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A country should support through its innovation policy, all types and phases of innovation not necessarily confining itself to high-tech industries
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Summary so far: There are 39 Presidential hopefuls seeking the mandate from voters to rule Sri Lanka for the next five years. Since Sri Lanka is a country that had been embroiled in an unparalleled economic crisis and still struggling to recover, it is necessary to adopt a suitable policy strategy to push the economy through a high growth path to facilitate it to deliver prosperity and wellbeing to people. This requires the policymakers to give the highest priority to build an innovative or a creative economy.
In this context, the development of human knowledge will generate inventions, but those inventions should be commercially produced by entrepreneurs through a process, identified by the Austrian American economist Joseph Schumpeter as innovation. Then, to lead those innovations to continued economic advancement, as also identified by Schumpeter, the knowledge should be diffused or made known to others, and they should imitate the early innovators.
Sri Lanka has been a laggard in the global innovation club as revealed continuously by the Global Innovation Index or GII compiled by the Cornell University, INSEAD, and the World Intellectual Property Organization. The latest report for 2023 too confirms it. In the latest index, Sri Lanka scoring 23.3 out of the possible score of 100 is ranked at 90 out of 132 countries down from 85 in 2015. Sri Lanka should therefore make a conscious effort to make it a creative economy and be a winner in its drive toward prosperity.
Spend more on research and development
The Global Innovation Index Report for 2015 has highlighted that it is the research and development that leads to technological inventions. It says: “Innovation policies occupy a central role in developing and emerging economies, where promoting innovation is central to development plans and strategies and is key to addressing pressing societal problems such as pollution, health issues, poverty, and unemployment”1. A country should secure its technological potential by investing the country’s resources in adequate amounts in R&D. For this, there should be a well-coordinated innovation policy plan with clear targets and a matching institutional set-up.
Sri Lanka’s challenge
An emerging economy like Sri Lanka does not have its own capability of generating a high level of innovation set up. For instance, Sri Lanka’s R&D expenditure in 2020 stood at 0.12% of its GDP, down from 0.16% in 20102 in comparison to a world average of 2.5%3. In the case of highly innovative countries like Israel, R&D expenditure has been as high as 5.7% of GDP. There was a pressing demand from the stakeholders in 2010s that the education expenditure should be increased to 6% of GDP4 in Sri Lanka. However, this was never met by successive Governments. The average expenditure remained at around 1.8% of GDP, much lower than the average of low-income country group at 4.16%, lower middle-income country group at 4.26%, upper middle-income country group at 4.88%, and high-income country group at 5.59%5.
If Sri Lanka could increase its expenditure on education to comparable levels of peer countries, it is necessary that at least a half of that expenditure be incurred in the R&D area to gain the full technological potential that is necessary for Sri Lanka to elevate its status from a lower middle-income country to a higher middle-income country within the next decade and a developed country by 2048. However, as the Austrian American economist Joseph Schumpeter has pointed, the inventions generated by R&D should be followed by commercial production of same for the country to make an immediate gain. In the long-run, to generate a country-wide development, such knowledge should be diffused, and many others should imitate the same.
The GII Report for 2015 has also presented six key principles which a country has to follow to make it an innovative nation6.
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Introduce innovations across all the industries
Principle 1 requires a country to have an innovation policy aiming at improving innovation in all the industries. A country seeking to move from an upper middle-income country to a rich country should necessarily improve innovations in the manufacturing industry in general and high-tech industry in particular. However, for a developing country like Sri Lanka where innovations are at a low level, it is necessary at first to improve innovations across the economy. Sri Lanka has been concentrating on producing simple products for the global market by using simple technology as revealed by the Economic Complexity Atlas prepared jointly by Harvard University and the Massachusetts Institute of Technology7. The problem with such a production structure is that any other nation can copy it and become a competitor thereby out-beating Sri Lanka easily.
A case in point is Sri Lanka’s garment industry which is threatened by low-cost labour countries like Bangladesh and Myanmar which has easy access to simple technology in the industry8. Hence, the Cambridge University economist Nicholas Kaldor had argued that the rate of productivity growth across the economy depends on the expansion of the manufacturing sector first and then it should provide beneficial linkages for the improvement of productivity in all other sectors9. Hence, Sri Lanka should have focus on both the traditional and modern sectors alike when it plans to boost innovation across the economy.
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Don’t allow inefficiency of one sector to rub on others
Principle 2 is a further development of principle 1. It highlights that a country should support through its innovation policy, all types and phases of innovation not necessarily confining itself to high-tech industries. This is because the innovation gains in high-tech industries are negated if other sectors in the economy are lagging causing their inefficiencies to rub on improved sectors as well. Hence, it is a macro level efficiency improvement that is needed rather than the efficiency improvement in a given sector of the economy that leads again to the development of a dualistic economy. Therefore, Sri Lanka’s boost innovation program should aim at introducing multiple types of innovations, including network innovations, business structure innovations, service innovations, and channel innovations. What this means is that if there are inefficiencies in the supply chain, it will have a damaging impact on the businesses that use the inputs of inefficient operations for their outputs. For instance, if fertiliser and seeds are not delivered to farmers in time, the whole agricultural activities get hampered.
Go for disruptive innovations
Principle 3 requires a country to adopt what is known as ‘disruptive innovations’ so that a country can directly get itself linked to the advanced economies in the world. This is what Joseph Schumpeter termed as ‘creative destruction’. The mistake which many countries do in introducing innovations is to go for marginal improvements in the existing industries. On one side, such marginal improvements are incapable of generating a sufficient prosperity for the nation. On the other, they also widen the technological and innovation gap between the country concerned and other competitors making it difficult for competing with them in the global markets. In this context, promoting competition is a must.
The report highlights that one way to improve competition is to make it easier to start new business. Sri Lanka is notorious in this respect because it is ranked at medium level in the World Bank compiled Ease of Doing Business in all successive years. For instance, it is ranked at around 100 out of 190 countries for which the index is compiled10. This means Sri Lanka should have proper measures on a priority basis to improve its status as a country in which businesses could be started with ease.
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Make available capital goods at an affordable price
Principle 4 relates to making available capital goods imports, especially those products relating to information and communication technology, at an affordable price keeping such prices low. This is to enable a country to replenish its worn-out capital quickly. If it is not done, innovation processes started by the country loses its steam in midway, productivity improvements stagnate, and competitiveness started by businesses starts declining. The way-out for countries to do this, according to the report, is to keep tariff and trade barriers low so that advanced capital goods can be acquired to make their economic enterprises competitive with the rest of the world. This is highly pertinent if Sri Lanka plans to develop a competitive healthcare sector to attract healthcare users from the rest of the world. Sri Lanka’s close competitors in this area like Thailand and Singapore have already equipped their healthcare facilities with most modern medical equipment.
Support key innovation inputs as well
Principle 5 highlights the need for supporting the key innovation inputs on a wider scale. In addition to the availability of ‘best-in-class’ ICT, the other inputs such as reliable digital infrastructure, a skilled workforce and new knowledge should also be available to businesses. It is necessary to support both the production and the transfer of such key innovation inputs to businesses. For instance, if a State-owned research institution comes up with an invention, the Government should have clearly laid out policy principles for private businesses to acquire such inventions having paid the due amounts to such research institutes.
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Create a dedicated outfit to implement national innovation strategy
Principle 6 is concerned with developing a national innovation strategy and suitable organisational structures to implement such strategies. Successful innovation nations have benefited from the creation of such dedicated organisations to carry their national innovation strategies forward. If such organisations are established under the direct supervision of the head of the state, it would immensely facilitate them to attain their goals easily by coordinating with other state and private organisations.
Hence, it is necessary for Sri Lanka to create an innovation economy if it is to survive and prosper.
An innovation economy uses ideas as raw materials
An innovation economy differs from a traditional industrial economy in several respects11. First, in an industrial economy, it is natural resources, labour and capital that matter as inputs for economic activities. But an innovation economy is ruled by ‘ideas’ that are used in actual businesses that harness those inputs. Second, an industrial economy focuses on mass production for use by customers. An innovation economy too produces for consumers but gives priority to design and quality based on information and communication technology. Third, industrial economies are organised as large corporations that depend on economies of scale. Innovation economies, on the other hand, are composed of small-scale entrepreneurs who use networks and agents to do business.
Fourth, the success of industrial economies is based on labour and its availability, quantity of products, low costs and ability to control organisations and markets. Innovation economies depend on talents, speed of delivery, innovation flexibility and customisation of the products for success. As such, an innovation economy is a further step forward from an industrial economy and effective user of new knowledge that is being produced throughout the globe.
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Researchers should be linked to industry
Hence, it is vital that, if an economy is to prosper, knowledge-makers should be effectively linked to business and industry. In the past, this did not matter so much because it was the inventors themselves who put their inventions into commercial production as well. But today, inventions are made at a rate and all inventors are not entrepreneurship-savvy. This makes it necessary for outsiders who are enterprising to absorb inventions and make them available in the form of goods and services to consumers.
Large companies have the capacity to acquire and command over inventions without the help of an outside party. But small start-ups and entrepreneurs need the services of networks and agents to get connected to funding, inventions and markets. Such innovation facilitators are called ‘innovation brokers’ who have now become an important element in a proper innovation economy system.
We will discuss how research outputs should be linked to industry in the next part.
To be continued.
Footnotes:
1https://www.insead.edu/news/global-innovation-index-2015#:~:text=The%20GII%202015%20looks%20at,a%20sound%20national%20innovation%20environment.
2https://www.nsf.gov.lk/images/pdf/Handbook2020Final.pdf , p 7
3https://databank.worldbank.org/source/world-development-indicators/Series/GB.XPD.RSDV.GD.ZS
4https://nec.gov.lk/wp-content/uploads/2024/01/RP_GE_2014_07_STUDY-ON-INVESTMENT-IN-GENERAL-EDUCATION-IN-SRI-LANKA.pdf p1.
5Ibid p 9.
6https://www.wipo.int/edocs/pubdocs/en/wipo_gii_2015.pdf Chapter 4
7See: http://atlas.cid.harvard.edu/explore/tree_map/export/lka/all/show/2013/
8For Bangladesh’s production mix, see: http://atlas.cid.harvard.edu/explore/tree_map/export/bgd/all/show/2013/
9GII Report for 2015, p 89
10https://en.wikipedia.org/wiki/Ease_of_doing_business_index
11http://www.channelingreality.com/Corporations/Collaborative_Economics_RoleInnovationBrokers_KnowledgeEconomy_web.pdf
(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)
Part I of this article can be seen at https://www.ft.lk/ columns/Presidentialhopefuls- should-give-toppriority- to-make-Sri-Lanka- a-creative-economy- Part-I/4-765399
Sri Lanka’s boost innovation program should aim at introducing multiple types of innovations, including network innovations, business structure innovations, service innovations, and channel innovations. What this means is that if there are inefficiencies in the supply chain, it will have a damaging impact on the businesses that use the inputs of inefficient operations for their outputs. For instance, if fertiliser and seeds are not delivered to farmers in time, the whole agricultural activities get hampered