Short-Term Thinking is a Barrier to Innovation in America’s Private Sector

Over the past few weeks, I've been discussing the innovation problem America faces and its various points of origin, from our education system to government initiatives. Obviously, there are many factors that determine how innovative our nation is overall, but since the private sector is usually where innovative ideas come to fruition and make it to a wider market, it’s worth focusing on in depth. The majority of American workers are employed by private companies, meaning that the wealth of our collective intellect resides in the private sector.

Our markets still have the potential to be as dynamic and forward-looking as any in the world, but there are a number of barriers – both tangible and cultural – that seem to have grown larger over the last few decades. The economy is possibly more competitive than ever, which has given rise to more short-term thinking and less truly groundbreaking innovation – because that kind of innovation takes time and investment even when you can’t necessarily see the upside immediately.

The economy is more competitive than ever which has given rise to short-term thinking and less breakthrough innovation

Phil McKinney

Cooperation Barriers

Innovation can take on many forms. But truly groundbreaking ideas, regardless of their industry, usually have one need in common: the ability to research their possibilities.

Many entrepreneurs have a general background in their ideas, but lack the practical means and expertise to bring them through a research and development phase. That's why cooperation with others, such as universities, is so important. Unfortunately, private companies often run into serious issues when initiating this type of cooperation.

Most importantly, according to a Dartmouth study, intellectual property rights are a contentious issue in most of these types of research joint ventures (RJV):

(Intellectual Property) is often a stumbling block for collaborations because many universities want to publish results prior to IP protection, and sometimes will not grant exclusivity of results.

Conflicting goals in the research too often result in the failure of the relationship, which will falter as the stakeholders seek to push through their objectives. Combine that with the amount of red tape required for a successful RJV, and the private sector's hesitancy to partner with universities becomes evident.

Interestingly, however, the Dartmouth study also concluded that “the longer the expected duration of the research project, the less likely it is that either party will face an insurmountable IP barrier.” This means that when both parties go into a joint venture expecting that the project will happen over a long period, they’re more likely to be able to work through any IP issues that arise. Too often, however, IP barriers prevent projects from even starting.

Short-Term Approach: A Problematic Mentality

One commenter emailed me after the publication of the first post in this series, and brought up many issues he feels plague the U.S. business mentality, preventing real innovation in favor of short-term thinking. This commenter talked about a very promising young analyst he knew who simply needed a stronger technical toolset to rise in the hierarchy – but to get that toolset, he would have to quit his job and get more education on his own dime.

In a previous era, companies like IBM or GE would invest heavily in training high-potential young future stars…Along the way, these companies would also reinforce the types of humane values which, in another era, used to define America's true leadership ethos…

We talk endlessly about ROI, but cannot grasp that the most important investment, the one with the highest ROI, is in our people's ability to think deeply, evaluate ideas, and assess the value of things rather than merely process information or bang out code.

Essentially, due to the highly competitive nature of our economy, especially after the recession, businesses are taking fewer risks on promising young talent that may simply need time, mentorship, and training to reach their full potential. Long-term human development has fallen by the wayside in favor of hiring employees who can simply “get the job done” right now.

Here is what Nobel Prize winner Edmund S. Phelps has to say about the subject:

A return to the productivity growth and broad economic inclusion of the past will require nothing less than a revival of the high dynamism that underpinned that performance…

It is necessary to put an end to the short-term thinking that unduly focuses on hitting quarterly earnings targets instead of aiming for long-range profitability and growth… It is (also) necessary to put an end to infighting in established companies and the shortsightedness of chief executives who know they have only a few years in which to haul in some big bonuses.

Our entire financial system is to blame. Former Twitter CEO Dick Costolo put it this way when he stepped down from the company earlier this year:

You always want to keep focused on the long-term vision, yet when you go public you're on a 90-day cadence and there's a very public voting machine of the stock price that accelerates that short term thinking.

Short-sighted thinking, in other words, with more emphasis on quarterly and annual earnings than long-term innovation and growth, may be the single biggest issue hampering the private sector's role in American innovation. This kind of cultural issue is perhaps more difficult to address than any other aspect of America’s innovation problem, but surely among the most important.

Contact me to share your thoughts on barriers to innovation in the U.S. and how we can lower them.