ITIF thanks the Kauffman Foundation for making this report possible.
The last decade has seen an increasing realization among economists and policymakers that innovation has become the central economic growth driver and a key to improved standards of living. This awakening to the importance of innovation-based economic growth has spawned a fierce race for global innovation advantage among countries. To advance their competitiveness in this race, many countries are implementing thoughtful and constructive innovation policies aimed at boosting their use of information and communications technologies, helping their companies become more productive and innovative, and facilitating the creation of new companies that produce high-value-added products and services. However, some countries have put in place policies that try to win the race by distorting the global innovation system at the expense of other nations. Hence, a framework is required to identify and promote the deployment of effective innovation policies that drive domestic economic growth while ensuring a sustainable innovation ecosystem that benefits all countries throughout the world. Effective innovation policy relies on more than just science policy and the promotion of high-tech product development. It also must focus on improving productivity across the board in all economic sectors. Countries with the best innovation strategies coordinate their policies toward skills, scientific research, information and communications technologies (ICTs), tax, trade, intellectual property, government procurement, standards, and regulations in an integrated approach designed to drive economic growth through innovation. Nations are unlikely to achieve sustainably high rates of innovation if their governments have not put in place a broad range of innovation-enabling policies that create the conditions in which organizations throughout a country—whether private enterprises, government agencies, or nonprofit entities—can successfully innovate. To help them do so, this report provides a structured assessment of policies informing the innovation capacity of fifty-five countries. Moreover, it highlights the most effective policies countries are using to build their innovation capacity, and describes how countries can learn from one another in deploying the best policies. The fifty-five countries analyzed in this report include all members of the Organisation for Economic Co-operation and Development (OECD), all European Union (EU) member states, and nineteen of the twenty-one Asia-Pacific Economic Cooperation (APEC) member economies, as well as the large developing nations of Argentina, Brazil, India, and South Africa. According to the income classification system of the World Bank, thirty-six of the fifty-five countries are “high income,” fifteen are “upper-middle income,” and four—India, Indonesia, the Philippines, and Vietnam—are “lower-middle income.” Due to a lack of available data, no “low-income” countries are included in the analysis.
The report assesses these countries on their strength in seven core policy areas:
- Open and non-discriminatory market access and foreign direct investment policies;
- Science and R&D policies that spur innovation;
- Openness to domestic competition and new firm entry;
- Effective intellectual property rights protection policies;
- Digital policies enabling the robust deployment of ICT platforms;
- Open and transparent government procurement policies; and
- Openness to high-skill immigration.
Countries are ranked as upper tier, upper-mid tier, lower-mid tier, or lower tier on each of these seven indices, with those ranks calculated by countries’ performance on an array of key sub-indicators relevant to each core policy area. In total, the study assesses eighty-four sub-indicators across the seven core innovation policy areas. The seven areas then are weighted as follows: trade, science and R&D, and digital policies at 17.5 percent of the overall weight each; intellectual property protection and domestic competition at 15 percent each; government procurement at 10 percent; and high-skill immigration at 7.5 percent. Countries’ ranks on the seven weighted core innovation policy areas then are aggregated to produce an overall ranking reflecting the strength of their innovation policy capacity.
To maximize global innovation, countries need to implement their policies with regard to trade, science and R&D, ICT, intellectual property rights, domestic market competition, government procurement, and high-skill immigration in ways that maximize their innovation capacity but without distorting global trade. To accomplish this, countries’ policies will have to be predicated on transparent, non-discriminatory, market-based principles that embrace both global standards and the free flow of talent, capital, information, products, services, and technologies. The following provides a brief summary of the key points in each of the seven core innovation policy areas.
Trade: As innovation and trade policy have become increasingly intertwined, openness to trade characterized by open market access and receptivity to foreign direct investment has become a bedrock pillar of a country’s innovation capacity:
- Free trade benefits all countries by allowing each to specialize in producing the products or services in which they have a comparative or competitive advantage.
- Countries should not specialize in all technologies and industries; rather, trade enables them to specialize in what they are good at and then trade for the rest.
- A vital component of free trade is openness to both inward and outward foreign direct investment.
- Another critical component is the use of voluntary, market-led, global standards.
Science and R&D: Science and R&D policies boost countries’ innovation potential while enhancing their ability to benefit from technology-based innovation:
- Developed nations should focus on implementing science and R&D policies that increase the supply of ideas, knowledge, and technology in their economies and then incentivize their commercialization.
- Developing nations should focus more on implementing science and R&D policies that enable their organizations to adopt newer and better technologies.
- Countries should utilize a diverse portfolio of science and R&D tools, targeting strategic and broad technologies and industries at all stages of their development.
- Technology and R&D policies should be coordinated by a National Innovation Foundation to take advantage of inherent synergies between policies.
- Science and R&D policies should not discriminate against foreign firms operating domestically.
Domestic Competition: Vibrant domestic markets supported by a sound and rules-based regulatory environment that allows both existing and new firms (whether domestic- or foreign-owned) to compete on a level playing field remain a lynchpin of prosperity:
- Competitive marketplaces are one of the strongest drivers of innovation and productivity growth.
- Countries should remove onerous regulatory restrictions, incumbent protections, cross-border trade restrictions, and labor market restrictions that inhibit competition.
- Leading countries feature regulatory systems that are transparent and non-discriminatory, provide due process, and include opportunities for the meaningful engagement of all stakeholders.
- Countries should create an environment that fosters entrepreneurship throughout all sectors of the economy.
IPR: Recognition of intellectual property rights (IPR) is a vital element if global trade and foreign direct investment are to thrive:
- Effective protection and enforcement of IPR encourages innovators to invest in research, development, and the commercialization of technologies while promoting their dissemination.
- Weak intellectual property rights protections reduce the flow of foreign direct investment and technology transfer.
- Without adequate intellectual property protections, there will be less innovation overall, and this hurts all countries.
- IPR reform tends to deliver positive economic results regardless of a country’s level of development.
Digital Policies: Information and communications technology is the global economy’s strongest enabler of productivity and innovation:
- Effective digital policies focus first and foremost on spurring ICT use throughout the economy.
- The vast majority of benefits from ICT come from the widespread use of ICT in all sectors as opposed to its production.
- Leading countries recognize that the greatest opportunity to improve their economic growth lies in increasing the productivity of their domestic sectors, particularly through the application of ICT.
Government Procurement: Because government procurement accounts for such a large share of economic activity in most countries, government procurement policy is an important and legitimate component of countries’ innovation strategies:
- Governments should orient their procurement policies to become strong drivers of innovation.
- Government purchases should be made on the basis of the best value for government, not on the basis of national preferences.
- Government procurement policies should be transparent, non-discriminatory, openly competitive, and performance-based.
- Countries should refrain from adopting measures that make the location of the development or ownership of intellectual property, or any requirement to license intellectual property to a domestic entity, a condition for government procurement eligibility.
High-Skill Immigration: Talent has become the world’s most sought-after commodity. Thus, having a highly skilled talent pool to draw from has become vital to countries’ economic well-being:
- High-skill immigrants play a critical role in bringing skills, talent, and knowledge to societies while contributing to new firm development, employment, and economic growth.
- Immigration policies play an important part in contributing to a country’s knowledge pool and creative ability by bringing in new perspectives and needed skills and knowledge.