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The Innovation Illusion: How So Little Is Created by So Many Working So Hard Hardcover – November 22, 2016
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About the Author
- Item Weight : 1.46 pounds
- Hardcover : 312 pages
- ISBN-13 : 978-0300217407
- ISBN-10 : 0300217404
- Publisher : Yale University Press (November 22, 2016)
- Dimensions : 9.4 x 6.4 x 1.2 inches
- Language: : English
- Best Sellers Rank: #1,654,321 in Books (See Top 100 in Books)
- Customer Reviews:
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The authors contend that all the hoopla about a new innovation revolution is a myth. Productivity and innovation have stalled over the last four decades. This decline has been largely due to the decline of entrepreneurship and thus the decline of free enterprise. Four factors are identified as the cause.
The most important is probably government regulation. This has moved western economies towards a command and control economy. It has produced a "compliance mentality" where the main economic thrust is to satisfy government regulations. Second is what the authors call "gray capital." This means most corporations are owned by distant institutions such as pension funds, mutual funds, insurance companies, and sovereign wealth funds. In other words they are rarely owned by entrepreneurs and thus have lost their innovative spirit. They are mostly defensive in trying to protect their market share. It's capitalism without capitalists.
A third factor is "managerialism" where the main function of managers is following corporate and government regulations. Their jobs consist largely of meetings and reports as opposed to innovative practices. Finally we have globalization where corporations have concentrated on growth through expanding into different geographic areas instead of innovative products or services. As a result of all this, American GDP growth has averaged 2 percent since 1973 after being 4 percent between 1950 and 1973.
The obvious objection to this theory is to point to Silicon Valley. Despite the nonstop hoopla about the internet, it has not produced any significant increase in economic productivity. The various computerized products which are so popular today have done little more than affect personal entertainment. The much ballyhooed iPhone has hardly changed in ten years. Recently it was revealed that Apple is secretly slowing down the performance of old iPhones to encourage the purchase of new ones. So the purported leader of technological development is actually concentrating on planned obsolescence instead of real innovation.
The authors mention the theory of Robert Gordon that technological innovation has slowed down from a peak in the 19th Century. All the main improvements in the standard of living were developed either then or later in the first half of the 20th Century. These include trains, cars, planes, indoor plumbing, electricity, heating, air conditioning, radio, and television. The increased productivity from computers and the internet have already been absorbed without having any major effect on productivity. Their effect has been incremental rather than revolutionary.
The first industrial revolution based on steam power lasted form about 1760 to 1840. The second industrial revolution based on electricity is believed to have lasted from about 1870 to 1970. The authors repeat the belief that a third industrial revolution based on computerization started about 1970. But I think that there is no third industrial revolution and that it is only an extension of the second which can be called the Age of Electricity.
The authors present business practices as causing the current economic stagnation with the policies mentioned above. But it could be that they are confusing cause and effect. It could be that the underlying technological slowdown is causing the new defensive business practices.
The problems he discussed were interesting, but not that surprising. The only references were quotes from a number of sources, but no detail. Considering the extreme detailed and repetitive description, there should have been more detail regarding the references. It was not entirely convincing.
The only companies mentioned were large existing corporations. He mentioned how old these companies were is some of the European countries. Except for a slight mention of "exceptions" nothing else was mentioned. I feel that old large companies are the last place I expect innovation. At present four of the 5 largest companies in the USA are new, very innovative, and growing extremely fast, but were not mentioned.
It felt like the book discussed a limited section of industry, in exhausting detail, where one would least likely find innovation.
Messrs. Erixon and Weigel attribute this under-performing mutation of capitalism to four mutually-reinforcing factors:
1. Gray capital;
2. Corporate managerialism;
Gray capital is best defined as rentier capitalism. Gray capital is mostly about short-termism, (higher) dividend payouts, and/or stock buybacks, not about economic renewal. Highly dispersed ownership interests, the growing financialization of the economy, and the aging of Western societies embed themselves into the structure, culture, and ambition of corporations.
Firm managers have equally contributed to the gradual corrosion of capitalism. The appetite for creative destruction is too often missing in action. Instead, a custodian corporate culture often reigns. It is both defensive about the future and protective of its boundaries. Furthermore, the increasing organizational complexity of many companies too often leads to the “silo curse.” None of these characteristics is conducive to the spirit of winning.
In the past 25 years, multinationals shifted strategy from contesting markets to defending their positions, partly because the fragmentation of value chain pushed companies to draw their firm boundaries closer to their ownership advantages. This mindset change does not emphasize disruptive innovation.
Finally, elected politicians have embraced managerialism in the past few decades, i.e. a marked preference for market stability and innovation predictability. The deregulation of Western economies is an illusion. Precautionary regulations often compound the deleterious impact of non-precautionary regulations on innovation. These regulations address problems that may occur, not existing problems.
To insufflate new life into Western capitalism, the authors have three recommendations:
1. Severe the link between gray capital and corporate ownership;
2. Give competition a real boost;
3. Nurture a culture of dissent and eccentricity.
As long as most Western pension plans are not financially stable, they will continue to drain companies of capital through (higher) dividend payouts, share buybacks, and/or short-termism. Furthermore, the usage of dual class stock structures would help reestablish and maintain entrepreneurial spirit. Ownership democracy is another illusion ripe for the culling.
Boosting competition, especially in the service sector, in Western markets requires changes in national and cross-border regulations.
Finally, radical innovation cannot prosper without the tolerance of the unknown and acceptance of experimentation. Reforms cannot make it happen. In contrast, encouraging a culture of dissent and eccentricity can further encourage innovators and entrepreneurs to articulate and pursue their unconventional ideas.
In summary, Messrs. Erixon and Weigel clearly demonstrate that in Western economies both entrepreneurship and openness to contestability are receding and depressing the capacity of capitalism to foster and diffuse new technology. Will the Western economies be up to the task of embracing radical, big innovation for their own betterment?