It is intuitive that economic downturns must be bad for innovation. Firms and governments – stretched for resources – must curtail non-core activities like research and development until more prosperous times return. It might surprise some to hear then, that the theoretical and empirical evidence to date on this truism is more mixed. The great economist Joseph Schumpeter (1939) for example described how recessions are vital periods of “creative destruction”, concentrating innovation that is useful for the long-term growth of the economy.
Innovation vs Economic Trends
In a quantitative study, Innosight examined a detailed database of 173 disruptive commercial developments in the United States from 1968 to 2003. Their analysis suggests that the correlation between the number of disruptive developments in any given year (either new impactful companies forming or disruptive commercial offerings launched by incumbents) and the growth of real GDP as a weak 0.17. This implies little relationship between the strength of the underlying US economy at any point in time and impactful innovation. A more recent study by the University of California, Berkeley shows that in terms of innovation, exploitation strategies are more prevalent in economic booms while exploration strategies (that can have larger, longer-term economic benefits) are more prevalent in recessions.
The National Bureau of Economic Research find, however, that venture capital (VC) funding is definitely pro-cyclical. As a result innovations conducted by VC-backed firms in recessions appear to be less highly cited, less original, less general, and less closely linked to breakthroughs in fundamental science.
Can we find any new evidence from the current
pandemic-led economic downturn concerning innovation and what the determinants
of it might be? Huawei has partnered with the management and research
consultancy Arthur D. Little to analyse this very issue, focussing on the
digital economy. If we were to look for it we suspect that digital innovations
will be characterised by the following five stimulants, brought on by the ‘new
normal’. Moreover, these are indicative of an evolution from the digital
economy to what we term the ‘smart economy’. They could therefore be
transformative and have much larger economic repercussions.
- Autonomous through removing or limiting human interaction;
- Augmented to improve the effectiveness and efficiency of human actions;
- Highly agile and rapid in execution, and thus scalable;
- Digitally represented, enabling new insights to be gathered from data analytics;
- Interconnected and compatible, allowing devices to talk to and learn from each other.
It is likely to be too early to make any
definitive measurements on the overall impact these types of innovations are
making on economic activity. However, through our research we have unearthed a
number of interesting disruptions that hint at wholly new ways of doing things.
Some of these are listed below. Many are happening in China.
- In China, Meituan-Dianping and Alibaba’s Ele.me have introduced innovations such as contactless deliveries and prepared meals for home-cooking, improving customers’ choice if they want to cook fresh meals at homes. These ramped-up capabilities have proved a lifeline for numerous small restaurants in China, allowing them to continue operating commercially after lockdowns and social-distancing were imposed. Even Michelin starred restaurants in London shifted rapidly to home delivery coupled with online experiences speaking directly to the chefs. It could be set to stay as a new form of fine-dining.
- These platforms have also expanded into sending books, cosmetics and smartphones with 30 minute delivery times, partnering with the likes of Huawei for electronic consumer products and Sephora – the beauty-products chain – leveraging the network effects of these platforms.
- WeDoctor, again in China, offered introductory free medical consultations over video connection to potential patients earlier in the year. It subsequently increased its subscriber base 36-fold between January and April.
- Beike, a Tencent-backed real-estate agency, introduced virtual reality (VR) capabilities to visit listed properties for viewings by potential buyers. The firm has also experienced explosive growth increasing its viewings 34-fold to 10 million monthly online property viewings.
- Cosmetics company Lin Qingxuan was forced to close 40% of its stores due to Covid-19. The company redeployed its 100+ beauty advisors from its stores to become online influencers. They in turn leveraged digital tools such as WeChat, to engage customers virtually and drive online sales. As a result its revenues in Wuhan achieved 200% growth compared to 2019 sales.
- The pandemic has shocked many sectors. In hospitals for example organisational inertia to change has been greatly reduced, accelerating the integration of complex new systems and technologies.
- The rapid uptake of telehealth and remote care management has subsequently reduced the burden for on-site facilities. Yonsei University Health System opened its newest hospital in Yongin in early 2020 utilising the latest technologies. It aims to improve patient comfort and convenience for medical staff, as well as strengthen information and physical security, introducing:
- Holograms of loved ones for very sick patients in isolation;
- AR-based indoor navigation;
- Facial recognition for authorized medical workers to enter secure areas;
- Voice-controlled patient-room functions (E.g., bed, lights, TV, nurse call);
- Automated electronic medical records updated from IoT monitoring devices.
- Robotic nurses and cleaning devices.
- Etihad Airways and Elenium Automation, a technology provider, are trialing contactless medical screening at Abu Dhabi airport. The technology can monitor the temperature, heart rate and respiratory rate of any person using an airport touchpoint, which includes check-in, immigration, and bag-drop. An early-warning indicator will help to identify people with virus symptoms for medical attention. The technology also helps move passengers through the airport quicker.
Our prescription from our research paper Putting Digital At the Heart of Economic Recovery is for commercial stakeholders to be bold.
It is understandable that businesses may want to cut investment in a crisis and be more conservative in uncertain times. But bold decisions today can offer higher returns tomorrow. Bold businesses wishing to acquire new skills and digital capabilities through M&A will also find they can do so at lower cost in the downturn as valuations are depressed.
But we also believe that companies cannot act in isolation. Governments will also need to play an active supporting role, placing digital at the heart of their national economic recoveries. Our report provides a multi-step plan on how to do this, emphasising the need to push “green” and digital together as well as prioritizing inclusion through digital skills training and awareness programs. In so doing, countries can maximize innovation possibilities and the societal dividends from their economic recoveries.
- Putting Digital At the Heart of Economic Recovery
- The Pandemic, Governance & Technology: Connected & Intelligent