On the Innovation of Nations

For centuries, economic thinkers, from Adam Smith to John Maynard Keynes, have tried to identify the elusive formula that makes some countries more prosperous and successful than others. My curiosity about this topic spurred me, as a young professor of economics in the late 1970s, to research new ways of measuring national competitiveness.

Discussions about economic performance, and levels of prosperity more broadly, have inevitably been accompanied by a desire to classify countries so as to better understand the forces that drive development and to improve economic policy.

Historically, a distinction was made between “developing” and “industrialized” economies. More recently, the term “emerging markets” came into vogue. Nowadays, organizations like the World Bank try to steer clear of the value judgments implicit in these terms by simply describing countries’ positions on the income ladder — low, middle or high — and their rates of growth.

But this present classification of national economic performance, based on income and growth, highlights only the outcomes of a process. They offer no insight into the factors that lead to these outcomes. In a quickly changing, increasingly interconnected world — one in which more countries are moving up the ladder, even as distributions of wealth and income are becoming increasingly concentrated within countries — this kind of output-based categorization is becoming archaic.

As an alternative to traditional measures of growth, some people have called for measures of “gross national happiness” and other broader measures of human well-being. This is well and good, but to understand economic performance, a classification based on the fundamental drivers of growth is essential. And this classification, I believe, should be centered on how innovative a country is.

The extent to which an economy can develop higher value-added products, processes and business models through innovation is a major determinant of long-term, sustained prosperity.

The factors that contribute to an ecosystem of innovation are many, and interconnected: A strong scientific and technological base, investment from public and private sectors, links between businesses and research centers, a high-quality education system, political transparency, and a culture that encourages entrepreneurship and risk-taking.

In the past, innovation was regarded as the preserve of certain companies in a few advanced economies. But today there are innovative companies in every region of the world, including in countries traditionally been labeled “emerging” or “developing.”

As countries place greater emphasis on their capacity to innovate, their economic success will be increasingly determined by whether and how countries can leverage their innovation potential. This will create a new global divide, moving away from one based on the static concept of income and toward one based on innovation and the ability to support rising living standards over time.

Building an innovation infrastructure, however, poses profound questions. Just as the industrial revolution had political and social consequences — for labor, mass education, the organization of corporations and the modern nation-state — that took a century to understand, the impact of innovation is only starting to become visible.

At the dawn of the industrial revolution, the founders of the modern factory system in Britain included utopians who perceived the benefits of mechanization but not the downsides. Their technological and spiritual descendants today share similarly good intentions, but also similar blind spots.

As the political economist Joseph Schumpeter noted, innovation is a revolutionizing force of constant change, propelling the economy via the “gales of creative destruction.”

While rapid technological change is disrupting the traditional notion of a “job for life,” it is also creating new opportunities: massive open online courses, or MOOCs, the increasing sophistication of technologies that allow face-to-face interaction across vast distances, and the growth of self-directed learning communities have made life-long learning accessible to all.

But it also must be recognized that the astonishing technological leaps of recent decades have been accompanied by increased inequality. An innovative society may be a less inclusive and more fragmented one. Silicon Valley in California is a beacon of global technological dynamism but, with its sky-high housing prices and nearly a fifth of its population living in poverty, it is also a warning that innovation cannot divorce itself from the society from which it springs.

In sum, we need to realize that while the costs of not innovating — lower economic growth — are steep, so too is the price of innovation. The changes it brings to labor markets, supply chains and social structures cannot be underestimated. So in assessing nations according to their innovative potential, we must also take into account how they manage the disruptive consequences of technological change.

Klaus Schwab is the founder and executive chairman of the World Economic Forum.

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