"Innovation in New York" Revisited

In June of 2008 I participated in a panel, “Is New York a Center of Innovation?,” which was jointly sponsored by SUNY’s Levin Institute and the New York Academy of Sciences, and moderated by Levin Institute’s president Garrick Utley.  Since that time, the same two institutions have partnered with the Sloan Foundation and organized Innovate New York - Envisioning an Inventive City , - which has held a series of panel discussions to explore how to foster innovation in such diverse areas as finance, media, services, life sciences, arts and culture.

I joined the Levin Institute as Senior Fellow in the Fall of 2008.  Innovation in large urban regions like New York has been one of my key areas of interest.  This coming June the Levin Institute will revisit our original panel, and to better prepare for the event, I want to reflect on how much progress we have made in the intervening two years in our quest to help make New York one of the premier world centers of innovation in the 21st century.

Few will argue that the still ongoing financial crisis, has been the dominant story for the past two years in New York City, the US and the world.  For many, survival, not innovation, has been paramount in their minds.  In April of 2008, the unemployment rate in New York City was only 4.4%.  By February of 2010, the NYC unemployment rate had climbed to 10.2%, higher than the 9.7% national unemployment rate.  There are now over four hundred thousand unemployed city residents, many of them having lost their jobs as a result of the major layoffs in the financial industry caused by the crisis. 

Two years ago we could not have foreseen JumpStart NYC, one of the major programs at the Levin Institute over the past year.  The key objective of JumpStart, which I have personally been involved in as an instructor and a coach, is to help city residents who lost their jobs on Wall Street and other industries explore new career paths and opportunities in small, entrepreneurial firms in the New York area. 

But, as is often the case, out of great pain comes great opportunity.  Innovation is now even more important to New York.  We need to help create all kinds of new, well paying jobs so the NY area can dig its way out of the crisis.  But, the innovation environment now feels quite different from what it was just a very short two years ago.  Let me discuss some of those key differences.

The Financial Crisis

While the New York area has long been one of the world’s major financial centers, it was also preeminent in a number of other major areas, including health care, law, arts, entertainment, publishing and media.  But then, over the past twenty years, financial services started to dominate the NY economy to an unprecedented degree.  While the numbers employed in the industry grew modestly, their overall compensation went up significantly.  For example, according to NY State Department of Labor statistics: 

“In 2007, [Wall Street] was responsible for almost 30 percent of private sector wages in the City.  Between 2003 and 2007, total wages paid on Wall Street more than doubled, increasing from $35.8 billion to $73.9 billion.  Similarly, average salaries in the industry jumped more than 77 percent over the period to top $400,000 in 2007; the rate of increase in average wage level was more than three times faster than growth in the rest of the City’s private sector economy.  During this period, Wall Street accounted for almost one-half of all private sector wage growth in the City as well as approximately 20 percent of the tax revenue for the state as a whole.”

The concerns expressed in this NY Times article from November of 2006 seem prescient in retrospect:  “The 280,000 workers in the finance industry collect more than half of all the wages paid in Manhattan, although they hold fewer than one of every six jobs in the borough.  The pay gap between them and the 1.5 million other workers in Manhattan continues to widen, causing some economists to worry about the city’s growing dependence on their extraordinary incomes.”

New York became almost like a monoculture financial economy, with all the risks that entails.  It made the region particularly vulnerable to major changes in one dominant industry, as often happens with third world single crop economies, and indeed happened to New York once the financial crisis hit in full force.  But beyond that, as we have seen with a number of countries that have become overly dependent on their petrodollars, the wealth in that dominant industry attracts too many talented people who could otherwise be creating new ideas, jobs and entrepreneurial companies in a variety of other areas throughout the economy.  The huge growth of the financial industry in the New York area ended up stifling innovation in the rest of its economy, essentially soaking up most of the innovation oxygen in the air.

But, what about innovations in the finance industry?  Didn’t all the talent it attracted in the last couple of decades result in major innovations in finance?  This question actually came up during one of my JumpStart seminars, and it led to a very interesting discussion.  In the end, it all depends what you mean by innovation.

The Wikipedia definition states:  “The goal of innovation is positive change, to make someone or something better. . . the change must increase value, customer value, or producer value. . .  Innovation leading to increased productivity is a fundamental source of increasing wealth in an economy”

As we know, many of the best and brightest graduates of science, engineering and management schools joined Wall Street.  A number of them became quants, and were very involved in creating many of the sophisticated but incomprehensible financial instruments that greatly contributed to the global meltdown, which, as we well know, resulted in large financial losses and much pain for institutions and individuals around the world.  It is hard to view such financial instruments as innovations in any meaningful sense of the world.  The name Warren Buffet gave some of those instruments, financial weapons of mass destruction, may more accurately describe them.

There are huge opportunities for real financial services innovation as we continue to build out a truly global digital economy.  Money itself is rapidly becoming digital, which will help bring many valuable and inexpensive financial services to billions in emerging economies who have heretofore not had access to the world's banking systems, as well as to significantly improve the efficiency of the overall financial infrastructure.  This is one of the many areas where you would expect New York to lead, given the talent and expertise available in the region.  Perhaps it will do so now.

The re-emergence of entrepreneurial capitalism

Why does Silicon Valley give birth to innovative new companies like Paypal and Netflix in industries, - financial payments and media and entertainment respectively, - where the New York area has long been the overall leader.  This is a question I have been asking myself for the last few years.

The answer, I think is clear.  Silicon Valley, the MIT-Boston area, Israel, Singapore and other regions around the world have developed highly entrepreneurial economies, continuously looking for innovative ideas and unrecognized problems to solve, so they can create new companies and bring their innovations to market.  Those who successfully do so, both the founders of the companies as well as their VCs and investors who invest in them, are thus able to amass a great deal of wealth.
 
New York used to be such an entrepreneurial city in the decades before World War 2, when so many exciting new companies and whole industries were created - advertising, media, broadcast TV and so on.  But, sometimes around the 1950s, New York lost its entrepreneurial edge and started to become a center of corporate or managed capitalism, a headquarters city more interested in preserving and protecting its leadership positions than in bringing new ideas to market.  This corporate culture, so focused on wealth accumulation for its own sake, led naturally to the financial engineering and casino capitalism of the recent past.  While many individuals were able to amass huge personal fortunes, few companies were created in the process, at least compared to Silicon Valley and other centers of entrepreneurial innovation.

There is general agreement that the 20th century corporation is now going through dramatic changes, driven by a combination of advances in information technologies - especially the Internet - and the heightened competitive pressures brought about by globalization.  Large companies that are able to successfully evolve into well managed, efficient globally integrated enterprises will do very well, both distributing innovative new ideas all over the world as well as tackling the very complex problems that are beyond the ability of small companies to address.  I am personally associated with two such global companies, - IBM which successfully transformed itself over the last couple of decades, and Citigroup which is in the midst of its own transformation.

But, the real innovation action and job creation will increasingly rest with small, new entrepreneurial companies.  It is hard to imagine any region being a global center of innovation without the strong entrepreneurial economy that will attract talented individuals, create lots of new jobs, and keep the region at the innovation edge. 

New York could be very well positioned for this new wave of capitalism that would combine the innovative ideas of entrepreneurial companies with the resources and global reach of large companies.  It has both a large talent base, continuing to attract smart people from all over the world who want to see how good they really are by making it in New York, as well as the necessary wealth needed to start and nurture new companies.  But to do so, New York has to re-discover its dynamic, entrepreneurial, roots.

The growing importance of smart, digital cities

Over the past two years, it seems as if the world has woken up to the growing importance of cities.  Why is that?  The key reason is fairly straightforward.  Our planet is becoming increasingly urbanized. 

In 1900, only about 13 percent of people lived in cities.  A couple of years ago we crossed a threshold, when for the first time ever, the world’s urban population now equals its rural population.  Moreover, from now on, cities will absorb all the population growth expected over the next decades while continuing to draw some of the rural population.  By 2050, cities are project to have around 70 percent of our planet’s population. 

The UN Population Division estimates that “between 2007 and 2050, the world population is expected to increase by 2.5 billion, passing from 6.7 billion to 9.2 billion (United Nations, 2008).  At the same time, the population living in urban areas is projected to gain 3.1 billion, passing from 3.3 billion in 2007 to 6.4 billion in 2050.  Thus, the urban areas of the world are expected to absorb all the population growth expected over the next four decades while at the same time drawing in some of the rural population.”

Something must clearly be done to help cities absorb all those people, and provide them the right infrastructure, jobs, places to live, public safety, education, health care and many other services, all the while being cognizant of the impact that this growing urbanization will have on the sustainability of the region.  This is about as daunting a task as anyone can imagine, but it is also a huge opportunity for innovation on a massive scale. 

Cities are very complex indeed.  Their many different parts, intricate organizations and varieties of interactions make them particularly dynamic and unpredictable.  Up to now, we have focused on the various components of a city pretty much in isolation.  Each is complex enough in its own right even before we start exploring how they interact with each other in the everyday life of a city, or consider the huge populations growths they have to absorb over the coming decades.  

Advances in technology, as well as in the study complex systems are now making it possible to improve our understanding of large urban environments, although we are still in the very early stages.  There is growing interest in applying the new digital technologies and systems thinking emerging all around us to help us better understand and manage the major components of a city.  We must also learn how to analyze, model and optimize the management of the overall city as a holistic system of systems.

This will require lots of innovative ideas, and will likely give rise to many new companies and jobs.  New York, with its large wealth and talent base is well positioned to assume a leading position in this new wave of innovation.  Being a major urban environments itself, it is a natural center in which to study the problems of large cities, as well as being a test-bed for experimenting with exciting new solutions.  Its tradition of welcoming people and ideas from all over the world make New York a natural global center for research and education in urban environments.

These and other major changes in the last two years, while painful in so many ways, could ultimately help improve the climate for innovation in the New York area.  The opportunities are all there, but it will not be easy.  There will be stiff competition from other cities and regions around the world.  It will require close cooperation between the private and public sectors, as well as the involvement of educational and research institutions.  But if we are up to the challenge, we should be able to see New York emerge as one the premier world centers of innovation in the 21st century.