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DEMI: a small policy to encourage disruptive innovation

What should a government do if it wants more disruptive innovation?

Ever since Clayton Christensen popularised the term in the late 1990s, people have been fascinated by disruptive innovation: significant shifts in technologies and business practices that embarrass incumbents and change the competitive landscape in once-stable sectors.

It’s become the holy grail for Silicon Valley venture capitalists, because disrupting a sector is a great way to make a lot of money. It’s also become the subject of considerable critique, as people asked who loses from disruption (workers as well as incumbents?) and whether real disruption is as common as Christensen claimed.

But let’s put aside for a moment the pros and cons of disruptive innovation and ask a more pragmatic question. If you’re a government that has decided it wants more disruptive innovation, what should you do? Let’s also throw in the assumption that we’re looking for something relatively cheap.

Some of the things you’d do are obvious: there are a set of policies that support innovation, and a set of policies that increase competition. So if you’re country isn’t doing these things, that’s the first thing to fix.

A good place to start is a generous, well-administered support for R&D and a strong well-connected public research base to support innovation, and strong regulation of monopolies, effective bankruptcy law, and access to capital (especially risk capital and growth capital) to enable competition. But you probably know this. What else can you do?

Here’s one suggestion

One of the challenges of any kind of radical innovation is that existing systems aren’t designed to take account of it. So for example regulations will sometimes ban an innovation completely (equity crowdfunding in Germany, for example), or in other cases leave it utterly unregulated in a way that puts off customers (for example, any number of health apps). Where public funding is at stake, they may fall between funding streams. Or they may sit awkwardly between different professional organisations or cultures (remember the anaesthetic machine that no hospital would adopt?).

In all these cases, if your goal is to encourage disruptive innovation, the system gets in your way – whether by not being permissive enough, or by being too unstructured (since most innovations depend on a host of social conditions to flourish) – or sometimes both.

The government has an important role to play here, since it sets some of these rules directly (eg through regulation) and can affect others (through moral suasion).

What the government should do is set up a programme – let’s call it the Dynamic Entrepreneurial Market Initiative, DEMI for short – to encourage positive disruption in important areas. Here’s what you’d do:

  • Pick six or so areas where technology has the potential to change important existing industries. Examples could include big data in healthcare, UAVs for delivery and observation, or IOT in insurance. (Hopefully this would be underpinned by a good intelligence function to understand emerging technologies and the country’s research bases and innovation system. If you don’t have that, start here.)
     
  • For each area, appoint a capable minister with some responsibility for the area, and charge them with making the country the best place in the world to do business in that emerging sector.
     
  • To do this, they’d be expected to set up a review, bringing together people from the emerging sector to identify regulatory obstacles, how well existing public support interacts with disruptive firms, and what public benefit might arise from the innovation. This obviously involves judgment – the government will need to differentiation between proposals that legitimately improve market access and those that represent special pleading by the new entrants. But on the other hand, government has to do this every day with regard to established industries and their many lobbyists, so it’s not exactly a new risk.

If DEMI sounds quite abstract, it shouldn’t. The basic principle has already been applied in a few areas in the UK. Matt Hancock and Debbie Wosskow’s Sharing Economy review played an important role in improving UK government policy on the collaborative economy. HM Treasury and increasingly the FCA have made serious efforts to help the growth of the Alternative Finance sector (peer-to-peer lending and crowdfunding).

But I’d question whether it can be simply rolled out an official level: ministerial support matters. For a review like this to work, it needs to have a political patron to give the participants confidence it will be taken seriously.

Looking at this from a UK perspective, DEMI has a couple of other selling points. Firstly, it draws on things the UK believes itself to be good at: the idea that institutions and competition policy are UK strong points is something of an article of faith at HM Treasury and elsewhere in government. DEMI is also an easier political sell than some policies. People on the left and the right may disagree about what the role of the British state in innovation is, but the idea that the state is responsible for regulation and institutions is much less controversial.

So, if (and it’s a genuine “if”) you’re a government that wants to turn up the dial on disruptive innovation, consider DEMI as a policy to make it happen.

Image credit: Doodybutch via Wikipedia, CC SA 4.0

Author

Stian Westlake

Stian Westlake

Stian Westlake

Executive Director of Policy and Research

Stian led Nesta's Policy and Research team. His research interests included the measurement of innovation and its effects on productivity, the role of high-growth businesses in the e...

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