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What is innovation and how do you measure it?

Today, WIPO released its highly-publicised Global Innovation Index. Some examples from the Asian data show that innovation is hard to measure and maybe even harder to define

The issue of what innovation is came up in today’s press conference in Australia to introduce the 2014 Global Innovation Index (GII), when an audience member asked what the term innovation encompassed.

The speakers gave answers that emphasised that innovation goes beyond just inventions or technologies. For example, Bruno Lanvin of INSEAD and one of the GII co-editors pointed out that Apple’s popularisation of the digital singles model for music sales is an innovation that has had a big impact how people acquire music, even though that is not an invention. Another panellist, Yuko Harayama of Japan’s Council for Science and Technology Policy, said that she also tends to see innovation as an open-ended matter, even though this level of vagueness can make some people “queasy”. WIPO Director General Francis Gurry pointed out that the term should be understood broadly beyond just commercialisation of technologies.

The broadness of these answers is not an accident, since, as Lanvin explained, the report is intended to be a holistic view of innovation and how it is being supported and sustained. This also explains the broad nature of the GII, which looks at 81 indicators categorised as either innovation inputs or innovation outputs.

Thus, it is not surprising that many of the innovation inputs reflect factors usually associated with development or ease-of-doing-business evaluations. For example, some of the indicators include political stability, ease of paying taxes and resolving debts, electricity output, total capitalisation of stock markets and cost of dismissal of redundant workers. The inputs on the other hand tended to be indicators more commonly associated with innovation, such as patent filing numbers.

Is Hong Kong really innovative?

This broad understanding of innovation makes sense and gives a more nuanced idea as to how innovation is sustained. It also leads to some interesting results.

For example, Hong Kong is ranked as the tenth most innovative jurisdiction in the world, which may come as a bit of a surprise to observers. When you delve into the methodology, you begin to see why it ranks so highly. Hong Kong is famously lauded as one of the world’s premier financial centres and thus scores well in most of the innovation input criteria, especially those that relate to general economic development such as infrastructure and stock market capitalisation.

On the output side, the numbers are less impressive, likely because those indicators tend to be more closely related to more traditional indicators of innovation, such as royalties collected on licences and patent filings. The few output indicators that Hong Kong excelled at, namely new business formation and FDI outbound investment, arguably reflects more the city’s financial sophistication than its status as a wellspring of new ideas and technologies.

The GII authors note this discrepancy between Hong Kong’s innovation input and output, and it leads to another question; does having well-developed financial services make a place one of the most innovative in the world, even if doesn’t actually have much R&D or knowledge creation of its own?

A Chinese paradox?

China’s ranking also demonstrates the challenges in quantifying innovation. China has made tremendous progress in updating its IP system and it has been open about its ambitious plans to become an innovation-based economy. At first glance its move up the GII rankings (up six places from last year) seems to reflect this reality, but the picture is a bit more complex once you delve into the data.

Several of the indicators where China are ranked highly include domestic invention patent filings, utility model filings and high-tech exports as a percentage of net exports. However, those following China are well aware of the controversy surrounding its filing numbers and concerns about patent quality, which some have argued may actually be stifling innovation there. The same criticisms have been levelled against the utility model patents in China.

Thus, though China has been taking steps to increase patent quality, these improvements, which can foster true innovation, may actually hurt China’s performance in future GIIs if they slow down the country’s patent filing numbers growth.

Similarly, China’s strong showing in the high-tech exports metric is a reflection of its status as the world’s electronics factory rather than true innovation on its part. Furthermore, China’s goal to shift from manufacturing to an innovation-based economy will almost certainly involve a reduction in high-tech manufacturing as well. As former SIPO commissioner Tian Lipu explained to Managing IP, for each $299 iPod sold, Apple received $114 in creative, brand, design and patent income, while the Chinese manufacturing firm received just $4. Thus, even if high-tech manufacturing is an indication of China’s innovative qualities, the country’s goal is to move up and away from this low-value part of the market.

Therefore, China’s move from high-tech manufacturing may also hurt its rankings in future editions of the GII, though ideally its performance in other metrics will make up for the drop in this particular indicator.

What do you think? How do you define innovation and how can it be quantified?

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