A remarkable guide for how firms innovate

By David Crane

At a time when there is growing concern that slow growth may be the "new normal" and that the pace of innovation may be slowing, governments and businesses need better information on how they can improve prospects for innovation and hence sustained and growing living standards. Likewise, the world faces grand challenges that can only be met by innovation.

This is why a new book — Handbook of Innovation Indicators and Measurement — is so timely. With 19 chapters and 31 contributors, and edited by Fred Gault (who also contributes three chapters), the book is a remarkable guide to why innovation matters, why good innovation statistics and indicators are essential guides for effective innovation strategies and policy interventions, and where innovation statistics have to go next.

Gault, who until 2008 headed the Science, Innovation and Electronic Information Division at Statistics Canada, has long been recognized as one of the world's foremost experts on innovation measurement, playing a key role at the Organization for Economic Cooperation and Development in leading its evolving understanding of innovation. He is currently a professorial fellow at UNU-MERIT in the Netherlands, where much ground-breaking work on innovation measurement is being done for the European Union's Eurostat.

"People want jobs, ideally good jobs, and some support when things go wrong. The fundamental policy question is how to deliver jobs and sufficient growth to provide the public services expected," Gault says. "Some would argue that innovation is part of the answer, if not the only answer, but innovation is a complex phenomenon and the implementation of an innovation policy is not straightforward. More needs to be known about innovation and how it connects to the economy and society."

Hence the need for good statistics. An important step in understanding the innovation process so that policy makers can improve public policies "is learning how to measure statistics and its links to the innovation system," Gault says. And his book, he explains, "is a guide to how this is being done and may be done in the future." As well, he reminds us, the measurement of innovation is "still a work in progress." Indeed, the various revisions to the OECD's Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, which first appeared in 1992, illustrate how our understanding of innovation has changed.

The first edition, published in 1992, focused only on manufacturing and statistics on R&D, employment of scientists and engineers and other straightforward inputs. In two revisions since its coverage has been expanded to cover services, the definition of innovation has been expanded to cover innovations in business organization and marketing and now, says Gault, we probably need yet another edition of this vital handbook.

We now live in a world where rapid advances in the Internet have greatly expanded the diffusion of knowledge, the opportunities for collaboration and open innovation and the development of global value chains. As well, gains in software and new tools, such as CAD software and 3D printing enable new forms of user innovation. With the Internet of Everything, including cloud computing, the process of innovation will change again. Moreover, we now see two sides to innovation: the supply side, such as R&D spending, and the demand side, the need for innovation, large and small, to solve problems.

There is much greater interest in innovation today, both because many countries are seeking new sources of growth that can deliver high-value jobs, profits for enterprises so that they continue to invest in innovation, and tax revenues for government to meet future needs for public services, but also because the world faces many great challenges. These range from climate change and aging societies to meeting the needs for water, food and other resources as our global population continues to grow. One implication, a contributor argues, is that the role and status of innovation policy should be just as high as fiscal or monetary policy – that the Minister of Industry should be as important as the Minister of Finance.

There is a need for better understanding of how businesses innovate — which policies work and which don't. Since innovation is not an isolated event, and many innovate with no R&D, we need a better understanding of how businesses obtain the knowledge they need for innovation, the role of business models and organizational structures, and the measurement of investments in so-called intangibles. These include not only R&D, but software, marketing and branding, design and engineering services, training, and organizational change.

There has also been a proliferation of ways that businesses innovate through collaboration, including open innovation where enterprises look outside their own organizations for new ideas, new approaches such as the Linux-led open source movement, the use of competitions to help solve problems and shared R&D centres with universities.

But as various contributors point out, we also need to develop ways to measure innovation in the public sector, track social innovation and meet national or global grand challenges. Also of growing interest, how we can use statistical measurement to track emerging technologies or use so-called foresight exercises to help focus priorities in programs and strategies.

As recognition at the policy making level of the importance of innovation to future economic and social well-being grows, it is critical that statistical agencies, such as Statistics Canada, have the resources they need to provide the all-important data to help lead to improved programs for innovation. Statistics Canada, despite the choke-hold imposed on the agency's budget by the federal government, is currently in the process of looking at where its own innovation data gathering should go next. As our poor performance on what economists call multifactor productivity shows, we need to do much better in the world we face; MFP is a proxy for overall innovation performance.

It is clear, Gault writes in the concluding chapter, that "there is still much to learn about how an innovation system functions and that knowledge is needed if policy makers are going to be able to propose policy interventions that will achieve their socio-economic objectives." Innovation isn't everything, but it's very close and the book shows why.

David Crane can be reached at crane@interlog.com.