Is innovation the new driver of growth?

By Shanti Jagannathan on Mon, 11 March 2013

This topic has been much discussed in recent years. The Organisation for Economic Co-operation and Development (OECD) reports argue that capability to innovate and to bring innovation successfully to market is a crucial determinant of global competitiveness. World Bank reports highlight the positive correlation between knowledge economies and economic growth. Innovation is crucial to increasing productivity, which is expected to be the future driver of growth. Counties in Asia that have done well in growth have a better world ranking in innovation than in the overall Knowledge Economy Index. While causality is difficult to establish, the fastest growing economies in Asia also increased their innovative capacities significantly.  People’s Republic of China (PRC), India and Indonesia made impressive improvements in their world innovation ranking in 2012 compared to 2000.  Japan, which slid back in innovation, also did poorly in terms of growth.   

The outlier is Kazakhstan, whose innovation ranking is poorer than its knowledge economy index ranking. However, it is a top priority for the government of Kazakhstan to improve the country’s capacity for innovation, which came through strongly during my recent visit to the country. The state program of Accelerated Industrial-Innovative Development 2010-2014 aims to diversify and modernize the economy beyond the oil and gas sectors. The government is investing in a robust innovation infrastructure that includes design bureaus, techno parks and centers for commercialization of technology. Foresight studies have been carried out to identify 73 critical technologies. The National Innovation Fund has funded over 50 R&D projects between 2003-2010 to promote productivity growth and high tech sectors. The new Science Law dramatically increased funding for R&D and innovative education.  Seven venture capital funds were launched with funding of $ 10 m each to stimulate innovation and its commercialization. In summary, although not yet reaching advanced country levels of R&D funding as a share of GDP, Kazakhstan is investing substantial public resources in innovation. 

However, there is still some distance to an innovation-driven economic development. For effective commercialization of innovation, a more vibrant domestic private sector is required, as pointed out by a recent Innovation Performance Review. An ‘eco system’ that supports financing of entrepreneurial start-up companies and ensures a strong patents regime, for example, are needed. In addition, I did not hear much about policies or strategies that link public investments in innovation to expected public goods. A recent paper by the Brookings Institution on Smart Policy - Building an Innovation Based Economy points out that while the translation of publicly funded research into profitable economic activity is a great outcome, it is also important to explicitly encourage greater competition, through appropriate policies such as non-exclusive licenses, wider use of patents and regulation of monopolistic practices. The paper gives the example of the evolution of innovation and costs of healthcare. The revolutionary advances in biomedicine, largely derived from publicly funded science, have given new hope to patients but may not mean that more patients can access or afford the latest medical care.  Moreover, established global pharmaceutical companies can possibly set prices above competitive prices. In this case, the paper argues that innovation ends up strengthening the power of established companies, and keeping prices high. However, appropriate policies may generate better public outcomes from research and innovation. This should ring true for Kazakhstan. 

An important question to investigate is how advancing on the innovation and knowledge front can also help to reduce inequality, which is growing in Asia and how innovation can serve mass markets. These issues are currently being investigated in an ADB study Asia's Knowledge Economies: the Next Policy Agenda