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Innovation and economic bubbles. How to reap the benefits of Innovation? J.P.CONTZEN Instituto Superior Tcnico Slide 2 Introduction (1) Do the fruits of Innovation become starting points for stable new economies, or do they create transient economic booms, economic bubbles? The end of the 90s and the beginning of this century experienced a serious economic bubble in the ICT field: overinvestment in optical fibers, UTMS licenses disaster, WAP marketing failure The losses were quite extensive. In 2002, of the 180 Billion $ of debt defaulted worldwide, 46% were due from companies in the telecommunications business ( Source Michael Higgins, KPMG ). WorldCom alone accumulated a loss of 73.7 B$ in the last three years. It impacted on the economy as ICTs represent 3 to 5% of the European GDP and 4 to 7% of US GDP Slide 3 Introduction (2) Such bubble should be considered separately from a generalized economic crisis as experienced by Japan in the 1990s with different causes such as poor governance in the banking system and real estate speculation. Slide 4 Introduction (3) How did it happen? Will it extend to other sectors, particularly in the services area, where radical innovation, either technological or organizational, occurs? Let us start with a look at the past in technological innovation. No similar example of a technology bubble can be identified (with perhaps the exception of the Great Eastern of I. Brunel). Innovation in the last 200 years generated large investment waves mostly in infrastructures - railways, telephone networks, air transport - that were durable. Slide 5 Technological and market life cycles (1) The traditional wisdom based on past experience was that investments should follow closely the life cycles of both technologies and markets. Evidence is available about the evolution of such life cycles that are characterized by a S curve leading to a saturation level. Slide 6 Source: Lee, T.H. and Nakicenovic, N. (1998) Technology life-cycles and business decisions, Int. Journal of Technology Management, Vol. 3, No. 4, pp. 411-426. Slide 7 Slide 8 Slide 9 Technological and market life cycles (2) The S-curve can be represented on a semi- logarithmic scale with time in linear dimension as one ordinate and F/1-F in log dimension as the other ordinate, F being the evolving fraction of the saturation level K: F(t) = x(t)/K. In this representation, the S-curve displays a linear pattern. Many examples of such pattern are available (Marchetti, Lee and Nakicenovic at IIaSA, Jose Vargas in Brazil) Slide 10 Source: Lee, T.H. and Nakicenovic, N. (1998) Technology life-cycles and business decisions, Int. Journal of Technology Management, Vol. 3, No. 4, pp. 411-426. Slide 11 Slide 12 Slide 13 Technological and market life cycles (2) Following periods of continuous improvement (Kaizen), re-engineering, quantum leap in innovation lead to a new technology or a new market segment. This results in the creation of consecutive life cycles all shaped as S-curves Such S-curves could be used as tools for recognizing the period where excess capacity and technology saturation might happen and this information should be used for guiding business strategies, notably in terms of investment. Slide 14 Source: Lee, T.H. and Nakicenovic, N. (1998) Technology life-cycles and business decisions, Int. Journal of Technology Management, Vol. 3, No. 4, pp. 411-426. Slide 15 Slide 16 Slide 17 Slide 18 Technological and market life cycles (3) Is this approach still applicable today, notably for forecasting purposes? Some people still stick to the concept of S-curve and of the advent of a saturation level, even in dynamic fields such as ICTs (Nicholas Carr: IT doesnt matter May 2003). Other people raise doubt about its validity: two factors tend to support this doubt, at least for some technological sectors: The saturation level K, in terms of technological innovation and/or market, appears to become a moving target. Examples: the AIRBUS 380 in terms of performance (technological innovation) or low-cost airlines in terms of market accessibility (organizational innovation). Moores law applied to chip performance is still valid after 30 years with no sign of saturation (may be in 2030?) Slide 19 Technological and market life cycles (4) Huge amounts of money floating around in search of a huge profit introduce a new element in the system, leading to investments beyond market needs. This factor led to looking at Geert Noels approach. Slide 20 A new approach (1) A renowned economic expert Geert Noels, Chief Economist at Petercam looked at the attraction exercised by High Tech on financial markets and concluded that such attraction creates economical excesses leading in several cases to subsequent collapse. The recent ICT Bubble constitutes such a case. These booms last, according to him for about 20 years, with rapid collapse, followed by a recovery time of about 10 years. Slide 21 A new approach (2) More recently, financial markets attracted by the so-called High Tech created economical excesses leading in several cases to subsequent collapse. The recent ICT Bubble constitutes such a case. According to a renowned economic expert Geert Noels, Chief Economist at Petercam the booms last for about 20 years, with rapid collapse, followed by a recovery time of about 10 years. Slide 22 A new approach (3) Such booms are more likely to happen in technological areas where substantial infrastructures are required. This assumption should explain why biotechnologies were spared excessive ups and downs in recent years. On the contrary, optical fibers operators, mobile phones companies, telecommunications satellites operators were in trouble. Slide 23 123 Le Cycle typique des surinvestissements Boom/bust et redressement NECESSAIRE DISPONIBLE Capacit Temps Leons des anciennes New Economies - Vainqueurs 3e vague Services - Perdants Pionniers Constructeurs dinfrastructures Prteurs 1. Pionniers 2. Opportunistes 3. Consolidateurs Slide 24 A new approach (4) Noels identifies three phases in the boom/bust and subsequent correction: The Pioneer phase: hundreds of pioneers create a new capacity in services. They find easy financing by investors eager to enter into a new High Tech area. This leads to an infrastructure largely exceeding the demand. The pressure on prices leads to default The Opportunist phase: investors looking for a good buy acquire at low cost the activities of the pioneers. They still arrive too early: even if the users are accustomed to the service, there is still over-capacity. The financial losses continue and further default occurs. The number of actors diminishes Slide 25 A new approach (5) The Consolidation phase: the market is eventually ripe; the capacity has been brought down to a reasonable match with demand. The few actors who remain make finally money. They are the ones who reap the benefits of innovation. The Gospel is right Les premiers seront les derniers Slide 26 A new approach (6) The lessons to be learned: When dealing with innovation that require investments in infrastructures, remain close to the demand Being a pioneer is not necessarily the best situation in financing terms Keep in mind this lesson when the next infrastructural boom will occur in 20 years Slide 27 Questions in guise of conclusion (1) Have tools for decision- making in investing in innovation that were used in the past become obsolete? Probable but not sure Should we rely on a new paradigm based on the poor experience of the troubles encountered in a recent past? Geert Noels has attempted to formulate a recipe for avoiding such troubles. Dont be a pioneer! Slide 28 Questions in guise of conclusion (2) What we have seen happening for ICTs will also occur for other economic sectors in the service area using large infrastructures?: Audacious low-cost airlines (Ryanair vs. Virgin Express)? Railways (Eurotunnel)? The discussion is quite open.