How do businesses learn?

“How do companies create new products and services?” A new report from the Brookings Institution explores this question and reveals some useful answers for economic developers and city policy makers.

How Firms Learn: Industry Specific Strategies for Urban Economies contrasts the formal processes through which research institutions (e.g. universities, federal laboratories, independent inventors, and young technology firms) develop scientific breakthroughs and transfer these to companies. The formal transfer of technologies takes place through market mechanisms like licenses, mergers and acquisition, and contracts.

Using academic research and other surveys, How Firms Learn argues that firm inventions are more industry specific than most economic studies propose, coming from a range of sources beyond research institutions. Informal sources include other firms, customers, reverse engineering, the hiring of workers with specific knowledge, and partnerships with suppliers. While economic developers are aware of these informal channels, the report argues that these “nonmarket” innovation channels are more important than has generally been acknowledged in policy and practice in American cities.

While the report looks primarily at the manufacturing and software industries, it highlights that unique innovation pathways exist in other industries. The report categorizes industries into four groups based their use of traditional or non-traditional technology generators and formal or informal channels of technology acquisition.  

Based on these four types, the report shares recommendations to help public and private stakeholders understand innovation at the industry level in their communities so that they can facilitate local economic growth. These recommendations, along with real-world examples, make How Firms Learn a useful read for economic developers and policymakers across the Unites States and beyond.

The OECD's painfully slow job recovery

In its most recent annual employment assessment, the Organization for Economic Cooperation and Development (OECD) found that job growth in member states has been “painfully slow” since the 2009 global financial crisis. More than three-quarters of the 35 OECD member states are still experiencing high levels of unemployment. Greece, France, Italy, Portugal, and Spain are faring the worst with continuing unemployment rates in the double digits.

This inability of many countries to rebound is attributed to a “low growth trap” involving low levels of investment, weak productivity gains, little job creation, and stagnating wage rates.

For those countries where unemployment rates are back below five percent (such as the United States, Germany, Japan, and Mexico), the OECD expresses concern over the low quality of jobs and high levels of labour market inequality that are fuelling those gains. In some cases, these unemployment figures may also have decreased as a result of discouraged workers giving up on job searches and declaring themselves disabled or retired. A focus on job quality in particular highlights that a higher percentage of young people in OECD countries are neither employed nor in school compared to pre-crisis levels (in some countries, this number has increased significantly).

To counter these trends, the OECD recommends that countries adopt “high-performance work practices” in order to boost productivity. This includes encouraging job rotations, bonus pay, and flexibility in working hours, many practices that some of the world’s leading private companies are starting to implement. The report also recommends prioritizing getting disadvantaged youth into the workforce through a variety of coordinated services such as healthcare, overcoming skills deficits, and reducing social isolation.

How Toronto is getting main street businesses online

Small businesses can face big challenges when it comes to competing in the digital marketplace. In fact, almost 60% of Canadian businesses don’t have a website at all, and just 13% of Canadian retailers are online (according to 2013 Statistics Canada data).

Potential customers, however, place significant value on the online presence of businesses. A recent CIRA study, for example, found 76% percent of respondents look for product pricing information online. Another study found 80% of respondents would shop more at small businesses if they were easier to find online, with 59% buying from large corporations because they outperform independent businesses on web, mobile, and social platforms.

Recognizing the importance of an online presence for small businesses, the City of Toronto has partnered with the Toronto Association of Business Improvement Areas (an umbrella organization for the city’s 81 Business Improvement Areas) and corporate partners to launch Digital Main Street. The initiative, which seems to be the first of its kind, aims to help main street businesses succeed in the digital world.

Participating businesses go through a Digital Readiness Check to assess their online presence and receive a Digital To-Do List with actions and information to help them improve their digital readiness. Digital Main Street also acts as a platform to connect main street businesses with local vendors, such as retail technology startups. Local technology vendors can sign up to participate in the initiative.

For Business Improvement Area members, Digital Main Street offers a Digital Service Squad that connects main street businesses with George Brown College students and recent graduates who will help businesses meet their digital goals.

Along with Digital Main Street, the BIAcademy offers main street businesses workshops and training through BIAs to build digital skills and the BIA Lab, a retail innovation startup incubator, will support the prototyping, testing and scaling of technologies and services in Toronto’s BIAs.

For economic developers looking to help local businesses succeed online, Digital Main Street provides a template for future initiatives.

Want more entrepreneurs?

Make college cheaper.

It’s a simple idea that was recently investigated in a working paper by Harvard Business School economist Gareth Olds.

According to Olds, fewer American parents take the plunge into entrepreneurship when college tuitions rise. Olds found that a 10% increase in the average price of in-state college tuition corresponds with a 13.9% decrease in the number of parents with college-age children who become self-employed. The effect is strongest for parents with multiple children and holds up even after controlling for factors such as state economic conditions.

At the same time, Millennials (i.e. students and young professionals) are facing significant financial challenges that may be making it more difficult for them to start their own businesses. Based on a Wall Street Journal analysis of Federal Reserve Data, the share of people under 30 who own a business has fallen by 65% since the 1980s and is now at a quarter-century low. As John Lettieri, co­-founder of the Economic Innovation Group, testified in July of this year before the U.S. Senate, "Millennials are on track to be the least entrepreneurial generation in recent history”.

Olds’ research has significant policy implications. Cheaper tuition could give more students access to education, but also it would free more parents to take risks by launching new companies. Ultimately, people are much more willing to take an entrepreneurial risk when they have some sense of financial security and stability.