How to Measure Innovation

In spite of years of effort, no one has been able to prove that increased spending on innovation activities actually increases innovation.  For example, R&D spending doesn’t correlate with any financial measure of company success.  Neither does the number of patents granted to a company.

But these are all measures of inputs to the innovation process.  What we really need is a way to measure how good a firm is at transforming inputs into innovation outputs: successful new products and services.  And for the first time, we now have such a study.*  Three researchers studied 750 publicly held companies across 17 countries, and their findings were intriguing.  First, they did not find that national cultural characteristics had any impact on innovation.  That contradicts a commonly held belief that some Asian countries are less able to innovate than Western countries (and it’s not only Americans that believe this; many people in China, for example, also believe this).  Instead, the researchers found that innovative companies are similar, no matter what country they are in.  Two innovative companies in different countries were more likely to be similar in corporate culture than two companies in the same country.

Second, the researchers found that although patents don’t correlate with company success, radical innovation increases company success.  The lesson is that the small, incremental patents don’t help that much.  A third finding was that the level of R&D employment was correlated with the number of radical innovations, and thus with enhanced market performance.

Finally, the authors conclude that in innovative companies, management is future-oriented: that means they are willing to trade off investments that maximize profits from a present technology, in exchange for increased investments in the next generation.  This means that management empowers product champions, and encourages experimentation with new ideas by providing time and resources.

*Tellis, G. J., Prabhu, J. C., & Chandy, R. K. (2009). Radical innovation across nations: The preeminence of corporate culture.  Journal of Marketing, 73(1), 3-23.