It’s often said that necessity is the mother of all invention, and that certainly seems to be the case during Covid, with new data from Accenture revealing that innovation has flourished during the pandemic. The survey found that the pandemic has promoted a flurry of changes as our organizations have strived to adapt to the changing marketplace.
“Born out of disaster and necessity comes opportunity; the pandemic has sparked a new wave of innovation. As companies fundamentally rethink ways of doing business that deliver growth, many are using advanced analytical capabilities to spot, respond, and target changing consumption trends,” Accenture says. “For instance, British beer company, Brewdog, responded with agility and creativity throughout the crisis —shifting to produce hand sanitizer, creating virtual bars, setting up the Brewdog Drive-Thru, and repurposing physical locations to create co-working space with Desk Dog.”
Unusual quarters
It’s a sign of how innovation can often be triggered by the most unexpected things. A recent series of studies from Stanford shows the role China’s emergence has played in the innovative output in both Europe and the United States.
The researchers assessed data concerning the innovative output of European firms before and after Chinese exports took the world by storm. The analysis reveals that this competition spurred European firms on to develop new products and services that the researchers believe would not otherwise have been developed.
Indeed, companies that experienced intense competition from new Chinese firms were found to launch more new products, obtain more patents, and generally increase their productivity more than their more insulated peers. This resulted in a boost to GDP of around 0.4%.
Uneven distribution
While the wave of new competition spurs some firms to greater heights, however, they wash over others entirely. Perhaps unsurprisingly they found that there were various sectors that suffered greatly from Chinese competition, such as manufacturing in the Midwest and South, which largely vanished as a result.
The same was not the case in the coastal states, however, which easily made up for the few factory jobs lost with a surge in jobs in the service sector. This helped to make the area more profitable and prosperous.
“If you’re a factory worker in the Rust Belt, the manufacturing areas of the Midwest and South, Chinese competition was not good news,” the researchers say. “But if you’re a college graduate on the coasts, you were never going into manufacturing in the first place and your life got better. Now you could work at a company like Apple, innovating products that can be made cheaply in China.”
Skills are key
The key determinant of whether a region thrived as a result of the competition or withered was the education and skill levels of its inhabitants. Those regions with a higher share of college graduates lost few jobs and were able to adapt more successfully. The researchers believe this was mainly because they were already focusing on areas that were hard for Chinese firms to replicate, such as R&D.
“Most of Silicon Valley has been a massive beneficiary of Chinese manufacturing,” they explain. “The Chinese made computers and cellphones massively cheaper, which has hugely increased the reach of technology companies here. The market for their software has exploded. So if you’re Apple, you’ve got thousands of people here designing new phones, plus marketing and selling them. Apple’s total U.S. employment has almost certainly gone up, but its U.S. manufacturing employment has likely gone down.”
The researchers argue that many American and European companies will already have employed a lot of people in R&D roles, and they would therefore be reluctant to give up those skills should Chinese competition increase. That in turn lowers the opportunity cost of investing in innovation as you may as well utilize those skills.
As a result, a 10% increase in Chinese imports into a company’s market was linked with a 12% rise in R&D expenditure, a 3.2% rise in the number of patents registered, and a 2.6% increase in overall productivity.
It’s a reminder that while trade with China and other similar nations can be disruptive to certain communities, in the long-term it is beneficial for countries such as the United States.
“In the long run, 50 years from now, we will almost certainly be richer if we have more trade, because innovation is going to be increased,” the researchers conclude. “That doesn’t mean everyone will be richer, and it doesn’t mean we’ll be richer next year. There’s a trade-off between the short run and the long run, and politics gets in the way. That’s the thing about trade: The costs are narrow and obvious, while the benefits are diffuse.”
