Assessing National Innovation and Competitiveness Benchmarks

In recent posts I mentioned two benchmarks of national innovation and competitiveness: the World Bank’s Knowledge Economy Index (KEI) and the World Economic Forum’s Network Readiness Index (NRI). Each of these benchmarks serve as useful indicators of national competitiveness. But, how do we interpret these benchmarks? There’s no doubt that the rank a country receives gets a lot of attention, but interpreting benchmarks means much more than rank. In this post I’ll examine some of the assumptions underlying another important benchmark, the World Economic Forum’s Global Competitiveness Report (GCR).

The GCR, produced since 1979, ranks national competitiveness according to the Global Competitiveness Index (GCI). The GCI defines competitiveness qualitatively as “the set of institutions, policies and factors that determine the level of productivity of a country.” Like the NRI and KEI, the GCI ranks nations quantitatively according to a weighted index of pillars. GCR defines twelve pillars: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation. And if that’s not enough each pillar is comprised of a set of indicators!

To better assess national competitiveness I’ll first examine how the pillars fit into the GCI index, then look closer at how a few key pillars and their indicators cause certain countries to rank as the most competitive. The GCI partitions each of the twelve pillars according to three stages of a nation’s economic growth: stage one growth is factor-driven, stage two is efficiency-driven and stage three is innovation-driven.

Factor-driven economies are typical in countries that compete on the basis of unskilled labor and natural resources. Chad, the lowest ranking country in the GCI, with its estimated one billion barrels of oil reserves is a good example of a factor-driven economy. The pillars associated with factor-driven economies are: institutions, infrastructure, macroeconomic stability, health and primary education.

Efficiency-driven economies are typical in countries that compete on the basis of production processes and increased product quality. Countries in this stage of development typically have well established higher education and training, efficient goods and labor markets, sophisticated financial markets, a large domestic or foreign market and the capacity to harness existing technologies, or technological readiness. Unlike the NRI, the GCI differentiates technological readiness, a stage two pillar, from technological advancement as embodied in stage three, innovation-driven growth. Brazil with a per capita GDP of about $7,000 is a good example of an efficiency-driven economy.

Innovation-driven economies are typical in countries that compete on business sophistication and innovation. The U.S. with about $46k per capita GDP ranks first overall in the GCI with the largest domestic market size and the second largest foreign market size (pillar 10). The U.S. also ranks fourth in business sophistication (pillar 11) and first in innovation (pillar 12). To really understand how the U.S. ranks so highly in GCI, we need to look more closely at the indicators that comprise business sophistication and innovation.

Business sophistication is comprised of nine indicators. I’ll comment on two – value chains and clusters – because they say so much about how to interpret the GCI as a benchmark. Value chains were first introduced by Professor Michael Porter, Bishop William Lawrence University Professor, Harvard Business School, in his 1985 best selling book Competitive Advantage: Creating and Sustaining Superior Performance. A value chain is a set of activities in which value accrues to a firm at each stage of producing its outputs. Porter’s value chains are well known, so I won’t spend more time on them here other than recognizing their close relation to five of the other Business Sophistication indicators: local supplier quantity and quality, control of international distribution, production process sophistication and the extent of marketing. Business Sophistication also depends on Porter’s more recent work on clusters. Clusters are geographic concentrations of firms, their interconnected suppliers and supporting institutions in a particular field that are known to increase productivity. There’s strong evidence that a high ranking in business sophistication implies geographic proximity, specialization, dependency and complex relationships among firms in a cluster.

Innovation is comprised of seven indicators of a nation’s science and technology maturity. Indicators include legal (number of patents and intellectual property protection), investment in research and development (private and public sector), knowledge related activities (quality of scientific research institutions, availability of scientists and engineers, and university-industry collaboration). Recall that the KEI measures the number of scientific articles published, which serves only as a proxy to GCI’s knowledge related indicators.

So what do we make of all this? It’s a lot of detail, but the detail tells us how the GCI determines a nation’s rank and why the U.S. ranks so highly. The GCI benchmarks technology readiness differently than the NRI by better separating technology adoption from new technology creation. It also better separates primary and secondary education as well as research and development according to the stages of a nation’s economic growth than the KEI. To rank highly in national competitiveness, nations must rank highly in both business sophistication and innovation. Porter’s value chains and clusters influence a nation’s rank as well as a nation’s science and technology policy.

Where will the U.S. rank in 2010? Last week in his speech on the Necessity of Science, President Obama stressed the importance of science and technology policy and set a national goal to devote more than 3 percent of our GDP to research and development. This bodes well for innovation. But the global financial crisis will surely affect soundness of banks and regulation of securities and exchanges (pillar 8) as should the troubles of the Detroit automotive cluster.

Stay tuned!