How To Fire Up The Innovation Machine

Financial risk-taking is the fuel that powers the process of change

The 75th Anniversary issue of BusinessWeek is a tribute to the power of innovation. In the years since the magazine was founded in September, 1929, technological and scientific breakthroughs have given us jet travel, antibiotics, computers, high-yield crops, television, space exploration, the Internet, genomics, cell phones, and a host of other advances. Yet innovation remains an enigma. As Asia begins to join the U.S. and Europe in building high-tech, high-growth economies, the search to unlock the secrets of innovation is quickening. Fortunately, we have learned valuable lessons in recent years in how to nurture the ecology of innovation. Here are some of them:

INNOVATION CAN BE TAUGHT. It is not culturally determined. There was a time, not long ago, when the conventional wisdom decreed that "Confucian cultures cannot innovate." They were said to be too hierarchical -- with education being by rote learning. Only Western cultures, especially the U.S. and Europe, were said to be able to create the new.

Yet today, Korea is a leader in digital displays, electronic gaming, and wireless telecom. China produces advanced computer graphics and synthetic-language software. Indeed, innovation is sprouting across Asia as colleges and universities expand and as curriculums are transformed. India is building a cadre of highly trained engineers and programmers from the Indian Institute of Technology. Japan is renewing its commitment to cutting-edge products in nanotech, auto engine technology, and electronics. In short, Asians are discovering that they are not prisoners of their past.

INNOVATION CAN BE MANAGED. Corporations have long been stymied by innovation's elusive nature. Only a fraction of all innovation ultimately pays off. But new research in improving the "hit rate" of innovation is letting corporations choose the right strategies to boost their chances of success. And it's not just high-tech companies that are succeeding. Staid consumer-products giant Procter & Gamble (PG ) and Korean electronics producer Samsung Group have remade themselves by combining their technological strengths in chemicals and electronics with new ethnographic and behavior practices from anthropology and psychology to bring them closer to the needs and wants of their customers.

P&G, Samsung, and others like them put great energy into learning what their customers crave -- and into designing their innovation process to satisfy them. So close are they to their customers that they are beginning to co-create with them. In what is fast becoming an era of ubiquitous invention, low-cost production, and international distribution, success increasingly goes to those companies who focus on creating better things with their customers, not for them.

INNOVATION CAN BE SPURRED. Risk-taking speeds up the pace of innovation. The glorious sight of the private, manned SpaceShipOne rocketing to the edge of space is a testament to the role of private capital in innovation. Financed largely by Microsoft (MSFT ) billionaire Paul Allen, SpaceShipOne is a completely original vehicle for getting people into space -- at a fraction of the shuttle's cost. Virgin Group's Richard Branson is licensing SpaceShipOne's design to take tourists to space by 2008.

Nations around the world are trying to learn the lesson of American financial risk-taking. Innovation generates options on future products and services. Successful innovation requires a well-developed capital market that allows people to invest in these possibilities to see if they are The Next Big Thing. No country beats the U.S. at this -- yet. Its huge venture-capital industry has billions to fund new companies. Its IPO market allows first-round winners to scale up by going public. Its huge stock market has enough depth to spread the risk of new ventures. And its low taxes on capital gains reward people for taking that risk. Ebay (EBAY ), Amazon (AMZN ), Genentech (DNA ), and Google (GOOG ) were all born out of risk-taking.

Continental Europe has traditionally struggled with encouraging and rewarding risk. Despite Europe's incredible record with invention, its ability to finance new companies has been weak. Europe is trying to do better and Asia must as well. There is a strong tradition of entrepreneurialism in Asia. It needs risk-taking finance to take innovation and make it an engine of growth.

At a time of intense division, with deep political and religious fault lines splitting the world, innovation stands out as a powerful integrative force. It ties countries, companies, and consumers together in creating value, solving problems, and generating wealth. An innovation economy demands that society be open, dynamic, educated, international, and risk-taking. Given a chance, innovation can improve all our lives.

    Before it's here, it's on the Bloomberg Terminal.