More on innovations and the role of governments

This is revisiting an old debate, thanks to the excellent Chris Dillow. Daron Acemoglu re-examines the classic claim that producers capture only a tiny fraction of the full benefits of any innovative activity and research and development activity should therefore be catalyzed by governments.

Analysing the incentives that drive investments in innovative activities by private firms and the direction (or areas) of those investments when the market is dominated by a particular technology or strategy, he writes,

"This paper... shows that equilibrium technological progress may exhibit too little diversity (too much conformity), in particular, foregoing socially beneficial investments in 'alternative' technologies that will be used at some point in the future. The presence of future innovations that will replace current innovations imply that social benefits from innovation are not fully internalized. As a consequence, the market favors technologies that generate current gains relative to those that will bear fruit in the future; current innovations in research lines that will be profitable in the future are discouraged because current innovations are typically followed by further innovations before they can be profitably marketed...

The recognition that there will be further innovations (in the prevailing technology or strategy) will discourage research in areas that will generate new products or technologies for the future relative to improving currently used products, processes, or technologies. Consequently, in equilibrium, too much research will be devoted to currently successful product and technology lines...

A social planner would choose a more diverse research portfolio and would induce a higher growth rate than the equilibrium allocation. The diversity of researchers is a partial (imperfect) remedy against the misallocation induced by the market. Researchers with different interests, competences or ideas may choose non-profit maximizing and thus more diverse research portfolios, indirectly contributing to economic growth."

In this context, Chris Dillow points to three reasons why this finding assumes even greater significance. He writes,

"1. If there is a danger of catastrophic climate change, then there is a need for new green technologies. But the danger that producers won’t get the fruits of such innovations - as they’ll be usurped by future better innovations - can lead to under-investment in them.
2. Capital spending and productivity growth have been weak for years. This might be a symptom of a decline in useful innovations. Maybe capitalism has picked the low-hanging fruit.
3. Many innovations (pdf here) since the 1980s have had the effect of increasing inequality. They’ve benefited capitalists and/or bosses at the expense of workers."

Hot Coffee, just right!

How do we lower the temperature of scalding-hot coffee to the perfectly drinkable temperature and keep it there while you sip along? Buy Joulies metal beans!

"Coffee Joulies work with your coffee to achieve two goals. First, they absorb extra thermal energy in your coffee when it’s served too hot, cooling it down to a drinkable temperature three times faster than normal. Next, they release that stored energy back into your coffee keeping it in the right temperature range twice as long.

This amazing feat of thermodynamics happens thanks to a special non-toxic material sealed within the polished stainless steel shell. This material is designed to melt at 140 degrees Fahrenheit, and absorbs a lot of energy as it melts. This is how Joulies cool your coffee down three times faster than normal. Once it reaches this temperature, the special material begins to solidify again, releasing the energy it stored when it melted. This is how Joulies keep your coffee warm twice as long."

The Joulies are being developed as part of a Kickstarter funded project. Kickstarter is the crowdsourcing way to fund creative projects. Creators can post their ideas with the total funding requirement on Kickstarter website and solicit funding for a certain duration. If the project does not attract the required funding within the duration, none of the pledged amounts changes hands.

(HT: Fast Company)

The Groupon effect - using social networks to address collective action problems

In recent months, the electronic coupon company, Groupon, has revolutionized the way the internet can be harnessed to minimize search and co-ordination costs (the collective action problem) in retailing. Its electronic discount coupons get activated (discount sales happen) only if a certain number of fellow citizens agree to buy the same thing on the same day. The retailer makes up his loss due to lower price with larger number of customers, who not only bring in larger immediate sales but more importantly brings in future patronage.

Groupon subscribers receive notifications of one deal a day, tailored to their location and profile. The local business gets customers, and Groupon takes a share of the coupon proceeds. The average Groupon deal offers 50 to 90 percent off retail goods and services, from restaurant certificates to skydiving lessons. Once the tipping point in registrations is reached, all buyers are locked in, and their investment becomes irrevocable. If the point is not reached, the deal is automatically aborted.

Groupon's spectacular success (it has been described the fastest growing internet company ever and has already crossed 50 million subscribers) since its founding in 2008 by Andrew Mason has naturally generated considerable commercial interest. Attempts by all the major web-service providers, including Yahoo and Google, to take-over Groupon have been rebuffed. The company recently raised a record $950 million from big investors and is considering a $15 bn IPO soon.

For its part, Groupon harnesses the power of psychology to attract customers and retailers. It seeks to leverage the inherent attractiveness of a shopping plan where customers are forced to wait for sometime to find out whether they can win the deal. The one-deal a day strategy also means that the attention bandwidth of customers can be more easily captured.

This psychological attraction of getting deep discounts also means that Groupon like websites are likely to become extremely popular in price-snesitive markets like India. In order to overcome the challenge posed by the limited reach of computers and internet, it may be more effective to use the now ubiquituous mobile phones to deliver such shopping deals in these countries. Further, mobile phones offers the possibility of much greater interactivity, potential for behavioural nudges, and the achievement of more overall efficient outcomes.

A recent article in NYT, in the context of the recent wave of street protests that have swept Middle East and North Africa, speculates on the possibility of solving the collective action problem with street protests. It writes, "Even if we all watch television coverage of demonstrations together and express our enthusiasm for the movement online, we have no guarantee our neighbors will take the physical risk of going out in the streets until they actually do so".

Technology will make it much easier for frustrated societies to express their collective anger. However, I am inclined to believe that translating this collective angst into tangible action on the field will remain beyond the reach of technology (apart from increasing the likelihood of participation) and as much a challenge as ever.

Update 1 (20/4/2011)

Excellent infographic on the rise of Groupon.

Update 2 (5/5/2011)

Felix Salmon identifies the USP of Groupon - the idea that coupons only become activated once a certain minimum number of people have signed up for them. He writes,

"This is essentially a guarantee for the merchant that the needle will be moved, that their effort won’t be wasted. With traditional advertising or even with old-fashioned coupons, a merchant never has any guarantee that they will be noticed or make any difference. But with a Groupon, you know that hundreds of people will be so enticed by your offer that they’re willing to pay real money to access it. That kind of guaranteed engagement is hugely valuable, and more or less unprecedented in the world of marketing and advertising."

Update 3 (5/11/2011)

Groupon debuted in the equity markets 31% higher than its offer price in its first trading day, bringing the online coupon-seller’s valuation to more than $16bn and reflecting a surge of excitement for one of the fastest-growing and most controversial companies to list in recent years. Shares in the company were set at $20 late on Thursday, then jumped as high as $31.14 in the first few minutes of trading before closing at $26.11. Groupon raised $700m in its highly anticipated initial public offering, in a deal which valued the company at $12.6bn, higher than the anticipated cap of $11bn but below the $20bn the company had sought earlier this year.

The company’s co-founders, who own about a third of the company’s shares, became billionaires. Andrew Mason, chief executive, has a stake worth about $1.2bn. Groupon’s buyers included many funds that intended to “flip” the shares to take advantage of their first-day jump. By the close, 49m shares had changed hands, nearly the entire float, making it the second most traded US stock on the day.

Reinventing the Wheelchair

Reading Scientific American this morning I spied the innovation that won their annual World Changing Ideas Video Contest: the Leveraged Freedom Chair designed by MIT Mobility Lab.

It's a three-wheeled human-powered wheelchair that goes faster than normal and also navigates difficult terrain—rutted roads, cobblestones, trash-strewn slums. The genius resides in the vertical hand levers: Users simply grab higher or lower depending on how much torque or speed they need. It's like being able to change gears.

The drivetrain consists of common bicycle parts and so is "manufacturable and repairable anywhere in the developing world," according to MIT. Sometimes low-tech solutions are the most appropriate.

China's 'Indigenous Innovation' as Protectionism

This post is a neat continuation of the one below. And, it offers a contrasting perspective on the increasing belligerence of China towards Western multinationals. While I think it's an offshoot of the "obsolescing bargain," Adam Segal of the CFR presents a more conventional argument.

It's certainly a tempting proposition if you have 1.3 billion people--perhaps not a captive market, but not really quite a true market economy as Chinese officials like to portray it, either. Broadly speaking, the idea behind the article from Foreign Affairs which follows is that since a lot of the value-added activities in global supply chains are still not provided by China--intellectual property, branding (more on this later), and so forth--it will be increasingly difficult to capture value-added if all you can offer are labour and environmental arbitrage opportunities. Not only are the prices of commodities going up worldwide, but wages are too in the PRC.

Chinese officials do recognize that, sooner or later, an increasingly affluent middle class will demand a move towards less labour- and energy-intensive forms of production. Or, a greater deployment of "knowledge economy" inputs to create more from less (and, it goes without saying, more profitably). There comes a time when LDCs need to move up the value-added ladder. However, it is certainly an open question if the Chinese can manage this feat with a lot of what I can only describe as "semi-enlightened central planning." For instance, they are keen on choosing national champions and requiring foreign firms support knowledge transfer more explicitly. Here is a snippet from the introduction; the rest is well worth reading even if I don't entirely agree with the conclusions:

If you want to get to the bottom of indigenous innovation, the Chinese policy so deeply aggravating Western businesses and governments, look at the bottom of your DVD player. Most likely, the machine was made in China. For Beijing’s leaders, that is part of the problem: for every Chinese-made DVD player sold, the Chinese manufacturer must pay a large royalty fee to the European or Japanese companies that patented various components of the unit, such as its optical reader. These foreign firms reap substantial profits, but the Chinese take is extremely small -- and is shrinking further as energy, labor, and commodity prices rise. Policymakers in Beijing, looking to strengthen China’s economy, are no longer satisfied with the country’s position as the world’s manufacturer. Their solution is to break China’s dependence on foreign technology, moving from a model of “made in China” to one of “innovated in China.”

The Chinese phrase for indigenous innovation, zizhu chuangxin, was introduced in a 2006 state-issued report, “Guidelines on National Medium- and Long-Term Program for Science and Technology Development.” The paper contained a curious mix of top-down, state-directed policies alongside bottom-up efforts meant to foster technological innovation. The top-down measures echo China’s old state planning system. They include 20 state-driven megaprojects, including initiatives to develop nanotechnology, biotechnology and new drugs, high-end generic microchips, and aircraft. The bottom-up efforts seem to follow a Silicon Valley model and are centered on university-industry collaboration, small start-ups, and venture capital.

Well, they can always try. Ha-Joon Chang will most likely be supportive of the PRC's efforts.

GSK's "Open Innovation" Strategy

I just got off of a conference call with Andrew Witty, CEO of GlaxoSmithKline (GSK). He started out by saying that pharmaceutical companies like GSK need a more pluralistic approach toward solutions. To that end, GSK will pursue an "open innovation" strategy toward delivering better medicines to people in poor countries.

This strategy will include an "Open Lab" with 8 million dollars seed funding, an effort to share intellectual property to fight tropical diseases, and a pledge to create "sustainable pricing" for a malaria candidate vaccine.

This morning at Council on Foreign Relations, Witty made what he called "the most striking" commitment to put into public domain 13,500 chemical structures that may fight malaria. In doing this, Witty is hoping to stimulate more innovation efforts--increasing "the bandwidth of discovery." He does not necessarily expect GSK to be rewarded financially from this move. From the press release:

GSK has screened its pharmaceutical compound library of more than 2 million molecules for any that may inhibit the malaria parasite P.falciparum, the deadliest form of malaria, which is found primarily in sub-Saharan Africa. This exercise took five scientists a year to complete, and has yielded more than 13,500 compounds that could lead to the development of new and innovative treatments for malaria, which kills at least one million children every year in Africa.

GSK will make these findings, including the chemical structures and associated assay data, freely available to the public via leading scientific websites. The release of these data will mark the first time that a pharmaceutical company has made public the structures of so many of its compounds in the hope that they could lead to new medicines for malaria.

He said it was partly a personal decision. His travels, seeing suffering abroad, have led him to want to fight malaria. A malaria vaccine (called RTS,S) is already in Phase III of clinical trials and is two years away from reaching the market. Last year, this pivotal phase was launched and it is well underway in seven African countries. The results of Phase III are expected next year--2011, and if all goes as planned, the vaccine could reach the market in the next couple of years. As further background, RTS,S is the result of a partnership between GSK, The Malaria Vaccine Initiative (MVI) and the Bill and Belinda Gates Foundation. (CORRECTED)

Witty said he hoped that other companies would join GSK's open innovation strategy.

In Witty's travels to poor countries, he said he noticed that pieces of the solution were present but were not put together. And this problem has often been used as in excuse for poor health conditions. GSK hopes to find local partners to serve as delivery vehicles of GSK's investment.

In the long-term, "it is all about horizons," he said. He hopes that African economies become prosperous. But for now the company's interest in applying investments and ideas to improve the conditions in Africa--a "non-commercial" interest.

Could open innovation become the dominant paradigm for developing drugs in poor countries? "It is one step at a time," Witty said.

America Shouldn't Blow an Opportunity for Green Diplomacy

Among all the talk about soft power and smart power something big and obvious has been missing: wind power. By not being a global leader on climate change over the past decade America has blown a major opportunity to engage in Green Diplomacy—the strategic use of clean energy projects to boost development and security in poor countries. Going forward, the Obama Administration should articulate and carry out a plan to align several of our national priorities: innovation, emissions reduction, development, diplomacy, and security.

When it comes to linking climate change and security it is common practice to trot out the specter of mass hordes of climate refugees inundating rich countries as their own coastal homelands disappear into the ocean. Likely this fear suffers from a case of xenophobic exaggeration. But an already-porous migration policy does motivate the United States to focus on the development of climate-resilient countries in its own hemisphere first. Fortunately a demonstration project exists in the region: Costa Rica, where reforestation and renewable energy combine in a national commitment to becoming carbon neutral.

One can envision the United States helping clean energy best practices radiate out from there, facilitated by domestic and international regulation. Thus it is heartening to see funding and institutional priorities coalescing around these goals in Sen. John Kerry's recently submitted Clean Energy Jobs and American Power Act [PDF]. The bill calls for establishment of a Strategic Interagency Board on International Climate Investment, to be composed of the secretaries of State, Energy, Treasury, Commerce, and Agriculture, the administrators of USAID and the Environmental Protection Agency, and any other relevant officials the president sees fit.

The SIBICI's task would be "to provide United States assistance to developing countries to develop, implement and improve nationally appropriate greenhouse gas mitigation policies," including preparation for participation in "markets for international offset credits for reduced emissions from deforestation." The bill also calls for the State Department to establish an International Clean Energy Deployment Program that would distribute funding either as bilateral assistance, to multilateral funds or institutions formed pursuant to the UNFCCC, or some combination of both. Similar funding would also be distributed under the International Climate Change Adaptation and Global Security Program to "provide assistance to the most vulnerable developing countries... in a way that protects and promotes interests of the United States."

The bill goes on to specify the details for emissions allowances and international offset credits, but much is also left open-ended to ensure that the executive branch has enough latitude to create and carry out these new programs. This bodes well for putting Green Diplomacy in the American power toolbox.

[Photo credit: Volcan Arenal, by Arturo Sotillo (CC).]

Making the Internet Connection

"Innovation is possible literally anywhere that the internet is in operation," says Vint Cerf, Google's "Chief Internet Evangelist," in an interview with Andrew Edgecliff-Johnson of the Financial Times. Of the 6.5 billion people in the world, however, only 1 billion have access to and use of the internet. What does that say about the untapped potential for global innovation?

Cert highlights some of the challenges to extending internet connectivity to greater numbers of people around the globe. These range from infrastructure and capacity building (such as electricity and training) to security and privacy concerns.

"If we ever move into a regime where the providers of basic internet service have any control over what users can put on the network as an application, then I see a potential hazard to innovation. At the present time, this is still a very open system."

As Evan O'Neil points out elsewhere, there are ethical issues related to the process of extending connectivity that may not be immediately apparent. Getting laptops into the developing world is a noble venture. But what if development is not the only motive?

The Economist: Innovation helps poor and rich countries alike

The latest issue of the Economist features a special report on innovation and the global economy which is well worth a look. In it you will read about the efforts of India's Tata motors to produce a $3,000 "people's car" and small biotech firms that are figuring out ways to produce generic drugs without trampling on Western patents.

"With manufacturing now barely a fifth of economic activity in rich countries, the “knowledge economy” is becoming more important. Indeed, rich countries may not be able to compete with rivals offering low-cost products and services if they do not learn to innovate better and faster. But even if innovation is the key to global competitiveness, it is not necessarily a zero sum game. On the contrary, because the well of human ingenuity is bottomless, innovation strategies that tap into hitherto neglected intellectual capital and connect it better with financial capital can help both rich and poor countries prosper. That is starting to happen in the developing world."

Click here to read about how so-called "open innovation" is transforming the corporate attitude toward intellectual property rights (in the public realm this is often referred to as "policy transfer").

See this graph for a nifty visual of the relationship between innovation, labor, capital and productivity growth in the US.

The Ethic of Stewardship: It won't be easy being Green

In the New York Times Magazine this weekend Thomas Friedman discusses the challenges of making environmentalism profitable, strategic, patriotic, and globally equitable. Political and technological innovation will play a crucial role in this process.

One major hurdle is the energy market and its often conflicting incentives: The world needs to simultaneously reduce demand for carbon-intensive energy sources and create demand for alternatives. Robert Socolow and Stephen Pacala of Princeton's Carbon Mitigation Initiative have innovated a series of "stabilization wedges"—aspects of the energy economy and changes in behavior that can be adjusted using current technologies. Their ideas could help bridge the transition to a Green economy over the next half century.

According to Friedman, McKinsey Global Institute has forecast that "developing countries will generate nearly 80 percent of the growth in world energy demand between now and 2020, with China representing 32 percent and the Middle East 10 percent."

Despite the advanced industrial world's historical responsibility for climate pollution, the developing world is catching up, and so Friedman concludes that the Green platform "will not go down Main Street America unless it also goes down Main Street China, India and Brazil. And for green to go Main Street in these big developing countries, the prices of clean power alternatives—wind, biofuels, nuclear, solar or coal sequestration—have to fall to the “China price.” The China price is basically the price China pays for coal-fired electricity today because China is not prepared to pay a premium now, and sacrifice growth and stability, just to get rid of the CO2 that comes from burning coal."

Friedman believes that the "only way we are going to get innovations that drive energy costs down to the China price... is by mobilizing free-market capitalism." But the market will only work if there is an accurate price for carbon, if countries "force their people to pay the full climate, economic and geopolitical costs of using gasoline and dirty coal."

But Friedman realizes that "the market alone won’t work. Government’s job is to set high standards, let the market reach them and then raise the standards more. That’s how you get scale innovation at the China price."

He goes on to suggest a number of areas where government can help:

• Raise efficiency standards for buildings and appliances


• Stipulate that utilities generate a certain amount of electricity from renewables


• Raise mileage standards for cars


• Tighten the cap-and-trade system for the amount of CO2 any factory or power plant can emit


• Offer loan guarantees and fast-track licensing for anyone who wants to build a nuclear plant


• Enact a carbon tax

Government, of course, means us. The market, of course, means us. People now must roll sleeves, cinch belts, and innovate. As the unpredictable havoc of doubling atmospheric carbon gets delivered to our doorstep, the Ethic of Stewardship becomes less about intergenerational sacrifice and more about shared humanity. It won't be easy being Green, but it will be worth it.

Balancing Innovation and Intellectual Property

"For industries ranging from software to pharmaceuticals and entertainment, there is an intense debate about the appropriate level of protection for intellectual property," write Felix Oberholzer-Gee and Koleman Strumpf in the abstract to their recent paper: "The Effect of File Sharing on Record Sales: An Empirical Analysis" (Journal of Political Economy, 2007, vol. 115, no. 1). Their data and analysis show that file-sharing and downloads from peer-to-peer networks have had an impact on declining record sales "that is statistically indistinguishable from zero." (JPE online requires a password. Here is an earlier version of their paper.)

This information is relevant to governments and businesses in developing countries as they consider how to capitalize on creative and cultural industries as engines for growth. Caribbean economist Keith Nurse believes that developing countries have a comparative advantage and window of opportunity in these fields.

Finding a new balance that encourages innovation, respects intellectual property, and delivers fast results is especially important in the global health sector. Thomas Pogge argued in the first issue of Policy Innovations that new incentive structures could be designed to meet these goals.