Innovation and Standardized Qualifications: Quantitative analysis to establish relationship between indicators of creativity and formality

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1 Innovation and Standardized Qualifications: Quantitative analysis to establish relationship between indicators of creativity and formality Preetinder Singh Gill Student PhD Candidate (Engineering Management), Eastern Michigan University Konnie G. Kustron Professor, College of Technology, Eastern Michigan University Abstract Innovation provides a perfect avenue for staying competitive in today s global marketplace. High qualification on the other hand ensures consistent high quality products and services. While creativity vis-à-vis free thinking instigates innovation, formality of processes vis-à-vis constrained activities ensures standardized qualification. These two phenomena seem counter productive however, they are critical for an organization s success. This paper tries to address this paradox by determining what relationship, if any, exists between these phenomena. Data pertaining to innovation and qualification indicators from all states of the U.S. were collected. Power law regression equations between the variables indicator data representing the two phenomena are created. The superlinear and sublinear relationships, thus generated, are in turn interpreted to arrive at potentially meaningful policy decisions. States are also clustered based on statistical proximity of the indicators and the results are reviewed in light of the regression relationships to uncover opportunities of further enhancing innovation. Introduction Technological innovation has direct and positive implications on the global economy and the spread of prosperity across international borders. Innovation and market competition share an inverted U relationship (Aghion et al., 2005). This means that high amount of innovation is accompanied by minimizing of market competition. By being and staying highly innovative, geographical regions could establish and cement their market leadership position. Standardized qualification of processes vis-à-vis quality, reliability and durability at both individual and organizational levels has also gained immense importance. Tassey (2000) asserts that industrial standardized qualification via enhanced organizational and individual qualification impacts innovation productivity and market It is widely accepted that innovation and quality form corner stones of today s knowledge based global economies. Kano (2000) and Acemoglu, Gancia and Zilibotti (2010) illustrate the creative tension between the innovation and qualification. In recent years increases have been observed in intellectual properties (Hingley & Bas, 2009, Flitney, 2009 and Ulrich, 2009) and quality related certifications (International Organization for Standardized qualification, 2010 and Stevenson & Barnes, 2001). Bodewes, (2000) also highlights the need for both formalization and innovativeness albeit in a optimum balance. Furthermore, Horn (2005) maintains that standardized qualification and qualification could act as enabler for innovation. This paper presents quantitative scaling regression relationships between various innovation indicators, organizational standards and individual certifications in the United States. The superlinear and sublinear relationships are in turn interpreted to arrive at potentially meaningful policy decisions. Furthermore, the states are clustered with respect various standardized qualification indicators using the furthest neighbor minimum squared Euclidian distance approach. Lastly, the constituent states in individual clusters are reviewed in light of the

2 regression relationships to uncover opportunities of further enhancing innovation. Methodology Innovation is associated with creation of something which has not been done or experienced before. Standardized qualification, on the other hand, is associated with formalization and imposition of pre set regulations. In other words, while innovation is a prospective, standardized qualification is retrospective. Indicators can be described as statistically derived summation values which can be used as a measure and express the amount of innovation or standardized qualification. The indicators hence are stand-ins which represent innovation and standardized qualification. Patel and Pavitt (1995) highlight that innovation needs to measured along many dimensions to achieve a complete picture. These dimensions can be represented by various indicators. As Grupp and Schubert (2010) and Katz (2006) point out innovation indicators such patents, research papers/articles are included in this paper. Furthermore, Dushnitsky and Lenox (2005) demonstrate the positive correlation between venture capitalist investment and innovation. Hence, number and volume of venture capital investments could also serve as indicators for innovation. Lastly, taxonomical study by de Jong and Marsili (2006) exhibit that number of small businesses could also serve as indicator for the amount of innovation. Innovation indicators used in this paper are shown in Table 1. Table 1 According to International Organization for Standardized qualification (ISO) standardized qualification involves conformance to specific, uniform and consistent regulations. Indicators for standardized qualification don t appear extensively in the existing literature. Additionally standardization of qualifications itself is a complex process. Single indicator would hence be inadequate to measure the amount of standardized qualification. Standardized qualification at individual levels includes academic degrees, licenses and certifications. At the organizational level standardized qualification can be reflected in terms corporate certifications. Standardized qualification indicators used in this paper are shown in Table 2. Table 2 Upon finalization of relevant indicators all pertinent data was collected. Correlation equations were then formulated between the technological innovation indicators and standardized qualification indicators. The innovation systems and standardized qualification systems are complex (Baranger, 2001) and dynamic in nature hence, they exhibit scaling properties (Amaral & Ottino, 2004). The signature of a scaling property is a power law correlation between variables of the system or power law probability distribution of a property of the system (Katz, 2006). Hence, the correlation equations between the indicators were setup as a series of power laws. A power law is a special kind of mathematical relationship between two quantities. When the number or frequency of an object or event varies as a power of some attribute of that object, the number or frequency is said to follow a power law. A power law could be expressed as f(x) =

3 α*x β + ε where α is a constant, β is the scaling factor and ε is the error term (Katz, 2006). The power laws are scale invariant. In other words if x is scaled by a constant γ then f(x) would be scaled by a constant γ β. Data Collection Publicly available data sources as of April 2010 were gleaned to generate data related to the indicators listed above, The data source included professional engineering regulatory bodies for all fifty states, Professional Management Institute, Linkedin.com, International Association of Accredited Registrars, U.S. Small Business Administration, Pricewaterhouse Coopers/ National Venture Capital Association s database, Leadership in Energy and Environmental Design s online directory and Underwriters Laboratories (UL) online certification directory The number of professional engineers registered with each state s professional engineering regulatory body was tabulated from the respective websites or through specific requests to the regulatory bodies. The number of individuals per state who identify themselves as certified Blackbelts in quality and as Auditors were estimated by performing specific searches on Linkedin.com. The number of individuals certified by American Society Quality per state was directly provided the society. The number of people certified by Professional Management Institute per state was tabulated from the institute s public registry. The number of patents issued between January 1995 and April 2010 associated in a specific state was determined via the United States Patent and Trademark Office s database. The number of articles for each state was collected from the Web Science database. The number of organizations in active possession of quality, environmental and health and safety certifications per state were estimated from the data available at Independent Association of Accredited Registrars public directory. The number of small businesses in each state was estimated from the data available via the Dynamic Small Business Search feature of the United States Small Business Administration. The number of individuals, per state, holding Leadership in Energy and Environmental Design credentials was estimated from the Green Building Certification Institute s publicly available data from Green Building Certification Institute. The number of organizations, per state, holding various Leadership in Energy and Environmental Design credentials were estimated from the U.S. Green Building Council s member directory. The number of organizations, per state, holding Underwriters Laboratories certifications was obtained from UL s online certification directory. Data pertaining to venture capital investments per state were collected from Pricewaterhouse Coopers/ National Venture Capital Association s database. Additional details about the data collected are shown in Table 3. Data Analysis Due the wide range of the observed values natural log of both the independent and dependent variables was incorporated to generate the regression equations and cluster analysis Indicator Relationships Mono-variable power law based regression equations were established between each of the innovation indicators and each of the standardized qualification indicators. The innovation indicators served as the dependent variables. The creation of power law regression equations resulted in an inventory of alpha (α) and beta (β). The slope alpha (α) would help to establish proportionality direct or inverse between the dependent and independent variables. The scaling factor beta (β) would help establish sub-linear or super-linear relations between the independent and dependent variables. The alpha (α), beta (β) and R 2 values of the various regression equations are shown in Figure 1. Since the data is a stationarized series an R 2 > 60 can be considered significant.

4 Table 3 Figure 1

5 Cluster analysis Figure 2 displays a statistically significant positive correlation between various standardized qualification indicators. Figure 3 displays a statistically significant positive correlation between various innovation indicators. This builds a case for further analysis involving grouping of states which are similar in their performance with regards to innovation indicators and standardized qualification indicators. A cluster analysis of the data was then performed to establish four groups of states. The results of the cluster analysis for independent variables are presented in Table 4. The results of the cluster analysis for dependent variables are presented in Table 5. The cluster analyses illustrate: 1) how various states rank with respect to each other and 2) which states are relatively similar to each other with regards to a specific indicator. Centeroid values of each cluster are shown in Figure 4 and Figure 5. Blackbelts ASQ_Ind Auditor PMP PE ISO_Comp LEED _ Ind LEED_Comp UL Cert Blackbelts 1.00 ASQ_Ind Auditor PMP PE ISO_Comp LEED _ Ind LEED_Comp UL Cert Figure 2 Patents Articles Web of Science Small Businesses VC Investment VC Deals Patents 1.00 Articles Web of Science Small Businesses VC Investment VC Deals Figure 3 Cluster ASQ Auditor Blackbelts ISO_Comp LEED _ Ind LEED_Comp PE PMP UL Cert Figure 4 Cluster Articles Patents Small Bus. VC Deals VC Investment Figure 5 In order to underscore what measures different states can take in order to improve their level of innovation analysis of variance ANOVA - was performed for innovation indicator which hold a strong superlinear relation with the standardized qualification indicator i.e. alpha (α) >1, beta (β)

6 > 1 and max R 2. In the cases where the p value shows statistical significance it can be concluded that states can enhance the level of a specific independent variable to improve the level of the innovation indicator. Additionally, the method used to discriminate different clusters is Fisher's least significant difference (LSD) procedure. State ASQ Auditor Blackbelts ISO_Comp LEED _ Ind LEED_Comp PE PMP UL Cert AL AK AZ AR CA CO CT DE FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY Table 4

7 State Articles Patents Small Bus. VC Deals VC Investment AL AK AZ AR CA CO CT DE FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY Table 5 Results of the ANOVA are presented below for following combinations: Articles vs. Professional Engineers: The p- value for this combination is less than 0.05 at 95% confidence interval which proves statistical significance. Difference analysis of the cluster ranks shows that there is statistically significant difference at 95% confidence interval between ranks 1 and 2, 1 and 4, 2 and 4 and 3 and 4. Patents vs. LEED Companies: The p-value for this combination is less than 0.05 at 95% confidence interval which proves statistical significance. Difference analysis of the cluster ranks shows that there is statistically significant difference at 95% confidence interval between ranks 1 and 2, 1 and 4, 2 and 3, 2 and 4 and 3 and 4.

8 Small Business vs. Professional Engineers: The p-value for this combination is less than 0.05 at 95% confidence interval which proves statistical significance. Difference analysis of the cluster ranks shows that there is statistically significant difference at 95% confidence interval between ranks 1 and 2, 1 and 3, 1 and 4, 2 and 3 and 2 and 4. Venture Capital Deals vs. ISO registered organizations: The p-value for this combination is less than 0.05 at 95% confidence interval which proves statistical significance. Difference analysis of the cluster ranks shows that there is statistically significant difference at 95% confidence interval between ranks 1 and 2, 1 and 3, 1 and 4 and 2 and 3. Venture Capital Investment vs. LEED Companies: The p-value for this combination is less than 0.05 at 95% confidence interval which proves statistical significance. Difference analysis of the cluster ranks shows that there is statistically significant difference at 95% confidence interval between ranks 1 and 4, 2 and 3, 2 and 4 and 3 and 4. Plots of means for different clusters are shown in Figure 6. ANOVA for other combinations of the indicators also showed similar phenomena. Normality of data is assumed for ANOVA analysis. Figure 6

9 Discussion Data analysis shows that innovation and standardized qualification share positive correlation. Furthermore in many instances this relationship can be characterized by a superlinear scaling factor. The data provides evidence that innovation could be enhanced by encouraging standardized qualification. Increasing the number of organizations and individuals who have been certified and/or licensed in a specific area of expertise could in turn lead to an increased output of innovative product and/or services. Cluster analyses for different states demonstrate clear distinction in the level of innovation and standardized qualification among various states. Additionally, data analysis also presents a high degree of correlation between various innovation and standardized qualification indicators. Lastly, the analyses of variance (ANOVAs) present the clearest evidence that show that states with high standardized qualification also have high innovation. These findings imply that higher degree of qualification leads to higher degree of creativity at a macro level Limitations/Assumptions The data collection occurred in April 2010 and was limited to the fifty states in the USA. The study cross-sectional in nature hence the results are limited to one snap shot in time. Future studies could include longitudinal from other geographical locations. The indicators selected for the study were limited by authors subjectivity. A Delphi study with a panel of experts could help reach a much more reliable list of indicators. The data collected was limited to what was publicly available. The data was assumed to be accurate and bias free. Furthermore, the data collected was assumed to represent the underlying phenomena Conclusions The power law regression equations exhibit that standardized qualification indicators and innovation indicators are directly proportional. Additionally, this proportionality is superlinear for multiple combinations. The cluster analysis and ANOVA seem to provide additional evidence which surmises that states with elevated standardized qualification also have enhanced level of innovation indices boost their research article production by enhancing the number of professional engineers. Intuitively standardization seems to be limit organic thinking which in turn would be counterproductive for innovation. However, it can be concluded that various standardized qualification activities do not stifle the level of innovation. This is constitutes major benefit of this study. Policy makers can use the results of the analyses provided above as an evidence to make a case for boosting standardized qualification in an effort to make their states more creative and competitive. Corporations could look at enabling, even encouraging, their work force to get professional licenses or certifications as a means of increasing innovation. Future research in this area could uncover casual relations between the standardized qualification indicators and innovation indicators. Also future studies could focus on establishing thresholds beyond which standardization start to hinder innovation. References Acemoglu, D., Gancia, G., & Zilibotti, F. (2010). Competing engines of growth: Innovation and standardized qualification. Journal of Economic Theory. doi: /j.jet Aghion, P., Bloom, N., Blundell, R., Griffith, R., & Howitt, P. (2005). Competition and Innovation: An Inverted-U Relationship. The Quarterly Journal of Economics. 120(2), Amaral, L. A. N., & Ottino, J. M. (2004). Complex networks: augmenting the framework for the study of complex systems. European Physical Journal B, 38, doi: /epjb/e Baranger, M. (2001). Chaos, complexity, and entropy: A physics talk for non-physicists. Wesleyan University Physics Dept. Colloquium. Retrieved from Bodewes, W. E. J. (2000). Neither chaos nor rigidity: An empirical study on the role of partial

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