Jeff Bezos once said: “Good intentions don’t work, mechanisms do.” I interpret this line as implicit support for my conviction that chasing the chimera of “culture of innovation” is a distraction, rather than an enabler, of corporate innovation.

Instead, firms should start identifying and implementing specific and actionable corporate policies boosting innovation.

Over the past few years, I’ve been looking for socio-economic factors favoring or obstructing corporate innovation. This post summarizes some of my findings.

I based my search on a theoretical framework created by Gustavo Manso in 2011.

Manso postulated that the optimal incentives motivating employees to innovate must include a combination of tolerance for failures in the short term and reward for success in the long term.

Tolerance for early failures allows the employees to take risks at the initial stages of the innovation process without incurring the negative consequences of failed projects.

The reward for long-term success encourages the employees to explore risky ideas that may allow them to achieve innovation breakthroughs in the more distant future.

Below, I’m listing some factors that I’ve identified in the literature organized into two groups: innovation do’s and innovation don’ts.  

Innovation do’s

• Stricter labor laws, such as 1988 Worker Adjustment and Retraining Notification Act (Acharya et al., 2010), wrongful discharge laws (Acharya et al., 2013), and employments nondiscrimination acts (ENDAs) (Gao and Zang, 2016)
• Legalization of same-sex marriages and medical marijuana (Vakili and Zhang, 2016)
• Diverse workforce and pro-diversity corporate policies (Hewlett et al., 2013 and Mayer et al., 2016)
• Enterprise family ownership (Kammerlander and van Essen, 2017)
• Debtor-friendly (as opposed to creditor-friendly) bankruptcy laws (Acharya and Subramanian, 2009)
• Working with risk-tolerant VC investors (Tian and Wang, 2011)
• Greater use of long-term incentives, such as stock-option grants, to compensate employees involved in innovation activities:
  • CEO level (Francis et al., 2011)
  • Heads of corporate R&D level (Lerner and Wulff, 2006)
  • Non-executive employee level (Chang et al., 2015)
• Better employee treatment, as measured by:
  • KLD Socrates database (Chen et al., 2016 and Mao and Weathers, 2016)
  • MSCI ESG STATS database (Mayer et al., 2016) 

Innovation don’ts

• Abortion restrictions (Vakili and Zhang, 2016)
• Creditor-friendly (as opposed to debtor-friendly) bankruptcy laws (Acharya and Subramanian, 2009)
• Unionization (Bradley et al., 2015) (but see discussion in Doucouliagos, 2017 below)
• Income inequality (Doucouliagos, 2017)
• Initial public offering (IPO) (Bernstein, 2017)
• Noncompete agreements (NCAs) (Johnson et al., 2023)

Admittedly, many of the factors listed above, such as employment or abortion laws, are largely out of corporate control.

Yet, firms might consider local bankruptcy codes when choosing the location of their innovation centers. And startups ought to be aware of the risk-tolerance level of VC investors they choose to work with.

Besides, firms may boost corporate innovation by modifying their termination and compensation policies, something that is entirely under their control. Here, I propose two specific recommendations:

1. Placing employees involved in strategic innovation projects on fixed-term employment contracts (as opposed to employment-at-will). Alternatively, tenure-like positions may be created for the same employees. Whatever the arrangement, the employees should be assured that they have a fixed “window of opportunities”—say, three to five years—to make progress before any administrative decisions regarding their employment will be considered.
2. Making stock option grants the principal incentive for engagement in innovation projects–as opposed to cash bonuses or non-monetary rewards.

A larger point that I’d like to make is that we must finally move from words to corporate deeds when dealing with innovation. Implementing specific corporate policies is a much better way to boost innovation than wasting time on “innovation theater.”

Image credit: Piret Ilver on Unsplash