Monday, July 9, 2012

THE GLOBAL INNOVATION INDEX AND THE UK ECONOMY

Politicians and policy makers are always wary of league tables produced by independent organisations or academic bodies as they can have a major effect on the way that governments, and their policies, are perceived by the outside world.

For example, PISA - the Programme for International Student Assessment - has become the leading international benchmark for educational achievements.

As a result, education ministers await the results of these tests, which are carried out every three years, with all the nervous trepidation of an A-level student picking up their marks from school in August.

Given this, it is surprising that UK Ministers were not jumping up and down in joy at the latest results from the 2012 Global Innovation Index. Produced by INSEAD, one of the World’s top business schools, and the World Intellectual Property Organization (WIPO), the report ranks 141 economies on the basis of their innovation capabilities and results.

Whilst smaller countries such as Switzerland, Sweden, Singapore and Sweden led the world in overall innovation performance, the UK managed fifth place, ahead of other major economies such as the United States, Germany and Canada. Below is a comparison of the UK's performance on nine key indicators with Sweden and Singapore.



According to the index, the UK is No 1 in indicators such as the cost of redundancy dismissal, ease of getting credit and areas of online creativity. And at a time when our financial institutions are facing considerable difficulties due to issues such as the Libor scandal, it must be noted that they are vital to developing a strong innovative economy – the UK is ranked first on credit and third on investment with regard to financial markets.

There is also evidence that the commercialisation of knowledge is working well with high rankings for not only the creation of knowledge through patenting and scientific research, but also for the economic impact of these activities in the economy.

However, policymakers concerned with the internationalisation of British goods and services will be worried by the 57th global ranking in trade and competition. Certainly, there are lessons to be learnt from countries such as Singapore – ranked first in the World under this measure - that have always prioritised the exports of goods and services as a critical part of their economic and innovation policy.

In a wider context, the report shows worrying trends for the development of the World economy. For example, whilst it is generally accepted that investing in innovation during recessions is essential for enabling quick recovery, research and development expenditures in most leading nations has fallen by an average of 1.6 per cent since 2009. But whilst governments have continued to support investment in higher education research as part of their recovery strategies, the business community has cut back its expenditure in R and D by almost five per cent over the same period.

Going forward, the concern for policymakers is that unless there are changes to political imperatives, the public sector will no longer be able to keep up the same level of research funding to universities, especially if austerity measures continue to bite. As a result, it is critical that the private sector is supported in funding new technologies, products and services over the next few years to make up for any potential shortfall.

The issue of a two track Europe, which has attracted considerable commentary over the last year, also seems to apply in terms of innovation. Indeed, the  study suggests the emergence of a group of innovation leaders in Northern Europe (Sweden, Finland, the United Kingdom, the Netherlands, Denmark) as well as a second group of innovation laggards in southern Europe, including Spain (29th), Portugal (35th), Italy (36th) and Greece (66th).

The question for policymakers in Brussels is whether these four nations, given the state of their public finances, will ever be in a position again to develop their innovation potential and, more importantly, whether the European Commission should continue to spend large amounts of its vast R and D budget on these economies rather than on those economies, such as Finland and the UK, which can achieve far more in terms of their innovation potential.

But it is not only the poorer parts of Europe that are facing issues with innovation.

As economists continue to write volumes on the market potential of the so-called BRIC economies, the report suggests that a lack of investment in innovation could lead to a slowdown in their growth over time. For example, whilst China’s performance in terms of knowledge and technology is amongst the best in the World, there remain considerable weaknesses in the development of a strong innovation infrastructure, an issue that is also prevalent in India, Russia and Brazil.



Therefore, one can conclude that the Global Innovation Index is good news for the UK economy.
It shows that we are doing well on a number of indicators whilst demonstrating that there is a need to do far better in terms of export-related activities. It also suggests the UK has the potential to be a major player in terms of driving forward European innovation policy and, more crucially, remains ahead of the game when it comes to competing with BRIC nations.

However, it also demonstrates, unequivocally that politicians and policymakers should not rest on their laurels. Certainly, any hard earned gains made in innovation in the UK during the last few years can be easily lost if government, because of fiscal pressures, fails to incentivise business to invest in R and D or cuts its own budget to support innovation in the economy.