Innovators create jobs; Govt. sets the policy framework

Recent research by the Kauffman Foundation, which specialises in promoting innovation in the US, shows that between 1980 and 2005, virtually all new jobs created in the US were created by firms that were less than five years old.

Recent research by the Kauffman Foundation, which specialises in promoting innovation in the US, shows that between 1980 and 2005, virtually all new jobs created in the US were created by firms that were less than five years old.

The lesson here is that sustainable job creation, as against make work government jobs, are created by start ups, new enterprises established by innovative inspired risk takers, seeking business opportunities.

To say this in a country such as ours, where the economist Dr. Usvatte-aratchi has gone on record that there is one civil servant for every 18 people, may be heretical. But Dr. Usvatte-aratchi takes the position that in Sri Lanka, “employment in Government has been a major mechanism for grabbing Government money… it is simply a mechanism for plundering the Treasury for the benefit of the supporters of the Government.”

But with a problematic budget deficit, further bloating of State sector employment is not a reasonable option; it is always possible, if one is financing the budget deficit by foreign and domestic borrowings, but it is not rational nor reasonable nor responsible.

New business innovation

So, if we give a rational economic approach priority, with unemployment running at 17.8 %, in the 20 to 24 age group (2000-2008) excluding the North and East Provinces, the only way for sustainable job creation is by creating an economic environment which supports new business innovation.

Innovation has been defined as ‘the introduction of new things, ideas or ways of doing things’. It is an economic rather than a technical or social term. It can be defined the way entrepreneurship has been defined – ‘as changing the yield of resources’ – or as a modern economist would – in demand terms rather than supply terms – as ‘changing the value and satisfaction obtained from resources by the consumer’.

Innovation is a function of two things, the natural instinct of a person and the policy environment in which the innovator to be has to operate.

McKinsey Consulting has in a recent article identified five forces or crucibles which will provide the greatest opportunities for innovation in the next decade, taking into account current trends.

The first is that the next 10 years will be dominated by emerging markets which will be populated by an emerging middle class with strong purchasing power for innovative new products. Second, developed economies will have to achieve pronounced gains in productivity to keep growing, this will necessarily entail innovation.

Third, global connectivity will expand hugely, which will seed new innovative business models. Fourth, rising demand for resources will create a pricing war and a resultant demand for innovation in conservation and clean technology. Fifth, the state will be increasingly driven by the contradictory imperatives of driving economic growth through market friendly mechanisms and of providing adequate safety nets to maintain social stability, which in turn will require innovative solutions.

Instinctive innovation

Instinctive innovation is a cultural factor. Sri Lankans are naturally an innovative and ingenious people. However, this innovativeness can be blunted by a process of education which is rote learning oriented, as against the Socratic Method of independent research and group analysis, and does not encourage experimentation and creativity.

However, active participation in what is now described as co-curricular activities, sports, music, drama and theatre, hitherto traditionally relegated to extracurricular status, something which has no place in a formal education process, can keep the spark of innovation alive.

Indeed in most businesses and enterprises in Sri Lanka, the innovator has been a nonconformist, a loner, a sports person, not necessarily one who has excelled academically, in whom the spirit of competitive ingenuity and innovation has sparked and who is a natural leader.

For innovation to spark and be nurtured, the educational environment and the work place must have a culture which encourages empowerment, engagement and creativity. So, one matter which must be addressed for entrepreneurial job creation is making space for creativity in the process of education.

We cannot keep repeating that famous comment by Dr. Dudley Seers, Professor of the Institute of Development Studies at the University of Sussex, made in 1971, that in Ceylon, “there was a mismatch between the skills the market demanded and what the process of education delivered”.

I was aghast to hear one of my former colleagues at the Ministry of Youth Affairs and Employment, now at the Ministry of Labour, repeat that statement just the other day! So also a presentation made at the Ceylon Chamber of Commerce by a Professor at the University of Moratuwa. Thirty-nine long years and two subsequent youth revolutions later, we repeat Dr. Seers’ hackneyed phase!

Now however, due to the opening up of secondary education, due to the ‘international schools’ and various foreign institutes offering tertiary education and alternative professional qualifications and sports, aesthetics, drama and the theatre gradually getting recognition it deserves, the pool of innovative young people seems available on a sustainable basis.

If we open up formally for international universities as India has done rather than the informal provision of foreign degree courses that goes on now, that will be the icing on the cake as far as education for entrepreneurship is concerned. One lives in hope.

‘Trust but verify’

There is a new draft ‘Council for Higher Education Institutions Act’ making the rounds, but this seems on a first reading to be far too Government centric. It seems to have been drafted on the Leninist principle of ‘trust is good, but control is better’! The alternative ‘trust but verify,’ through an autonomous regulatory institution, would be an approach which would be far more attractive to well reputed international seats of learning at the tertiary level.

On the policy environment, things do not look that good. We have a nanny government, which thinks it knows best for its people and does not provide the space for the people’s creativity to blossom. In the international ‘Ease of Doing Business’ survey in 2009 our rank was 97, in 2010 we are down eight points to 105.

Statism, where the highlights of the economy are controlled by the state, seems to be in vogue. State-controlled captive funds are investing in private enterprises through stock market transactions. Innovation is the very anti thesis of Statism. Politicians and bureaucrats are not creative, they are control freaks. Innovation and creativity will cease, except where there is opportunity for rent seeking.

Statism has failed, Socialism has failed, and regulated market capitalism has been resorted to by China, India, Russia and Eastern Europe. The emerging BRIC economies, Brazil, Russia, Indian and China are all market economies, albeit some flawed. Cuba, Venezuela, North Korea, Burma are the unsustainable aberrations. Cuba is on a binge of terminating state employment and encouraging people to set up private businesses.

Innovation is becoming an important attribute of emerging markets. The Minute Maid unit of the US beverages group, Coca Cola, has developed a new fruit based drink in China, called Pulpy, which its top selling brand in Shanghai, Jakarta and Mexico City. It is Coca Cola’s first international product to be developed in an emerging market.

Joanna Lu, a Coke Marketing Director, says: “This is one of the most successful Coca Cola innovations of the 21st century.”

Emerging market innovations



The BRICSs not only offer companies fast growth prospects, they also provide opportunities for innovation, developing new products, services, manufacturing techniques and business processes. Such innovation should not be dismissed as mere localisation; emerging market innovations are not seen by some multinationals based in developed economies, because they do not yet affect their home markets, says Christopher Nettesheim of Boston Consulting.

The Japanese threat of technology innovation was dismissed in the 1970s as merely producing cheap, low cost, low quality copies. It took some time, after they had taken over the market, for the world to wake up to the miniaturisation and the just in time manufacture innovation revolution.

More than two decades ago Hindustan Lever in India began to market shampoos in one time user mini sachets, as it realised that the poor Indian consumer aspired to use shampoo but could not afford a whole bottle at a time. The piles of used and discarded sachets near and around any Indian rural bathing well is proof of the validity of that innovation.

The BRICS no longer copy, they innovate. As Dieter May, a Vice President of Nokia, says:  “They don’t need to steal any more. They innovate.” Chinese corporates such as Huawei, a leader in switching technology, Mindray, a medical equipment manufacturer, and Haier, a white goods company, are all giving their rivals based in developed economies a run for their markets through creative innovation.

Similarly in India, Tata Motors with the Nano and the pharmaceutical manufacturer Ranbaxy. India’s role in software innovation by corporates such as Infosys, Tata Consulting Services and Wipro, etc. are well known. Kris Gopalakrishnan, CEO of Infosys, says: “We have changed the industry.”

Engineers at Siemens’ Indian affiliate developed a low cost x-ray scanner camera that is of world class quality. General Electric also sells Indian developed electrocardiograms and Chinese designed ultrasound scanners worldwide. Nokia uses Indian and Chinese skills to develop smart phones.

SAB Miller, the South African brewer, has developed a low cost beer based on sorghum, instead of expensive imported malt. In Russia, Kaspersky Laboratories, a software group, exports world beating own brand security programs. Vodafone launched a mobile money transfer system called M-Pesa on Safaricom, its Kenyan affiliate, which has become a world standard.

Some of these innovations have been dismissed as incremental improvements by sceptics. But they miss the point; the improvement leads to better products, services and processes. As Professor Peter Williamson of Cambridge University says, “The innovations may be incremental but the effects are not.”

Harnessing innovation

In a recent book ‘The Rational Optimist: How Prosperity Evolves,’ the author Matt Ridley declares that humans are the only species capable of innovation. Other animals use tools and some ants, for example, do specialise in certain tasks, but these skills are not cumulative and the animals concerned do not improve their technology from generation to generation. Only man innovates continuously.

Innovation is a collective phenomenon, man must have the freedom to associate and speak out, if he is to mingle with fellow innovators and innovate. Ridley is firmly of the view that governments are anti-innovation. The heavy hand of the state has often suppressed individual freedom and creativity. However governments may have a role when markets fail.

Advances in ICT, globalisation and Googlisation has resulted in a democratisation of innovation, it is no longer the preserve of technocrats in ivory towers. It is a people’s movement.

Cloud computing, the combination of ubiquitous fast internet connections and cheap, plentiful web-based computing power to deliver sophisticated software, has opened up the field of innovation in an unprecedented manner. It is now an open networked and democratic endeavour. Human ingenuity, man’s greatest asset, can be harnessed today, in way unprecedented in human history.

Vaclav Havel, the first President of the post Soviet Czech Republic, wrote: “The only economic system that works is a market economy; this is the only natural economy, the only kind that makes sense, the only one that leads to prosperity. It is the only one that reflects the nature of life itself. The essence of life is infinitely and mysteriously multi form and therefore cannot be planned for in its fullness and diversity, by any centralised process.”

Economic and human development is a function of markets driven by innovative human beings responding to a permissive and enabling policy framework.

‘Innovation city’

However, there is an alternative experiment. President Medvedev of Russia wants to build an ‘innovation city’ in the Moscow suburb of Skolkovo, where the state will leave the best minds free to pursue the scientific and technological breakthroughs which he feels are the bedrock of a 21st century knowledge economy. Medvedev wants to revive the greatness of the late Soviet Union for scientific and technological achievement.

Zhores Alferov, the only Nobel Prize winner living in Russia, heads the Skolkovo project, which is already home to Russia’s leading business school. This innovation city is a copycat of the relationship between Stanford University and Silicon Valley, and the Massachusetts Institute of Technology and the Route 128 tech firms outside Boston.

Medvedev’s idea hails back to Stalin’s Gulag days, where there were hi tech cities where selected scientists worked in privileged seclusion. On his recent visit to the US, President Medvedev tried to talk Cisco into investing in this new innovation city. But others are sceptical. Vladislav Inozemstev of the Moscow based Centre for Post Industrial Studies, points out that “nowhere in the world has a Silicon Valley blossomed because of decrees issued by bureaucrats, even if the decrees are backed by government financing.”

Medvedev is pushing Innovation, as one of his 4Is for Russia’s modernisation, the others being Institutions, Infrastructure and Incentives. Wags have renamed the 4Is as Illusion, Inefficiency, Instability and Incompetence! Critics say that the weakness in Medvedev’s strategy is that he expects scientists to come and invent everything, so that there will be no need to reform institutions.

Israeli innovation

Israel is an example of a nation having an unusual crucible for innovation. It’s the Israeli Defence Forces (IDF). Among the cyber community in Israel they joke that many Israeli hi tech start ups should pay royalties to the IDF! The IDF does not merely train soldiers, it nurtures entrepreneurs in its cyber warfare technology units. Teenagers conscripted into hi tech units of the IDF are said to gain experience on a level of a bachelor’s degree in computer science.

The IDF, unlike other armies encourages creativity; soldiers are encouraged to improvise. There is a model here to be followed by any defence force winding down after a prolonged conflict. Sri Lanka’s armed forces can be deployed for this sort of innovation rather than retailing vegetables! This may be of short term relief to the consumer, but cyber technology will help the national innovation effort much more in the medium and long term.

So, having innovative people is not enough; we have to get the policy framework right. Innovative entrepreneurs break free from the competitive pack by staking out fundamentally new market space, by creating goods, products and services for which there is no direct competition – until the copycats latch on, that is! The path to value innovation requires a different competitive mind set and a systemic way of looking for opportunities.

Sri Lanka has many products, goods and services which innovators have brought to market very successfully; to recite a few brands as examples: Dilmah Tea, Mlesna Tea, Samahan, Siddhalepa, Odel, Sensaal, Tea Trails, Barefoot, House of Fashion, Fashion Bug, No Limit/Glitz, P&S, Maliban, Munchee, Food City, Sampath Bank, MAS, Brandix, MA’S Products, Dankotuwa Porcelain, Central Finance, DSI, Dialog, Sirasa, etc. There are many more.

Innovators must be recognised, held up as role models and their strategies documented and disseminated so that young people will be inspired. A world famous professor of business studies once said that “in every young non conformist delinquent, lies dormant the spark of an entrepreneur”!

Education and the policy environment have to mould and provide the space for entrepreneurs to create jobs. Statist central planning is dead; development innovation is a function of regulated markets reacting to entrepreneur friendly policies. The policy framework is vital, as Mark Foster of Accenture says: “Innovation doesn’t happen in black boxes. It happens in markets.” Neither does it happen in the air-conditioned rooms of statist planners!

(The writer is a lawyer, who has over 30 years experience as a CEO in both government and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)