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The Innovation for Development Report 2010–2011 Papers

Augusto López-Claros
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 1.1 Policies and Institutions Underpinning Country Innovation
     Results from the Innovation Capacity Index

Augusto López-Claros
EFD–Global Consulting Network;
Honorary Professor, European Business School

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

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The first chapter, by authors Augusto López-Claros and Yasmina N. Mata, entitled “Policies and Institutions Underpinning Country Innovation: Results from the Innovation Capacity Index,” begins with a brief review of some of the little-known history of innovation, long before the Industrial Revolution. We learn that the invention of eyeglasses not only significantly lengthened the working life of skilled workers, but spawned the invention of precision instruments. 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, 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) have become increasingly widespread and have resulted in improvements in 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 increasingly linked to sound policies, good governance, effective management of scarce financial resources, and, most important, to the extent to which societies are able to harness the latent creative capacities of their populations. Successful countries today are not necessarily large geographically, nor richly endowed with natural resources, nor 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 2010 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 different 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 be 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’ income per capita 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.

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 2010–2011 are presented in Table 1 (click image at right to access a pdf copy). This year’s printed edition of the Innovation for Development Report (see Orders) includes the individual innovation profiles of 70 countries, accounting for the lion’s share of world output. The remaining 61 can be downloaded gratis through the Orders page of this website.
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 (click corresponding link to read/download copy):
These case studies highlight a number of important lessons: (1) the fundamental role of a sensible policy framework that extends well beyond the traditional focus on macroeconomic stability, and which includes an outward orientation and active encouragement of foreign investment, for the tangible benefits it brings in terms of building innovation capacity; (2) the need to provide early support to human capital development and the building up of a modern infrastructure for training and education, without which countries will be greatly hampered in their efforts to boost productivity and to foster innovation; (3) the desirability of removing bureaucratic and regulatory obstacles to entrepreneurial activity, the excess of which can greatly stifle innovation; (4) the scope for active government policies which, through transparent and well-designed incentives, can accelerate the development of an ICT sector and, along the way, significantly boost inno¬vation capacity—certainly the inference than can be drawn from the experiences of Korea, Israel, and Taiwan; (5) the need to constantly review government spending priorities, with gains to be made from investments in the promotion of ICTs, as against the funding of consumer subsidies or other expenditures with high opportunity costs.

 Summaries for Chapters 2.1–2.12: go to » PAPERS

 Contents of the Report: go to » CONTENTS pdf

Copyright © 2010
The Innovation for Development Report
Augusto López-Claros, Editor