Business Transformation
Business Transformation: This year’s Nobel Prize in Economics went to Philippe Aghion, Peter Howitt, and Joel Mokyr. They changed how we understand long-term economic growth. Their main idea is simple but powerful: growth and prosperity do not happen by luck. Instead, growth comes from knowledge and innovation. They showed that growth follows a cycle of creative destruction. New technologies and firms replace old ones. This process increases productivity. However, innovation does not happen alone. It needs conditions that let ideas spread, entrepreneurs compete, and knowledge grow. Their work shows that rich and poor countries differ because of the systems that encourage knowledge creation and sharing.
Pakistan’s Challenge
For countries like Pakistan, this lesson is very important.
Our debates on growth often focus on energy shortages, fiscal deficits, or exchange rate problems. Although these issues are real, they are only symptoms. The deeper problem lies in how our economy creates—or fails to create—new ideas, products, and ways of doing business. Weak innovation, poor knowledge sharing, and weak incentives for technological improvement hold us back. Without addressing these issues, short-term fixes only provide temporary relief. The economy stays far below its potential.
Innovation Study
Over the past decade, my research with colleagues at the Lahore School of Economics studied innovation in Pakistani manufacturing. Specifically, we collected detailed data from firms to see how they improve, learn, and compete. We analyzed product, process, and managerial innovations. Then, we looked at how they affect productivity, exports, and employment. We found that firms that innovate—by upgrading technology, introducing new products, or improving management systems—are more productive and more likely to export. Technological improvements, such as cost-cutting methods or better products, boost productivity. Organizational changes, like better management or faster decision-making, also improve firm performance.
Missing Foundations
However, innovation in Pakistan is rare. Only a few firms innovate regularly, and most innovations are small improvements. Very few firms invest in continuous research and development. Fewer are connected to global knowledge networks. Why? The foundations for innovation are missing. Nobel laureates highlight three key elements: competition, openness, and knowledge accumulation.
Competition is essential because it pressures firms to innovate. Yet, many Pakistani industries are protected by tariffs or dominated by a few large players. These firms face little incentive to improve. Protection reduces turnover and stops new competitors from challenging existing firms. Openness is equally important. Exposure to foreign buyers, suppliers, and standards spreads ideas. Our studies show that firms with international certifications or export links are more productive and innovate more.
Weak Knowledge
Finally, knowledge accumulation through education, training, and research is weak. It is underfunded and poorly linked to industry needs. As a result, Pakistan’s industrial base has stagnated for decades. Industrialization barely happened, and it is now declining. Average productivity lags behind regional competitors. Most firms still use outdated technology and weak management. They avoid competitive markets. For example, when Pakistani firms face competition from foreign manufacturers, they stop innovating and often leave the market. In such conditions, even strong innovation policies struggle to succeed.
Embrace Competition
The Nobel framework offers lessons for Pakistan. First, embrace competition and allow new firms to enter the market. Creative destruction needs space for new ideas and companies. Industrial policy should not protect old firms. Instead, it should help new ones grow, experiment, and compete. Second, invest in innovation. Support research and knowledge creation in firms and universities. Industrial policy should promote partnerships between industry and academia focused on knowledge and technology upgrades. Third, reduce the cost of learning and improve knowledge sharing. This can trigger innovation across the country’s industries. Finally, build trust through standards and enforcement. Our research shows that international quality certifications increase firm performance and innovation. They also reduce uncertainty between Pakistani producers and global buyers.
Reward Experimentation
Mokyr reminds us that modern growth began when societies institutionalized the pursuit of useful knowledge. For Pakistan, the goal is not just to import technology or copy policies. The country must create a system where experimentation is rewarded, failure is tolerated, and ideas move freely between universities, firms, and markets. The Nobel laureates teach a timeless lesson: nations grow when new ideas challenge the old. For Pakistan, this means allowing innovation, not inertia, to drive the future. Remember, when ideas stop, economies stall.
Published in Dawn, 27th November 2025
