To imitate or innovate? Firm behaviour and economic performance

innovative-manufacturing-headerSuccessful developing countries that have made the transition to advanced country status are relatively few in number. Those that have ‘made it’ in the wake of already rich countries have tended to adopt polices which encourage firms and sectors to ‘catch up’ over a sustained period.

When economies are far from the technological frontier they can achieve more when firms learn to use and adapt already existing technology rather than innovating themselves. Historically this has taken place in countries from the US and Germany to South Korea and Taiwan. One would expect firms to imitate technology more at an earlier stage of development, assuming that there are economies, sectors and firms ahead of them and closer to or at the frontier, while as they approach the frontier, innovation should become more important.

A recent article in the journal Industrial and Corporate Change looks into this process at the firm level. Ching T. Liao explores the differences between those firms that imitate others and those that innovate, and the effect this has on productivity. Continue reading

Promoting sustainability: better left to government?

The UK government definition of sustainability runs as follows: “Sustainable Development is a very simple idea. It is about ensuring a better quality of life for everyone, now and for generations to come.” It may be a simple idea, but how can it be put into practice? Does a ‘better quality of life’ mean more than material gains, valuable though these are. It could mean better health, more ‘freedom’ to pursue one’s aspirations and to ‘self-actualize’, in the words of Abraham Maslow, and to become all that one is capable of becoming. The ‘generations to come’ that also define sustainability are key. All the philosophical ‘good’ that is achieved must be able to be sustained into the future. Certain natural resources must not be depleted in a way that damages the ecosystem and puts at risk further development. The consumption of other resources that it may be less costly to use up should not do similarly. And whose job is it to promote such a course? Should governments lead the way, or is it down to the firm or the individual? I will argue below that the actions of all three can drive the changes needed. Moreover they interact holistically in doing so.

It is the job of a government to govern its people. Whether it takes place democratically or not, government performs a mixture of leading and following, with leaders becoming popular and/or successful when they manage to judge a public mood and then act to implement policy which reflects or anticipates it. Sometimes this might mean public opposition for a while, followed eventually by acceptance that the politician did the ‘right’ thing for the prosperity of some majority. For promoting ‘sustainable’ prosperity, reform to the economy and society should be ‘win-win’ in the long-run, but may involve unpopularity for politicians and pain for citizens in the shorter term.

As mentioned in an earlier entry, in economic terms, unsustainable activity involves market failure due to externalities. These can be ‘internalised’ through taxes or regulation so that individuals, businesses and other organisations pay the ‘correct’ price. The latter should promote greater sustainability. It is the proper job of governments to enforce taxes and regulations. Unfortunately these can slow economic growth if they are set at too high or too stringent a level. Businesses can potentially relocate production abroad to avoid these new costs. This can lead to calls for international taxes and regulation to ‘level the competitive playing field’. On the other hand, a growing awareness of and demand for sustainability among consumers can see them switch to buying from ‘well-behaved’ companies, no matter where they locate, negating the effects of businesses avoiding new costs. Increasingly, it may offer a competitive advantage to be ‘good’ and to be seen to be so. Enter Corporate Social Responsibility (CSR).

CSR, as businesses seen to be going ‘good’, shows that governments can be behind the curve in promoting sustainability. Sometimes it seems to be little more than simply a public relations exercise in which firms dress up what they are already doing as sustainable and ethical. In other cases, it leads to real changes in business practice and in the best of all possible worlds, greater economic efficiency and higher profits go hand in hand with the changes. A firm may cut costs by shrinking its carbon footprint and economising on energy use. I mentioned a theoretical example in which CSR creates competitive advantage in my October entry. So individual firms and industries can potentially lead the way.

Individual consumers can also ‘lead’, or more accurately, stimulate, the promotion of a sustainable society and economy. Quite simply they can buy the products and services they perceive to be sustainable. As citizens, individuals can support political parties and policies that promise to create a more sustainable economy. This then requires a new awareness to be effective. Companies may lie in promoting their products as being green. Politicians can fail to implement promises. So it can sometimes be difficult for individuals to contribute to sustainability. But in demanding socially responsible business practice and government policies, they can certainly help.

I would also argue that the behaviour of the three actors considered above interacts in a holistic fashion. Individuals, as both citizens and consumers, can demand new policies and practices from government and business, and vote and consume accordingly. Businesses can act more sustainably and thereby give governments some idea of what policies may promote both efficiency and the social good for the long term. They can also set new benchmarks for business practices, such that individuals demand such practices in the future. Finally, governments can lead the way and implement new policies which guide the overlapping categories of business, industries, citizens and consumers in new directions of behaviour. A combination of these directions of causality is likely to operate in reality. Clearly everyone can make a difference.