The innovative entrepreneur

R&D and innovation are sources of growth for society. How should they be managed to encourage entrepreneurship? 

When the CEO or Chairman of a company opens a research and development (R&D) department, there are hopes that it will create the next cash cow and spurt of growth for the firm. Using the best brains, tools and resources, management expects innovative products coming forth from R&D laboratories to take the world by storm.

While some of these outfits may work independently, others may collaborate with universities, third-party research institutions and start-ups to create the next 'big thing'. There may also be resultant published research papers and patent grants for the technology or product. But would this ensure the longevity of the department that is often resource intensive? How can the business owner manage the department internally?  Research is an uncertain process, and the lag between output and input can be long and variable. This makes it difficult to manage research within a commercial organization.

"I am fully convinced that it has never, is not now, and never will pay commercially, to keep an establishment of professional inventors, or of men whose chief business is to invent," according to T.D. Lockwoods, AT&T's head of the patent department in 1885.

"In other words, he said it will never be profitable to have internal research.  Instead, AT&T only needed the capability to evaluate external innovations being offered to them for sale or licensing. So the job of the internal research department was to evaluate outside technology," Tommie Goh Professor Ashish Arora, The Fuqua School of Business, Duke University said in his lecture at Singapore Management University recently. The lecture was entitled ‘Back to the future? The evolving division of innovative labour and the changing locus of innovation in the American Economy’.

So is science useless?

"When you look at patents, they would sometimes cite scientific literature. Research shows that there is no decline in the way patents are citing science or recent science. For firms that are doing less science, their patents continue to cite science. It is not that science has become less useful, but corporations should not manage science. It goes back to Lockwood who did not say inventors are useless but that he should not be managing them."

In the US, companies invest in internal research capabilities to evaluate external technologies for quality control. Professor Arora said due to historical reasons such as the effects of war, anti-trust and the weak university system, businesses looked to internal investments to create products and growth. However, internal research has proven very hard to manage as investors ask about what they are getting for their money.

“It may not be a promising way forward for research in big companies and from centrally-directed investments in general. My research suggests that creating national champions and top down investment plans is not a good way to create successful innovation and research,” Professor Arora told Perspectives@SMU.

“Decentralised, more market-based programs are likely to succeed. While mistakes would be made, they would tend to be small and easily rectified. Big, top down plans are harder to change because often, people’s reputations are at stake and there are vertical decisions that are harder to change and undo.”

Vibrancy breeds innovation

With the creativity of start-ups, government support to foster innovation and competent universities today, he said innovation will help countries such as Singapore grow their wealth. While market sentiments suggest countries follow in the footsteps of the US, build science parks, encourage entrepreneurship in another Silicon Valley, he said it would be very difficult for one country to copy the success of another, particularly the US as it is “special in so many ways”.

“Singaporean companies should look at Japan when Japan reached 80 percent of US per capita GDP, which did not quite go beyond that,” said Professor Arora.

“From what I know, Singapore is quite different from Japan and South Korea. Singaporeans speak English. The country is well integrated in the world market systems. It is cosmopolitan and has its own identity. It is also outward looking and open, which is a massive social strength. While being open creates tensions and problems that need to be managed politically, there is an influx of people. Science thrives at its best when there is movement of people and ideas.

“The one remarkable thing about America is its ability to take what goes on in the universities and put it to the service of societies, such as service and start-ups in general. It is a source of strength that the system is free-wheeling and every university does things differently to create various ways of doing things. However, it would be counterproductive if this process is management centrally through political means or funding.

“Entrepreneurship is by nature disrespectful to authority, which is a central challenge that Singapore has to manage. The institutions that get you from US$3,000 to US$45,000 per capita are different from those that will keep you from growing. How do you keep what is essential about Singapore without destroying what makes entrepreneurs possible?

“Confident people and a system that allows people to become rich through their efforts in transparent ways create entrepreneurs, which is important and is not an issue for Singapore. Productive entrepreneurship happens when there is a level playing field. You want people to believe that if they are smart, work hard and want to thrive, they will have a fair chance of success.”

This is particularly prevalent in family businesses with the third generation in power. Liken to Alfred Marshall’s in Principles of Economics ‘from clogs to clogs in three generations’ analogy, the first generation of a family business has tirelessly created an empire for the second generation to succeed. The second generation has respect for the first generation as they have seen the effort that had gone into their rags-to-riches journey. It has a sense of responsibility towards continuing the business. On the other hand, the third generation, which has been the recipient of the fruit of the labour from their elders, may not be able to handle the wealth and possess the same drive as their forefathers to run the business.

“For family businesses to continue, separate the ownership and management of wealth from each other. The family can portion wealth to the third generation for their wellbeing and hire able people to run the family business based on merit. Create policies for an efficient allocation of wealth and work. Businesses die when valuable resources are not used in an efficient way,” advised Professor Arora.

By allowing fresh ideas from external hires into the business, the company can continue to grow from strength to strength. This helps the company to keep the legacy of its pioneers while embracing the future of the unknown in the name of innovation.

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