Good news: The US has the most 'innovation capital' in the world
Credit: McKinsey
The consultancy McKinsey says it has found a strong correlation between productivity growth and what it has termed "innovation capital." In fact, more than half of advanced economy productivity growth over the past two decades has come from innovation capital investment. And as the above chart shows, the US has the most. McKinsey: "The US stands out as a powerhouse when it comes to the scale of its Innovation Capital, ranking in the top three for most of the components."
Innovation capital, as the previous quote alluded to, has three parts:
1. Physical Capital is formed by investments in information and communication equipment and represents 16% of Innovation Capital.
2. Knowledge Capital is formed by investments that build firms' intellectual property and brand equity, including investments in computerised information, R&D and marketing investments, as well as relevant research in universities. It represents 60 per cent of Innovation Capital across the countries we analysed.
3. Human Capital is formed by investments in building individual or organisational skills that drive productivity growth. This includes public and private investments in tertiary STEM education, employee-based training programmes and investments to develop organisational efficiencies (e.g., redesign of business processes or review of business models more broadly). Across countries analysed it represents 24% of Innovation Capital.
Credit: McKinsey
Here is how all this stuff resulted in the Apple iPod:
Seen through the lens of Innovation Capital, the iPod's development rested upon investments across components.
For example:
Physical Capital • Investments in ICT facilitated the migration of music distribution to online channels. Both the shift towards broadband internet in many developed markets, and Apple's own ICT infrastructure were essential for the end product to take root.
Knowledge Capital • Design investments underpinned the look and feel of the product, which contributed to much the appeal it held with customers • Investments in advertising enabled the creation of what is now one of the world's strongest brands. While Apple already enjoyed a strong following among designers and developers, it was the iPod that turned it into a broader, consumer brand.
Human Capital • New business and organisational capabilities had to be built, both for manufacturing and distribution. On the latter, Apple had to build capabilities to pull together the latest creative work from the music industry and quickly transfer it to customers. Finally, none of the above could have succeeded without a strong base in Human Capital – both from investments Apple made itself and from the economies in which it was situated. The development of iTunes, for example, required not simply a strong design concept but the software engineering talent to put it into practice.
This example also demonstrates how developing Innovation Capital can lead to follow-on advantages that accumulate over time. In Apple's case, much of the work in building the iPod provided the basis for future advances, which led to the smartphones and tablets that became so influential over the following decade. For companies as well as economies, these medium- and long-term benefits are a further reason to prioritise innovation investment in the present.
And here's how a nation generates more innovation capital:
It's helpful to read the report in order to navigate the consultant-ese. But the thrust of the suggestions are useful in clarifying one's thinking about what policymakers should do or not do to promote innovation-driven productivity growth.
Sent from my iPad
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