Peter Cohan answers to the Portuguese Press
15 Nov 2011
On the occasion of his visit to Portugal to participate in the international conference "Coimbra Fostering Innovation", Peter Cohan, a renowned expert and Professor at Babson College, had the opportunity to answer a few questions posed by the Portuguese press. Here's what Peter Cohan thinks about some of today's issues:
1) More than 95% of Portuguese companies can be classified as small and medium sized enterprises (SMEs). In a weak growing economy as Portugal, under bailout like Greece and Ireland, how is it possible to invest and export?
Portugal has a small local market - therefore in order for its SMEs to grow, they must export. Exporting becomes more imperative when the domestic economy is not growing. For example, in the U.S., the economic growth rate is a mere 2.5% but U.S. companies are growing at 18% and are expected to earn record profits in 2011.
The reason the companies are growing so many times faster than the overall economy is that they are exporting to market where demand is growing faster. For example, there are many U.S. brands that are viewed as desirable by newly emerging affluent people in places like India, China, and Brazil. The U.S. companies are growing because they are getting their products to those markets.
Exporting for SMEs does not have to be capital intensive. The SME's CEO must learn about those export markets - and doing that requires the will to invest the time to develop an export strategy. The steps are outlined in my new book, Export Now - it details the 5Cs of exporting. While developing the export strategy requires management time, implementing it can be done with limited capital if the SME can find a good export partner in the country where the SME wants to sell its product.
The hardest part is changing the SME's mind about the benefits of exporting. And given the weak Portuguese economy, the fear of company stagnation could be just the motivation required to start developin an export strategy.
2) Do you agree with the more general characteristics of economic policy within Euro Area? Strong cuts in public expense and high taxes in order to adjust fiscal budgets and postpone growing policies?
I completely disagree. While I don't know enough about the growth drivers in each Eurozone country, there is a very good chance that cutting public spending will mean people have less money - therefore there will be less demand. The lower demand will lead to economic contraction and companies will lay off extra people. This will mean fewer people with incomes and despite the higher tax rates, tax revenue will drop because the amount of taxable income will fall.
The medicine will be worse than the disease.
3) Lowering salaries (cutting them directly, freezing them for years or increasing taxes) is a good way to reach an innovation economy? Are we going towards the Chinese or Vietnamese if we do this?
Lowering salaries is the opposite strategy than the one that innovation economies use. People might look at China and think that its low salaries are somehow making it into an innovation economy. In fact, the low salaries are just leading innovative companies like Apple to manufacture in China because the labor costs are so low.
Having said that, if the companies that get on the first rung of the value-added ladder through low labor costs can invest their profits in hiring top notch engineers and scientists, then they can bootstrap themselves up to the next rung of that ladder. That's what India did when it changed its intellectual propety laws in the 1970s. It stopped protecting that patent rights of multi-national drug companies. Then Indian entrepreneurs started companies that copied the drugs and manufactured them with lower labor costs - creating a multi-billion dollar generic drug industry.
But after about 15 or 20 years, some of the generic drug companies decided to invest their profits in new drugs. They wanted India to change its patent laws to protect their innovations because such patent protection would secure those new drugs a substantial return on investment. When India wanted to join the World Trade Organization, it effectively reverted back to the patent laws it had before the 1970s so it could protect its home grown innovators.
4) According to your experience, most innovations are on processes or products/services? Making something totally new is kind of impossible nowadays?
In my experience, innovation is alive and well around the world. For my new book, Hungry Start-up Strategy, I have interviewed about 100 companies around the world - based in Silicon Valley, Boston, Pittsburgh, London, New York, Coimbra, Israel, India, and Sweden. They've figured out how to turn innovation from universities into entirely new devices and services. And those start-ups are gaining market share because they alleviate customer pain points with irresistably large step-function increases in value.
5) Did you see Steve Jobs as an icon of innovation? Why?
Steve Jobs is an icon of taking others' ideas and making them better. After all, the Macintosh was originally designed by Xerox, there were MP3 players a decade before Apple started selling the iPod just as there were smart phones and tablet PCs before Jobs introduced the iPhone and iPad. But he took existing products and made them better.
6) Lack of innovation can be due to bad working organization? Too many levels of decision stop flows of innovation?
If a CEO really wants innovation, the levels of decision-making will be managed to encourage innovation. Most large organizations don't really want innovation so they blame its failure on too many levels of decision-making. The CEO always gets the organization to do what he or she wants it to.
7) What advices would you give to Portuguese government in terms of innovation?
I developed an index that measures how attractive a country is to private capital providers. This index, I called it the Capital Receptivity Index (CRI), measures how good a job a country does of managing four Entrepreneurial Ecosystem elements - corporate governance, financial markets, human capital, and intellectual property protection. Portugal's CRI is 58 out of a possible 100 - the U.S. is the world's best and it has only 82.
Portugal's government can either try to improve its CRI by working on its weaknesses or it can educate Portuguese executives on the importance of renting the EEs of countries with higher CRIs. One example is India which has a pretty low CRI itself - but its entrepreneurs don't get discouraged - they just rent the EEs of better countries. For example, India's venture capital market is not as robust as the one in the U.S. so Indian entrepreneurs seek out capital from big Silicon Valley names like Sequoia Capital. There's more about this in my book, Capital Rising.
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