Innovation: Of Indices, and Economies

Innovation is a multi-sectoral process involving various stakeholders from the state, market, and society.

Innovation: Of Indices, and Economies
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The first thing that comes to our mind when we hear the word “innovation” is originality. Innovation is successfully creating and implementing something new that improves a product, process, or service. It strives to improve the monotony of everyday life. It becomes difficult to establish a precise definition of the word, in the dynamic world that we live in where innovation is required at all levels in today’s age of global competition.

Innovation is a multi-sectoral process involving various stakeholders from the state, market, and society. Each contributes a significant value to the larger “innovation ecosystem” by transforming new ideas into reality through R&D, human resources, and financial investment. There exist two parallel economies in the innovation ecosystem, the research economy is driven by fundamental research whereas commercial economics is driven by the marketplace. Therefore, in the current time innovation is perceived, pursued, and incentivised by different institutional actors and entities in the innovative ecosystem.

Progress in innovation is placed by many countries at the heart of their growth strategies. Despite the massive setback by COVID 19, the global innovation investment remained buoyant.  The ones that adopted digitalisation, innovation, and technology displayed resilience to the pandemic. The top global corporate R&D spenders increased their R&D expenditures by around 10 percent in 2020, with 60 percent of these R&D-intensive firms reporting an increase as per the GII (Global Innovation Index) report. Over time, a few middle-income economies have managed to catch up in innovation with their more developed peers. India ranks 46th out of 132 countries in the 2021 Global Innovation Index report, the most significant jump by any major economy. China jumped two places to 12th and is now at the threshold of the GII top 10. India has climbed up 4 places to 50th rank becoming the only South Asian country in the BII (Bloomberg Innovation Index) whereas China ranks 16th on the list.

Which nations have the most advanced technology systems in the world is largely dependent on innovation. Trends in innovation are linked to several financial, industrial, economic, and social indices. Hence, it becomes crucial to develop tools to assess innovation across diverse economies. There is no single indicator that captures the entire spectrum of innovation performance, from idea generation to impact. Innovation is different at a macroeconomics level as compared to a microeconomics level and this is the reason why researchers have found it difficult to objectify innovations. The problem that most researchers face is that the data available is aggregate data, which only reflects the macro-economic aspects of innovation. This need for adequate statistical data reflecting all aspects of innovation is the reason why researchers have continually pushed for new indicators of innovation output. This gave rise to various indices such as Global Innovation Index, International Innovation Index, Bloomberg Innovation Index, etc.GII monitors over 130 economies around the world to identify R&D investments and the effects of innovation using robust metrics. This data is used by academicians as a tool to study and understand innovation all over the world, businesses to affirm the most suitable R&D investments, and governments in policy making. GII relies on a wide set of indicators to measure the innovation performance of economies. The seven pillars form the foundation of the GII rating, which is divided into Innovation Input and Output Indexes, which form the foundation of the GII rating. Innovation Inputs: Institutions, Human and Capital Research, Infrastructure, Market sophistication, and Business sophistication. Innovation Outputs: Knowledge and Technology Outputs, and Creative Outputs. Input data could serve to fill the void, where standards for determining the level of innovation in an economy's products are dearth.The annual Bloomberg Innovation Index analyses 7 metrics with dozens of criteria that contribute to innovation in each country: research and development, gross value added by manufacturing, productivity, high-tech company density, researcher concentration, tertiary efficiency, and patent activity.

The Bloomberg Innovation index categories are so broad and comprehensive, that the analysis is often interpreted not only as a measure of economic innovation but of innovation as a whole. If we look at the top 5 countries in the GII and BII indices, we see different names making it to the top of the list. Such as the USA ranks 3rd in GII, whereas it ranks 11th in BII. Likewise, the UK ranks 4th in GII, but it’s nowhere in the top 5 names on BII, the same goes with Switzerland as it ranks 4th in BII but doesn’t make it to the top 5 of GII. At the same time, GII releases data for 132 nations whereas BII releases just for 60 countries.

GII is special because all of the variables used to calculate GII are macroeconomic variables born from the aggregation of micro- variables, thus representing both perspectives. Along with that, GII uses proxies such as human capital and research which not only capture innovation but also the potential drivers of innovation. Further, out of the 81 variables used, 22 are economic variables which are calculated using GDP, FDI, etc thus making GII reflective of the national position of a country. Hence, GII seems to be a perfect indicator while at the same time taking into account the factors which drove said innovations. This is indicative of the fact that according to the GII report 2020, Australia saw the maximum growth in government budget allocations from R&D. Subsequently, it jumped from 25th position to 22nd position in the rankings.

Government Budget Allocations for R & D, growth in 2020

Similarly, when comparing the percentage of the GDP that the top 5 countries spend on R&D compared to India’s expenditure on R&D, it is evident that this factor plays a major role in deciding how innovative a particular country is. The top 5 countries have an average expenditure of 2.6% of their GDP whereas for India it is a mere 0.65%. This is reflected by the fact that India is ranked 46th in the GII. Hence, a factor such as the percentage of GDP spent on R&D, which is a driver of innovation and represents the national position of a country is an important factor taken into consideration while calculating the GII.

When the data is analysed, it was evident that these 5 countries performed much better in comparison to the other countries. They had a higher average mean value of 61.97 as compared to 37.96 of the other 124 countries. They also had a lesser average standard deviation of 0.91 as compared to 1.6. This indicates that these countries were performing far better and much more consistently than the other countries.

Silicon Valley in California and Bangalore in India, as well as Shanghai in China, are known to be innovation hotspots, where they attract the best talent and the largest number of companies, startups as well as entrepreneurs compared to other regions and cities of the same country or even around the world. Indeed, Silicon Valley and Bangalore are household names for anyone who is remotely associated with the Tech Industry given their reputations for being innovation hotspots. The startups in India have grown remarkably over the last six years. The number of newly recognized startups has increased to over 14,000 in 2021-22 from 733 in 2016-17. As a result, India has become the third-largest startup ecosystem in the world after the US and China. Further, a record 44 Indian startups have achieved unicorn status in 2021 and 17 unicorns with a total valuation of $ 22.00 Billion were born in 2022, taking the overall tally of unicorns in India to 103 unicorns with a total valuation of $ 335.80 Billion 83 as of 29th June 2022, most of these are in the services sector.

It is evident that there is a clear correlation between innovation and economic growth, that is why prestigious innovation indexes like WIPO’s Global Innovation Index, Boston Consulting Group’s  International Innovation Index, World Economic Forum’s Competitiveness Index, Bloomsberg Innovation Index, and other global and local indices look at innovation as one of the crucial factors and drivers of growth. It is hard to objectify the innovation and precisely represent it in numbers but the Global Innovation Index manages to capture this through multiple variables which demonstrate the various aspects of innovation. Though it is safe to say, looking at the different names of countries making it to the top 5 rankings of GII and BII that there is still a need for a more robust index that reflects the innovation that is being carried out and contributing to the country’s economic growth and we are hopeful that this need will cease to exist soon!