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The three (four?) forms of Innovation – Clayton Christensen

By Clayton S. Christensen “A Capitalists Dilemma” New York Times, Sunday Nov 4th, 2012

According to Professor Christensen, there are three forms of innovation:

  • Empowering Innovations – That transform complex, costly products only available to a few to simpler, cheaper products available to many. (And that use capital to expand capacity and finance receivables and inventory.)
  • Sustaining Innovations – Replace old products with newer, better ones. (Have a neutral effect on economic activity and capital.)
  • Efficiency Innovations – Reduce the cost of making or distributing existing products or services. (Emancipate capital from balance sheets.)

[To which I would add a fourth type of innovation: Disruptive Innovation – Innovations that are impossible to predict, but create entirely new products (e.g. biotechnology drugs, nanotechnology materials, artificial photosynthesis) and even entirely new industries. – sm-]

As long as emowering innovations create more jobs (human capital) than efficiency innovations the economy expands. However when efficiency innovations liberate capital that is used only for more efficiency innovations, employment does not grow. In today’s economy, empowering innovations are not growing at a sustainable rate. This is partly due to the “Doctrine of New Finance”, which measures the revenue and profit of each dollar of capital deployed. Three such measures are:

  • RONA – Return on Net Assets
  • ROCE – Return on Capital Deployed
  • IRR – Internal Rate of Return

The “Capitalists Dilemma” posits that managers are running the economy according to the metrics required when capital is scarce, not now when capital is abundant and it is new skills that are scarce. According to this argument, measuring the efficiency of empowering innovations through RONA, ROCE or IRR is therefore fallacious. Instead we should do the following:

  • Optimize return on education, not return on capital
  • Make capital-gains taxes regressive over time, encouraging long-term investments
  • Provide the wealthiest an incentive to invest for the long-term




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