In Depth: Is there a formula for innovation?
The 4IR is reshaping the economic landscape by changing the drivers of growth and competitiveness. It is no longer possible to rely solely on efficiency and cost-cutting for economic success: innovation, flexibility and adaptation to change are becoming the key ingredients. When change is the only constant, economies that can adopt new ideas, methods or products more quickly will have an edge. That’s why embracing opportunities and leveraging innovations can accelerate growth and development for every economy.
However, the Innovation capability pillar has the lowest performance on average of the 12 pillars on the GCI 4.0, with a median score of just 36, and three-quarters of countries score 50 or lower, indicating they are less than halfway to the frontier (Figure 4). The distribution of scores is so skewed that the pillar’s three best performing economies—Germany (87.5), United States (86.5) and Switzerland (82.1)—are considered statistical outliers.
Why are there so few innovation powerhouses in the world? Innovation is a complex process. It starts with the generation of ideas, some of which lead to inventions, and only a few of which are ever commercialized. Innovations enhance economic productivity only if they reach the desired markets and achieve commercial success. Innovation takes place within an ecosystem of multiple factors. Any factor missing from the innovation ecosystem can prevent new ideas from being generated or evolving into viable commercial products.
The index is designed to capture this complexity and assess countries against it. Both the Innovation capability and Business dynamism pillars enable an assessment of each economy’s innovation ecosystem. Innovation capability is comprised of indicators on the ‘softer’ and less tangible aspects of idea generation, captured in the Interaction and diversity, as well as Research and development (to develop inventions) and Commercialization (the capacity to successfully bring innovation to the market) sub-pillars. The Business dynamism pillar captures broader factors, captured in the two sub-pillars: Administrative requirements (the extent to which the regulatory framework supports creative destruction by making it easy to found and close companies) and Entrepreneurial culture (a country’s willingness to take risks and embrace disruptive ideas).
Other GCI components also play a critical role in determining a country’s capability to innovate. These include ICT adoption (pillar 3), quality of education (captured in the Skills pillar), intensity of competition (Domestic market pillar) and availability of financing (Financial system pillar).
The results demonstrate that the countries with the winning formulas for innovative ecosystems have embraced a wide range of measures to achieve success. On average, high-income economies achieve significantly higher scores than those in lower-income brackets on each of the five sub-pillars that make up the Business dynamism and Innovation capability pillars, demonstrating that their innovation ecosystems are more developed. Nonetheless, they are still far from the frontier on all dimensions—and all economies have potential for further progress (Figure 5).
The most striking differences are found in the Research and development sub-pillar, which includes indicators on R&D spending, patents, publications and research institutions.7 For 94 of the 140 economies featured in the report, this sub-pillar is the lowest scoring of the five. Nonetheless, despite low levels of research and development these economies can still adopt technologies developed elsewhere and adapt them for local needs. For example, in some developing economies the diffusion of mobile phones has become a platform for delivering financial services.8
The gap between advanced and developing economies is less prominent on the Administrative requirements sub-pillar, but there is still room for improvement. Further reducing administrative burdens on starting or closing a business represents a relatively achievable goal in terms of policy intervention: accessible, low-cost and without requiring cultural shifts.
The top performers in the upper- and lower middle-income brackets, such as China and India, are catching up with or even outperforming the average among high-income economies. China, for example, is already more advanced when it comes to investing in research and development sub-pillar than the average high-income economy, while India is not far behind and let down only by its less-efficient bureaucracy for business creation and insolvency. The catch-up process is reflected in the emergence of Chinese and Indian companies in technology-intensive sectors. China is home to 33% of the world’s ‘unicorns’ (private companies valued at over 1 billion) in 2017, up from 12% in 2014.9
Among low-income countries, however, even the best performers are still lagging behind. Kenya, for example, underperforms on most of the five sub-pillars. This supports the widely-held idea that innovation requires stable conditions—such as well-established institutions, extensive ICT adoption, domestic market competition and a favourable education system—and suggests these factors should be priorities for governments in low-income economies that are looking to innovation for employment growth.10
The exception to this performance gap is found in the Entrepreneurial culture sub-pillar, which the GCI results suggest is not a prerogative of advanced economies. In Uganda, for example, 28.1% of the population are self-described entrepreneurs, the highest percentage in the world.11
Among the best performers, the so-called ‘softer’ drivers of innovation—represented by the sub-pillars Entrepreneurial culture and Interaction and diversity—distinguish the ‘super innovators’, Germany and the United States from other innovation hubs found in countries such as Japan and Korea (Figure 7).
One reason why Korea and Japan lag slightly behind their high-income peers on these sub-pillars could be a tendency toward uncertainty avoidance. As Figure 8 shows, despite some recent increases, the appetite for entrepreneurial risk in Japan and Korea is significantly lower than in the United States. Possible explanations include perceived higher opportunity costs to entrepreneurial risk and other cultural factors that make it more difficult to embrace disruptive ideas. In fact, many experts attribute Japan’s ‘lost decade’ partly to companies’ reluctance to be forward-looking and break away from the status quo. A more vibrant innovation ecosystem would allow these economies to more fully translate their research efforts into economic growth and increase long-term resilience to technological shocks.
For success in the Fourth Industrial Revolution, all economies—whether advanced or developing—will need to embrace the opportunities offered by innovation. The Global Competitiveness Index helps them to identify which factors—from regulations to cultural practices—each country’s government needs to focus on to develop a balanced and dynamic innovation ecosystem.