By Letty Kwan and Chi-Yue Chiu.

It began as an April Fools’ Day prank. But in the space of two months, the augmented-reality game Pokémon Go has been downloaded 100 million times and has pulled in US$160 million in revenue. It has also done something far more fundamental. Pokémon Go has changed the way people behave.

US-based software company Niantic Inc, which developed the app in conjunction with Nintendo and The Pokémon Company, is now worth around US$3.65 billion, according to analysts at Citibank. Companies associated with Nintendo and Pokémon, such as First Baking, Tomy, TV Tokyo and Bank of Kyoto, have all seen significant gains.

pokemon go
Photo: YouTube Screenshot.

And with millions of people roaming the streets looking for virtual creatures, pubs and restaurants across the UK are beginning to profit from “Pokémonomics”, according to the Financial Times.

But while gamers are busy hunting virtual monsters, corporate heads and shrewd policy-makers are asking the same question: how can Pokémon Go’s success be replicated?

What they may find surprising is that Niantic is a relatively small company with a few dozen staff, and the technologies used to launch Pokémon Go – GPS and cameras in smart devices – are far from complicated. It is the innovation and creativity of the game that holds the key to its impressive commercial performance.

The first Pokémon games were introduced in Japan back in 1996. Through innovation, Niantic has managed to re-ignite interest in an old game, engage existing fans and excite a new generation of consumers.

YouTube video

But what drives innovation that creates substantial and lasting economic success? A study conducted by the Department of Psychology of the Chinese University of Hong Kong may offer some clues to this million-dollar question. It suggests that an economy with a pool of the right talent, working in a free and open environment, stands a better chance of developing transformational innovation with strong global influence.

Policy-makers know very well that science and technology innovation is important to sustained national growth and business performance. It could also be the key for rapidly developing countries to escape the middle-income trap.

Researchers have identified human capital and institutional support as the major contributing factors to innovation. In this context, human capital refers to the availability of a pool of expertise in an economy which, through their transfer of knowledge, contributes to new skills and technologies that drive innovation outputs.

Innovation can also prosper with proper support from formal political, legal and market institutions. Studies have indicated that, where freedom of expression and innovators’ proprietary rights to their intellectual and financial properties are protected by credible legal and political institutions, people are more willing to share and exchange knowledge, and this transfer of knowledge will lead to higher quantity and quality of innovation outputs.

niantic labs

The most valuable innovation output is achieved by services and products which attain global influence and change significantly the way people live and work, such as Facebook, Google Maps and the iPhone. Pokémon Go is fast catching up, with commentators talking about how the game has revolutionised the way people interact.

In contrast, incremental improvements or variations of existing products, such as smartphones from Xiaomi and Huawei, can at best claim a local market.

The Chinese University study, using the Global Innovation Index, is the first known attempt to measure how human capital and institutional support contribute to knowledge creation. The study of more than 120 countries  provides a useful indicator for policy development: human capital or institutional support, by themselves, do not lead to extraordinary innovation outputs with broad global influence.

Human capital alone can contribute to knowledge creation and have limited local impact but is unlikely to lead to transformational innovation.

pokemon china

Where then does that leave China, a nation long known for copying rather than innovating? A decade ago, the Chinese leadership announced ambitious plans to transform the country into an “innovative society” by 2020.

And this May, guidelines for a national strategy were unveiled. It urged promoting the tal­ent pool and stimulating mass innovation to implement the strategy, while pledging greater investment in innovation. Will that be enough to turn China into a global innovation powerhouse?

The former boss of Google in China, venture capitalist Lee Kai-fu, believes the Chinese education system’s focus on drills means “it’s not so good at breaking the mould”. Lee, who now invests in Chinese start-ups, told the BBC in June: “Will the next Facebook or Google come from here? It remains to be seen. I think breakthrough innovation will be difficult.”

The lesson is clear for fast-growing countries such as China. Institutional support can stimulate innovation only when people trust the institutions. Talent is attracted to, and remains, in countries with political, legal and business institutions that encourage entrepreneurship and protect innovators’ proprietary rights, and which enshrine good public governance, press freedom and the rule of law.

Professor Letty Kwan and Professor Chi-Yue Chiu, Department of Psychology and Faculty of Social Science, The Chinese University of Hong Kong.

Guest contributors for Hong Kong Free Press.