Capitalising on innovation

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Mainstream innovation experts suggest that technological innovation in the R&D sector employing human capital and existing knowledge stock exerts a positive impact on per capita output in both emerging and advanced economies. Opinions are divided, however, on whether this can help explain sustained economic growth.

Economic growth today is driven not merely by capital accumulation but by creative capability. Hence, unlike the approach of neo-classical and Keynesian economics, innovation borne by tacit and codified knowledge applied in a positive, enabling environment is argued to be a key contributor to national, and sustainable, economic growth.

Faster innovation for more impact

Bringing innovations successfully to the national market would constitute a decisive element of the country’s global competitiveness. Policymakers may generally concede that innovative activity is crucial for growth, but awareness alone is insufficient; a more coherent coordinated state approach By P.S. Yeoh FEATURE is needed. This does not apply only to middle income economies like Malaysia. Even advanced economies like the US and the UK are applying national strategic roadmaps to accelerate innovation.

The pace of innovation is driven by the demands of globalisation. Public policies and regulatory frameworks are continuously being reformed, especially in services and the networked industries, in response to international trade, investment, education and the labour market. What are sought include stable macroeconomic conditions, R&D funding, fiscal incentives, entrepreneurial development, immigration, education and the reduction of anti-competitive market regulations. Even the current system of intellectual property rules and practices which hamper competition, fair use and technology diffusion have also been challenged to allow participation by latecomers – particularly poorer economies – while being mindful of the necessity to combat piracy and counterfeiting.

Different paces for different phases

Main hall of the National Museum of Emerging Science and Innovation in Tokyo, Japan. The East Asian country ranks higher in the Bloomberg Rankings due to its capacity to innovate.

Innovation as a tool is, however, not just about high technology products but also about building capacity in poorer economies. It has been said that different types of innovation match different phases of economic development; incremental or imitation innovation is said to suit early phases of economic growth while high technology and R&D based innovation counts most in middle income economies such as Malaysia. When looked at from this perspective, vast opportunities are available. These are found in the vertical fragmentation of value chains in Asia, the boost from ICTs, the transformation of global value chains, the enhanced entry of servicebased economies, and the enhanced openness to FDIs and trade from increasing numbers of multilateral trade agreements.

Growth by innovation depends on the commercialisation of ideas and is ergo totally different from growth by intensification of factor inputs. The latter proved unsustainable due to eventual diminishing returns, as was demonstrated in the 1950s and 1960s in Russia and other centrally planned Eastern European economies. Furthermore, innovation requires a lot of R&D funding in both the public and private sectors; linked to this is the need for certainty and stability about the macroeconomic environment, taxation and the balanced protection of intellectual property rights.

Innovation as physical capital

Typically, innovation is underestimated, as the focus is usually on physical capital instead of business development changes and employment skills, which are conventionally “expensed off ” in conventional accounting. Scandinavian economies, though advanced, are nonetheless capturing such expenses as a kind of technology or innovation capital. Established business practitioners and others have increasingly recognised this to be a product of physical capital, human capital via investments in manpower development skills and knowledge capital via investments in intellectual property and brand equity, including R&D in ICTs.

There is said to be a link between innovation capital as a proportion of GDP and labour productivity growth. In this sense, it is an important accelerator for economic growth; estimates put it at around a 4.5% annual growth rate or thereabouts over the last two decades or so – hence the growth experience seen in most economies.

One approach drawing from cross-country case analysis argues that national innovation is driven and sustained by various key factors, such as the roles played by institutions, human capital and research, infrastructure, and market and business sophistication. Upon the collaborative implementation of such enabling activities within a given national economy, two key output factors emerge: knowledge and technology and creative outputs.

Another approach more closely followed by the industrial sector evaluates a country’s capacity to innovate on the basis of patent activity, tertiary efficiency, manufacturing capability, researcher concentration, high tech density, productivity and R&D intensity. This approach, which relies more on manufacturing capability and productivity, led to higher Bloomberg Rankings for countries such as Japan, Korea and Taiwan. Malaysia, on the other hand, is ranked less highly in terms of R&D intensity, productivity, researcher concentration and patent activity.

Innovation as key to sustainability

Though the relative Bloomberg Rankings for participating economies may differ between different barometers, by and large they to tend to converge around high income economies, particularly those not endowed with abundant natural resources. This further suggests that innovation sophistication exerts a positive economic impact upon national economies in terms of high economic growth sustainability. Extending from this, it further suggests the crucial contributions of the human factor in terms of education and training, and the capacity to develop and retain human talents, especially in science and technology and business innovations.

The need for more human talents in science and technology, finance, business and business law is likely to be further enhanced because of the surge in the global wealth management industry, now widely estimated at US$31,980bil, and the enhanced transformation of the global supply chain industries.

It might also be beneficial to revisit the role of innovation systems; business clusters; economic transformation via science, technology, engineering and mathematics; and the entrepreneurial ecosystems. The advancements of these should be aligned with national economic objectives and in particular the quest for solid, sustainable and balanced growth in contrast to fragile, erratic or unbalanced growth.

P. S. Yeoh is a retired businessman and academician. He currently does research as a hobby.



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