Freedom to Fail, Freedom to Innovate

Innovation is risky and involves a lot of experimentations that often end in failures. Therefore, it is essential to have a high tolerance for failure as a prerequisite for a successful innovation program. However, little attention has been paid to promoting a positive attitude towards failure. Academic research suggests that policies should be put in place to incentivize employees to innovate by tolerating early failures and limiting the negative consequences of failed projects. For instance, stronger labor laws positively correlate with a country's innovation output, while wrongful discharge laws were found to foster innovation by increasing employee motivation and effort. Tolerance for failure also positively affects corporate innovation by promoting the continuation of innovative activities following a firm's bankruptcy. Finally, startups backed by more tolerant VC investors are significantly more innovative. The above studies suggest that organizations can increase the efficiency of their corporate innovation by modifying their termination policies.