Ideas That Change the World

Pial Islam outlines the power of innovation

If you're not failing every now and again, it's a sign you're not doing anything very innovative." What this quote from Woody Allen underscores is that innovation is not as easy as it may sometimes seem. Perhaps this explains why organisations and countries find it so difficult to systematically stimulate and capitalise on innovation.

Why have we not seen Bangladesh reach the same level of economic development as have Vietnam or South Korea over a similar period of time? The answer to this question partly lies in our ability, or lack thereof, to exploit innovation. But before we can appreciate the role of innovation in the economic growth of a nation, it would be helpful to arrive at a clear understanding of what is innovation.

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Innovation is a commonly used buzzword. However, it doesn't hold the same meaning to everyone. Clayton Christensen of Harvard University, an authority on innovation, defines innovation as anything that improves an entity's existing resources, processes or values, or creates new resources, processes or values.

At first, the definition may seem somewhat repetitive. But the distinction between improving something that already exists and creating something new is very important. In that distinction rests the two different types of innovation: incremental innovation and disruptive innovation.

Incremental innovations are improvements to existing products on dimensions historically valued by people. Aircrafts that fly farther or carry more people, computers that process faster, mobile phones that are smarter are all examples of incremental innovation. Also included in this category of innovation are reconfigurations of existing forms to serve other purposes. Repackaging shampoos into small sachets to make it more affordable or mobile phones with digital cameras are also examples of incremental innovation.

Disruptive innovations, on the other hand, introduce new value propositions and offer something new to the world. They create new markets or radically reshape existing markets. Apple personal computer, Xerox photocopier, Wal-Mart's discount retail store, and Dell's direct-to-customer business model are all examples of disruptive innovation. Such innovations are a departure from existing ways of doing things. In Bangladesh, the collateral-free lending mechanism mainstreamed by Grameen Bank could be considered an example of disruptive innovation.

Deeply embedded in the notion of innovation is the need for a mindset that views failure as an opportunity for learning and systematically harnesses the learning to fuel growth. Bangladesh certainly has had its fair share of failures over the last four decades. But perhaps where we falter as a nation is in accepting failures as a process of learning and taking a systemic approach to "processing" the learning into innovation. Let us briefly review how Vietnam and South Korea have harnessed innovation to fuel their economic development.

Vietnam's growth story began at the end of the Vietnam War in the mid 1970s. After the War, Vietnam implemented its Second Five-Year Plan (1976-1981). However, it set extraordinarily high goals for annual growth rates for industry, agriculture, and national income and aimed to integrate the North and the South. This five-year plan failed to generate the intended growth targets.

But Vietnam learned from this failure and incorporated a more modest and manageable set of goals for its Third Five-Year Plan (1981-85). The planning function was decentralised while the managerial skills of public sector officials were improved.

Subsequently, its political and economic renewal campaign, DoiMoi, combined government planning with free-market incentives and encouraged the establishment of private businesses and foreign investment, including foreign-owned enterprises.

Collectively, the measures Vietnam took were a series of gradual shifts from its earlier strategies. Lowering growth targets, training resources and encouraging private sector participation are not radical shifts. But when these steps are structured in a way where one element builds on the success of another, it allows a country to initiate and harness incremental innovation in its policy-making apparatus. The results were being felt in Vietnam by the late 1990. By then, more than 30,000 private businesses had been created, the economy was growing at an annual rate of more than 7 percent, and poverty was nearly halved.

South Korea's growth story began at the end of the Korean War in the mid 1950s. After the war, South Korea invested in an infrastructure that included a nationwide network of primary and secondary schools, modern roads, and a modern communications network. While this provided the foundational blocks to achieve a respectable growth rate, it was felt that something radically different would be required to significantly enhance its growth rate.

South Korea introduced a disruptive innovation called chaebol. Chaebols are a small number of extremely large and highly diversified family-controlled business groups. South Korean government deliberately created and nurtured chaebols to use them as locomotives for rapid economic development.

The key benefit of a chaebol stems from a well-understood system to get new ideas and innovations to market. Innovators in most countries, including the US, spend years working without support or resources, attempting to jump through a confusing array of hoops with the hope that they will be noticed by someone with the capital to fund their innovation. In contrast, a South Korean innovator can simply select a chaebol, get a meeting, and pitch their idea to a person who actually has the means to get them started developing their venture.

The chaebols were the backbone of industrialisation in the labour-intensive industries and played a major role in expediting technological learning in industry, upgrading South Korea's technological capability and globalising South Korean businesses. Although chaebols served their purpose well from the early 1960s for nearly four decades to propel South Korea's growth, in recent times, major reforms were made to regulate chaebol systems because of various corruption charges and unpaid debts.

What lessons can we learn from Vietnam's and South Korea's innovation journeys? The intent is not to merely replicate those innovations, but rather to study the underlying processes that led to the innovations in those countries. One is not suggesting Bangladesh lowers its growth targets as did Vietnam, or that we develop a system here similar to the chaebols in South Korea. Those strategies were the correct course of actions for those countries in those specific situations at those times. But the underlying process of innovation is very similar.

Firstly, both countries recognised and accepted a failure or a challenge. Vietnam realised its growth plan was too high and South Korea realised it wasn't growing fast enough.

Secondly, both countries were open to learn from those situations and adopt different strategies, if deemed necessary. Moving from a state-controlled system to one that fostered privatisation and foreign ownership required incremental shifts in the Vietnam scenario. Coming up with a radically different chaebol system that was a hybrid between state ownership and full private ownership required disruptive shifts in the South Korea scenario.

Finally, both countries understood well that innovation is not merely a one-off intervention mechanism, but rather a continuous system that requires ongoing effort. Vietnam's innovation continued past DoiMoi with major education sector reforms in late 1990s and large investments in ICT and agro-breeding technologies more recently. South Korea's innovation system is exemplified by its capability to take a hard look at a past innovation (chaebol), understand its drawbacks, and take measures to address the issue head-on.

Bangladesh today is at a crossroad with regards to innovation. We can continue on the path we have been for the past four decades where innovation happens mostly by chance. This type of innovation stems from necessity-driven improvisations. In Bangladesh, Grameen Bank's collateral-free lending mechanism and Brac's primary education program are perhaps the two most internationally acclaimed examples of this type of innovation. However, such innovations are often recognised only after-the-fact, difficult to replicate across sectors or organisations, and therefore very rare.

Alternatively, Bangladesh can adopt a systemic approach to innovation. This would involve a rigorous study of various initiatives that may have failed or face challenges, learning from those situations, understand the intended outcomes for those initiatives, assess whether the innovation that is required is incremental or disruptive in nature, and finally, develop and implement strategies to materialise the initiatives.

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Moreover, we need to extend the approach to include opportunities for action that are beyond existing initiatives. Several supporting elements, such as high education level, reliable infrastructure, adequate funding mechanisms, and better business and governance conditions, are also important factors to making innovation systems successful. However, these elements should be viewed more as co-requisites rather than pre-requisites since an effective innovation system can help enhance these elements as well.

It is not that one approach is better than the other. Both approaches are important because innovation can emerge from structured or unstructured contexts. And therefore policy measures and strategies that allow both approaches to coexist are required.

Pial Islam is Managing Partner pi Strategy Consulting and welcomes feedback at pial.islam@pistrategy.org. The author thanks Seama Mowri and ASM Maruf, Associates at pi Strategy Consulting, for their contributions.