5 Ways to Stimulate Innovation and Restructure the Economy

by: Michael Eisenberg

In my previous post, I outlined what I believe to be the almost irreparable state of many 20th century business models. However, all hope is not lost. Here are 5 concrete ideas for stimulating innovation and restructuring the economy for the next century.

1. Focus investments and don't spend to preserve

Each government needs to draw up a priority list during these times of scarcity and decide where it has the best shot at a competitive advantage for the next century in the global economy. Resources are scarce in this day and age so we must focus those resources and investments. The future economy is like a start up. It needs extreme focus to engender success. We also need to be like venture capitalists and kill the ideas that are not working.

How can we focus the resources? We should pour lots of money and offer incentives up and down the stack in that chosen industry from universities to businesses to worker training in order to create a critical mass cluster in those areas. In my own country, Israel, I would argue we need to invest massively in Digital Innovation (broadband), Water, Biotechnology and probably Energy or Agriculture. How can we do this?

Let's take digital innovation as an example. The Israeli government must invest to upgrade the broadband infrastructure with more underwater cables, bandwidth to the home etc. Like Korea, 100 MBPS should be the near term target. This will enable Israelis to work at home for companies across the globe and not be limited to job creation and demand for skills in tiny Israel.

With increased bandwidth, the government should provide micro-loans and tax incentives to people who work independently from home in the digital economy. We should provide tax incentives to these workers since they are saving money on gasoline, road upkeep, traffic accidents, to encourage them to work at home and hire others. We should incentivize profitable IT companies to hire and retrain more of our workers with tax rebates per worker trained. The government should shower university labs with money for post-docs and basic research into innovation that will drive the 21st century economy and to keep our brains in Israel and bring back those that have left. The same can be done in agriculture where Israel is a world leader and has critical mass and in Water where we need to get much better and already have an advantage. This type of investment must be done at all levels in order for it to work and truly drive innovation.

2. Do not be afraid of virtual companies and local production

I alluded to this in #1 above. I have had two experiences with startups that have most, if not all, of their workers working remotely. It has its challenges but is incredibly cost effective and efficient when you learn to manage it.

Think of the time saved not driving to work. That is extra responsiveness and productivity. It forces a great spirit of collaboration and removes a lot of office politics.

A corollary of this is local production. I referred above to agriculture. The 20th century saw a dramatic move to centralized agriculture (read this excellent NYT article). It turns out that industrial agriculture has a lot of unwanted side effects from transportation costs to fuel consumption to abuse of the land. That is a model that can be rethought. In fact it is already happening. CSAs and local farms are gaining steam (for a good summary see my favorite agricultural site www.localharvest.org). These are local businesses run by fellow members of my community who are improving both the health of our diets and the environment as well as creating local jobs and living symbiotically with our natural resources.

3. Invest in retraining

We keep stimulating businesses and preserving jobs at these companies but the companies keep laying off folks and taking more stimulus money. That should tell us something about the shrinking need both for those businesses and the skills of its laborers. Let's rethink how we take care of the workers. In fact, we need to take care of the employees but not necessarily the businesses. Morally and socially, society owes workers respect, decency and a shot at earning a good living. It is not their fault that technology advances and changing economics has eroded their employer's business.

While at a macro level, we cannot provide for everyone, that should be our goal nonetheless. You will notice that even in my example of digital innovation above, there are jobs for technology savvy people and blue collar workers as well. Israel is today reeling from the potential impending closure of a vegetable packing plant and a chicken packing plant. The plants have been losing money. I do not know if it is from poor management or a bad business model. However, they will not be the first or last factories to close as production and packaging seeks cheaper global alternatives.

We need to invest in retraining these people in local agriculture, in laying fiber optic cables and other elements of 21st century economies when Israel will be less competitive in certain areas. We owe it to these workers to take care of them, not by pouring good money after bad to prop up failing factories but in exhilarating them to tackle a new career that they can certainly handle with the government's retraining help. We must invest in worker retraining in the focus areas the governments will lay out. The government, which has never been particularly adept at retraining, can offer tax rebates to successful businesses to retrain many of these workers. I believe it will not cost more than paying people unemployment and the societal costs of thousands of disgruntled former employees.

4. Reexamine business models.

I spoke in my previous post about the anomaly in the music industry of people paying 10X for a concert ticket what they pay for the same number of songs on iTunes. They also pay $1.99 for a ring tone when the song costs a buck. Go figure.

Let's use the music industry as an example of a business that can reexamine its business model. For years the music industry sold songs (it still does, just digitally). Like newsprint, music is IP. It can move in bits and on physical media and today I can get it any way I like and often for free but I am still willing to pay lots of money to go to a concert. Why? The experience.

Here is an idea: Artists and music labels need to start turning music intro a consumable experience rather than a sale of songs. Here is just one idea among many: how about if the labels or artists sold you ten songs by an artist, 3 ringtones, special digital photos of the artist for your screen saver or social network profile, behind the scenes video of the song making (unseen footage!!), priority access to concert tickets (real or virtual) and membership in the artist's fan club for 10 bucks. You could let them post this all to their social networking profiles with a cool badge and label so they get digital reputation for having spent the dough and they market it to their friends. I bet this will be as profitable for the music industry as selling CDs for $10. Media costs are lower, ad costs are lower, there is zero distribution cost and I may not need to pay Apple (NASDAQ:AAPL). Artists will need to reach out to their fans online as part of the fan club but they spend time on that anyway. It will be a good way to identify who and where your fans are so you can plan concerts and marketing properly. Sell the experience. Not the individual IP asset.

The same reexamination can be done in agriculture, water and any other industry. We just need new blood and new brains to think and invest deeply in the stack of innovation.

5. Market your expertise not your time and labor

I hosted a panel the other day at Israel's Internet Association annual conference. At the end of the panel I remarked to everyone in the audience that they needed to build their digital reputation and domain expertise because that will become their job of the future. Next thing I know, the next day the WSJ runs an article on the same topic entitled "Selling Expertise on the Internet for Extra Cash." Here is the well-put money quote

"It was the economy," she says of her move to take her skills online. "LivePerson is way more lucrative than my private practice." Ms. Estes had charged her private clients up to $75 an hour.

As the recession deepens, a small but growing number of people are taking their skills online, doling out expertise or performing specified tasks for a fee. Labor-at-the-keyboard sites are gaining popularity as people increasingly turn to the Web in search of work.

It is not just the layoffs but the structural change in the economy that makes it more lucrative to work from home and sell your expertise rather than your hours. In a knowledge economy, we should pay for knowledge and not time. Everyone is an expert at something and in many cases that expertise has economic value. When you think about the corporate cost equation above and the changing cost models required to compete in the 21st century, independently selling your expertise looks like an exciting model for many workers in the next century. It can be done remotely and globally and is not limited by local market size.

Governments should provide incentives for ongoing education and independent business owners that sell their expertise globally. This is the export economy of the 21st century. It is no longer crates shipped by boat and plane (although that will not go away) but keeping brains at home that will export their knowledge. Governments should stimulate this type of economic creativity. It will have meaningful societal and employment benefits as well.

As we continue thinking about stimulating the economy we need to encourage politicians to think about their children and our children. By increasing deficits and borrowing from tomorrow, we are mortgaging a big part of the future. By propping up failing businesses and business models we are bequeathing our slow adaptation to the 21st century to our children who will really not understand the 20th century that politicians think was built for them. Now is the time to invest for the future. It is a time to lay the roots of innovation rather than watering the decaying trees of the past.

We have arrived at a moment that defines leadership. Leadership requires hard and often unpopular decisions. It will take a remarkable group of political and business leaders who will be willing to stare down political pressure to spend on quick fixes in order to invest in stimulating innovation for the future. Let's hope they do it.