Monday, October 11, 2010

Research suggests US need more innovation

I've just come across the National Science Foundation's (NSF) survey from 2008 on Business R&D and Innovation.  This was a study conducted by the NSF across a wide swath of US firms of all sizes and industries.  The results should scare you.  I'm surprised they haven't been front page news.

The results suggest that about 1 in 5 manufacturers indicate they produced a significant new product innovation in the period 2006-2008 and about the same percentage produced a significant new process innovation in the same period.  One manufacturer in five thinks they created a significantly new product or process over a two year period.  Wow.  But it gets worse.

The results suggest that 1 in 12 non-manufacturing firms indicate they produced a significant new product innovation in 2006-2008, and the same number suggest they created a new process innovation in the same period.  We've suspected for a while that service firms weren't keeping up with manufacturing firms in terms of their investment in innovation.  Now we have some reasonably detailed evidence.

The reason this is even more alarming is that manufacturing firms make up only 8% of the firms in the survey.  That means that the vast majority of firms (the 78% of manufacturing firms and the 92% of non-manufacturing firms) weren't innovating during 2006-2008.  The lack of innovation during that period should be especially evident now, as ideas generated in that period should be coming on the market as new products and service.  Given that close to 80% of the firms (92% of the firms are non-manufacturers and 92% of them aren't innovating) are not claiming to innovate at all, we have a significant hole in our innovation efforts in the US.

And these statistics come from a period before the financial meltdown, during the final years of the Bush administration.  We can't claim that the financial meltdown caused this lack of innovation, because these numbers reflect a time prior to that economic slowdown.

The survey also finds that firms with R&D investments claim to generate more innovation.  This is like the newspaper reporting that weather in Hawaii is nice or that Canadian winters can be quite cold.  Any firm with a significant investment in Research and Development had better be able to demonstrate a return  - which is usually new products or services.  That firms with deep R&D investments generate more product innovation isn't a surprise.  What was slightly surprising was that the focus on product innovation seems to translate to process innovation.  Firms with investments in R&D also claimed to be significantly better at process innovation as well, yet most R&D probably isn't directed at process innovation tasks.  Interestingly, the more invested in R&D, the more likely the firm was to claim it was "innovative".  With R&D investments at less than $10M, (which accounted for 90% of those reporting an R&D expenditure) the number claiming new innovative products was 66%.  For those very few firms with R&D spending over $100M, those claiming new innovative products was 81%.  What on earth were the 19% of firms spending more than $100M in R&D and NOT delivering new products and services doing?

There are a couple of problems with this survey, which the authors recognize and will correct in the future.  The first is that there is no clear definition of a significantly new product or service.  In the future they will ask if the product is new to the company or new to the market.  I'd like them to ask:  new to the company, new to the market, new to the world, but perhaps we can add that later.  This would begin to distinguish between incremental innovation and radical or disruptive innovation.  Second, the authors plan to ask about the amount of revenue generated from newer products over the core or legacy products.  This kind of measurement is the same as 3M uses - what's the percentage of revenue driven by products introduced in the last X years?

I can't wrap my brain around this - a scientific study conducted by the Federal Government that suggest that over 80% of the firms in the US didn't create a significantly new product or process innovation in 2006 through 2008, and there's almost no outrage or astonishment?  During a period BEFORE the economic meltdown and recession, which is likely to make these numbers worse?  These numbers are very serious, and indicate a real reduction in investment in innovation - regardless of the R&D investments.  If our economy is to compete, in the US and globally, we need much more focus on innovation.

During the 2006-2008 period, according to the survey, only 8% of health care firms released new innovative products or services.  This in a period when it was evident that the Democrats were going to take office and radically change health care.  Rather than taking a proactive stance and working up ideas, the industry sat back and dug in its heels.  Now it is in a purely reactive mode and will be for quite some time.

The missed opportunities are almost too numerous to mention.  The lack of innovation is glaring, and the need for innovation at all levels and in all regions is stark.  Where is the attention?  Where is the outrage?  Where are the investors, demanding their executive teams do more to generate new products and services? 
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posted by Jeffrey Phillips at 12:55 PM


Blogger Dale B. Halling said...

Hi Jeff,
As a patent attorney I am not surprised that the NSF finds innovation is down. We have significantly reduced the value of inventing. We have weakened our patent laws and Sarbanes Oxley makes it almost impossible to go public. The number of patents issued to US inventor in the last decade has been flat to declining. Once again you see people asking where has all the innovation gone in the US. In both decades the US economy was in the doldrums and in both cases the patent system was weakened and under attack by intellectuals.
In the 1970s the number of patents issued to US inventor declined significantly. This corresponded with a decline in R&D and soul searching in the US as to where on the innovation had gone.

9:57 AM  
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