Evolve or disappear

In the economic evolution driven by creative destruction, market dynamics destroys the slow and spares the fast.

Mika Maliranta, research director of ETLA, the Research Institute of the Finnish Economy, emphasises innovation that transcends the borders of various industries as a remedy that speeds up innovation. He is also aware that innovators are not often keen on spreading their best ideas far and wide.

Professional innovator Pekka Koivukunnas sees the narrowness of innovation environments in practice on a daily basis, even though open innovation would have much more to offer.

Broader innovation is nonetheless the direction of the future, given that bioeconomy and the attendant applications to come form an operating environment that transcends the borders of various industries.


Luovan tuhon tie kilpailukykyyn, a book on how creative destruction can form a path to competitiveness by Mika Maliranta, research director of ETLA and professor of the University of Jyväskylä, was published a year ago, in January 2015. The book is based on the concept of creative destruction popularised by the Austrian American economist Joseph Schumpeter.

“Time does fly, doesn’t it. But not that much has changed in the Finnish economy over the past year,” says Maliranta.

In the financial crisis of 2007–2008, Finland’s productivity declined while real wages continued to grow. When productivity and the cost level fail to meet, neither is a country’s competitiveness in good shape. Improvement requires creative destruction.

The structural change of industries that takes place within creative destruction kills off weakly productive companies, while companies with higher productivity thrive. This providesproductivity with the boost it needs, giving the industry’s competitiveness a chance to grow.

Maliranta is nevertheless mindful of the fact that, in addition to the structure of corporations, we should pay attention to their job structures. We often tend to think, within the framework of national economies, that sector-specific growth is the result of the growth of productivity in the sector in question. This conclusion does not quite hit the mark.

“In macroeconomic terms, an industry’s productivity may grow even if the productivity of the companies that represent it does not. Instead, according to the theory of creative destruction, the growth is explained by a stage during which something new is created, this being evident in the churn of businesses. Those with the weakest levels of productivity have died away and been replaced by new operators with higher productivity rates. Therefore, to be able to form a more precise picture, we should also look at corporate and job structures.”

Destruction always precedes the creation of something new

To increase their productivity and efficiency, companies aim to innovate and develop new products and production models. When they succeed in doing so, they grab market shares from their lesser known competitors—meaning that the process of creative destruction often begins with demolition work.

The forest industry in Finland, for instance, has been investing heavily in recent years. At what stage is this sector in within the process of creative destruction?

Maliranta has expected the question and shifts his attention to his laptop.
“The beginning of the millennium was a period of great destruction. A modest upward swing is visible in 2008. At that point, the sector had already started to prepare for the future by revamping its production structures and job restructuring.”

But the turn at this point was not much more than a fragile beginning.
“While we’ve only seen clearly new and increasingly productive business in the woodworking and paper industries during the past few years, the growth seems to be continuing.”

Innovation that spills over industry borders

Given that productivity needs to be increased, companies need a good operating environment. According to Maliranta, this should not be achieved by way of a misguided public aid policy, because the market dynamic that keeps creative destruction in motion will do its job if it is given a chance to do so.

He thinks that the only role the government should play is to support the broad innovation related to the production of technological data.
“Broad, in particular, in which the focus is not on specific sectors, let alone companies. People move from one company and industry to another, converse and innovate. And an innovation that does not benefit one industry can prove to increase productivity in another.”

He also knows that companies are averse to informing their competitors of their next big thing.
“Of course it’s difficult. But in terms of the national economy, it would also be important for companies to innovate past their own focus. This is why public aid should also concentrate on strengthening spillover-type innovation that crosses company and industry boundaries.”

Another role that could be taken on by the government is to provide funding when other funding is not available.
“But the importance of this has declined. Of course you might think that its better if the support comes from the country of origin rather than from abroad. But nowadays funding is not the problem, if the idea is good enough. And if it’s not good and does not really lend itself to commercialisation, why should it be funded in the first place?”

Maliranta is indeed of the opinion that, in terms of importance, the direction of funding trumps cuts in public funding.
“While the startup boom raises hopes, the hype tends to go overboard at times. Even the current government’s key projects with regard to bioeconomy give the appearance of a speed race. ‘Come on, come up with something quick, and we’ll support you.’ And yet high-quality product development and innovation take time. To develop innovation that transcends the borders of various industries, it would make sense to give stronger support to larger companies, because this also creates opportunities for the SME sector. It seldom happens the other way around.”

According to Maliranta, the government’s statements about the possibility to cancel the cuts in education when there is more money are strange.
“It’s anti-Keynesian. If a foreign company is seriously pondering an investment in Finland, it’ll scrap those plans when it hears something like that. It really is the government’s job to support growth when there is a need for fresh starts.”

Systematic ideas

Professional innovator Pekka Koivukunnas (M.Sc. (Eng.)), who works for Elomatic, a company that provides product development services for the industrial sector, among other things, is a self-confessed supporter of open innovation environments that transcend the borders of various industries.
“This will become more common at some point, given that networked cooperation is so superior to companies’ internal product development.”

But that day is not here yet, and Koivukunnas is as aware of the difference between the ideal and the reality as ETLA’s Mika Maliranta.

Not only do companies and individuals protect their own innovations from competitors, they are also susceptible to a very human emotion.

“The biggest challenge has to do with fear. Instead of possibilities, you tend to focus on things that can go wrong. I’ve seen a lot of decisions related to product development that are wrong precisely because of excessive caution.”

Koivukunnas’s handiwork is visible in more than a hundred inventions, and he is also responsible for plenty of innovations in the forest sector. The paper calendering method he developed for his former employer Metso Paper in cooperation with Juha Lipponen, for instance, is an innovation that has been exported overseas by well over a billion euros during its life cycle.

Work, on the other hand, first took Koivukunnas from Metso Paper to entrepreneurship focused on innovation and, in 2013, to Elomatic, which was his biggest customer already at the time he was an entrepreneur.

It’s the customer’s need that counts

Koivukunnas was recognised with the Inventor of the Year award in 2013.

The website of the Finnish Inventors’ National Federation describes the work of Koivukunnas as something that crystallises the qualities of an exceptionally successful inventor: the ability to listen to customers, come up with a solution to the customer’s problem, sell his visionary problem solving abilities and to practice the business of a successful professional innovator.

While Koivukunnas appreciates the recognition, he would rather keep a little distance from Gyro Gearloose-type of activities.

“My goal is consistency and systematics. The starting point for my innovations is always customer need. I make inventions to order.”

While inventors often do a good job according to him, it is not easy to find a buyer for the invention if there is not a problem that requires a solution.

“That’s why I work in close cooperation with my customers. I look at their problems and try to solve them by thinking about how to do things differently, for example, and also by making use of intuition, as hard as that is to define.”

He is not particularly keen on lamenting the short supply of product development funds.

“You can’t hide behind resources. An innovator needs to remain particularly alert when money is scarce, and have the ability to engage in product development with scantier resources.”

Text: Jaakko Liikanen

Photo: Shutterstock

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