Monday, June 24, 2013

Is innovation a job creator?

For many years, I've heard economists and politicians expound the benefits of innovation as a source of new jobs.  It goes without saying anymore that innovation is lumped in with economic development, entrepreneurship and job creation.  One big happy family.  But does innovation create more jobs?  Is innovation a reliable economic development platform? 

I think there is a correlation/causation issue working here.  In places where there is a lot of innovation, say, Silicon Valley, there appears to be more job creation and those jobs often have higher salaries and wages.  Conversely, in places where innovation quotients are lower, it seems there's less job creation and less economic development.  Does innovation lead to job creation?

Here's where Schumpeter comes in

While I'm not an economist, there are some things I think I understand about how business works.  Schumpeter said it best when he coined the term creative destruction.  While the phrase originally was meant to indicate how capitalist systems would destroy themselves, the phrase is now used to reflect the fact that a healthy and innovative capitalist system will create new things and at the same time destroy existing things.  These things may be structures, profits, products and, interestingly, jobs.  Creative destruction suggests that when new things are created, it's to be expected that other, perhaps older or less useful or valuable things will be destroyed. 

Apple as a job creator

Let's look at Apple, that noted innovator.  Did Apple's era of innovation create new jobs?  Few would argue that Apple was anything other than a successful serial innovator, creating the iPod, iPhone, iPad and so on.  So we celebrate Apple as an innovator.  But did Apple's innovation create jobs?  To some degree, yes, for Apple and for Foxconn, Apple's manufacturing partner.  But there are a couple of issues with that job creation.  First, many of the jobs created were in China, where the cost of labor is lower than in the US.  Apple outsourced much of its manufacturing, so while it was innovative, the growth in jobs in the states were focused in marketing, sales, finance and product design.  Note that Apple's new advertising campaign focuses on DESIGN in California, not manufacturing.  Second, if we were to track what was happening in Apple's core markets, we would find that while Apple was adding jobs here and abroad,  jobs were eliminated in competitive firms.  Look at Nokia and Motorola for example in the cell phone industry.  While the iPhone was booming (and creating new jobs) Nokia and Motorola, which had been the largest players in the space, lost thousands of employees. At one point in the late 1990s and early 2000s, Nokia seemed an unshakable dominant force in handsets.  Yet today Nokia is a shell of its former self and Motorola is exiting much of the handset business.  Both lost far more jobs than Apple added.  So if innovation is a job creator, it is a job creator for the dominant innovation winner, creating jobs locally but often destroying jobs in competitive firms.

But Apple's innovation allowed a whole new industry to emerge - the "app" industry, where people could build small mobile applications and sell them for use on their smart phones.  While Apple's innovation killed many smart phone jobs, it simultaneously created a new industry with thousands of good paying jobs.  Any innovation is likely to kill jobs in its core context, but may create jobs in adjacent solutions or markets, both creating and destroying.

New jobs new skills

To take the point further, innovation creates new jobs based on new insights, new technologies or new capabilities.  These new jobs often make old jobs and potentially existing workers obsolete since they require new skills.  In many instances new innovations create new jobs that existing workers, systems and processes can't sustain.  Further, many innovations create improvements to the way we work, simplifying or eliminating steps or jobs.  For example, innovation in farming techniques and equipment means that less than 2% of the US population creates enough food to feed everyone in the US and have plenty left over for export.  Less than 50 years ago the same food production required almost 25% of the population.  Innovation creates new jobs but those jobs aren't necessarily transferable to existing workers.  Innovation often eliminates processes, worksteps and jobs through automation or efficiency.  Note that in Apple's case new jobs were created not in hardware (handset) but in software, especially in the app market.  This requires new and potentially different skills.

Rate and Scope of Economic Change

So far this analysis has failed to acknowledge perhaps the most significant contributor to the issue of jobs.  Innovation is more destructive than it was previously for two key reasons.  First, many inventions and innovations made it possible to take advantage of human capital.  Railroads, steamboats, even the internet created platforms that people could build on, increasing output and jobs.  There may be a diminishing marginal return to that type of innovation.  Today many of our innovations are intangible innovations, and don't often have a "platform" or "Long Tail" offering that allows others to capitalize on the platform and build new solutions on the platform.  If we could sponsor more innovations around meaningful infrastructures that help people gain more from their knowledge or labor, those innovations will create more jobs.

Second, the rate and pace of economic and market change has accelerated, and markets that are tightly bound together through financial transactions allow ripples that affect the entire globe.  More competitors from more geographies offering more solutions is better for the consumer, but means the rate and pace of change (and innovation) must increase while at the same time creative destruction accelerates.

Is Innovation a job creator?

The next time you hear a politician expound innovation as a job creator, take notice.  Innovation creates opportunities for the first movers, but often destroys products, businesses and jobs in its wake.  This is, in fact, the natural order of things, handled down from Darwin and part of the capitalist model.  Jobs will be created and destroyed with many innovations, and a fair number of innovations simply make work less difficult, requiring fewer people, increasing efficiency.

Innovation is an economic necessity, but isn't necessarily a net job creator in the aggregate.  Countries, regions or states that bank on innovation as a job creator must also invest in skill development and education, and create a nimble workforce that can respond when new innovations threaten existing companies or operating models.  One glance at history will tell you all you need to know.


The textile industry in the US was originally headquartered in New England.  As labor costs increased and technologies improved, much of the textile industry moved into the South, to take advantage of lower labor rates.  Eventually, as labor costs increased and technology improved, the amount of labor to create a yard of cloth diminished.  Even that wasn't enough to keep the textile market from migrating to Mexico, India and other locations in search of lower labor costs. But at the same time innovations in textiles were doing two things:  constantly reducing the amount of labor required to generate a yard of cloth, while simultaneously creating completely new types of fabrics - non-wovens, for example or newer types of textiles that require highly specialized machines operated by highly trained technicians.  Textiles didn't go away entirely in the South, the jobs and machines changed as innovations in technology were implemented.

It's a moot point

The question of whether or not innovation is a job creator is almost a moot point.  Any firm or industry that fails to innovate will be overwhelmed by competitors, alternative products and substitutes.  The rate and pace of change and demand for innovation is only accelerating.  Firms have little choice but to innovate.  The more tenuous tie-in is whether or not communities and states have a vested interest in picking winners and losers, declaring innovation as a job creator.  The only firms capable of creating jobs based on innovation are those dedicated to consistent, sustained innovation over time, and every innovation creates jobs and destroys jobs, hopefully in other places.

What economic developers must understand is that innovation creates ecosystems - just as the hardware (handset) that Apple created built a market and demand for software (apps) that exploded.  Much of the real job growth wasn't at Apple, and wasn't in their core space, but was taken up by small entrepreneurs building on a platform Apple created.

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posted by Jeffrey Phillips at 6:26 AM


Blogger Unknown said...

The oversimplification of equating innovation to economic growth is evident among the policy makers in my State of Ohio. I arrive at this statement from a careful reading of the report published in June 2012 by the Ohio Board of Regents titled "Advancing the Innovation Economy". However, there are some promising approaches for economic development in Northeast Ohio underway and supported in the recommendations of this report. They resonate with the conclusion in this blog posting that economic developers must have an innovation ecosystem mindset and supporting strategy to achieve meaningful job growth. The focus on developing two innovation ecosystems in northeast ohio come to mind: Shale Gas Fracking and Flexible Electronics.

9:50 AM  

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