Innovation Policies for a New Age: What Countries Do Best (& Worst)

“Productivity isn’t everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” So says Paul Krugman, Professor of Economics and International Affairs Emeritus at Princeton University.

These words have, of late, taken on a new profundity. In a previous blog article I outlined current thinking on the ‘productivity puzzle’. But what fundamentally drives productivity and then economic growth?

The main inputs are of course labour and capital. But the way the two interact in ever more productive and efficient ways is often called total factor productivity (TFP) – a somewhat enigmatic but crucial third driver. And the primary enhancer of TFP is thought to be innovation.

For instance, the US Department of Commerce reported in 2010 that technological innovation can be linked to three-quarters of the US economic growth rate since the end of World War II.  Similarly, two-thirds of UK’s private-sector productivity growth between 2000 and 2007 resulted from innovation.

A few months ago I participated at the third annual conference of the Global Trade and Innovation Policy Alliance (GITPA) in Mexico City. GITPA is a global network of 33 independent, leading think tanks from 25 countries. A fortunate output of the discussions and research for the conference is an expansive report that summarizes what 23 economies and the European Union are doing best in innovation policy, and where they have the greatest room for improvement. A brief summary of some of the main findings follows.

Create a national agency for innovation. This was seen as an essential precursor for improving innovation for many countries. The lack of such an entity was identified as a weakness.

Implement strong and innovative tax measures. Several economies—including Argentina, Canada, Chile, China, Italy, Korea, and Poland—had implemented strong and innovative tax measures, such as more generous R&D tax credits, investment incentives, collaborative tax credits. These offer more generous incentives for industry-funded research occurring at universities.

Improve the business regulatory environment. The pervasive operating environment is considered to be an influential driver of general innovation. Cited examples of notable improvement include Argentina and Chile who have introduced all-in-one-day registration for new businesses. Korea has introduced a regulatory sandbox covering all industries—including information and communications technology (ICT), energy, and fintech. Other notable examples provided were The Philippines’ Central Bank, which is experimenting with a regulatory sandbox for fintech companies.

Encourage ‘open data’ for the benefit of all. Colombia, the European Union, Mexico, Pakistan, and Taiwan all have initiatives to leverage open data as a platform for innovation. Colombia’s portal has more than 10,200 datasets from 1,184 public institutions. Mexico’s National Digital Strategy has more than 40,417 datasets from 278 public entities available on its open data portal.

Get ahead of the incoming manufacturing revolution. Several governments have already defined strategies to ensure leadership in manufacturing digitalization, or “Industry 4.0”. These include Bangladesh, Italy, Malaysia, Mexico, Sweden, and the Philippines. For instance, in 2017, the Filipino government launched the Inclusive, Innovation-led Industrial Strategy, which represents a new approach to industrial policy for a nation anchored in competition, innovation, and productivity.

Prioritise national R&D intensity. Several think-tanks reported favourable trends in their national R&D intensity (their countries’ R&D investments as a share of GDP), including Korea, China and Germany. Lamentably, The United Kingdom invests a meagre 1.67 of its GDP in R&D, ranking 11th among European nations; France’s investments have been flat for years. U.S. public investment in R&D is down dramatically in recent years. Latin America remains a laggard in global R&D investment.

Protect intellectual property. While some members have reported improvements to their countries’ IP environment in recent years, notably Mexico, many think-tank participants alluded to weak IP environments inhibiting innovation. Reports from Bangladesh, Canada, China, India, Malaysia, and South Africa in particular note difficult IP environments.

Strengthen human capital. Another concern for many nations is the need to improve and enhance workforce-training systems, especially science, technology, engineering, and mathematic (STEM) talent. The profiles of innovation policies in Chile, Germany, Italy, Korea, Malaysia, Mexico, the Philippines, Sweden, and Taiwan all cite educating high-level talent, fielding highly skilled workforces, and ensuring a sufficient level of graduates and workforces as a significant concern.

Repoint public procurement systems. Government expenditure, used wisely can be a vital accelerator for innovative companies. Research contributions from Colombia, Korea, Poland, the Philippines, and Taiwan have all cited the need to reform public procurement systems to either favour more innovative vendors, give small businesses better opportunities to compete, or introduce more competition into the tender process. For some countries, including Bangladesh, Ghana, Honduras, India, and the Philippines, the challenge isn’t just about government procurement, but broader regulatory weaknesses, including slow government processes for registering new businesses, approving uses of new technologies, and simply removing restrictions and burdensome regulations and procedures from sectors such as telecommunications, transport, and professional services.

Invest in ICT infrastructure. Finally, some think-tank representatives, including in Colombia and Poland, believe a weak ICT infrastructure is significantly inhibiting their countries’ innovation potential. Alternatively those in Pakistan and the Philippines, report improvements in this regard which have advantageously advanced their national innovation environments.

Perhaps we should refine the quote along the lines of “Innovation isn’t everything, but, in the long run, it is almost everything”.

Read more: Innovation 2.0: From Innovation to Invention

Disclaimer: Any views and/or opinions expressed in this post by individual authors or contributors are their personal views and/or opinions and do not necessarily reflect the views and/or opinions of Huawei Technologies.