Effective governmental policies can have a positive impact on domestic companies’ ability to innovate. Consistent government policies that address workforce quality, the payback from innovation, and the ease of utilizing the results of governmental efforts will have the biggest impact. James P. Andrew, a senior partner and managing director in the Chicago office of the Boston Consulting Group (BCG), leads the firm’s innovation practice. This article appears in the November issue of eJournal USA, “Roots of Innovation.”

Much has been written about innovative companies and what sets them apart. Less obvious is the role that government can and does play to create the conditions for success. A recent report by BCG, in conjunction with the National Association of Manufacturers, highlights the interdependence of government and business and the mutual need for innovation leadership.

A critical driver of growth, competitiveness, and shareholder value, innovation is cited by senior executives around the world as integral to their company’s success. But innovation benefits countries, too. Those with thriving industries have higher incomes, a better quality of life, and a higher standard of living than their less-robust peers.

The need to stay one step ahead of the competition is even more urgent in today’s global economy. The emergence of companies from low-cost countries such as India, China, Brazil, and Eastern Europe has transformed the playing field. With good, cheap products flooding the market from every corner of the globe, competing on cost alone is a losing battle for most businesses. To stay in the game, companies must differentiate themselves through innovation: new products and services, new ways of working, new ways of going to market. And governments must support these innovation efforts through effective policies.

Strengthen the Workforce

A skilled, educated workforce is the most critical element of innovation success, yet finding quality talent is an ongoing challenge for companies. Governments can improve workforce quality by investing in effective education and making sure that immigration policies support, rather than hinder, innovation.

While wholesale education reform is a lengthy process and the full impact may not be felt for many years, some educational and workforce development reforms are available much more quickly. For example, better integration of academic and technical education in secondary schools can ensure that graduates are ready for work or college. When professional and technical programs are aligned with industry needs and standards, students gain industry-recognized credentials and companies gain skilled workers. In addition to education policies, less restrictive immigration policies can strengthen the workforce. Skilled immigrants can improve the innovation climate of a country. A 2009 survey by the National Bureau of Economic Research found that states with more skilled immigrants had more patents among immigrants and the native-born alike. Everyone benefited.

Boost the Payback

Companies must be able to earn a return on their innovation efforts. If not, they’ll either stop investing or relocate to a different state or country where they can make more money. Governments can help lower costs and boost profits by enforcing strong protection for patents, copyrights, and other intellectual property and by providing tax breaks, skills training, and policies that lower structural costs related to fiscal policy, regulation, and energy.

Research and development (R&D) tax credits are the most common way to lower innovation costs. The recent BCG/NAM report demonstrated a strong positive relationship between R&D tax programs and national economic performance. Of the top 20 developed economies as measured by gross domestic product, 19 have R&D tax relief programs. Interestingly, the absolute amount of the tax credit was less important.

 

IBM’s Bangalore, India, headquarters holds a camp for innovative students to promote education in science, mathematics and engineering.

Supporting revenue streams is also important. Most countries have policies to register and protect intellectual property. Losing the rights to an invention or product because of country policy or poor enforcement is a top issue for business executives and can lead to loss of revenues. Faced with this risk, companies are likely to take their innovation activities elsewhere.

Be Consistent

Innovation takes time and careful planning. Companies will innovate more when they can count on government support being there tomorrow and for years to come. To be effective, policies and tax benefits must be consistent and reliable over the long haul, since some innovation investments can take up to a decade to bear fruit.

Other policies -- such as education and workforce environment -- can take even longer to come to full fruition. Governments must stay the course until these policies deliver results. Given how long the innovation process can take, consistency of support and continuity of policies are critical.

Make Innovation Easier

Governments can improve the ease and efficiency of developing and commercializing ideas through research and better access. All governments, particularly those with limited funds, will find it advantageous to engage in partnerships with businesses, nonprofit organizations, and educational institutions to increase the scale of operations and attain greater results. Although U.S. universities and government agencies fund a great deal of innovative science, business executives tell us that accessing these resources is very difficult.

Governments need to ask what companies need and how they can help -- and listen to the answers.

Promote Cluster Development

Clusters are groups of related, interdependent companies within the same industry that are concentrated in a geographic area. By attracting or creating groups of manufacturers in specific industries, governments can help drive innovation performance and, if they make the right choices, sharply improve their country’s economy. This approach can be particularly effective for smaller countries and individual states. For large countries, clusters are relatively less important because any one cluster may be too small on a relative basis, at least initially, to have a meaningful impact.

Although small countries can make bets in specific industries to kick-start innovation (and growth more broadly), such a strategy is not without risk. Concentrated economies, no matter how successful they are for a time, ultimately rise and fall based on the results of a limited number of industries. Some notable recent collapses offer cautionary tales. It’s a high-risk, high-reward policy.

Lead by Example

Vocal and visible support -- in the form of R&D funding, tax credits, policy changes, and so forth -- sends the message that innovation is important. Make innovation a common cause, for the greater good of all. Countries such as South Korea, China, and Singapore, whose governments publicly and actively support innovation, are attracting an increasing share of the world’s innovators and innovation.

These actions closely align the mutual interests of companies and governments, helping governments more effectively serve their constituents. For countries that want to encourage innovation, it’s time for all levels of government to make innovation a top priority and prove their commitment with concrete action. The stakes couldn’t be higher -- nothing less than global competitiveness, secure jobs for their people, and a higher quality of life.