Innovation drives economic growth. This logic dominates the discourse in development circles. policy-makers and development-minded business leaders embrace innovation as a panacea for unemployment and economic underperformance.
From the evidence of 2014, the innovation mindset has gone global. India’s Narendra Modi called for a revival in Indian manufacturing and greater innovation to stimulate growth. Nigerian businessman Tony Elumelu launched a $100-million Pan-African entrepreneurship grant program to unlock Africa’s economic potential. Start-up accelerators are almost as likely to be found in emerging nations as in Silicon Valley.
But does greater innovation always equal sustained growth and prosperity on a macroeconomic level? This question requires clarifying because it may well be the difference between the developing nations that replicate the blistering success of China and the East Asian tigers, and those that crumble under the weight of their demographic booms.
While innovation can be pivotal to prosperity, not all kinds of innovation are created equal. But correlating innovation in itself with growth is misleading, as my coauthors and I discuss in a recent article in Foreign Affairs. To understand how innovation interacts with prosperity, we should first distinguish between investments in three different types of innovation.
Sustaining innovations (which replace old products with new and better ones) and efficiency innovations (which allow companies to make and sell established products for less) help companies serve their existing customers better, but do not address the needs of the majority of the population.
Conversely, market-creating innovations are primarily focused at making products and services accessible to nonconsumers or those who are underserved. Market-creating innovations offer rapid growth and job creation, and by definition affect a larger swath of the population.
They not only build new domestic value networks from scratch but also can disrupt foreign markets.
The cost models they develop and their knack for going after nonconsumers often blindside global competitors. This allows tiny economies to punch above their weight and build globally relevant companies.
Because companies and entrepreneurs are the vehicles for innovation, leaders in developing nations are right to review how policy and other factors drive innovation.
Rather than seeking innovation for its own sake, however, there needs to be a clear priority for the right kind of innovation.
Market-creating innovations are almost always harder to execute. By pursuing nonconsumers, they are more often bound to the myriad infrastructural and social challenges that most developing nations face.
Executing them successfully requires unparalleled collaboration between policy-makers, investors, entrepreneurs and other stakeholders—but the rewards are more than worth it.
Bryan Chidubem Mezue is a member of the Forum for Growth and Innovation, a Harvard Business School think tank.
Bryan Chidubem Mezue