EMBEDDED in the life of many politicians is a need to boost their prowess in managing the economy, creating future visions of prosperity and advance. But to what extent is this simply puffery and vote buying public relations?
Any politician who claims to be supporting growth through innovation is really only being evangelical; that’s why announcements like the First Minister’s “bold plan to make Scotland a technological global powerhouse” sound so false to many. A business consultant once said to me that if he heard another politician or civil servant describe a new initiative as “bold and exciting” he would strangle them. “Businesses don’t need optimism, it’s their default position”, he said, “they need realism and numeracy”.
Let’s look at the numbers relating to what the Scottish Government’s news service describes as “key actions” to “seize economic opportunities for the future”.
They plan to invest £15 million each year for three years. This is against a gross fixed capital formation in Scotland as a whole of around £8,000 million each year. Any outcomes in the form of additional income generation from the £15 million investment will come as small beer in addition to £127,000 millions of gross value added in the Scottish economy each year; created across 350,000 businesses 99% of which are defined as small – only 170,000 are registered for VAT.
So these key actions are in essence trivial within the larger economy. But that does not mean that they might not catalyse what marketers call a “wildcat” – a strand of business that stuns everyone with its speed of success and rate of cash generation. However, there are a few problems with the economics of that vision.
First, overheads. When governments try to fund innovation they favour larger players, usually operating in partnerships with technical skills centres like universities. These entities are quite different innovators from true entrepreneurs. They have offices, full time PAYE staff and unproductive management procedures, whereas small players often sleep under a second hand desk in their workshop taking little pay. Universities as innovation centres are particularly prone to creaming off more than fifty percent of funding to support their buildings and administration. They also have staff that are not incentivised or culturally attuned to working at any pace. They’re the slowest innovators on the planet.
Second, product focus. When politicians proselytize about technology and innovation, what they are talking about is “stuff” made using innovative technology. It’s no surprise that the First Minister was shown at her economic strategy announcement with a model aeroplane and a factory background for the photo opportunity. However, wild cat successes are not product stories, but marketing stories. Marketing integrates a product with its price, a channel to customers and how it is promoted. It also handles, particularly in today’s technical industries, something called the diffusion of innovation through time, in which your new product becomes old extremely rapidly and marketers have to be highly fleet of foot to adjust pricing and packaging to maximise long term revenues. Marketing is an extremely hard-headed game; part management science, part black art. Wild cats are made by marketeers, not technologists.
Third, knowledge. No-one knows what new innovations will succeed. To choose winners you have to spend and usually lose money; by doing that you learn to choose potentially winning ideas. But only potentially winning; ideas are cheap which is why crowd-funding sites have hundreds of similar proposals. Execution of those ideas commercially demands overcoming risks about technical mistakes and difficulties, followed by commercial uncertainties in the marketing mix above. Again, that requires an attitude of mind to risk and uncertainty that combines optimism, stubbornness and self-belief. It usually also involves losing a lot of sleep and retaining stout control of internal anxieties.
In contrast, anyone who has attempted to use government funding for innovation will know that the state hedges its bets in layers of precaution and professional advice – ideas are vetted by lawyers, accountants and so called specialists all of whom are essentially involved in trying to find reasons to be pessimistic. These professions are culturally opposite to those entrepreneurs who live the dream and suffer sleepless nights.
The chances of a wild cat idea surviving such a vetting process is slim; this is why state supported innovation tends to end up within larger companies as a sub-element of a grander design project. Ms Sturgeon’s announcement yesterday lauded a £2.2 million subsidy to a company with its HQ in Kansas and plants across Europe and Asia. The innovation was in composites technology, but to a company which hardly spends a dollar in Scotland’s supply chain.
Fourth, cash flow. Because innovation creates losses before it creates profits, it eats cash. Cash flow is king for any business trying to grow. The elements above combine to constrain cash flow in addition to existing needs for working capital to fund innovation. The biggest drain on cash flow in any business is the taxing state, through payroll, property and profit margins. Again, state sponsored innovation inevitably favours those with higher free cash flow; the bigger corporates. So, more often than not, tax funded innovation drains small businesses in favour of larger players. In Scotland, where 99 per cent (yes!) of businesses are defined as SME’s, the state, in attempting to boost innovation is using an anti-competitive policy for political gain. The false arithmetic here is that, say, two to three thousand larger companies are assumed to be more likely to generate wild cat earnings than cash flow left in the other 347,000. That would suggest that they are 100,000 times more clever and capable than the eager little guys. Hmmmm.
What should the state do to maximise innovation? Well, the reverse of what it does now; maximise cash flow, bolster optimism and self-belief by letting knowledge grow, encourage market focus rather than product focus and help curtail overhead costs.
How does it do that? By engaging in improvements to the rules that maximise these things rather than imposing itself in the market for funds and products. That means:
These are rules-based initiatives, creating freedom and not attempting to construct specific outcomes. Even announcing these reforms would kick start Scotland’s economy as soon as business chose to believe they were going to happen. Scotland, as always run by managerial socialists that are just about managing to do not very much, must stop trying to construct a future. Let business be free to do that for us.