Innovation is widely seen as a good thing, both for companies and for society as a whole.  With recent innovations causing a degree of consternation around things like employability (automation) and workers rights (the sharing economy), a recent paper set out to explore what kind of innovation is best to secure our future.

Such scrutiny is not usually applied to innovation.  After all, the classic view is that for an innovation to thrive in the market, it needs to offer something to customers, whether it’s better quality, cheaper goods/services or more convenience, therefore a market proven innovation has to be good for society.

This view is fine so long as negative externalities are overlooked.  The paper argues that an innovation that isolates its benefits in the hands of the few is not one that is good for the whole.

These externalities often blindside us, as their unpredictability makes them difficult to regulate against and plan for.

The best kind of innovations

So, the paper sets out to explore whether there are kinds of innovation that minimize (and indeed earlier identify) these risks, and what kind of incentives can be used to help encourage such innovations.

Recombination is something I’ve touched on several times before, and the paper centers its argument around that, and particularly the way information needs to flow to encourage it.  It makes the distinction between open innovation, where such knowledge acquisition is both deliberate and two way. Limits to this approach typically revolve around the ability of the organization to absorb new knowledge, and the channels by which that knowledge can be filtered into the organization.

Whilst the web has certainly facilitated the open innovation process, the majority of innovation still remains more of the closed variety, with any outbound information packaged up in IP protected products or via tightly controlled joint ventures.

Even when innovation is open, it is far more common (by a factor of four) for this to mean inbound flows of information than it is outbound, with what outbound information there is typically flowing to non-competitors.

Who wins and who pays?

The costs involved in innovation can be considerable, both to us as individuals, but also to those organizations that lose out as a result of the creative destruction.  This process has underpinned much of the relocation of jobs and resources to Asia over the past few decades.

So long as the gains outweigh the losses, society tends to improve, but the question is posed nonetheless as to whether the winners should do more to compensate the losers, even if that compensation is delivered by society rather than the winners themselves.

Of course, another cost of innovation is the huge number of projects that fail to succeed in the marketplace.  Indeed, it is often a bid to reduce the uncertainty involved in innovation that encourages a more open approach.  Does this open process make it easier to spot negative externalities early on however?

Logically yes, in that the more opponents there are to an idea, the less likely it is to be pursued, and the author provides mathematical proof for this.  In closed innovation processes, it takes an awful lot for negative externalities to both emerge and derail a project, with more open innovation increasing both the likelihood and the speed by which those externalities are uncovered.

The needs of organizations versus society

This inevitably creates a degree of conflict, as whilst companies tend to gain more from closed innovation processes, society would appear to benefit much more from an open one.  The author suggests that if openness is mandated, it would result in fewer chances being taken with regards to innovation as the returns will be lower.

Whilst I have some sympathy for this conclusion, previous studies have suggested that companies do indeed benefit from open innovation, as their openness helps to foster standards and the development of complimentary goods around their new product that subsequently increase the overall size of the market, even if their individual chunk of it is lower.

It’s an interesting paper however, especially at a time when the EU are pushing so heavily for openness.  Indeed, their innovation policy goes by the moniker of ‘open innovation, open science and open to the world‘.  If you have an interest in the various policy machinations behind innovation, it’s a paper worth reading.