It is hard to find a government that disagrees with the notion that innovation is vital for economic, social, and technological progress. Yet putting this into practice can be a challenge, especially for developing countries.

The process of creating an innovative society is complex. It requires coordinated policy action across multiple institutions and levels of government, and is often a balancing act between the demands of trade partners and what is appropriate for a country’s development stage. Moreover, it requires short-term sacrifices for long-term gain.

Before taking these steps, we need to gain an understanding of what is innovation. We tend to think of innovation as a world-first application of a specific technology, for example artificial intelligence or robotics. These are called ‘frontier innovations’ because they expand the boundaries of human knowledge. But there is a whole other side to innovation, known as ‘catch-up innovation,’ which is the first application in a specific country or firm of a technology that already exists elsewhere.

When they first started making solar panels, companies in the People’s Republic of China adopted manufacturing equipment from Germany and Japan, then gradually replaced it with domestic equipment. This learning process helped Chinese solar power makers achieve a dominant position in the market. This is an example of how catch-up innovation can improve productivity in developing countries.

Asia has a rich tradition of innovation. The “Four Great Inventions” of the People’s Republic of China—papermaking, gunpowder, printing and the compass—had a tremendous impact on the world. But the region fell behind western countries around the time of the Industrial Revolution. In recent years, some developing Asian economies have narrowed or eliminated the innovation gap with high-income countries. The region is increasingly moving from the periphery of global innovation to its center. In one notable example, the Republic of Korea has lodged more US patent applications than Germany since 2012.

 

There are five key challenges that countries must face to become innovative societies.

The first is education, which is hardly surprising since innovation is an intrinsically human enterprise. In many developing Asian economies, the estimated proportion of 10-year-olds who are unable to read a simple sentence—a metric that the World Bank has termed ‘learning poverty’—exceeds 50%, meaning the majority of children do not have even basic literacy.

Policymakers must focus on strengthening basic numeracy and literacy to resolve this learning crisis. A shift to more learner-centered teaching practices will develop students’ natural inquisitiveness and curiosity. Schools must broaden and diversify the skill mix by avoiding an overemphasis on science, technology, engineering and math, the so-called STEM subjects, at the expense of subjects that can develop creativity (like art and design) or critical thinking (such as social science and the humanities). These disciplines are critical to the innovation process.

The second driver is entrepreneurship. While we generally assume a positive association between entrepreneurship and innovation, the reality is that most entrepreneurs are not innovative, do not create many new jobs, and lack the means to be productive. Indeed, just a tiny fraction (less than 2%) of entrepreneurs are responsible for the majority of job growth.

Less than one-sixth of businesses in 11 developing Asian economies are product innovators. Therefore, it is crucially important to design policy measures that help to realize the potential of these productive entrepreneurial firms and better harness their contribution to economic development.

The final three drivers of innovation are quality institutions, a robust financial system, and cities. Quality institutions, including but not limited to the rule of law and strong property rights, give innovative entrepreneurs the confidence to take risks and experiment with new ideas. Our study on the evolution of intellectual property rights in the Republic of Korea shows that economic and institutional development go hand-in-hand. Therefore, ensuring that policies to enshrine these rights are tailored to a country’s development stage is more important that than their overall strength.

A sound and efficient financial system can channel monetary resources to would-be innovators. Indeed, our analysis suggests that development of financial markets, both for equity and debt, has a positive and significant effect not only on research and development activity measured by the number of patents granted, but also on innovation quality and exclusiveness.

Finally, cities can be a powerful force for promoting innovative activity by bringing businesses, people, and institutions together. Shenzhen and Shanghai in the People’s Republic of China, Bangalore and Hyderabad in India, and Pangyo in the Republic of Korea are well-known examples of innovative cities. The implication is that innovation policy requires a nuanced, bottom-up policy approach geared toward creating an enabling environment for innovators.

These five key drivers of innovation are interrelated. Quality human capital is a crucial component of a functional entrepreneurial ecosystem; access to finance is closely tied to institutional quality; and innovative cities have world-class education systems. It is clear, then, that policy action must be coordinated across these different dimensions.

There are no shortcuts to creating an innovative society. The journey is a long-term commitment requiring a lot of hard work. However, developing Asia’s remarkable track record of adjusting policies to support growth and poverty reduction makes us optimistic that the region’s future prosperity can be driven by a new golden age of innovation.

This blog post is based on research in the publication Asian Development Outlook (ADO) 2020: What Drives Innovation in Asia?