Macro minutes: innovation — the Covid silver lining?

 

Macro Matters: innovation – the Covid silver lining?

Stephanie
Hi, and welcome to Macro Matters. My name is Stephanie Kelly and together with my co-host Paul Diggle, this podcast is your one-stop shop for economics, politics, policy and markets. As this is the last show of the year before we take a couple of weeks off for Christmas, we want to end on more of a positive note. It's been a really tough year in markets, and indeed just to be a part of this world. COVID-19 crisis has reinforced trends that were already worrying markets, things like stagnant growth, slowing globalisation. But there has been one silver lining in this kind of giant grey cloud that has been 2020. And that's innovation. Lockdowns and social distancing have forced us all to adapt and innovate. Digital technology has never been more central to the way we work, the way we collaborate and the way we live our lives. So today, we're going to be digging into how COVID has affected the innovation landscape, and what 2021 might hold.

So to do this, I'm delighted to be joined by Felicity Burch CBI, Director of Innovation and Digital for the first part of this show. Our senior economist James McCann will join us later on to discuss the macro implications of innovation and digitalization. But first up, I'm delighted to be joined by Felicity, she leads the CBI, this policy work to create the conditions that enabled businesses to come up with new ideas, invest in research and development, and adopt new technology. So who better to kick us off? Welcome, Felicity.

Felicity
Thanks, Steph. It's really nice to be here.

Stephanie
So I thought we could just kick off with a super basic question, but maybe not an easy answer question, which is just to ask, how do you think “what is innovation”? How do you think about defining innovation? And is innovation always a good thing? In your view?

Felicity
Funnily enough, that's a question I've thought about rather, rather a lot. And when I started working in innovation policy, someone said to me that if you think about science as turning money into ideas, innovation is turning ideas into money. And I really like that as a as a way of thinking about it. But I don't think it necessarily gives you a really clear view of what I mean. And, and for me, I think I tend to break it down into two parts.

So if you want to count something as an innovation, it has to be new. But it doesn't have to be new to the world, it doesn't have to be really exciting with the stuff that's been designed by people in lab coats, it could just be new to your industry, or even new to your business. So I'm thinking for a lot of businesses, video conferencing software has been new, over the last six or seven months or so.

And there's a second part that's really important to make it innovation. And that's that it has to add value. This isn't about doing new things for the just for the sake of it, it has to either make your internal processes work more efficiently, or it has to increase the value of your product to your customer, improve your turnover, improve your margins, doesn't really matter what that value is. But it has to in some way, have a positive impact on your business. So newness and value of the two key things that I think you need to look out there. The question on whether innovation is always a good thing? It's certainly a big question. And it's one that the government's been grappling with, this week, bringing out new ideas on how to tackle things like online harms. And the truth is, every time we have a new technology, it raises new questions about the ways that we use news that technology, you know, innovation in itself is not inherently good or bad. It's sort of what you do with it, that matters.

Stephanie
That's great. I think that's a super, super useful place to start and useful. A couple of, I guess, key levers to think about when we go into this discussion. So obviously, I preface this conversation by saying, but COVID-19 has had lots of negatives for everyone. But clearly, one positive seems to be around innovation. So I wonder if you would give us a sense kind of big picture of what has COVID-19 meant for innovation, and we can kind of be specific about the UK. I know that's your focus, and kind of more broadly, but really happy to go into the details there about what has COVID-19 done for innovation.

Felicity
Yeah, I think it's been really transformative. And actually for one thing, for me is just the extent to which people have been able to see innovation in action and see what it means in their in their daily lives. right at the start of the crisis, I'd actually taken a week's leave at the start of the crisis, and I got pulled in on day two. And because we needed to help companies who were trying to innovate to solve some of the big challenges that we were suddenly faced with. And, and what we saw was companies that suddenly said, Actually, I could produce ventilators, I produce things that look a bit like them, but I need connecting with someone who can give me the designs to do that or we had Others who were, who were saying, Yeah, I can produce hand sanitizer, I normally make whisky, but that's fine. But I really need being put in contact with a company that makes plastic bottles. So I can distribute this. And we just saw this explosion of companies that were stepping up to innovate to help out. And we saw in the university sector as well, and offices and universities and businesses working together to deliver some of these incredible innovations. More recently, you know, looking globally, we have seen how quickly some of the vaccines have been developed for COVID. In the US, in Italy, in the UK, as well, it's super fast speed. And this is, you know, making a profound difference to people's lives, people are starting to get vaccinated now. And so it's been very, very visible and very impactful during the crisis.

Stephanie
Those are some, I think, really useful, and kind of interesting anecdotes that I'd almost forgotten about from back in March, when they were kind of rolling. I think, maybe as if we look to kind of over the last seven months that we've had this, um, maybe more, um, what are the kind of what are the kind of, I guess, common innovations? I guess, I'm thinking here of things like videoconferencing and or the kind of be online, we will work? I mean, to what extent when you interact with businesses, is that genuinely transforming their the way that they work? Or is it like a stopgap for now, when they'll probably go back to something else?

Felicity
Yeah. So I think this is this has been really transformational. And again, you know, when I say we've seen innovation in action, every single person has seen that business that they work for have to change how it operates in some way. You know, normally, I'm used to talking about innovation, and I'm talking about things that seem quite nebulous to people and you know, Stephanie, and I were chatting before this call, and I was talking about companies adopting video conferencing software going on to the cloud, you're like, Oh, yeah, yeah, of course, we've done that. And but the thing is, companies weren't doing that. On the whole, before the crisis, particularly you look at the at the UK, we were we'd like to, say, a decade behind the Danes, when it came to uptake on some very basic technology, things like websites, things like in e-commerce, things like video conferencing software, and cloud. And we’ve just seen this massive increase during the crisis. Different reports will tell you different things, something, say two months of innovation in a story, two years of innovation in two months, some say three years of innovation in three months. I don't think it matters necessarily what the stat is around that. It's massive. And it has really changed how companies are operating. And I don't think we hear from any companies that things are ever going to go back quite the same. And as they as they were, there are big questions now as to how the future of work the future of innovation looks. And what's really interesting, actually, is that all companies are kind of grappling with this at the same time, right?

Stephanie
Totally. And I'm super keen to go into that, that kind of what comes next, but maybe focusing in on those benefits a little bit more. I mean, I'm kind of struck by the way, the incentives shifted in crisis to kind of, you know, economists are always talking about innovation is good, it's important, it can help kind of long term growth, potentially, but it's like the incentive to do that can be, you know, just quite difficult because it can be expensive and time-consuming. So what are kind of, I guess, if you look at the amount of progress that's been made, which I think has, you know, from what you've said, been really quite, quite huge. What are the kind of knock on implications? Are there additional benefits? Aside from just being able to operate as a business? Are there additional benefits that businesses have had from that innovation?

Felicity
Yeah, there's a few. And probably the first one, I would say, and I wouldn't underestimate is how for many businesses, this sort of scale of change that they've had to go through is the first time that they've done this. And so we've just had so many businesses sort of flexing this muscle for the first time. And I've kind of talked about it a bit like Joe Wickes, and maybe some people were starting to do that they're Joe Wickes, workouts at the start of the, at the start of the crisis, it was really, really hard. But if they kept it up for the last seven months, they're probably feeling quite fit now. And they can go on to the next day. The next challenge is start lifting heavier weights, what have you, and kind of the same companies, we find that when a business has started the innovation journey, they find the next step doing something a bit more risky, easier, because they understand sort of what some of the benefits of it are, they can talk about the technology with a bit more confidence that people are a bit more used to change. So there's a potential there for sort of accelerated innovation in the future. those challenges which I'm sure we'll get into in a bit, and but a couple of other positives that I would point to as well. So firstly, around inclusion. And you know, I'm sure we've all seen other people's kids and other people's pets and just people's home life. While we've been while we've been working from home and for many people balancing that sort of home and work life has been easier. And I've heard a lot of our members talk about reduction of regional bias, as well. So it's just easier to hire people from anywhere, or frankly, anywhere in the anywhere in the world. And because it doesn't really matter where people are, if everyone is everyone is virtual, so that opens up all of these potential productivity gains. And I think there are some examples, particularly on an individual basis where people feel more productive as well, they don't have to go on their commute. They're not necessarily always being interrupted by people. So walking in on them all the time. So particularly more introverted people have really, really benefited from working from home. Yeah,

Stephanie
I think that that's, that's really useful. Particularly, I mean, the point you made around just the ability to change means that maybe in the future, you can change it again, which seems really relevant. Actually, last week, our episode was on climate change. And it seems really relevant to that conversation. Because if businesses can adjust so profoundly in such a short space of time, then maybe, you know, there's potential for that kind of change to be applied to other very important kind of long term themes. Maybe then to switch to are there any downsides that have come for businesses dealing with such a hugely different environment? What kind of challenges has that raised for them?

Felicity
Yeah, it's a quite a few challenges, as well, I think the first one I probably point to is that while often we've seen individuals become more productive, employees are really worth it, that teams have become less productive. And the ability to collaborate, online, is much reduced. And so there's a big concern about that, and also a concern about the sort of loss of serendipity. So be it external networking events, or frankly, when you're just chatting to someone on a team that you don't work with day to day, when you're making a cup of tea, there's a there's a kind of big question marks about how do you make coincidence deliberate. And that's, that's a really hard thing to do.

And then the other, which I think employers have become much more aware of during the crisis, but it is a real concern is around mental health. And you know, if people are in the office, all of the time, it's easier to tell if someone on your team is having a bad day, it's much, much harder when you're just chatting to them on sort of in instant messaging, or something like that. You don't necessarily realise if they're, if they're going quiet. And it's hard for managers to have visibility of people's workloads are there, of course, there are tech solutions to that, too. But I think that those are, those are a couple of the challenges from a people perspective, and then maybe a couple of challenges from a from a business perspective as well.

So firstly, there's one that's really risen up the agenda, which is around turning data into decisions. So right, lots of businesses adopting lots of new data driven tech, that's very exciting, that's suddenly getting lots more data about how their business is operating. And they don't know what to do with it. You know, I have so many companies I've spoken to said, I have so much data, I just don't know what to do with it. And they don't necessarily have the analytic skills within the business, the cybersecurity skills, the cloud skills within the business, those are the three areas we're really hearing a lot of concern about. And because every business is looking for people with those skill sets at the moment, there's obviously a sort of salary bump that comes that comes with that. So we are seeing some quite acute and specific skill shortages.

And then the other thing is around cash, and capacity. And let's face it, businesses are dealing with quite a lot of stuff at the moment. And in the UK, we clearly have a big question about what's going to have happened with Brexit. But even if you're looking at other countries, and the COVID crisis has really hit the economy, businesses are dealing with reduced demand increased investment in things like being COVID secure. And it's a really difficult time to sort of prioritise strategic investments.

Stephanie
Right. Right. I think that that point is really important. Obviously, we're getting very excited, and it's nice to have something positive to talk about. But it is obviously against a backdrop that is just quite, quite challenging. Maybe, you know, we focus a lot on the innovation side, but I know there's a there's a degree, I think that we could discuss around research and development specifically. So what are you seeing in terms of the research and development landscape in the UK and kind of in this weird COVID period?

Felicity
Yeah, I mean, there's so much happening on R&D at the moment. And one of the most exciting things has clearly been the development of the Oxford AstraZeneca vaccine, which is just this amazing example of long term university research and business collaboration. But what we've also seen is the government really committing to making the UK a science superpower and a lot of the investment that was committed to in the spending review was for research and development either like direct R&D budget all through research and development solving net zero. So again that link through to climate change that you were talking about earlier. So there's some, there's some quite exciting things happening and some real positives from a government perspective. But it's a very similar picture of the business on R&D as it is for innovation and technology adoption, that there's these capacity constraints and these cash constraints and on balance, we do expect firms to be decreasing their research and development expenditure next year, which, which could potentially have some quite negative long term consequences.

Stephanie
And so maybe, then it's useful to compare this crisis to other crises, we've had recent experience of sort of a financial crisis, for example, how was the innovation changes this time around deferred or been similar to kind of previous crises? Or is every crisis different in the innovation space?

Felicity
I feel like I shouldn't say this on a on an economics podcast, but it's very much this time. It's different. (laughter) Famous last words, I know, well, what we saw in the, in the financial crisis, so take the manufacturing sector, which in the UK accounts for about two thirds of our R&D spend so really important. And actually, they were thinking, how do we learn from the crisis before this, where we let a lot of people go, and then lost a lot of expertise in their sector. And instead, they moved a lot of their people off the factory floor into R&D roles, so they could invest for the future get their businesses sort of more competitive. And that sort of ready to grow when the when the financial crisis ended. And fast forward to the COVID crisis and things are really different. Partly because, you know, if your people aren't working, you don't have to fire them, you can furlough them. And indeed, you don't write them in the you don't want them in the factory if you don't need them there. And so we saw a really, really different and really different sort of landscape there. And so many R&D projects, especially being put on hold. But the flip side is this is this explosion, as I say in innovation adoption, which is really transformative, and could have a massive productivity impact for the UK.

Stephanie
Well, and then maybe that's a place to go to, to start to wrap up, which is around thinking forwards and thinking to 2021, you mentioned a few times that there will be challenges in 2021 for companies. So maybe, I mean, what kind of sense do you have around the opportunities in 2021.

Felicity
For businesses to build but also then the challenges that are likely, there'll be lots of opportunities in 2021. And for me, the big question that's on everyone's lips at the moment, is how do we make hybrid working work, and I think the business figure, figure that out and get that working? Well, we'll be the ones that will really succeed. And particularly once we move past some of the more immediate pandemic pressures, and people aren't having to worry so much about being COVID secure. There's lots of challenges that come with working at home and office, it's not very satisfying, just going to the office and like doing video calls all day, like that's not what people are gonna want to do. So kind of how we transform the office is such a big question how we make that work for the high street, retail, and build back a dynamic economy, some really big questions. And I think the firm's that innovate and stay at the front of that are going to be the ones that succeed.

Stephanie
That's great. Well, I think that's been a really uplifting and positive discussion compared to a lot of the conversations we've had around COVID themes, and a great way to finish off the year. So thank you so much for listening for joining us. And in the next section, we're going to talk to James McCann, about the macro side of innovation.

Stephanie
So now we're joined by James McCann, our senior economist, he's based in the United States. And we're gonna have a chat now about off the back of our conversation with Felicity, which I think was really uplifting, but also really informative about the micro level individual company trends and challenges, to bring that up to the macro and kind of ask questions about what this all means for macro economy, for forecasting, and also for kind of longer term themes around innovation at the country level. So, James, thanks so much for joining us, again,

James
Thank you for having me.

Stephanie
So maybe let’s kick off just by saying, you know, having heard Felicity’s take on that company level innovation during COVID. How does this kind of affect or contribute to the way you've been thinking about innovation from the perspective of kind of the macro economic outlook?

James
Absolutely. Look really, really fascinating insights. And it's something absolutely we've been thinking quite a lot about, particularly earlier on in this crisis about how COVID will affect a number of themes long term, but particularly around innovation and digital innovation. I think what Felicity’s comments really underline is there's no doubt that this has been a big accelerant for the adoption of a range of digital technologies. You know, what's that old saying - necessity is the mother of invention. And I think that's definitely proven the case this this time round. You know, when we did our work, we sort of mindful of this sense that companies will be pressed towards these types of solutions. But equally, I guess, still concerned about some of the other forces which might push back against that. So things through the COVID shock, which might have hurt confidence, things that might have hurt balance sheets, and so made it harder to finance these types of these types of shifts and adoptions of technologies.

You know, we know from the literature, there's a whole bunch of structural forces, which make it harder to innovate or make it harder to adopt existing technologies to be it around, you know, competition, policy and markets be around tax systems, be it around education and skills, the links between universities and companies as well. So you know, I think's really, really encouraging from that is that, you know, absolutely, we've seen this really rapid acceleration of the adoption of digital technologies. I think what was interesting, particularly with the comment around the potential for that almost to become habit forming. So this sense that, you know, innovative companies in themselves, having seen the benefit of that, and taking that step and more likely to take that step in the future, I think that's going to be really, really interesting to, to watch and see if that plays out. Because that would be really, you know, a really important thing from the macroeconomic perspective. Now, we do have to be mindful, I think Felicity did a good job of flagging there sit, there are still barriers there. So yeah, we don't always have a COVID crisis, to force us down these avenues. And we don't want to have that crisis that forces us down these avenues necessarily. So I think that the challenge now for policymakers is probably to build on that momentum. And to try and say, right, how do we create an environment in which, you know, if companies are becoming more innovative, we can foster an encouraging continue to push that innovation? Because that's, you know, macro-economically really critical.

Stephanie
Well, that's I mean, that's precisely what I was going to ask you is, why is it that innovation is so important, from a kind of macro perspective, like, what does it bring, and I'm particularly mindful of this kind of world of low numbers that investors are always talking about, is innovation, something that can help to solve that or start to kind of push growth gradually off?

James
Yeah, I think Felicity did a great job about sort of identifying why companies should innovate and what constitutes innovation, there has to have sort of a tangible output, it has to make a difference. And the way you conflate that, from the economic perspective, is it's really important in driving productivity. And in a drop another quote from Krugman, this time, and productivity isn't everything, but in in the long run, it is almost everything can so you know, this really forms a key building block of potential growth.

So we've, if we were to get companies to continually innovate or to adopt existing innovations more broadly, you know, that could play a key role in trying to trying to revive productivity, which has been a week over the past decade since the financial crisis. So when you add on the fact that we've got a whole bunch of demographic challenges, it just becomes ever more important, you know, on that, on that aspect, and I think it's something Felicity touched on a little bit as well, it's not always that we have to, you know, be pushing forward the technology frontier, even to get these gains and to innovate, we can, we can adopt existing technologies. And, you know, there's a lot of work by the OECD, which sort of flags that we're still making a lot of breakthroughs that the productivity frontier, we're just very slow to adopt them through the rest of the economy.

So I think that stages is going to be really, really critical if we if we want to think about raising potential growth battling against this world of low numbers, I think there are avenues to do that. And I think a lot of them go through taking advantage of a lot of the breakthroughs and existing technologies we've got, and trying to diffuse them through the economy tried to amplify that benefits.

Stephanie
I love that that argument that kind of making the most of what you've already got, it's kind of a more attainable, I guess, source of innovation, rather than, you know, having to be that person in a lab coat and has that eureka moment that actually, you know, economically it sounds like they're just benefits to seeing what's out there and actually utilising it.

James
That's absolutely right. That's absolutely right. I mean, it's, it may be a little bit less sexy in terms of that breakthrough, which is the only the only company that has this and you really push things forward. But, you know, I think the examples of the adoption of all these range of digital solutions, which have meant that businesses can survive through the COVID period or not such a big hit through their productivity as they've pushed all their staff remotely. Right. You know, these are really critical. I think what they've found is once they've started to use them that they have much broader and long lasting effect. So, you know, maybe from time to just the case of needing that spurred to realise that there are solutions here, they're risky to take they cost money to take but you know, they have long term returns, so hopefully business We'll continue to take that step. Yeah,

Stephanie
Yeah, absolutely, I can't help but think about, we're recording this on Zoom, and Zoom existed before, before the crisis, but I have never used it. And most of my friends had never really used it. So and now, you know, I use it for everything, I use it for this, I use it for work, I use it for yoga classes. And you know, it really is kind of one of those things that it already existed, but our ability to use it and our kind of how entrenched it was in the way we live, our lives are so, so different. So I know as well that you are doing a piece of research at the moment, quite a big piece of research, looking at, you know, digital innovation. And I'm wondering, could you give us a sense, I know, it's early days, but could you give us a sense of what you're looking for what you're kind of interested in that research?

James
Yeah. 100%. We're working quite closely with our global equity teams on this. And I think the first question that we want to ask is, you know, if we look back, say 50 years from now, what will this digital innovation stuff look like from a historic perspective? And essentially, the question we want to ask here is, is this going to go on and form a general purpose technology? Will things like artificial intelligence, etc, go on and be pervasive across economies and sectors? Will it go on a mode of continuous improvement, so you continue to get refinements and improvement in that existing technology will in itself, spur its own innovations?

These are all some of the key signposts of general purpose technologies, which go on to have huge effects across economies and markets. The classic examples in the literature of those are obviously electricity and the it revolution as well. So that's the first thing we want to do is to try and ground that and try and think about the characteristics of those technologies like electricity and the IT revolution. And think, will digital technology, will the current wave of digital technologies go on and, and replicate those? Or will they be perhaps less pervasive and less widespread, but still important and impactful across markets? And then the second point, I think we want to really understand is that almost regardless of what that that technological wave looks like, yeah, which of the companies which are best place to benefit? And I guess, here we come from a more investor standpoint, so, you know, what are the characteristics of companies? And can we spot those companies that are most innovative, that have consistent and sustained productivity advantages over their peers, and those that deliver excess returns over a period of time? So really, it's a way of trying to identify, I suppose the companies, which are best placed to lead and benefit from the next waves of technological advancement, particularly around digital technologies?

Stephanie
Why I think that sounds like it'll be super, super interesting, both from the kind of Economic and Policy perspective, but also, crucially, that investment angle of, you know, where the opportunities and maybe where are the risks? You know, are you going to look at companies in terms of risk of falling behind?

James
Absolutely. I mean, there's this sense that, yeah, there will be winners, and there will be losers from this. I mean, also, there's a sense in economic literature, the part of the innovation cycle is a cycle of creative destruction. So, you know, when we see around, you know, again, around the electric revolution around the it revolution, there were companies which gained huge market share through that process, and companies that were competed out because their technology set the way that they were set up and orientated just was no longer no longer viable over the over the long term. So I think we probably, you know, from an investment standpoint, need to be cognizant of both, absolutely. We want to be positioned to take advantage of, of those companies, which best place, but now we want to understand where companies might be vulnerable to. So I think from a micro perspective, it's important. And then, from a macro perspective, important as well, if we are on the verge of a general purpose, technology that raises productivity levels, across sectors, across economies, and now obviously has implications as we discussed earlier for the world of low numbers and the potential equilibrium interest rates. So I think from an investor standpoint, there's a whole bunch of reasons for really, really care about, you know, what that what the long term innovation output looks like. And the shape that that takes?

Stephanie
Yeah, gosh, I think I mean, I think it'll be a fantastic and it sounds like quite a big piece of research, in terms of getting to grips with all of these things, particularly. I mean, as you talk and you talk about this, like creative destruction, I'm always struck by the labour market implications that these kinds of things can have that innovation and digital technology can have. And you know, Felicity talking about this idea that wages for people who work in in kind of digital technology and have the skills that are needed, actually have risen, because there's not enough of those. And so that sense of kind of labour market churn taking place over time is that I mean, I guess there's just so many angles you’ve come at this from.

James
Yeah, absolutely. And automation in particular is an angle that creates a lot of concern. You know, we, we've seen automation, the effects of automation economically and politically, you know, quite often about the effects of the loss of manufacturing jobs and, you know, really becomes this is why the policy environment that accompanies these revolutions just has to be nimble and really has to be well targeted. Because if it is the case that you are seeing certain categories of jobs replaced by these technologies, first of all, you'd hope that the aggregate growth they create will create opportunities in other sectors. But if there's issues in redistributing that, that labour force if there's a stickiness there, and they think the government plays an important role in helping people, you know, making sure people have the skills to transfer as the shape and structure of the economy changes. So, you know, absolutely, that's, that's super critical. And I think we see examples maybe through through parts of automation in the manufacturing sector, where that maybe hasn't been managed quite as well as could have been, and the political ramifications of that has been very real. So yeah, that's I think that's that's such a great point. As you know, these are one of the features that accompany these these types of revolution is I guess, a degree of displacement.

Stephanie
Exactly, exactly. Why? Well, I'm really looking forward to seeing the research and I think it was a great place to finish off the discussion. So once again, thanks to Felicity and thanks to James for joining. In the meantime, as I mentioned at the beginning of the podcast, we're going to take a few weeks off from recording, but we will be back in the new year with a great lineup of new topics and guests. So we hope you'll join us then.

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