When private actions generate harmful externalities, previous research has shown that public intervention can improve welfare if it appropriately trades off social harm reduction with enforcement costs. On the flip side of this, however, public intervention may thwart the firm’s incentives to undertake research by reducing its expected profitability, depending on the approach used.

Giovanni Immordino, Marco Pagano and Michele Polo consider public policies and approaches that may affect a firm’s effort to discover new technologies and the actual use of that technology once discovered in their paper, “Incentives to innovate and social harm: Laissez-faire, authorization or penalties?” They compare four different regulatory responses: 1) laissez-faire; 2) a lenient authorization regime, where inventions can be used commercially once they are ascertained to be safe during tests; 3) a strict authorization regime, where they can be used commercially only if they are ascertained to be beneficial; and 4) a regime based on penalties, where the commercial use of innovations is sanctioned ex-post if found to be harmful.

There results indicate that the regulatory regime should become more stringent and cogent as the danger of social harm increases. In other words, “if fines are unbounded, laissez-faire is optimal if the social harm from innovation is sufficiently unlikely; otherwise, regulation should impose increasing penalties as innovation becomes more dangerous.” Furthermore, if fines are bounded by limited liability, “it is optimal to adopt (indifferently) penalties or lenient authorization, while strict authorization becomes optimal if social harm is sufficiently likely.”

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Motivating innovation is a critical part of designing incentives. Some previous research has shown that shareholders often must motivate managers to pursue more innovative business strategies. Gustavo Manso examines aspects of an incentive structure in his paper, “Motivating Innovation.”

Manso finds that the optimal incentive scheme motivates innovation by exhibiting substantial tolerance for early failure and reward for long-term success. Additional critical components to encourage innovation and new ideas include commitment to a long-term compensation plan, job security and timely feedback on performance. Furthermore, in regards to managerial compensation, Manso writes that this incentive program can be implemented into an organization via a combination of stock options with long vesting periods, option re-pricing, golden parachutes and managerial entrenchment.

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Non-compete covenants are clauses written into contracts that expressly prohibit individuals from competing with former employers. Particularly for technical workers and upper-level management, they have developed to become a common feature of employment contracts. Sampsa Samila and Olav Sorenson research this issue and determine whether they encourage innovation or impede growth in their paper, “Non-compete Covenants: Incentives to Innovate or Impediments to Growth.”

They find that the enforcement of non-compete clauses significantly impedes entrepreneurship, employment growth and innovation. The authors believe that this may be due to the fact that the “value of the recombination of knowledge facilitated by the elevated mobility of individuals across firms might outweigh the greater incentives to innovate afforded by the enforcement of these non-compete covenants.” Furthermore, their results show “relative to states that enforce non-compete covenants, an increase in the local supply of venture capital in states that restrict the scope of these agreements has significantly stronger positive effects on (i) the number of patents, (ii) the number of firm starts, and (iii) employment.” Finally, their findings point to a strong interaction between financial intermediation and the legal regime in promoting entrepreneurship and economic growth.

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Robert G. Cooper recently addressed a common issue in the present market in his article, “Perspective: The Innovation Dilemma: How to Innovate When the Market Is Mature.” If you are trying to grow your business wishes in the midst of mature, commoditized markets, this is a good article to read that discusses examples of bold innovation, which are breakthrough products, services and solutions that create growth engines for the future.

Cooper outlines five different vectors that can act as drivers of innovation. First, have a product innovation strategy that focuses your development efforts on opportunity-rich strategic arenas, much like Corning and Apple do. Second, foster the right climate and culture for innovation, driven by senior executives, as found at Grundfos and 3M. Third, set up a system to generate, capture and handle proactive ideas, similar to what Swarovski has done. Fourth, design a robust idea-to-launch stage-gate process to manage large and complex and development initiatives, which companies like P&G, Emerson Electric and Kennametal have done. And finally, do the necessary up-front due diligence and make the right fact-based investment decisions in riskier projects, such as portfolio management, much like Corning, Green Mountain Coffee Roasters and Grundfos do.

Click here for the paper to read more about these examples

Recent research on new managerial processes, practices and structures that can change the nature of managerial work show that this form of management innovation can be an important source of competitive advantage. Ignacio Vaccaro, Justin Jansen, Frans Van Den Bosch and Henk Volberda hone in on this research at the organization level in their paper, “Management Innovation and Leadership: The Moderating Role of Organizational Size.” Because top management has the ability to influence such management innovation within organizations, the authors investigate the role of leadership behavior.

They define two forms of leadership: transformational and transactional. They see transformational leadership as being “aimed at the followers’ identification with its purpose and common goals. It stimulates employees to attain to organizational goals by appealing to high-level needs for self-actualization.” Through its four dimensions of idealized influence, inspirational motivation, intellectual stimulation and individual consideration, transformational leadership can affect all facets of management innovation. Transactional leadership, on the other hand, involves leaders who are “primarily concerned with gaining compliance from subordinates – which they will do by targeting their self interest – by agreeing upon the conditions and rewards that will follow the fulfillment of certain requirements. With two dimensions of contingent reward and active management by exception, transactional leadership is also positively related to management innovation within an organization.

The authors further find that organizational size moderates the effectiveness of both transformational and transactional leadership on management innovation. Their results indicate that the effectiveness of transformational leadership increases with organizational size. In contrast, smaller, less complex benefit from transactional leadership when realizing management innovation.

Paper

Business surveys and research have often reported that managers prefer face-to-face communication when negotiating deals and selling products. However, Nune Hovhannisyan and Wolfgang Keller go further in their paper "International Business Travel: An Engine of Innovation?" to show that face-to-face meetings are also important for the transfer of technology, reasoning that technology is tacit and usually best described and demonstrated in person. They examine the role of inward business travelers in raising a country’s rate of innovation by looking at business travel from the United States to thirty-six other countries during the years 1993-2003, using patents to measure innovation.

Their results indicate that international business travel has a significant effect on technology transfer through international trade and foreign direct investments. On average, a 10% increase in international business traveler arrivals leads to an increase in patenting by about 0.6%, which is substantial in this scope. Hovhannisyan and Keller also find evidence showing that the quality of the impact on innovation and patents is related to the quality of the technological knowledge carried by each business traveler. Furthermore, they suggest that cross-country income differences can be reduced through international air travel, issues that create the foundation for further research within labor market policies on how strongly short-term cross-border movements affect innovation.

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For any business, delayed exits pose substantial economic problems. Even though many companies tend to hold on to their assets, studies have shown that returns would triple if VCs exited ventures at the right time and shareholder value could increase as much as 13.6% should corporations divest underperforming business units optimally.

Anne Marie Knott recently co-authored a research paper with Dan Elfenbein entitled, “No Exit: Failure to Exit Under Uncertainty.” They examine the private costs of excess entry and study whether social welfare can be improved by expediting the exit of would-be failures. As predicted, their results show that there are substantial economic gains to improving exit decisions. In essence, their research paper provides the mathematical support to prove the value of exiting the market at optimal times.

The general topic of her current paper is in entrepreneurial exit, but the problem they are trying to alleviate is actually much broader, as these types of exits occur frequently. For example, firms exit markets, business units and products, close plants and abandon R&D projects, while venture capitalists exit ventures, employees leave firms and individuals sell stock. Quite simply, exits influence much of the market, as do entrepreneurial entries.

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Presentation

Abstract:  Inventions that aren't commercialized remain inventions, not innovations. Companies such as Apple are organized internally to repeatedly produce innovations in the core business as well as in new businesses. Such companies make sure that their innovations matter and their products are really valued by the customers. This article’s conclusion is that an invention should solve some job that needs to be done. The product developed in the process should matter enough that the customers are willing to pay for the same. Companies should not go too far to battle over the marginal differences but should rather focus more on creating products that are really valued by their customers.

Published: Bloomberg Businessweek, March 2011

Authors: Mark W. Johnson

Link: Making Innovation Matter

Abstract: During global economic downturns, senior executives take many measures to reduce costs especially in their research-and-development budgets. However, such measures delay promising projects as well as adversely affect morale. This article’s main conclusion is that companies should take a more innovative and strategic approach to cutting R&D costs. They should use difficult economic periods as an opportunity to upgrade their R&D organization’s focus, practices, and management. This will not only help them to cut their costs in the long run but will also raise staff productivity and accelerate the process to develop new products for the customers.

Published: McKinsey Quarterly, February 2009

Authors: Christie W. Barrett, Christopher S. Musso, and Asutosh Padhi

Link: Upgrading R&D during Downturn

Abstract: This article articulates the proposition that innovation is about problem solving, understanding how to ask the right questions, and seeing patterns before facts. All these aspects of innovation help companies develop the right product or service for their customers. This article’s main conclusion is that all the employees in a company have the necessary skills to be innovative. The key challenge faced by most of the companies is not to develop new innovative products for the customers but to create an experience for the customers that also preserves the brand equity those companies had built in the past. It is imperative for companies to preserve their brand equity and simultaneously seek out all the innovative opportunities discovered while developing a new product.

Published: Bloomberg Businessweek, March 2011

Authors: Laura Jakobsen

Link: Innovation

Abstract: This article describes how global companies have adopted a new process called knowledge brokering in which executives are actively seeking out external ideas from people in a variety of industries and disciplines to improve their core business processes and develop better solutions to their organizational problems.

Based on a study reviewing the use of knowledge brokering by more than 50 teams at ten multinational companies, it was found that these teams were able to devise innovative solutions to assigned projects twice as quickly as possible by conventional techniques. It was also found that these teams adopted the following similar path to projects in areas such as strategic planning, sales and marketing, corporate social responsibility and HR.

1.      Analyze the problem space

2.      Evaluate brokering communities and choose experts

3.      Engage knowledge brokers to extract ideas

4.      Incorporate the new ideas into an implementation plan for a new process.

The article’s conclusion is that companies can develop breakthrough process innovation and better position themselves for a new networked world by efficiently using their knowledge sources and combining outside insights into their core internal business processes.

Published: McKinsey Quarterly, January 2010

Authors: Corey Billington and Rhoda Davidson

Link: Improve_Business_Processes

Abstract: The article describes how the wealthy nations of the world with low birthrates and graying workforces are finding it difficult to compete with emerging markets with much larger and younger working populations. This had made it imperative and compelling for the wealthy nations to take up the productivity challenge to produce more and more with fewer workers.

The article conclusion is that developed economies would have to deploy innovative business models to get more from their higher quality knowledge employees. This article suggests that some of the aspects of such a transformative business model can be changing the boundaries around the work–life balance or better adopting approaches such videoconferencing to collaborate and exchange knowledge with far-flung employees.

Published: McKinsey Quarterly, June 2010

Authors: Peter Bisson, Elizabeth Stephenson, and S. Patrick Viguerie

Link: Improving Productivity

Abstract: Globalization and digital technology have combined to create a vast, complex information network grid which has helped innovative businesses as well as newcomers such as Skype to grow multifold. This had made every company a global company where business transactions are made to customers around the world via sales platforms such as eBay or Alibaba. The article’s conclusion is that this interconnectedness has increased stability for the businesses by diversifying their risk but has also raised the need for the executives to better understand areas where disruption such as global financial crisis could rather have an amplified negative impact.

Published: McKinsey Quarterly, June 2010

Authors: Peter Bisson, Elizabeth Stephenson and S. Patrick Viguerie

Link: Globalization+Technology

Abstract: This article describes that many high tech products such as fabless chips, LCD for monitors, TVs, handheld devices like mobile phones, power semiconductors for solar panels are no longer produced in United States because the industrial commons required for the manufacturing of these products have been lost through outsourcing for short term cost benefits. The article defines industrial commons as the combined capabilities of the high technology firms and the other companies in the industry such as the suppliers of advanced materials, tools, production equipment, and components.

The article’s main conclusion is that the U.S government and industry should work together to revive the country’s industrial commons and thus restore the ability to manufacture a wide array of high technology products. The article also provides a number of suggestions to the policy makers of the U.S businesses about the role that government can play to rebuild the industrial commons and thus realize continued innovation and sustainable economic growth in United States.

Published: Harvard Business Review, July–August 2009

Authors: Gary P. Pisano and Willy C. Shih

Link: Read Full Article

Abstract: Many U.S multinational companies have been forced to revise their R&D budgets because of weak sales and the pressure to stay ahead from their global low-cost competitive rivals in Asia and Latin America. The article concludes that some of these companies have adopted a new approach of “ecosystem investing” in which large companies such as Johnson & Johnson, General Electric, General Motors, and Google are creating strategic partnerships with startups and small companies whose technologies and skills can help them expand their own capabilities. This approach has helped large companies to tap into new sectors such as genomics and biotechnology, advanced robotics, lithium ion batteries, semiconductor manufacturing, and nanotechnology.

Published: Strategy+Business, January 24, 2011

Authors: William J.Holstein

Link: Strategy+Business