Malaysia is pretty poor at doing R&D. Spending relative to GDP is by any standards low; so are the number of researchers relative to the population. Patent applications, in absolute terms, in relative terms, and in the ratio of local to foreign applications, are in a word: pathetic. The government has all kinds of programs to get R&D and innovation going, the latest of which is MaGIC. Much of these ideas revolve around the invention and commercialisation of new products.
While this is certainly one way to get innovation off the ground, it’s not the only – or even the best – way of increasing productivity, incomes, and local value added. Getting to and sustaining high levels of development involves much more than that. I think we really need to put as much emphasis on process innovation and managerial innovation as well.
Take the classical definition of an entrepreneur in economics – someone who combines capital and labour to produce something. Joseph Schumpeter talked about waves of entrepreneurship, where successive generations of entrepreneurs find new and better ways of doing things, which drives obsolete industries out of business and drives new economic growth. Hence the term creative destruction.
And I think that’s a formula that Malaysia needs to take to heart. As much as coming up with the newest disruptive technology is an enticing goal to achieve, you can grow and become rich not just by coming up with new things, but by simply doing things better, faster and cheaper than anyone else. Put another way, organisational efficiency and technology-driven productivity should be put up there along with product and service innovation. That was the initial impetus behind Japan, and later Korea and Taiwan’s, route to development.
Put in yet another way, this is about raising total factor productivity – the part of productivity growth that can’t be explained by greater labour supply, a bigger capital stock, or more investment in ICT. It’s the indefinable difference between an organisation that learns and grows, and one that does not.
Take for example this relatively old study (abstract):
Using a unique longitudinal representative survey of both manufacturing and non-manufacturing businesses in the United States during the 1990's, I examine the incidence and intensity of organizational innovation and the factors associated with investments in organizational innovation. Past profits tend to be positively associated with organizational innovation. Employers with a more external focus and broader networks to learn about best practices (as proxied by exports, benchmarking, and being part of a multi-establishment firm) are more likely to invest in organizational innovation. Investments in human capital, information technology, R&D, and physical capital appear to be complementary with investments in organizational innovation. In addition, non-unionized manufacturing plants are more likely to have invested more broadly and intensely in organizational innovation.
In EconoEnglish: it was found that about a third of the big improvement in US labour productivity in the 1990s came from improvements in organisational efficiency, and not just from investment in ICT. Further translation: you can raise profits and wages by improving the way you work, and not just by spending oodles of money on product development, marketing, computers, and equipment. Those things are necessary too, but there’s a not insignificant boost to the bottom-line (and economic growth) by improving management and workflow practices.
Here’s another one (abstract):
Convergence to the Managerial Frontier
William F. Maloney and Mauricio Sarrias
Using detailed survey data on management practices, this paper uses recent advances in unconditional quantile analysis to study the changes in the within country distribution of management quality associated with country convergence to the managerial frontier. It then decomposes the contribution of potential explanatory factors to the distributional changes. The United States emerges as the frontier country, not because of better management on average, but because its best firms are far better than those of its close competitors. Part of the process of convergence to the frontier across the development process represents a trimming of the left tail, much is movement of the central mass and, for rich countries, it is actually the best firms that lag the frontier benchmark. Among potential explanatory variables that may drive convergence, ownership and human capital appear critical, the former especially for poorer countries and that latter for richer countries suggesting that the mechanics of convergence change across the process. These variables lose their explanatory power as firm and average country management quality rises. Hence, once in the advanced country range, the factors that improve management quality are less easy to document and hence influence.
As much as there is an income gap between developed and developing countries, a part of it is due to a managerial quality gap as well. Now, correlation is not causation, but one would think that improving one (especially if it involves export-import firms) would also improve the other.
A second finding is that some of the difference is due to differences in distribution – lower income countries have extended left tails i.e. management quality is not only worse, but is more dispersed in lower income economies. Translated: There’s a greater difference in the worst firms between rich and poor economies than there are in the better ones. That suggests that raising organisational and managerial quality will have a substantially greater impact in less developed economies than in rich ones. Given that improvements in managerial quality have already had a significant impact when at the global frontier, productivity growth should be significantly higher when you’re below it.
A third, and very critical finding: ownership structure matters. Specifically, family owned or founder-run firms tend to do significantly worse, both between economies and comparing between companies within economies. Ownership structures that are more dispersed and less concentrated tend to be better run. That strongly suggests improvements in corporate governance matters a great deal more than is generally understood.
In sum, innovation isn’t just about R&D, patents or world-class products, it’s also about how we work. And it’s about time that we started putting some real resources behind this.
- Lisa M. Lynch, "The Adoption and Diffusion of Organizational Innovation: Evidence for the U.S. Economy", NBER Working Paper No. 13156, June 2007
- William F. Maloney and Mauricio Sarrias, "Convergence to the Managerial Frontier", World Bank Policy Research Working Paper 6822, March 2014