Innovation absorption

In an earlier posting, I mentioned the "not invented here" syndrome. Usually this trait is thought of as applying only to organizations. The concept of "open innovation" is an attempt to overcome the NIH problem.

But the dangers of NIH also applies to nations. A major part of any National Innovation System (to use the fancy title academics have given it) is the ability to absorb and utilize innovation. Two recent studies have highlighted the issue.

First is a report from the UK's NESTA: Innovation by Adoption. NESTA is the National Endowment for Science, Technology and the Arts -- and is Britain's chief innovation agency, something like our NSF but with a much broader mandate on innovation.

As the NESTA report states:

The capacity to absorb external knowledge was identified as early as the 1950s as playing a major role in bridging economic development gaps between places. The new ideas and innovations brought by migration, trade and foreign investment networks cannot be fully captured and exploited if a place lacks the internal ability to absorb external knowledge.

So, the capacity of places to innovate depends on internal and external sources of knowledge, which complement each other. Traditional innovation policy has ignored the importance of external knowledge in developing local innovation capacity. But a place needs both to be able to draw in good ideas from elsewhere – an innovation absorptive capacity (AC) – and to use them to create new products and services – an innovation development capacity (DC). This is what the report describes as the AC/DC model. Absorptive capacity allows a place to identify, value and assimilate new knowledge. The development capacity of a place allows it to exploit that knowledge. The extent to which different places draw on ‘AC’ or ‘DC’ to create new value differs across economic sectors.

Five main components are essential to any innovation system. Three of these elements form the ‘absorptive capacity’ components of the AC/DC model: (1) the capacity to access international networks of knowledge and innovation; (2) the capacity to anchor external knowledge from people, institutions and firms; and (3) the capacity to diffuse new innovation and knowledge in the wider economy. The two components of the ‘development capacities’ element of the AC/DC model are (1) knowledge creation and (2) knowledge exploitation.

The second report is from Harvard Business School: "An Exploration of Technology Diffusion." The authors found that:

• The remarkable development records of Japan between 1870 and 1970 and of the so-called East Asian Tigers in the second half of the 20th century all coincided with a catch-up in the range of technologies used with respect to industrialized countries.
• Adoption lags account for at least 25 percent of cross-country per capita income differences.

Bottom Line:
Technology adoption, the cost of producing capital goods, and per capita income growth may be inextricably linked. As a result, to compete in today’s global economy, countries must learn how to quickly leverage new technologies to ensure that their workforces remain competitive.

But in the United States, we pay little attention to the absorption issue. Why? Well the Harvard study inadvertently highlights the issue: an adoption strategy is for catch-up nations. In other words, "developed" nations don't have as much to learn: NIH

The Booz & Co., analysis of the results understands the broader ramifications. If you are going to stay ahead in this global competitive economy, you have to continue to run fast. That includes utilizing technology from whatever source. As the NESTA report finds, it is a case of AC/DC. Both absorption and development are needed.

So where is the US innovation policy to promote absorption? We have an underfunded MEP (Manufacturing Extension Partnership) program that can't even look in the direction of the largest part of our economy: services.

Time to rethink our policies.