There is no denying that innovating is risky. It means experimenting, and lots of experiments fail. Hence, in order for innovation to be successful, a business must have high tolerance for failure. It is no surprise that businesses now regularly talk of “celebrating failure”. Every failure is a positive lesson to be learned. By putting innovation software tools in place, innovative thinking can be encouraged, even if it leads to failure.
Innovation Software Tools and the “Labor Law”
Gustavo Manso completed theoretical analysis on how employees can be motivated to innovate. He suggested that tolerance for failure is key to that. This ensures people are willing to take risks, even at the start of the process, because they are not afraid to fail. Empirical evidence suggests that Manso was right in this. In particular, it was shown that countries with strong labor laws had higher innovation output. Additionally, it was found that companies that followed the US wrongful discharge laws (WDL) were more innovative than companies operating according to employment-at-will, because workers were not afraid to lose their job for making a mistake. This is known as an “insurance effect”, which is noticed particularly strongly in companies that have excellent innovation software tools in place.
Bankruptcy Laws and Innovation
When employees are protected, they are more likely to innovate. At the same time, it protects businesses. When looking at the bankruptcy laws found in some 12 different countries, it showed that those who had bankruptcy codes that favored the debtor had far more positive innovation. If businesses know they can take risks, therefore, they are more willing to do so.
Investment and Innovation
One study looked at the way venture capitalists coped when startup companies they funded failed. Startup companies are some of the most innovative of all, but they are also some of the riskiest. Venture capitalists are aware of this, and they have a high failure tolerance, therefore. If not, they would never be able to invest in a startup company anyway. Studies have shown that the more tolerant the investing venture capitalist is, the more innovative the startup company becomes. This became particularly obvious during the recovery of the Great Recession.
What these studies show is that having innovation software tools in place is vital but having a high tolerance for risk is just as important. It also shows that there are specific things businesses can do to encourage innovation. Changing employment contracts so that employees feel more secure and encouraged to innovate is one of those things. It is more difficult to change bankruptcy laws, or to convince a venture capitalist that risks should be taken, but if companies begin by becoming more innovative by changing contracts, thereby demonstrating that taking risks is beneficial, it is feasible that the rest will follow. Putting innovation software tools in place and showcasing to employees that they are encouraged to use it is just a first step, but perhaps one of the most important ones as well.