Prosperity Pathway - Promoting Innovation in Emerging Markets

Edited by Deloitte | Updated: Wednesday, 6 April 2016, 5:15 AM

Introduction

National innovation policies are not new in the spectrum of economic development. In fact, the formulation of such policies began more than 40 years ago.1 While the Charpie Report dealt primarily with technological innovation, it should be stated that the concept of innovation is much broader. Innovation is the process of creating or improving a product, process, or institution to generate additional value.2 This encompasses technological innovations, but also those that focus on new management techniques, the adoption of new supply or logistical chains, and improved approaches to marketing, communications and media. Innovation can and should occur in most areas of society, not just in the field of technology, though technology tends to drive innovation in other fields as well.

In a national context, the purpose of innovation is to help create prosperity, which is highlighted in our methodology, Prosperity Pathway. The Prosperity Pathway’s basic concept is as follows:

  1. Innovation can drives Productivity
  2. Productivity can builds Competitiveness
  3. Competitiveness over time can create Prosperity
  4. Prosperity can be sustained through Innovation

The premise of the Prosperity Pathway is a) that prosperity can help support economic, social, and political stability, b) that countries should continue to innovate to sustain prosperity, and c) that innovation in all forms, whether it is incremental, disruptive, or open should permeate society, which comes through a change in the way citizens think about their quality of life, their government, their economy, and their value system.

While a number of emerging markets are beginning to embrace innovation as a pathway to prosperity, many continue to focus on privatization, liberalization, deregulation, and modernization as growth strategies. According to Jean-Eric Aubert of the World Bank Institute, these policies did not yield the expected fruits, due to their lack of sustainability (Aubert, 2004). Innovation models that have buoyed the economy of developed nations around the world have not been directly applicable to emerging markets, even though these countries are most in need of innovative approaches, since sustainability is the key challenge for such initiatives.

The approach promulgated in this paper is based on the gradual integration of the Prosperity Pathway into emerging markets by building on their existing resources, culture, capabilities, and governance. Before outlining how this approach can spur innovation in emerging markets, however, one should fully understand the limiting factors facing innovation policy in countries that struggle with poverty, poor governance, and cultural barriers.

Challenges to innovation in emerging markets

Innovation strategies in emerging markets are hampered by a variety of challenges, including lack of educational attainment, unstable business environments, and weak information infrastructure. The link between educational attainment and innovation was highlighted by William Maloney in a presentation to the Europe and Central Asia Knowledge Economy Forum in Budapest, Hungary in 2004.3 During his presentation, Maloney linked the ability to innovate to the ability to learn. Since knowledge is the key to creative approaches, educational levels are a key input to innovation. If educational attainment was the only factor in innovation, however, countries such as Jordan and Romania would be among the leaders, since their levels of education, according to the Global Competitiveness Index, are high.4

Unstable business climates also present a daunting challenge to innovation in emerging markets. Public sector institutions tend to be numerous and often are resistant to business-friendly policies that could reduce bureaucracy, increase competitiveness, and increase private sector development. Instead, a process of economic development vertigo ensues, wrapping the private sector in a cloak of dysfunctional organizations, nascent sectors, and underperforming and unsupported companies. Innovation is squelched because there is little incentive for public sector officials, many of whom are at the upper strata of society both socially and economically, to open the door to creativity and ultimately, change. In such a system, prosperity is held by a few, while the middle class, long the bastion of prosperity in developed countries, is suppressed by an enabling environment that is not consistent with innovative approaches.

Another key challenge to the development of innovation in emerging markets is weak information infrastructure. While in some countries this is apparent in a lack of access to computers and the internet, it can also mean lack of access to statistics, analysis, and evaluation that are necessary to make economic decisions to spur innovation and prosperity. If information is power, then many emerging markets are rendered virtually powerless by the sheer lack of the basic macro and micro-economic data necessary to make sound decisions relative to the economy, society, and education. In a number of emerging markets, even those considered as medium to high income, research institutions exist in nascent form if at all and all too often are “siloed” within universities that see them as academic rather than economic development institutions. When combined with unsophisticated or out-of-date information at the public sector level, this may leave both businesses and government officials without access to the data that forms the foundation for sound economic policy.

These challenges, in addition to those focused on cultural paradigms, are significant limiting factors in the integration of innovation into emerging markets. They do not, however, render innovation impossible, but rather change the mechanism or mechanisms that are necessary to achieve it. The baseline for embracing innovation in an emerging market context is the ability of many stakeholders (i.e. public sector, private sector, academia, NGOs, and the donor community) to understand the linkage between innovation and prosperity.

Innovation’s link to prosperity

The Legatum Prosperity Index, the world’s only global assessment of wealth and wellbeing, cites innovation as one of the key elements in the development of prosperity. Its findings show that innovative countries are not only more competitive, but more prosperous.5 The 2009 Legatum Prosperity Index measured the performance of 104 countries in nine categories that included entrepreneurship and innovation. These categories measured prosperity in broad terms, focusing on societal, educational, and quality of life factors in addition to economic ones. One of the report’s key findings was the “The ability of a nation’s people to innovate is more strongly related to the soundness of its economy than any other factor”6. The key take away from this is that in order to be competitive, emerging markets should focus on establishing business environments that promote creativity, individual initiative, and productivity. Since the latter is an essential element in building competitiveness, the importance of promoting productivity cannot be overstated.

A glaring example of the linkage between productivity and prosperity comes from comparing some of the world’s most productive nations, mostly located in the north Atlantic region, to selected emerging markets. The following graph compares Ireland (blue), Finland tan), Israel (gray), Egypt (red), Jordan (orange), and Lebanon (green):7

The graph shows that from the standpoint of prosperity8, countries with high entrepreneurship and innovations rankings outpace those without. However, it also shows a clear linkage between prosperity and the other eight criteria. This begs the question, however, about how much weight innovation has on the other criteria. For instance, could a country that has a low innovation ranking still achieve prosperity? Could a country with a high innovation ranking fail to achieve it?

Among the fifteen most prosperous countries according to the 2011 Legatum Prosperity Index, the lowest ranking in innovation (in the current report called Entrepreneurship and Opportunity which incompasses innovation) was 18th (Austria), while rankings among the other criteria was not as consistent. For instance, Australia ranked 3rd in overall prosperity, but 14th in health, while Switzerland ranked 8th in prosperity but 29th in education.9 It appears, then, that innovation may play a larger role in the creation of prosperity than other criteria, or at least be an enabler for success in a broader context.

Among the fifteen least prosperous countries according the Legatum Prosperity Index, only Pakistan ranked higher than 86th in innovation, and it was an outlier, as the other countries ranged from 89-110. These countries ranked appreciably higher relative to other criteria, however, such as in social capital, personal freedom, and education.10 Again, this may cause one to deduce that innovation carries heavier weighting in terms of prosperity than the other criteria.

This hypothesis is supported by the following table that links business competitiveness to overall prosperity.

The summary of this data, from three different competitiveness reports, suggests that innovation may play a key, if not critical, role in the creation of prosperity.11 Of the top ten most prosperous countries in the world according to the Legatum Prosperity Index, all are in the top twenty-five countries in both competitiveness and productivity as ranked by in the World Economic Forum’s latest Global Competitiveness Report and the International Labour Organization. The baseline for the movement towards prosperity is linking innovation to increased productivity. While the rankings support this linkage, there are a plethora of qualitative measures that augment it as well. One such measure is the Crepon, Duguet, Mairesse (CDM) model, which focuses on three stages of development along the continuum of innovation and productivity.12 The first stage explains the determinents of innovation inputs (e.g. R&D spending), while the second stage links innovation inputs with innovation outputs (e.g. sales generated by new products). The third stage measures a company’s innovation output with performance indicators. In other words, it measures the increase in sales volume or quality to overall performance such as hours worked, amount produced, quality enhanced, etc. By using the CDM model across a broad spectrum of industries within the countries noted as the most prosperous in the world, one finds that a link does in fact exist between productivity and innovation. An example of this linkage is Estonia’s service sector, the CDM model showed a connection between innovation and increase productivity in industries where knowledge-base processes were used.13

With this in mind, it establishes the Prosperity Pathway as a viable developmental model for emerging markets…but is it viable? Can emerging markets embrace the value chain as a road to prosperity, or will it simply become another experiment that does not produce the desired results? The answer may be clear when enveloped in a strategy that is buoyed by a sound methodology. If strategy and methodology merge to create broad-based support for innovation as a trigger for prosperity, then the answer to the first question is “yes”. This being the case, the strategic path to innovation offered by the Prosperity Pathway is one that should be explored by emerging markets.

The Prosperity Pathway: the path to innovation

When analyzing the current state of emerging markets relative to innovation and comparing them to the functional aspects within the Prosperity Pathway (i.e. productivity, competitiveness, innovation, and prosperity), seven focal areas emerge that may assist emerging markets in embracing innovation:

  1. Governments should improve welfare for their citizens in terms of health and quality of life.
  2. They should focus on the adoption of a national strategy that stimulates innovation on the enterprise level and creates flexible and autonomous agencies to support productivity, competitiveness, and innovation.
  3. They should develop competitive industries that utilize technology to create and commercialize knowledge

The overarching theme of these focal areas is the necessity for emerging markets to adopt an ongoing, innovative, and results-based strategy that is deeply rooted in economic development leading practices and offers practical approaches, which allow for “quick wins” and momentum-building results. To do so, further exploration of the three focal areas is necessary to communicate an understanding of what is at stake.

First, governments in emerging markets should improve welfare for their citizens in terms of health and quality of life. While it is true that countries focusing on the creation of high value jobs in the knowledge economy are also creating wealth throughout society, the ability to reach this point is contingent on a country’s ability to provide basic services, infrastructure, security, and quality of life to its citizens. Across the globe, many emerging markets continue to focus on one of two ends of the development spectrum, namely promotion of poverty alleviation programs that on their own have not produced the desired results or complicated strategies for growth that quickly lose momentum because they become ensnared in research and/or planning instead of concrete action. These initiatives have too often developed unrealistic expectations for investment, skill sets, and economic performance that did not come into fruition. The first step on the path to innovation in an emerging market context, therefore, is the improvement of quality of life according to appropriate and sustainable mechanisms. In other words, many international organizations that provide significant financial and technical assistance support to emerging markets are beginning to embrace indigenous-based programs that promote local empowerment, action, and economic growth. Since productivity is the first link in the Prosperity Pathway, it is integral to view it as the initial impact that should be achieved for emerging markets to embrace innovation and ultimately prosperity.

Secondly, emerging markets should focus on the adoption of national innovation strategies that provide a leading path to success. A strategy should focus on specific actions that may be taken to promote movement up the Prosperity Pathway. While the steps listed in the following table are not necessarily sequential, they do represent a methodology that has shown to be effective in even the poorest of emerging markets:

Promoting innovation at the enterprise level is one of the key components to a national innovation strategy. Enterprise-level innovation may take many forms including the development of think tanks, research institutions, incubators, and/or research and development centers that focus on targeted economic sectors, as well as macro-economic issues. International leading practices in innovation should be researched and used within or adapted to the local context.

Another key component of a national innovation strategy should be to create flexible and autonomous agencies to support productivity, competitiveness, and innovation. In many countries, variations of the same processes are used continuously even though it is likely that they have never,and may never, provide the flexibility needed to enhance economic development. In these countries, control is likely valued above enterprise.

Finally, emerging markets should develop competitive industries. This should be done, however, within the context of a defined strategy that focuses on industries that can be productive, create a market niche, and foster innovation. While some emerging markets continue to protect dying industries through subsidies and high tariffs that protect them from competition, others spend precious resources on industries and sectors that, while in demand by the global market, are not consistent with the country’s workforce skills, culture, infrastructure, and/or economic potential. Both strategies may be equally defeating, ending in frustration and derailing any efforts to generate prosperity. In order to increase productivity, emerging markets should focus on economic sectors and/or industries that provide potential for growth while at the same time being consistent with their ability to provide workers and quality products/services. To keep pace with competition and to gradually traverse the Prosperity Pathway, improvements should be expected in quality, marketing, logistics, and business climate. By focusing in these areas and within sectors that provide natural competitive advantages, it is even possible to develop innovation of worldwide significance.

Utilization of foreign technologies to build local knowledge is one way to develop competitive industries. Adapting foreign technologies to the needs of particular countries can spur increase productivity and spur innovation. Innovation is quite often an output of the intersection of foreign technology with indigenous experience and knowledge. For a relatively small cost, emerging markets can develop research and development centers and business incubators that link foreign technology with indigenous talent.

Of course, there are other factors that emerging markets should also address in adopting and implementing the Prosperity Pathway. These include the establishment of a business-friendly enabling environment, development of technology infrastructure, and continued enhancement of worker skill sets through both university participation and vocational instruction.

The establishment of a policy framework to enhance innovation in a broad spectrum of economic strata within targeted sectors is critical to success. The following table outlines specific policy objectives and instruments to facilitate movement up the Prosperity Pathway:

The intersection of a strong policy framework and a realistic innovation strategy is the nexus of the Prosperity Pathway. The following graphic describes the strategic approach that emerging markets might take toward the institutionalization of the methodology as a mechanism to generate prosperity.

Transcending strategy

Development of an innovation strategy as previously described provides the foundation for prosperity, but it is insufficient to increase the likelihood of success unless buoyed by a sustained implementation. In emerging markets around the world, economic development strategies have been developed only to be replaced in a few years by another, with little action in between. .For this reason only, significant time and effort should be dedicated to the implementation of an innovation strategy that has the ability to produce significant results in the near term in order to capture and maintain momentum. Many countries have found the creation of innovation clusters to be a sound implementation mechanism, as they establish synergy between the major stakeholders within targeted sectors.

Since the early 20th century, clusters defined by industry, sector, and spatial location have increased business productivity. Specialists such as Peter Drucker and later Dr. Michael Porter, brought cluster mentality to the forefront of economic development, focusing on the development of competitiveness within industries located in close spatial proximity. The cluster model, as highlighted by the “Porter Diamond” 14became the foundation for global economic development initiatives. Many of these initiatives achieved various levels of success, while others failed to gain traction due to a variety of reasons, not the least of which was the lack of understanding of the practical elements of cluster development rather than merely the theoretical ones.

Over the last ten years, innovation clusters have emerged, taking the theory and practical application to a new level. Porter and other specialists have facilitated this transition, calling for increasing infusion of innovation into traditional cluster models. The emerging innovation clusters adopted a broader focus than their traditional counterparts by facilitating connections among firms, research centers, investors, public officials, academicians, and enabling organizations, which work together to create new technologies, products, and enterprises. Rather than replacing industrial clusters, innovation clusters have augmented their ability to capture opportunities by increasing knowledge, creativity, and collaboration. In addition, because of the structural design of innovation clusters as connecting points versus implementing bodies, they have provided a lower cost, non-hierarchical alternative to standard clusters.

Measuring impact

Measuring the Prosperity Pathway’s impact is not difficult, but it is often overlooked in a country’s desire to strategize and implement. All too often, innovation efforts are not evaluated based on objective criteria, so their results can be clouded in a fog of misinformation, faulty data, and inadequate reporting.

This is compounded by the fact that in many emerging markets, monitoring and evaluation is not valued because of either a misunderstanding of its definition or a willful decision not to track progress in key indicators. In the latter case, this can mean that no results have been achieved and therefore should not be tracked.

Monitoring and evaluation begins with baseline indicators that track a country’s, or in some cases a sector or industry’s, current position relative to specific measurable criteria. Once baseline indicators are established, target impacts can be created and tracked on an ongoing basis. Typically, a cluster manager will be responsible for tracking this data and sharing the results with cluster members, but specific benchmarks and impact targets should also be established and tracked on a national level.

In many cases, monitoring and evaluation, especially in the case of tracking economic indicators, is inconsistent unless supported by force of law. For instance, Statistics Canada has tracked thousands of indicators-economic, social, educational, and otherwise-for more than two decades. It is able to do this because compliance with its data collection surveys is mandatory for all businesses, and audits are conducted to ensure the accuracy of the information. Even without the force of law, however, countries can collect empirical data by focusing on a small set of key indicators and tracking them consistently over a long period of time.

Conclusions

Based on research conducted by the author as well as a plethora of international organizations, it is clear that innovation is a critical ingredient to prosperity, and that its position in the Prosperity Pathway is essential. It should be said, however, prosperity comes with a price. Not every country will implement the Prosperity Pathway, choosing instead to adopt more localized mechanisms or to implement strategies that focus on output instead of “throughput”. These countries will likely continue to struggle in the face of changing economic circumstances and increased competition. Prosperity comes at a price that some countries may not be able or willing to pay. Even among prosperous countries, the price for the continuation of prosperity grows daily, through investment in technology, promotion of innovation, and the refinement of governance structures.

Even so, it is clear that emerging markets can implement effective innovation strategies that leverage their natural assets, build on the local knowledge base, enhance productivity, boost competitiveness, and ultimately create prosperity. The key is adopting a methodology that can transcend political upheaval, economic turmoil, and cultural paradigms. This methodology must be understood and embraced by citizens, and they should be involved in the process of creating prosperity. The reality is that the ultimate responsibility for creating prosperity lies with a country’s government and its people. Donor funds can help speed the process, but they cannot replace the initiative, energy, creativity, and commitment that must be in place for innovation to thrive and for the seeds of prosperity to grow.

Endnotes

1The “Cha rpie Report”, prepared in 1964 by the Johnson Administration in the United States, was entitled, “Technological Innovation and its Environment”. It remains the primary foundational document for the definition, understanding, and coverage of innovation policy.

2Source of Definition:http://www.businessdictionary.com/definition/innovation.html

3Maloney, William. “Presentation to the ECA KE Forum”, Budapest, Hungary, March, 2004.

4According to the World Economic Forum’s 2009 Global Competitiveness Index, Romania ranks 52nd in educational attainment and Jordan ranks 42nd, while their rankings in the Legatum Prosperity Index are 48th and 80th respectively.

5Source: The 2009 Legatum Prosperity Index

6Ibid

7Source: The 2011 Legatum Prosperity Index. The original can be found at www.prosprity.com, which is the Legatum Prosperity Index site. This chart was built by using an interactive feature on the site that allows for comparison of variables for different countries.

8The actual category up until 2010 was called “innovation.” In 2011, the category’s name was changed to “Entrepreneurship and Opportunity” that includes all the variables that encompass innovation.

9Source: The 2011 Legatum Prosperity Index

10Source: The 2011 Legatum Prosperity Index

11Sources: Prosperity rankings (Legatum Prosperity Index 2011); Competitiveness rankings (World Economic Forum Global Competitiveness Report 2011); Productivity rankings (International Labour Organization/Wall Street Journal 2011); Innovation rankings (Legatum Prosperity Index 2011).

12Crépon, B., Duguet, E., Mairesse, J. (1998), “Research, Innovation, and Productivity: an Econometric Analysis at the Firm Level ”, NBER Working Paper No. 6696.

13Vahter, P. & Masso, J. (2011). The link between innovation and productivity in Estonia’s service sectors. The William Davidson Institute. University of Michigan.

14 The “Porter Diamond” refers to the economic and cluster model conceived by Dr. Michael Porter of Harvard University in his book, The Competitive Advantage of Nations.

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