Innovation-led growth is no longer the prerogative of high-income countries alone. Middle-income countries are catching up fast, but they still need some crucial ingredients to compete.
There is a common misconception about the success of Silicon Valley; that its success is largely down to the disruptive and rebellious innovators who have made it their playground. A hive of innovative activity it may be, but the truth is that the young and ambitious have congregated around the valley because it is home to universities, research labs, venture capital firms and armies of risk-taking talent, which came because of smart government policies.
Countries around the world are trying to emulate Silicon Valley’s success by trying to construct similar frameworks in the hope of building the next Google. There are three key policy elements that can mean the difference between success and failure. First, policies matter. From tax incentives to regulations and from grants to funding, the role of policies is crucial. During the Cold War, the US Defence Department threw massive amounts of funding at semiconductor firms creating ever-faster integrated circuits and computing capacity, which give Silicon Valley its name. It was computer research at the Defense Advanced Research Projects Agency (DARPA) that led to the creation of computer networking that later became the internet. Its nearby universities also received federal funding for networking hardware that was later commercialised as Cisco. Working at the National Science Foundation’s Digital Library Initiative, Sergey Brin created the algorithm that later became Google.
Secondly, as Jean Monnet, one of the founders of the European Union famously said, “nothing starts without people, nothing lasts without institutions.” Innovators need political stability, streamlined tax structures, inter-agency cooperation, supportive research institutions and fluid links between public researchers and private companies.
Thirdly, risks need to be made attractive. Entrepreneurs and innovators need clear legal frameworks, clear fiscal frameworks and clear business frameworks to mitigate risk and investment confidently. These three qualities have made the United States the 5th most innovative country in the world according to this year’s Global Innovation Index.
Innovation achievers
Similar characteristics defined the top 10 in the GII, with Switzerland leading the pack for the 5th year in a row. The Swiss recipe stands out for its historical engineering culture, its strong emphasis on education, especially of the vocational sort, and its open mindset where talent comes and goes freely.
| 2015 TOP 10 | |
|---|---|
| 1. | Switzerland |
| 2. | United Kingdom |
| 3. | Sweden |
| 4. | Netherlands |
| 5. | United States |
| 6. | Finland |
| 7. | Singapore |
| 8. | Ireland |
| 9. | Luxembourg |
| 10. | Denmark |
While the top 10 are to be celebrated, this year’s report takes specific steps to understand how policy is being leveraged by what we call the “innovation achievers”, economies that perform at least 10 percent better than their peers in the same income group. While high-income countries dominate the index and maintain their positions, noticeable ranking moves are happening more frequently within lower-income groups.
Among such achievers are China, Malaysia, Vietnam, India, Morocco and Jordan. They are all making improvements to institutional frameworks, the skills of the labour force with expanded tertiary education, better infrastructure and a deeper integration with global credit investment and trade markets.
Malaysia for example, has outperformed its middle income peers in all seven pillars of the GII over the last three years, due to institutional stimulation of innovation, an improving business environment and the government’s increasing focus on research funding, which has increased its R&D expenditure as a percentage of GDP and the number of workers in R&D fields. The Ministry of Science, Technology and Research (MOSTI) supports creation, research and development, as well as commercialisation of innovative activities in Malaysia. MOSTI also coordinates with Malaysia Industry-Government Group for High Technology, the Multimedia Development Corporation, the Malaysian Technology Development Corporation, the National Science Research Council and five research universities, which expands both scientific input and output.
| HOW THE GII RANKS COUNTRIES | |
|---|---|
| Innovation Inputs | • Institutions (political, regulatory, business environment) • Human capital and research (education, tertiary education, R&D) • Infrastructure (ICTs, ecological sustainability) • Market sophistication (credit, investment, trade) • Business sophistication (knowledge workers, innovation linkages, knowledge absorption) |
| Innovation Outputs | • Knowledge and technology outputs (creation, impact and diffusion of knowledge) • Creative outputs (intangible assets, creative goods and services, online creativity) |
Closing rich-poor divides
The proliferation of cheap and simple technology is helping such countries. While gaps remain in overall innovation performance between rich and poor countries, the technology gap is narrowing. This is due to the fact that recent new technologies are globalised from the start, such as 3D printing, cloud computing, and big data analytics, lowering production and labour costs for firms in emerging countries.
But the innovation achievers realise that technology alone is not enough to foster an innovative environment. Getting the right talent and an institutional framework in place appear to be the most difficult of all inputs to achieve both in general but for low-income countries in particular. In Malaysia for instance, the government has created the institutional setting for solving collective action problems but much remains to be done to establish linkages between these organisations and private firms. In talent, strong university-industry links have been built in industrial training of undergraduates, but those linkages are not so obvious in R&D and in the placement of academics in firms. It has not yet reached Taiwan’s level of sophistication in incubating, commercialising and spinning off local tech firms. In addition, large numbers of Malaysian professionals are living in Singapore, the US, Australia and the UK and contributing to the innovative potential of those countries. Attracting and retaining knowledge workers is a pressing issue.
Countries at higher income levels benefit from established education and research facilities and traditions that allows them to translate their inputs into innovative outputs. Immigration openness in the UAE, Singapore and Switzerland has made these three countries strong performers.
Don’t stop now
Despite slowing growth, we don’t anticipate a slowdown in R&D spending and investment. This should always be protected even at times of economic uncertainty. Countries have learned that stop-and-go policies in R&D costs more in the long run and is hugely disruptive to innovation potential. A commitment to fostering innovation goes hand-in-hand with investment and policies.
Emphasis in emerging countries should be placed on gaining knowledge as much as on providing the right framework conditions that stimulate a process of innovation and knowledge diffusion: political stability and supportive institutions; good and widespread technical and tertiary education to enhance absorptive capacity; reliable and widespread basic infrastructure; provision of information and communication technology (ICT) property rights; and stronger links and interaction between publicly funded research institutes and private companies.
The ultimate policy mix will depend on a country’s broader development objectives, and will have to be made in collaboration with all the stakeholders to maximise the chances of success. Good coordination between ministries and between the private and the government sectors is therefore essential.
Each year INSEAD team up with the World Intellectual Property Organisation (WIPO) and Cornell University to produce an innovation league table for the countries of the world. It’s designed to rank the infrastructure and support environment for innovation around the world.
The 2016 rankings have just been published, and given the desire of the EU to support ‘open science, open data and open to the world‘, it is perhaps no surprise to see European nations in the top 5 spots, and 7 in the top 10.
The top 10 most innovative nations
Switzerland top the league table for the 4th year in a row, with Sweden and the United Kingdom rounding out the ‘podium’.
So what makes a country innovative? The first, and most important thing is attitude. Whilst it should be clear that innovation is crucial to the economic wellbeing of a country, few take the right approach to it. For instance, despite much of modern science and innovation being both collaborative and across national borders, to many nations still treat each other as rivals rather than collaborators.
There is something of a PR job to be done here, as the win-win nature of global collaboration is often not communicated effectively, not least during the recent Brexit referendum where the research community was largely marginalized in the debate.
The report also highlights the importance of investing in innovation, even during challenging economic times. Just as a slump is the right time for companies to innovate, the same logic applies to nations, with the report highlighting that a sustained investment is far better than stop/start splurges.
State support for innovation
Whilst it can seem somewhat anachronistic to believe the state can play much of a role in innovation, the report highlights some of the crucial things they can do. For instance, they can play a critical role in developing an environment that supports RD or in facilitating international collaboration.
The report also makes the argument for an integrated framework between nations to support innovation in areas such as the mobility of researchers, the funding streams for that research and the intellectual property that underpins it all.
It’s tempting, given the Brexit vote and the rise of people like Donald Trump, to think that countries can go it alone, but the report reminds us that the best innovators are those that are integrated into the global marketplace and active collaborators with their peers around the world. Whilst Switzerland isn’t a member of the EU, for instance, they work extensively with EU nations on projects such as the Human Brain Project.
Building for quality
Of course, whilst the report highlights a number of factors that they believe underpin strong innovation, it should not be taken as a recipe that policy makers can follow to make their country innovative. Equally, it can be tempting to fall into a numbers mindset, and pour all energy into increasing the number of graduates or some other easily measurable output in the belief that quantity equals quality.
The report attempts to overcome this by shedding light on the quality of the innovations produced rather than just the quantity. For instance, citations are used to gauge the quality of a paper rather than simply the number of published papers.
It can be a tricky balancing act between providing the kind of infrastructure support for innovation that is beneficial, and having an active industrial policy that picks winners.
“Proving enough space for entrepreneurship and innovation; the right incentives and encouragement to bottom-up forces such as individuals, students, small firms, and others; and a certain ‘freedom to operate’ that often challenges the status quo is part of the equation,” the authors say.
Such a balancing act has never been harder, but it has also never been more important as innovation takes a central role in both the economic and social wellbeing of a nation.
If nothing else, the report provides a crucial reminder that innovation goes way beyond just technological creation and runs the gambit from education to commercialization. Hopefully the paper will go some way towards providing just such a fertile environment.