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The Innovation for Development
Report 2009–2010
Strengthening Innovation for the Prosperity of Nations

Augusto López-Claros, Editor

Director, EFD–Global Consulting Network
The Innovation for Development Report
Copyright © 2010
2009–2010: Strengthening Innovation for the
Augusto López-Claros
Prosperity of Nations

European Business School All rights reserved. No reproduction, copy or transmission of

this publication may be made without written permission.
Augusto López-Claros
Editor No paragraph of this publication may be reproduced, copied
or transmitted save with written permission or in accordance
with the provisions of the Copyright, Designs and Patents
Act 1988, or under the terms of any licence permitting lim-
ited copying issued by the Copyright Licensing Agency, 90
Tottenham Court Road, London W1T 4LP.

Any person who does any unauthorized act in relation to this

publication may be liable to criminal prosecution and civil
claims for damages.

The authors have asserted their rights to be identified as

the authors of this work in accordance with the Copyright,
Designs and Patents Act 1988.

First published 2010 by

PALGRAVE MACMILLAN
The terms country and nation as used in this report do not in Houndmills, Basingstoke, Hampshire RG21 6XS and
175 Fifth Avenue, New York, N.Y. 10010
all cases refer to a territorial entity that is a state as under-
stood by international law and practice. The term covers
PALGRAVE MACMILLAN is the global academic imprint
well-defined, geographically self-contained economic areas
of the Palgrave Macmillan division of St. Martin’s Press, LLC
that may not be states, but for which statistical data are main- and of Palgrave Macmillan Ltd. Macmillan® is a registered
tained on a separate and independent basis. trademark in the United States, United Kingdom and other
countries. Palgrave is a registered trademark in the European
Union and other countries.
ISBN 978-0-230-23966-1 ISBN 978-0-230-28547-7 (eBook)

DOI 10.1057/9780230285477
This book is printed on paper suitable for recycling and made
from fully managed and sustained forest sources.

A catalogue record for this book is available from the British

Library. A catalogue record for this book is available from the
Library of Congress.

10 9 8 7 6 5 4 3 2 1
19 18 17 16 15 14 13 12 11 10
Contents
Preface v

Executive Summary ix

Part 1: The Innovation Capacity Index 1 2.6 Quantifying the Impact of ICTs on Growth
in Developing Economies
1.1 The Innovation Capacity Index: Factors, by Markus Haacker 147
Policies, and Institutions Driving Country 2.7 Good Governance for Sustained Growth and
Innovation Development
by Augusto López-Claros and Yasmina N. Mata 3 by Daniel Kaufmann 167
2.8 Dynamics and Challenges of Innovation in
1. Innovation: A brief historical overview 4
2. Factors, policies, and institutions fostering innovation 6 Germany
3. Measuring innovation: Composite indicators 13 by Alexander Ebner and Florian Täube 183
4. The Innovation Capacity Index 15
5. Innovation Capacity Index rankings 2009–2010 24 2.9 From Enlightenment to Enablement:
Opening Up Choices for Innovation
Sweden: Why is its innovation outlook so bright? 38
by Andrew C. Stirling 199
Chile: Catching up with the top performers 40
India: Priority areas for boosting innovation capacity 42 2.10 How Do Emerging Markets Innovate?
Russia’s unfulfilled potential 47
Evidence from Brazil and India
Taiwan: Green silicon island 50
by Simon Commander 211
Part 2: Dimensions of Innovation 2.11 Technology and Innovation for Addressing
Climate Change: Delivering on the Promise
2.1 Enabling Innovative Entrepreneurship by Laura Altinger 219
through Business Incubation 2.12 Innovation and Social Development in Latin
by Mohsen Khalil and Ellen Olafsen 69 America
2.2 The US Patent System: Does It Strengthen or by Hernán Rincón 233
Weaken Innovation and Progress?
by Josh Lerner and Adam B. Jaffe 85 Part 3: Innovation Profiles
2.3 Innovation Policy as Cargo Cult: Myth and Introduction 241
Algeria 242
Reality in Knowledge-Led Productivity
Argentina 244
Growth Australia 246
by Alan Hughes 101 Austria 248
Belgium 250
2.4 International Mobility of the Highly Skilled:
Brazil 252
Impact and Policy Approaches Botswana 254
by Ester Basri and Sarah Box 119 Bulgaria 256
Canada 258
2.5 Grassroots Green Innovations for Inclusive,
Chile 260
Sustainable Development China, People’s Republic of 262
by Anil K. Gupta 137 Colombia 264
Costa Rica 266 Ukraine 366
Czech Republic 268 United Kingdom 368
Denmark 270 United States 370
Egypt, Arab Republic of 272 Uruguay 372
El Salvador 274 Venezuela 374
Estonia, Republic of 276 Vietnam 376
Finland 278
France 280 About the Authors 379
Germany 282
Ghana 284 Acknowledgements 385
Greece 286
Hungary 288 Index 387
India 290
Indonesia 292
Iran, Islamic Republic of 294
Ireland 296
Israel 298
Italy 300
Japan 302
Jordan 304
Kazakhstan, Republic of 306
Kenya 308
Korea, Republic of 310
Kuwait 312
Latvia, Republic of 314
Lithuania, Republic of 316
Malaysia 318
Mexico 320
Netherlands 322
New Zealand 324
Nigeria 326
Norway 328
Pakistan 330
Peru 332
Philippines 334
Poland 336
Portugal 338
Romania 340
Russian Federation 342
Saudi Arabia 344
Singapore 346
Slovenia, Republic of 348
South Africa 350
Spain 352
Sri Lanka 354
Sweden 356
Switzerland 358
Taiwan 360
Thailand 362
Turkey 364
 Seen in the context of the current financial and economic cri-

Preface
sis, at least two reasons why many may have seen a diminished

Preface role for innovation stand out. First, many question how it is
possible to generate R&D-driven, technological innovation,
given the shortage of funds and the apparent unwillingness or
Professor Christopher Jahns, reluctance of banks to lend, even to solvent companies. Sec-
President, European Business School ond, the entire notion of innovation may have suffered in the
public imagination. Financial “innovations” have been at the
centre of the crisis itself—derivatives, structured products, fi-
nancial engineering driven to perfection, yet often incompre-
hensible even to many bankers and their managers, and seen
as value-destroyers by the general public.
However, it is particularly in times like these that inno-
vation—done the right way—should play a more promi-
nent role in companies and nations at large. Innovation is a
powerful value-driver, which can be utilized by governments
and companies to improve their competitive advantage and
emerge from the crisis in a stronger position, better able to
face the challenges of our increasingly complex global mar-
ketplace.
Our understanding of what drives national prosperity has
evolved over time. Natural resources, population growth, in- v
dustrialization, geography, climate, and military might have all
played a role in the past. We also know that the relative impor-
tance of these drivers has shifted over time, and that in recent
decades more importance has been given to the coherence
and quality of policies and the development of supporting
institutions. A relative newcomer to this debate—identified
as perhaps one of the most important modern engines of pro-
ductivity and growth—has been the innovation excellence of
a country; that is, its industries, researchers, developers, cre-
ative thinkers, politicians, lecturers, managers, and clusters.
The “discovery” of innovation as a driver of prosperity is
not only an indication of the rising social welfare awareness
of nations. It also constitutes an unexpected shift in direction
towards a more equitable world and a fairer division of the
fruits of global prosperity at this critical stage in the evolution
of capitalism. The prosperity of a country no longer depends
solely on raw materials, capital, and other structural endow-
ments, as the current unequal distribution suggests, but in-
creasingly mirrors a nation’s innovation strength, as reflected
in the quality of its governance and the strength of its insti-
tutions. More critical today is the extent to which societies
 allocate resources for the development of human capacities and reality. I am convinced that leaving decisions of how to
Preface

through education and training, and succeed in promoting develop the right atmosphere, structures and processes to the
social inclusion, gender equity, and environmental sustain- free market alone is at best inefficient, and at worse danger-
ability. ous. The free market is not only blind to fair and equal distri-
Commendable as the insight about the importance of in- bution in theory and practice; it is also blind in other ways. It
novation for prosperity may be, the challenge is to make this only innovates what is economically advantageous or profit-
realization practical. How does a country boost its own in- able. Sometimes it does not innovate at all, or not enough of
novation potential? What constitutes a nourishing innova- what is absolutely necessary for future generations—witness
tion climate? How can it be created, cultivated, and allowed our well-justified, present-day worries about the dangers of
to flourish? If the innovation capacity of a country developed climate change and the extent to which environmental prob-
in a particular way in the past, how will it develop over the lems reflect serious market failures. It is the responsibility of
next few years when changes have taken place in the global scholars, researchers, and managers to remedy these failures.
environment? In which direction is the innovation capacity For these reasons, we feel it is worthwhile collaborating in the
of a country moving? Has innovation resulted from greater preparation of a report which addresses these fundamental
attention to training the labor force in new skills and from in- questions.
vestment in human capital? Or has greater attention been paid In its broad view of innovation, this Report goes far beyond
to creating a more transparent regulatory environment, one R&D as the main source of (product) innovation, beyond
in which the state sees its role as the setter of sensible rules conventional process and business models, and beyond the
rather than mindless bureaucracy? What are the tradeoffs and private sector, which is so often seen as the main locus of in-
how quickly can changes in direction be made? Is the pace of novation. The Report provides a macro perspective of the en-
change consistent with shifts in the environmental dynamic? tire value-chain of innovation and innovation management,
vi
In contrast, what are innovation climate “killers” and how and includes analysis of the many factors which underpin a
can countries avoid them? These are all important policy modern conception of innovation. Furthermore, as the title
questions that must be probed. The answers to these ques- indicates, innovation is seen as an important driver of devel-
tions entail more than the usual sweeping recommendations opment in its broadest sense. It is here that the strengths of
which often come from the mouths of policymakers. Answers the Report’s Editor, Augusto López-Claros, are of greatest val-
are needed that will allow every country to assess its strengths ue. His many years of service with such institutions as the In-
and weaknesses and gauge where it stands in comparison to ternational Monetary Fund and the World Economic Forum,
other countries, to see more clearly which factors contribute have given him an understanding of innovation from a truly
to its current ranking, and to understand how it can improve global perspective. Together with a team of eminent contribu-
innovation through a combination of more efficient alloca- tors from diverse backgrounds, institutions and countries, he
tion of scarce resources and more coherent policies based on has put together a volume that delivers both a range of in-
scientifically established strategies and roadmaps. The Innova- sightful perspectives on many dimensions of innovation and
tion for Development Report provides an excellent foundation that offers the Innovation Capacity Index, a tool for assessing
for intelligent debate on these central questions, for the saying the extent to which nations have succeeded in developing a
that “You can’t manage and improve what you can’t measure” climate that will nourish the potential for innovation. The In-
applies equally well in this context. dex allows policymakers and entrepreneurs around the world
Unquestionably, nations have come to recognize the im- to examine the broad range of country-specific factors which
portance of innovation for productivity growth. Indeed, the underlie innovation capacity, creating a quantified intellectual
global race for excellence in innovation is on. However, desire framework for formulating and implementing better policies
alone is not sufficient to “win the race.” It is the support for the for the creation of an environment supportive of innovation.
culture of innovation, adequate structures and effective and The Report contains three thematic sections. Part 1 features
efficient processes, which make the difference between will the Innovation Capacity Index, a methodological tool that
examines those factors, policies, and institutions that criti-

Preface
cally affect innovation in a large number of countries. Part 2
offers the contributions of a number of leading experts, who
deal with different dimensions of innovation, and address
such questions as: What is the effect of increasing access to
information and communication technologies on a country’s
economic growth? What is the role of good governance in
fostering a culture of innovation? What are the myths and the
realities of knowledge-led productivity growth? Does the US
patent system strengthen or weaken innovation and progress?
How do emerging markets innovate? Finally, Part 3 presents
innovation profiles for those 68 important countries, which
account for the lion’s share of world output.
The European Business School (EBS), with its strong ties
to government, industry and entrepreneurs around the globe,
is honoured to support this study. Our mission is to educate
students to become responsible leaders, to inspire each in-
dividual with the vision of sustainable business through in-
novation. With our international profile and clear focus on
emerging markets, EBS already offers an inside view on many
countries to students, stakeholders, and the scientific com-
munity. vii
In supporting this publication we are making a contribu-
tion to further discussion on how to analyze, measure, and en-
courage innovation on various levels of society. I am confident
that this publication will provide the basis for the fruitful ex-
change of ideas between countries, governments, policymak-
ers, entrepreneurs, managers, and academics in our mutual
striving to create a better world for the generations to come.
 Augusto López-Claros and Yasmina N. Mata

Executive Summary
The first chapter, “The Innovation Capacity Index: Factors,

Executive Summary Policies, and Institutions Driving Country Innovation,”

by authors Augusto López-Claros and Yasmina N. Mata,
begins with a glimpse at some of the little-known history of
innovation, long before the industrial revolution. We learn
that the invention of eyeglasses not only extended productive
working life, but spawned the invention of precision instru-
ments, laying the foundation for later articulated machines
with fitted parts. The clock permitted the ordering of life in
cities, but gave rise to the very notion of productivity, leading
to Adam Smith’s insight that wealth and prosperity depend
directly on the “productive powers of labor.” As the authors
show, the varied paths followed by different nations in their
approach to innovation and scientific discovery determined
their ability to capitalize on their innovations and buttress
their development and technological potential. They explain
how, despite the priceless inventions they bequeathed to the
world—printing, paper, the compass, gunpowder, porcelain,
silk, the use of coal and coke for smelting iron, and the nu-
merous inroads into scientific research which far surpassed
what was known in Europe in their day—the totalitarian na- ix
ture of the regimes in the Arab world and China stifled the
possibilities for further development. With the coming of the
Renaissance and the establishment of scientific societies and
formal programs of scientific enquiry, Europe imposed fewer
constraints on innovators, leading inexorably to the industrial
revolution and the culture of innovation and research which
we now see as powerful engines of economic and social de-
velopment.
There is no doubt that, in recent years, progress in the
dissemination of knowledge and the use of information and
communications technologies (ICT) has become increas-
ingly widespread and has resulted in improved productivity.
As the authors make clear, the traditional sources of power
and influence, such as territory, resources, raw manpower, and
military might—for centuries the chief determinants of na-
tions’ prosperity—are far less important today, and have giv-
en way to a world in which successful development is not only
increasingly linked to sound policies, good governance, and
effective management of scarce financial resources, but, most
important, to the ability of societies to release and harness
the latent creative capacities of their populations. Successful
 countries today are not necessarily large geographically, nei- with means and other enabling factors. The weight distribu-
Executive Summary

ther are they richly endowed with natural resources, or able tion encourages achievements in the last set of pillars in countries
to project military power beyond their borders. More and where the institutional and human resource foundations are well
more, the countries to look to are those which have managed laid, whereas the reverse obtains for achievements in these same
to expand opportunities for their populations through the areas, in countries where these foundations are lacking.
full exploitation of the opportunities afforded by the world The ICI is offered as a policy tool to promote dialogue
economy through international trade, foreign investment, the for examining more closely the broad range of policies and
adoption of new technologies, macroeconomic stability, and institutions which foster an environment conducive to inno-
high rates of saving. vation. The methodologies developed offer country-specific
In building the Innovation Capacity Index (ICI), the policy prescriptions, based on nations’ stages of development,
authors draw on a sound theoretical framework and the best and the nature of their political regimes. The authors have
available data to correlate the wide-ranging set of relevant fac- constructed the Index on the foundation of the large body
tors, policies, and institutional characteristics which play a of work which sees indexes—with all their limitations—as
central role in boosting a nation’s capacity for innovation. In working tools to generate debate on key policy issues, and
its 2009 edition, the ICI covers 131 countries and identifies to track progress over time in the evolution of those factors
over 60 factors that are seen to have a bearing on a country’s which help explain national performance. The Innovation
ability to create an environment that encourages innovation, Capacity Index rankings 2009–2010 are presented in Table 1.
such as a nation’s institutional environment, human capital This year’s printed edition of the Innovation for Development
endowment, the presence of social inclusion, the regulatory Report includes the individual innovation profiles of 68 coun-
and legal framework, the infrastructure for research and de- tries, accounting for the lion’s share of world output. The re-
velopment, and the adoption and use of information and maining 63 can be found at the dedicated Website:
x
communication technologies, among others. Fully 90 per- www.innovationfordevelopmentreport.org
cent of the variables used in the construction of the Index are Following a detailed description of the constituent ele-
“hard”—i.e., measuring directly some underlying factor, such ments of the Index and its construction, the authors highlight
as the budget deficit, expenditure in education, or cumber- the uses to which the ICI can be deployed, and examine in
some regulations, etc.—and, therefore, not dependent on a some depth the innovation capacity of five countries: Swe-
survey instrument. den, Chile, India, Russia, and Taiwan, brief descriptions of
The authors explain in detail the construction of the Index, which follow:
which explicitly incorporates the notion that, while there are Sweden (ICI rank 1) is the ICI’s top performing country in
many factors which influence countries’ innovation capacity, 2009, serving as a benchmark for other countries. The authors
their relative importance varies, depending on the stage of a point to Sweden’s important presence in the global economy
country’s development and the particular political regime in and to elements in its approach to innovation, which are of
which policies are being implemented. These differing stages particular relevance not only to other industrialized coun-
of development are closely correlated with rising economic tries, but to many middle-income countries with aspirations
prosperity and per capita income. But, the authors also take to join the league of top innovators. Sweden is impressive not
the view, anchored in empirical observation, that democracies only in combining open and transparent government, univer-
tend to do better than authoritarian regimes at encouraging sal social protections, and high levels of competitiveness and
the creation of friendly environments for innovation. These productivity—making it one of the most innovative econo-
notions are reflected in the weight distribution assigned to the mies in the world—but equally so in the extent to which the
different pillars of the Index according to countries’ per capi- country’s excellent policy framework has turned the private
tal income and political regime classification. Those pillars sector into the main engine of innovation.
which have more to do with people, institutions, and social Chile is presented as an interesting case, proving that sound
networks are shown to be foundations for the pillars dealing policies and good institutions are not the result, but rather the
 Executive Summary
Table 1. Innovation Capacity Index rankings 2009–2010*

Country ICI ICI Country ICI ICI Country ICI ICI

rank score rank score rank score
Sweden 1 82.2 South Africa 46 53.3 Ecuador 91 44.2
Finland 2 77.8 Macedonia, FYR 47 53.1 Tanzania 92 43.7
United States 3 77.5 Romania 47 53.1 Nicaragua 93 43.4
Switzerland 4 77.0 Uruguay 49 52.8 Madagascar 93 43.4
Netherlands 5 76.6 Russian Federation 49 52.8 Morocco 95 43.3
Singapore 6 76.5 Mauritius 49 52.8 Kenya 95 43.3
Canada 7 74.8 Malta 52 52.4 Pakistan 97 42.7
United Kingdom 8 74.6 Cyprus 53 52.3 Belize 98 42.1
Norway 9 73.5 Ukraine 54 52.0 Zambia 99 41.8
New Zealand 10 73.4 Saudi Arabia 55 51.9 Bolivia 100 41.5
Luxembourg 11 73.3 Tunisia 56 51.8 Papua New Guinea 101 41.3
Denmark 11 73.3 Kazakhstan, Republic of 57 51.6 Venezuela 102 40.9
Taiwan 13 72.9 Costa Rica 58 51.5 Nepal 103 40.3
Iceland 14 72.6 Turkey 59 50.8 Nigeria 104 40.2
Japan 15 72.1 Peru 60 50.6 Suriname 105 40.1
Hong Kong SAR 16 71.3 Mexico 61 50.5 Bangladesh 106 39.8
Australia 17 71.2 Oman 62 50.2 Syrian Arab Republic 107 39.4
Ireland 18 70.5 Greece 62 50.2 Mozambique, Republic of 108 39.1
Korea, Republic of 19 70.0 Kuwait 64 50.1 Uganda 109 38.3
Germany 20 68.8 China, People's Republic of 65 49.5 Cameroon 109 38.3
Israel 21 68.2 Argentina 66 49.2 Senegal 111 38.1 xi
Belgium 22 67.6 Botswana 67 49.1 Cambodia 112 37.5
Austria 23 66.7 Panama 68 48.9 Malawi 112 37.5
France 24 65.4 Trinidad and Tobago 69 48.7 Ethiopia 114 37.3
Estonia, Republic of 25 62.7 Bosnia and Herzegovina 70 48.3 Mauritania 115 37.1
Lithuania, Republic of 26 60.7 El Salvador 70 48.3 Lao PDR 116 36.8
Latvia, Republic of 27 60.5 Colombia 72 48.0 Yemen, Republic of 117 35.1
Spain 28 60.3 Namibia 73 47.5 Sudan 118 35.0
Chile 29 59.4 Azerbaijan, Republic of 74 47.3 Iraq 119 34.2
Italy 30 59.1 Philippines 75 47.0 Mali 120 33.8
Slovenia, Republic of 31 58.6 Algeria 76 46.7 Angola 121 33.4
Czech Republic 32 58.0 Ghana 77 46.6 Rwanda 122 33.3
Bulgaria 33 57.7 Vietnam 78 46.4 Congo, Republic of 123 33.0
Malaysia 34 57.3 Dominican Republic 79 46.3 Côte d'Ivoire 124 32.4
Portugal 35 57.2 Egypt, Arab Republic of 79 46.3 Zimbabwe 125 31.8
Bahrain, Kingdom of 36 56.6 Jamaica 81 46.2 Niger 126 30.6
United Arab Emirates 37 56.2 Honduras 82 46.0 Togo 127 30.1
Croatia, Republic of 38 56.0 Lebanon 83 45.8 Guinea 128 29.1
Slovak Republic 39 55.8 Iran, Islamic Republic of 84 45.7 Haiti 129 28.7
Poland 40 55.7 India 85 45.6 Chad 130 25.6
Hungary 41 55.6 Sri Lanka 86 45.5 Afghanistan, Islamic 131 24.0
Republic of
Georgia 42 55.1 Brazil 87 45.2
Thailand 43 54.6 Indonesia 88 44.9
Jordan 44 53.9 Guatemala 89 44.5
Qatar 45 53.8 Paraguay 90 44.3 *All rankings and scores are after rounding.
 engines for, the creation of wealth and prosperity. Chile’s per- point also to corruption, the lack of independence of judges
Executive Summary

formance (ICI rank 29) is far ahead of any other country in and courts, and the gradual return to authoritarian forms of
Latin America, and in many critical areas it is already ahead governance as factors which do not bode well for the creation
of the European Union average. A mix of sound macroeco- of an environment conducive to various forms of innovation.
nomic management—including one of the most virtuous However, they conclude that there is no intrinsic reason why a
fiscal policies in the world—institutional reforms, and the country with such rich human and natural resources and dis-
opening of its economy to the benefits of free trade, foreign tinguished history of scientific innovation should not be able
investment, and international competition, have combined to to catch up with the best of the world’s innovators.
create a reliable engine of high growth and poverty reduction. Taiwan (ICI rank 13) is offered as the most impressive ex-
The authorities have also sought to implement micro-policies ample in the post-World War II period of the consequences of
aimed at enhancing the efficiency of public services through high growth and the policies that underpin it. That a country
various electronic platforms, and facilitating the use of ICTs should be able to increase its income per capita from under
more generally. Chile is well poised to catch up with the richer US$200 in 1952 to close to US$17,000 in 2007 is nothing
members of the EU. short of astounding. Taiwan’s success is attributed to two fac-
India is acknowledged as one of the world’s fastest-growing tors: first, its success in achieving high growth, while taking
economies and has aspirations to be a global player in the field full advantage of the benefits of international trade and invest-
of technological innovation. Its economic performance over ment and the acquisition of new technologies, and second,
the past two decades has been impressive, and has turned it in avoiding the errors that have inhibited development in so
into the world’s fourth largest economy. India has not only many other countries. While acknowledging Taiwan’s rapid
a long political tradition of democracy and rule of law, but transformation in less than a half century from a simple agrar-
also favorable demographics, with a growing working age ian society in the earliest stage of development into a global
xii
population which, if properly educated, could spur rising pro- technology powerhouse and world leader in the production
ductivity and growth. But the authors deal also with India’s of ICT equipment, the authors suggest that Taiwan’s chal-
disadvantages, including high illiteracy, a poorly developed lenge in coming years will be to find creative ways to cooper-
infrastructure, a festering fiscal deficit problem, and a highly ate with China—an emerging technology power in her own
bureaucratic regulatory framework, all of which seriously dis- right, with a much lower cost structure—and to move closer
courage entrepreneurship and innovation. While its ranking to the best performers in the ICI.
in the ICI (85) is not high, they indicate that there is wide
scope for the implementation of better policies, including in-
stitutional reforms, which might allow India to scale up in the Other dimensions of innovation
rankings.
Russia (ICI rank 49), despite its well-established tradition Laura Altinger
of solid contributions to basic science, is shown to be lagging The chapter entitled “Technology and Innovation for Ad-
far behind its true potential for innovation performance. In dressing Climate Change: Delivering on the Promise,” by
previous decades a leader in space exploration, nuclear tech- Laura Altinger, first provides an overview of the current think-
nology, and aviation, it has had a difficult transition from the ing about climate change and then an analysis of the promis-
inefficiencies of bureaucratic central planning to the chal- ing role for innovation in global efforts to reduce greenhouse
lenges of a market economy. The authors describe how the gases, in adapting technologies to decrease the vulnerability
commodity boom of the past five years has increased Russia’s of those most likely to suffer the most serious impact of cli-
economic dependence on energy and other raw materials ex- mate change, and in moving our economies onto green and
ports, and how the country’s unfriendly business environment sustainable growth trajectories. While key technologies al-
hinders entrepreneurship and the incubation of new ideas ready exist with great potential for limiting GHG emissions,
and approaches to new products or process creation. They leading up to 2050, the technologies that will be relied upon
to make the substantial cuts in GHG emissions required to efit the migrant, the receiving country, and the sending coun-

Executive Summary
keep the planet safe will target energy efficiency in all key try, but that the policy environment plays an important role
sectors: carbon capture and sequestration for power genera- in whether this mobility can lift innovative performance. The
tion and industry, nuclear power, biofuels, wind, electric and evidence on return migration and brain circulation, beneficial
plug-in vehicles, and hydrogen fuel cells. The author describes brain drain and diasporas suggests that there are a variety of
the roles to be played by the private sector in developing tech- mechanisms by which migrants can continue to contribute to
nologies, and by the public sector in addressing important knowledge creation and innovation in their home countries.
market failures, using such mechanisms as carbon markets
and regulatory regimes to provide investment incentives for Simon Commander
alternative environmental technologies, to facilitate research, The article entitled “How Do Emerging Markets Innovate?
and ensure an adequate pool of human capital. She proposes Evidence from Brazil and India” by Simon Commander
that governments boost investment, supplemented by carbon examines the productivity effects of ICT adoption and use
taxes, in supportive infrastructure for new technologies or in two of the emerging market economies, Brazil and India.
green fiscal stimulus spending aimed at environmental tech- The author takes off from the past studies on the varied pro-
nology development. Finally, she discusses the importance ductivity and growth consequences of ICT adoption across
of legally binding commitments to regulate countries already countries and regions and inquires into the factors behind
generating significant GHG emissions, improving risk man- such variation. ICT has been adopted and managed in differ-
agement in smaller developing countries, removing barriers ent ways in different parts of the world, and, not surprisingly,
to trade and investment, and support by developed countries associated organizational dimensions of the new technology
for the transfer of clean technology in regions of the world appear to play an important role in explaining differences in
where it is most needed. outcomes. The author’s research, based on interviews with
1,000 manufacturing firms in the two countries, describes xiii
Sarah Box and Ester Basri the factors explaining the pace of ICT adoption—including
In their chapter entitled “International Mobility of the policy and financing constraints—and the consequences of
Highly Skilled: Impact and Policy Approaches,” Sarah Box that adoption. The results show that that there are differences
and Ester Basri discuss the international mobility of highly not only in the timing of adoption and the patterns of ICT
skilled people, with a particular focus on “human resources use across the two countries, but also within the countries
for science and technology” (HRST), the group of skilled in- themselves. Larger sized firms and foreign ownership tend to
dividuals, such as scientists, engineers, and researchers, who be associated with higher adoption, and in both countries, as-
play an important role in stimulating innovative activity. The sociated with a higher share of educated workers and a change
mobility of such skilled people, including human resources in the skill mix. The Brazilian firms are shown, on average, to
in science and technology, has become a central aspect of have adopted more ICT than their Indian counterparts, and
globalization, with talented migrants playing an important to have used it more intensively. However, firms operating in
role in shaping the skilled labor forces of many countries Indian states with good institutional arrangements tend to
and influencing the creation and diffusion of knowledge. The have adoption rates similar to those in Brazil. There is clear
authors present selected data to describe the broad patterns evidence that high returns in productivity have resulted from
of mobility of highly skilled people, the importance of mo- investment in organizational change and improvement in the
bility for the transfer of knowledge, the effects on receiving quality of infrastructure arrangements.
and sending countries, focusing in particular on the potential
impacts of “brain gain,” “brain circulation,” and the diaspora. Alexander Ebner and Florian Täube
Finally, they outline the policy responses of selected OECD In their article “Dynamics and Challenges of Innovation
countries regarding mobility of HRST. Their central message in Germany,” authors Alexander Ebner and Florian Täube
is that mobility of the highly skilled has the potential to ben- analyze the historical underpinnings and current challenges
 facing innovation in Germany. They first review the con- cycle that generates energy from bumpy roads, a peanut pod-
Executive Summary

ceptual frameworks for assessing innovation dynamism and collecting device, an organic pesticide, and more—the author
survey the relevant institutional components of the German stresses the importance of reorganizing consumption and
economy, discussing the trade regime, competition law, labor production relationships, minimizing investment in wasteful
relations, the financial system, and entrepreneurship policies. packaging, creating frugal design and development processes,
They then highlight the basic features of the German innova- allowing communities to take creative ownership in order to
tion system, in particular pointing to factors such as education solve serious local problems, creating global markets of grass-
and training, R&D, and university-industry relations. From roots products, and redesigning supply chains. Gupta stress-
its renowned position as a “social market economy,” combin- es the importance of including grassroots innovators in the
ing technological innovativeness, international openness, and benefits of their creativity when products are marketed, and
industrial competitiveness with an extensive welfare system, giving them full credit for their work, through patenting and
Germany has become an institutional “hybrid” moving in the intellectual property rights.
direction of greater entrepreneurial spirit. The innovation sys-
tem, based in a rather bureaucratic, bank-dominated economy, Markus Haacker
has been seriously challenged by globalization, technological “Quantifying the Impact of ICTs on Growth in Develop-
change, demographic pressures, persistent unemployment, ing Economies” is the title of the article by Markus Haacker,
and the burdens of reunification. They contend that the cur- in which he sets out to quantify the growth impact of tech-
rent situation requires an urgent institutional response, in the nological advances in ICTs across the developing world.
form of increased venture capital, high-growth stock markets, The author analyzes existing data on the production of ICT
more flexible regulatory measures, the removal of hindrances equipment, and builds a dataset covering the absorption of
to innovation in small and medium enterprises, and increased ICT equipment in a cross-section of developing economies.
xiv
public support for R&D. According to Ebner and Täube, the His analysis suggests that the direct growth impact of techno-
German service sector lags behind in knowledge-intensive logical advances in the production of ICT equipment plays a
services to create employment in the current world economy subordinate role in the developing world. However, advances
and there is a significant lack of human capital in high-tech in- in ICTs do affect economic growth across the developing
dustries which could be addressed by creating more attractive countries, as lower prices of ICT-equipment result in ICT-
conditions in the research and educational systems. related capital deepening. Haacker finds that the growth im-
pact of ICTs across the countries covered has increased from
Anil. K. Gupta 0.19 percent annually in 1991–1995 to 0.26 percent annually
“Grassroots Green Innovations for Inclusive Sustainable in 2000–2006, and that there appears to be a greater growth
Development,” the title of the article by Anil K. Gupta, is an impact in low-middle-income countries than in low-income
exploration of open, user-driven innovation, as exemplified by countries, reflecting higher rates of ICT-related investment.
individuals in India. Long reliant on internal R&D for inno- He concludes that the sources of these growth increments are
vation, large companies are often constrained in their ability divided evenly between capital deepening related to IT and
to identify and meet the needs of what he calls “excluded cli- to communications equipment and that, while investment in
ents.” The ability of corporations to influence the lives of com- communications equipment has been roughly twice as high
mon people with a variety of products and services has not as investment in IT equipment, the rate of technological prog-
increased in the recent past. The author presents the model of ress regarding IT equipment has been higher.
the “Honey Bee Network,” which offers new thinking to help
the formal sector learn from grassroots innovators and tradi- Alan Hughes
tional knowledge-holders, enabling them to solve problems In his article “Innovation Policy as Cargo Cult: Myth and
in an affordable, accountable, and accessible manner. Using Reality in Knowledge-Led Productivity Growth,” author
intriguing examples of grassroots innovations by users—a bi- Alan Hughes compares the mid-20th century Melanesian
“cargo cults” to the danger he perceives that the evolution of analyzing the 60 largest countries (by total economic activity)

Executive Summary
innovation policy structures which copy perceived cultural in 2000, they show how patent systems changed from 1859 to
and structural characteristics of the US innovation system 1990, significantly constraining the discretion of government
will also fail to deliver the “goods,” viz. economic well-being officials, increasing the length of patent shelf life, but not solv-
through improved productivity. Hughes describes these “ritu- ing the universal dilemma of patent validity. Changes to US
al structures” as increased R&D expenditure, the commercial- patent law and policy between 1982 and 1990 have resulted in
ization of science, and the promotion of an entrepreneurial a decline in rigor with which the standards of novelty and non-
culture based on the subsidization of risk-taking in venture obviousness are applied, pushing under-qualified, underpaid,
capital investment. In questioning the emphasis on R&D-in- and overworked examiners, using “flawed and obsolete tools”
tensive high-technology spin-offs, he contends that they have to resolve cases quickly. Coupled with the explosion in pat-
been exaggerated to the neglect of other key factors in the in- ent litigation, the deterioration in the examination standards
novation system which must be considered. After consider- of the overworked PTO has resulted in thousands of noxious
ing these factors (e.g., diffusion and use of ICT as a general- “patent weeds” which threaten the innovation garden. The au-
purpose technology, the role of performance transformation thors end with concrete recommendations for reform, with
of existing firms as compared to new entrants in driving pro- the aim of achieving a better balance between rapid approval
ductivity, and the role of universities in the creation of human of good applications and reliable rejection of bad ones, with-
capital, role of public procurement policy, among others), he out dramatically increasing expenditures.
concludes by arguing that the crafting of any specific national
innovation policy requires a careful consideration of its own Daniel Kaufmann
structural features and particular opportunities and challeng- The article “Good Governance for Sustained Growth and
es. In order for the innovation “cargo” to be delivered, space Development,” by Daniel Kaufmann, provides more solid
must be created in institutional mechanisms for the practical evidence for judging the effects of governance on develop- xv
utilization of scientific advances, focused problem solving, ment, and the effectiveness of strategies to improve it. Kauf-
and the recognition and potential exploitation of commercial mann’s research disproves the common assumption that be-
opportunities. coming rich is a precondition for a country to “afford good
governance,” to have a competent government bureaucracy,
Josh Lerner and Adam B. Jaffe sound rule of law, and an environment in which corruption is
In their article “The US Patent System: Does It Strength- not condoned. Contrary to popular belief, he says, corruption
en or Weaken Innovation and Progress?” authors Lerner is not the direct result of low income, and good governance is
and Jaffe ask the critical question: whether it strengthens or not a “luxury good.” His studies point to better governance as
weakens innovation and progress. In order for technological being the cause of higher economic growth and improved de-
innovation to create broad social benefits, to enable us “to live velopment, and not the reverse. By introducing the notion of
differently from our grandparents,” institutions must create “state capture” and “legal corruption,” the author explains why
incentives for individuals and firms to invest money in a fi- traditional definitions and views of the investment climate—
nancially rewarding process. After a brief excursion into the usually focused on the public sector—have tended to under-
history of the “passionate debates” over patenting in Britain estimate the importance of governance factors and why they
and the Netherlands, the authors describe the workings of the do not accurately reflect what enterprises themselves report
US Patent Office (PTO), the process by which patent applica- as being of greatest significance for their operation. He ends
tions are examined for utility, novelty, and non-obviousness, his chapter by showing how moves toward transparency, gen-
and, how, if granted, patents are intended to ensure intellec- der equality, freedom of expression, and public participation
tual property rights and protect inventors from the risks of in- result not only in better socio-economic and human develop-
fringement. They then outline three ways in which patents fail ment indicators, but in higher competitiveness, less corrup-
to protect and how they are wielded to retard innovation. By tion, and the fostering of a culture of innovation. Reforms in
 such areas have proven to be net savers of public resources, ob- rent financial crisis and its effects on developing economies
Executive Summary

viating the necessity for excessive regulations or rules. Kauf- from the perspective of the CEO of Microsoft Latin America.
mann makes strong recommendations to the international aid He takes issue with the notion that “developing” necessar-
community to rethink strategies and embrace more fully good ily implies moving from a low- to a high-income economic
governance approaches. model, and to the idea that countries are going to return to the
seemingly “stable” high-income regime that prevailed before
Mohsen Khalil and Ellen Olafsen the current crisis. For Rincón, economic development does
In their article “Enabling Innovation and Entrepreneurship not necessarily dovetail perfectly with economic growth—as
through Business Incubation,” the authors demonstrate measured by GDP—any more than GDP satisfactorily mea-
how a globally applied mechanism of “business incubation” sures economic well-being. Referring to the current situation
is facilitating the creation of an innovation and entrepreneur- as a challenge of recalibration rather than recession, Rincón
ship ecosystem that encourages entrepreneurs who are willing uses the example of the photographic industry which failed
and eager to take the risk of bringing new ideas to the market, to foresee the onslaught of the digital camera, and stresses the
and helps them turn the potential of their ideas and ambitions critical importance of people-centered training, re-training,
into real social and economic value. Basing their research R&D, and IT applications in managing the shift to new busi-
on the international network of “infoDev,” they provide the ness models. He points to the success of Brazil’s San Luis Dig-
reader with examples of a wide range of innovations in prod- ital project in providing an entire province with free wireless
ucts, services and business models which have been brought Internet access, and Mexico’s Housing Funds Institute, which
to market by developing country entrepreneurs: from biogas gave partners access to instant messaging, video and audio
cooking stoves in Rwanda, to improved honey production conference capabilities, vastly simplifying communications,
methods in the Ukraine, to improved bus services through and increasing productivity. Rincón is optimistic that Latin
xvi
telephony and tracking in Brazil. They discuss in some detail America is now better positioned to face the downturn and
the various methods countries can use to spur innovation do- adapt to new conditions, both because of the continent’s past
mestically and adapt imported innovations, in order to couple experience in surviving severe economic, political, and social
such innovations with viable entrepreneurship. In addition to upheavals, and because of recent stronger economic policies
the more commonly encountered factors which foster inno- which lowered inflation and interest rates, improved public
vation, they stress an often-overlooked characteristic called finances, reduced external debt, and substantially increased
“cultural capital,” which refers to the level of tolerance for risk foreign exchange reserves. Rincón concludes by describing
and the interpersonal trust that exists in a given society, affect- Microsoft’s “Unlimited Potential” program to promote sus-
ing both decisions to start a business and the entrepreneur’s tained social and economic opportunity for the world’s five
ability to grow it. The authors describe the intricate web of billion people, who have yet to benefit from technological ad-
interactions making up the innovation “ecosystem” and the vances, by transforming education, fostering local innovation,
linkages between all stakeholders in the system. They then il- and creating jobs and opportunities.
lustrate how business incubators assist early-stage enterprises
to become competitive and grow by interacting with all the Andrew Stirling
actors in the ecosystem, either directly or indirectly through “From Enlightenment to Enablement: Opening up Choic-
the enterprises they serve, and help them to meet the chal- es for Innovation,” by Andrew Stirling, provides insight into
lenges their clients face, whether related to regulations, fi- the “knowledge society” and the widespread notion that sci-
nance, labor, or infrastructure. entific and technological progress is linear and cumulative,
that every possible or feasible path will be realized. Rather,
Hernán Rincón Stirling writes, “whether deliberately, blindly, or unconscious-
In his article “Innovation and Social Development in Latin ly,” societies pursue only a restricted subset of diverse possibil-
America,” author Hernán Rincón shares his view of the cur- ities, in which certain pathways for change are “closed down,”
while others are “opened up.” The factors driving choice are

Executive Summary
determined by whether power is exercised deliberately and
democratically, and whether public policy is open, inclusive,
and accountable in dealing with links between technological
risk, scientific uncertainty, social values, political priorities,
and economic interests. Stirling analyzes the relationships be-
tween social and technological progress, on the one hand, and
public participation and responsible precaution, on the other,
and asks what are the most appropriate and practical ways,
under different conditions, to “get the best out of specialist
expertise,” while “engaging stakeholders, learning from differ-
ent experiences, and empowering the least privileged groups
in society.” Stirling analyzes the vulnerability of society from
technology (biological, environmental, etc.), and its intrigu-
ing opposite: the risks for technology from society, such as
when wise, feasible choices are foreclosed because of “mar-
ket lock-in,” prejudice, or the needs, preferences, values, and
interests of restricted groups. After a discussion of the gov-
ernance of these vulnerabilities, the author examines some
of the unfounded assumptions about knowledge itself: that
every marketable innovation is socially acceptable, or that the
knowledge responsible for an innovation also encompasses xvii
its consequences, and reminds us that even apparently com-
plete knowledge may be indeterminate in its implications,
that facts and values are not necessarily interdependent. The
article ends with a description of the “precautionary prin-
ciple” which acknowledges both the potential for irreversible
harm and the impossibility of scientific certainty, and opens
up “directions for choice.”
Part 1 The Innovation Capacity Index
 “Never before in history has innovation offered promise of

1.1 The Innovation Capacity Index: Factors, Policies, and Institutions Driving Country Innovation
so much to so many in so short a time.”
— Bill Gates
Chapter 1.1

The Innovation Capacity Index: Introduction

The relative importance of various drivers of economic
Factors, Policies, and growth and prosperity has evolved over time and, for a grow-
Institutions Driving Country ing number of countries, innovation, in its many dimensions,
Innovation is emerging now as a leading factor.1 This chapter discusses
the role of innovation in enhancing the development pro-
cess. In particular, it features the Innovation Capacity Index,
Augusto López-Claros, a methodological tool that examines a broad array of factors,
EFD–Global Consulting Network policies, and institutions that have a bearing on strengthen-
ing innovation in a large number of countries, including their
Yasmina N. Mata, institutional environment, their human capital endowment,
Consultant the presence of social inclusion, the regulatory and legal
framework, the infrastructure for research and development,
and the adoption and use of information and communica-
tion technologies, among others. The primary aim is to offer
a didactic tool for policy dialogue on various dimensions of
innovation. As will be shown, the methodologies developed
3
allow the formulation of policy prescriptions that are coun-
try-specific, based on a nation’s stage of development, and the
nature of its political regime.
This chapter is divided as follows: Section 1 presents a brief
historical overview of the role of innovation in economic and
social development, with particular emphasis on its role in
boosting factor productivity. In Section 2, we examine some
of the factors which appear to be essential for the creation of
an environment that will encourage innovation and the types
of initiatives that will contribute in some way to boosting pro-
ductivity and, hence, economic growth. Implicit in Section 2
is the idea that as countries have managed to sort out some
of the more basic building blocks of development (macro-
economic stability, reasonably working institutions, and the
creation of predictable mechanisms for social protection),
they have had to give increasing attention to the role of tech-
nology and innovation as the primary engines of productivity
growth.2 The content of this section, which draws on insights
1
For their insightful comments on particular dimensions of this project, the authors would like to thank Sergei Alexashenko, Farshad Arjomandi, Neil
Buckley, Arthur Lyon Dahl, Yegor Gaidar, Evgeny Gavrilenkov, Pablo Guidotti, David S. Hong, Jui-Bin Hung, Natalia Ivanova, Jason Kao, Wang Kong,
Shyh-Nan Kao, Yao Chung Liao, David Lin, Ricardo López Murphy, Alexander Pumpiansky, Beatriz Nofal, Anne Pringle, Hernán Rincón, Eduardo
Rodriguez Veltze, José María Valdepeñas, Armida Sanchez, Sergei Vasilyev, Ignacio Walker, Stanley Wang, Randy T. M. Yen, and Mikhail Zadornov. The
authors remain solely responsible for its contents.
2
In this respect, our approach and arguments have some of the flavor found in Rostow (1960) and Porter (1990) and of their analysis and discussion of
the central themes of the stages of economic growth. A thoughtful application of these concepts can also be found in Sala-i-Martin and Artadi (2004).
A. López-Claros, The Innovation for Development Report 2009-2010
© Augusto López-Claros 2010
 in economic theory and practice accumulated during the past ers not been able to see particularly well, thus laying “the basis
1.1 The Innovation Capacity Index: Factors, Policies, and Institutions Driving Country Innovation

half century, will be central to determining the major building for articulated machines with fitted parts” (p. 47).3
blocks of the Innovation Capacity Index (ICI) featured later The mechanical clock is characterized by Landes as “the
in the chapter. Section 3 presents a brief overview of inter- greatest achievement of medieval mechanical ingenuity” (p.
national benchmarking as a means of enhancing analysis and 49), both for its revolutionary conception (the first instance
policy dialogue in a number of important areas. Against the of a digital as opposed to an analog device) but, equally im-
background of this discussion and the vast international expe- portant, because it permitted the ordering of life in the cit-
rience acquired thus far with benchmarking exercises, Section ies in ways that had a major impact on productivity. “Indeed,
4 goes on to present the Innovation Capacity Index and to dis- the very notion of productivity is a by-product of the clock:
cuss various dimensions of its architecture. Section 5 presents once one can relate performance to uniform time units, work
the main results of the ICI for 2009, with particular reference is never the same” (p. 49–50). It was the invention of the me-
to a handful of countries: Sweden, Chile, India, Russia, and chanical clock which in turn led to one of Adam Smith’s semi-
Taiwan, which are seen as exhibiting some especially interest- nal insights: wealth and prosperity depend directly—to use
ing features, or as suggesting patterns that may be of broader Smith’s language—on the “productive powers of labor.”4
interest. Finally, we present our main conclusions and discuss Printing was a Chinese invention in the ninth century, but
the way forward. it did not take off in a major way until it made its way to Eu-
rope several centuries later. Landes notes that “much publica-
1. Innovation: A brief historical overview tion depended on government initiative, and the Confucian
David Landes (1998) gives several examples of scientific in- mandarinate discouraged dissent and new ideas (p. 51).” In
novation in Europe of the Middle Ages which contributed to Europe, in contrast, written manuscripts had been much in
substantially enhancing labor productivity. Eyeglasses signifi- demand for centuries before Gutenberg printed the first Bible
4 cantly lengthened the working life of skilled workers. He notes in 1452–55, and after the arrival of movable type had led to
that a medieval craftsman of 40 years of age could realistically an explosion of printed materials. In Italy alone, more than
expect—provided he could see well—to work for another 20 2 million books were printed before 1501. Other cultures,
years, a development made possible by the invention of spec- however, took longer to accept this new technological innova-
tacles, which greatly boosted the productivity of toolmakers, tion. According to Landes, the Muslim countries found the
weavers, metalworkers, scribes, and others who depended on idea of a printed Koran unacceptable, leaving the operation
their eyesight to do fine work. The first eyeglasses appeared in of printing presses in Istanbul to Jews and Christians, but not
Pisa around the end of the 13th century. Although these early Muslims. Indians, likewise, did not adopt the new technology
spectacles were initially not particularly accurate, by the middle until the early 19th century when the first printing presses
of the 15th century, “Florentines at least understood that visual made their appearance. In Europe, in sharp contrast, not even
acuity declines with age and so made the convex lenses in five- the Church was able to restrain the new technology and all its
year strengths and the concave in two, enabling users to buy uses. In all of these examples, one sees innovations spreading
in batches and change with time” (p. 47). More significantly, gradually, sometimes over several decades, “diffusing across
eyeglasses not only prolonged the productive working life of countries and regions as people moved up learning curves
large numbers of people, but, in doing so—in a fascinating case and gained efficiency through practicing and improving the
of reverse causation—they also encouraged the invention of a new techniques” (Goldstone, 1996).
whole battery of new precision instruments (e.g., gauges and An interesting question concerns the factors that may help
micrometers), which could not have been invented, had work- create an environment that nurtures the capacity for inno-

3
Indeed, Adam Smith himself had noted this feedback mechanism in his Wealth of Nations. “This great increase in the quantity of work, which, in conse-
quence of the division of labor, the same number of people are capable of performing, is owing to three different circumstances; first, to the increase of
dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and
lastly, to the invention of the great number of machines which facilitate and abridge labor, and enable one man to do the work of many” (p. 7). But then
he adds that “the invention of all those machines by which labor is so much facilitated and abridged” is itself the result of the improvements in productiv-
ity made possible by the division of labor.
4
Smith, 1994, p. 5.
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