American Innovations

The President’s ambitions in research and innovation reminds me of a report I wrote a year ago on the subject.

Tuesday March 23, 2010.
Chiclets, The Model T, Coca Cola, Mc Donald’s, Apple, CNN, Pampers, Disney, Gillette, Nike, Levi’s, eBay, Kleenex, VISA, Microsoft, Google, Amazon, Kindl, iPad, Facebook. What do these icons have in common? Yes, they are all American. But each of these iconic brands also transformed people’s life styles. Before Coca Cola, there was no soft drink industry. Before McDonald’s, the world had never heard of fast food. All these companies started totally new industries. They all created needs we did not know we had. As a result, every time, a new wave of consumption and investments was initiated. Many foreign brands also reach global iconic status. But they are seldom new, transformational concepts. BMW is a great and well recognized global brand. But BMW is just another car. So is – was ? – Toyota. Louis Vuitton may be fashionable in China, but does not qualify as a transformational product. The company was started in 1854 and already then most people in France knew what luggage was. In Europe, only Nokia, which is at the origin of the mobile phone industry, qualifies as a transformational company. Japan created the walkman. But that’s about it. Even video games are not a Japanese novelty. We all remember the first home video game launched by Magnavox Odyssey in 1972. Or do we? At the end of the day, the Japanese took the baton and ran with it. I suspect one would have made more money holding Nintendo stocks than Phillips (who bought Magnavox in 1974 before doing what Phillips does best, i.e. destroying the brand). Here lies the reason why I never bought the argument that the US economy’s growth is solely due to population growth. European apologists have it wrong when they use demographics as an excuse for the comparatively pedestrian growth in Euroland. The real engine of growth in the US is and remains innovation. It is similarly a mistake to expect emerging markets to take over US’s role in the world economy. We have seen it before. Western Europe after World War II rebuilt its economies at breathtaking pace. Then stalled. Japan was the new inevitable economic power in the 1980’s. Then it stalled. China is the new flavor of the day. But one has to be realistic about the long term potential of economies built on exports to the American consumer. They tend to hit a wall because of lack of innovation. Michael Pettis (China Financial Markets) is right: consumption tends to drive innovation, not production. An economy overly focused on production, like the German or Chinese ones, will always lag the US in innovation. But consumption is not the only factor. When comparing the US with other economies one is also struck by the difference in attitudes towards risk and success. In cultures of entitlements, risk taking is a dirty word. One would have a hard time explaining to Mr Sarkozy, for example, that the economy needs more – not less – “speculators”. Especially the venture capitalist type. Furthermore, in rigid societies, professional success is usually not measured through wealth creation. Rather, ambitious young people spend all their energy climbing the hierarchical ladder for social recognition. Be it in government or in large oligopolistic companies, what matters most is to get to the top of the pyramid. Just ask a French white collar about his job. He will inevitably tell you how many people are “reporting to him”. He will also praise the smarts of CEOs of CAC 40 companies. And make fun of vulgar entrepreneurs like Bernard Tapie. So, how do foreign countries try to improve their innovation deficits? From the top down. The French created Sophia Antipolis in Provence, supposedly to compete with Silicon Valley. The difference, of course, is that Sillicon Valley just happened, it was not “created”. The Japanese bureaucrats twenty years ago decided to make Japan the world leader in the software industry. Hmmm. Wonder what happened. In the year 2000, Eurocrats signed the Lisbon Agenda. Its aim was to “make Europe, by 2010, the most competitive and most dynamic knowledge-based economy in the world.” As of March 2010, I am not aware of coming victory celebrations. Creativity is a bottom-up thing. It cannot be dictated. No bureaucrat or politician ever invented the internet. Even if they make a living claiming credit for everything. Every politician wants to have his “man-on-the-moon” moment. So, today, the great vision-du-jour is alternative energies. I suppose that if governments throw enough money at the problem, it may eventually bear fruit. So far, however, the returns on investments are not obvious. Consider Spain’s generous incentives to develop a solar energy industry. Half the solar power installed globally in 2008 was in Spain. It unfortunately did not help innovation much. Instead, low-quality solar plants sprang up on Spain’s plateaus, The New York Times reports. Officials came thus to realize that they would have to subsidize many of them indefinitely… with taxpayers’ money. We know governments do not allocate money efficiently because the returns they seek are measured by voters, not accountants. Yet, that has never stopped them. Inevitably, as they spend the money, some companies will benefit. That’s why I am holding on to my underperforming solar and wind energy plays. It is also a long term love affair. My first failed entrepreneurial venture dealt with the promotion of alternative energies. Back in 1981, my vision was ahead of its time. It does not pay to be too early.

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