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Global Innovation Ratings: Not a Perfect Art

Finland, South Korea, Switzerland? Innovation rankings can’t agree on the winner but could help inform long-term investment decisions.

South Korea, Finland and Israel are not yet among the nations that Donald Trump decries for stealing America’s jobs and future. But the Republican presidential hopeful may be missing something. All three rank higher than the U.S. on the lists compiled by three estimable organizations of the world’s most innovative countries. China, the nemesis for Trump and many other Americans, doesn’t make the top 20 on any of the lists.

Innovation is an economic virtue universally prized and, at least rhetorically, promoted. But rankings from the World Economic Forum, Bloomberg and the Global Innovation Index (a collaboration of Cornell University, French-founded business school INSEAD and the U.N.’s World Intellectual Property Organization) show how challenging it is to quantify at a national level. They also highlight the less-than-perfect correlation between perceived innovation and economic growth. Innovation may be a good bet for investors in the long run, but defining it seems to be as much art as science.

The three rankings reach consensus on a couple of important points. First, the U.S., despite gestating the world’s dominant technology companies, is not the most innovative nation: It finishes third in the WEF poll, places fifth in the GII survey and ranks sixth according to Bloomberg. Second, rich countries are more innovative than poorer ones. The dynamic giants of emerging markets, China and India, finish well behind most of low-growth Europe and Japan.

Beyond that, results vary. Bloomberg weighs six straightforward measures of technical achievement, such as patents, research and development spending and higher education per capita. South Korea emerges as the world champion on this scale, followed by manufacturing powerhouses Japan and Germany.

The GII looks at no fewer than 79 factors, including support elements like infrastructure and finance, and stretches the definition of innovation to include cultural as well as engineering output. “Science and technology is one important factor, but quality of institutions makes the key difference,” says Soumitra Dutta, dean of Cornell’s Samuel Curtis Johnson Graduate School of Management and a co-editor of the GII report. “We also look at innovative creative outputs like movies in India or telenovelas produced in Mexico.”

By the GII’s broader-based standards, none of Bloomberg’s Big Three even make the top ten. The GII’s champ is Switzerland, followed by the U.K. These two countries rank 16th and tenth, respectively, under Bloomberg’s methodology. The World Economic Forum, which offers innovation rankings as part of its annual Global Competitiveness Report, is less specific about its formula, but the results look like something of a compromise between its two competitors. Switzerland edges Finland for first place, while Germany and Japan finish in the top ten.

Given such divergent methods of assessing innovation, economists who study the process are skeptical about the rankings’ value. “I wonder if there is any nonsilly way to assign a single measure to the level of innovation in a country,” says Richard Nelson, professor emeritus of economics at Columbia University and winner of the coveted Honda Prize for his research on the subject. “Innovation is going on in many different fields of economic activity, and countries have many different regions and industries that do different things.”

Still, as a rough guide to economic vigor around the world, the innovation rankings have a ring of truth. A few, smaller standouts — Finland, Singapore and Sweden — make the top ten in all three lists, whereas southern Europe and Latin America lag painfully. Spain makes the former region’s best showing, at 27th in the GII rankings, while Chile leads the Latin countries at 42nd.

The most valuable bit of the GII ranking for investors, Dutta suggests, may be a substratum of data that compares countries in similar wealth brackets and over a multiyear period. The finding that China is outinnovating all other middle-income nations will shock no one. But the other seven middle-income outperformers include some surprises — Jordan, Kenya, Moldova and Mongolia — alongside three that many investors have already embraced: India, Malaysia and Vietnam.

On a regional basis, the GII lauds the innovative progress of sub-Saharan Africa, where “institutions, business sophistication and creative outputs” are noticeably improving across a range of unexpected stars like Burkina Faso, Mozambique and Uganda. That contrasts with stagnation in South Asia, excluding India.

No responsible equities manager will shift weightings based on such shreds of information. Most European companies are too global in scope for their domestic environments to matter much, except on taxation. Emerging-markets companies are subject to any number of factors that are more important than the broad innovative background: governance, currency, politics, macroeconomic policy and so on. For direct investors with a multidecade horizon, the innovation rankings could be a relevant input, however.

The main service of the rankings may be to jog public discussion and single out examples for less innovative nations to follow. The U.K. and South Korea might offer different paths to a vibrant economy, but either could serve as an inspiration. “I don’t think these ratings are refined enough to be very useful in investing,” says David Ahlstrom, a professor of management at the Chinese University of Hong Kong who writes frequently on innovation. “But they may be interesting for academics and policymakers to work with — a little like the corruption and ease-of-doing-business indicators, which do spur action.”

If the U.S. wants to be spurred to action by its also-ran status, Dutta’s first suggestion is to improve basic education. That’s an achievement that really would make America greater again.

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