Crafting a Supportive Global Economic Environment for SME Innovation

– by Stephen Ezell-

Innovation – the creation of new or improvement of existing products, processes, services, and business or organizational models – drives the modern knowledge and technology-based global economy. For example, the U.S. Department of Commerce finds that between one-third and one-half of the economic growth in the United States since World War II can be directly attributed to technological and scientific innovation. But the knowledge that innovation drives growth is no longer a secret: countries throughout the world increasingly recognize that fostering robust levels of innovation in their enterprises, industries, and societies is vital for robust, long-term economic growth and sustainable improvements to quality of life and standards of living. And, as the Information Technology and Innovation Foundation (ITIF) documented in the book Innovation Economics: The Race for Global Advantage, this recognition has spawned an intense race for global innovation leadership, as evidenced by the fact that scores of nations have created national innovation foundations and/or articulated national innovation strategies.

Yet constructively managing and guiding this global competition among nations for innovation leadership has become perhaps the central economic challenge of our times, for in their efforts to implement innovation-enhancing policies, countries can do so in a number of qualitatively different ways, with some designed to add to the global stock of knowledge and innovation and others designed to merely shift innovation (and the production it engenders) from one country or region to another.

For example, when countries invest in the basic building blocks of innovation – such as by increasing expenditures on scientific research, educational attainment, and digital and physical infrastructure or by putting in place better policies to transfer technologies developed in university or national laboratories to the private sector – they empower the innovation potential of their own economies and enterprises while also generating positive spillover effects that benefit other nations, thus creating a win-win result for themselves and for the entire world. (See Figure 1). In contrast to such “Good” innovation policies, when countries implement zero-sum, mercantilist-inspired “Ugly” policies – such as blocking digital trade, stealing others’ intellectual property, imposing high tariff barriers, or manipulating currency or standards – these can help one country win, but at the expense of all others. Such policies harm truly innovative enterprises and thus degrade the quality of rules-based international economic competition.


There also exists a set of “Bad” innovation policies that countries have implemented – such as import substitution industrialization policies – thinking that such policies will help their innovation economies, but in reality the policies only end up harming both themselves and the rest of the world. For example, for every $1 of tariffs India imposed on inbound information and communication technology (ICT) products – in the interest of spurring creation of an indigenous ICT manufacturing sector – the country suffered a $1.30 economic loss, as the productivity of India’s economy was stunted as all other sectors of Indian enterprise had to use more expensive or less effective ICT equipment. (Such a policy was “Bad” for the global economy because it distorted global trade and harmed the world’s most efficient producers of ICT products). Similarly, today, ITIF estimates that the additional taxes and tariffs Brazil imposes on imported ICT products costs its GDP as much as 2 percentage points annually. Finally, countries can also implement “Self-destructive” innovation policies—which harms themselves while helping others—such as when the immigration policies of countries, such as the United States, make it difficult for high-skill immigrants to enter or stay in a country.

Given how important innovation has become – and how dramatically one nation’s policies to drive innovation affect the rest of the global economy – how 0nations decide, both individually and collectively, to pursue their innovation-based economic growth strategies has tremendous consequences for the health of the global innovation system.

To better understand these dynamics, in January 2016 ITIF released a first-of-its kind study called Contributors and Detractors: Ranking Countries’ Impact on Global Innovation, which assessed 56 countries accounting for over 90 percent of the global economy (including all the leading economies from Asia, Europe, and the Americas) on how their economic, innovation, and trade policies (on a per-capita basis) either contribute to or detract from global innovation. The report scored countries on 27 measures, grouped into 14 “Contributions” indicators – covering research and development (R&D) and technology, human capital, and innovation-incenting tax policies – and 13 “Detractions” indicators – including a range of trade barriers and measures of weak intellectual property protection. This approach allowed for countries to be awarded an “Overall” score as well as a “Contributions” and “Detractions” score.

Finland, Sweden, and the United Kingdom led as the countries whose policies do the most (per-capita) to support global innovation – and the least to detract from it. India, Indonesia, and Argentina ranked weakest overall, fielding an above-average number of policies (such as localization barriers to trade or weak protections for intellectual property) that detract from global innovation while having policies that contributed the least to global innovation. The United States ranked 10th overall in the study and China 44th. Italy ranked 33rd in the study, placing 39th in terms of how constructively its economic, trade, and innovation policies positively contribute to global innovation, although Italy scored better, 25th, in terms of refraining from implementing policies that harm global innovation. In general, the report’s intent is to help countries rank themselves against peer nations on key metrics of innovation policy and to guide them toward only using win-win innovation policies best-positioned to help both the country and the rest of the world.

This issue matters particularly for the innovation potential of the world’s small-medium sized enterprises (SMEs), for if they are to flourish globally, they (no less than large multinational corporations) need access to global markets at scale across which they can export their products and services to grow their fragile businesses. Another key finding of the Contributors and Detractors report – and ITIF’s research more broadly – is that SMEs face unique innovation challenges which policy makers must be responsive to. For example, helping SMEs find access to the capital they need to scale innovation efforts is of particular concern. To address this, as ITIF has documented, almost a dozen countries – including Austria, Belgium, Canada, Denmark, Germany, the Netherlands, Ireland, and Sweden, among others – have introduced innovation vouchers. Usually ranging in value from €5,000 to €30,000, innovation vouchers enable SMEs to “buy” expertise from universities, national laboratories, or public research institutes regarding preparatory studies, analysis of technology transfer, analysis of the innovation potential of a new technology, or other similar services. Studies in a number of countries have found that innovation vouchers encourage “additionality” in SME innovation, meaning they enable SMEs to undertake innovation efforts that may not otherwise be able to.

As a related policy instrument in the United States, several states have introduced “manufacturing reinvestment accounts,” these are tax-deferred accounts into which SMEs can deposit up to $1 million that can be subsequently withdrawn tax-free for purposes of expenditures toward research and development, workforce training, or investment in improved plant and capital equipment. Likewise, many countries have introduced favorable tax treatment for SMEs, including expanded R&D tax credits, refundable or transferrable R&D tax credits for pre-revenue SMEs, or even tax forgiveness for young SME start-ups in the first three years.

Finally, SMEs often lack the resources larger firms do to identify and to adopt the latest technologies or production practices, particularly when it comes to SME manufacturers. Accordingly, as ITIF documents in International Benchmarking of Countries’ Policies and Programs Supporting SME Manufacturers, manufacturing extension services (also called technology extension services) play an important role in promoting technology adoption by SMEs; supporting technology transfer, diffusion, and commercialization; performing research and development in direct partnership with SMEs, and/or providing access to research labs; and engaging SMEs in collaborative research and development and/or technology specific consortia. Such manufacturing extension programs are increasingly common throughout the developed and developing world, and in many cases the capabilities of such programs are also available to services firms.

With more than 95 percent of firms in Organization for Economic Cooperation and Development (OECD) countries being SMEs and those firms accounting for 60 to 70 percent of OECD employment while generating a disproportionate share of new jobs in OECD economies, it’s vitally important that public policy pay specific attention to supporting SMEs’ innovation potential. However, those efforts will only be successful if they take place in the context of a global economy that permits innovation by all firms to flourish to the maximum possible extent, which is why it’s imperative that the international economic community and its institutions push nations to only use “win-win” innovation policies.

Stephen Ezell is Vice President, Global Innovation Policy at the Information Technology and Innovation Foundation (ITIF), a Washington-DC based technology and economic policy think tank, where he focuses on science, technology, and innovation policy as well as international competitiveness, trade, and manufacturing policy issues. He is the co-author with Dr. Robert Atkinson of Innovation Economics: The Race for Global Advantage (Yale, September 2012) and a co-author of Innovating in a Service-Driven Economy: Insights, Application, and Practice (Palgrave McMillan, November 2015). Mr. Ezell came to ITIF from Peer Insight, an innovation research and consulting firm he co-founded in 2003. He previously worked in the new product development group at NASDAQ. Mr. Ezell holds a B.S. from the School of Foreign Service at Georgetown University, with an Honors Certificate from Georgetown’s Landegger International Business Diplomacy (IBD) program.

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