Strengthening Innovation for the Prosperity of Nations

The Innovation for Development Report 2009–2010 Papers

Augusto López-Claros
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 1.1 The Innovation Capacity Index: Factors, Policies, and
     Institutions Driving Country Innovation

Augusto López-Claros,
EFD–Global Consulting Network

Yasmina N. Mata,
EFD–Global Consulting Network
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Yasmina Mata
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Executive Summary

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executive summary

The first chapter, “The Innovation Capacity Index: Factors, Policies, and Institutions Driving Country Innovation,” by authors Augusto López-Claros and Yasmina N. Mata, begins with a glimpse at some of the little-known history of innovation, long before the industrial revolution. We learn that the invention of eyeglasses not only extended productive working life, but spawned the invention of precision instruments, laying the foundation for later articulated machines with fitted parts. The clock permitted the ordering of life in cities, but gave rise to the very notion of productivity, leading to Adam Smith’s insight that wealth and prosperity depend directly on the “productive powers of labor.” As the authors show, the varied paths followed by different nations in their approach to innovation and scientific discovery determined their ability to capitalize on their innovations and buttress their development and technological potential. They explain how, despite the priceless inventions they bequeathed to the world—printing, paper, the compass, gunpowder, porcelain, silk, the use of coal and coke for smelting iron, and the numerous inroads into scientific research which far surpassed what was known in Europe in their day—the totalitarian nature of the regimes in the Arab world and China stifled the possibilities for further development. With the coming of the Renaissance and the establishment of scientific societies and formal programs of scientific enquiry, Europe imposed fewer constraints on innovators, leading inexorably to the industrial revolution and the culture of innovation and research which we now see as powerful engines of economic and social development.

There is no doubt that, in recent years, progress in the dissemination of knowledge and the use of information and communications technologies (ICT) has become increasingly widespread and has resulted in improved productivity. As the authors make clear, the traditional sources of power and influence, such as territory, resources, raw manpower, and military might—for centuries the chief determinants of nations’ prosperity—are far less important today, and have given way to a world in which successful development is not only increasingly linked to sound policies, good governance, and effective management of scarce financial resources, but, most important, to the ability of societies to release and harness the latent creative capacities of their populations. Successful Executive Summary countries today are not necessarily large geographically, neither are they richly endowed with natural resources, or able to project military power beyond their borders. More and more, the countries to look to are those which have managed to expand opportunities for their populations through the full exploitation of the opportunities afforded by the world economy through international trade, foreign investment, the adoption of new technologies, macroeconomic stability, and high rates of saving.

In building the Innovation Capacity Index (ICI), the authors draw on a sound theoretical framework and the best available data to correlate the wide-ranging set of relevant factors, policies, and institutional characteristics which play a central role in boosting a nation’s capacity for innovation. In its 2009 edition, the ICI covers 131 countries and identifies over 60 factors that are seen to have a bearing on a country’s ability to create an environment that encourages innovation, such as a nation’s institutional environment, human capital endowment, the presence of social inclusion, the regulatory and legal framework, the infrastructure for research and development, and the adoption and use of information and communication technologies, among others. Fully 90 percent of the variables used in the construction of the Index are “hard”—i.e., measuring directly some underlying factor, such as the budget deficit, expenditure in education, or cumbersome regulations, etc.—and, therefore, not dependent on a survey instrument.

The authors explain in detail the construction of the Index, which explicitly incorporates the notion that, while there are many factors which influence countries’ innovation capacity, their relative importance varies, depending on the stage of a country’s development and the particular political regime in which policies are being implemented. These differing stages of development are closely correlated with rising economic prosperity and per capita income. But, the authors also take the view, anchored in empirical observation, that democracies tend to do better than authoritarian regimes at encouraging the creation of friendly environments for innovation. These notions are reflected in the weight distribution assigned to the different pillars of the Index according to countries’ per capital income and political regime classification. Those pillars which have more to do with people, institutions, and social networks are shown to be foundations for the pillars dealing with means and other enabling factors. The weight distribution encourages achievements in the last set of pillars in countries where the institutional and human resource foundations are well laid, whereas the reverse obtains for achievements in these same areas, in countries where these foundations are lacking.

The ICI is offered as a policy tool to promote dialogue for examining more closely the broad range of policies and institutions which foster an environment conducive to innovation. The methodologies developed offer country-specific policy prescriptions, based on nations’ stages of development, and the nature of their political regimes. The authors have constructed the Index on the foundation of the large body of work which sees indexes—with all their limitations—as working tools to generate debate on key policy issues, and to track progress over time in the evolution of those factors which help explain national performance. The Innovation Capacity Index rankings 2009–2010 may be accessed in pdf format by clicking on the thumbnail image to the right (it is also available in the downloadable full paper by the authors at the top of the page). This year’s printed edition of the Innovation for Development Report includes the individual innovation profiles of 68 countries, accounting for the lion’s share of world output. The remaining 63 can be found on our country profiles page.
Innovation Capacity Index rankings
ICI rankings

Following a detailed description of the constituent elements of the Index and its construction, the authors highlight the uses to which the ICI can be deployed, and examine in some depth the innovation capacity of five countries: Sweden, Chile, India, Russia, and Taiwan, brief descriptions of which follow:

Sweden (ICI rank 1) is the ICI’s top performing country in 2009, serving as a benchmark for other countries. The authors point to Sweden’s important presence in the global economy and to elements in its approach to innovation, which are of particular relevance not only to other industrialized countries, but to many middle-income countries with aspirations to join the league of top innovators. Sweden is impressive not only in combining open and transparent government, universal social protections, and high levels of competitiveness and productivity—making it one of the most innovative economies in the world—but equally so in the extent to which the country’s excellent policy framework has turned the private sector into the main engine of innovation.
Extract from this paper on Sweden pdf

Chile is presented as an interesting case, proving that sound policies and good institutions are not the result, but rather the engines for, the creation of wealth and prosperity. Chile’s performance (ICI rank 29) is far ahead of any other country in Latin America, and in many critical areas it is already ahead of the European Union average. A mix of sound macroeconomic management—including one of the most virtuous fiscal policies in the world—institutional reforms, and the opening of its economy to the benefits of free trade, foreign investment, and international competition, have combined to create a reliable engine of high growth and poverty reduction. The authorities have also sought to implement micro-policies aimed at enhancing the efficiency of public services through various electronic platforms, and facilitating the use of ICTs more generally. Chile is well poised to catch up with the richer members of the EU.
Extract from this paper on Chile pdf

India is acknowledged as one of the world’s fastest-growing economies and has aspirations to be a global player in the field of technological innovation. Its economic performance over the past two decades has been impressive, and has turned it into the world’s fourth largest economy. India has not only a long political tradition of democracy and rule of law, but also favorable demographics, with a growing working age population which, if properly educated, could spur rising productivity and growth. But the authors deal also with India’s disadvantages, including high illiteracy, a poorly developed infrastructure, a festering fiscal deficit problem, and a highly bureaucratic regulatory framework, all of which seriously discourage entrepreneurship and innovation. While its ranking in the ICI (85) is not high, they indicate that there is wide scope for the implementation of better policies, including institutional reforms, which might allow India to scale up in the rankings.
Extract from this paper on India pdf

Russia (ICI rank 49), despite its well-established tradition of solid contributions to basic science, is shown to be lagging far behind its true potential for innovation performance. In previous decades a leader in space exploration, nuclear technology, and aviation, it has had a difficult transition from the inefficiencies of bureaucratic central planning to the challenges of a market economy. The authors describe how the commodity boom of the past five years has increased Russia’s economic dependence on energy and other raw materials exports, and how the country’s unfriendly business environment hinders entrepreneurship and the incubation of new ideas and approaches to new products or process creation. They point also to corruption, the lack of independence of judges and courts, and the gradual return to authoritarian forms of governance as factors which do not bode well for the creation of an environment conducive to various forms of innovation. However, they conclude that there is no intrinsic reason why a country with such rich human and natural resources and distinguished history of scientific innovation should not be able to catch up with the best of the world’s innovators.
Extract from this paper on Russia pdf

Taiwan (ICI rank 13) is offered as the most impressive example in the post-World War II period of the consequences of high growth and the policies that underpin it. That a country should be able to increase its income per capita from under US$200 in 1952 to close to US$17,000 in 2007 is nothing short of astounding. Taiwan’s success is attributed to two factors: first, its success in achieving high growth, while taking full advantage of the benefits of international trade and investment and the acquisition of new technologies, and second, in avoiding the errors that have inhibited development in so many other countries. While acknowledging Taiwan’s rapid transformation in less than a half century from a simple agrarian society in the earliest stage of development into a global technology powerhouse and world leader in the production of ICT equipment, the authors suggest that Taiwan’s challenge in coming years will be to find creative ways to cooperate with China—an emerging technology power in her own right, with a much lower cost structure—and to move closer to the best performers in the ICI.
Extract from this paper on Taiwan pdf

 Summaries for Chapters 2.1–2.12: go to » PAPERS

 Contents of the Report: go to » CONTENTS pdf

Copyright © 2009
The Innovation for Development Report
Augusto López-Claros, Editor