The Global Innovation Index Report 2020.
I am one of those who believe that innovation requires an effort of information and a global approach, even though our operating framework is a local business. Any change thousands of kilometres away will affect us in our small business or organization, local or regional, and also in a short time.
For this, we are interested in having multiple sources that allow us to update this global perspective. And the GII Global Innovation Index report is one of them, that help us to reaffirm and see in perspective, the conclusions of the multiplicity of immediate information that comes to us on a daily basis.
Our information system, therefore, would be composed of a series of selected sources for immediate information and others such as the GII, the European Innovation Scoreboard (EIS) etc., to see the perspective and get an idea of the trends.
What does the GII 2020 report tell us?
As “key findings” we find the following six conclusions:
1.- An obvious conclusion: The COVID-19 crisis will affect innovation, and leaders will have to act to move from containment to recovery.
The current crisis hit the innovation landscape at a time when innovation was booming. Until 2018, spending on research and development (R&D) grew at a faster rate than world GDP, after recovering strongly from the financial crisis of 2008-2009.
Now that global economic growth is projected to slow significantly in 2020, one wonders whether R&D, venture capital and political determination to foster innovation will also decline.
It is evident that the efforts of companies and investors in R&D and innovation should not be reduced to guarantee their future. Companies in the ICT sector, for example, have large cash reserves, and the drive towards digitization should strengthen innovation.
The pharmaceutical and biotechnology sector is likely to see growth driven by renewed interest in R&D in health. Other key sectors, such as transport, will have to adapt more quickly, due to renewed interest in the search for “clean energy”.
Additionally, the COVID-19 crisis could well catalyze innovation in many traditional sectors, such as tourism, education, and retail. Innovation could also be driven by the way work is organized at the company / employee level and the way production is (re) organized globally and locally.
Harnessing the above potential is now essential and will require the support of governments, as well as models of collaboration and continued investment from the private sector.
2.- In the current crisis there are fewer funds for innovation. But there is also hope
In the context of the GII 2020 monographic theme, “Who will finance innovation?”, A key question is the impact of the current crisis on startups, venture capital and other sources of innovation financing.
Unlike 2009, the positive is that, for now, the financial system is solid. The bad news is that in North America, Asia and to a lesser extent Europe, venture capital figures are declining dramatically.
In fact, current venture capital investments are concentrated in a few venture capital hot spots around the world, and only a few of those spots are in emerging economies. The nerve centers of venture capital, which are: Singapore, China, (with Hong Kong), Luxembourg, the United States, the United Kingdom, India and Israel, will continue to be the poles.
Notably, venture capital and innovation appear to have been reoriented towards healthcare, online teaching, big data management, e-commerce, and robotics.
On the other hand, globally, R&D expenses are highly concentrated in a couple of thousand companies around the world, which are responsible for 90% of the R&D financed by companies. The figure below shows the distribution of global corporate R&D spending by sector.
The following shows the companies with the highest investment in R&D in each sector and their contributions to the global growth of R&D spending.
It is useful to note that, for most of these R&D companies, innovation is now a vital component of their business strategy in an international competitive environment.
Some of these companies and sectors are less adversely affected by the COVID-19 crisis than others.
These companies typically have vast cash reserves, and given the increased push towards digitization during this pandemic, the impact of the crisis on the revenues of these companies or sectors may be positive.
3.- The global geography of innovation is changing; China, Vietnam, India and the Philippines are making steady progress
This year, the geography of innovation continues to change, as demonstrated by the GII rankings. Over the years, China, Vietnam, India and the Philippines are the economies with the most significant progress in their GII innovation rankings. All four are now in the top 50.
Switzerland, Sweden and the United States top the global ranking for innovation, followed by the United Kingdom and the Netherlands.
This year for the first time there is a second Asian economy, the Republic of Korea, in the top 10, along with Singapore and the geography of innovation continues to transform, as evidenced by the rankings of China, Vietnam, India and the Philippines that with the Over the years, they have become the economies that have advanced the most in the ranking. All four are now in the top 50.
The best performing economies according to the Global Index remain almost exclusively the group with high GDP per capita. China is the only exception, ranking 14 for the second time in a row and remains the only middle-income economy in the top 30 of the Index.
4.- Some developing economies show a very high development in terms of innovation.
The more developed an economy is, the higher its capacity for innovation and vice versa. The curve in the GII chart below illustrates this fairly predictable relationship between innovation and development.
However, some economies break this pattern. Their performance is above or below expectations, sometimes a lot. They obtain results higher or lower than those that correspond to the potential of their economy according to their GDP or income. These potential variations are observed in the following image.
5.- Regional divisions persist, although some economies harbor significant innovation potential.
Despite a “shortening of the gap” in terms of innovation performance by country, there are regional differences: North America and Europe lead, followed by Southeast Asia, East Asia and Oceania, and further afield , North Africa and Western Asia, Latin America and the Caribbean, Central and Southern Asia and Sub-Saharan Africa, respectively.
An example of regional divisions are brands as an important aspect of everyday life and an important element of a country’s score on intangible assets.
Which economies have the most valued brands?
On average, companies that invest more in innovation invest more in branding; is an important way for companies to realize returns on their investments in innovation and R&D. To advance global value chains and increase their margins, companies in low- and middle-income economies are increasingly looking to develop their own brands or acquire them abroad.
As a result, investments in global brands have approached half a trillion dollars and represent a growing share of GDP, equivalent to about a third of global research and development (R&D).
6. Innovation is concentrated in science and technology (S&T) poles or clusters of selected high-income economies, in addition to China.
There are also large differences in the classification of science and technology poles or clusters on a global scale.
The top 100 poles are in 26 economies, of which 6 (Brazil, China, India, Iran, Turkey, and Russia) are middle-income economies. The US continues to have the largest number of clusters (25), followed by China (17), Germany (10) and Japan (5).
In 2020, Tokyo-Yokohama remains the most dynamic hub, followed by Shenzhen-Hong Kong-Guangzhou, Seoul, Beijing and San José-San Francisco.
For the first time, GII 2020 presents the 100 main clusters, of which we present the top 50, classified by the intensity of their scientific and technological (S&T) activity, that is, the sum of the percentages of their patents and scientific publications divided by their population. From this new perspective, many European and American clusters present a greater scientific and technological activity than the corresponding Asian poles. In this sphere, Cambridge and Oxford in the United Kingdom stand out, followed by Eindhoven (Netherlands) and San José-San Francisco (USA).
An interesting part is the study of intensity in science and technology (S&T) of each cluster in relation to the population of its area of influence.
Some of them, due to their area of influence with a very high population, (Tokyo-Yokohama) obtain a notably lower index than others such as Cambridge or Oxford in the UK. Barcelona and Madrid are in the lower-middle range.
Who will finance the innovation?
Innovation is the best way to promote economic development and the generation of more and better levels of employment. Finding the best way to finance innovation is one of the key issues in business and policy in the 21st century.
The COVID-19 pandemic and its enormous personal and economic impact has made and will make both innovation and its financing needs more urgent.
The GII 2020 has dedicated 15 chapters, with policy makers, academic experts and business leaders trying to shed light on the state of innovation financing, researching the evolution of existing financing mechanisms, and pointing out progress and pending challenges
May be interesting to firstly present this graph with the most consolidated sources of financing according to the life cycle of the companies.
Recent developments in financing innovation
The lack of sources of financing, for many reasons, can generate a worrying lack of investment in innovation. This is particularly true when there is high technological or other risk associated with an innovation, when entrepreneurs are illiquid or lacking in credit, and in emerging or developing economies, where financial markets do not yet exist or are weak. .
Today, innovators have some funding mechanisms at their disposal, including a variety of new players, such as non-profit organizations, sovereign wealth funds (SWF) or investments of certain personal fortunes.
- Traditional innovation financing mechanisms include public support systems, company-specific investment in innovation, and investment market-based mechanisms that specifically target innovation, such as loans, private equity, and venture capital (RC).
- New mechanisms include corporate companies, intellectual property (IP) markets, microfinance, crowdfunding, and technology channels.
Venture capital investments have risen in the last two decades but are suffering the recent decline caused by the pandemic. Also, in general, few winners take the whole result.
And venture capital financing (Venture Capital VC) is a rare event: only about 0.17% of startups get venture capital financing. In recent years, these “winners” have increasingly been found among expansions, late-stage companies and the so-called “unicorns,” young and generally technology-focused companies valued at more than $ 1 billion.
Sovereign wealth funds have contributed in part to this trend with their concentration on financing companies close to their national interests. Sovereign wealth funds differ from many other investors in their character, risk tolerance and time horizons, investing in disruptive technologies and early stage companies while balancing technology investments with investments for the competitiveness of their economy and well-being.
While its financial resources have helped many startups prosper, its investments have raised concerns related to the resurgence of economic nationalism.
The report also raises the following topics on the topic “Who will finance innovation?”
Venture Capital. Access to finance for innovation is skewed across countries and sectors.
While the US has traditionally been the world’s largest venture capital market, other countries have embraced this model as well. New foci have emerged in Europe, Israel and more recently in China and India and, to a lesser extent, in some countries in Southeast Asia, Latin America and Africa.
Despite this positive sign, penetration rates remain uneven between countries at different stages of development, and even between countries with similar income levels. Venture capital investments are concentrated in a few cities.
For example, 11 cities, 6 in the US, 3 in China, London and Bangalore, account for more than 60% of total investments worldwide. This divide is likely to become even more pronounced in the years after the current economic crisis.
A subset of innovations, particularly those that can generate short-term returns, attract the majority of venture capital investments. On the contrary, it seems that scientific and technological advances receive less attention, regardless of their social need.
Venture capital is highly concentrated in software, IT services, consumer products and services, and financial services. These sectors not only absorb most of the financial resources available through CR, but their growth has been quite rapid in the last 10 years. Healthcare, IT hardware, energy, and materials have not captured the same level of venture capital.
The current crisis is likely to further deepen this trend, and sectors and companies with a longer research horizon will face more severe financial constraints.
Sovereign wealth funds (SWF)
Other forms of financing, such as sovereign wealth fund investments, are also concentrated, mainly in the United States and Asia, and much less in Europe and elsewhere.
Some sovereign wealth funds have been created specifically to invest in their national economies and promote their economic development, diversification and the improvement of their living standards. Examples include France, Ireland, Turkey, Kazakhstan, Morocco, Oman, and Singapore.
Interestingly, with much more patient capital available, SWFs are better suited to invest in companies with longer incubation times, including healthcare. Beyond healthcare, SWFs have shown interest in business software, consumer services with high-tech elements (such as e-commerce), and consumer technology, while preferring practical technologies that solve everyday problems and create new opportunities for customers.
However, today the need to finance disruptive innovations is growing, “the unknown” is stronger than ever.
Significant social changes require large investments in science-intensive technological fields with broad research horizons.
Financing innovations that can contribute to societal challenges is a cornerstone of European innovation policies, as described in the case of, for example, the Czech Republic.
Strong innovation systems must balance start-ups, growing and / or expanding companies, and mature companies.
Investment in innovation is often conceived as something that only refers to investment in emerging companies. However, finding the right balance between financing startups, expansions and mature companies is critical for innovation ecosystems.
But in many parts of the world, start-ups still attract most of the financial resources for innovation, even though “development and scale-up” is the true litmus test for innovation.
For example, India has a vibrant ‘Startup’ ecosystem and is home to 6 of the 100 most entrepreneurial cities in the world, with Bangalore ranking 11th in the world. Even in other low- and middle-income economies, including Kenya, investing in startups has become the cornerstone of innovation policy, despite the “missing middle” phenomenon – business shortages. medium, threatens innovation ecosystems.
It appears, however, that there has recently been a shift to the later stages, reflecting the interests of non-traditional investors, including sovereign wealth funds and mutual funds. If this is done, companies remain the property of their initial entrepreneurs for longer. Exits, already declining in 2019, have become even rarer during the pandemic crisis.
It also appears that the void created by this shift has been partially filled by angel investors, accelerators and microfinance platforms (crowdfunding).
Mature and established companies also need access to finance to be able to introduce new innovations, including some radical innovations, and to avoid becoming obsolete.
This need for existing and mature companies to access innovation capital is vital and often overlooked. In general, policy makers and financiers are obsessed with startups especially focusing on “unicorns” as a sacred source of innovation.
Since the early days of the industry, investing in innovation has been a combination of investing in mature and developing startups. However, finding the right balance is critical for innovation systems.
New instruments, which have raised expectations, are helping, but have not completely eased financial constraints in developing economies.
Microcredits has been hailed as a major financial innovation, to help ease the credit constraints faced by underserved communities. Microcredits have facilitated access to credit for entrepreneurs without resources, women and rural areas. Until today, however, microcredit has not always been used to foster entrepreneurship and transformative innovation. Many of the microcredit line loans are for subsistence and with a limited interest in innovation.
New technologies allow companies and entrepreneurs to connect to Fintech platforms that, among other services, provide alternative financing and that are spreading in all areas, affecting emerging and developing economies and countries.
In general, crowdfunding is particularly suitable in the preliminary or “seed” phase of an innovation project, which is also the phase when funding is running out the most.
Despite these prospects, the actual impact of Fintech and other instruments remains difficult to assess at this early stage.
The market for ideas and intellectual property (IP) is growing, but barriers remain
Intellectual property has long been used to signal the quality and feasibility of an innovation project. This has been helpful in reducing financing costs, attracting new investors, qualifying us for government programs, and entering international consortia.
Intellectual property is also a kind of “insurance policy”: if the company goes bankrupt, its ideas and intangible assets can still be sold or licensed. It is also increasingly used as collateral for loans, with many governments around the world facilitating these practices to reduce difficulties in securing their investments.
However, there are still no IP markets that are the size and volume of a Stock Exchange, and no large Internet Platforms for trading physical goods, despite numerous initiatives to establish emerging IP markets.
Several issues still endanger idea markets and intellectual property. The first and most important is the valuation. The value of an IP is highly context dependent. Valuation is also hampered by the fact that, to date, there is still no standard method of valuation that is uniformly accepted.
In some countries such as Austria, France, the United States and the United Kingdom, IP audits are implemented with varying degrees of success. These instruments can and should be used more.
A carefully designed policy mix is essential to improve the financial landscape of innovation
A general political message emerges from the chapters of this GII’s monographic report: No innovation policy instrument can solve all the problems that a country or an economy may face in relation to its innovation system.
The recommendation to governments is that they should study and design a particular policy mix that addresses the various obstacles to funding, maximizing complementary elements between the funding mechanisms and sources of the various funds.
In fact, government support can be direct or indirect, and sources of funds can be public, private, or a combination of both. Some combinations can stimulate innovation, while others can make efforts to do so futile.
Three additional policy actions are recommended in the GII report:
- First, governments can play an important role in eliminating technological risks.
- This role of government is even more important today, given the current decline in companies’ own financing possibilities and the reduction in venture capital (CV) by early-stage companies and emerging sectors.
- Examples of how governments can intervene in this area include the use of grants to finance prototyping for businesses and SMEs, along with procurement grants and advance purchase commitments.
- Second, by recognizing the persistent financial gaps in the world, and making concrete efforts to develop more active venture capital markets. Beyond offering tax incentives to venture capitalists, governments could decide to become venture capitalists. There are examples of governments that have established state companies for this.
- Third, and specifically with regard to developing countries and emerging economies, policies are needed that allow financial markets to become mechanisms that stimulate innovation. For example, by removing various legal and regulatory barriers to the development of the venture capital market.
The GII 2020 identifies a series of specific policy actions that could help countries in these efforts
Currently openness and international collaboration on innovation are threatened.
However, the joint search for medical solutions during the pandemic has shown, among other things, the strength of cooperation.
The speed and effectiveness of this collaboration show that internationally coordinated R&D initiatives can clearly counteract the trend towards further isolation and respond to the important needs of society, both now and in the future.