BERLIN Our country must remain innovative.
Germanys Chancellor Angela Merkel declared that when talking about the countrys 2015 federal budget. It sure sounds great, but according to the Global Innovation Index 2014published by the Cornell University, INSEAD, and the World Intellectual Property Organization last September Germany is actually not among the top 10 in the world.
These are the most innovative countries in the world
The list may surprise you.
Germany doesnt seem to belong to the crme de la crme when it comes to innovative countries. Even Ireland and Canada wereahead of us. For me, thatraised the question of what this ranking is based on. The answer isnt that simple: Its based on 81 indicatorsacross the following seven categories:
- Political, regulatory, and business environment
- Education, tertiary education, R&D
- Information & communication technologies, general infrastructure, ecological sustainability
- Credit, investment, trade & competition
- Knowledge workers, innovation linkages, knowledge absorption
- Knowledge-creation, -impact, -diffusion
- Intangible assets, creative goods & services, online creativity
You can find more details on page 287 in the report linked above, if you are interested. There you find the individual indicators and how each of the 143 nations that were evaluated rank in each of them. Just to give you an idea of what this looked like for Germany, here are the three categories where we stacked up the best.
|Citable documents H-Index||The H index is the economys number of published articles (H) that have received at least H citations in the period 1996 2013||1|
|State of cluster development||How widespread and well-developed are deep clusters (geographic concentrations of firms, suppliers, producers of related products and services, and specialized institutions in a particular field) in the country||3|
|Logistics performance||The logistics performance Index||4|
and here are the three worst
|Foreign direct investment net inflows||How much money flows into the country in the form of investments (as a percentage of GDP)||120|
|Gross capital formation||How much of the additionally created capital was spent on investments (rather than consume)||112|
|Cost of redundancy dismissal||In plain language: How easy it is to let employees go||99|
Particularlyinteresting for investors: Germany was ranked 81 at Ease of protecting investors, along with the Dominican Republic, Kenya, Lesotho, and a few others.
Why Germany isnt the most innovative country
Now we could closely examine the 81 lists to come up with a theory around what Germany lacks versusCanada and the others who are considered more innovative. But we dont have to do that, because I believe there are two simple reasons for why there are, and will always be, more innovative countries than Germany.
The main reason is Germans tolerance for risk. We are not really well known for taking the highest risks. We have to look no further than the stock market as a contemporary example. Innovative US companies such as Linkedin, Facebook, and Twitterhave trailblazed new markets and are valued several billions each. Meanwhile, theirhigh-profile counterparts in Germany areZalando and Rocket Internet.
Thats not meant as a discredit tothose two companies. But we know that in both cases their business models are based on copying what has already proven successful in other markets (like the US). And creating the copy of something is the opposite of being innovative.
The second reason is Germanys economic backbone the high number of strong small and medium sized companies. Several of those have positioned themselves as market leaders in niches of their industries over many decades. The reason for the success has often been these companiesexceptional experience and product quality. Many of them dont have to be innovation leaders in order to defend their market-leading position.
This argument is backedby the latest Innovation Survey of the Centre for European Economic Research (ZEW). According to this study, Germany has spent more money on innovation in 2013 than ever before. However, the majority of the spending isatbig corporations. The picture looks different if you look at smaller companies:
The ZEW survey also shows that small and medium-sized enterprises (SMEs) are increasingly retreating from the innovation business.
Why Germany doesnt have to be the most innovative country in the world
It seems questionable, whether Germany will ever make a major step forward in the Innovation Index. And Angela Merkel seems to be content with Germanys position (Our country must remain innovative).
And I share the opinion that we dont have to become an innovation powerhouse. Made in Germany will remain will remain a sign of quality and, if we continue to rely on our virtues, I believe we will always find industries with German companies as market leaders. Maybe not necessarily in the most innovative industries at least not right at the start.
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Bernd Schmid, the article’s original author, does not own any of the stocks mentioned.