Is a Stringent Climate Change Agreement a Pot of Gold?
Reading this month's comments, HBS professor Jim Heskett wonders if we even need a climate change agreement as a catalyst to foster innovation and the VC investment required to support it. (Online forum has closed; next forum opens February 4.)
Do we even need a stringent climate change agreement? Judging from this month's comments, a question can be raised about the necessity of a climate change agreement, stringent or not, as a catalyst to foster innovation and the venture capital investment needed to support it. Some readers asked whether the objectives of the kind of agreement being discussed are even relevant to the world's needs. While suggesting that major government initiatives will be needed, Phil Clark suggested a different direction for them. He said, "Let's step away from arguments … over where we are causing global warming and turn that energy and resources into actually improving our way of life with limited impact on our world."
Tom Dolembo questioned whether agreements are necessary. He believes that change driven by entrepreneurs seeing an economic opportunity is more important than, and might even be impeded by, an international agreement. As he put it, because "scale advantage is reversed" in the alternative energy field, change "will be driven from the bottom, not the top." In other words, will venture capital and change require a major agreement? In fact, as Jim Winkelmann pointed out, such agreements can be changed, providing little assurance that a "context" for change can be maintained long enough to allow entrepreneurs to earn a sufficient payout.
Zach Allen argued, in a sense, that a global agreement encouraging innovation to stop climate change assumes that it can be stopped. If this is not the case, as he suspects, it may encourage the wrong entrepreneurial efforts. In his words, "maybe jumping on this runaway bandwagon is good for short term profits, but … is terrible public policy." Gerald Nanninga saw another kind of problem. If entrepreneurial interests try to skew the response, in the form of an agreement, in one direction or another, it could limit the range of possible responses to be encouraged, thereby limiting innovation.
This is a debate more pertinent to countries with the venture capital to support the conversion of inventions into commercially viable innovation. As Allen Roberts points out, "… lacking as we do a worthwhile VC industry … the history of the last 100 years where Australia exports all its great ideas with little return will continue."
Michael Hogan teed up a number of questions by pointing out that without initiatives to create a vast infrastructure, progress achieved by innovators and venture investors will be piecemeal. In his words, "What will NOT emerge without collective government action are the transformations in the indispensable infrastructure … that will determine which types of non-finite-resource based opportunities innovators will be able to exploit beyond just curious little niche plays." What will it take to make this happen? Will it even take "collective" action? Or will it take a country with highly centralized leadership, like China, to lead the way, forcing other countries to act with or without an agreement? And should countries that will benefit most from the entrepreneurial opportunity, as Bharath Krishnan and Ajay Kumar Gupta implied, help finance others? What do you think?
Entrepreneurship, as we study it, is defined by my colleague Howard Stevenson as "the pursuit of opportunity beyond the resources you currently control." In short, managers manage assets, entrepreneurs manage opportunity. And instead of taking risk, they manage it. Further, opportunity arises out of a change in something called "context," namely the competitive environment, whether it is due to legal, social, regulatory, or other kinds of change. For example, the rise of hackers changed the "context" in which information was communicated, providing an opportunity for entrepreneurs to create an Internet security industry. Let's apply this thinking to the recently reinitiated global conversation about climate change. If one subscribes to precepts of entrepreneurial management, there should be a pot of gold at the end of a climate change agreement rainbow, regardless of how one feels about global warming or its causes.
Carrying the hypothesis one step further, to the extent that climate change agreements change the rules governing national policies and actions (the "context"), they should represent opportunity. In fact, the more stringent the rules, the greater the entrepreneurial opportunity, a lesson from which U.S. automakers could have benefitted years ago. This should be the case at least up to the point at which shorter term costs become greater than industry or society can bear. Anything up to that point would be a net advantage, at least to some industries or nations.
Who would benefit most from stringent guidelines? Presumably, countries that spend the biggest proportion of their gross domestic product on new ideas, those whose stream of patents is greatest, and those in which the atmosphere for entrepreneurs is most favorable (in terms of venture capital financing, a socially positive attitude toward entrepreneurship and the failure that it often entails, and a market for new ideas). If that's the case, countries that should be at the forefront in advocating more stringent rules regarding global warming should be countries like the U.S., China, and Israel. India, on the other hand, is not well positioned to take advantage of the opportunity, as pointed out recently by Vikas Bajaj.
The problem is that one can't be sure whether or not climate change agreements are enforceable. But should that matter as long as people believe in the need for action? That is, in this case, does belief in the need to create the rainbow help insure that the pot of gold is in fact there and is attainable? The question for entrepreneurs, of course, is whether the level of uncertainty argues against starting the journey toward that pot of gold.
How strongly should venture capitalists around the world get behind climate change agreements? Should governments with highly-favorable environments for entrepreneurship, such as the U.S. and China, push even more strongly for stringent rules or guidelines? Should they go so far as to provide venture capital funding (through some form of sovereign fund) to those economies that are short of it? Is a climate change agreement a pot of gold or only the rainbow? Does it matter? What do you think?
To read more:
Vikas Bajaj, "In India, a Developing Case of Innovation Envy," The New York Times, December 9, 2009, pp. B1 and B7.
Howard Stevenson, "The Heart of Entrepreneurship," Harvard Business Review, March-April, 1985, pp. 85-94.