In a featured presentation at the ATSE Forum, Rob Atkinson stresses the relationship between innovation and productivity. All nations need an innovation-productivity strategy because addressing complex and systemic challenges–such as achieving affordable health care, combating global climate change, achieving sustainable energy production, deploying digital infrastructure, etc.–requires coordinated strategies leveraging the resources of firms, government, academia. And, in contrast to what the conventional neo-classical economic doctrine holds, markets alone will produce societally sub-optimal levels of innovation.

1. November 11, 2011
Innovation and Productivity:
What’s the Relationship and How
Does it Happen?
ATSE Forum
Presented by:
Rob Atkinson, President, ITIF

2. The Information Technology and Innovation Foundation (ITIF)
is a Washington, D.C.-based think tank at the cutting edge of
designing innovation policies and exploring how advances in
technology will create new opportunities to boost economic
growth and improve quality of life. ITIF focuses on:
 Innovation processes, policy, and metrics;
 E-transformation (e.g., commerce, government, health);
 IT and economic productivity;
 Science and technology policy related to economic growth;
 Manufacturing and innovation-based competitiveness; and
 Innovation and trade policy.
2

3. Productivity Growth is Critical

4. A productivity strategy is different than innovation strategy.
The latter tend to focus on:
 “creative”, not “creative destruction” and
 traded sectors, rather than all sectors.
4

5. Especially As the Australian Population Ages
45.0
40.0
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25.0
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15.0
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2000
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2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
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2050
Dependency Ratio: 65 and older/20 to 64 year olds
5

6. Today’s Presentation
1 “New Growth” Theory and Innovation
2 Why We Need an Innovation-Productivity Policy
General Purpose Technologies and Productivity: the
3
Role of IT
4 Three Paths to Productivity Through Innovation
Comprehensive IT-Based Productivity-Innovation
5
Policies
6 The Political Economy of Innovation/Productivity
6

7. Innovation Drives Growth

8. Today’s Presentation
1 “New Growth” Theory and Innovation
2 Why We Need an Innovation-Productivity Policy
General Purpose Technologies and Productivity: the
3
Role of IT
4 Three Paths to Productivity Through Innovation
Comprehensive IT-Based Productivity-Innovation
5
Policies
6 The Political Economy of Innovation/Productivity
8

9. Why Do Nations Need an Innovation-Productivity Strategy?
1. Because addressing complex and systemic challenges–
such as achieving affordable health care, combating
global climate change, achieving sustainable energy
production, deploying digital infrastructure, etc.–
requires coordinated strategies leveraging the resources
of firms, government, academia.
9

10. Why Do Nations Need an Innovation-Productivity Strategy?
1. Because addressing complex and systemic challenges–such as
achieving affordable health care, combating global climate
change, achieving sustainable energy production, deploying
digital infrastructure, etc.–requires coordinated strategies
leveraging the resources of firms, government, academia.
2. Because, in contrast to what the conventional neo-
classical economic doctrine holds, markets alone will
produce societally sub-optimal levels of innovation.
10

11. Because innovation is not as a market

12. It is a system, that under-performs without innovation policy
12

13. Why Do Nations Need an Innovation-Productivity Strategy?
Markets alone will produce societally sub-optimal levels of
innovation. Systemic market failures around innovation include:
 High levels of risk
 Time horizons
 System interdependencies (e.g. chicken or egg)
 Externalities (e.g. spillovers from research)
 Private RoR from R&D is 7%; but the RoR to society
from R&D is 28%
 Need for technology platforms
13

14. Today’s Presentation
1 “New Growth” Theory and Innovation
2 Why We Need an Innovation-Productivity Policy
General Purpose Technologies and Productivity: the
3
Role of IT
4 Three Paths to Productivity Through Innovation
Comprehensive IT-Based Productivity-Innovation
5
Policies
6 The Political Economy of Innovation/Productivity
14

15. This is a Sophisticated Mobile Information Factory

16. Why Is IT Driving Productivity-Innovation?
IT is what economists call a General Purpose Technology
(GPT).
 Most innovations come incrementally, with modest
changes in products, processes, and business models.
 But approximately every half century a new technology
system emerges that changes everything.
 Steam power
 The Railroad
 Electricity
 Steel
 IT
16

17. GPT’s Have 4 Main Characteristics
1. They undergo rapid price declines and performance
improvements.
2. They are pervasive and a part of most industries, products
and functions.
3. They enable innovation in products, processes, business
models and business organization.
4. They drive productivity growth and profitability.
17

18. GPT Driver Periods in American and European Economic History
Period Years Technology System
Mercantile/craft 1840s to 1890s Iron, Steam
Factory-based industrial 1890s to 1940s Steel
Electro-mechanical,
Mass-production, corporate 1940s to 1990s chemicals
Entrepreneurial, knowledge-based 1990s to ?? ICT
18

19. Today’s Presentation
1 “New Growth” Theory and Innovation
2 Why We Need an Innovation-Productivity Policy
General Purpose Technologies and Productivity: the
3
Role of IT
4 Three Paths to Productivity Through Innovation
Comprehensive IT-Based Productivity-Innovation
5
Policies
6 The Political Economy of Innovation/Productivity
19

20. Three Paths to Productivity Through Innovation
1. Expanding high productivity industries faster than
lower productivity ones.
 In the U.S., average compensation per employee in
innovation-intensive sectors increased 50 % between
1990 and 2007—nearly 2.5 times the national
average.
 Jobs in the U.S. technology industry pay 70 percent
more than average jobs.
20

21. Three Paths to Productivity Through Innovation
1. Expanding high productivity industries faster than lower productivity ones.
 In the U.S., average compensation per employee in innovation-intensive
sectors increased 50 %between 1990 and 2007—nearly 2.5 times the
national average.
 Jobs in the US technology industry pay 70 percent more than average jobs.
2. Expanding high productivity firms faster than low.
 One study of Canadian manufacturing found that
plant turnover from entry and exit contributes from
15% to 25% of manufacturing-labor productivity
growth
Source: John R. Baldwin and Wulong Gu, “Plant Turnover and Productivity Growth in Canadian
Manufacturing,” Statistics Canada, No. 11F0019MIE, No. 193 (April 2003): 9.
21

22. Three Paths to Productivity Through Innovation
1. Expanding high productivity industries faster than lower productivity ones.
 In the U.S., average compensation per employee in innovation-intensive
sectors increased 50 %between 1990 and 2007—nearly 2.5 times the
national average.
 Jobs in the US technology industry pay 70 percent more than average jobs.
2. Expanding high productivity firms faster than low.
 One study of Canadian manufacturing found that plant turnover from
entry and exit contributes from 15% to 25% of manufacturing-labor
productivity growth
3. Helping all firms expand productivity
22

23. Today’s Presentation
1 “New Growth” Theory and Innovation
2 Why We Need an Innovation-Productivity Policy
General Purpose Technologies and Productivity: the
3
Role of IT
4 Three Paths to Productivity Through Innovation
Comprehensive IT-Based Productivity-Innovation
5
Policies
6 The Political Economy of Innovation/Productivity
23

24. A Framework for Productivity-Innovation Policies
1. Macro
24

25. A Framework for Productivity-Innovation Policies
1. Macro
2. Factor Inputs/Framework Conditions (e.g.,
education levels, science support, etc.)
25

26. A Framework for Productivity-Innovation Policies
1. Macro
2. Factor Inputs/Framework Conditions (e.g., education
levels, science support, etc.)
3. Sector Studies/Policies
 Hotels
 Construction
 Music
 Health care
 Government
 Education
26

27. Service Blueprinting
27
Source: V. Zeithaml, M.J. Bitner, D. Gremler, “Services Marketing: Integrating Customer Focus Across the Firm,” 4th ed., McGraw Hill, 2006

28. Finland’s Omena Hotelli: A Vision of the Future?
 “A modern hotel for the Internet age.”
 Customers book online and the key code
is transmitted to the door lock and
customer’s email.
 Eliminates the need for receptionists, sales
personnel, and concierges.
 Offers the core product of
hotel operations—high-quality
accommodations—without
expensive auxiliary services.
28

29. Applying IT Prior to the Customer’s Visit, Pre Check-In
1. Social media and phone-based applications
2. Trip Advisor and Facebook
 Engage potential customers online.
 Be active on hotel comment boards.
29

30. Applying IT at Check-In: Kiosks
“Our Customers Won’t Use Kiosks” …But They’re:
1. Not advertised;
2. Not initially deployed with the proper functionality; and
3. Have no rewards for use.
30

31. Applying IT at Check-In: Room-Key Alternatives
 Alternatives to the plastic room key card.
 RFID-enabled guest loyalty card as the room key.
 Mobile phone
 Using near-field communications (NFC) technology.
 Openwave allows mobile phone to play
audio file to open door.
31

32. Applying IT to Concierge Services/Social Spaces
 Surface computing can bring interaction, connectivity, and a social
experience to the lobby.
• 360-degree satellite maps/tools allow guests to search for local
restaurants and bars, recreation, etc.
• Download and view photos, order food/drinks from menus, play
games, watch videos, etc.
32

33. Applying IT to the In-Room Experience
1. Have an in-room electronic concierge.
 Print-on-demand jogging maps.
 iPod/iPhone software that has hotel lay-out in it.
 Application that give links/info/discounts to merchants
in a neighborhood.
2. High-definition television.
 Should be able to act as a computer and leverage IPTV.
 Link to movie reviews.
3. Connect rooms to Bluetooth-enabled
wireless printer to let guests print.
33

34. Applying IT to Operations
1. Equip bell hops, concierges, room service, and repair
personnel with handheld devices informing them and
allowing them to confirm fulfillment of specific room service
requests.
 Puts knowledge of customer needs into the hands of your
professionals, provides method to
validate that customer service needs
have been met.
34

35. Applying IT to Restaurant/Conference Facilities
1. Electronic self-serve ordering would boost throughput in restaurants.
2. Restaurant staff use a handheld to take order (including room
number).
 Provide customer the bill by iPhone and let them pay by iPhone.
 Could have an electronic pad to sign the receipt.
3. Strive to digitize processes with regard to conferences and event
management, make it easier for event planners to share information
on a central Website.
35

36. A Framework for Productivity-Innovation Policies
1. Macro
2. Factor Inputs/Framework Conditions (e.g., education
levels, science support, etc.)
3. Sector Studies/Policies
4. Functions (e.g., processing information;
processing money; moving people; growing
foods-fiber; etc.)
36

37. A Framework for Productivity-Innovation Policies
1. Macro
2. Factor Inputs/Framework Conditions (e.g., education
levels, science support, etc.)
3. Sector Studies/Policies
4. Functions
5. Tool Development (e.g., faster computers; voice
recognition; expert systems [e.g, IBM’s Watson];
flexible displays, etc.);
37

38. A Framework for Productivity-Innovation Policies
1. Macro
2. Factor Inputs/Framework Conditions (e.g., education
levels, science support, etc.)
3. Sector Studies/Policies
4. Functions
5. Tool Development
6. Platform Development (e.g., smart grid; health
IT; broadband; mobile payments; electronic IDs;
ITS, etc.)
38

39. A Framework for Productivity-Innovation Policies
1. Macro
2. Factor Inputs/Framework Conditions (e.g., education
levels, science support, etc.)
3. Sector Studies/Policies
4. Functions
5. Tool Development
6. Platform Development
7. Firms’/Organizations’ Adoption (e.g., R&D tax
incentives; capital equipment investment
incentives)
39

40. IT Has Outsized Impacts on Organizations
 In large U.S. firms, every dollar of IT capital is associated
with $25 of market value.
 However, $1 of non-IT capital is associated with only
$1 of market value.
 IT workers contribute significantly more to productivity
than non-IT workers and the difference has grown over
time.
 IT has 3 times more impact on
productivity than non-IT capital.
40

41. But Applying IT is Not Enough…
41

42. Organizational Change is Also Required
 Firms that adopt digital organization tenets and simultaneously
invest more in IT have disproportionately higher performance
than firms that do not.
 MIT’s Erik Brynjolfsson: “Something unique happens when
human capital and other
workplace practices are
combined with technology.”
42

43. The Seven Practices of Digital Organizations
A distinct corporate culture and organizational practices are
found in most corporations that make extensive use of IT
and the Internet. They are:
1. Move from paper-based to digital business processes
2. Empower front line service personnel
3. Foster open information access
4. Link incentives to performance
5. Maintain focus and communicate goals
6. Hire the best people
Erik Brynjolffson
7. Invest in human capital
43

44. Higher Profitability Accrues to Firms That Get Both Right
Profitability
44

45. A Framework for Productivity-Innovation Policies
1. Macro
2. Factor Inputs/Framework Conditions (e.g., education
levels, science support, etc.)
3. Sector Studies/Policies
4. Functions
5. Tool Development
6. Platform Development
7. Firms’/Organizations’ Adoption
8. Individuals
45

46. Today’s Presentation
1 “New Growth” Theory and Innovation
2 Why We Need an Innovation-Productivity Policy
General Purpose Technologies and Productivity: the
3
Role of IT
4 Three Paths to Productivity Through Innovation
Comprehensive IT-Based Productivity-Innovation
5
Policies
6 The Political Economy of Innovation/Productivity
46

47. Need the Right Economic Policy Framework - Innovation Economics
 Puts innovation and growth at
center of economic policy.
 Focuses on institutions (e.g., firms,
universities, governments) and not
just market exchanges mediated by
price.
 Maximizes growth with proactive
and strategic public policies to spur
innovation.

48. Don’t give into Luddites
48

49. Thank You
Robert Atkinson ratkinson@itif.org
Follow ITIF:
facebook.com/innovationpolicy
www.innovationpolicy.org
www.youtube.com/user/techpolicy
www.itif.org
Twitter: @robatkinsonitif