Measuring the value in innovation

23 Jun 2010 | Viewpoint
Efficiency in deploying knowledge is more important to economic competitiveness than the ability to create new knowledge, argues Sami Mahroum.

INSEAD's Dr Sami Mahroum

Innovation is now regarded as central to any nation or region’s competitiveness, social wellbeing, and prosperity. From Abu Dhabi to Zambia, governments are boosting efforts to encourage local firms and organisations to become more innovative and create new value.

In many cases however, policymakers are focusing too much on the capacity of local firms to create new knowledge and exploit it in the local economy, rather than on their capacity to create new value per se.

The overemphasis on locally produced and locally exploited innovation goes against the obvious reality that most value is created by the adoption of innovation and its exploitation at a global scale. Most of us are engaged in economic activities that use technology and services originating from more than one firm, region or country. This is true for computers, mobile phones, cars, capital machinery, and the business models around which we create new economic and social value.   

Efficacy of knowledge use is therefore more critical than the capacity to create new knowledge and innovations per se. Consequently, policymakers need to pay more attention to the capacity of the businesses and other organisations in their economies to access, attract, and diffuse innovation from elsewhere and exploit whatever new value can be created.

Two years ago I worked with a team of researchers in the UK to develop the Innovation Adoption Index on behalf of the public investment fund, the National Endowment for Science Technology and the Arts (NESTA). The index focuses on the five key capabilities that are critical to using innovation to create new value: the ability to access, anchor, diffuse, create and to exploit knowledge.

I recently produced a modified version of the index in collaboration with the Statistical Centre Abu Dhabi, to measure innovation adoption capacity in Abu Dhabi and selected natural resource rich economies (Australia, Canada, Finland, New Zealand, Norway, and Sweden) for the General Secretariat of the Executive Council.

The results, while not overly surprising, are nevertheless quite revealing. On the capacity to access knowledge needed by firms to create value, Abu Dhabi is ranked last, in 7th position, compared with the other benchmarked countries. The ranking is based on the mean average for the following metrics: Advanced Producer Service Network Connectivity, outward mobility of students, Internet usage (per 100 persons), and Exports of High-Tech products as a percentage of GDP. Abu Dhabi ranks highly only in its level of outward student mobility.

It should be noted that some of the data used to measure this capacity were old (more recent data was not available), and it is believed that on the whole Abu Dhabi’s capacity to access international knowledge has improved with the increased presence of international companies operating in the Emirate.

The countries with the highest capability for accessing international knowledge are Sweden and Norway. Both possess a good level of international connectivity and networking. Norway is particularly boosted by high levels of Internet usage.

The second capacity for value creation in an economy is the ability to anchor knowledge, that is, to attract and ‘domesticate’ knowledge through foreign direct investment and/or immigration of highly skilled professionals. Here, Abu Dhabi performs well in terms of its knowledge anchoring capacity, and is ranked only behind Canada. Abu Dhabi’s increasing capacity to attract highly skilled workers and high value businesses indicates that its access to knowledge is mediated more through attracting foreign companies and professionals, and less through direct exchanges with international partners.

Conversely, the Nordic countries do not perform well in terms of knowledge anchoring, with relatively low levels of foreign direct investment and highly skilled immigrants. This suggests a business climate and a culture that are not favourable to foreign firms and foreign professionals.  Australia, Abu Dhabi and Canada are all countries in which skilled immigrants are conduits for knowledge access and for anchoring knowledge.  

The third capacity for value creation in the Innovation Adoption Index is knowledge diffusion, or the ability of an economy to absorb new knowledge on a wider scale. It is measured on the basis of the percentage of people educated to tertiary level in the labour force, the proportion of businesses that have cooperated on innovation-related activities, the proportion of firms adopting innovations, and the share of imports of high-tech products (as a percentage of total imports) in an economy.

Abu Dhabi’s overall knowledge diffusion scores are low because it has a relatively under-skilled workforce and there is little collaborative innovation across businesses and other organisations. On the contrary, Sweden, Australia and New Zealand have the highest propensity to diffuse knowledge, based on a high level of education and training and strong inter-firm and inter-institutional collaboration around innovation.

In the fourth capacity measured in the innovation adoption index, the capacity to exploit knowledge, Abu Dhabi comes in 6th position, above New Zealand, and only slightly below Sweden, while Canada leads the way by some distance, followed by Norway and Finland.

The fifth capacity - to create knowledge - was not included in the current Abu Dhabi version of the Innovation Adoption Index for two reasons: the desire to put a greater emphasis on creating value on the basis of knowledge acquired from elsewhere, and the lack of data on knowledge creation outside formal R&D activities.

Abu Dhabi in the overall Innovation Adoption Index

In the overall composite Innovation Adoption Index, based on the mean average of the four sub-composite indices, Abu Dhabi is ranked 6th, one position above New Zealand. Canada is ranked first and Australia second, followed by the two Nordic countries.

The index shows that Abu Dhabi is highly reliant upon an innovation model based on the anchoring of overseas knowledge through the attraction of foreign talent and foreign knowledge institutions. Whilst this is expected to produce significant benefits in the mid-term future, there remains the need to improve adoption and exploitation capabilities, especially the means through which knowledge is exploited locally and on an international basis and through partnerships with players overseas.

As the director of the newly launched Innovation and Policy Initiative at INSEAD Abu Dhabi, I now plan to both improve and expand the indicators for the Innovation Adoption Index in order to apply it to a greater number of countries. This will allow policymakers to monitor the performance of their economies in terms of the readiness to create value.

Value can be created through accessing, anchoring, and diffusing innovation, and not only through the creation of new innovations. This is where the strength of the innovation adoption index for policymaking lies.  

Dr Sami Mahroum is the Director of INSEAD’s Innovation & Policy Initiative based in Abu Dhabi.

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