Innovation's Impact on the Economy

Executive Summary: We have perspectives on measuring innovation's impact on a company and even on a sector. How do you measure innovation's impact on the economy? Would this information help government/ economic decision-making in any way?

The Background
There is some interesting an exciting work around innovation and organizations- The name Clayton Christensen immediately comes to mind. There also is some insight on innovation an industries- specifically clusters.

At CES, 330 companies joined 2500 existing companies in debuting 20,000 products. Now, given all the hype generated around the iPad and around CES 2010 in these tough times, how would you attempt to measure innovation's impact on the economy?

The Avalanche of Questions
* Does innovation make a significant dent on the economy (especially if the economy is driven by the Big C- Consumption)?
* Does innovation become more, or less, important during tough times for the economy?
* Does innovation help in economic recovery?
* What kind of innovation is best for economic recovery and well being?
* How do we categorize innovation- diruptive, incremental and something-in-between?

One Method to the Madness
Lets indulge in some rogue behavior and dive in approaches. We can then step back and evaluate value and ease of obtaining data elements of each approach. One approach would be to add up all the revenues of "innovative" products et voila! Given a consumption economy, does it really matter?

* You might argue that the revenue from some complex technique- say the legal mechanism that allows sovereign funds to invest in key infrastructure assets- may not easily be classifiable as an "innovative product" or service. Fine. Make an executive decision- in or out, or even halfway in.
* You might also argue that some of these products may have been manufactured elsewhere- well, then that shows up as trade or investments doesn't it?
* Why are we only looking at revenue? What about the rest of the financial statements of the firm in relation to the product?

Another Method to the Madness
Now, do you believe that the way out of a current economic quagmire is to focus on production of goods and services, and start saving?


How about trying to build an optimization function/ index that tries to minimize Big C (consumption) in the GDP?
 
The Model
Could we start by categorizing innovation with this objective in mind? Yes, it is a different way of thinking, and I am pushing the envelop a little, but I am sure we can come up with some sort of back-of-the-envelope index? It, tongue firmly in cheek, need not even be as rigorous as zero carbon footprint.
 
The Data
What do we really need for a rigorous approach here? Firm financial statments broken down by products? As easy as ABC (pun intended with Activity Based Costing)? Also, mapping these components to their net effect on the elements of the GDP?
 
What do you think?
 
Here's a crazy thought:
Would this sort of granular data help the government make more effective decisions in the interest of the economy?
 
--

Debt and Economies.

From time to time, we get data, and news, on debt, and how it is affecting country economies, corporations and individuals. Sometimes, with so much going on in terms of the impact of debt on corporations and individuals, the value of looking at debt's impact on country economies may not be obvious. Or perhaps, the impact of news from Dubai made you go "Wha?".

While economists may not always (!) be successful in demonstrating the interconnections between country economies, corporations and individuals, through neatly tied in, accurate and precise models, we still have a sense of how these interconnections affect us.

Say, a country's debt troubles affect the medium to long term rates it offers on government debt. If an industrial sector company, say in the infrastructure sector, has limited financing options, this impacts the internal hurdle rate that the CFO would set for the company's internal projects. This, in turn, would impact a division's ability to innovate and price products to its customers, which, in turn, could impact the sector's ability to service its individual consumers. One of the many possible outcomes- you, as a utilities consumer, end up paying exorbitant electricity charges for power served off an outdated grid that wouldn't let you leverage advances in renewable energy within your home.

You may argue that economies are complex systems, and practically every outcome could be termed an "unintended outcome", but that does not mean we throw the baby out with the bathwater. It pays to "watch" the macroeconomic world around us.

Lets look at the impact of debt with country economies on returns on long term government bonds. Here's an article that should make you think:
http://www.economist.com/businessfinance/displaystory.cfm?story_id=15016142

This is a quick review of recent perspectives on debt's impact on country economies to provide background on :
Japan:
1. Deflation:
http://www.economist.com/opinion/displaystory.cfm?story_id=14966237
2. Managing Debt:
http://www.economist.com/businessfinance/displayStory.cfm?story_id=14972943

Dubai:
1. Sovereign debt and risk:
http://www.economist.com/opinion/displaystory.cfm?story_id=15017205
2. Potential lessons from market reaction:
http://www.economist.com/displaystory.cfm?story_id=15016168

Speculation about an EU country default:
http://www.economist.com/businessfinance/economicsfocus/displaystory.cfm?story_id=15016124

Are there any other economies you believe that need a closer look? Economies in Asia or LATAM, perhaps? Why? What could be the potential impact?

What do you think?

Innovation, Sentiment, Economics, and the Market

The thought “one company’s cost savings are another company’s lost revenue” below offers interesting economic insight:
{ On Private Equity: Scott Schoen, THL }
http://randomjunkyramblings.blogspot.com/2009/04/on-private-equity-scott-schoen-thl.html

As I have pointed out in this blog based on Shiller’s and Stiglitz’s articles, “sentiment”/ “perception” and other such “soft” or “behavioral” aspects play an important part in the economic engine of a region: {Financial Transactions, Trust and Keynesian "Animal Spirits"} & {Financial Markets, Economic Crises And Global Co-ordination}
http://randomjunkyramblings.blogspot.com/2009/01/financial-transactions-trust-and.html

Economic contraction would lead to a destruction of value through the destruction of existing market players, structures and relationships, before the economic engine restarts. This may lead to a slower recovery. This can be a good rationale for a central bank investing in an economy to keep it afloat in such a way.

However, once we accept that “sentiment” is a factor in the economic engine; could the effort to maintain existing market players, structures and relationships also impact the incentives for the economic engine to generate lasting recovery?

What do you think?

US Consumer Confidence, Economists' Optimism, and the Economy.

Chatting with a brand manager at a Consumer Goods/ Beverages company recently, I got the sense that the consumer was focused on value and was still buying. So I took another look at the news to put the conversation in perspective:

A. Did someone say "green shoots"?

1> US consumer confidence reports has interesting, and intriguing numbers, this week:
http://www.bloomberg.com/apps/news?pid=20601068&sid=aYRGnAW70og8&refer=home

2> Economists are turning optimistic about the economy as well:
http://news.yahoo.com/s/usnews/20090506/ts_usnews/economistsoptimisticaboutuseconomy

3> Even Roubini has mentioned that we are in the trough phase of the U shaped recession. While he still stands by the possibility of a "perfect storm" in 2010, I am inclined to call this positive news.

B. Are we there yet?
For contrast to the signs of Spring we see above:

1> Dr. Altman recently demonstrated, backed by research, that corporate defaults had hit 8 percent in January.

2> He also pointed out that many creditors are in no position to take companies through a bankruptcy.

3> Additionally, on the consumer front, credit card defaults are still a concern.

Now that we have a contrast between most economists and Doctors Doom and Gloom, what does the impressive rise in consumer confidence mean? 70% of the economy is consumption- so a rise in consumer confidence may, at best, be good news in the short term. So, based on this recent news, we seem to have the right economic tools at work to "salvage" the situation and those tools seem to be having an effect.

However, I still think of this as a zero sum game when it comes to investing (bailout) in pulling the economy from the brink. Here are some thoughts:
1> In 2001, the US government took some steps to "salvage" the situation, that eventually led us to 2008. What are economists suggesting needs to be done to prevent us from ending up in an downward spiral of increasingly severe recessions? Could Roubini's W shaped "perfect storm" really be plain old speculation about "when", not "if", the next storm lands at out doorstep?
2> How will the world pay for this? Could an effect show up in international finance, where some countries pay more for this rebound that others?

While I hope economists continue to huddle to figure out options and tools that will solve some of the problems, these questions give you the context to make decisions that steer you and the enterprise through the storm.

What will you do?

P.S. This note is based on a post on a macroeconomics forum on the morning of 05/31/09.

I later found some interesting articles that provide more structured and well thoughtout arguments. The leader here is Nouriel Roubini:
http://www.forbes.com/2009/05/20/depression-recession-green-shoots-housing-jobs-opinions-columnists-nouriel-roubini.html

Also, Fareed Zakaria's GPS episode, dated 05/31/09, will give you more food for thought, besides the added bonus of seeing Kissinger talk about US options in NE Asia.

Managing a crisis.

A couple of thoughts:

1> Parallel between managing a financial crisis and plain old project management.
As a crisis prevention (management?) measure, would a decision maker pump in money into "the system" to minimize the impact of a crisis as against spending as much money after the crisis has totally hammered the economy?

The context is the current administration's steps in dealing with the crisis as against the government initiating huge construction projects to keep the economy floating through the Depression period.

2> Credit and liquidity characterized as life saving therapy that could kill?
What do you think?