Sixty months after the 2008 recession ended, the economy was still
sputtering, producing disappointing growth and job numbers. Corporations
seemed stuck: Despite low interest rates, they were sitting on massive
piles of cash and failing to invest in new initiatives. In this article,
a leading innovation expert and his HBS colleague explore the reasons
for this sluggishness. The crux of the problem, they say, is that
investments in different types of innovation have different effects on
growth but are all evaluated using the same (flawed) metrics.
Performance-improving innovations, which replace old products with
better models, and efficiency innovations, which lower costs, don't
produce many jobs. (Indeed, efficiency innovations eliminate them.)
Market-creating innovations, which transform products so radically they
create a new class of consumer, do generate jobs for their originators
and for the economy. But the assessment metrics that financial
markets--and companies--use always show efficiency and
performance-improving innovations to be better opportunities. This is
the capitalist's dilemma: Doing the right thing for long-term prosperity
is the wrong thing for investors, according to the tools that guide
investments. Those tools, however, are based on an unexamined
assumption: that capital is scarce, and that performance should be
assessed by how efficiently companies use it. The truth is, capital is
no longer scarce, and our tools need to catch up to that reality.