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Innovative capacity - a means of overcoming the crisis?

  For modern economies, the ability to convert technological knowledge into growth is one of the most important factors in improving their competitiveness. This is a complex process and assessing how countries develop and market their discoveries is no easy task. Designing indicators for innovation performance is therefore of great interest as it can guide countries in terms of their policies to stimulate investment and development. These indicators are also useful for assessing whether the economic cycle is having an effect on the creation of ideas, particularly within the context of the current crisis.

  With this aim in mind, since 2001 the European Commission has published the European Innovation Scoreboard (EIS), an instrument to illustrate the degree of innovation of the EU27 Member States and other countries. In general terms, this study focuses on producing the Summary Innovation Index (SII), calculated using indicators that summarize seven dimensions required for progress, in turn grouped into three blocks.

  The first block includes drivers of innovation that are external to the firm: the creation of knowledge or human resources and the financing of projects. For example, it contains variables such as the ratio of doctorate graduates, participation in life-long learning, public R&D expenditure and the ratio of firms with broadband access. The second group focuses on business initiative: company investment and private expenditure on R&D, IT or innovation; linkages (the degree of collaboration between innovative SMEs or the number of publications); and the production of copyright (patents, trademarks and designs). The last group quantifies the output of firms' activity: the total innovation products, such as the ratio of SMEs introducing product, process or organisational innovations and the ratio of firms that manage to reduce their labour or energy costs thanks to innovation; as well as the economic effects (sales, employment and exports).

  What do these indices reveal about the countries' attitude towards innovation? The graph below shows the correlation between countries from the innovation index and their annual growth according to the findings from the EIS 2009. It should be noted that the index refers to an earlier period as it uses variables gathered during 2006, 2007 and 2008. An analysis of the spread of data allows us to group the economies according to their ability to generate innovation: innovation leaders, followers, moderate innovators and catching-up countries. In turn, the countries' growth in innovation performance is classified into three dimensions: growth leaders, moderate growers and slow growers.

  According to this study, Denmark, Finland, Germany, Sweden, Switzerland and the United Kingdom lead the ranking with values that are quite a lot higher than the average for the EU27 member states. However, they have varying speeds of growth; while Germany, Finland and particularly Switzerland are improving their ability to innovate, Denmark and the United Kingdom are showing signs of slowing up. The case of Japan and the United States has not been dealt with here but a previous study places both countries among the leaders.

  In the group of innovation followers are states with an index slightly above the average. Although most have moderate growth rates (Austria, Belgium, Cyprus, Estonia, France, Ireland, Luxembourg and Holland), there are some reservations about the good rates enjoyed by Cyprus, Estonia, Iceland and Slovenia.

  Moderate countries are below average in terms of their innovation. Among these, the cases of Italy, Norway and Spain come as some surprise, as their growth is also slow. This suggests that these countries should possibly review their policies and invest more in those areas that would improve their ability to innovate.

  In the Spanish case, its lower innovation performance than the EU27 average is mainly due to its weak business initiative, in investment, linkages and the production of copyright. On the other hand, its relative strength lies in its ability to finance projects and the economic effect of its innovation. Over the last five years, business investment has made a positive contribution to the rate of innovation growth thanks particularly to the 12% increase in private credit and 13% in innovation expenditure. However, human resources, linkages and the overall number of innovation products fell compared with the EU27 average.

  The rest of the moderate countries, mostly from emerging Europe, are increasing their innovation index either gradually (Hungary, Lithuania, Poland, Slovakia) or more quickly (the Czech Republic, Greece, Malta and Portugal). These findings therefore point towards a certain gradual convergence in the innovation levels of some countries.

  The last group of countries, the catching-up group, develop their technological knowledge very gradually and are below the EU27 average (Bulgaria, Romania, Latvia, Turkey and Croatia). Of particular note is Croatia's bad performance due to its equally low rate of growth in innovation attitude.

  So the innovation index is clearly useful for informing the respective countries on their performance regarding the development of innovations. However, it does not help to assess whether the current recession has modified innovation practice as it does not cover the most recent period. To this end, we can use the Innobarometer survey of 2009, produced in April 2009 by the Gallup Organization for the European Commission. The survey asks companies with more than 20 employees about their investment plans. This questionnaire also asks direct questions about whether they have varied their innovation expenditure due to the slump in the economy as from mid-2008. The results show that 22% of innovative firms reduced their level of expenditure on innovation, a figure that is quite a bit higher than the 9% recorded in the period 2006-2008. This suggests that the economic crisis has had a significant effect on investment in this area.

  However, not all countries reacted in the same way. In fact, some firms took a more radical stance and used this recession as an opportunity to invest in innovation. The case of Switzerland is of note, where only 9% of its firms reduced their expenditure compared with 17% that increased it. In Finland, Sweden, Germany and Austria, the proportion of firms that increased or decreased their expenditure was similar. In the rest, the number of firms that reduced their level of spending on innovation was higher than those that increased it, taking a more defensive attitude. The findings of the Innobarometer 2009 also indicate that the most innovative firms tended to cut back less on their expenditure on innovation, so that they might be less affected by the current recession.

  In summary, an analysis of innovation performance shows that there are notable differences between economies. Given the importance of technological progress for well-being in general, these findings show the need for the so-called moderate countries (and the catching-up countries) to review their investment strategies in innovation. Similarly, the data show that the process of convergence has slowed up somewhat as a result of the crisis, as it is precisely the less innovative countries that have seen the biggest cuts in expenditure in this area.

  This box was prepared by Maria Gutiérrez-Domènech

  European Unit, "la Caixa" Research Department

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