Few people have shaped the way we see the process of economic development as Joseph Schumpeter did. While his theory of economic growth through innovation and creative destruction has been widely disseminated in academic and policy circles, we know less about one critical implication for economic development: the huge potential role of technology adoption. As Schumpeter noted, the ability of less-developed countries to tap into global know-how and technical knowledge—to be able to adopt what has already been invented—is a potential transfer of wealth from rich to poor of historic proportions.
In a new report we show that firms in developing countries actually invest less in innovation than firms in more advanced countries—regardless of how you measure innovation.
Firms in developing countries:
Why, despite the large gains that innovation and technology adoption would bring to them, don’t developing-country firms innovate more and why don’t governments prioritize innovation more than other growth policies?
The resolution to this “Innovation Paradox” lies in the fact that when you look closely to the returns to innovation investments, these returns are not as large as the theory predicts, and certainly not much larger than in wealthier countries. While calculating the “return on investment” in innovation is not a simple task, available estimates suggest that the average return is positive in most countries. However, in less advanced countries, the return can be very modest or even negative. The bottom line here is that managers in firms in many of these countries are taking sensible decisions that respond to the risks they perceive for their investments. If the returns to investing in innovation were guaranteed to be larger, they would invest more.
The critical question that follows then, is why are the returns on investment in innovation not as a large as expected? In our report, we offer two key explanations to explain these low returns and some evidence. First, we see a lack of complementary factors that make innovation projects feasible. Foremost among these missing complementary factors are the capabilities related to good managerial and organizational practices that help firms to manage an innovation project. A second factor is the in the inability of governments to formulate effective policies that support firm-level innovation. When we look at developing effective innovation policies in developing countries, we need to look carefully at the gaps in these complementary factors. Simply pouring money into R&D in a country where basic managerial and organizational capabilities are absent is not effective innovation policy – or a good use of scarce resources.
In a new report we show that firms in developing countries actually invest less in innovation than firms in more advanced countries—regardless of how you measure innovation.
Firms in developing countries:
- are less likely to purchase technology licenses or intellectual property that would allow them to use more efficient processes that have already been developed
- invest less in training and equipment for innovation
- are less likely to introduce new products and processes that require significant upgrading
- invest less on R&D or patenting.
Why, despite the large gains that innovation and technology adoption would bring to them, don’t developing-country firms innovate more and why don’t governments prioritize innovation more than other growth policies?
The resolution to this “Innovation Paradox” lies in the fact that when you look closely to the returns to innovation investments, these returns are not as large as the theory predicts, and certainly not much larger than in wealthier countries. While calculating the “return on investment” in innovation is not a simple task, available estimates suggest that the average return is positive in most countries. However, in less advanced countries, the return can be very modest or even negative. The bottom line here is that managers in firms in many of these countries are taking sensible decisions that respond to the risks they perceive for their investments. If the returns to investing in innovation were guaranteed to be larger, they would invest more.
The critical question that follows then, is why are the returns on investment in innovation not as a large as expected? In our report, we offer two key explanations to explain these low returns and some evidence. First, we see a lack of complementary factors that make innovation projects feasible. Foremost among these missing complementary factors are the capabilities related to good managerial and organizational practices that help firms to manage an innovation project. A second factor is the in the inability of governments to formulate effective policies that support firm-level innovation. When we look at developing effective innovation policies in developing countries, we need to look carefully at the gaps in these complementary factors. Simply pouring money into R&D in a country where basic managerial and organizational capabilities are absent is not effective innovation policy – or a good use of scarce resources.
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