Policy Innovation Blog

Innovation policy: the battle between Germany and Austria

Stian Westlake - 03.10.2011

Attempts to subjugate Austria to Germany generally turn out badly. There’s a surprising lesson here for politicians who talk about innovation.

From a politician's point of view, there are two aspects to innovation - and they find one much easier to deal with than the other. Let's call these two sides of innovation the "German" and the "Austrian".

Let's start with the "German" side of innovation - named in honour of the German economy and beloved of pundits like Will Hutton. It's a vision of established businesses in easy-to-understand sectors ("making things"!) that drive productivity through largely incremental innovations. Because they're productive, they can afford to spend money in a whole range of things that politicians like: training, corporate social responsibility, high wages. Consensus is high, rules are followed and disruption is low - you get the picture. So do politicians. Even those politicians who don't aspire to Teutonic corporatism have a tendency to lionise German-style businesses in Britain, in particular Rolls Royce plc.

But the "Austrian" model of innovation they find much more challenging. By this, I'm talking not about the economy of Austria, but the creative-destructive theory of innovation sketched out by the Austrian school of economists, in particular Joseph Schumpeter, and popularised in recent years by Clayton Christensen. We know that most productivity increases are driven by productive, often innovative businesses expanding at the expense of their competitors. From a political point of view, the Austrian view of innovation is pretty unpalatable. Disruptive innovators are by definition outsiders and rule-breakers, and often immigrants - three groups that electorates find it hard to love. And the consequences of disruptive innovation are politically toxic: they usually make large numbers of people a bit better off, and small numbers of people much worse off, notably by destroying the businesses they work for. Guess which group is more likely to bend politicians' ears?

This tension has come to the fore as British politicians seek to make the economy grow. You can see it in the government's immigration policy, where its stated goal of capping net migration has met opposition from the UK's start-up and venture community, who see highly skilled foreign workers as a sine qua non of thriving, innovative clusters. You can see it in reactions to BIS's recent announcement of a buddy scheme and ministerial hotline for big businesses - which several commentators saw as an unfair leg-up for incumbents over new entrants. And you can see it in reactions to Ed Miliband's Labour Conference speech, which praised Rolls Royce's Sir John Rose and argued for an economy based on a set of rules, despite the fact that many innovators describe themselves as rule-breakers and trouble-makers.

This isn't just an abstract ideological debate. If politicians ignore aspects of innovation they find challenging, we're likely to see less innovation, and fewer attempts to mitigate the disruptive aspects of innovation. So a request to the UK's politicians: can we see a little more Austria in the debate, alongside all the Germany?