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By
Michael A. Blank, Managing Director Senior Advisor, Credit
Suisse Private Advisors, Miami, Florida, USA
The word “innovation” derives from the Latin “novare” which means “to renew” or “to change.” So innovation does not just refer to a pioneering invention. It can also imply a promising further development or improvement of something which exists already. In the first half of the 20th century, the economist J. A. Schumpeter first used the word “innovation” to refer to the process of creative destruction. Indeed, to achieve economic success, companies must not only keep developing new products, but also constantly rethink their business models and adapt their processes to current conditions. This is absolutely decisive in today’s interconnected world. While innovative products are important, they can only offer profit for a limited time, notwithstanding patent protection. It is only a matter of time before they will be copied, developed and, quite possibly, improved further.
For innovation to occur in the first place, the right basic conditions are of vital importance. These conditions also include the interplay between science and economics. Only those who succeed in getting knowledge out of the laboratories and into the market quickly are able to survive in the long term in the face of intense competition. Investors, in particular, play an important part when it comes to providing access to the market for promising developments in research. History shows that innovation has always been an important driver of economic growth and continues to be so. The Asian countries with their rapidly burgeoning economies provide a very good example of this from recent history. They show very clearly what a spirit of innovation can achieve, and that it pays to take entrepreneurial risks in order to foster progress and growth. The most powerful innovations, driving leaps in economic growth and business opportunities, centre on technologies that enable other technologies. A century ago the harnessing of electricity played this role, facilitating development in areas as diverse as automobiles and radio. Nowadays, information and communications technologies go even further.
New field of investment opportunities
The quantum leap forward in information technology over the last two decades has unleashed one of the most important waves of innovation since the advent of electricity. And the momentum is still building, opening up a whole new field of investment opportunities. The recent acceleration of US productivity to record levels is evidence that the current technology cluster is much more powerful than its predecessors (see graph on page 12). Moreover, its impact is magnified by interaction with other large-scale changes, such as urbanization and globalization. Since we are still in the early stages of the information and communication technology (ICT) revolution, there should be far more impact still to come. If so, it bodes well for investors, as it suggests many future years of high-productivity growth. The technology is there, but it will take a new younger generation of entrepreneurs and city leaders to see its application as natural.
Networking and collaborative technologies – and people growing up using them – are shifting economic power toward individuals, enabling the creation of micro markets. They are also enabling companies to reach specific consumers with targeted marketing programmes. This trend is disrupting the Industrial Revolution’s mass market paradigm. Hence, another key theme is the growing power of the consumer, including very poor ones, in a world where ICT makes it so much easier to tailor products to new customer segments, or individual needs. A closely related phenomenon is the ability of microfinance to give tiny loans to multiple millions of low-income borrowers. In both cases, costs are being lowered to reach more people and create new sources of profit, but in the first case, mass markets are made even more “mass” while in the second, firms are finding millions of novel niche markets.
The rise of the PC/Internet generation
Worldwide revenues from mobile Internet services are expected to grow more than fourfold from USD3 billion today to more than USD13 billion in 2011. The impact will be felt in different ways in developed and developing economies but the core effect will be the same – communication and information-connectivity technologies unleash a global wave of individual expression, creativity and economic participation. In developing economies, people are connecting at a pace that may not be fully appreciated in the West. Millions of new subscribers are joining wireless networks each month in India, China and sub-Saharan Africa. Millions – perhaps billions – of people will come “online” and so enter into the global economic value equation over the next ten years, creating a significant market force. This process is already underway in developed markets. As the primary touch point between customers and suppliers, the payment process can be the key to customer/supplier relationship innovation. With low variable costs, e-payment processing is big business. In emerging markets, e-payments are a vital tool in the development of supportive financial infrastructures, where only weak ones existed before. The emerging market cards per capita ratio is only 0.2 (versus 3.3 in the USA, for example), suggesting substantial room for growth.
The move toward a knowledge-based economy, shifting demographic trends and the opening up of global markets are the cornerstones of a changing landscape for education providers. According to UNESCO and the OECD, the number of students in middle-income countries seeking higher education is skyrocketing, with enrolments jumping by 77% over the past decade, compared to 43% in high-income countries. As emerging markets develop, so demand from the service sector for highly educated workers increases, often at a faster rate than the existing education system can absorb. One solution to this shortfall is for companies to build their own education infrastructure, a measure that has been employed in India – one of the first big emerging markets to face this challenge. In fact, India possesses some of the world’s most renowned universities and higher education is not its largest problem. Meanwhile, China’s dynamic and fast-growing economy is emerging as the world’s most challenging and potentially lucrative education market. According to some estimates, the sector could be valued at more than USD70 billion.
The spread of innovation
To return to our starting point, the power of the digital revolution lies not only in the innovations it enables directly, but also in the technology it fosters indirectly. Possibly the most important of these is nanotechnology, which incorporates a vast range of scientific developments built on foundations laid by information technology, such as semiconductor electronic circuits, advanced batteries and power systems and new materials, filters, devices and coatings for a vast array of applications and systems ranging from energy and transportation to health care, consumer goods, processed foods, and so on. For instance, efficient energy storage is a crucial element for the alternative electricity market. On the consumer side, off-grid systems, mobile devices and electric cars are just a few applications which stand to benefit tremendously from new energy storage technology. Of all alternative energy sources, the most groundbreaking changes can be expected in photovoltaic (PV) technology. While, for example, the hydropower market share of global power generation is 16%, wind and solar still account for less than 2% according to the International Energy Agency (IEA). Solar electricity prices are expected to continue falling, and once they become commercially competitive, there is huge expansion potential for the industry.
New distribution, logistics and production mechanisms are needed to sustain 21st century global economic development. Emerging markets are developing without the existing resource-intensive infrastructures that developed markets have. As the world’s average standard of living rises, resource consumption will need to become far more efficient. Transportation of goods needs to be cost-efficient, safe and environmentally friendly. Technical progress makes it possible to increase the speed and efficiency of the flow of goods. For example, maritime transportation will be improved by satellite navigation, enabling faster and larger ships cruising with smaller distances between the vessels. In particular, automation allows better synchronization of processes at docks and depots. This not only saves time, but also expensive storage.
Innovation at the heart of value
Finally, fast-developing economies are all faced with problems created by increased demand for health care and protecting the environment. New nanofilters and membranes able to decontaminate and desalinate water may solve the problem of drinking water scarcity in many regions. Better, faster and cheaper diagnostics, using nanotechnology, able to detect illnesses at a very early stage could prevent many diseases. Improvements in drug delivery should allow patients to take medicines almost without side effects. Innovation has always been integral to capitalism and has always been one of the main sources of high returns for investors. The pool of innovation-driven investment opportunities may be greater now than ever before. At present the market is a stock-picker’s environment, where investors need to assess their choices carefully. But, in the long term, the innovative power of information and communications technologies and other enabling technologies such as financial engineering and nanotechnology will prove beneficial to persistent investors: innovation is a key value driver for shareholders.
The material on these pages represents the opinion of Credit Suisse Private Advisors and is not intended to predict or depict the performance of any asset class, investment sector or commodity. The information provided herein including excerpts, abstracts, and other summary material derived from third parties is believed to be reliable but no such warranty is made. Past performance is no guarantee of future results. These views are as of December 2007 and are subject to change based on subsequent developments.
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