Last time I promised to continue the discussion we started in How To Make Africa More Innovative and Entrepreneurial – Part I.  To do that, I would like to consider this question: Why are some nations more innovative than others?

Fortunately we do not have to attempt to divine an answer on our own. INSEAD professor SoumitraDutta leads a research project, the Global Innovation Index, conducted by INSEAD in partnership with Alcatel-Lucent, Booz & Company, The Confederation of Indian Industry and the World Intellectual Property Organization.

I can imagine that one of the questions you must be thinking about at this very moment is this: How do they measure innovation? The following description of their methodology comes from their website[i].

The Global Innovation Index 2011 (GII) relies on two sub-indices, the Innovation Input Sub-Index and the Innovation Output Sub-Index, each built around pillars.

 

Five input pillars capture elements of the national economy that enable innovative activities: (1) Institutions, (2) Human capital and research, (3) Infrastructure, (4) Market sophistication, and (5) Business sophistication. Two output pillars capture actual evidence of innovation outputs: (6) Scientific outputs and (7) Creative outputs.

 

Each pillar is divided into sub-pillars and each sub-pillar is composed of individual indicators. Sub-pillar scores are calculated as the weighted average of individual indicators; pillar scores are calculated as the simple average of the sub-pillar scores. Four measures are then calculated:

 

• The Innovation Input Sub-Index is the simple average of the first five pillar scores.
• The Innovation Output Sub- Index is the simple average of the last two pillar scores.
• The overall GII is the simple average of the Input and Output Sub-Indices.
• The Innovation Efficiency Index is the ratio of the Output Sub- Index over the Input Sub-Index.

They do this for:

. . . . 125 economies, accounting for 93.2% of the world’s population and 98.0% of the world’s Gross Domestic Product (in current US dollars).

So how do African countries fare? Not good. Mauritius and South Africa are the highest ranked African countries at 53 and 59 respectively. Tunisia, Ghana, Namibia, Botswana, Egypt, Kenya, Morocco, Nigeria, Senegal, Swaziland, Cameroun, Tanzania, Uganda, Mali, Malawi, Rwanda, Madagascar, Zambia, Cote d’Ivoire, Benin, Zimbabwe, Burkina Faso, Ethiopia, Niger, Sudan and Algeria respectively fall somewhere between 64 and 125. It is interesting to note that the United States is ranked 7 and Switzerland 1. Brazil, Russia, India and China are ranked 47, 56, 62 and 29 respectively. Sweden, Singapore, Hong Kong and Finland round out the top 5 in that order.

So what lessons can we glean from the GII 2011? You will recall that we have previously stated that in order to create centers of innovation (or innovation clusters) government agencies, universities, nongovernmental or nonprofit organization and businesses need to work in partnership.  We did not say how such a partnership might function. To gain some insight I decided to dig into the GII 2011 Report. It is available without charge online.

In the GII 2011 Framework, one of the roles African governments should play in nurturing innovation clusters on the continent is studied under the Institutions pillar. It comprises three main elements as sub-pillars; Political environment, regulatory environment, and business environment. The political environment plays a role in the development of innovation clusters by fostering political stability, government effectiveness and press freedom. The comparison of the regulatory environment in each of the countries studied by the GII is based on regulatory quality, rule of law and employment flexibility or rigidity of employment as it is called in the report. Finally, conclusions about the business environment are drawn after examining such things as the length of time it takes to start a business, the cost of starting a business and national tax regimes.

The GII 2011 Framework argues that the innovation capacity of a nation is determined by the level and standard of education and research activity. It tries to gauge the human capital of the countries included in the index by studying three things; Education, Tertiary Education, and Research and Development (R&D).  Here the GII looks at a country’s effectiveness in educating its citizens at the elementary level as well as at the tertiary level. Tertiary education is important mainly because it enables countries to transform themselves from exporters of primary commodities into exporters of finished, manufactured goods that rely on specialized knowledge in science and engineering.  R&D measures the level and quality of activities that transform ideas into products and services. Education is another area in which African governments have a big role to play. It is also an area in which an effective partnership between the public and private sectors can yield enormous dividends – a strong public education system that educates the vast majority of a country’s citizens, and is supplemented by well funded private elementary, secondary and tertiary institutions that educate a small minority of people that can afford to pay for a private education. Ideally, the public option should be competitive with the private option in terms of output at every level.

The GII 2011 Framework delves into the importance of infrastructure in aiding the formation of innovation clusters. We touched on the importance of infrastructure only very briefly in part I, where we suggested it is another area in which government bears primary responsibility. GII goes a step further;

Information and communication technologies (ICT), energy supply, and infrastructure are respectively the nervous system, the circulatory system, and the backbone of any economy. They facilitate the production and exchange of ideas, services, and goods and feed into the innovation system through increased productivity and efficiency, lower transaction costs, and better access to marks.

In relation to ICT, GII studies access, use, government’s online service, and e-participation. To reach its conclusions on energy it studies electricity output and consumption, GDP per unit of energy use, and the share of renewables in a country’s energy use. General infrastructure is studied by examining each country’s quality of trade and transportation networks, gross capital formation and ecological footprint and bio capacity.

The fourth pillar on which the GII is based relates to market sophistication. This pillar comprises sub-pillars that examine credit, investment, and trade and competition.

Credit is studied by

. . . measuring the degree to which collateral and bankruptcy laws facilitate lending by protecting the rights of borrowers and lenders, as well as the rules and practices affecting the coverage, scope, and accessibility of credit information.

The investment sub-pillar is closely related to credit. The investment sub-pillar measures

. . . . the extent of disclosure and of director liability and the ease of share holder suits. To show whether market size is matched by market dynamism, stock market capitalization is complemented by the value of shares traded.

GII 2011 is the first year in which venture capital deals have been included in the study – 7,937 deals in 81 countries form part of the research study.

The last sub-pillar under market sophistication looks at trade and competition by country:

The market conditions for trade are given by two indicators: the average tariff rate weighted by import shares and a measure capturing market access conditions to foreign markets. The sub-pillar then includes the total value of exports and imports as a percentage of GDP.

The GII research team did not have a lot of success obtaining hard data on competition. However, the study includes a survey question that reflects on the intensity of competition in local markets.

The business sophistication pillar takes the logic that was introduced under the human capital and research pillar a step further. Business sophistication studies how the businesses within a country foster their own productivity, competitiveness and innovation potential by employing people that have benefitted from the country’s education infrastructure. It also examines links and partnerships between public and private entities in fostering the diffusion of innovation within each country’s economy. Lastly, this pillar looks at knowledge absorption within an economy by examining foreign direct investment net inflows, and royalties and license fees payments, among other things.

The sixth pillar is one of two output pillars in the GII 2011 framework. Scientific outputs looks at knowledge creation, knowledge impact and knowledge diffusion. This pillar looks at all the variables that have traditionally been recognized as fruits of innovation. It also looks at

. . . . the impact that innovation has at the micro and macroeconomic level: increases in labour productivity, the entry and density of new firms, and spending on software.

Knowledge diffusion under this pillar is a mirror image of knowledge absorption under the market sophistication pillar. It examines statistics linked to sectors with high-tech content or that are key to innovation.

The seventh pillar looks at creative outputs. It has two sub-pillars. Creative intangibles looks at statistics related to issues like trademark registrations as well as the use of ICT in developing new business and organizational models. Creative goods and services looks at the share of household expenditure on recreation and culture. This serves as a proxy for the comparative level of creative activity in a particular national economy.

Are you feeling tired yet? I don’t blame you. But, I really think the GII 2011 report is worth reading.

Let’s talk again in two weeks. On deck?I will try to connect the dots between the various elements on which the GII is based. If there is time, we will look at what the researchers say contributes to the success of countries that rank high in the 2011 index as well as what contributes to low rankings on the index.