State of Global Innovation: 2023 Insights & Perspectives
Senior Research Analyst
April 26, 2023
Innovation is the spirit of progress, serving as the driving force behind technological, social, and societal advancement. Much as Sisyphus pushed his rock up the mountain in perpetuity, innovation keeps humans ever on the cusp of greater achievement and undiscovered frontiers.
Given the fundamental importance and role of innovation in the global political economy and the world of technology and business, understanding the trends shaping and guiding the forces of innovation is crucial in achieving competitive, technological, and operational success.
The World Intellectual Property Organization (WIPO) is responsible for maintaining the Global Innovation Index (GII), which tracks global innovation trends and data points across roughly 132 global economies. Based on the most recent GII report, many factors and drivers behind innovation have exhibited strength and resiliency in the face of numerous headwinds. However, in an increasingly turbulent environment characterized by simmering geopolitical tensions, fickle market forces, and a growing litany of complex business challenges, several trends are taking hold that carry monumental weight in shaping the future of technology, business, and innovation.
Our key takeaways
Technological adoption and investment in innovation by nation-states and corporate entities have remained robust and resilient in the face of the dislocation caused by the COVID-19 pandemic.
Although the West continues to lead in the global innovation race, Asia is quickly closing the gap and has displayed strong innovative momentum over the recent past.
There is an emerging trend taking hold in which regions and countries are encountering stagnating innovative growth alongside a global weakening in the positive socioeconomic effects of innovation and technological advancement.
China and the West/Western allies are demonstrating divergences in technological spending trends that carry heavy implications related to the future of technological innovation – implications that are reinforced by growing geopolitical tensions and supply chain challenges.
Innovation Driven by Resilient Investment Through the COVID-19 Pandemic.
The COVID-19 pandemic served as an accelerant for technological advancement, investment, and adoption, driving consumers, enterprises, and governments to leverage new technologies to adapt to new directives such as lockdown mandates and work-from-home initiatives. As a result, technological and scientific investment and spending by various global stakeholders represented a strong innovative tailwind.
Global R&D Investment
Although the rate of global investments in research and development has slowed, R&D investment growth has continued and remained resilient in the face of various headwinds. Global R&D investment grew 3.3% in 2020 (6.1% in 2019), supported by business R&D, which rose 3.5% and represents the most significant component of total global R&D investment. Notably, the U.S. and China served as key pillars of support from the global spending perspective – excluding these two countries, total global R&D investment would have fallen by -0.6% during the year.
As it relates to corporate R&D, based on a sample of the largest global corporate R&D spenders, activity reached $903 billion in 2021 – representing a 9.1% increase from the prior year. Following a moderation in activity during 2020, the proportion of those reporting increases in their R&D expenditures across all industries has sharply rebounded to largely align with their pre-pandemic levels. Investment growth during the year was primarily a result of the robust activity within the information and communication technology (ICT) hardware/equipment, pharmaceuticals and biotechnology, and software and ICT services verticals.
Vation Ventures found a similar trend of innovation investment support among our global technology and business leaders community. Based on the 2023 Global CXO Report findings, more than half of global business leaders cited increases in their IT budget, with a resounding 83% indicating that they are maintaining or expanding their innovative efforts and investments.
Proxies for entrepreneurship, business formation, and innovation have remained healthy, partially driven by pandemic-induced tailwinds and dislocation. In addition to the accelerated adoption of digital technologies, the pandemic also generated employment displacement and a new wave of entrepreneurs and small businesses.
In fact, during 2021, international patent filings registered an annual growth rate of 0.9% to reach a record-shattering 278 million. Similarly, trademark registration and filings grew by nearly 15% during the year. Looking at the U.S. specifically, since the onset of the pandemic, new business formation has surged to new heights. Following 2020, likely-to-hire employer business applications reached a record 1.8 million in 2021 – an annual record high – and 1.7 million in 2022 – the second largest annual total on record and a nearly 30% increase over the pre-pandemic baseline.
Amid Big Strides in Asia and Select Countries, the West Remains Home to Many of the Most Innovative Countries in the World
Top County Ranks
For the 12th consecutive year, Switzerland has retained the crown as the most innovative economy in the world, followed by the United States and Sweden, which swapped rankings after three years of Sweden leading the U.S. Western Europe dominates the remainder of the top spots, with South Korea (6), Singapore (7), China (11), and Japan (13) also making appearances in the top ranks. Notably, South Korea and China have continued to demonstrate consistent ascension in recent years, with the former previously being ranked 12th in 2018 and the latter re-entering the top 15 in 2016.
North America and Europe Innovative Edge Narrowed by Asia Momentum
From a more regional perspective, North America (United States and Canada) is the best performer across every GII indicator compared to every other global region. Alongside Canada’s reentry into the top 15, the United States maintains high marks in the categories of market sophistication (1st worldwide), business sophistication (3rd), and knowledge and technology outputs (3rd).
Europe remains home to the largest number of innovative economy leaders, with 15 countries ranking in the top 25. Alongside the foundational strength from Switzerland, the Netherlands, Germany, and Sweden, the region has broad, innovative support from advancing countries such as Austria, Estonia, and Luxembourg.
Although North America and Europe maintain an innovative edge over the rest of the world, Southeast Asia, East Asia, and Oceania (SEAO) have demonstrated steady signs of growing momentum, propelled by seven countries in the region ranking in the top 25 most innovative global economies. These seven countries – South Korea (6th), Singapore (7th), China (11th), Japan (13th), Hong Kong (14th), New Zealand (24th), and Australia (25th) – serve as the innovative underpinnings of the region, with recent momentum and activity picking up in Vietnam, the Philippines, and Indonesia.
Innovation in Asia also benefits from numerous science and technology innovation hubs that contain the highest density of inventors and scientific authors. In fact, the top four science and technology innovation hubs are all located in Asia (Japan, China, Hong Kong, and South Korea). Notably, China now claims as many top 100 innovation hubs as the United States for the first time.
Big Mover Botswana
Outside of the West and select countries in Asia, several countries made notable strides in innovation advancement. Among these was Botswana, which entered the top 100 after climbing an impressive 20 ranks.
Botswana represents the most significant gainer in terms of year-over-year innovation rank ascension. The country, which has emerged from independence as an upper middle-income nation home to one of the fastest-growing economies in the world, has leveraged its wealth in diamond reserves to invest heavily in areas conducive to innovation and advancement, such as education, business development, and technology. In addition, various initiatives have been implemented that are explicitly designed to foster greater innovation, such as the country’s 2018 National Broadband Strategy for greater connectivity, a program for accelerating public digital transformation, and a 2021 national ICT policy review for the identification of additional areas for investment.
A Widening Innovation Gap and a Waning Socioeconomic Impact Between Regions
Historically, technological advancement and innovation have served to propel society forward through the attainment of heightened standards of living, political and economic freedom, improved health, and greater efficiency. Unfortunately, however, a concerning trend has been taking hold – not only are there widening gaps and tightening bottlenecks related to innovation, but there has also been a slowing and even lack of growth in various socioeconomic metrics associated with innovation, such as labor productivity and life expectancy.
Relative Innovation Performance
There were 26 economies within the GII that were identified as performing above expectations relative to their respective level of development. In contrast, 41 economies were identified as performing below expectations. The Sub-Saharan Africa region had the largest number of economies categorized as performing above expectations and a notable number of underperformers alongside Latin America and the Caribbean.
Compared to last year, four economies experienced improvements in their performance status to match corresponding expectations. Conversely, 12 economies were relegated from meeting expectations to falling below expectations. Of these 12 economies, half were in Latin America and the Caribbean.
From this, although there are regional pockets of promise regarding innovation investment, technological adoption, and societal and business advancement, there are also concerns over the innovative stunting and stagnation in growth across certain regions. The trend of diverging regional innovative growth patterns alongside an erosion in the positive impacts of innovation and technology represents a global risk to advancement and improvement, particularly when taken in the context of other emerging threats, such as geopolitical tensions.
Although global labor productivity growth soared by 4.5% in 2020, productivity growth has deteriorated following a period of productivity stagnation across many advanced nations. In 2021 output per hour worked – a measure of productivity – registered a growth rate of 0%, representing the lowest annual growth in more than 15 years. However, labor productivity growth has been on a downward trajectory in North America and Western Europe following a 1960s boon, with recent decelerations taking the regions to historic lows in terms of growth. Regardless of region, the persistence of geopolitical tensions, economic pressures, and technological risks will likely serve as a broader headwind on global productivity.
Life Expectancy Decline
Alongside the stagnation in productivity, life expectancy fell by 0.02% in 2020, reflecting the first decline in modern history. Although the COVID-19 pandemic undoubtedly played a role in driving the life expectancy reversal, there has been a six-decade trend of slowing growth rates. The recent and historical decline can also be attributed to high-income countries, typically comprised of older populations with a relatively high life expectancy compared to lower-income countries.
Technological Divergences between East and West
There have been several other pertinent and notable technological trend divergences between global regions, which carry significant weight when looking at future innovation and technological advancement.
Regional Venture Capital Investment
Before COVID-19, the software sector accounted for a hefty portion of regional VC investment activity within the U.S., Europe, and China. However, we can see a stark divergence taking hold following the pandemic. While software investment activity continues to climb upward within the West, it has fallen dramatically in the East. In place of rising software investment activity, IT hardware and commercial products and services have surged ahead, the latter of which has exceeded software investment over the past two years.
On the surface, this may seem insignificant. However, in a globalized world characterized by growing technological dependence, integration, and advancement, and with the backdrop of festering geopolitical tensions between East and West, resulting in escalating technological and policy wars, these diverging trends are going to carry significant weight in terms of technology innovation and business adoption moving forward.
Accompanying venture capital divergences, there is also an emerging trend of divergence in semiconductor spending between China and the West/Western allies. Many West/Western allies are forecasted to significantly ramp up semiconductor fabrication equipment spending next year, a critical aspect in the semiconductor manufacturing process. In contrast, China is reportedly set to increase spending by just 2% in 2024.
Japan stands out as moving particularly aggressively regarding semiconductor technology and manufacturing. The country is set to spend roughly $7 billion on semiconductor fabrication equipment next year - an 82% year-over-year increase and the largest increase in the world. Additionally, Japan recently announced tightening restrictions on shipments of 23 types of advanced chipmaking technologies, furthering its competitive technological posturing.
Geopolitical Tensions Straining the Technological Global Supply Chain
As made abundantly evident by the impacts of COVID-19 and shifting regulatory and geopolitical landscapes, effective supply chain management – particularly that concerned with the advanced ICT vertical – has become of paramount importance from a business standpoint. As technology becomes more advanced, increasingly serving as competitive and geopolitical differentiators, and more tightly integrated with business and government, the importance of supply chain stability and accessibility will continue to rise.
For a closer look at the technological landscape for supply chain management, including technology approaches, vendors, and startups, platform subscribers can access the Supply Chain Management PoV.
Countries and allies will likely continue to make incremental policy and technological moves over the near term to ensure continued domestic innovation and advancement. The continued advancement and adoption of important technological innovations will yield an ongoing and likely escalating technological proxy war between geopolitical entities.
The escalating geopolitical proxy wars and technological advancement trends are also likely to lend strength to existing or emerging considerations that have grown in importance in recent history. For example, organizations will continue to face an increasingly complex and evolving regulatory landscape. There’s also the fact that with a growing attach surface facilitated by technological advancement and adoption, the need for effective and continuously improving cybersecurity systems remains more critical than ever.
Vation Views – Strategies for Navigating a Turbulently Transformative Global Innovation Landscape
Despite economic uncertainty, market volatility, and rising global interest rates, investment innovation remains a priority for organizations worldwide. A continued emphasis on innovation will increasingly serve as a source of competitive and technological differentiation and success. This will be even more true as technological advancement, adoption, and integration intensify.
Organizations need to continue to leverage technology to improve the productivity of their workforce and the efficiency of their operations, arguably now more so than ever. Although innovation across industries has maintained a relatively brisk pace, this has not and does not always translate into greater efficiency or productivity. From this, in identifying innovative technological solutions, there needs to be a particular focus on ensuring that adopted tools can be effectively implemented and utilized to achieve organizational goals.
Not only is it important to remain at or near the forefront of technological innovation, but it is also important to maintain a meaningful degree of flexibility and adaptability. Technology continues to undergo transformative advancements quickly. As businesses and organizations seek to adopt such technology, they must maintain a holistic and strategic awareness. The flexible and adaptable adoption of technology solutions aligned with an organization's long-term vision and goals can limit the accumulation of cumbersome technical debt and ensure that maximum value is derived from tools and initiatives.
Navigating the evolving complexity of the innovation and technology landscape can be a daunting undertaking. Vation Ventures can serve as your valued partner in your business journey, whether it’s through tailored market, technology, and competitive insights provided through our Research as a Service or through our sparkLAB, a program designed to help CXOs identify and solve complex business problems using innovative technology. Get in touch today.