Forum: Incentives for Entrepreneurial Innovation
Feb. 14, 2008
Hudson Institute
Gustavo Manso, professor of finance at the MIT Sloan School of Management, presented research revealing that innovators are more prone to failure through experimentation, that failure is a logical and necessary step in the road to success, and that government and industry should support the creation of incentives for experimentation.
Too often, entrepreneurial risk is regarded with fear, and failure branded with stigma.
A few noteworthy points:
* Debtor-friendly bankruptcy laws can foster innovation by enabling entrepreneurs who just barely missed the mark to try again. Ironically, Europe has been revising bankruptcy laws to model those more forgiving conventions in the the U.S., while the U.S. is now ratcheting up regs.
* Pay for performance was shown in Manso’s research to actually depress creativity.
* A better incentive to motivate exploration and experimentation: an “Exploration Contract.” By incenting exploration, Manso noted the business ventures got closer to the optimal business strategy than those subjects under pay-for-performance and fixed-wage contracts.
* Back to the lemonstand stand.... A key model used in the study was that time-honored indie business symbol: the lemonade stand. Research subjects who were employed under an exploration contract made remarkably greater strides in scouting locations that would best support a new business.
* Innovation team-building blocks: discussant Robert Baum, associate professor of entrepreneurship at the University of Maryland, noted employee selection is critical and that tools exist for evaluating potential employees. For example, look for prospects who express “situation-specific obsession.” If you’re looking to create the world’s best car seat, look for people already jazzed about that goal. Next comes motivation and retention.
* The subprime mortgage mess is having a negative impact on entrepreneurial activity, since credit-tightening means less money for new pursuits and unproven technologies. Breaking convention costs money.
Inability to borrow money will change attitude and effort. If you can afford only one shot, will you try something really new, or take the safer route?
Forum transcript, Manso’s “Motivating Innovation” study report, and more on http://www.hudson.org
