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Special report 63: Innovation

Innovation is key to improving productivity and efficiency. This report covers the subject with practical and interesting articles.

Defined as the process of introducing new ideas, innovation is very difficult to pin down. This has not stopped Forbes magazine from publishing an annual global top innovators’ list. Forbes produces this by calculating an ‘innovation premium’ – the difference between a company’s market capitalisation and the net present value of cash flows from their existing income streams. This valuation premium to their true value is reckoned to be the best gauge of a company’s ability to create wealth from new products and hence its innovation measure.

We accept those companies at the top of the list as true innovators – Servicenow, Workday, Salesforce, Tesla, Amazon, etc – but in fact the premium that they enjoy may be no more than a vote of confidence in the company’s management and board to be able to successfully exploit their existing income streams. ‘Innovation is hard to define’ admitted Fred Allen, senior editor, leadership at Forbes when issuing the list.

The Balanced Scorecard Institute have however agreed that if innovation is the process of implementation of new or improved products, the results are measureable from the success achieved from that implementation. They measured this by looking at the number of new ideas per 100 employees, the number of those funded and the ROI on the new ideas. This practical approach is likely to come up with a different list as to which companies are the best at innovation.

Many believe that there is a correlation between investment in R&D and innovation. The UK has historically been relatively poor at investing money into R&D against other OECD countries. The UK also scores very low on the list of innovators, which belies the fact that the UK had more than 6,000 patents registered each year, significantly higher than most OECD countries. The imbalance could be that the UK is great at inventing things, but less good at taking them to market. Hopefully new tax efficient investment raised through the Enterprise Investment Scheme and other similar ideas will alter this over time.

One other interesting idea about innovation is raised by Cerulli and Poti (2012)  – they raise the prospect that there is a ‘crowding out’ effect from competitors and government on investing in R&D and innovation. The more that government and large companies invest, the less room there is for smaller ones to innovate.

This is my last report for the Business and Management Faculty – I am moving off to pastures new. Please do look me up on LinkedIn if you would like to keep in touch and contact dipak.vashi@icaew.com or matthew.rideout@icaew.com if you have any comments or thoughts about our output. I wish you all a wonderful Christmas and hope that you enjoy a prosperous New Year.

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Dipak Vashi, Technical Manager, Business and Management Faculty