A nation of fast followers

ISA’s recent ISR System Review described Australia as “an incremental innovator, with generally low levels of new-to-market innovation”. Compared to other OECD nations, the proportion of Australian firms engaging in “new to market” innovation is quite low (23rd out of 31 countries). Indeed, we seem to be better at adopting existing innovations, rather than creating them for ourselves.

Is it enough to be a nation of fast followers? Or should we be trying to lead from the front of the pack?

We like new to market innovations because they generally involve a higher degree of novelty. These innovations are of a greater quality, they draw more heavily on the innovation system and often require lots of STEM inputs. New to market innovations are also more likely to create spillovers that benefit the broader economy.

In contrast, new to firm innovations are typically incremental. They are the small increases in execution and efficiency and the minor, cumulative improvements to products and processes.

While perhaps less shiny, the majority of innovation occurs in this way — particularly in Australia. More often than not, firms will innovate by applying existing, off the shelf ideas to their business. Around 7 per cent of Australian firms are introducing new to market innovations, but more than five times as many are making incremental innovations. (And to the extent that innovation is mismeasured, one has to think that it’s more likely that new to firm innovation is underestimated.)

More radical innovation, the argument goes, will result in higher payoffs, greater spillovers and the creation of new knowledge. More new to market innovations will see us enjoy first-mover advantages.

However, this is perhaps easier said than done. New to market innovations can be a very expensive, risky and difficult exercise. Even if you can think of a greatidea, there’s more than a 90 per cent chance it will flop. Google, one of the most innovative and successful companies on the planet, has failed with Google Glass, Google Wallet, Google+, Google X, Google Catalogues, Google Answers, Froogle, Wave and many more. Studies have shown that where the failure rate of first to sell the product is around 47 per cent, the failure rate of fast followers is about 8 per cent.

Stepping up in novelty also requires greater innovation infrastructure. It’s not simply a matter of choosing which type of innovation you want to buy. The system needs to be able to support new to world innovation — and this means STEM skills, managerial skills, personal skills, high degrees of collaboration and cross population, platforms, networks, capital markets, tax breaks, regulatory sandboxes, and so on. Incremental innovation requires some of that of course, but not as much.

Yes, new to firm innovations are likely to have a smaller payoff, but they are also inherently less risky. Typically they are also further down the research-development-extension chain, and so firms can be more confident of their success. Also, in a whole of economy sense, small increases across a broad base can often amount to a much greater impact than large increases on a very small base.

The fast follower model is frowned upon in technology circles. It’s considered more imitation than innovation, which is for some reason is a bad thing. But experience has shown, that companies that copy are the ones that succeed. The iPod was not the first digital-music player; nor was the iPhone the first smartphone or the iPad the first tablet. Apple imitated others’ products but made them far more appealing. Samsung has sought to “the ultimate fast follower”. The multi-billion-dollar category of supermarket own-label products is based on copying well-known brands, sometimes down to details of the packaging. Fast-fashion firms have built empires copying innovations from the catwalk.

This is, of course, not an either or question. There’s a balance to be struck (and finding that balance requires a better understanding of the marginal costs, benefits and externalities of innovation than we currently have). But while imitation is less heroic than innovation, and the incremental less exciting than the radical, there are plenty of gains to be made.

Post script: Where Australia sits in the ranking of firms engaged in new to market innovation across the OECD, is just ahead of Japan, and just behind Estonia, Israel and Great Britain. Which seems like pretty good company.