Innovation: The Role of Money and Government

Over the past couple of months, I have attempted to assess the role of a few major socio-economic factors on the national innovation potential. To do that, I ran a series of simple regression tests to estimate the correlation between these factors (as measured by appropriate indexes) and the 2019 Global Innovation Index, a database that analyzes global innovation performance of approximately 130 economies.

First, I analyzed to which extent the ability of a country to innovate correlates with the level of political freedoms. Second, I looked at a possible role of the country’s prosperity and education spending.

The above findings can be summarized as follows:

  1. There is a strong correlation (R2=0.46) between a country’s innovation potential and the level of democratic development (as assessed by the Democracy Index 2019).
  2. This correlation is only valid for democratic countries (R2=0.45) but is absent in the case of non-democracies (both groups defined per Democracy Index 2019).
  3. Although all five individual components of the Democracy Index positively correlate with innovation, the strongest correlation occurs for Functioning of Government (R2=0.53).
  4. Poor correlation (R2=0.14) was observed between a country’s innovation rankings and its nominal GDP.
  5. This correlation was strong, however, when GDP per capita was analyzed instead (R2=0.54).
  6. A very solid correlation (R2=0.68) exists between innovation and what a country spends on Research and Development (R&D) expressed as the percentage of the nation’s GDP.
  7. Somewhat surprisingly, a poor correlation (R2=0.17) was observed between the Innovation Index and a country’s expenses on education expressed as the percentage of the national GDP. However, I have some concerns about the quality of the education expenses data that I used.

One might argue that political freedoms and democracy affect innovation only indirectly, via the country’s prosperity and R&D spending. The argument would go like this: the freer the country, the more prosperous it is (as measured by the country’s GDP per capita); the more prosperous the country, the more it spends on R&D; and the more it spends on R&D, the more innovative it is.

A more sophisticated statistical analysis is needed to see whether this argument is valid or not.

Check out my eBook, “We the People of the Crowd…,” a collection of stories about crowdsourcing reflecting my personal experience in working with corporate and nonprofit clients.

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Innovation and Money

In my previous post, I further explored the notion that the ability of a country to innovate correlates with the level of political freedoms in this country.

In particular, I showed that no such correlation exists for non-democratic countries (as defined by the Democracy Index 2019 composed by the Economist Intelligence Unit). It appears that a “threshold” exists below which no improvements in democratic development would lead to more innovative economies.

In contrast, a reasonably strong correlation was observed for democratic countries (with a plateau seen for the most democratic). Further analysis suggested an important role of government in promoting national innovation programs.

Before exploring this “government” connection in more detail, I wanted to check other, seemingly more trivial, factors that could affect a country’s ability to innovate.

One of such factors is money. Innovation costs money, so more prosperous countries should theoretically be more innovative. To test this simple idea, I plotted the countries’ innovation rankings from the 12th (2019) edition of the Global Innovation Index against their nominal GDP (as per World Bank, 2018). Poor correlation was observed (R2=0.14).

This correlation was evident, however, when instead of nominal GDP, GDP per capita, which is considered a bona fide measure of a country’s prosperity, was used. The results are presented below:

One can see that the correlation between a country’s Innovation Index and GDP per capita is especially strong up to approximately $60,000; a plateau seems to be formed after that. There are also two outliers with the GDP per capita exceeding $120,000: Luxemburg ($123,892) and Qatar ($126,898). With these two countries excluded, the correlation becomes even stronger (R2=0.68).

Perhaps, the best way to see how money affects innovation at the country level is to look at how much this country spends on Research and Development (R&D). To do that, I plotted the Innovation index against the national R&D spending expressed as the percentage of the nation’s GDP (as per World Bank). The results of this comparison are presented below:

A solid correlation is indeed seen. This correlation seems to be especially strong until R&D spending does not exceed 2% of the country’s GDP; a plateau seems to be forming after that – which intuitively makes sense.

Finally, I decided to see how the country’s expenses on education may affect its innovation abilities. To do that, I plotted the Innovation Index against the country’s educational expenses expressed as the percentage of the nation’s GDP (as per World Bank). Somewhat surprisingly, a poor correlation between the two parameters was observed:

There is a problem with the education expenses data that I used: many data points are not current, so data for different years were often used to compare countries (although I didn’t use the data points collected prior to 2014). I do not know to which extent this may or may not affect the quality of the comparison.

Regardless, the lack of a strong correlation between the country’s Innovation Index and its spending on education looks surprising. Whether it reflects the fact the relationship between education spending and its quality is complex – or that some additional, more subtle factors play a role in innovation – needs further investigation.

 Check out my eBook, “We the People of the Crowd…,” a collection of stories about crowdsourcing reflecting my personal experience in working with corporate and nonprofit clients.

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Innovation: Governments Matter

In a recent post, I presented evidence that the ability of a country to innovate correlates with the level of political freedoms in this country.

To make this argument, I used innovation rankings from the 12th (2019) edition of the Global Innovation Index that analyzes global innovation performance of approximately 130 economies (Y-axis) and plotted it against the political freedom rankings taken from the Democracy Index 2019 composed by the Economist Intelligence Unit (X-axis). The results are presented below:

As one can see, a reasonably strong correlation exists between the countries’ innovation prowess and the level of democratic development.

A careful examination of the graph reveals, however, a certain degree of “non-linearity,” implying that the relationship between innovation and freedom might be different at the lower and higher ends of the freedom scale (X-axis). I decided to explore this opportunity.

The Democracy Index 2019 assesses the countries’ level of democratic development on the scale 0 to 10.0, marking them as authoritarian regimes (0–4.0), hybrid regimes (4.0–6.0), flawed democracies (6.0–8.0), and full democracies (8.0–10.0). I pooled the data for authoritarian and hybrid regimes to mark them “Non-Democracies” (0-6.0) and the data for flawed and full democracies to mark them “Democracies” (6.0-10.0) and plotted them separately. The results can be seen below:

 

 

 

 

 

Amazingly enough, for the group of non-democratic countries, there is virtually no correlation between the level of democratic development and innovation. But a solid correlation can be seen for the group of democratic countries.

Outliers occur on both graphs. For the non-democratic countries, the most visible is China (democratic index 2.26, innovation index 54.82). Among democracies, these are Hong Kong (6.02; 55.54) and Singapore (6.02; 58.37); excluding Hong Kong and Singapore from the “democracies” graph makes the correlation even stronger (R2=0.59). The presence of outliers suggests that even countries with a less than stellar level of political freedoms can be innovative – apparently by inventing some “compensation” mechanisms. I will study such “compensation” mechanisms in the future.

I must admit that the above results came to me as a surprise. First, I didn’t expect that there appears to be a “threshold” in democratic development below which no improvements would lead to more innovation; I expected at least some level of positive correlation at the lower end of the political freedom spectrum to exist.

Nor did I expect that there will be no “plateau” in democratic development. I thought that when a country reaches a certain level of political freedom, any further improvement will not affect innovation, the level of which will be defined by other factors: investments, education, etc. Instead, what the data suggests is that at all levels of democratic development, there are factors included in The Economist’s Democratic Index that still positively affect innovation.

What these factors could be? To probe this question, I plotted the innovation index against each of the five individual components included in the Democracy Index: Electoral Process and Pluralism, Functioning of Government, Political Participation, Democratic Political Culture, and Civil Liberties. The results of this analysis are presented in the table below:

 

Although all five individual components positively correlate with innovation, the strongest correlation occurs for Functioning of Government (R2=0.53).

I will return to factors affecting Innovation Index in my future posts, but for now, we can leave the topic with the following statement: when it comes to innovation, functioning governments matter.

Check out my eBook, “We the People of the Crowd…,” a collection of stories about crowdsourcing reflecting my personal experience in working with corporate and nonprofit clients.

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The Fallacy of Predictions

There is a popular joke (attributed to Niels Bohr): “It is difficult to make predictions, especially about the future.”

I remembered it when I picked up the March-April 2020 issue of the MIT Technology Review.

Subtitled “The prediction issue,” it showcased 10 predicted breakthrough technologies of the 2020s. In addition, the Review invited a dozen or so leading futurologists to predict which technology trends will dominate in 2020-2030. As Gideon Litchfield, the editor-in-chief, wrote introducing the issue: “…the point of futurism isn’t to guess the future; it’s to challenge your assumptions about the present so the future doesn’t catch you off guards.”

Characteristically, none of the predicted breakthrough technologies – and none of the proposed future trends – even mentioned the threat of worldwide pandemic like the one that is currently ravaging the globe.

No, I am not criticizing the writers and the editorial staff of the MIT Technology Review for making “wrong” predictions. My question is, have they been as caught off guard by the COVID-19 pandemic as the rest of us mere mortals?

The fallacy of predictions struck me again when I opened the 2019 Global Health Security Index, the first comprehensive assessment of the health security capabilities across 195 nations. The Index specifically focused on nations’ preparedness for infectious disease outbreaks that can lead to international epidemics and pandemics.

To the credit of its authors, the Index finds no single country fully prepared for epidemics or pandemics: the average overall score among all 195 countries was 40(!) of a possible 100.

But what genuinely surprised me were the scores that the Index assigned to individual countries. The United States led the world in the overall preparedness score (83.5) with the United Kingdom coming a close second (77.9). The U.S. also scored the highest in a few specific categories, including Prevention of the Emergence of Pathogens; Early Detection & Reporting of Epidemics; and Sufficient & Robust Health System to Protect Health Workers. The U.S. was second after the U.K. in the category Rapid Response to the Spread of an Epidemic.

What is the predictive power of the Index given the fact that the U.S. and the U.K. are among the countries with the highest per capita numbers of COVID-19 infections and COVID-19-related deaths?

In contrast, countries that did a reasonably good job in preventing the spread of the virus and keeping the death toll at a reasonably low level did not score particularly high. For example, the Czech Republic was only 48th on the overall score, and Iceland even lower, 58th. The Czech Republic was 57th in the category of Rapid Response to the Spread of an Epidemic, with Iceland being lower again, only 66th.

What were the assumptions about the present that led to the low rating of both countries that responded with admirable agility when facing a real, not imagined, crisis?

Like every normal human being, I love guessing about what will happen tomorrow. And I know that organizations need to predict the future to plan the next steps and foresee upcoming threats and opportunities. Yet, before we rush into a new set of predictions – as some consultancies have already begun doing – let’s pause and first explain to ourselves what happened.

As the next step, let’s challenge our assumptions about the present. Real present not assumed. And then – only then! – carefully resume predicting. Perhaps.

Check out my eBook, “We the People of the Crowd…,” a collection of stories about crowdsourcing reflecting my personal experience in working with corporate and nonprofit clients.

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Innovation and Freedom

With waves of profound technological change rocking every corner of the global economy, innovation isn’t a luxury anymore, not even a matter of choice – it’s a means of survival.  The mantra “innovate or die” may have become a cliché, yet it correctly reflects the contemporary business environment in which companies must relentlessly innovate to just stay in business.

Unfortunately, managing the innovation process in a sustainable way turned out to be difficult for a lot of organizations. Many corporate innovation leaders have failed to establish the infrastructure and processes needed to run efficient innovation programs and instead are wasting time talking about the elusive “culture of innovation.”

Sure, it’s impossible to ignore the importance of the human component in any corporate process, including innovation. But it’s much more important to identify specific factors affecting the innovation process to be able to improve it in a systematic way.

One such factor that, quite surprisingly, doesn’t get much attention is freedom. Yes, freedom. It’s very simple: in order to innovate, one needs freedom – and this applies to innovation at the individual, organizational, and national levels.

Freedom from being discriminated  

A case in point is the effect on innovation of U.S. anti-discrimination laws. A 2016 study showed that U.S. state-level employment nondiscrimination acts (ENDAs)—laws that prohibit discrimination based on sexual orientation and gender identity—spur innovation. U.S. public companies headquartered in states that have passed ENDAs experienced an 8% increase in the number of patents (and an 11% increase in their quality) relative to companies headquartered in states that have no ENDAs.

Another study showed a positive effect on innovation of two social liberalization policies: the legalization of same-sex civil unions and medical marijuana. In contrast, the laws setting additional restrictions on abortion had a negative effect on innovation at the state level.

It’s therefore hardly a coincidence that the two arguably most innovative U.S. states, California and Massachusetts, have traditionally been drivers of social liberalization: California was the first state to legalize medical marijuana in 1996, and Massachusetts the first state to legalize same-sex marriages in 2004.

No, I’m not saying that sexual minorities or people smoking weed are intrinsically more innovative. My point is that innovation implies a certain level of individual freedoms, including freedom from being discriminated for whatever reason.

The labor laws of innovation

Interestingly, labor laws have also been shown to have a positive effect on innovation. For example, the staggered passage of wrongful discharge laws (WDL) (the laws providing employees with greater protection than employment-at-will) across the U.S. states created a “natural experiment” assessing their impact on the innovation output. And this impact turned out to be quite impressive: the adoption of WDL resulted in a rise in the annual number and quality of patents issued to a state, an effect starting to emerge two years after the WDL passage in this state.

The above data indicate that innovation is fostered by limiting firms’ ability to discharge their employees at will.  The authors of the study call this phenomenon an “insurance effect”: feeling increased protection from negative consequences of failure, employees are more committed to the engagement in risky innovative projects. In other words, providing employees with immunity for failed innovation projects might be a better way to promote innovation than by “celebrating failures.”

Innovation and political freedoms

There is one more level at which innovation can be affected and which is almost never considered in the literature: the level of political and individual freedoms in individual countries. I first came across this point back in 2014 while reviewing the 2013 Global Innovation Index, a collaborative project of Cornell University, INSEAD, and the World Intellectual Property Organization. The Index ranked the innovation capabilities of 142 countries by using 84 indicators, which included, among others, the quality of higher education, availability of venture capital and government support.

Even a brief look at the Index led me to a curious observation: the top of the ranking was heavily populated by countries representing established democracies (according to the 2013 Freedom of the World Report). The reverse was also true: the bottom of the Index was stacked with countries with an extremely low level of democratic development.

To give this observation statistical support, I used the data from the 12th (2019) edition of the Global Innovation Index that analyzes global innovation performance of approximately 130 economies (Y-axis) and plotted it against the political freedom rankings taken from the Democracy Index 2019 composed by the Economist Intelligence Unit (X-axis). In the latter case, the countries are measured on the scale 0 to 10.0, marking them as authoritarian regimes (0–4.0), hybrid regimes (4.0–6.0), flawed democracies (6.0–8.0), and full democracies (8.0–10.0). The results of the regression analysis are presented below:

A reasonably strong correlation does exist indicating that the ability of a country to innovate correlates with the level of political freedom in this country.

A careful examination of the graph reveals, however, a certain degree of “non-linearity,” implying other factors affecting the innovation index. I’ll delve into this issue in follow-up posts.

But for now, let’s just state aloud what we always intuitively knew: to be more innovative, you should live in a free country.

Check out my eBook, “We the People of the Crowd…,” a collection of stories about crowdsourcing reflecting my personal experience in working with corporate and nonprofit clients.

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Freedom to Connect

Social media were once considered a liberating technology, a level playing field allowing civil groups and ordinary citizens to reach large audiences at little or no cost. Unfortunately, the open and almost unregulated space of social media platforms has been hijacked by repressive regimes and politicians with authoritarian ambitions, who started to use them as instruments for political distortion and societal control, as tools for surveillance, oppression, and electoral manipulation.

As a result, social media are in crisis. This is a sentiment expressed in a recent report, “Freedom on the Net 2019,” prepared by Freedom House, a non-governmental organization promoting democracy, political freedom, and human rights around the world. The report assessed internet freedom in 65 countries, covering 87 percent of the world’s internet users, and concluded that global internet freedom declined for the ninth consecutive year in 2019.

A few numbers from the report are worth repeating here. Of 3.8 billion people with access to the internet:

  • 65% live in countries where individuals have been attacked or killed for their online activities.
  • 59% live in countries where authorities manipulate online discussions.
  • 46% live in countries where authorities disconnected the internet, often for political reasons.

The report also provided a country-by-country ranking of internet and digital media freedom. Each country received a numerical score from 100 (the freest) to 0 (the least free), which served to mark the countries as Free (700–100 points), Partly Free (40–69 points), or Not Free (0–39 points). Of 65 countries surveyed, 15 (23%) turned to be Free, 29 (45%) Partly Free, and 21 (32%) Not Free.

Among the countries in the Free category, I immediately spotted Iceland, Canada, and France, three established, mature democracies. On the opposite side of the spectrum, in the Not Free category, my eye caught the names of China, Russia, and Iran, all known for their repressive and authoritarian nature. Is there a correlation between having internet freedom and being a free country?

To see whether my observation had any statistical basis, I ran a linear regression test plotting the internet freedom rankings (Y-axis) against Freedom Rating provided by the same Freedom House (X-axis). The Freedom Rating ranks a country’s political rights and civil liberties on the scale 1.0 to 7.0, marking countries as politically Free (1.0 to 2.5), Partly Free (3.0 to 5.0), or Not Free (5.5 to 7.0). The results of the test shown below clearly point to a strong correlation between the two indexes:

There is one potential problem with the above test. One might argue that the observed correlation is exaggerated because both sets of scores are provided by the same source, so that Freedom House gives higher internet freedom scores to the countries it considers more democratic, resulting in a bias.

To exclude such a bias, I repeated the test using as X-axis input the political freedom rankings taken from the Democracy Index 2019 composed by the Economist Intelligence Unit. In the latter case, the countries are ranked on the scale 0 to 10.0, marking them as authoritarian regimes (0–4.0), hybrid regimes (4.0–6.0), flawed democracies (6.0–8.0), and full democracies (8.0–10.0).

The resulting plot is shown below (please note that the inverted slope of the curve is because the Economist Intelligence Unit ranks political freedom in ascending order while Freedom House in descending):

A strong correlation between the two indexes was evident again leading to the conclusion that the more democratic a country is, the more internet freedom it provides to its citizens.

This is a hardly surprising discovery because it only confirms what we’ve intuitively known for a long time.

Want a free internet? Live in a free country!

Check out my eBook, “We the People of the Crowd…,” a collection of stories about crowdsourcing reflecting my personal experience in working with corporate and nonprofit clients.

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On Steve Jobs, Henry Ford, and Fast Horses

A solid consensus seems to exist that customer feedback, gathered through market research, is a key to successful innovation. And yet, I’m surprised how often one can hear dissenting voices. Some folks, especially not engaged in day-to-day innovation activities, claim that paying too much attention to customers can stifle innovation, degrade it to a mere incremental improvement of existing products (which these folks consider as anathema to the “true” innovation).

In support of their position, they routinely quote Steve Jobs: “It’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them.” A plausible interpretation of this quote would seem to be that had Jobs listened to his customers, Apple would still have been making incremental improvements to Apple-1.

Another supportive line to the same argument is attributed to Henry Ford: “If I had asked my customers what they wanted they would have said a faster horse.”

Recently, I came across a brilliant piece by Tristan Kromer, who provided an interesting twist to Ford’s line:

“If the customer asks for a faster horse, do not build a faster horse. Ask, “Why do you want a faster horse? What would you use it for?” If the customer wants a faster horse to move cargo across town, a car might be a great invention. When the customer wants a faster horse to win a horse race, a car is a terrible invention.”

And then it struck me. I reread Ford’s quote. Read it again, too: “If I had asked…they would have said.”

Ford didn’t ask his customers! He simply assumed that all they wanted was a faster horse. But he invented the car instead – and good for him!

It’s still unfortunate that Ford didn’t develop a habit of asking his customers what they wanted. I doubt that many of them would have said they wanted a faster horse. Most of them would have replied, as Tristan Kromer suggested, that they needed to move cargo across town. And if Ford kept asking follow-up questions – which cargo quantities, for which distances, at which speed – useful feedback would have inevitably emerged. Who knows, had Ford had a habit of talking to his customers, the first Ford truck – arguably the best Ford Motor Company’s invention ever – would have been invented earlier than 20 years after the first Ford car.

Curiously, in the 1930s, the Toyota Motor Corporation invented 5Y (the 5 Whys technique), a simple but powerful approach to get employee and customer feedback. I don’t want to sound preposterous but had Ford, not Toyota, invented 5Y, it could have been Ford, not Toyota, occupying today the top spot on the list of the biggest car manufacturers in the world.

Of course, one should understand the difference between two related, overlapping, yet distinct forms of customer feedback: customer wants and customer needs. What focus groups produce is the customer wants: a demand for a faster horse or a faster computer. It takes more time and effort – and much more sophisticated market research tools – to identify customer needs behind customer wants. True, people often don’t know that they want a product until you show it to them. But it is only after they realized that they needed this product – and wanted it too! -that they would be ready to pay for it. There is no innovation without customer feedback – either in the form of wants or needs.

And what about Steve Jobs? Read his quote again, too. Jobs obviously didn’t like focus groups, arguably a very messy tool of collecting consumer feedback. His quote says nothing about other forms of market research. Did he detest them all? I don’t know.

Regardless, a genius like Steve Jobs can afford to eschew proper market research and trust his guts. Feel yourself on par with Jobs? Go ahead and try! Just don’t be surprised if your innovation journey won’t be as successful as Apple’s.

Check out my eBook, “We the People of the Crowd…,” a collection of stories about crowdsourcing reflecting my personal experience in working with corporate and nonprofit clients.

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