Why Some Societies Innovative and Why Others Aren’t

Many great thinkers have pondered this question, why are some places innovative while others are not? Why do some places catch up fast, and others stay behind? What is the key here, the secret to making a society innovative? Our friend Joseph Schumpeter, for example, argued that the individual entrepreneur was the key. These innovators did not just make profits for himself or herself, or even just build a successful company. They acted radically and changed the entire economy, contributing to overall economic growth by enhancing productivity. To Schumpeter, innovative societies were societies that gave maximum freedom to individual entrepreneurs.

After World War II, and particularly among Western nations, focus on the individual gave way to focus on the organization, especially the large multinational corporation. It was believed that strong, vertically integrated corporations were the progenitors of most innovations. Strong private firms would provide the leading edge of research and development and especially the commercialization of innovations. Nations that lacked big, vertically integrated corporations would tend to be less innovative, unable to compete in the race to develop and diversify new products, processes, and techniques, which were expensive to create and needed to be produced at low cost through economies of scale. This made a lot of sense when big American corporations were dominant in so many industries and sectors of manufacturing that in Europe and Asia there was talk of an unstoppable "American Challenge" to economic supremacy. The problem child among the advanced industrial world in this regard was England, which was said to lack both the strong, integrated corporate sector and had failed to invest sufficiently in scientific and engineering education, preferring instead a higher education system that produced liberal arts scholars and generalist gentlemen and women.

But in the 1970s and 80s the era of American corporate dominance seemed to be waning. Nations ranging from Japan to Germany to eventually even France and England bounced backed or caught up while others such as South Korea, Taiwan, and Singapore were on the rise. New models were afoot. These models stressed a new, more central role for government. Bold programs that focused on new research efforts, in the manner of the successful Manhattan Project that built the atom bomb or the race to the moon that required innovations in materials, fuels, and propulsion and computers seemed to offer positive examples of government led innovation. For a time it seemed that the most successful nations were those that had hit on the formula of government led research or government-business collaborations and publicly-directed strategies for innovation. Japan and its storied Ministry of International Trade and Industry (MITI) seemed able to command and direct the nation’s firms and researchers to learn how to enter and eventually dominate whole industries or sectors—steel, automobiles, consumer electronics, silicon chips. Such overt industrial policies were followed by a number of Asian economies, a tradition carried on in China and South Korea today.

Then things changed again and the seemingly unstoppable rise of Japan stalled. The government-led model was challenged by a new political economy rooted much more in the private sector. Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom had ushered in a new respect for the “supply side” of the economy that placed much more emphasis on new firms, startups, and nimble entrepreneurs than on large incumbents. It was crucial, the new supply side theorists argued, to encourage firms and individual entrepreneurs to innovate. Popularizers of these ideas such as economics writer George Gilder predicated that if governments would step back from trying to regulate and manage their economies and let private initiative take over, there would be radical improvements in technology and a flourishing of new innovations that would usher in a golden age of economic growth.

By the 1990s, it became clear that large firms could be overwhelmed and even defeated in the race to innovate by small startups that were hungrier for profits, more knowledgeable in emerging areas of technology, and more nimble in moving into and dominating those new sectors. The virtues of the startup seemed confirmed by the success of the computer and software firms that burst onto the scene in Silicon Valley and elsewhere in these decades, challenging and in some cases toppling long established big players like RCA, Control Data, Honeywell, and others. The problems faced by the once highly touted giants were summarized and analyzed by Clayton Christensen in his best seller, The Innovator’s Dilemma. He argued that incumbent firms were handicapped when it came to innovation because they had no choice but to focus on existing markets and serve existing customers, and thus were badly positioned to recognize new opportunities or to serve small, but growing emerging markets.

To unleash the power of startup innovators and supply side forces, the new thinking, sometimes called “The Washington Consensus” or “neoliberalism,” was that government should be much smaller, that markets should be much freer, that private capital should flow into the hands of creative entrepreneurs with as few restrictions as possible. Tearing down barriers such as tariffs would also unleash these forces on a global level, with trade, capital flows, and exchange of knowledge eventually spreading the benefits of innovation to all nations and equalizing the incomes of rich and poor regions of the world. Especially in the West, old style government policies and big government-funded research projects lost favor. Government still had a role to play in innovation. Innovators needed educated workforces, so investments in education to enhance “human capital” were if anything more important. And the state could incentivize would-be innovators, but less by giving them money or material resources and more by stabilizing the legal and political environments. Particularly important were intellectual property laws—patents and copyrights. Strong intellectual property laws would allow innovators to exploit and profit from the fruits of their labors, thus encouraging more people to innovate. Stability included price stability, which required an independent central bank that would not debase the currency. Crucial to building the necessary system, it was argued, were open, democratic, and transparent political systems accountable to the people. Dictatorships and other forms of authoritarian governments tended to suppress free thinking and bold private action, or else keep all resources and opportunities locked up for insiders and supporters of the regime in a form of “crony capitalism.”

Law, property, and institutions now became the magic elixir that explained economic success. The record of the past, it was argued, revealed a consistent pattern of open and free societies with good laws and strong property rights emerging as the most creative, successful, and wealthiest. Conversely those societies that did not embrace such policies tended to either second rate status or to lose ground once they backed away from openness and competition. In perhaps the most ambitious survey of this kind, economists Daron Acemoglu and James Robinson examined and catalogued the record of diverse societies and nations over centuries of history to discover Why Nations Fail. Their survey fit the open society model, with the failures being places that either declined to embrace or gave up on openness, inclusiveness, and competitiveness. Closed societies without democratic and responsible governments created institutions that extracted and expropriated wealth for the few. In the end, these societies could not keep up with change and innovation and new opportunities, losing ground to more open and competitive societies.

By the early 2000s theories of innovation seemed to have settled on a consensus of this sort. The world would move toward the open, democratic model of the West. At the same time, the movement of people, goods, capital, and ideas across borders would allow innovations to spread, so that things invented in once place would become available for other people to use, adapt, and improve upon in all parts of the world. Over time, the force of innovation would spread the benefits of technology, and hence economic growth, worldwide, leading to a convergence among nations. There seemed little reason to believe that any people could not adapt the benefits of innovations or indeed become successful innovative participants themselves.

As it has turned out, however, the world has not converged as expected. Differences in income and wealth remain, and in some cases have grown more pronounced, especially between the advanced first world and the poor third world. The assumption that innovation, growth, and economic success necessarily meant adoption of the Western democratic model of government also no longer holds. Few now argue that China’s prosperity will lead to democracy. And a long look over history makes it clear that the range of governments in innovative societies is much more diverse than simply those of Western-style democracies. Where there has been progress among nations, as with China most notably, it has not come by adapting Western-oriented notions of openness and democracy or reducing the role of the public sector in favor of the private. If we look across the globe, we see that democracy is hardly a universal attribute of successful innovative places: Besides China, South Korea, Singapore, Malaysia, Dubai, even Japan and Taiwan are either not democratic or are run by long standing parties that hardly ever lose elections. Sometimes power stays within the same family, as with Singapore; in other cases it is monopolized by a relatively small group of elites from the same universities and with similar backgrounds.

China has come further and industrialized faster than any other economy in history by building the world’s most extensive manufacturing ecosystem manned by 150 million low-cost workers. The nation has been widely criticized as a haven for copycats and intellectual property pirates. But copying and pirating have been used throughout history by nations that want to catch up to the economic leaders, as we will soon see. In fact, one might say that stealing is both the highest form of flattery and also the way that formerly closed and benighted nations come into the global competition for innovation. In 2006, Chinese party leaders began to heavily promote indigenous innovation through an economic and political campaign that is now pressing the nation’s entrepreneurs to evolve rapidly beyond their reliance on foreign technology. Under the strong leadership of President Xi Jinping, Beijing is intensifying its efforts to accelerate homegrown innovation. In 2017 the government announced a comprehensive plan to make it the world’s primary Artificial Intelligence (AI) innovation center by 2030, and Beijing is bankrolling that enormous effort. It is already employing AI through its advanced facial recognition technology throughout the nation to keep a close eye on its citizens, and Chinese companies use it to track the whereabouts of workers. China is now crashing "headlong into the foundational principles of the Internet in market-based democracies: online freedom, privacy, free international markets and broad international cooperation.” “Can a country like China with lots of money combine repression, creativity, and economic success based on that creativity? If the answer is yes, then we will have to rethink everything.” We need a new way to explain why nations innovate.

In the recent and comprehensive survey across nations, Mark Zachary Taylor concludes that none of the existing explanations for innovation is adequate to account for these persistent differences and variations. The verdict of history and the evidence of the great variations across many different societies today make clear that there is not a “one best way,” as predictors of the Washington Consensus hoped just a decade or so earlier. There are many ways to accomplish the same thing, and what might make one place highly innovative does not simply translate directly to another. Becoming innovative, in other words, often requires innovative thinking and innovative policies that might not be found in existing societies. But that does not mean we cannot find solution to the innovative equation either. We may not find “the” answer; many different resources and factors can contribute to innovation and it is unlikely that we will find any society that combines all of them in just the right amounts. But we can identify what makes places likely to be innovation leaders, and what is likely to keep them back.