Entrepreneurs

Economic Growth Depends On The Flow Of People And Ideas

It’s nearly a decade since Northwestern’s Robert Gordon pondered whether sclerotic innovation was causing the death of economic growth as we had come to know it. He argued that far from some form of miraculous perpetual motion machine that would deliver economic growth in perpetuity, the engines of our economy need a constant flow of new innovations in order to thrive.

As a general thesis, it’s one that was supported by research from the Stanford Institute for Economic Policy Research, which found that we’re spending more and more on research and innovation and getting less and less in return for that investment. What’s more, this “innovation input” is not purely a financial one, as the authors highlighted that around 20 times as many people are currently working in R&D than they were in the 1930s.

Recombinative growth

An explanation comes in the form of a paper from Northwestern’s Mark Buchanan, in which he highlights what is known as recombinative innovation. In essence, this is the process by which existing technologies and processes are combined or deployed in new ways. Buchanan highlights that 40% of all parents in the U.S. Patent and Trademark Office take this form, with the ratio growing with each passing year.

While this may sound like something of a beige version of innovation that we have been conditioned to view as something groundbreaking and revolutionary, it’s actually anything but. Indeed, as Martin Weitzman argued in a celebrated paper from 1998, recombination is not only the bedrock of knowledge production, but takes its cue from the kind of work Gregor Mendel famously did when he mixed and matched peas to uncover the power of genetics.

From an innovation perspective, therefore, it can be hugely valuable to be able to cross boundaries and employ a wide range of perspectives. César A. Hidalgo and Ricardo Hausmann compare the best economies to a bucket of Lego bricks, with the most diverse buckets those that are able to grow and produce the most innovative solutions.

As Mancur Olson put it in his book, Power and Prosperity: “because uncertainties are so pervasive and unfathomable, the most dynamic and prosperous societies are those that try many, many different things. They are societies with countless thousands of entrepreneurs.”

The inherent value of diversity is a central reason why immigrants make such potent entrepreneurs, because they bring a whole new set of norms from their homeland that can shed light on new ways of operating in their adopted home. Similarly, the evidence that the best entrepreneurs tend to be a bit older also rests heavily on their greater combined life experiences with which to combine in various ways.

Fostering combinations

Within countries, universities tend to be at the heart of attempts to foster such diversity. As the University of Michigan’s Jason Owen-Smith argues in Research Universities, universities tend to be excellent sources of innovation because they not only contain a diverse array of people but also a diverse range of specialisms to juggle together.

There are also initiatives such as the European Union’s European Institute for Innovation and Technology, which aims to encourage and support the fertilization of ideas and innovation across the European Union. Such efforts have buttressed up against the rising tide of nationalism in recent years.

Recent research from the Max Planck Institute for Research on Collective Goods suggests that when it comes to cooperation, such nationalism is not as uncommon as we might think, with people seeming to prefer to collaborate with those just like them rather than those who are different in whatever way. At an individual level, this can render us closed to potential opportunities, whereas at a national level it can create a “not invented here” insularity that turns our nose up at potential innovations from abroad.

Knowledge transfer

As the World Economic Forum highlights, this is especially important for developing nations that tend to import science and research rather than develop it domestically.

“Knowledge transfer between countries is an important driver of innovation,” they say. “In countries where education systems are strong and financial markets deep, the estimated effect of foreign technology adoption on productivity growth—through trade, foreign direct investment or learning-by-doing—is particularly large”

Indeed, in Dynamism, Edmund Phelps argues that imported innovation contributes more to a country’s productivity than native innovation. This import of ideas and innovations is certainly no less impactful for having been “invented” elsewhere, but it is increasingly attached to the people who contain the knowledge to make the idea work.

While this knowledge could be imported as intellectual property, it’s most commonly attached to us as individuals. For instance, data from the McKinsey Global Institute reveals that around 35% of those people living outside their country of birth have at least a tertiary education. What’s more, research from The Royal Society highlights the crucial role these migrants play in the intellectual output of universities.

It’s no surprise that at the height of Trumpism, the deans of numerous American business schools felt compelled to write a paper urging a loosening of talent restrictions because of their impact on American competitiveness. As the latest edition of INSEAD’s Global Talent Competitiveness Index illustrates, we are in a competition for talent like never before. Whereas most of the report focuses on the organizational challenges of attracting, developing, and retaining the talent required, the same urgency should also be considered from a national perspective too.

As Harvard’s Ricardo Hausman and MIT’s César Hidalgo illustrate, there is a clear and direct link between the know-how within a nation and its economic prosperity. From an innovation and entrepreneurship perspective, that largely involves having an open and liberal approach to immigration so that the diverse insights can power the recombination innovation that is the norm today.

*this article was co-written with Muneeb Sikander

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