Global Innovation Index 2020: Who Will Finance Innovation?

By Catherine Jewell, Publications Division, WIPO

The 2020 edition of the Global Innovation Index (GII), launched in early September in Geneva, Switzerland, reveals the latest global ranking of countries in terms of their innovation performance. Now in its 13^th edition, the GII supports policymakers’ understanding of how to foster innovation in support of their national social and economic development goals. Amid the economic turmoil triggered by the COVID-19 pandemic, the 2020 edition of the GII explores the question of who will finance innovation? Sacha Wunsch-Vincent, Senior Economist at WIPO and co-editor of the GII 2020 at WIPO, discusses some of the report’s key findings.

What do the GII 2020 rankings reveal?

Switzerland, Sweden and the United States continue to lead the innovation ranking . For the first time, the Republic of Korea (ranked 10), broke into the top ten group of countries. China (ranked 14), remains the only middle-income country to feature in the top 30 GII economies, with the United Arab Emirates (ranked 34) making it into the top 35 for the first time this year. Similarly, India (ranked 48) and the Philippines (ranked 50) fall within the top 50 countries for the first time. The continuous rise in the rankings of the Philippines is notable having moved up 50 places since 2014.

Over the past seven years, China, the Philippines, India, and Viet Nam have made the most significant progress in the rankings.

While regional innovation divides persist, the GII 2020, which comprises a broad range of metrics, reveals strong innovation performance by a number of emerging economies. For example, Thailand and Malaysia rank first in business R&D and high-tech (net) exports, respectively; Botswana and Mozambique top the leader board for education spending and innovation investment, respectively; and Mexico emerges as the largest creative goods exporter relative to total trade worldwide.

The impact of the crisis on innovation will depend on recovery scenarios and the business and innovation practices and policies that are in place.

Moreover, of the 25 economies that performed better on innovation than their current level of development would predict, eight are from sub-Saharan Africa. Interestingly, India, Kenya, Moldova and Viet Nam have been among this group of “innovation achievers” for ten consecutive years.

GII 2020 also reveals that with respect to science and technology clusters, innovation is concentrated in select high-income countries and China. Tokyo-Yokohama (Japan) is the top-performing cluster once again, followed by Shenzhen-Hong Kong-Guangzhou, (China), Seoul (Republic of Korea), Beijing (China), and San Jose-San Francisco (USA).

Why is this year’s GII focusing on the financing of innovation?

The ability to secure access to sustainable funding sources is a constant challenge for innovators around the world and is becoming particularly difficult as a result of the current COVID-19 pandemic. Finance plays a role at every stage of the innovation cycle from the conceptualization of a product, service or technology through to its commercialization and beyond.

Prior to the pandemic, new actors, such as sovereign wealth funds and non-profit organizations, were entering the innovation finance scene. And while public schemes remain an essential vehicle for innovation funding, a variety of new funding mechanisms, such as IP marketplaces, crowdfunding and fintech solutions, were beginning to emerge. While the current crisis has put a brake on these developments and as they are unlikely to disappear, they merit closer examination.

Top R&D-spending sectors as share of global top R&D spenders, 2018-2019

What impact has the COVID-19 crisis had on innovation?

To fathom the impact on innovation, it is important first to consider the context in which the COVID-19 crisis struck. The GII 2019 sent a very upbeat message about the outlook for global innovation.

Over the last decade, growth in average innovation spending worldwide grew faster than the global economy, which had not fully recovered from the 2009 global financial crisis, venture capital was at an all-time high, and global intellectual property (IP) filing activity reached new heights with every passing year. On top of that, across the globe we saw the emergence of an overwhelmingly strong political determination to foster innovation in support of national social and economic development goals. The global innovation landscape was thriving. Then, the world was shaken by COVID-19.

Venture capital and other sources of innovation finance are likely to be in shorter supply, especially for firms with longer research horizons. Such a decline risks having a negative impact on the future development of major breakthrough innovations.

Economic literature tells us that we should expect a strong negative impact on innovation as a result of the COVID-19 crisis. Historically, pandemics have been followed by sustained periods of depressed investment in innovation. Like past economic downturns, such as the 2009 global financial crisis, R&D and other innovation expenditures are likely to fall in 2020.

However, the impact of the crisis on innovation will depend on recovery scenarios and the business and innovation practices and policies that are in place. Past crises have affected different sectors and countries in different ways, with some experiencing higher levels of innovation. This is possible again today. Indeed, COVID is already catalyzing innovation, in particular, in the health sector, where unprecedented sums are being invested in the race to develop a vaccine and other COVID-related therapies and diagnostics. 

What is the current state of R&D funding by business?

The GII 2020 shows that expenditure on research and development (R&D) is heavily concentrated among a few thousand R&D-based firms across the globe – the top 2,500 R&D spending companies are responsible for more than 90 percent of the R&D funded by businesses globally. For most of these companies, innovation is central to their business strategy. 

Which sectors are likely to be more resilient to the crisis?

Buoyed by ongoing digitalization, the ICT (information and communication technologies) and software sectors are likely to experience resilient revenue and R&D growth. In the race for effective treatments for COVID, pharmaceutical and biotechnology companies are also likely to enjoy robust performance in the current context. The same is true for the alternative energy sector.

Optimists expect that these R&D intensive sectors will help avoid a rapid R&D downturn in the mid- and longer-term. While firms, most notably those dealing in household goods (retail and wholesale), travel & leisure (including restaurants) and professionals in the creative sectors (including concert venues and artists), are hit hardest by the COVID-19-related economic lockdown, they are not typically among the big players when it comes to formal innovation spending.

Top R&D-spending firm in each sector, 2018-2019

And what is the expected impact on innovation finance?

In contrast to the global economic crisis of 2009, the good news is that the current situation is not caused by a crisis in the financial or banking sectors. The bad news is that indicators for venture capital, on which companies, especially startups, depend show that money to fund innovative ventures is drying up.

Preliminary evidence suggests that rising levels of risk aversion are restricting access by young firms to capital. Indeed, venture capital and other sources of innovation finance are likely to be in shorter supply, especially for firms with longer research horizons. Such a decline risks having a negative impact on the future development of major breakthrough innovations.

At the same time, key high-income and fast-growing emerging economies, such as the United States and China, which are magnets for venture capital, are likely to rebound quickly. There is still a strong appetite for innovation and a hunger to supply capital in search of returns. Chinese venture capital deals, for example, contracted by about half earlier this year due to the pandemic, but are already rebounding strongly, catalyzing innovation in online education, big data, software and robotics.

Policy measures that stimulate investment, unlock future sources of growth, and encourage the pursuit of longer-term goals will be critically important going forward.

What are policymakers doing to mitigate the impact of the current crisis on innovation?

Most governments in high- and middle-income economies are setting up emergency relief packages to buffer the impact of the lockdown and the looming recession to prevent short- to medium-term harm to their national economies. So far, an estimated USD 9 trillion has been allocated for this purpose.

In general, however, these measures are not, as yet, explicitly directed at financing innovation and startups. Indeed, many startups do not qualify for available schemes or have difficulty in accessing them if they do. However, a handful of countries, mostly European, are setting up special funds to support startups. France, for example, has set aside EUR 80 million to bridge the innovation finance gap facing startups. Similarly, in Switzerland, CH 154 million in loans has been made available for startups facing pandemic-related cash flow problems.

And in the longer-term, what should governments focus on?

After the worst scenarios of the lockdown have been averted, it will be crucial for governments to embrace forward-looking innovation strategies – even in the face of higher public debt. Failure to reverse the decline in innovation spending will reduce opportunities for long-term growth.

In the aftermath of the 2009 global economic crisis, governments implemented such pro-growth policies, which included measures to stimulate innovation and innovation financing, and came out all the stronger for doing so. Some countries are already shifting their focus from containment to recovery. The United States and China, for example, are considering investing additional large sums of stimulus money in building infrastructure and boosting innovation.

After the worst scenarios of the lockdown have been averted, it will be crucial for governments to embrace forward-looking innovation strategies – even in the face of higher public debt.

Policy measures that stimulate investment, unlock future sources of growth, and encourage the pursuit of longer-term goals will be critically important going forward. And as the impact of the pandemic’s economic fall-out will be uneven across sectors and countries, evidence-based policymaking will become even more important to acquire a better understanding of these effects.