The Free Market Innovation Machine

Bauntol, Willianz L. Bauntol (Princeton University Press: 2002)

Reviewed by A. C. Hyde

 

Though we still lack criteria by which to measure innovation with any precision, indirect evidence and analysis point strongly to the conclusion that the United States is passing through an unusually noninnovative period in public administration. Government is seemingly stuck dead center on many important matters of basic policy, foreign and domestic, and although day-to-day administrative puzzle solving takes place, nothing very creative is going forward. Far from being innovative, public administration is in a period of reaction.

 

Whether you agree or disagree with the state of progress (or lack of) assessment of innovation in public administration quoted above, one thing has change very dramatically. In addition to knowing how important innovation is to economic progress, we are now beginning to understand how to measure the impacts of innovation and perhaps more importantly how innovation works. This is due in large part to the work of economist William J. Baumol.

 

Taking Innovation Apart

Baumol's new book takes innovation apart and shows why investment in R&D and innovative activity is essential to organizations who wish to compete. In Baumol's view, "firms feel forced to incorporate the generation of new techniques and new and improved products as a critical part of their day-to-day routine activities. It is built into the company's organization and budgeted like any other activity." But this is just the why of innovation.

 

The more intriguing aspects of this new work deal with the how—everything from budgeting for R&D labs for the purpose of ensuring that innovations will occur at "reasonably regular intervals" to coordinating innovation investments via research joint ventures, strategic alliances, and licensing of proprietary technology to direct competitors.

 

Innovation vs. Invention

In exploring how innovation works, Baumol also differentiates innovation from invention. Yes, there is (and always will be) a place for the lone entrepreneur creating/inventing the next radical technology wave or new product in the basement or garage. But the larger impact is more likely to come from what Baumol calls "routinized innovation."

 

The hallmarks of successful innovation for such industries as pharmaceuticals, IT, and telecommunications, are both the ability to make continuous investments in staff, space, and strategic alliances, and putting the control of innovation investment "in the hands of managers rather than entrepreneurs. Routinized innovation," Baumol clearly states, "...is not the realm of the unexpected, of the unrestricted exercise of imagination and boldness that is the essence of entrepreneurship. It is rather the domain of memoranda, rigid cost controls, and standardized procedures, which are the hallmark of trained management."

 

An Economist for Economists

Baumol is an economist writing for economists and the book shows it. The opening chapters are part history, part organizational analysis, and very accessible to any manager. But when the seventh chapter—on Oligopolistic Rivalry and Markets for Technology Trading—opens with basic theory, the next half of the book is filled with economic models, propositions, matrices, and equations, which were certainly beyond this reader's expertise (the statute of limitations on this editor's undergraduate minor in economics having long since expired).

 

But The Free-Market Innovation Machine returns to the management realm with a concluding section that asks some very critical questions:

• how important is innovation to the economic success of our current market system?
• what is the chance that current rates of innovation fueling economic progress can't be sustained, resulting in stagnation?
• does innovation fuel further innovation?

The last question is handled nicely in a must-read chapter entitled: Feedback: Innovation As a Self-Nourishing Process. And yes, Baumol argues that innovation breeds innovation because innovation has an accelerator effect on increasing productivity and extending the supply of limited resources. Can Government Be Innovative?

 

Can government be innovative?

Of course! After all, government is often a major player in those strategic alliances and R&D projects that are part of the new world of routinized innovation. The larger question of whether government can make routinized innovation its own hallmark is a different question. Baumol's work identifies the internal processes, sustained investments, and management focus required to produce continuous innovation.

 

Somewhere within, there is a new model for transforming government toward innovation rather than reaction.

 

Which brings us back to the opening quote. The assessment at the start of this review was from Victor Thompson's classic work, Bureaucracy and Innovation, written in 1968. Perhaps the final point is that—whether you agree or disagree with the assessment for the 1960s or for today—innovation is something public administration has always worried about. The problem remains transforming that concern into "innovative activity."

 

A. C. Hyde is a senior. consultant with the Brookings Institution. He is an associate editor of The Public Manager.