This article first appeared in Forum, The Edge Malaysia Weekly on November 11, 2024 - November 17, 2024

We are in an era where the traditional drivers of economic development are losing their potency. Our view is that the winners in the next phase of growth will be those nations that are better able to create new engines of growth through more innovation. But this is easier said than done as no one really knows for sure what makes one nation superior to another in innovation. However, some surveys provide insights such as the importance of innovation efficiency, the way innovation inputs are turned into actual innovation outputs. Understanding how countries can be more efficient in the innovation process will help us craft better policies to foster innovation. This will be particularly important for countries such as Singapore in coming years.

Population growth is set to slow all over Asia in the coming decade. At the same time, technological progress is likely to accelerate markedly, with the US and China in the vanguard of change while other nations might lag behind. Rapid growth through exports is also looking less feasible as protectionism and inward-looking policies proliferate. Finally, countries will face hard choices as they balance adapting to climate change against pressing for high economic growth.

Thus, traditional approaches to growth relying on trade, population and physical infrastructure will be hit by diminishing returns. The key to economic success will therefore be through extracting more growth from existing resources, which means higher productivity — and that is where innovation comes in. This higher productivity ultimately must spring from speeding up the innovation which yields new products and new approaches to doing things. Hence the importance of determining what is behind innovation.

But first of all, what really is innovation? To us, it is the process of coming up with novel ways of creating value, being able to think up new processes or invent new techniques or use previously untried approaches to bring about new products or new services or even new business models or policies.

If that is the kind of innovation we need, then what is the secret sauce which makes one country more innovative than others? This remains a mystery despite many years of study. But a first step towards trying to understand this is to look at surveys such as the Global Innovation Index (GII) 2024. The value in such surveys is not the headline figures on the rankings of countries which tend to be superficial and open to being gamed by clever bureaucrats. A major shortcoming, for instance, in many country rankings of innovation capacity is the way they mix how well a country mobilises resources for innovation — the so-called innovation inputs — with the actual innovation outcomes. Because it is the latter which is what we are really interested in, such measures actually muddy the waters. The capacity to mobilise inputs reflects the bureaucratic capacity of a country, which is not necessarily associated with inventiveness. Some would even argue that bureaucrats might actually stifle creativity.

Another criticism of such rankings is that some countries that are highly conscious of their global profile learn to “game” the rankings. A recent report by The Economist newspaper noted that one reason why the World Bank’s Ease of Doing Business survey had to be withdrawn and completely revamped was that certain countries learnt how to report data in such a way as to improve their ranking even though they were not really making much progress in facilitating business growth.

So, we need to dig deeper into the data. When we do so, we find that many countries are excellent in mobilising traditional inputs for innovation such as research and development (R&D) spending, or the number of research and scientific engineers per capita, or the level of venture capital funding for innovative start-ups. However, it is also clear from the GII that countries — for instance, Singapore — which excel in such mobilisation efforts struggle to convert those inputs commensurately into actual innovation outcomes.

In fact, GII 2024 shows that while there has been progress in investing in innovative capacity, that capacity is not always utilised efficiently, leading to underperformance in technological outputs. In other words, innovation efficiency across Asia remains a mixed bag.

The most prominent example within our sample is Singapore. Its outputs are relatively middling, given the stellar performance in mobilising inputs for innovation. Its world-beating performance in the headline index relies heavily on accumulating input resources, but struggles to effectively get “bang for the buck” in terms of tangible innovation outputs.

Singapore is exceptionally strong in the measures for input components. For instance, it scored full marks in critical subcomponents such as operational stability, government effectiveness, regulatory quality and political stability — areas that Singapore has consistently done well in. Singapore also boasts a highly educated populace, and a large number of graduates in science and engineering, where it ranked second and fifth globally, respectively. Singapore also scored third in business sophistication, highlighting a strong presence of knowledge-intensive employment and knowledge absorption facilitated through high-tech imports, information and communications technology (ICT) services imports, and net foreign direct investment inflows.

However, when we look at the key measures of innovation outcomes such as knowledge and technology output as well as creative output, Singapore appears to fall short. Singapore lags in patents and unicorn valuations when compared to other Asian countries, such as South Korea and China, reflecting a lack of groundbreaking technological advancements made by Singapore-based businesses and universities. Intuitively, one would have thought that having one of the best educated and economically sophisticated workforces in the world, Singapore should be pushing at the frontier of global innovation. Yet, it is at best barely a regional champion but certainly not a global one in innovation outcomes.

In contrast, South Korea and China outperformed their regional peers in terms of innovation efficiency. When inputs are compared against outputs in innovation, these countries appear better able to convert inputs into tangible innovations surpassing that of other nations in the region.

•    South Korea and China outclassed other countries in the “knowledge creation” output subcomponent with a score of 65.1 and 69.9, respectively, significantly outpacing the third-ranking Singapore’s score of 39.9. These countries have a high proportion of patents per gross domestic product. In China, it appears that government incentives and programmes such as the Made in China 2025 initiative that prioritises advanced technologies like artificial intelligence and electric vehicles have helped. South Korea, too, is a global leader in electronics and semiconductors; with innovation crucial for staying ahead of competitors, a high number of patent filings to protect intellectual property is expected.

•    China and South Korea have also made their mark in high-tech exports and ICT services exports. These countries are tech exporting powerhouses, with their economies deeply embedded in the global technology supply chain. South Korea, for example, punches above its weight as one of the world’s leading exporters of semiconductors and electronic goods, while China dominates in the manufacturing and export of consumer electronics, ICT equipment, and components.

•    Finally, both countries performed well in the “intangible assets” subcomponent, with China on top and South Korea a close second. Clearly, these countries have done well in creating globally recognised brands. China is home to some of the world’s most valuable companies, including Huawei, Alibaba, and Tencent, which are ranked among the top 10 global brands. South Korea, too, is home to internationally recognised brands such as Samsung and Hyundai, both of which are global leaders in their respective industries.

In the absence of good studies, we can only offer hypotheses of why Singapore is not achieving levels of innovation in line with its extraordinary marshalling of innovation inputs. Our suspicion is that it is the ecosystem broadly defined which is the key. To our mind, a business ecosystem is the interconnected network of companies, government agencies, trade associations, universities and other educational institutions, and funding institutions such as banks or venture capital firms that interact together. In addition, one suspects that it is the cultural norms and underlying incentives in this ecosystem that determine success.

One striking difference between Singapore’s ecosystem and the other Asian success stories is the corporate structure. China and South Korea had a strategy of emphasising the development of local enterprise whereas Singapore has a multinational-heavy economic structure where local private firms play a much smaller role. While multinational corporations (MNCs) have set up R&D centres in Singapore, the bulk of the cutting-edge work is probably done in the headquarters of those MNCs rather than in Singapore. In addition, it is also possible that MNCs might be crowding out local firms, either by exerting upward pressures on business costs or competing away talent and other resources. This constrains the ability of Singapore-based firms to take the necessary risks inherent in research and innovation.

A second potential problem could be our education system. It is certainly the case that our education system has improved tremendously over the years. Our schools do a highly credible job of developing strong academic skills while our universities have blossomed over the years into globally recognised centres of learning.

Still, one must ask why many of the economies that outpace Singapore in innovation efficiency include advanced economies in Europe, such as in the Nordic area. Could it be partly explained by the Nordic education model’s emphasis on developing lifetime skills, a contrast to the academic-focused, content-driven and highly pressured approach taken in Singapore? As excellent as our universities and schools are, we need to ask if they are not quite adept at instilling in students the skills and behaviours needed to push the boundaries in science, knowledge and culture.

A third possibility is the structure of our financial sector. There is no doubt that Singapore is one of the great financial hubs of the world, given the assemblage of asset managers, private banks, family offices, foreign exchange trading and other activities that we have brought together. But is what we have created what is needed to help our companies create value and gain scale by being competitive globally? For instance, how many of the venture capital firms based in Singapore actually fund Singapore start-ups? Do we have the government-backed institutions such as export-import banks and small business banks that other countries have?

Finally, we need to ask ourselves if we have the culture of openness to critical thinking and ability to espouse controversial ideas that is certainly a vital reason why Silicon Valley is so successful? While China is an outlier, it is noteworthy that South Korea and Taiwan have made extraordinary progress in innovation capacity once they opened up their political systems and opened the way for critical voices to express themselves.

In short, whether Singapore and other emerging Asian economies can fulfil their full development potential will depend on their willingness to undertake reforms that unleash the innovative potential of its people. Since the prize for doing so is incredibly attractive, more thought should be given to how this can be done.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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