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Marco Annunziata: Innovation Fuels Greater Hopes And Deeper Fears

By Marco Annunziata January 17, 2013

GE's chief economist and executive director of Global Market Insight says this year's GE Global Innovation Barometer results call for greater risks from business leaders and more openness from governments.

While the global economy is on track for moderate growth this year and next, the pace of the US recovery remains disappointing, and Europe is stagnating. Some large emerging economies, including China, India and Brazil, have also experienced a deceleration in the pace of economic activity.

In this global economic environment characterized by rapid change and high uncertainty, innovation plays a pivotal role. It can be a winning competitive edge and a powerful engine of economic growth, and upset the existing balance of powers across companies and countries.

The 2013 Innovation Barometer highlights that innovation today is a source of both hope and fear for business leaders, and uncovers new important ways in which businesses are reacting to a changing and challenging environment. Though innovation remains a top business priority globally, leaders are conflicted on how best to maintain a competitive edge.

Global Competitiveness

The pace of innovation and increased competition from new industries and markets is challenging local economies, and business leaders are clearly conflicted between appetite for globalization and protectionist temptations—experiencing a paradox the Barometer has dubbed “innovation vertigo”. One of the more fascinating findings from this year’s Barometer is this tension between open markets and protectionist tendencies: 71% of companies would like to see more imported innovation and investment, but simultaneously (and paradoxically) 71% would like governments to protect and foster domestic innovation over imported. To emphasize this paradox, executives in Mexico (80 %), India (56 %) and Brazil (50 %) were most likely to advocate both open and closed market policies as a means to better innovation.

It is natural and understandable to want more of innovation’s benefits to accrue to the local economy. But this desire for a more active protection of local innovation is alarming; it comes at a time when broader protectionist tendencies are already on the rise, whether in the form of outright trade restrictions, capital controls, or local content requirements. There is an increasing risk that protectionist pressures might escalate to the point of hindering growth in global trade, and therefore slowing the global economy further. Similarly, tensions on exchange rates are simmering and may come back to the boil, with the threat of “currency wars” bringing higher uncertainty and volatility in foreign exchange markets.

Innovation is another area where “protection” can be self-defeating. The Barometer found that innovation is best served by collaboration; as many as two out of every three firms surveyed say they have already developed a successful product or process innovation through collaboration with another company. Given the globalized nature of the world economy, many of these collaborations are likely to have crossed borders. And we will see more of this: nearly 90% of respondents are convinced that they can be more effective and successful at innovating by partnering rather than by going it alone.

Governments could understandably be tempted to accommodate the protectionist pressures: as in trade, the beneficiaries of protection can be more easily identified ex ante and are often more vocal. But doing so would negate the broader benefits of collaboration that accrue to a wider section of the national economy, with a multiplicative effect on the global economy. Now more than ever, innovation can help bring a much-needed boost to economic activity and living standards—especially as government monetary and fiscal policies appear to be running out of steam, their room for maneuver largely exhausted. Open, collaborative cross-border innovation is the most efficient way to achieve faster and greater results, with benefits accruing on a global scale.

Jobs and Skills

Taking on the challenges and opportunities of open collaborative innovation requires confidence: we are more willing to compete when we feel we have a chance to win. In the innovation race, human capital is arguably the most important factor, and the Barometer confirms that education ranks at the top of firms’ concerns.

When asked what governments’ should do to foster innovation, one respondent in two points to strengthening the education system in a way that not only gives students a solid basis of knowledge, but also fuels an entrepreneurial culture and creates a closer alignment with business. This message is especially important at a time when policymakers are struggling to reduce unemployment from persistently high levels, and when in many countries youth unemployment has become a pressing concern.

Firms are also becoming increasingly aware that to succeed in a fast evolving environment you have to change not just what you do, but how you do it. One in two respondents ranks the development of new business models as the greatest potential contributor to stronger performance going forward.

The survey results are a clear call for business leaders to take more risk in exploring new business models and approaching innovation in an open way, and for governments to foster the open flow of goods and ideas (with the necessary safeguard to IP and privacy, including cyber security) and to make their education systems stronger, better aligned with the business world and better able to endow student with the new skills needed by a fast-changing economic environment.

Marco Annunziata is Chief Economist and executive director of Global Market Insight for GE.

More on GE’s 2013 Global Innovation Barometer results.