OECDIT The Innovative Society and Its Enemies

Government Leaders' Role in Promoting Innovation

By Kenneth Neil Cukier

The Economist

In the early 1990s, AT& T laid down cables across the United States to build a nationwide network. After digging the trenches, they wanted to seal them securely. So they poured cement over them. Then, of course, something happened: the Internet. Between 1994 and 1998, AT& T sold as much telecoms capacity as it expected to sell in almost 20 years. In an era when voice calls were the main use of telecoms, traffic grew in a slow, predictable way. But now demand for capacity was huge. Moreover, the bandwidth technology didn't stay the same, as it generally did in the world of voice calls. Instead, it improved rapidly.

However when AT& T wanted upgrade the cables with new technology that would let it deliver more data over the same strands of fiber, the company realized it had a very serious problem. They couldn't reach the cables ― or, at least, it was extremely expensive to do so. They had to crack through the concrete.

AT& T had made a huge error. The company hadn't built their network in a way that made it "extensible" or "upgradeable." In some ways, it is an understandable mistake. The company did not know at the outset how the technology would evolve. Ultimately, AT& T had to spend a huge amount of money to upgrade its lines, which contributed to its demise (though the name lives on, after one of the ``Baby Bells'' bought its former parent in 2005).

The story is important not only because of its lessons for the technology and telecoms industries, but because of what it means for policy makers. Regulations and public policy are often like this: it pours concrete on industry. It hardens the economic structure into place. And like AT& T's cement, the policies are hard to undo once they have been set.

This week, government officials, businesspeople, academics and leaders of civil society groups are arriving in Seoul for the OECD Ministerial Meeting on The Future of the Internet Economy. They will consider one of the most important issues of our day: how to foster the development of innovation and entrepreneurship. Around the world, technology start-ups are emerging as the bedrock of economic growth and better living standards, as countries shift from an industrial to an information age.

Korea is one of the most significant examples of this. Its technical prowess, built on the back of major firms, is a model for economic development. But while big corporations that can pool resources have their place, another important element is the start-up company. Yet policymakers face difficulties: How can governments support innovations and entrepreneurship in the right way -- and minimize the chance that they may do harm?

The policymakers, business leaders and experts attending the OECD Ministerial Meeting would do well to consider five key themes, that serve as a sort of "food chain" for fostering innovative entrepreneurship and a successful information society.

* The Entrepreneur:

Innovation starts with a "random walk," which ideas can be incubated and challenged. Government should invest in education, as well as encourage risk-taking by softening the consequences of failure through mechanisms such as bankruptcy law that lets people rebound if their ideas do not pan out. No one knows at the outset what will work ― so people must have the space for experimentation.

* Social Networks:

Diversity is critical to generate new ideas, and the relationships among people, firms and nations determines the variation and fresh thinking that people are exposed to. Governments, universities and businesses need to support interactions among people across groups.

* Organizing R& D:

A networked-model based on interconnections among groups, collaboration and flat hierarchies is essential. The 20th century model of research and development was top-down and bureaucratic, just like the vertically-integrated companies that brought inventions to the market. Today, a networked approach is possible, whereby teams can interact on the fly. Universities and companies need to organize their activities in ways that enable new forms of connections and knowledge-sharing to take place.

* Creating Geographic Clusters:

Places where finance, technical talent, legal, accounting and marketing support intermingle aids the innovation process. Yet too often, governments only concentrate on the science at the expense of other dimensions of the issue. Moreover, governments try to pick winners; instead, they should ensure that their support does not back one technology or technical area at the expense of others. No one can predict which technologies will work out.

* New Role for Policymakers:

Fostering a networked economy requires resources, patience and ― most importantly ― ceding control. This must happen on a municipal, regional and national basis. Being open to new approaches and designing policies so that they can be implemented and built upon in a flexible manner is critical.

However, pursuing these policies is difficult because innovation entails disruption to the status quo, yet the state's role is traditionally to ensure stability and predictability. Ironically, in order to promote innovation, governments need to act innovatively themselves. The crux is devising policies that are "extensible" or "upgradeable" ― that do not try to prejudge the future, but let it unfold.

The role of public policy is vital. In the past, governments built infrastructure such as roads and power grids to further economic development. But the infrastructure and institutions needed today are different. Instead of investing directly in promising technical innovations, government needs to resist the temptation to forecast the future or assert control and instead ensure that platforms exist for creativity to emerge. Moreover, rather than appeal to a parochial sense of protectionism, governments should consider promoting the free-flow of information, goods and people within and across their borders.

Of course, there is no magic formula. Rather, there are a myriad of factors account for innovative success. If supported well, entrepreneurship need not be the exclusive purview of just a handful of exceedingly smart or lucky individuals, but fostered in many people in multiple ways. Promoting innovative entrepreneurship is essential for modern governments. Yet it requires new forms of partnerships with industry, academia and civil society.

Whether today's leaders are prepared to accept this challenge will effect the success of tomorrow's innovators. Most importantly, governments need to remain open and flexible in their activities ― or they may have to endure the difficulty of breaking through the concrete of the policies it sets ― just like AT instead, they should ensure that their support does not back one technology or technical area at the expense of others. No one can predict which technologies will work out.

Fostering a networked economy requires resources, patience and -- most importantly ― ceding control. This must happen on a municipal, regional and national basis. Being open to new approaches and designing policies so that they can be implemented and built upon in a flexible manner is critical.

Whether today's leaders are prepared to accept this challenge will effect the success of tomorrow's innovators. Most importantly, governments need to remain open and flexible in their activities ― or they may have to endure the difficulty of breaking through the concrete of the policies it sets ― just like AT&T's cement a decade ago.

Kenneth Neil Cukier is the Japan correspondent of The Economist specializing in technology and business, and is moderating a session at the OECD Ministerial Meeting.