How to Determine if You’re in an Innovative Nation?

“The math of innovation is really quite simple: Knowledge drives innovation, innovation drives productivity, productivity drives economic growth.”

Everybody knows what the most innovative nation on Earth is, right? Think again, my dear reader. To illustrate, I asked my family, and they said Japan. Then, I asked the media, and they said the United States. Finally, I asked Google, and its answer was Switzerland! The reason for this intercontinental variance is simple. To answer this seemingly straightforward question, you would need to evaluate all 195 nations across the globe, employing an accurate tool for measuring national innovativeness, and then rank the nations, which would reveal the top country. That’s it! Once you have done this, you’ll have your answer. The problem is that there is no such measuring tool in the shed, and if you’re expecting this article to unveil a perfect national innovativeness tool, then I’m afraid I may disappoint you. What I can promise is that we’ll head in the right direction.

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I. The Global Innovation Index?

Let’s start our quest for candidates for the best tool for measuring a nation’s innovativeness with the most popular and widely recognized one. Based on objective and subjective data from multiple sources, it’s the?Global Innovation Index. This is a ranking of countries—published annually since 2007 by the World Intellectual Property Organization (WIPO), in partnership with several corporate and academic partners and its advisory board—that measures their innovation capacity and success. First, it considers two subindexes, the average of which yields the overall index. These two subindexes relate to inputs (factors in a country’s economy that facilitate innovation) and outputs (the results of innovative activities). The input?subindexes are further broken down into five pillars, while the output sub-index is divided into two pillars. The five input pillars are as follows:

1.??? Institutions

2.??? Human capital and research

3.??? Infrastructures

4.??? Degree of market sophistication

5.??? Degree of business sophistication

The output, or results, subindex includes the following:

1.??? Knowledge and technology outcomes

2.??? Results in creativity

To measure these seven pillars, 81 different indicators are used, of which 65 are direct numerical values, 13 are composite indicators, and 3 are survey results obtained from the World Economic Forum Executive Opinion Survey. These indicators come from a wide variety of sources, and the index ranks over 130 countries each year.

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II. The Blomberg Innovation Index

Our second candidate hails from the private sector and was developed and is managed by Bloomberg, a privately held financial, software, data, and media company headquartered in Midtown Manhattan, New York City. Bloomberg publishes the Bloomberg Innovation Index, which ranks the most innovative countries among around 60 analyzed each year. This index draws on over 200 sources of information grouped into seven broad categories:

1.??? Research and development intensity (the ratio of R&D expenditure to GD)

2.??? The added value of their production

3.??? Productivity (GDP [gross domestic product] per hour worked)

4.??? High-tech density (the number of high-tech firms domiciled in the country)

5.??? Research concentration (professionals and scientists per million inhabitants)

6.??? Tertiary efficiency (human capital available for innovation through degrees and student enrollment)

7.??? Patents (patents applied for and granted per GDP)

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III. The European Innovation Scoreboard

Our third tool is specific to European nations and has been published annually by the European Commission since 2001. The scoreboard aims to provide a comparative assessment of the state of research and innovation in EU member states. It highlights the relative strengths and weaknesses of their research and innovation systems. To compile this index, four main types of activities are considered:

1.??? Environmental conditions that are not conducive to business innovation

2.??? Public and private investments in innovation

3.??? Innovative activities carried out by companies

4.??? Impact, or the economic, social, and environmental effects of innovation

The index results from the integration of 32 independent measures.

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IV. The International Innovation Index

Unfortunately, our?fourth tool, known as the International Innovation Index, has been used only once. This global index for measuring a country’s innovation level was jointly produced in 2009 by the Boston Consulting Group (BCG), the National Association of Manufacturers (NAM), and the Manufacturing Institute (MI), NAM’s nonpartisan research affiliate. The initiative was part of a large research study that examined both the business outcomes of innovation and the government’s role in encouraging and supporting innovation through public policy. It involved a survey of over 1,000 senior executives from NAM member companies across all industries, in-depth interviews with 30 of these executives, and a comparison of the "innovation friendliness" of 110 countries and all 50 US states. The findings were published in the report The Innovation Imperative in Manufacturing: How the United States Can Restore Its Edge. This report not only discusses national performance but also explores the actions companies are taking and should take to spur innovation. It looks at new policy indicators for innovation, including tax incentives and policies related to immigration, education, and intellectual property.

V. Some Indirect National Indicators

To the best of my humble knowledge, there are no better-known international indices that directly target innovation than the above. But for interest’s sake, let’s have a look at some indirect ones. First, we have the Readiness for Frontier Technologies Index, which, as its name suggests, evaluates the readiness of 166 countries to adopt new technologies. Specifically, the United Nations Conference on Trade and Development (UNCTAD) publishes the Technology and Innovation Report, which includes this index. It encompasses five categories of indicators:

1.??? Deployment of information and communication technologies (ICT), including internet usage percentage and average download speeds

2.??? Skills and knowledge of the population, including the percentage of the population in high-tech jobs and years of schooling

3.??? Research and development activities, such as the number of scientific publications and patents

4.??? Industrial activity, which considers the share of high-tech product exports and digital service exports

5.??? Access to finance, including the share of private credit in the GD

If you agree with me that national innovativeness and competitiveness tend to go hand in hand, then you’ll appreciate my second indirect tool: the Global Competitiveness Index, published by the World Economic Forum (WEF). This index combines macroeconomic and the micro/business aspects of competitiveness into a single index that demonstrates how efficiently a country uses available resources. Therefore, it measures the set of institutions, policies, and factors that set sustainable current and medium-term levels of economic prosperity. The index comprises over 110 variables, with two-thirds from the Executive Opinion Survey, a survey of business leaders in their respective countries, and one-third from publicly available sources, such as the United Nations. In calculating the index, over 140 countries are separated into three specific stages: factor-driven, efficiency-driven, and innovation-driven, each reflecting a higher degree of economic complexity. Thus, the index’s indicators are weighted differently based on a nation’s per capita income.

Lastly, speaking of per capita economic values, economists have been using GDP growth as an indirect measure of national innovativeness for many years. When GDP is growing, especially if inflation is not a problem, workers and businesses are generally better off than when it is not. GDP is the sum of all the total “value-added” at each stage of the production of goods and services within a country’s borders. Calculating a country’s GDP is usually handled by its national statistical agency, which compiles data from a large number of sources. To determine “real” GDP, the value must be adjusted to account for price changes. This allows us to discern whether an increase in the value of output is due to higher production or simply rising prices. To make comparing the GDPs of small and large nations reasonable, economists use GDP per Capita, which is calculated by dividing the GDP of a nation by its population.

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VI. The 12 Flaws within the Global Innovation Index’s Methodology

While I cannot deny the commendable efforts made by top economists worldwide to design and update these national indices for measuring the unmeasurable annually, I cannot ignore the inherent problems in their methodologies. To spare you a detailed rundown of the limitations of each measurement tool, I’ll briefly describe just 12 basic blind spots in the most popular one: the Global Innovation Index. Believe me, dear reader, if you look under the hood of the other tools, you’ll find that each also suffers from one or more of these flaws.

Interestingly, many of the Global Innovation Index’s limitations were shared by Prof. Bruno Lanvin , the index’s mastermind himself, in our inspiring discussions in December 2019. By the way, he’s a great, transparent thinker with nothing to hide.

1.??Using secondary data?

The index’s team doesn’t collect data themselves but depends on data gathered by several other organizations?for non-innovativeness-related purposes. This reliance raises big concerns regarding the data’s suitability for the innovation index.

2.??Dependency on available international indicators

To measure a nation’s innovativeness, one could identify most relevant national indicators and search for reliable international databases that have data on these indicators. But what if not all of these indicators are available for all countries? I think that this issue has led the index team to compromise the accuracy of their index by only including indicators for which annual data are available for more than 130 countries, even if their relationship to innovation is not direct. This also jeopardizes the index’s sustainability, as international indicators can change their objectives or disappear over time, which will not be good news for the index team that depends on them every year.

3. Ignoring data incompleteness

Even if the data of a country are incomplete, the index will still evaluate its innovativeness. It will also compare the country with other countries that have complete sets of data. This means that a country’s ranking can rise or fall dramatically, depending on the availability of data from other countries in that year.?

4. Dependency on government-reported data

Not all national statistics in the index come from independent international bodies; many are provided directly by local governments, which may have reasons to alter the numbers for national or international political or financial reasons. This has happened in some historical cases. Thus, the innovation index’s dependence on such data compromises its accuracy.?

5. Irrelevancy of some sub-indicators

While indicators of the inputs and outputs of national innovation, such as research and development expenditures and high-tech goods production, make sense, others, like the ease of paying taxes and electricity output as well as printed publications and Wikipedia modifications, might not directly reflect innovation. This is a small sample of the controversial indicators from which this innovation index has been constructed.

6. Using opinion-based data

The index relies on survey results that include subjective ratings (1 to 7) of national economic conditions; there should be no need to convince you that this soft data is less reliable than national hard data.

7. Time inconsistency

What happens if certain indicators’ data from the past few years were not reported by the relevant international measurement bodies regarding one country? No problem! The index combines the country’s older data with its current data from another indicator to determine rankings. Basing calculations on data?that were collected in different years for most countries raises the question of whether the published scores of the listed countries accurately reflect their current national innovativeness.

8. Oversimplification of measurements of complicated systems?

The index employs high-level national statistics, including macroeconomic data and the total number of patents, to describe very complex systems, which are national innovation ecosystems. These figures present an oversimplified picture of what is happening inside these intricate systems. For instance, in a small country, producing 1,000 patents through 1,000 local startups is not the same as producing 1,000 patents through internal projects run by a large foreign corporation that came to the country to escape taxes.

9. Oversimplification of the calculation

When you dig deeper into how index teams calculate countries’ final scores from over 80 indicators with various levels of importance and relevancy to the complex concept of the national innovation ecosystem, you’ll raise your eyebrows at the simplistic manner in which weights are derived from the crude way of averaging and identifying the weights of each indicator using basic subjective fractions. You’ll ask yourself: Is that all there is to scoring a nation’s innovation ecosystem?

10. Redundancy among Indicators

To avoid getting too technical in describing collinearity issues, let’s just say that in statistics, one of the conditions for obtaining the best results is to choose input variables that are not correlated with each other. This means that if you have two variables in the model that always increase or decrease together, such as the monetary value of income and the monetary value of taxes, you should remove one of them to increase the accuracy of the model. Back to the Global Innovation Index. It consists of more than 80 input variables. Several?of them are composite indices that include many national variables (indices within an index) computed by other organizations for different reasons. Thus, the partial overlaps that occur among these national variables are unavoidable. In fact, even the untrained eye can detect some logical relationships among the index variables upon careful examination, which supports the claim that these variables are not 100 percent independent of each other.?

11. Comparing incomparable economies

Let’s ignore the fact that the index has several social, cultural, and political indicators that don’t directly measure innovativeness and may be irrelevant to the structure and culture of some nations. The main assumption?behind the index is that there is a single recipe for building the ideal innovative nation; thus, the index’s final score measures how close a nation comes to this ideal recipe. But is there a one-size-fits-all approach to national innovation in all types of economies? Honestly, I don’t have a firm answer right now, but I’m certain that the innovation recipes for agriculture-based, manufacturing-based, natural resource–based, and tourism-based economies are by no means similar.

12. Comparing continents with cities

You might think that China, with a population of a billion and a half, and the tiny European state of Luxembourg, with a population of half a million, have nothing in common. Think again. I’ve discovered a similarity. They are competing for a spot on the top-ten global innovation index list. In this list, the US and Singapore are locked in a deadly battle for first place, even though the former is made up of 50 states and hundreds of cities and the latter is a single-city state. The message is that economic, social, and political changes differ significantly between large and small countries, and comparing, for example, the top three universities or changes in GDP per capita between them in a single list will get you nowhere.

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VII. My Proposed Measurement Tool?

Before I introduce you to the methodology I’m proposing for measuring a nation’s innovativeness, I want to bring to your attention, dear reader, that while I’m sure that it’s way more accurate and impactful than existing methodologies, applying it correctly in the field would be quite challenging in terms of money, time, and human resources. Nevertheless, the long-term economic benefits it offers are priceless.

?The methodology I’ve developed uses a tool called the Global Annual Innovative Nations Monitor, or GAINaMo for short (rhymes with dynamo, the mechanical system used to transform insignificant inputs into useful electric energy). First, allow me to list the seven stones—or assumptions, as they are known in performance management jargon—on which GAINaMo was founded.

?A. Measuring a nation’s innovativeness involves evaluating the country’s capability to generate valuable innovations throughout the calendar year. This capability can be assessed by comparing the total cost of direct innovation-related inputs with the total gain from direct innovation-related outputs or by examining, in depth, the effectiveness, efficiency, and productivity of the process of generating gainful outputs from inputs, regardless of whether the level?of inputs is high or low.

B. Accurately measuring the total cost of direct innovation-related inputs and the total gain from direct innovation-related outputs is almost impossible due to theoretical and practical challenges. Even if it were possible, as such data do not include details of the complex innovation journey, it is not so useful for national decision-makers who seek opportunities to improve the innovation ecosystem. Therefore, evaluating a nation’s effectiveness, efficiency, and productivity in the process of generating gainful outputs from inputs is more promising.

C. The process of generating gainful innovation-related outputs from inputs is defined?as the journey of innovators from the intention stage (deciding to pursue an innovation) to the income stage (receiving commercial benefits from the innovation), involving various innovation support providers from the public, private, and nonprofit sectors. These groups provide innovators with information, money, services, and opportunities, either for free or for commercial benefit, and include universities, investors, prototyping workshops, and open innovation platforms.

D. Although almost all innovations follow three general steps in their journeys from intention to income—namely, inquiry, ideation, and implementation—the specific journey toward each innovation varies based on the sector to which it belongs, such as pharmaceuticals, information technology, fashion, and fintech.

E. ?Data collected for measuring a nation’s innovativeness should be primary, unbiased, quantitative, directly measure the target variables, and?represent the activities that took place during the year under study to ensure measurement accuracy and reliability. This means that the designers of the measurement model, the teams that collect and observe the data from the field, and the statisticians who aggregate the collected data and report the results should belong to the same international entity or affiliation. It also means that the data must be based on observed facts from within each sector’s innovation journey, not on opinion-based polls or media analyses.

F. To measure the true innovativeness of a nation, the methodology should focus on individual innovators and local innovative?small and medium enterprises rather than large corporations, especially foreign multinational ones, that often work in isolation from the local innovation ecosystem. Exceptions include projects involving knowledge partnerships with local research entities or supported directly?by local governments or other local innovation support providers.

G. Comparing the innovativeness of all 195 nations on?a single list has socioeconomic flaws, so special care must be taken to make comparisons within relatively small subgroups of nations?that are reasonably comparable.?

Now, let’s walk through the five high-level steps for developing a GAINaMo report for a specific year.

1. The national GAINaMo team in each country assesses the intensity of innovation-related activities in all sectors within the local economy and assigns weights to each sector that add up to 100%. For example, a team may allocate 23.7% to information technology, 26.3% to fintech, 8.6% to pharmaceuticals, and 41.4% to fashion.

2. The national GAINaMO team develops a comprehensive database of active innovation support providers within the nation’s geographical borders and classifies their support elements based on the particular sectors and steps in the innovation journey they target.

3. The national GAINaMo team evaluates?each innovation support provider based on four criteria: availability, reachability, knowledgeability, and desirability.

3.1. Availability

The team observes?the number of average-sized?innovation-related requests that each support provider can handle during the year through each of its support elements.

3.2. Reachability

The team observes whether innovators are aware of the support elements that target them, and how easy it is to apply for them and receive responses from the provider (approval or rejection) in terms of ease of communicating with the provider’s representative, required documents and approvals, and response time.

3.3. Knowledgeability

The team evaluates the knowledge levels of the provider’s staff about innovation, the innovation journey, and support elements. Questions may include the following: How would you define innovation? Why do individuals or groups innovate? What do you know about the innovator’s journey? How would you position your support elements on the steps of an innovator’s journey? What do you know about the sectors to which innovations tend to belong? What support elements do other providers offer that target innovators who are still on the steps of the innovator journey before the position targeted by your support elements? What support elements do other providers offer that target innovators who have reached the steps in the innovator journey after?the position targeted by your support elements? What support elements do other providers offer that target?innovators who are in the same position in the innovator journey as that targeted by your support elements?

3.4. Desirability

The team investigates whether an innovator can be provided with the requested support at minimal cost and maximum benefit. Specifically, the?team examines the average time and cost, both direct and indirect, that an innovator must incur to receive the full output?of an average-sized?innovation-related request to an innovation support provider. This support relates to each support element offered. The team also examines the average quality of the output.

4. The international GAINaMo team receives data annually from national teams and calculates national score using the GAINaMo model. Perhaps I’ll describe the detailed calculations in another article, as this one is already quite lengthy. Nevertheless, I see no harm in giving you a glimpse of its high-level conditions. For each country, scores related to the availability of innovation support elements are normalized using the country’s working-age population and sector weights. In evaluating?the dimensions of the desirability criterion for each support element, the scores are calculated by considering the international average of time, expenses, and output quality of comparable elements around the world as well as the purchasing power parity (PPP) with a given year. For each country, the innovation support data are grouped, as far as possible, under the country’s previously identified innovation sectors. The national GAINaMo score is calculated by aggregating the scores of each country’s sectors, taking into account the weight of each sector in the national innovation mix.

5. The international GAINaMo team develops and publishes its annual global report, which?includes GAINaMo scores for each participating nation along with global insights. Although the report doesn’t include a complete ranking of all nations, it does group nations into small groups of comparable nations, such as high-income/low-population nations and low-income/high-population nations. In contrast, the team develops a rich national report for each nation that contains hundreds of pages and tables about the strengths and weaknesses of the nation’s innovation ecosystem and includes practical recommendations. These national reports will be confidential and delivered to each government directly.

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To bring this proposal to life, I hope that one of you, my dear readers, can take the lead (I’ll be your obedient follower). A GAINaMo organization would need to be established as a nongovernmental entity affiliated with the United Nations or one of its arms, such as the World Intellectual Property Organization (WIPO). Nations that are interested in developing or perfecting their innovation ecosystems pay an annual subscription fee based on their size. For example, a medium-sized nation would perhaps pay a fee of US$8.6 million, which would fund a local team of 23 full-time data collection experts who are independent of the government. If no one takes the lead in launching this initiative within the next year, I’ll step in and try to start it with the help of my innovation activist friends. Until then, I’ll keep waiting for a superhero to save the day.

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VIII. Final Thoughts

I agree with the statement by the great American scientist William Brody, with which I began this article. The link between a nation’s knowledge inputs and economic outputs through innovation is clear. However, quantifying this connection with hard numbers is another story. This problem is particularly challenging in a world that still does not agree on how to measure innovativeness at the country level, let alone at the firm or individual levels. So, why should innovation activists allow me to waste their valuable time discussing some inaccurate innovation indices published here and there in the media??Because these indices exert pressure on national governments to increase their innovativeness rankings by feeding their indicators through their budgets. If these indicators don’t lead to any improvement in national innovativeness, then these governments may inadvertently destroy their innovation ecosystems using their budgets. In essence, if you measure it wrongly, you’ll manage it wrongly.?