking for new ways to extract money from businesses rather than making it easier for them to do business – and the consequence is that business leaders perceive that it is getting more difficult to do business in Tanzania.

Influencing the Government of Tanzania

I am writing a paper about state business relations in Tanzania following some work there in July when I met with a number of people in government and in business associations. The paper will be available in due course but in the meantime, I thought that the conclusions might be of some interest.

The overall impression is that considerable progress has been made in the last year or so. Ministries are much more likely now to consult with the private sector and are increasingly moving towards the creation of formal dialogue mechanisms which will make it easier still for the private sector to convey their views to government. They are also demonstrating
that they are willing to listen to the private sector and to take ideas on board.

This raises a challenge for the private sector, however, in that they need to undertake research, gather evidence and prepare compelling policy positions. One association explain that it is not always necessary to provide detailed evidence, say in policy position papers, but they must have the facts at their fingertips when they get into dicsussion with officials

Business associations are becoming more effective. They are relying less on emotive argument and more on evidence. They are more likely to work at all levels within a Ministry rather than going ‘straight to the top’, which is appreciated by policy officials who, in turn, become more responsive.

There is undoubtedly a need to improve communications. Associations are still not good at gathering ‘market intelligence’ and are not good at sharing it when they do. Government gives the impression that it is not good, either, at sharing information early on. Clearly some information will be sensitive but much of what the government is trying to do could be made much
easier, and would engage the private sector more effectively, if they were more open. This may of course simply be because they are not sure how to share information more widely. It would be sensible for Tanzania Private Sector Foundation (the apex business association) to take on this role and doing so would begin to justify their existence to all the other business
associations. It has asked an advocacy support programme for financial support so that it can facilitate and co-ordinate working groups paralleling task teams in government. It intends to explore ways in which it can disseminate more broadly information about the roadmap process and on any progress being made. Taking an active role in dissemination would make a big difference in ensuring that the private sector was kept abreast of developments and was in thus in a better position to be able to comment and make further proposals.

It is not always easy for the private sector to adopt a common position. When the private sector is divided it is easy for government to say that it will decide, but when the private sector is united, it is more likely it will be able to influence public policy. This does not mean that the apex business association should speak for everyone – but it does mean that TPSF should take a role in ensuring consensus on issues that cross sectors and does mean that all associations should know the agreed policy position so that all can communicate the same message – implying a further communication role for TPSF.

It is very easy to get excited about sector specific issues, such as park fees or concession fees. No-one gets excited about process issues, such as mandating the use of regulatory impact assessments. But adopting policies such as this would require proper consultation before changes could be made, for example, to park fees and so could make a big difference in ensuring
that the private sector can make its case early on. This is exactly the sort of policy proposal that TPSF should be taking forward and is almost certainly a good example of where it could form a policy coalition, in this case with the Prime Minister’s Office, to take this to the President.

Improving the enabling environment

All round the world, spurred on by the World Bank and its Doing Business reports, governments are looking for ways to make it easier for businesses to do business. There are a host of factors that comprise the so-called enabling environment (sometimes called the investment climate) including infasructure (power, roads, water, telecoms etc), access to finance, regulation and licensing, corruption, access to skilled labour, macro-economic factors such as inflation and interest rates and many more. In developed couuntries, we take many of these – such as reliable power or telecoms – for granted and complain about regulation and access to finance. These are both important in developing countries as well – but generally power and corruption are seen as the key barriers to business and the main deterrents to investment.

My objective in writing this blog s to draw attention to some of the problems that exist in places such as Tanzania, Kenya, Mozambique and Nigeria – and to encourage debate and discussion about what could be done to improve the enabling environment in those countries. I don’t imagine that I will have time to write something every day, but I hope that I might manage at least once a week, so please keep coming back – and please contribute.