Emerging Markets’ Innovation Problem

The Global Innovation Index ( GII)  measures how countries compare in their ability to innovate. Presumably, innovation drives productivity and development, and, therefore, the most innovative economies are also those enjoying the best growth in living standards. Today we face revolutionary breakthroughs in artificial intelligence and automation technologies which promise to radically change  for the better the way we work and live. However, these changes present a heavy challenge for many emerging markets as new technologies eliminate the rote manufacturing jobs traditionally off-shored to labor-abundant developing countries.

Sponsored by Cornell University, INSEAD and WIPO (World Intellectual Property Organization),  since 2007 GII ranks countries in terms of their innovation potential. This gives us a decade of observation to gauge how different countries are progressing. Unfortunately for emerging markets, the evidence is disappointing, with a few important exceptions. By and large, emerging markets appear to be falling behind in their innovation capacity.

The chart below shows the rankings of the top 25 most innovative countries in both 2007 and 2017, with arrows pointing to the change in position.

 

The rise of small European countries is highly significant. Switzerland, the Netherlands, Ireland and the Nordic countries have all progressed very positively. This contrasts to the relative decline of France, Germany and Italy. In any case, eight  of the top 10 innovators in the ranking are European countries, which belies the prevalent market pessimism on the prospects for Europe. Italy, India, UAE and Belgium fell out of the “elite “top 25, replaced by China, Czech, Estonia and New Zealand.

In relation to emerging markets, the chart highlights the radical divergence of India and China. China has had a steady rise up the rankings from 29th in 2007 to 25th in 2016 and 22nd  in 2017. South Korea has also had an impressive escalation, from 19th to 11th; and, remarkably, it has surpassed Japan which has fallen from 4th to 14th. However, the most concerning performance has come from India which has seen its ranking fall from 23rd to 59th.  This result raises serious questions about the quality of Indian growth.

India’s decline is emblematic of a wider problem in emerging markets, as the below chart highlights

 

The chart highlights how the GII rankings have changed for the 18 most important countries for investors in emerging markets.  Of these 18, two-thirds have had significant declines in their rankings and only one-third has experienced improvement. Of these EM countries, only eight rank in the top 50 for innovation, compared to eleven in 2007. Aside from China and Korea mentioned above, Vietnam, Poland and Russia have risen in the rankings. The rise of Vietnam is impressive and gives credence to its claim as the rising star of “frontier markets.”

On the negative side,  India, Brazil, Mexico, South Africa, Thailand, Colombia and Indonesia are evolving very poorly, raising questions about how they can compete effectively in an increasingly competitive, technology-driven global economy. Also in this camp, the Philippines and Argentina are in dire situations. These countries do not seem able to nurture the institutions and make the public investments required for investment and productive innovation to take place. Consequently, their best minds are deserting, immigrating to more hospitable places.

Macro Watch:

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China Watch:

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China Technology Watch

 

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