Conversazioni su Innovazione e Imprenditorialità – Il Prof. Ram Mudambi, esperto di business internazionale dall’Università di Temple, Filadelfia, mette in luce il ruolo dell’innovazione e della conoscenza in Sicilia.

Il Prof. Sebastiano Bavetta, docente di Economia Politica presso l’Università di Palermo, ha ideato la serie Archimede, focalizzata sull’innovazione e l’imprenditorialità. In una di queste sessioni, il Prof. Ram Mudambi, specialista in Business Internazionale e Strategia, ha esplorato il potenziale innovativo della Sicilia. Il dialogo ha messo in evidenza come la regione possa diventare un fulcro di innovazione globale, sfruttando i flussi di conoscenza internazionali e gli investimenti esteri. Di seguito riportiamo la trascrizione integrale della conversazione tenutasi a Palermo il 16 novembre 2023 nell’ambito delle attività collaterali alla prima edizione del Premio Innovazione Sicilia.

Archimede – Ram Mudambi – Palermo, Giardini del Massimo

Sebastiano Bavetta – So let me first introduce ou speaker, Professor Ram Mudambi. Ram is a professor of international business and strategy at Temple University in Philadelphia, a city to which I’m deeply tied, as you know, and where we spent a lot of high quality time in the past. Ram has written more than 100 articles in international outlets, which makes him one of the top 100 academics in his own field. So is a highly prominent academic and we are honored to have him here. I’m personally thrilled and really humble for your acceptance of our invitation. Ram’s scientific production is mainly in innovation, in international business, and the role of multinationals in increasing productivity and creating conditions for economic growth. So he is a perfect fit for the project that jointly with Digitrend we are about to launch. A project about innovation, about entrepreneurship, which aims to create a community. And the community is an important feature of our idea because it is the condition that helps to create the individual  and institutional links that are important for allowing innovation to take place and flourish. Just a few more words before we start our conversation. Part of our plan is to develop courses for students and to allow the students to access education that is not otherwise available within their traditional curriculum. So Innovation Island is an environment where you find information and education that might be useful for developing professional skills. So, I very much hope that this venture may be successful in the interest of our region and especially the interest of the students.

This is the reason why we are here and why Ram is with us: we want to talk about a specific topic that he’s been working on in the past. A topic connected with innovation that starts with a general perspective that focuses on what he calls the [00:07:39]flow of knowledge. [1.0s] The flow of knowledge is essential for innovation. It is a precondition, among many others, of course, for innovation. And the structure that it takes and the understanding of how it moves around the world on a global scale, is helpful for understanding the conditions for innovation and the paths torward innovation that regions may actually undertake. So, I think we might start here, Ram, if you agree with me, with some general considerations which explain to our audience what the flow of knowledge is and the relation that it entertains with innovation.

Ram Mudambi – Thank you, Sebastiano. Thank you for that question because I think it is very good to start with the basic, the very fundamental. I see here on screen the logo of Innovation Island. And I’d like to focus first of all on the distinction between two words in English: innovate and innovation. Innovation, by definition is an act. Innovation is a process. And so when you talk about innovation, it’s not like a yes or no thing, it’s a process. And when you talk about the relation between knowledge and innovation, which is a very fundamental question, I’d rather start not with my reading of it but with how the technology and innovation scholars generally view innovation. They talk about the innovation funnel. [0.5s] The innovation funnel is the idea that the innovation process starts with the broad things and then it moves narrower and narrower till, at the end, it comes to the market.

Ram Mudambi – In order to put the issue of knowledge in context, I’m going to narrow down the picture a little bit. I’m going to focus on what I would call [00:10:05]commercial knowledge. [0.6s] Commercial knowledge is that knowledge basically used in business, knowledge that creates money and value. The innovation funnel starts with commercial knowledge and commercial knowledge is typically created in the realm of what we call [00:10:28]knowledge for knowledge sake. [0.7s] The largest producer of commercial basic knowledge, scientists, tend to be in universities and nonprofits and not necessarily working in a for profit setting. But their’s is knowledge that always percolates, some of that ultimately to scientists working in firms. So scientists work as an interface between universities and firms. Firms get this knowledge and they say: well, of all the ideas that come from university, some are useful for us. So they bring it into the firm and spend money on it. That’s the beginning of the innovation funnel, which is what we call R&D spending. R&D spending produces outputs, one of one of which is knowledge, which for a firm is valuable. And if something is valuable, firms want to protect it. In order to protect it, they need legal protection. That’s called a [00:11:34]patent. [0.0s]

Ram Mudambi – So we have R&D spending, lots of R&D spending. Some of that R&D spending produces patents – the narrower part – some of those patents are used to produce products. So, what the firm is going to bring to market that’s even narrower. And some of those new products will become successful and produce money that recedes back into the R&D budget of the firm. So, take the case of Steve Jobs and Apple. They spent approximately $200 to $240 million of R&D spending. And to produce the first iPhone it eventually took seven years from 1998 to 2005. The first iPhone produced approximately $120 million in revenue. Less in profit, obviously. But, by 2008, three years later, the iPhone had broken even. And of course, today the iPhone, it makes billions of dollars and paid back all of those additional spending that Apple put into R&D. So, let me stop here, because as you can see, that scientific knowledge that universities are creating now is already creating jobs. And some of this knowledge is going to come into the focus.

Sebastiano Bavetta – So, we now have a picture that says how knowledge is produced and how it is used for commercial purposes. So we have restricted our perspective, but the issue we really want to discuss tonight is still further ahead. What am I aiming at is that we have commercial knowledge, but this commercial knowledge doesn’t reside always in the same place: it moves around. And in a global world it looks for either applications or circumstances that might potentiate it. So I think it is important that not only we focus on what you call the funnel of knowledge and on the initial conditions that permit the funnel of knowledge but also on how knowledge chooses where to go and what kind of features emerge, once it has chosen where to go, for the opportunities for innovation and growth in the territories where it goes.

Ram Mudambi – This is a [00:14:14]people question [0.4s] to me. In business you might ask what commodity is in the shortest supply? And many of you might think, as layman: “Oh, money is in the shortest supply”. The thing you really need and you don’t have is money. However, when you talk to senior executives, they think that what is in the shortest supply is [00:14:49]human brains. [0.9s] If you look at the production of knowledge over the last 200 years since the Industrial Revolution, by any measure, what we find is that we see a tremendous acceleration from 1980 or so onwards. It gets faster from the early 1990s, and it’s just going exponentially after the year 2000. And my explanation for this – this acceleration of knowledge production and the shortening cycle of products, the shortening of the rent seeking period over which you can you can create a patent, enjoy a temporary monopoly and get money out of it – is the rising connectivity. In the late 70s we had China beginning to enter into the market economy, all of a sudden beginning the release of a billion new brains. But then we have emerging economies beginning to come in by the end of 19hundred, and the Berlin Wall comes down in 1989 and we release hundreds of millions of new Eastern European brains. Then in the 90s the Asian economies join the global economy. And so we’re getting essentially an innovation process which is no longer limited to the triad, North America, Western Europe and Japan. That has accelerated major profit. Big companies realize that the shortest supply are smart people and therefore we’re going to go look for smart people wherever we can find them. And so you have these big multinational corporations setting up R&D centers in emerging markets throughout Asia, Singapore, Hong Kong, Indonesia, Thailand. Obviously, I would say India because I’m from India, but that all of these innovation centers are joining the global innovation system. Let’s look within companies. Consider the global 500 company, whether it is Philips in the Netherlands, Daimler-Benz in Germany. In fact, just take the German example, take Daimler-Benz. More than about 56% of R&D workers work for a Daimler-Benz work outside of Germany. They’re tapping into the global innovation system. And this is true for every company. And so we’re creating this global innovation highway connectivity around the world and ultimately every country needs to be connected in order for this knowledge flowing along these highways. I don’t know if that answers your question.

Sebastiano Bavetta – It does. Since we’re having this conversation in Palermo, it is important to contextualize it a bit to the circumstances of where we are. If you guys have a look at the figure that is available on the screen, you notice this is the European Innovation Scoreboard. It’s a measure that’s being constructed by the European Commission to assess the level of innovation in Europe. In particular, the figure that is is being shown looks at the regional differences in innovation in Europe. So the different colors pertain not to nations but to regions within each nation. The darker the red, the worse the condition in innovation, the bluer, the better. So this flow of knowledge, which is globalized, is certainly in part responsible for the colors that we observe there. And since Sicily belongs, fortunately, not to the darkest part, but anyway, to the red, is there any way in which the flow of knowledge could be helpful for creating conditions for innovation in Sicily and for an increase in productivity?

Ram Mudambi – Obviously, everybody here knows Sicily far better than I. So, for me to comment on Sicily would be would be too presumptuous. However, what I can talk about are success stories for regions which used to be peripheral, which have become central to the global innovation system. We can talk about the level of countries. We could talk about the level of subnational, subnational, and that that does create an additional level of complexity, as Carlo and I were talking about earlier. And what would sometimes call the layer cake problem within a country. We have success stories in Asia, but they might be too far away because they’ve either culturally different so on. So let’s stay in Europe. Probably the greatest success story in Europe in terms of innovation is Ireland. Ireland is a country of less than 4 million people. I’m not entirely sure how big is Sicily, but Ireland is smaller than Sicily in terms of population. In the early 1980s, Ireland was the second poorest nation in Europe. Today they’re the second richest country in Europe. Ireland had a very clear idea. And their idea was that we have to be connected to the global economy and the global economy is dominated by giant companies and giant companies have subsidiary networks. So we need to have a winning proposition to bring global giant companies to have subsidiaries located in Ireland. This policy was promulgated in 1984 and if you look at the Irish economy, per capita GDP or almost any other metric, you see a degree of distinction. After this policy is implemented, Ireland just takes off.

Ram Mudambi – Now, a lot of people have dismissed this as saying: “oh, it’s just taxes”. The Irish have reduced taxes to 10% while the European tax rate is about 38%. But that’s only part of the story. Because taxes are simply cost of doing business. The Irish began by becoming part of the personal computer production system, they began manufacturing. By the late 80s, literally five, eight years later, they were out competed by all the Asian locations in terms of cost of production. All PC production left Ireland and went to Asia. Did the Irish economy collapse? The answer is no, it did not collapse. What happened was that, by the time this happened, six, eight, ten years had passed. The multinational subsidiaries had become embedded in the Irish infrastructure. And they moved manufacturing out of Ireland, but they moved up the value chain, they started producing knowledge, becoming more R&D intensive. Today, Ireland is a knowledge economy. They have no manufacturing at all. They don’t produce anything. It’s all knowledge, all R&D, right? So they become part of the knowledge economy. So the point is that once you have these things in place, ecosystems begin to develop. They start putting roots down. You might lose certain activities, but you don’t, so long as you have an environment which is highly and always productive. I think Sicily has that. You have the University of Palermo, you have very good universities all through Sicily. You’re producing young people who are knowledge intensive. The capabilities are there. I mean, maybe some language skills might be necessary to be able to speak English which is the language of global business and so on. But these are small things that can be addressed.

Carlo Amenta – I would like to go back to the problem of brains. Unfortunately, I start to think more and more about brain and age because I’m no longer young. As you know, there is a well known distinction between the [00:23:57]fluid intelligence [0.3s] that is closely connected to innovation and that usually decreases with age, and the [00:24:06]crystallized intelligence, [1.0s] which is the one that Sebastiano and I share as we are growing older. My question is, what do you think is the impact of an aging society on the flow of knowledge, as Italy is, I think, the second oldest country in the world after Japan. Also, I think that this problem is connected with migration, with the need to have younger people from other places because they can perform better in a lot of different things. There is a very famous book by Carlo Maria Cipolla, a distinguished economic historian, in which he says that when people aged 15 to 24 start to go abroad, then regional decline starts. So what is the impact of an aging society on the flow of knowledge and on innovation?

Ram Mudambi – Thank you very much, Carlo. That’s that’s an excellent point and obviously a formidable one without an easy answer. All of Europe is aging and that may be part of the whole scenario issue within Europe. Nobody has a perfect answer. There are two parts to addressing the issue. One of what I think is [00:25:36]leverage [0.0s] and the other dimension is [00:25:38]migration. [0.0s] Leverage is the idea that ultimately you have fewer young people, but you only need very few, you just need to tap the best and they have incredible leverage, right? Ultimately, 1 or 2 or 3 successful entrepreneurs can create 10,000 jobs, 40,000 jobs, 50,000 jobs. So you don’t need lots of people, you just need to have a fertile environment. Pietro Navarra and I have a paper, “A Tale of Soil and Seeds” (Small Business Economics, 2016). So you need the seeds, but you also need soil,  fertile soil. If you throw seeds on an institutional environment which is not welcoming, they just will die, nothing will grow. So, you need a fertile environment. And if you don’t have seeds, then a fertile environment is just manure. It doesn’t smell good. So, you need both.

Ram Mudambi – If you have a fertile environment and if you have young people, you’re getting the process going. The ecosystem is functioning, then it becomes something self-sustaining. And it becomes attractive because then people want to come. Right. They want to come from other parts of Europe. Now there is, I think, migration. One big issue with making migration successful is assimilation into the local ecosystem. And if assimilation is difficult, people who have a difficult time assimilating have a more difficult time at becoming successful are going, even if they have great human capital. So you need to think about it in a sort of targeted fashion, who are the people that are most likely to assimilate well into our ecosystem, if we give them a good environment. Maybe people from Spain, maybe people from Latin America, who are closer to us culturally and are therefore likely to be attracted, if we have a good environment, get going. Then these people say: “I want to go to Catania because there are exciting things going on there”. And again, we mentioned this earlier, the snowball. Once the snowball gets rolling, it develops momentum and becomes unstoppable. You then get the process going.

Sebastiano Bavetta – There is an issue that I think we shouldn’t miss and we probably would be useful to go back to. You said a few minutes earlier that your knowledge of the Italian circumstances is not as good, perhaps as many others. Nonetheless, you have published a research, a very interesting research with some Italian coauthors on the circumstances of our country and how knowledge flows in and out of our country and how this flow of knowledge is connected with the global environment where knowledge is produced. I have a figure, it is behind you, I’m sure you recognize it because it is taken from one of your papers, on which you perhaps might want to dwell and explain a bit what is the meaning of the blue and yellow/orange circles, and in what sense these circles explain how knowledge flows and how it affects innovation.

Ram Mudambi – So yes, I do in fact know that map very well and my colleague, my coauthor, Alba Marino, was instrumental in producing that data, that map. Essentially what we share there is that the blue dots are what would be called the [00:29:31]reaching in [0.0s] process. This is knowledge that is created and owned by non Italian companies using Italian inventors, reaching in. Foreign companies, reaching into the Italian knowledge system, using Italian inventors to create knowledge. The orange or yellow circles are basically Italian companies utilizing Italian knowledge and foreign knowledge in order to leveraging the Italian knowledge ecosystem. So, in other words, Italian companies leveraging the Italian brains along with the global knowledge system to create new knowledge, foreign companies leveraging Italian brains to create new knowledge, leveraging it with their global knowledge bases.

Ram Mudambi – What we show is that Italy, between 1975 and at this century, over 40 years, has becoming more connected to the global innovation system. But almost all of it, vast majority of it, is actually driven by foreign companies, not Italian companies. More to your point, look at the more recent process, 1995 to 2014. We can see that foreign companies reaching in to the Italian knowledge hotspot is getting deeper and wider. Right there, there are more and more blue circles, but the blue circles are all over Italy, north, middle and south, whereas the orange circles are mainly concentrated in the north. Italian companies are remaining constrained within the Northern Industrial District’s, the traditional industrial districts, whereas foreign companies are much more capable, have leverage on italian brands in the south far more. So this means basically that it’s not that in the south there are not smart people at the top. There is a lot of smart knowledge. They’re not afraid to sell. Foreign company are seeing that. That’s why we see all those. In spite of your picture of Sicily, we have a lot of blue dots in Sicily. Foreign companies using Sicilians for creating dollars. So the potential is there. This is my point. And foreign companies are seeing that. I don’t want to criticize Italian companies, but certainly all I want to use this map to say is that the potential is there.

Carlo Amenta – One last question from here. I think that the audience would be interested in asking something.

Ram Mudambi – One last question, and that is to both of you, actually. You are in Sicily. Does it matter to you if a company were to come in and say, we’re going to hire 200 engineers to create a new R&D center in Palermo? Do you care if it’s an Italian company or a German company or an American company? Does it bother you? I don’t care if they’re Italian or foreign, as long as they’re going to create jobs and create wealth.

Carlo Amenta – One last question, connected to this aspect of reaching out. So sometimes it’s easier when you are a multinational, you can come and tap into the pool of talent. But sometimes you cannot grow very much when you are based in Italy. Maybe – and here is the question that I’m asking you – maybe because we have something that, especially in the South, – in the paper, there is a very interesting distinction between periphery and core of the center, for sure Sicily and the South in general is periphery in the Italian economy. So I think that maybe, if we go back to the institutional quality of the territories and what is connected to the cultural factor, to social capital – that we have talked about in the afternoon discussing about migration, so we know that from Banfield’s amoral families to the studies of Guiso, Tabellini and Zingales who document less social capital in the south – do you think that the relationship between social capital, institutional quality, is something that can affect the probability that Italian company are less supportive in some sense, they are less capable of going out and reaching out toward the world because they are less, let’s say, secure, they have something that they miss behind their back.

Ram Mudambi – I mean, that’s certainly possible. We have not looked at the why question. So it’s a very hard question that you’re posing to me, why some companies reach out more than others? I think that to some extent it has to do with [00:35:06]mindset. [0.0s] We did some other work on Silicon Valley where we looked at early stage software companies, which had become fairly big and later stage companies. And we found that early stage companies tended to do very little global knowledge, forcing even companies like Facebook and Autodesk and I think a few others that we looked at, which were multibillion dollar companies at the time, they were not active. At the time, in 2015, they had no R&D centers outside the U.S.. Subsequently this has changed, they have moved on. But  there are definitely a mindset: there’s nothing out there for us to to tap into. That can often be an issue. And the overall international mindset of companies is fairly important. If you look at the European picture, and I don’t want to take too much time, the countries that have the most number of very successful multinational companies tend to be countries that have very small home markets. So you think of the three European countries that have the most number of very successful big multinational companies, and they are the Netherlands, Switzerland and Sweden. All of these countries have less than 10 million population. And so Nestlé and Volvo and Philips, you could think of one giant company, albeit this tiny country, because they have to be international right from the go because the local markets were small. For many Italian companies. I mean, it is is not that big, but it’s big enough. Take Brazil. All my Brazilian colleagues tell me that Brazilian companies have really a problem because Brazilian market is so big. The Brazilian companies don’t feel a need to go abroad. Nobody speaks Portuguese except Portugal. And we can sell lots of stuff in Brazil. So it’s just too complicated for us to go anywhere else.

Sebastiano Bavetta – You guys probably do not know that Ram is not only a very successful economist, he’s also a very successful novelist. He wrote novels and you can find them on Amazon. Some of them are very entertaining, and I would recommend you to read them and are written in very beautiful English prose. We are here in the Teatro Massimo of Palermo, a place where performing arts have reached the highest level in this region. And performing arts presuppose a lot of creativity. Which is not, of course, commercial knowledge, but it is certainly connected to knowledge. So just to conclude our conversation in a light tone. What is the relationship between creativity and innovation, how important is creativity for innovation? In what way can we, as university professors, stimulate creativity on our students and allow them to make use of it in their careers and produce maybe new unicorns.

Ram Mudambi – Thank you very much and thank you for bringing up about my novel writing, which is my passion very close to my heart. My novels are all in English, unfortunately, but I haven’t yet found a Italian translator, so I’m very happy to talk to anybody who was so interested. Let me take a slight issue with with what you mentioned. There is an entire branch of scholarly endeavor, as you probably know, focusing on the economics of the arts. There is a lot of commercial art. Movies are an obvious example. J.K. Rowling is an example, obviously, of somebody who made billions of dollars writing novels. So clearly creativity and J.K. Rowling has always said in every interview that she only wrote to make money. She was not writing for art. There’s no question of writing art. I was starving and I wanted to make money. I was writing novels to make money. And she has been very successful, billions of dollars doing that. So Steven Spielberg creates art, but he creates money. So there is definitely a very similar funnel in the creative art situation. Right. I mean, Riccardo Muti makes a lot of money. All the great soprano who sing in this theater I’m sure, also make a lot of money. So there is definitely money to be made. And there is a very big commercial aspect to art. We all know that every renaissance painter, they were doing what they were doing also for the money. So the creativity definitely evoked a lot of money.

Ram Mudambi – I think this is very similar to science. There is science for science sake, for people who are studying quasars or pulsars or whatever, the distant galaxies or atoms or whatever, or biology and so on, where they just are curious, interested in the science and not interested in making money. The same thing is true in art, right? There are some people, like in the movies in Hollywood, they are only interested in the money. Right. Okay. I’m interested in art, but I only want to make money out of this. Don’t make money. I don’t make it. I don’t make. And there are lots of people who are in the world of Richard Cave’s art for art’s sake, which is create art because they love it. So there’s that as well. Now, I would say that in the arts or the creativity world of art that you’re talking about, the percentage of people who do art for art’s sake is far bigger than the percentage of people doing science for science. And the funding for science for science sake is significantly bigger than the funding of arts for arts sake, right? So ultimately, the university think of the budget for the physics department or budget for the Department of painting. Maybe in Rome people say, yes, we need a physics department. We’re going to put money into physics. We need a painting department. Oh, well. So there’s much less money involved. The theory that there is a lot of creativity involved in that. And I think the difference between art and science is a question of degree, not of kind.

Sebastiano Bavetta – Thank you very much. Thank you to everybody who’s been here tonight.