Key Findings
The Context
- Productivity growth has declined since the Global Financial Crisis
- Changes in global trade and technologies are challenging countries¡¯ key engine of growth ¨C export-oriented manufacturing, and
- The COVID-19 pandemic and other shocks, including climate change, are accelerating the need for new modes of production.
The Challenge
- Although the region has experienced some noteworthy successes, most countries in the region (except for China) underperform on several key indicators of innovation.
- And while countries have narrowed the gaps with advanced economies in the initial adoption of new technologies, they are falling behind in the broad diffusion and use of those technologies.
- Moreover, there is significant heterogeneity in innovation performance across in the region ¨C between countries and within countries, across sectors and firms.
- Innovation appears more prevalent in manufacturing than in services, even though services are increasingly important to the region¡¯s economies, including as inputs to manufacturing.
- Most firms remain far from the technological frontier, and only a small share of firms engages in more sophisticated innovation activities, including cutting-edge research and development.
What do we mean by ¡°Innovation¡±?
- People commonly associate innovation with breakthroughs at the technological frontier, and such breakthroughs often capture the imagination of policymakers and the media.
- defines innovation more broadly, however, to include both ¡°¾±²Ô±¹±ð²Ô³Ù¾±´Ç²Ô¡± (i.e., developments that push the technological frontier), and the ¡°»å¾±´Ú´Ú³Ü²õ¾±´Ç²Ô¡± and ¡°²¹»å´Ç±è³Ù¾±´Ç²Ô¡± of existing technologies and practices that result in significant improvements in the ways firms produce or operate. Diffusion and adoption are well-suited to the capabilities of the vast majority of firms operating in developing East Asia.
What inhibits innovation?
New evidence shows that several factors impede innovation in the region.
- Firms often lack adequate information about new technologies and high uncertainty about the returns to investment in innovation
- Firm¡¯s innovation capabilities, including management quality, are often weak
- Firm employees frequently lack the skills needed to enable innovation
- Limited financing options hinder firms¡¯ ability to fund innovation projects, and
- Countries¡¯ innovation policies and institutions are not aligned with firms¡¯ capabilities and needs.
- They favor invention over diffusion and adoption
- They favor innovation in manufacturing over innovation in services, and
- Links between national research institutions and private sector firms remain weak, as do incentives for research institution-industry collaboration.
What will it take to spur innovation in the region?
To spur greater innovation ¨C both diffusion and invention ¨C country policymakers need to
- Reorient innovation policy objectives to
- Promote diffusion and adoption of existing technologies, not just invention
- Support innovation in the services sectors not just in manufacturing
- Invest in building firms¡¯ innovation capabilities
A key objective of innovation policy should be to increase the number of firms engaged in any form of innovation ¨C diffusion, adoption, invention ¨C and progressively increase the share of firms transitioning from technology adoption to more sophisticated forms of innovation.
- Strengthen key complementary factors for innovation, including
- Developing students¡¯ and workers¡¯ skills for innovation ¨Cstronger foundational skills as well as advanced cognitive, technical, and socio-emotional skills
- Improving finance for innovation through continued capital market deepening and more diverse financial instruments to support innovation
- Raising management quality
- Reform innovation institutions and agencies and strengthen their capacity through
- Increasing institutional capacity to design and implement innovation policies
- Improving governance of innovation institutions and agencies along with interagency coordination
- Strengthening linkages between research institutions and firms, including incentives for research institution-industry collaboration.
The term ¡°developing East Asia¡± refers to the 10 middle-income countries covered in this study: Cambodia, China, Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar, the Philippines, Thailand, and Vietnam.
