The innovative performance of a country or region depends very much on the degree to which the role of creativity, innovation, and entrepreneurship has become the basis of national culture and the central preoccupation of organisations and individuals. It cannot be imposed by regulation and government policies, nor can it reach optimal levels without a well-functioning innovation ecosystem.

To fully and properly understand the innovation processes in a country, we need to tackle all three aspects of the phenomenon:

  • the actual performance of the country – as reflected in international rankings;
  • the innovation efficiency of the country – measured in comparison between the inputs and outputs;
  • the quality and impact of the innovation ecosystem in the country.

This is because we are strong on the position that the quality and efficiency of the knowledge economy depends largely on innovative capacity and actual innovation performance of a society and its economy.

The innovation performance

Probably the most authoritative ranking of innovation performance is presented in the WIPO report Global Innovation Index – an annual publication, systematically covering 132 countries. The assessment of each country’s performance, and consequently its global ranking, is now based on 81 parameters, grouped into the following 7 pillars:

  • institutions;
  • human capital and research;
  • infrastructure;
  • market sophistication;
  • business sophistication;
  • knowledge and technology outputs;
  • creative outputs.

Each country receives for each of the parameters its index and ranking, and on that basis, its overall global ranking is determined.

Since innovation performance largely depends on economic conditions in a country, the report divides the 132 countries into 4 categories:

  • 51 high-income;
  • 34 upper middle-income;
  • 34 lower middle-income;
  • 13 low-income countries.

The difference in the proportions of the successful innovators among the rich and poor countries - 54% vs. 23% - speaks loud and clear: the economically advanced countries are distinctly better in innovation performance than the poor countries.

How well did the countries actually perform – based on expectations with regard to their economic status? Of all 132 countries covered, 44 of them performed above expectations based on their level of development, 57 performed in line with their level of development, and 31 of them underperformed.

China
When comparing these rankings with WIPO reports for the last 4-5 years, it is apparent that – with very few exceptions, particularly in the case of China – the global innovation landscape is changing rather slowly. This is true especially for the top 20 countries – vis-à-vis the rest of the world.

There are however notable changes in global ranking among the Top S&T clusters. Namely in the 2021 rankings the San Jose-San Francisco, Paris, London, and Amsterdam-Rotterdam clusters are on positions between 5 and 19, while the 4 leading top clusters are all in Asia (Tokyo-Yokohama, Shenzhen-Hong Kong-Guangzhou, Beijing, and Seoul). Over the last year, even 8 clusters from high-income countries have experienced a fall in their global ranking, while 3 in Asia and Australia have improved theirs.

Investing in innovation

No innovation can be successfully developed and introduced to the market without the necessary funding, which comes from public and private sources. Both combined and compared to the GDP – the GERD (Gross Expenditures on R&D) – demonstrate the level of a country’s commitment to supporting innovation. Though funding R&D and innovation efforts fall into high-risk investment – especially in the public sector – people usually refer to it as expenditure, rather than investment, with very promising return in the long run.

As reported during the year, only a handfull of countries have reached GERD of over 3% (Israel, Korea, Sweden, USA, Switzerland, Singapore, Taiwan), the EU average is just over 2%, but unfortunately, the majority of countries remain at around 1 – 1.5% level, while many even below 1%. The Chinese government has fully understood the strategic importance of investing in innovation (having doubled GERD in 10 years), and giving it a very high priority. The government is still not fully satisfied with the achievements and recently decided for GERD to reach 3% in 2025!

For many years now, investments in R&D have consistently grown faster than GDP – manifesting commitment by respective governments. The GERD reached an all-time high before the onset of the pandemic, growing at an exceptionally high rate of 8.5 % in 2019. In comparison, global GDP grew by only 2.4 % that year. With already high growth in R&D expenditures in 2017 and 2018, the pre-pandemic years have seen one of the most pronounced increases in the world economy’s R&D intensity on record. The top five GERD growing economies in 2019 were China with +11.1%, followed by the United States (+10.9 %), Japan (−0.4 %), Germany (+2.3 %), and the Republic of Korea (+4.8%). These five economies have consistently been the world’s major R&D spenders since 2011. Business R&D expenditure – the largest component of total global R&D – grew by 7.2 % in 2019, up from 4.6% in 2018.

The other strategically important source of innovation funding is support to company creation and the availability of venture capital. How about the number of venture capital deals? They grew by 5.8 % in 2020, exceeding the indicator’s 10-year average growth rate of 3.6 %. The exceptional resilience of innovation financing is even more remarkable considering the fact that VC deals declined in Europe and Northern America in the second quarter of 2020 when overall financial market uncertainty soared. Strong growth in the Asia Pacific region more than compensated for this decline. Aside from the rapid growth of VC deals in the Asia Pacific region (+26.6 %), both Africa and Latin America, and the Caribbean also registered double-digit increases (+82.7 % and +12.1 %, respectively) – albeit from significantly lower levels. Northern America and Europe ended the year with declines of −3.1 % and −0.7 %, respectively. First-quarter figures for 2021 suggest even more vibrant VC activity in the year, with the Asia Pacific region reaching an all-time high with 1,260 deals. In funding terms, the first quarter of 2021 VC activity in all regions already equates to nearly half of total funding in 2020, setting a strong pace for the rest of the year. This is all very encouraging as it illustrates the interest of the private sector to create the entrepreneurial basis for not only developing innovations but also creating companies that will be capable and motivated to bring these innovations to the market (transforming an invention into an innovation).

Efficiency of innovation performance

A logical measurement of innovation efficiency is the proportion between innovation inputs and outputs – related also to their levels expressed in international rankings. Innovation efficiency was compared for 18 countries of Central and SE Europe, and the results were surprising: the difference between input and output ranking was largely unfavourable (negative and indicating the degree of inefficiency) for Hungary, Montenegro, Bulgaria, Serbia, Slovenia, France, Romania, and Italy. A more positive relationship, indicating efficient use of inputs (though in most cases at lower levels) has been registered for: Albania, Greece, Northern Macedonia, Bosnia-Herzegovina, Austria, Croatia, Portugal, and Spain.

China

The innovation ecosystem – a necessary environment

With the changes in the nature of the innovation processes, the role of the regulatory system and government policies has increased very strongly.

As explained by the world top expert on the issue prof. dr. Charles Edquist, the supply-driven, linear innovation model (starting with basic research and resulting in new products and services at the market) definitely belongs to history.

The new model, referred to by prof. Edquist as “the system of innovation” is characterised by demand-driven processes, covering the domains of R&D, education, development of new markets, articulation of quality requirements, creating and changing institutions, interactive learning, incubation, financing of innovation processes, and consultancy services.

This requires a different, more holistic innovation policy, while at present in most countries this transformation has not been fully understood. Therefore, the innovation system and government policies are not properly adjusted to the actual requirements of the modern innovation processes. What could be done to accelerate this adjustment? There are five priority domains for action:

  • urgent awareness building and mobilisation of policy-makers, as well as top leaders in business and academia;
  • creation of a government advisory body exclusively for innovation – to be led by the prime minister, and involving a couple of ministers and representatives of innovation actors – but also properly structured and well-coordinated government departments;
  • the concept and practical importance of the “System of Innovation” should be included in all education programmes, particularly in university curricula;
  • business-academia partnership is absolutely essential for upgrading the innovation processes, and it should be encouraged by policy measures, such as tax incentives;
  • innovation needs to become the backbone of the development strategy adopted at the national level – with the broadest possible consensus, and defining priority areas where a country is reaching global excellence, and should therefore be accepted as a focus in national research and innovation efforts.

Closing thoughts

Though attention to innovation – being increasingly recognised as the key to growth, higher productivity, and stronger international competitiveness – is gradually growing, there are still numerous misconceptions and oversimplified approaches preventing its full contribution to progress in the direction of a sustainable, knowledge economy.

The following are the most important among these issues.

  • Many governments still don't realise that the nature of the innovation process in the 21st century is fundamentally different compared to the past when it was primarily the responsibility of science and R&D in the corporate sector. The linear innovation model still remains predominant in peoples’ mindset, keeping us away from identifying the roots and complexities of the transition into a knowledge economy.
  • Now innovation is present in all spheres of public and private life, there are many more actors directly involved, and the regulatory & policy framework affects critically all aspects and domains of innovation processes. The old linear innovation model has been replaced by a functional and complex »System of Innovation« model - changing the rules of behavior for all involved.
  • Dynamism of accepting innovation at the market has increased to a degree difficult to fully understand, but it implies a much quicker, hands-on response by all innovation actors, as well as the government. This can be illustrated by the number of years needed by some new products to penetrate the global market (at least 50 million consumers): telephone 50, mobile phone 12, YouTube 4, Facebook 3, and Twitter 2 years.
  • The impact of funding available to support innovation at various stages has increased, and therefore it is so important that GERD reaches at least 3% of GDP. What matters is also the relationship between public vs. private funding. While after WWII the public share was in most countries bigger than the private (in 1953 for example in the US government's share was about 2/3 of GERD, which was 1% of BDP). Though the public share has not been reduced in absolute terms, it tends to be now about 30-40% of GERD for most countries.
  • The accelerator effect of public R&D funding is generally underestimated. It is definitely not easy to assess it very precisely, but in economic literature, researchers having done extensive empirical studies confirm that there is a strong positive association between R&D expenditure and economic growth (GDP) in the long run; 1% increase in GERD leads to 0.07% increase in GDP.
  • Academic innovation actors are (somehow understandably) pushing focus on measuring inputs (legitimately requesting more funding) – while justifying it by focussing on publications. The fact is that scientific publications are important and beneficial, but represent only an early stage of innovation, and also academics should understand that only products and services accepted at the market bring money and contribute to economic growth.

Let us conclude by saying that innovation has become more than ever the prime generator of economic and social progress, and – particularly in modern system of innovation – they require a properly conceived ecosystem, fully engaged and well-connected innovators in all domains of public life, and a government recognising innovation as a decisive pillar of economic growth, which requires a proper development strategy.