Innovation: Transforming the way business creates

Innovation: Transforming the way business createsThree themes for the interactions economyThis white paper is one of three publishedin 2007 as part of a research programmethat arose from the Economist IntelligenceUnit’s March 2006 report for Cisco, entitled “Foresight2020.” This report highlighted a number ofimportant changes to the world economy over thenext 15 years. The principal trends identified in thereport—globalisation, demographics, atomisation,personalisation and knowledge management—willhave a profound effect on the landscape of majorindustries and the working of the company.In order to build on “Foresight2020,” we identified three themesthat were then developed into separateresearch projects investigatingpersonalisation, collaborationand innovation. Each is intendedto stand on its own and to fit withthe other two, describing from differentvantage points the developmentof the interactions economy,in which customers, suppliers,workers, owners and others go beyond mere transactionsto exchange information for mutual benefit.As companies adapt to the new forces mouldingthe interactions economy, they will find that personalisation,collaboration and innovation will presentgreat challenges and opportunities. Personalisationgoes beyond customisation, allowing the consumerto stamp a product or service with his or her own applications,preferences and configurations. Technologyis particularly adept at enabling a high degree ofpersonalisation, as in the case of the downloadableapplications available on mobile phones or personaldigital assistants. By offering a large variety of possibleproducts, features and services, personalisationhas the power to increase sales and margins enoughto transform business models.Collaboration will have a similarly profound effecton business. Broadly speaking, collaboration meansto work together, and our research focuses specificallyon formal collaborative arrangements at workthat bridge traditional geographic, institutional,and functional boundaries. The emphasis on corecompetencies, the need for corporate agility andthe rise of emerging markets have caused firmsto focus on collaboration both within and amongorganisations. Collaboration amongfunctional groups and organisationswill help companies become moreproductive and innovative.Innovation—defined here as theapplication of knowledge in a novelway, primarily for economic benefit—is becoming increasingly importantfor firms and governments. Businesspeople regard it as a way to beat theircorporate competitors. Governmentpolicy makers see the need for an innovative environmentif their economies are to prosper.The three themes are linked in many differentways. Firms collaborate with customers in order tocreate innovative products that can be personalised.Process innovations can enhance collaboration inwhich carefully selected workers from around theworld are brought together in teams to improveproductivity. The development of the interactionseconomy is likely to strengthen the links amongpersonalisation, collaboration and innovation andheighten their importance, with far-reaching implicationsfor global business.© The Economist Intelligence Unit 2007

Innovation: Transforming the way business createsin our ranking, and we predict that they will maintainthese positions during 2007-11. During this period,China’s rank will move up by five places, and Mexico’swill rise by six. Other noteworthy gainers will be Singapore,South Africa, Costa Rica and Lithuania.l China has more favourable conditions for innovationthan India. With annual expenditure ofUS$136bn on R&D, China now outspends Japan.However, in the sphere of innovation, there isa “small country advantage”: 12 of the top 25countries in our league table in Appendix A have apopulation of less than 10 million.l The return on innovation is estimated to behigher in middle-income countries such as Mexicoand China than in richer countries. Our empiricalanalysis suggests that middle-income countries tendto gain proportionately higher income per unit ofadditional innovation than richer countries. Althoughmiddle-income countries are dependent on importedtechnology, the speed with which they absorb thistechnology may depend on their own domestic innovationperformance. This finding augurs well for thecatch-up prospects of middle-income countries.For your organisation, is successful innovation more or lessimportant than other metrics of success?For my organisation, innovation is more important than...Select all that apply (% of respondents)Sales growthShare priceOperational efficiencyMarket shareProfit marginNone of the above21%22%26%32%36%38%How would you describe the origins of your organisation’smost successful innovations? Select all that apply.(% of respondents)Inadequacy in a process, product or service that was rectifiedChanges in industry or market structureChanges in consumer tastes or habitsDemographic changes13%Scientific breakthroughs (eg, sequencing the genome)21%Planned investment in innovation programmes29%Other7%39%46%49%© The Economist Intelligence Unit 2007

Innovation: Transforming the way business createsThe innovation imperativeWhy innovate? Innovation has become thedefining challenge for business everywhere.A decade ago, companies saw survival andgrowth in terms of restructuring, lowering costs andraising the quality of their goods and services. Sincethen, commoditisation, privatisation and deregulationhave swept the world—from the advanced economiesKEY POINTSof the United States, Japann Innovation is increasinglyand Europe to the rapidlyimportant for companies and emerging markets of the Asiagovernments.Pacific rim and Latin America.Thanks to the internet, airn The evidence of a link betweentravel and improved patentingprocedures, access to theinnovation and performance isstronger among firms and industriesthan among countries. latest technology has becomeBut even at the national level, universal. Today, few firms anywherecan feel secure behindinnovation may help to improveeconomic performance.their established brands, longstandingcustomer relationships,proprietary technology,n Innovation requires clear thinking,an ability to improvise anddogged determination.or tariff barriers. The competitivepressure on them is globaland immediate.Companies everywhere, especially those in advancednations with high labour costs, have becomepainfully aware that even in their new slimmeddown,outsourced, globalised guise, they cannotconduct business as before. No matter how goodtheir quality, standard products made in the standardway cannot sustain a firm’s competitive edge.Business leaders in companies big and small, inevery industry, have started to refocus on top- andbottom-line growth. And the general consensus isthat one of the best ways to achieve this is throughinnovation. The reaction of consumers to suchproducts as the iPod and the BlackBerry suggests thatcompanies can grow faster if they innovate. This givesthem a head start, if not an unassailable lead.A large number of studies have found a positiverelationship between research and development (R&D)and growth in output. Studies of the effectivenessof firm-level R&D use productivity to measure performancerather than profits. It has been difficult toestablish a direct link between innovation, or R&D, andprofits, in part because the variety of influences thataffect profits may be greater than for productivity.Other results that emerge from most of thesefirm-focussed studies include: process R&D is morebeneficial for companies than product R&D; basicR&D typically yields more than applied R&D; and R&Dreturns vary considerably between industries, withthe highest returns occurring in research-intensiveindustries. R&D should not be confused with innovation,however. A company may invest heavily inresearch and not come up with a single, good idea.Indeed, our survey suggests that more innovationscome from sales and marketing than from R&D (seepage 19). But even so, without a good R&D effort,it would be hard to translate most of the ideas intoinnovative products and services. Given that R&D israrely more than 5% of a company’s total revenue,increasing R&D activity would seem to be a winningcorporate strategy.It is argued that countries generating innovationcreate new technologies and encourage the adoptionof these new technologies. As a result, they growfaster than those that do not. The message that innovationis important is being heard by governmentsas well. The Organisation for Economic Co-operationand Development (OECD), a governmental groupingof 30 advanced economies, has been at the forefront © The Economist Intelligence Unit 2007

Innovation: Transforming the way business createsof those emphasising that long-run economic growthdepends on the creation and fostering of an environmentthat encourages innovation. Innovation is consideredan important driver of long-term productivityand economic growth. It is argued that countries thatgenerate innovation, create new technologies andencourage adoption of these new technologies growfaster than those that do not. However, the OECD’s empiricaltests of this proposition have been sparse, andthose that have been undertaken for a limited numberof OECD countries have yielded ambiguous results.The conventional wisdom is that innovation ismost likely to drive growth in the highly developedcountries, while poor and middle-income countriescan import technology from abroad and thereforeneed not bother to innovate domestically. However,our study indicates that for high-income countries,innovation yields a smaller impact on economicgrowth than for low- and middle-income countries.This is true for the top two countries in our innovationranking, Japan and Switzerland, (as well forsome innovative Euro-zone economies and Israel),whose economies have not grown rapidly for thepast decade.This finding also reflects the fact that for lowandmiddle-income countries, domestic innovationactivity tends to facilitate the more efficient andrapid absorption of imported technology. Thus, theybenefit from their internal innovativeness as well asfrom the spillover effect of foreign innovations. Thiswould tend to increase the catch-up prospects of themore innovative middle-income countries, such asChina and Mexico.Innovation defined Innovations have two maincharacteristics. First, innovations break the mouldby applying knowledge in some novel way. Second,innovations are the result of a chain of events thatstarts with an original idea, invention or discovery,and then proceeds (usually in a chaotic manner)Which of the following steps does your organisation generallytake in support of planned innovation initiatives?Select all that apply. (% of respondents)Create a dedicated team not distracted by current business operations41%Empower the internal venture to take appropriate risksProvide appropriate funding to the ventureProvide senior executive support to the ventureInsist on objective evaluation of progress by a senior executive team27%None of the above6%Don’t know3%37%39%50%through prototype construction, financing, customerdemonstration, field trials, engineering, production,marketing and finally sales. Only by successfullycompleting this obstacle course can an invention beconsidered an innovation. An invention that costsUS$1,000 to make can easily cost US$10m to turninto an innovation.Innovation, it has been said, is like climbing amountain. There has to be a plan of attack, a teamof talented mountaineers assembled, money for theventure secured, a full supply of provisions madeavailable, and all the appropriate equipment hauledto base camp. There are usually well-trodden paths upthrough the foothills, and numerous potential routesto the top—some riskier but quicker, others safer butslower, still others that have yet to be reconnoitred.There will be many disappointments, with successrarely coming quickly or even at the first attempt.Apart from skill and resources, the most importantrequirements are a clear head, an ability to improviseand dogged determination.Innovation is no less an ordeal. But, just as mountaineerswho have scaled the peaks successfully havebequeathed charts for subsequent climbers to retraceor amend, the pioneers of innovation have likewiseleft route maps for the rest of us to use. What theydemonstrate is that there is no one way to innovate.© The Economist Intelligence Unit 2007 7

Innovation: Transforming the way business createsMeasuring innovationIn order to look more closely at the drivers andperformance of innovation, we considered itfrom two angles, from the top down and fromthe ground up. This white paper first takes in the viewfrom the mountain top and then goes down to groundlevel to ask executives what helps them innovate. Theview from the top consists ofKEY POINTSan innovation ranking of theworld’s largest 82 economies.n Patents are a proxy forThe view from the bottom isinnovation.based on a survey of executives.The two aspects of the studyn Some innovation inputs, suchwere linked: we needed to knowas the educational attainmentsof the workforce, have a direct what weights to ascribe some ofimpact on innovation; others, the innovation drivers for oursuch as macroeconomic stability,have an indirect impact.ecutives to rank the importanceglobal ranking, so we asked ex-of a variety of environmentaln Some countries are better atfactors. We then applied thoseconverting these inputs intoinnovation output than others. weights to the factors in theindex.Taking the top-down viewfirst, in order to bring things into focus we needed toexplain some of the methodology behind the way weanalysed this topic. The first step was to decide howto measure innovation at the national level.The patent as a measure of innovation The mostcommon measure of innovation for a company is howmany patents it generates annually. The number onecorporate innovator in the world is IBM, which has aworldwide portfolio of more than 40,000 patents.The most appropriate measure of innovation for acountry is how many patents it generates per millionpopulation. Based on our research on 82 economies,the top-ranking national innovator is Japan,Approximately how many documented suggestions/proposalsfor innovations does your organisation consider for eachsuccessful new product/service/process it rolls out?(% of respondents)Fewer than 10 29%10 to 25 23%25 to 50 10%50 to 100 8%100 to 500 3%500 to 1,000 1%More than 1,000 1%Don’t know 24%with a perfect score in our index of 10 out of 10. Weconstruct our measure as the sum of patents grantedto applicants from the 82 economies by three majorgovernment patent offices—the European Patent Office,the Japanese Patent Agency, and the US Patentand Trademark Office. The data are averaged over2002-05 and expressed in terms of patents per millionpopulation for each country. These numbers arethen converted into an index on a 1-10 scale.While the number of patents generated is not aperfect measure of innovation, we found that it is avery useful one. Clearly, some inventions are morevaluable than others. A patent for a new melon-balleris not equivalent to a patent for shotgun sequencingof the genome. Moreover, a patent can represent afamily of inventions or can be merely a single memberof one such family.One approach to patenting, for example, a bicyclewould be to describe it as a two-wheeled, humanpoweredmachine for transport. Another would be © The Economist Intelligence Unit 2007

Innovation: Transforming the way business createsto patent separately the frame, wheels, handlebars,saddle, crank and chain as components for a twowheeled,human-powered transport machine. Somepatenting jurisdictions tend to favour the latterinterpretation, skewing the numbers of patents generatedin the country concerned. This was a perennialproblem when comparing Japanese patent figureswith those of other countries.We have corrected for the “Japan effect” by assumingthat the maximum value that the index cantake, with a top score of 10, is 800 patents per millionpopulation. This is below the actual value for Japan of1,213 to allow for the fact that until recently a differentpatent application had to be submitted in Japanfor each claim. An explanation of how the separatedata sets were combined and the regression analysisused can be found in Appendix B on page TK.Although the number of patents may be an imperfectmeasure of innovation, it correlates well withthree other proxies for innovation performance:l Citations from scientific and technical journalsper million population. The data are for 2003 fromScience and Engineering Indicators 2006 publishedby the US National Science Foundation, and ThomsonISI’s Science Citation Index.l The average of two ratios: the share of medium-and high-technology products in a country’smanufacturing output and the share of medium- andhigh-technology exports in its total manufacturingexports, taken from the United Nations IndustrialDevelopment Organisation (UNIDO) Industrial DevelopmentReport 2005.l The results of a survey question from the WorldEconomic Forum’s Global Competitiveness Report2006 that asked respondents to rate the extent towhich companies in 125 countries were adept at, orable to absorb, new technology.We have constructed a composite measure of innovationperformance that consists of these indicatorsas well as our patents measure of performance (seeHow does your organisation incentivise employees to suggestand develop innovations? Select all that apply.(% of respondents)Time off from regular work to pursue innovation22%Money to buy special equipment17%Special access to company resourcesStock options9%Pay raisesStock in spin-offs4%Public recognition by corporate leadersPrizes or presentsNone of the aboveOther5%20%22%27%33%38%p. 32). The composite index gives very similar resultsto the “patents only” measure. For example, thetop three remain Japan, Switzerland and the UnitedStates. Thus we can examine the “patents only” indexwith considerable confidence that it truly reflects acountry’s innovation performance.What factors lead to innovation on a nationallevel? There are two types of factor: direct and indirectdrivers of innovation.The direct drivers of innovation The direct drivers—factors closely linked to innovation—are selectedfrom a broader index called the Business EnvironmentRankings (BER), an Economist IntelligenceUnit spreadsheet included in Appendix D on page TK.These direct drivers are:l R&D as a % of GDPl Quality of the local research infrastructurel Education of the workforcel Technical skills of the workforcel Quality of IT and communications infrastructurel Broadband penetration© The Economist Intelligence Unit 2007

Innovation: Transforming the way business createsJapan and Taiwan are very efficientinnovators; they produce a lot ofinnovations for a low level of inputsEach country is ranked according to its score forthese direct inputs, a number that is based on theunweighted average of the six indicators.The indirect drivers of innovation A separate indexwas constructed for the indirect inputs, the broadeconomic, social and political factors that facilitate(or hinder) innovation activity. The innovation environmentindex is based on the following 12 factors:l Political stabilityl Macroeconomic stabilityl The institutional frameworkl The regulatory environmentl Tax regimel Flexibility of the labour marketl Openness of national economy to foreigninvestmentl Ease of hiring foreign nationalsl Openness of national culture to foreign influencel Access to investment financel Protection of intellectual propertyl Popular attitudes towards scientific advancementsAgain, the source for all the indicators is the BER,with the exception of popular attitudes towards science,which is taken from the World Values Survey,published by a global network of social scientists.Since these enabling factors are subjective and noteasy to quantify, we asked our survey respondents torank them according to their importance as innovationdrivers. The results allowed us to assign weightingsto each of the indirect factors that we then usedto assign an innovation environment index for eachcountry. (See Appendix B for details on the variousfactors and their weightings.)For the purpose of this study, indices of both thedirect drivers of innovation and the indirect environmentalfactors were created for all 82 economies inour database. These were then combined with a 70%direct and 30% indirect weighting into a single innovationenabler score.For each of the 82 economies, our chart listsvalues for direct inputs, the innovation environmentand the combination of the two: the innovationenabler score. A statistical analysis of our rankingsshows that the inputs we use for the rankingaccount for more than 90% of the differences we seein innovation performance among the 82 countries.In addition, we are able to calculate the innovationefficiency for each country.Innovation efficiency A comparison of a country’srank on its innovation output (performance) with itsranking on direct innovation inputs can provide aninsight into the efficiency of innovation. A large discrepancyin the two rankings suggests either a highlevel of efficiency (high innovation output relative toinputs) or a high degree of inefficiency if the directinputs rank exceeds significantly a country’s rankingon innovation performance.By this yardstick, Japan appears to be a very efficientinnovator, coming first in the output rankingdespite being in 11th place in the direct inputsranking. Taiwan is also in this category. It is in 8thplace in terms of patents per million population, butin 14th place in terms of direct inputs.A glance at the innovation environment index canin this context also be informative. A good innovationenvironment can help to explain why a country’sdirect inputs may be efficiently translated into innovationperformance (outputs). China is an inefficientinnovator, ranking 42nd in direct innovation inputsbut is ranked a full 17 places below that in innovationperformance (ranking 59th). The discrepancy in thetwo rankings partly reflects the fact that China’s in-10 © The Economist Intelligence Unit 2007

Innovation: Transforming the way business createsnovation environment (the framework through whichinputs are translated into outputs) is significantlylower (in 57th place).These indicators of innovation efficiency can helpto guide government policy. They can, for example,highlight possible inadequacies in certain environmentalfactors, such as the number of work permitsfor foreign scientists and engineers, or whetherthe protection of intellectual property (IP) rights isinadequate. Moreover, we have been able to forecastinnovation indices for the years 2007-11, becauseour BER model contains forward-looking assessmentsfor the next five years.For corporate strategists, the present and futureindices and associated ratios are helpful in decidingwhere new products should be developed overseasand what to expect from the national government,local services and labour force. For investors, theinternational innovation rankings are useful becauseto some extent the more innovative a country, thegreater its growth potential.Now that things are in better focus, we can lookmore closely at which countries come higher thanothers and why.Generally speaking, how do ideas for innovations start togain momentum within your organisation?(% of respondents)Backing from aboard director 28%Support fromthe C-suite 18%Approval by theresearch director 11%Support frommiddle management 29%Support from therank-and-file 11%Other 3%From what outside sources does your organisation most oftenget ideas for new products/services/processes? Select up to three.(% of respondents)Shareholders7%Customers and market researchSuppliers23%Partners (alliances or joint ventures)34%CompetitorsAcquired companies11%Consulting firms17%Universities11%ConferencesMediaOther2%9%13%41%72%© The Economist Intelligence Unit 2007 11

Innovation: Transforming the way business createsThe world’s most innovative economiesJapan is in 1st place, generating 51% morepatents than the US. Because Japan’s populationis only 42% of that of the US, its rationof patents per million population is 3.5 times higherthan the US—and indeed the highest such ratio of all.Thus, it tops out as the most innovative country inthe world, despite having lower rankings in the directfactors that drive innovationKEY POINTS(such as the stock of humancapital and IT/telecommunicationsinfrastructure) and still-n Japan, Switzerland, the UnitedStates and Sweden are the toplower rankings in the index thatfour innovators and are likelymeasures the environmentalto remain so in the next fiveyears.factors that are conducive to innovation.Japanese education,n During this period, China’sfor instance, fosters conformity,not creativity.ranking will move up five places;Mexico’s will rise by six.However, several factorspropel Japan to the position ofn Other noteworthy gainers willbe Singapore, South Africa,top innovator. For one thing,Costa Rica and Lithuania.this resource-poor economyhas long taken an “innovate ordie” approach. For another, theeconomy has a large proportion of high-technologyactivities that are, by their nature, more innovation-intensive.In Japan there used to be a symbioticrelationship between large companies and associatedsmaller firms that were closely integrated intoso-called keiretsu and were under strong pressureto innovate. These ties have broken down, but theycontinue to drive innovation to some degree.In addition, Japan invests proportionately morein R&D than the US (3.35% compared with 2.79% ofGDP) and most other major countries. And more ofthat R&D is carried out by industry (rather than universitiesand national laboratories) than is the casein the United States. Furthermore, Japan has morescientific researchers per million population than theUnited States (5,900 compared with 4,200).Switzerland is in 2nd place, demonstrating theimportance of the so-called small-country advantage.It is no coincidence that 15 out of the top 25 performerson the innovation index are countries withfewer than 10 million inhabitants. Generally speaking,small developed countries appear to enjoy morecomprehensive education and welfare services thanlarge countries, and the knowledge and skills set ofthe labour force are important drivers of innovation.Small countries with clusters of world-classcompanies in research-intensive sectors—such asSwitzerland, Sweden and Finland—outperform on theinnovation index. Their universally high standardsof education, especially in science and mathematics,guarantee their continued success at creating wealththrough their innovation prowess. Israel’s access towell-educated immigrants allows it, too, to punchover its weight.Small countries also benefit from easier networkingand comparative advantages derived fromclusters of historical specialisms (for example,watch-making in Switzerland). With its high-techclusters in the horological, electrical and pharmaceuticalindustries, Switzerland is a leading innovator.Pharmaceutical companies in particular have to beinnovative because there is a longer period than forother sectors between the filing of a patent and themarketing of a product. This gap is necessitated bythe lengthy and expensive testing protocols to ensurethat drugs are beneficial and safe.The US ranks third in innovation. There are onlysix economies in the top 25 that can be classed asmedium to large, with populations in excess of 5012 © The Economist Intelligence Unit 2007

Innovation: Transforming the way business createsmillion, and the US, with its 300 million population,is at the top of this list. Its high ranking says muchabout the creativity of its companies as well as theefficiency of its patenting process. Both Switzerlandand the US rank near the top, far above Japan, interms of innovation enablers. This indicates thatJapan has a high innovation efficiency.So much for the past five years. What about thenext five? Does our mountaintop view allow us to peerinto the future?Innovation forecast Our research provides a rankingof countries by how innovative they are today.Through an analysis of innovation enablers, nationby nation, we can also predict which economies willbe the most innovative in 2011. Our forecast enablespolicymakers to plan their investment and R&Dstrategies for the future.In the next five years, nearly 60% of the 82 countriesstudied are likely to improve their innovationperformance. Overall, between 2007 and 2011, weexpect a 6% increase in innovation performanceon average for the 82 economies in the ranking,similar to the rate of increase between 2001 and2004. This increase will be achieved because ofrising R&D spending and ongoing improvements inthe quality of IT and communications infrastructure.We also predict continuing improvements in mostof the indirect or environmental drivers of innovation.Despite some moves towards protectionismand anti-competitive practices in a few areas, mosteconomies are benefiting from greater economicopenness, improved IP rights and better conditionsfor financing innovative investments.Current and Forecast Innovation IndexThe full ranking is on page 28Index2002–2006 2007–2011 2002–2006 2007–2011Rank Index Rank Changein rankIndexRank Index Rank Changein rankJapan 10.00 1 9.91 1 0Switzerland 9.71 2 9.80 2 0United States 9.48 3 9.56 3 0Sweden 9.45 4 9.55 4 0Finland 9.43 5 9.38 7 -2Germany 9.38 6 9.51 5 1Denmark 9.29 7 9.32 9 -2Taiwan 9.28 8 9.42 6 2Netherlands 9.12 9 9.11 13 -4Israel 9.10 10 9.33 8 2Austria 8.91 11 9.16 10 1France 8.90 12 9.15 12 0Belgium 8.80 14 9.00 15 -1South Korea 8.78 15 8.97 17 -2Norway 8.73 16 8.94 18 -2Singapore 8.72 17 9.03 14 3United Kingdom 8.72 18 9.00 16 2Ireland 8.46 19 8.60 20 -1Italy 8.41 20 8.74 19 1Australia 8.37 21 8.50 21 0New Zealand 8.17 22 8.42 22 0Hong Kong 8.16 23 8.24 23 0Slovenia 7.68 24 7.91 24 0Spain 7.47 25 7.57 27 -2Canada 8.84 13 9.15 11 2© The Economist Intelligence Unit 2007 13

Innovation: Transforming the way business createsproperty, academic fraud, weak financial markets,and political meddling in science and research. At thecorporate level, Chinese innovation remains weak.Top-down government plans for fostering innovationdo not automatically lead to a strong innovationperformance.India will also rise in the ranking, although not asmuch as China. Now in 58th position on our innovationindex, India will rise to 56th in 2011.Mexico is expected to rise a full six places inthe next five years, from 45th to 39th place. Sincethe NAFTA agreement, Mexico has benefited fromconsiderable foreign investment. The pay-off interms of training, infrastructure improvements andbetter IT facilities is beginning to have a knock-oneffect, as deregulation, privatisation and modernisationmeasures spread throughout the economy.Mexico’s proximity to the US and the free flow ofgoods across the border ensure that it will not onlymaintain its competitive edge over the rest of LatinAmerica, but that it will start to leave behind economiesto the south.In terms of innovation rankings, Lithuania’s11-point movement from 51st place, at present, to40th place in 2011 makes the highest leap on ourchart. This big rise largely reflects the fact that it hasrecently made some overdue reforms, including theimproved protection of IP rights, and its R&D spendingand educational levels are increasing. In order tostem the outflow of skilled workers, a “knowledge”park has been established at Kaunas TechnologyUniversity, and there are plans to build a similarestablishment in Vilnius.The innovation performance of two other economiesshould be noted. Australia, in 21st position,has some excellent enablers but is not predicted torise in the ranks in the next five years. It would seemto have a poor innovation efficiency ratio. Italy, bycontrast, has few innovation enablers but demonstratesits flair for innovation by coming in at theApproximately what percentage of your organisation’semployees are scientists or engineers?(% of respondents)None 11%Less than 5% 28%5-10% 14%10-15% 9%15-20% 7%20-25% 6%More than 25% 18%Don’t know 6%rank of 20th today, rising to 19th in 2011.As for the entire EU, despite its efforts to boostinnovation performance, it is unlikely to close theinnovation gap with Japan and the United States overthe next five years.Before descending from the summit, there is moreto be said about national innovation performance.The rankings are all very well, but do they foretellwhich countries will succeed in overall economicperformance? Certainly, a growing number of governmentsare placing a high priority on creating theright conditions for innovation to occur. But doesthis guarantee faster economic growth? As the nextsection suggests, the answer is more complicatedthan it might at first appear.© The Economist Intelligence Unit 2007 15

Innovation: Transforming the way business createsInnovation and economic growthCompanies are the ultimate engines of innovation,yet there is much that governments cando to kick-start the process. In the end, it ispublic policy that determines much of the environmentwithin which firms can be innovative. Over thepast decade, a growing body of empirical data hasprovided clues as to how innovationfits into the economicKEY POINTSgrowth equation. In turn,this has spurred governmentsn Governments can determinemuch of the environment within throughout the developedwhich firms innovate.world and in some emergingeconomies to re-examine theirn Many economists said that the policies for fostering innovation.richer countries would have torun faster and be more innovativein order to maintain theirAccording to growth accounting,the missing ingre-rates of productivity growth.To date, these economies have dient that accounts for anyperformed well by investingincrease in output that cannotheavily in computers and other be explained by increases inkinds of technology.capital and labour is termed“total factor productivity”(TFP). This is calculated as aresidual—the difference betweenoutput growth and the weighted growth ratesof capital and labour input. And although the returnon investment may decline as more capital is addedto an economy, this decline is more than offset by theleveraging effects of TFP growth. This explains whylong-run average rates of growth in output have remainedremarkably steady in industrialised countries.The actual size of TFP remains uncertain and variousempirical studies give very different estimatesof TFP. When labour input is adjusted for qualityand other measurement issues are addressed, thecontribution of TFP to growth tends to decline.Approximately how much does your organisation invest inR&D as a proportion of total annual revenue?(% of respondents)Less than 1% 14%1-2% 10%2-3% 12%3-5% 16%5-8% 10%8-12% 9%More than 12% 10%Don’t know 19%Furthermore, since TFP is calculated as a residual, itmay also capture the influence of factors other thaninnovation or technological progress. Clearly, anyclaims that innovation is the sole driver of economicgrowth are nonsense. However, there is plenty ofevidence that innovation makes a significant contributionto growth, and not only in the technologicallyadvanced countries.The bubble and beyond One of the most puzzling examplesof recent economic growth performance is theway in which productivity growth in the United Statesstrengthened markedly from the mid-1990s onwards,especially when compared with the EU, where it hasslowed since 1995. Whereas annual labour productivitygrowth in the United States doubled from 1.1%during 1987-95 to 2.2% in 1995-2006, the first 15countries in the EU saw productivity growth declinefrom 2.3% a year to 1.4% over the same period. It isnot clear why the United States should have outperformedso. It is believed that among the significantfactors were the heavy investment in computing16 © The Economist Intelligence Unit 2007

Innovation: Transforming the way business createspower and network technologies associated with thedotcom boom.Another factor may have been the arrival inthe market of many products borne from innovationsbegun a decade earlier when the US governmentallowed universities to sell the results oftheir government-funded research (see page 27).Interestingly, productivity growth in the UnitedStates continued after the collapse of the dotcombubble, despite widespread cuts in IT investments.The question, however, is whether the performanceof the US economy over the past decade is sustainablein the future.So much for the view from the summit. How dothings seem at ground level? For one thing, we cansay with even more confidence than at the macroeconomiclevel that there is a strong link betweeninnovation and performance. Even if, after all issaid and done, the contribution of innovation toeconomic growth is uncertain, at the microeconomiclevel things are more clear-cut: corporate innovationpromotes corporate performance.Organisational innovation helps redefine the firmThose who did not watch carefullymay have missed it. Over the pastfive years, organisational behaviourhas been affected by dramatic changesin organisational dynamics that will createmore corporate value than we have seen inseveral decades.During the past century, when informationwas scarce, most business wasaccomplished by leveraging interpersonalrelationships. This was the foundation ofmany business disciplines; in fact, the veryword “discipline” connoted a wall betweenone function and another. Engineering orNew Product Development had its own set ofrules; Marketing, another; Finance, yet another.In these environments, managementinnovation focused primarily on processesto optimise the “command and control”functions within the firm.Information technology has begun tochange this by accelerating the flow ofinformation, effectively democratising thebusiness process. For the first time, individualsat all levels of the organisation can sharein the vision and strategy of the business,collaborating to unlock the potential oftheir specialised knowledge. Decentralisingknowledge brings strategy and organisationtogether: For example, through BloombergNews and independent on-line user communities,Microsoft employees can see how WallStreet and customers view their new Vistaproduct launch and make rapid adjustmentsto their plans. By linking operations andsales, dramatic opportunities can emerge, asin the case of UPS, which now sells businessdata, not merely logistics services.New technology is only part of theanswer, however. Along with the informationsystems to communicate freely, somecompanies are changing their processes andtheir culture in order to enhance performance.To be successful, effective collaborationrequires the creation of measurableobjectives that encompass the entireenterprise, and incentives to encourageall teams to meet these goals. This meanshaving processes in place that require theparticipation of all functions to achievethe objectives. Some firms are encouragingemployees to take a more entrepreneurialattitude to their work, and are setting upprocesses that nurture innovation, autonomyand collaborative environments. Leadersin these areas include Apple, whose culturehas allowed it to reinvent itself many times,and Siemens, whose new-product ideas followa well-defined development path.To align networks, culture and processesin support of a fast-moving companythat can outperform its competitors, themanager of tomorrow is likely to movebeyond the command-and-control paradigmof the industrial era towards a more organicapproach—one that is holistic, omni-directionaland interactive. Dell’s customerservice staff has wide latitude to pleasethe customer. Procter & Gamble gathersnew product ideas through its field staff.Wal-Mart’s management of its 1.8 millionemployees is all about communication. Inthis new era, the alignment among culture,systems and processes is the new form oforganisational innovation. n© The Economist Intelligence Unit 2007 17

Innovation: Transforming the way business createsView from the bottom upThe strongest evidence to support the viewthat innovation has a powerful connectionwith growth comes from looking at how firmsand sectors function. For instance, many studieson the subject conclude that the economic returnsfrom process R&D tend to beKEY POINTShigher than the returns fromproduct R&D (see sidebar onn There is a close link between page 20). And the returns onhigh R&D and corporate performance.R&D vary considerably from oneindustry to another—with thehighest returns being found inn Firms need to be more innovativein order to regenerateresearch-intensive industriesthemselves.such as aerospace, healthcare,pharmaceuticals, computingn In our survey, 49% of respondentssaid that their best ideasand telecommunications.One of the more intriguingaspects of some studiescame from changes in industryand market structure and only21% said they came from scientificbreakthroughs.on total factor productivity(including our own research)is the finding that the law ofn Of those companies that arediminishing returns appliesin, or connected to, high-techjust as much to TFP as it does toclusters such as Silicon Valley,capital and labour. In short, innovationyields less and less, in56% of respondents said theyperformed better than theirpeers, compared with onlyterms of incremental increases36% of firms outside of a hightechcluster.the level of national income.in economic growth, the higherThis raises questions aboutthe sustainability of the rateof innovation and economic growth in high-incomecountries such as Japan and Germany. In both countries,incremental improvement is the preferred formof innovation and this is less risky than some formsof innovation. But even in the United States, wherethere is a somewhat greater emphasis on more risky,technological breakthroughs, innovation cannot berelied on continually to deliver the goods.The survey In order to dig deeper into the corporateworld, in November 2006 the Economist IntelligenceUnit conducted a survey that was answered onlineby a worldwide panel of business leaders. Some 485qualifying responses were received, with statisticallysignificant numbers in all categories polled.Respondents The largest groups of respondentswere in financial services, followed by IT andtechnology, professional services, manufacturing,healthcare, pharmaceuticals and biotechnology,consumer goods, and energy and natural resources.A total of 48% of the respondents worked for companieswith annual sales of up to US$500m, whereas26% were employed by enterprises with revenue inexcess of US$5bn. Fully 30% were board membersor had C-suite job titles; another 35% were SVPs,VPs, directors, heads of business units or departmentalheads; and the remainder were managersor held other titles. Their functional roles werepredominantly in strategy and business development,general management, finance, and sales andmarketing—making the respondent sample idealfor our purposes. A total of 56% of the respondentswere based in Europe and the Middle East, 25% inthe Americas and 20% in the Asia-Pacific region(these numbers add to 101 due to rounding).Research or die The firms we polled invested abovethe national average on research and development.Forty-four percent spent more than 3% of sales annuallyon R&D. Twenty-nine percent spent more than5%, while one in 10 respondents said their firms in-18 © The Economist Intelligence Unit 2007

Innovation: Transforming the way business createsApproximately how many institutions of technologicalexcellence (eg, universities, government labs, contractresearch labs, think tanks) reside within the cluster?(% of respondents)Fewer than 5 13%5 to 20 25%20 to 40 17%More than 40 15%Don’t know 30%vested over 12%. This makes them fairly research-intensive—eventhough only a small proportion (13%)of firms were located in high-tech clusters such asSilicon Valley, the Cambridgeshire Fens, Israel orSingapore.The overwhelming majority (87%) of respondentsdeclared innovation to be important to theirlong-term success, and almost one-half (47%) saidthat innovation was critically important to it. Manyrespondents thought successful innovation at theircompanies was more important than its share price(38%) or market share (36%). More than 70% of thefirms in our survey received less than 10% of theirR&D budget from the government, and 61% said thatthey received no public help at all.The panel’s responses regarding the sources oftheir most successful innovations contradict thecommonly held view that innovations tend to comefrom scientific breakthroughs. A total of 49% ofrespondents said that their best ideas arose fromchanges in industry and market structure, and only21% said they came from scientific breakthroughs.Another popular, low-risk source of innovation (46%of respondents) was inadequacy in a process, productor service that was subsequently rectified.Also, our survey showed that more good ideas forfuture products come from sales and marketing (onehalfof respondents say so) than from R&D (42%).This is less surprising than it may seem. First, it ismore useful to give customers what they want (andhave asked for) than to consider in the abstract whatnew products to develop. Second, people employedby R&D are often or mostly finding out ways to putother departments’ ideas into products, services orprocesses.Survey results yielded another surprise. The generalconsensus had been that the winnowing processin innovation requires something like 3,000 brightideas to end up with four development programmes—the minimum required to get one blockbuster product.“You have to kiss a lot of frogs to find a prince,”said Art Fry, the legendary innovator at 3M. Yet 52%of our respondents reckoned they needed fewer than25 good ideas for each successful innovation!Such differences probably stem from the historicalnature of the literature. The traditional view wasthat corporate innovation tended to operate at themore risky end of the spectrum—based on inventions,discoveries and other forms of new knowledge. Thissurvey indicates that correcting underlying flaws andlistening to customers (both of which are at once lessrisky and less pricey) can lead to profitable innovations.An example is Mindstorms, a robot-buildingkit launched a few years back by Lego, a Danishtoymaker. The company was guided by feedback fromits customers—robot enthusiasts—to make improvements,in particular to the software operating systemand applications.In addition, previous innovation studies havetended to focus on larger corporations with trackrecords of bringing inventions and discoveries successfullyto the marketplace. A total of 58% of ourrespondents worked for firms with sales of less thanUS$1bn. This may explain why just 11% of respondentsreported obtaining ideas for new products/services/processesfrom universities.© The Economist Intelligence Unit 2007 19

Innovation: Transforming the way business createsA recent history of innovationThe current wave of enthusiasm for innovationstarted about five years ago, with a host ofconferences, books, reports and governmentinitiatives on the topic. Now, innovation has almostbecome an industrial religion. Business leaders seeit as a tool for increasing profits and market share.Governments reach out for itKEY POINTSin the hope that it will lead tonational economic growth.n An effective way to transferPerhaps the sudden passiona technology from laboratorybench to factory floor isfor innovation has its originsto encourage the researchersin the corporate soul-searchingthat followed the Nasdaqconcerned to run with it commercially.meltdown in the wake of thedotcom and telecom crashesn Seventy-one percent of thoseof 2000-01. Such factors may,responding to our questionnaireindeed, have played a part, butreckoned that one-half of theircompany’s annual revenue came for decades the boardrooms offrom products and services less Fortune 500 companies havethan five years old.been well aware that innovationcan be a bottom-line boon.n A single US law, the Bayh-DoleRather than leave innovationAct, has helped to accelerateto chance, many companies believeit important to have theirthe commercialisation of inventionsby transforming ownershipof the IP in any invention orown corporate research laboratories(as distinct from testingdiscovery made at taxpayers’expense from the government labs). Their task has been toagency funding the research tosearch systematically for newthe individuals and institutionstechnologies, techniques anddoing it..materials to power the corporateinnovation machine. Oneof the oldest and most prolific, Bell Laboratories,was founded in 1925. Since then, its scientists havegarnered 11 Nobel prizes for their discoveries.When functioning correctly, the mission of a corporatelaboratory is to produce inventions and, aboveall, enabling technologies. It is the company’s job as atotal enterprise, however, to produce the innovations.From laboratory to production Getting clever ideasfrom the laboratory to the rest of the company is noteasy. Blueprints or scientific papers cannot simplybe tossed over the laboratory wall—as happened toooften at Xerox’s Palo Alto Research Center (PARC).PARC is attributed with inventing many of the featuresfound in today’s computers. But Xerox nevermanaged to turn PARC’s many clever inventions intoinnovations, whereas firms such as Apple Computerprofited handsomely from them.The only PARC invention that became a multibillion-dollarbusiness for Xerox was the laser printer.This was simply because the research team that haddeveloped the technology moved lock, stock and barrelout of the lab and into the commercial side of thecompany to help build the business. The moral of thePARC experience is that ideas are embodied in peoplerather than reports, drawings and prototypes; andthat the most effective way to transfer a technologyfrom laboratory bench to factory floor is to encouragethe researchers concerned to run with it commercially.If that means giving them a stake in any futurebusiness that results, so be it.Whichever way the technology transfer process ismanaged, it is imperative that it be done well. Innovationis difficult and expensive enough without interdepartmentalsquabbles causing additional roadblocks.When the transfer process works smoothly, asit did with Xerox’s laser printer, then the return oninvestment can be very impressive indeed. One studycarried out a few years ago found that the overall rateof return on 17 successful innovations brought tomarket in the 1970s averaged 56% annually over the24 © The Economist Intelligence Unit 2007

Innovation: Transforming the way business createssubsequent 30 years. This compared with an averagerate of return of 16% for all investment carriedout by the whole of American business over the same30-year period. In short, the pay-off from innovationcan be huge—far exceeding that of any other form ofinvestment companies can make.Reinventing the firm Thanks to the acceleratingpace of innovation, information technology has justwitnessed the equivalent of a century-long industrialrevolution packed into a single decade. As a result,firms have never been more productive. But the rulesof the game have changed.According to Peter Cochrane, a professor at UniversityCollege London and former chief technologistat British Telecom, the half-life of companies (thenumber of years required for half of them to die) hasgone from 50 years before the IT revolution to fiveyears today. In many organisations, information nowhas a half-life of only six months. That is, half of it isoutdated in only half a year, although it continuesto be hoarded and accessed as though it had value.The implication is that companies have to regeneratethemselves continuously.One firm that has been reinventing itself longerthan most is 3M. In the 1970s, the Minnesota companywas unique in being able to claim that one-quarterof its annual revenue came from products less thanfive years old. Today, that would be considered wellbelow par. As we have seen, three out of four firmsresponding to our questionnaire reckoned that onehalfof their revenue came from products less thanfive years old. The median age of a company’s productrange is becoming an important way to assess itsability to reinvent itself.The Bayh-Dole Act In the last few years, the UnitedStates has been a leader in creating well-paid,knowledge-based jobs. It is now widely accepted thatone reason for its surge in innovation capacity sincethe late 1980s has been the Bayh-Dole act, whichfreed up great swathes of IP that had previously beengathering dust on government shelves.Essentially, what the Bayh-Dole act did was to switchownership of the IP in any invention or discovery madeat taxpayers’ expense from the government agencyfunding the research to the individuals and institutionsdoing it. The act also allowed the new ownersof the IP to sell exclusive licences to private firms tocommercialise academic discoveries. This meant thatthe public would, in effect, have to pay twice for anyproduct or process developed from a discovery madewith public funds at a university or national laboratory:once for the federal research grant and a second timeat the checkout counter. While this may seem unfair, inprevious years the product probably would never haveseen the light of day.The median age of a company’s productrange is becoming an important way toassess its ability to reinvent itself.Critics in the United States worry about the distortingeffect the Bayh-Dole Act has had on academics,as universities reward enterprising researchers forcoming up with patentable discoveries. Patents byacademics can now generate university revenue fromlicences and royalties or through campus start-upsand spin-outs. The University of Wisconsin, forinstance, has been a big beneficiary of the biotechresearch performed by its professors. There is a perceptionthat at a number of academic institutions thequality of teaching has suffered as a result.There are also concerns that academic researchcould suffer as the possibility of short-term financialbonanzas shifts the emphasis from long-range, blueskyinvestigation (the pursuit of fundamental knowledgeand truth traditional to universities) to morepractical studies with commercial potential. Never-© The Economist Intelligence Unit 2007 25

Innovation: Transforming the way business createstheless, to encourage their own academic institutionsto become more entrepreneurial, all major countrieshave enacted similar legislation to the Bayh-Dole act.Technology transfer To streamline things, manyuniversities have set up technology transfer officesto identify promising discoveries made on campusand to help turn them into revenue streams throughlicensing or spin-outs. By 2003, there were almost300 such offices at American universities, and 117 atBritish universities.Figures from the Association of University TechnologyManagers (AUTM) show that patents granted touniversities rose from around 300 a year before 1980to a peak of more than 3,200 in 2003, and then declinedto less than 3,000 in 2005. The recent fall contrastswith the increasing number of patent applications,and reflects a growing backlog of applicationsat the United States Patent and Trademark Office(USPTO). The income flowing to American universitiesfrom technology transfer has continued to rise. TheAUTM found that in the United States the number oflicences and options executed increased by severalpercent between 2003 and 2005, with overall incomefrom licensing reaching more than US$1.6bn in 2005.American universities now spend more thanUS$100m a year in legal fees associated with licensingactivities according to statistics published by the USNational Science Foundation. Studies also reveal thatthe average income of a successful disclosure that ispatented and marketed by a university comes to nomore than US$10,000, which is less than the cost ofadministering the project. After accounting for theirdirect and indirect costs, not many technology transferoffices on campuses in the United States and elsewherehave made a profit for their universities. From anational perspective, however, university technologytransfer offices have accelerated the flow of provenideas from academic research to private enterprises.The cluster effect Nowhere are ideas developedmore effectively than where universities with strongscience and engineering departments are surroundedby high-tech hinterlands—as with Stanford Universityin Silicon Valley and, to a lesser extent, with MIT nearKendall Square and Route 128 around Boston. Muchattention is focused these days on such geographicclusters of high-tech firms that have a powerfulacademic institution at the centre and perhaps anational laboratory in the neighbourhood. Becausesuch clusters account for a disproportionate amountof innovation being undertaken in a country, effortsare under way to replicate them regionally andnationally.There are many such clusters around the world—like the tool and die makers of Higashi Osaka, or thepulp and paper manufacturers in Finland. But mostare in fairly mature industries where innovation isat best incremental and unlikely to be patentable.In the more dynamic, high added-value fields, noneof the Silicon Wannabes around the world has comeclose to replicating the success of Silicon Valley.Special financial, entrepreneurial and cultural intangiblesare invariably missing.Israel has come the closest to establishing clusterslike those in California. It is not hard to see why.Both societies reward risk but do not punish failureunduly. Both have an open-minded, can-do attitudeto solving problems. Both respect learning and haveraised networking to a fine art. And both are blessedwith a steady stream of well-educated immigrants.Thanks to the talent that continues to flee Russiaand the former Soviet republics, Israel now has 135engineers and technicians per 10,000 population(compared with 18 per 10,000 in the United States).It is therefore no surprise that Israeli innovationsattract almost as much venture capital as all of that ofCalifornia, which has more than ten times the populationof Israel.26 © The Economist Intelligence Unit 2007

Innovation: Transforming the way business createsConclusion: The mothers of innovationThis paper has shown that governments andcompanies are no longer paying lip serviceto innovation, if they ever did. Heightenedglobal competition is forcing both to find new waysto increase productivity. They have little choice butto innovate, or at least to encourage the innovators.But what is the best way to become more innovative?One thing is clear from this study: thereis no single, right method. Take, for example, thediversity of the countries at the top of the ranking.Some are large and some are small. Some valuerote learning, others improvisation and spontaneity.Innovation is certainly not a Western preserve;witness the position of Japan at the top of theinnovation ranking, as well as the strong performanceof Taiwan and Singapore, not to mention theemergence of China. All heavily emphasise the useof government policies to encourage innovation,along with educational systems that produce largenumbers of scientists and engineers.Our forecast for innovation rankings over thenext five years highlights the rise of China inthe league table. But it would have been moresurprising if the ranking had not predicted thatthe world’s second-largest economy in terms ofpurchasing power would climb up the ladder. Lesspredictable was the strong showing of Mexico andLithuania, hardly countries famed for their innovationprowess. This is particularly so for the former,being part of a region, Latin America, not noted forits innovativeness.Clearly, it helps to be close to the United States,which ranks number three in the innovation league.The same is true for companies too. Our surveyfound that many more firms that are located in ornear high-tech clusters in such countries as Israelperform better than their peers than companies thatare not in such a location. One answer is to move toa high-tech cluster. A less drastic course, however,would be simply to open an outpost there andbreathe the same air.Despite the diverse reasons for success in innovation,some common themes emerge:l There is no real substitute for a good education—and a good education system. Whether you are Chinaor BMW, it is highly advantageous to be able to tapdeep, wide reservoirs of technical expertise.l Investments in IT and communications infrastructureprovide a good pay-off in terms of innovation.l Sizeable spending on R&D is likely to yield dividendsin terms of new products and services. In oursurvey, among respondents who say their firm’s R&Dspending is equal to at least 5% of their revenue,44% say their firm performs better than its peers; thiscompares with 35% among those who say their firmspends less than 5% of revenue on R&D.l Irrespective of performance, the pace of innovationoverall is faster than ever. Seventy-one percentof those responding to our survey said that morethan one-half of their sales came from products andservices that are five years old or less.l Innovative scientists and researchers work bestwhen given a high degree of autonomy, and thenallowed to work closely with the business functions toput ideas into effect.Without these people—the designers, the entrepreneurs,the scientists and the marketers—economiesand companies would not grow as fast and wewould all be less well off.© The Economist Intelligence Unit 2007 27

AppendixInnovation: Transforming the way business createsAppendix A: Innovation index2002-2006Innovation performanceInnovation enablersPatentsper mInnovationperformanceindexRankDirectinputsindexRankInnovationenvironmentindexRankAggregateinnovationenablers indexRankJapan 1213.103 10.00 1 9.50 11 6.88 23 8.71 14Switzerland 501.797 9.71 2 9.88 4 8.50 5 9.46 4USA 350.495 9.48 3 9.88 4 8.53 3 9.47 3Sweden 334.625 9.45 4 9.94 2 8.24 10 9.43 5Finland 321.717 9.43 5 10.00 1 8.48 6 9.54 1Germany 300.296 9.38 6 9.56 7 7.95 14 9.08 9Denmark 259.764 9.29 7 9.94 2 8.61 1 9.54 2Taiwan 253.973 9.28 8 9.06 14 7.68 16 8.65 16Netherlands 198.294 9.12 9 9.63 6 8.37 8 9.25 6Israel 192.058 9.10 10 9.56 7 6.85 24 8.75 12Austria 141.320 8.91 11 8.69 18 7.31 22 8.27 19France 139.483 8.90 12 9.44 12 7.52 19 8.86 10Canada 127.846 8.84 13 9.50 9 8.20 12 9.11 8Belgium 119.155 8.80 14 9.06 14 7.69 15 8.65 15South Korea 115.598 8.78 15 9.13 13 6.53 35 8.35 18Norway 106.303 8.73 16 8.44 19 7.38 21 8.12 21Singapore 105.291 8.72 17 8.81 16 8.61 2 8.75 11UK 105.108 8.72 18 8.81 16 8.52 4 8.73 13Ireland 69.879 8.46 19 8.44 19 8.42 7 8.43 17Italy 64.284 8.41 20 7.06 26 6.35 40 6.85 28Australia 59.981 8.37 21 9.50 9 8.28 9 9.13 7New Zealand 44.076 8.17 22 7.38 25 8.10 13 7.59 23Hong Kong 43.094 8.16 23 8.13 21 8.23 11 8.16 20Slovenia 20.178 7.68 24 7.50 23 6.26 43 7.13 25Spain 14.418 7.47 25 7.94 22 7.44 20 7.79 22Cyprus 11.738 7.34 26 5.19 46 6.83 25 5.68 41Hungary 10.351 7.26 27 6.94 27 6.76 27 6.89 27Czech Republic 5.253 6.83 28 7.44 24 6.50 36 7.16 24Estonia 4.628 6.75 29 6.94 27 7.54 18 7.12 26Croatia 4.471 6.73 30 6.00 36 5.54 56 5.86 39South Africa 3.701 6.61 31 4.75 52 6.06 46 5.14 49Greece 3.553 6.59 32 5.88 38 6.03 50 5.92 35Portugal 3.485 6.58 33 6.75 29 6.75 28 6.75 29Malaysia 3.007 6.48 34 6.44 32 6.55 34 6.47 31Kuwait 2.407 6.34 35 5.19 46 6.04 49 5.44 46Slovakia 2.122 6.26 36 6.50 30 6.70 30 6.56 30Russia 1.567 6.07 37 6.06 35 4.59 72 5.62 42Argentina 1.512 6.05 38 6.25 33 5.86 52 6.13 34Latvia 1.182 5.89 39 5.63 39 6.59 32 5.91 36Venezuela 1.046 5.82 40 4.25 56 5.22 60 4.54 60Saudi Arabia 1.040 5.81 41 3.19 71 4.80 68 3.67 7028 © The Economist Intelligence Unit 2007

AppendixInnovation: Transforming the way business creates2007-2011Innovation performanceInnovation enablersExpectedinnovationperformanceindexRankGrowth expectedduring the next5 yearsExpectedchangein rankExpected directinputs indexRankExpectedinnovationenvironmentindexRankExpectedaggregateinnovationenablers indexRankJapan 9.91 1 -0.9 0 9.56 12 7.36 25 9.01 14Switzerland 9.80 2 1.0 0 10.00 1 8.53 4 9.63 2USA 9.56 3 0.9 0 10.00 1 8.53 5 9.63 3Sweden 9.55 4 1.1 0 10.00 1 8.45 9 9.61 4Finland 9.38 7 -0.4 -2 10.00 1 8.33 10 9.58 5Germany 9.51 5 1.3 1 9.63 7 8.22 13 9.27 9Denmark 9.32 9 0.3 -2 10.00 1 8.55 3 9.64 1Taiwan 9.42 6 1.6 2 9.25 13 7.71 21 8.87 16Netherlands 9.11 13 -0.1 -4 9.63 7 8.33 11 9.30 8Israel 9.33 8 2.5 2 9.63 7 7.44 23 9.08 12Austria 9.16 10 2.8 1 8.81 18 7.82 20 8.57 18France 9.15 12 2.8 0 9.63 7 7.95 16 9.21 10Canada 9.15 11 3.5 2 9.94 6 8.28 12 9.52 6Belgium 9.00 15 2.2 -1 9.25 13 7.92 18 8.92 15South Korea 8.97 17 2.1 -2 9.19 17 7.00 35 8.64 17Norway 8.94 18 2.4 -2 8.50 19 7.92 19 8.35 20Singapore 9.03 14 3.5 3 9.25 13 8.67 2 9.11 11UK 9.00 16 3.2 2 9.25 13 8.47 8 9.05 13Ireland 8.60 20 1.6 -1 8.50 19 8.74 1 8.56 19Italy 8.74 19 3.9 1 7.25 27 6.83 37 7.15 29Australia 8.50 21 1.5 0 9.63 7 8.47 7 9.34 7New Zealand 8.42 22 3.0 0 7.69 23 8.18 14 7.81 23Hong Kong 8.24 23 1.0 0 8.13 21 8.50 6 8.22 21Slovenia 7.91 24 3.0 0 7.63 24 6.72 41 7.40 27Spain 7.57 27 1.4 -2 8.00 22 7.67 22 7.92 22Cyprus 7.85 25 6.9 1 5.69 48 7.06 32 6.03 45Hungary 7.78 26 7.2 1 7.44 26 7.34 26 7.41 26Czech Republic 7.07 31 3.5 -3 7.50 25 7.22 28 7.43 25Estonia 7.07 30 4.7 -1 7.25 27 7.98 15 7.43 24Croatia 7.32 29 8.8 1 6.63 35 5.91 58 6.45 36South Africa 7.46 28 12.8 3 5.50 50 6.67 42 5.79 48Greece 6.80 34 3.2 -2 6.00 43 6.41 47 6.10 42Portugal 6.98 32 6.2 1 7.25 27 7.05 33 7.20 28Malaysia 6.89 33 6.3 1 7.06 30 6.53 45 6.93 31Kuwait 6.43 38 1.3 -3 5.25 53 6.15 51 5.48 55Slovakia 6.62 35 5.7 1 6.81 31 7.28 27 6.93 32Russia 6.58 36 8.4 1 6.44 39 5.39 67 6.18 41Argentina 6.26 43 3.5 -5 6.50 38 6.03 56 6.38 39Latvia 6.52 37 10.6 2 6.31 40 7.21 29 6.54 35Venezuela 6.21 45 6.7 -5 4.81 56 5.01 71 4.86 59Saudi Arabia 6.28 41 8.1 0 3.31 73 5.59 63 3.88 73© The Economist Intelligence Unit 2007 29

AppendixInnovation: Transforming the way business creates2002-2006Innovation performanceInnovation enablersPatentsper mInnovationperformanceindexRankDirectinputsindexRankInnovationenvironmentindexRankAggregateinnovationenablers indexRankBulgaria 1.000 5.79 42 5.63 39 5.51 58 5.59 43UAE 0.981 5.78 43 4.25 56 6.75 29 5.00 53Cuba 0.981 5.78 44 6.50 30 3.40 81 5.57 44Mexico 0.930 5.74 45 5.00 48 6.34 41 5.40 47Costa Rica 0.892 5.72 46 5.56 42 6.48 37 5.84 40Chile 0.858 5.69 47 5.94 37 7.66 17 6.46 32Brazil 0.810 5.66 48 5.50 44 6.79 26 5.89 37Poland 0.805 5.65 49 6.25 33 6.57 33 6.35 33Bahrain 0.704 5.57 50 4.38 54 6.61 31 5.05 51Lithuania 0.653 5.52 51 5.63 39 6.43 39 5.87 38Ukraine 0.513 5.37 52 5.25 45 3.82 78 4.82 56Thailand 0.463 5.30 53 3.88 61 6.10 45 4.54 59Romania 0.426 5.25 54 4.69 53 5.85 53 5.04 52Jordan 0.405 5.22 55 3.81 63 6.06 47 4.49 61Turkey 0.400 5.21 56 4.38 54 5.93 51 4.84 54Qatar 0.372 5.17 57 4.88 50 6.47 38 5.35 48India 0.371 5.16 58 4.88 50 5.70 54 5.12 50China 0.326 5.08 59 5.56 42 5.54 57 5.56 45Philippines 0.222 4.84 60 4.06 60 6.05 48 4.66 58Colombia 0.219 4.83 61 4.19 58 6.15 44 4.78 57Kazakhstan 0.166 4.66 62 3.19 71 4.69 71 3.64 74Kenya 0.156 4.62 63 2.88 77 4.15 76 3.26 76Ecuador 0.154 4.61 64 3.06 74 5.07 61 3.67 71Tunisia 0.151 4.60 65 4.13 59 4.97 64 4.38 62El Salvador 0.149 4.59 66 3.38 68 6.29 42 4.25 64Serbia 0.134 4.52 67 4.94 49 4.59 73 4.83 55Peru 0.127 4.49 68 3.38 68 5.58 55 4.04 65Egypt 0.097 4.32 69 3.56 66 4.97 65 3.98 67Azerbaijan 0.090 4.27 70 3.44 67 4.74 69 3.83 69Dominican Republic 0.086 4.24 71 3.63 65 4.99 63 4.03 66Sri Lanka 0.061 4.03 72 3.88 61 5.44 59 4.34 63Morocco 0.040 3.77 73 3.31 70 5.05 62 3.83 68Indonesia 0.039 3.75 74 3.19 71 4.72 70 3.65 73Nigeria 0.019 3.29 75 1.75 81 4.84 67 2.68 81Algeria 0.015 3.16 76 3.00 75 3.82 79 3.24 77Iran 0.014 3.12 77 3.75 64 3.42 80 3.65 72Pakistan 0.011 2.97 78 2.63 78 4.55 75 3.20 78Vietnam 0.009 2.83 79 3.00 75 4.96 66 3.59 75Bangladesh 0.002 1.82 80 2.25 80 4.56 74 2.94 79Angola 0.001 1.44 81 1.19 82 2.82 82 1.68 82Libya 0.001 1.44 81 2.38 79 4.01 77 2.86 80World average 6.22 5.90 6.24 6.01Note: Patents data are averaged over 2002–05 and expressed as patents per million population for each country.The innovation enablers indexes is based on the average for 2002–06.30 © The Economist Intelligence Unit 2007

AppendixInnovation: Transforming the way business creates2007-2011Innovation performanceInnovation enablersExpectedinnovationperformanceindexRankGrowth expectedduring the next5 yearsExpectedchangein rankExpected directinputs indexRankExpectedinnovationenvironmentindexRankExpectedaggregateinnovationenablers indexRankBulgaria 6.21 46 7.2 -4 5.88 46 6.36 49 6.00 46UAE 6.22 44 7.6 -1 4.81 56 6.81 38 5.31 56Cuba 6.14 51 6.2 -7 6.69 33 4.18 81 6.06 43Mexico 6.41 39 11.6 6 5.94 44 6.40 48 6.05 44Costa Rica 6.27 42 9.7 4 6.19 41 7.03 34 6.40 38Chile 6.20 48 8.8 -1 6.69 33 7.93 17 7.00 30Brazil 6.06 52 7.2 -4 6.13 42 6.84 36 6.30 40Poland 6.14 50 8.6 -1 6.81 31 7.18 30 6.91 33Bahrain 6.20 47 11.3 3 5.19 54 6.76 40 5.58 53Lithuania 6.28 40 13.8 11 6.63 35 7.13 31 6.75 34Ukraine 6.19 49 15.3 3 5.94 44 4.85 73 5.67 52Thailand 5.37 59 1.3 -6 4.00 65 6.03 57 4.51 64Romania 5.93 53 12.9 1 5.44 52 6.43 46 5.69 51Jordan 5.35 60 2.6 -5 4.00 65 6.04 55 4.51 63Turkey 5.61 58 7.6 -2 4.63 59 6.66 43 5.13 57Qatar 5.81 55 12.5 2 5.50 50 7.39 24 5.97 47India 5.74 56 11.1 2 5.56 49 6.13 52 5.70 50China 5.82 54 14.5 5 6.56 37 6.07 53 6.44 37Philippines 5.33 62 10.2 -2 4.69 58 6.31 50 5.09 58Colombia 5.62 57 16.4 4 5.19 54 6.64 44 5.55 54Kazakhstan 5.09 63 9.3 -1 3.50 69 5.20 69 3.93 72Kenya 4.78 68 3.4 -5 2.88 78 4.56 78 3.30 78Ecuador 4.77 69 3.5 -5 3.31 73 4.97 72 3.73 75Tunisia 4.85 67 5.4 -2 4.31 60 5.38 68 4.58 61El Salvador 4.91 65 6.9 1 3.63 68 6.78 39 4.41 65Serbia 5.34 61 18.0 6 5.75 47 5.81 59 5.77 49Peru 4.57 71 1.7 -3 3.50 69 5.54 65 4.01 69Egypt 5.00 64 15.6 5 4.25 62 5.64 62 4.60 60Azerbaijan 4.85 66 13.6 4 4.13 64 5.04 70 4.35 68Dominican Republic 4.64 70 9.5 1 3.94 67 5.66 61 4.37 66Sri Lanka 4.29 72 6.4 0 4.19 63 5.71 60 4.57 62Morocco 3.95 74 4.9 -1 3.44 71 5.44 66 3.94 71Indonesia 3.98 73 6.3 1 3.19 77 5.56 64 3.78 74Nigeria 3.41 77 3.8 -2 2.00 81 4.65 77 2.66 81Algeria 3.64 76 15.1 0 3.38 72 4.76 74 3.72 76Iran 3.68 75 17.9 2 4.31 60 4.50 79 4.36 67Pakistan 3.41 78 14.8 0 3.31 73 4.71 75 3.66 77Vietnam 3.22 79 13.8 0 3.31 73 6.05 54 4.00 70Bangladesh 1.89 81 4.0 -1 2.38 80 4.71 76 2.96 80Angola 1.90 80 32.6 1 1.75 82 3.73 82 2.24 82Libya 1.62 82 12.9 -1 2.88 78 4.23 80 3.21 79World average 6.56 6.89 6.27 6.63 6.36The world average is the arithmetic average of the innovation index for each of the 82 countries.© The Economist Intelligence Unit 2007 1

AppendixInnovation: Transforming the way business createsAppendix B: Innovation indicesWe constructed three indices of innovation for 82countries, drawing on the Economist IntelligenceUnit’s Business Environment Ranking (BER) model.The first index measures innovation output or performance,and is based on international patents data.There are also two composite indices, constructedon the basis of BER scores, that measure innovationinputs, or innovation enablers. The first covers directinnovation inputs and the second the innovation environment,the broad economic, social and politicalbackdrop that facilitates innovation activity.There is a fourth aggregate innovation inputs orinnovation enablers index that combines the directinnovation and the innovation environment indexes.The weights used—0.7 for direct inputs and 0.3 forthe environment index—correspond to weights basedon the estimated coefficients in the regression equationdescribed below that relates innovation performanceto innovation inputs.The patents data are 2002-05 averages, whereasthe innovation enablers are indices based on 2002-06averages. All indices are expressed on a 1 to 10 scaleusing the following conversion formula:9 * (indicator value for country - minimum valuefor the indicator)/(maximum value for the indicator– minimum value for the indicator) + 1Because the BER contains forward-looking assessments(for the next five years), as well as historicaldata, we are also able to construct forecast innovationperformance indices (average for 2007-11).Innovation performanceAlthough the use of patent data has a number ofproblems, this is the single best available proxymeasure for innovation outputs—a common conclusionthat is bolstered by our examination of alternativeindicators of innovation performance (seebelow). The data are averaged over 2002-05 andexpressed in terms of patents per million populationfor each country. The natural logarithms ofpatents per million population are converted intoan index on a 1-10 scale on the basis of the formulagiven above. The maximum value is taken to be 800,which is below the actual value for Japan of 1,213per million population. Japan scores a maximum of10 on the index, but the latter procedure reduces itsdifferential with other countries and offsets to someextent the upward bias for Japan in the JPTO data.For example, in Japan, a different patent applicationhad until recently to be submitted for each claim; inother countries multiple claims can be made in eachapplication. This helps to explain the exceptionallyhigh level of patenting activity in Japan.A composite measure of performance can be constructedthat consists of these indicators as well asour patents measure. The composite index gives verysimilar results as the patents only measure (for example,the top three remain Japan, Switzerland and theUS). Furthermore, the relationship with innovationdrivers is very similar to the results obtained for patentsonly—some 90% of the inter-country variation inthe composite performance index is explained by thetwo drivers indices (see below, section on explaininginnovation performance).On the following page is a correlation matrix forthe various innovation performance indicators.Patents are most highly correlated with scientificcitations and less so, but still considerably, with theother two indicators. But the correlation betweenpatents and each of the other indicators is higherthan (in one case equal to) the correlation betweenany two of the other indicators. This also suggests32 © The Economist Intelligence Unit 2007

AppendixInnovation: Transforming the way business createsPatentsMedium- andhigh-techmanufacturingCitationsSurvey ontechnologyabsorptionPatents1.00Medium- and high-tech manufacturing0.751.00Citations0.900.701.00Survey on technology absorption0.700.590.59 1.00that patents are a robust measure of innovationperformance.Finally, one of the possible criticisms of usingpatents data is that there are many other significantforms of innovation activity not captured by thenumber of patents. Comparable cross-country surveyson various types of innovation are generally unavailable.A rare exception is the European Commission’speriodic Community Innovation Survey (CIS), whichtries to measure various forms of innovation by firms.However, the surveys are conducted only in someEuropean countries and may also suffer from defects(revealed, for example, by implausibly big variationsin results for particular countries between years),such as insufficient comparability across even thesmall sample of relatively homogeneous countries.It has also been found that the relationship betweenthe CIS results and other indicators of innovationtends to be quite weak.Nevertheless, we look at the results and constructa composite measure of innovation based on foursurvey questions from the CIS (European InnovationScoreboard 2005). Data are available for 2002for up to 25 European countries and for 2002 for 16countries.The CIS questions were:1. SMEs innovating in-house (% of all sample SMEs).Innovative firms are defined as those that introducednew products or processes.2. Innovation expenditures (% of sample firmsturnover). Innovation spending includes the fullrange of innovation activities: R&D, machinery andequipment linked to product and process innovation,spending to acquire patents and licences, industrialdesign, training and the marketing of innovations.3. Sales of new-to-market products (% of turnoverof sample firms).4. Sales of new to firms, but not new-to-marketproducts (% of turnover of sample firms)We then look at the relationship for 2000 and2002 between the CIS-based index and our patentsindex. The correlation based on data for all availablecountries is for both years in the modest 0.5–0.55range, but rises to a relatively high 0.75 if implausiblyhigh scores for Portugal and Spain are excludedand treated as outliers (the alternative is to take theresult at face value and conclude that south Europeanfirms have very high rates of innovation).Overall, this exercise seems to suggest that ourpatents data, to a significant extent, is also a proxyfor apparently unrelated forms of innovation performance.Direct innovation inputsThis index is based on an unweighted average of thefollowing indicators:n R&D as a % of GDPn Quality of the local research infrastructuren Education of the workforce© The Economist Intelligence Unit 2007

AppendixInnovation: Transforming the way business createsn Technical skills of the workforcen Quality of IT and communications infrastructuren Broadband penetrationAll indicators are rated on 1-5 scale based onoriginal raw values where relevant and as defined below.The composite index is converted to a 1-10 scale.Innovation environmentThe innovation environment index is based on thefollowing 12 factors:n Political stabilityn Macroeconomic stabilityn The institutional frameworkn The regulatory environmentn Tax regimen Flexibility of labour marketn Openness of national economy to foreigninvestmentn Ease of hiring foreign nationalsn Openness of national culture to foreign influencen Popular attitudes towards scientific advancementsn Access to investment financen Protection of intellectual propertyThe source for all the indicators is the BER, withthe exception of popular attitudes towards science,which is taken from the World Values Survey.To construct the composite innovation environmentindex, the 12 indicators were weighted on thebasis of our survey results on the relative importancefor innovation of the various factors.Weights for the innovation environment indexPolitical stability 0.109Macroeconomic stability 0.089Institutional framework 0.107Regulatory environment 0.108Tax regime 0.075Flexibility of labour market 0.072Openness of national economyto foreign investment 0.083Ease of hiring foreign nationals 0.069Openness of national cultureto foreign influence 0.063Popular attitudes towardsscientific advancements 0.058Access to investment finance 0.056Protection of intellectual property 0.112Explaining innovation performanceThe explanatory power of our two input indices inexplaining innovation performance across countriesis very high. A regression for the 82 countries showsthat the two indices explain more than 90% of theinter-country variation in patents per million population.The direct inputs index has a more powerfulinfluence on international patenting, but the innovationenvironment also has a significant impact.Dependent variable: International patents indexCoefficientst StatConstant 0.3603 1.0552Innov1 0.2944 3.3845Innov2 0.6779 13.0785Japan 1.4383 2.2563Adj R2 0.915N 82Innov1: Innovation environment indexInnov2: Direct innovation inputs indexJapan: Dummy variable taking value of 1 for Japan, 0for other countries.International patents index in some major economies,2002-05 av, per million populationPredictedActualFrance 8.97 8.90Germany 9.18 9.38Netherlands 9.35 9.12Ireland 8.56 8.4634 © The Economist Intelligence Unit 2007

AppendixInnovation: Transforming the way business createsSweden 9.52 9.45Switzerland 9.56 9.71United States 9.56 9.48United Kingdom 8.84 8.72Brazil 6.09 5.66China 5.76 5.08India 5.34 5.16Mexico 5.62 5.74Russia 5.82 6.07The estimated equation above can also be used topredict innovation performance over the next fiveyears. Forecast values of the two innovation inputindices, based on BER forecast scores, are insertedinto the equation to yield forecasts of innovationperformance (based on expected patents activity)in 2007-11 (the procedure assumes that estimatingerrors for the performance equation in 2002-06 alsoapply in 2007-11).Predicted values based on above regression equation.The business environment rankings methodologyThe business rankings model measures the qualityor attractiveness of the business environment in the82 countries covered by The Economist IntelligenceUnit’s Country Forecasts using a standard analyticalframework. It is designed to reflect the main criteriaused by companies to formulate their global businessstrategies, and is based not only on historicalconditions but also on expectations about conditionsprevailing over the next five years. This allows theEconomist Intelligence Unit to use the regularity,depth and detail of its forecasting work to generate aunique set of forward-looking business environmentrankings on a regional and global basis.The business rankings model examines tenseparate criteria or categories, covering the politicalenvironment, the macroeconomic environment,market opportunities, policy towards free enterpriseand competition, policy towards foreign investment,foreign trade and exchange controls, taxes, financing,the labour market and infrastructure. Eachcategory contains a number of indicators which areassessed by the Economist Intelligence Unit for thelast five years and the next five years. The number ofindicators in each category varies from five (foreigntrade and exchange regimes) to 16 (infrastructure),and there are 91 indicators in total.Almost half of the indicators are based on quantitativedata (for example, GDP growth), and are mostlydrawn from national and international statisticalsources (see sources below) for the historical period(2002-06). Scores for the forecast period (2007-11)are based on Economist Intelligence Unit forecasts.The other indicators are qualitative in nature (forexample, quality of the financial regulatory system),and are drawn from a range of data sources and businesssurveys, frequently adjusted by the EconomistIntelligence Unit, for 2002-06. All forecasts for thequalitative indicators covering 2007-11 are based onEconomist Intelligence Unit assessments.Calculating the rankingsThe rankings are calculated in several stages. First,each of the 91 indicators is scored on a scale from 1(very bad for business) to 5 (very good for business).The aggregate category scores are derived on thebasis of simple or weighted averages of the indicatorscores within a given category. These are thenadjusted, on the basis of a linear transformation, toproduce index values on a 1-10 scale. An arithmeticaverage of the ten category index values is then cal-© The Economist Intelligence Unit 2007

AppendixInnovation: Transforming the way business createsculated to yield the aggregate business environmentscore for each country, again on a 1-10 scale.SourcesThe main sources used for the historical period scoresinclude CIA, World Factbook; Economist IntelligenceUnit, Country Risk Service; Economist Intelligence Unit,Country Finance; Economist Intelligence Unit, CountryCommerce; Encyclopaedia Britannica, Annual Yearbook;Freedom House, Annual Survey of Political Rights andCivil Liberties; Heritage Foundation, Index of EconomicFreedom; IMF, Annual Report on Foreign ExchangeRestrictions; International Institute for ManagementDevelopment, World Competitiveness Yearbook; InternationalLabour Organisation, International Labour StatisticsYearbook; UN Development Programme, HumanDevelopment Report; UN, Monthly Bulletin of Statistics;UN, Energy Statistics Yearbook; Social Security Administration,Social Security Programs Throughout the World;World Bank, World Development Report, World DevelopmentIndicators and Doing Business; World EconomicForum, Global Competitiveness Report 2006.36 © The Economist Intelligence Unit 2007

AppendixInnovation: Transforming the way business createsAppendix C: Survey resultsIn November 2006 the Economist Intelligence Unit conducted an online survey of 485 senior global executiveson their companies’ approach to innovation. Our sincere thanks go to all those who took part in the survey.Please note that not all answers add up to 100%, because of rounding or because respondents were able toprovide multiple answers to some questions.How important is innovation to your organisation’slong-term success? (% of respondents)Critically important 47%Important 40%Somewhat important 12%Somewhatunimportant 1%How would you describe the origins of your organisation’smost successful innovations? Select all that apply.(% of respondents)Inadequacy in a process, product or service that was rectifiedChanges in industry or market structureChanges in consumer tastes or habitsDemographic changes13%Scientific breakthroughs (eg, sequencing the genome)21%Planned investment in innovation programmes29%Other7%39%46%49%For your organisation, is successful innovation more or lessimportant than other metrics of success?For my organisation, innovation is more important than...Select all that apply (% of respondents)Sales growthShare priceOperational efficiencyMarket shareProfit marginNone of the above21%22%26%32%36%38%In which area of your organisation are ideas for new products/services/processes most often generated? Select up to three.(% of respondents)R&DSales and marketingLogistics/supply chain/procurement10%General management team (including CEO)Board of directors7%Finance and accounting9%Risk/compliance/legal9%HR2%Strategy/planning/business developmentOperationsOther5%23%32%42%40%50%© The Economist Intelligence Unit 2007 7

AppendixInnovation: Transforming the way business createsWhich of the following steps does your organisation generallytake in support of planned innovation initiatives?Select all that apply. (% of respondents)How does your organisation incentivise employees to suggestand develop innovations? Select all that apply.(% of respondents)Create a dedicated team not distracted by current business operations41%Empower the internal venture to take appropriate risksProvide appropriate funding to the ventureProvide senior executive support to the ventureInsist on objective evaluation of progress by a senior executive team27%None of the above6%Don’t know3%37%39%Approximately how many documented suggestions/proposalsfor innovations does your organisation consider for eachsuccessful new product/service/process it rolls out?(% of respondents)50%Time off from regular work to pursue innovation22%Money to buy special equipment17%Special access to company resources27%Stock options9%Pay raises22%Stock in spin-offs4%Public recognition by corporate leadersPrizes or presents33%None of the above20%Other5%38%Fewer than 10 29%10 to 25 23%25 to 50 10%50 to 100 8%100 to 500 3%500 to 1,000 1%More than 1,000 1%Don’t know 24%Generally speaking, how do ideas for innovations start togain momentum within your organisation?(% of respondents)Backing from aboard director 28%Support fromthe C-suite 18%Approval by theresearch director 11%Support frommiddle management 29%Support from therank-and-file 11%Other 3%38 © The Economist Intelligence Unit 2007

AppendixInnovation: Transforming the way business createsFrom what outside sources does your organisation most oftenget ideas for new products/services/processes? Select up to three.(% of respondents)Approximately what percentage of your organisation’semployees are scientists or engineers?(% of respondents)Shareholders7%Customers and market researchSuppliers23%Partners (alliances or joint ventures)34%CompetitorsAcquired companies11%Consulting firms17%Universities11%Conferences13%Media9%Other2%41%72%None 11%Less than 5% 28%5-10% 14%10-15% 9%15-20% 7%20-25% 6%More than 25% 18%Don’t know 6%Approximately how much does your organisation invest inR&D as a proportion of total annual revenue?(% of respondents)Less than 1% 14%1-2% 10%If you sometimes obtain innovations from universities, whatform of technology transfer does your organisation favour?(% of respondents)Exclusive license15%Contract with university department19%Hiring key personnel involved in the invention or discovery19%Consulting jobs for academic developers involved19%Not applicable/don’t know53%2-3% 12%3-5% 16%5-8% 10%8-12% 9%More than 12% 10%Don’t know 19%Of the money your organisation invests in R&D, approximatelyhow much comes from government agencies or other public bodies?(% of respondents)None 61%1-10% 9%10-20% 4%20-30% 3%30-50% 3%More than 50% 5%Don’t know 15%© The Economist Intelligence Unit 2007

AppendixInnovation: Transforming the way business createsDoes your organisation reside in, or have close connectionsto, a high-tech cluster (eg, California’s Silicon Valley, UK’sCambridgeshire Fens, Israel’s Silicon Wadi)?(% of respondents)Yes 13%No 87%Generally speaking, how quickly does your company expectto recover its innovation-based investment costs?(% of respondents)Within a year or less 13%Within 2 years 40%Within 4 years 25%Within 7 years 7%Within 10 yearsor more 5%Don’t know 10%Approximately how many institutions of technologicalexcellence (eg, universities, government labs, contractresearch labs, think tanks) reside within the cluster?(% of respondents)Fewer than 5 13%5 to 20 25%20 to 40 17%More than 40 15%Don’t know 30%Generally speaking, how quickly does your company expectto recover the cost of other forms of capital investment(eg, building a new factory)? (% of respondents)Within a year or less 5%Within 2 years 23%Within 4 years 29%Within 7 years 14%Within 10 yearsor more 12%Don’t know 17%How knowledgeable about your business are the financialservices within the cluster?(% of respondents)Excellent 20%Good 26%Adequate 19%Poor 9%Non-existent 3%Don’t know 24%40 © The Economist Intelligence Unit 2007

AppendixInnovation: Transforming the way business createsTo what extent are your company’s revenues derived fromnew products or services? Please complete the phrase “Morethan half of my organisation’s annual global revenue comesfrom products or services that are approximately...”(% of respondents)1 year old 8%2 years old 15%3 years old 20%5 years old 28%10 years old 13%15 years old 4%20 years old 4%25 years oldor older 8%If your organisation was looking for a country in which to conduct innovationactivities, how important are these technological factors to the decision?(% of respondents)Total spending of R&D in the country15% 46% 36% 3%Spending on R&D by the private sector19% 46% 32% 3%Spending on R&D by the public sector (government)14% 43% 40% 3%Availability of scientists and engineers48%37% 4 12% 2%Availability of university graduates47% 43% 9% 2%Technical skills of the workforce49%42% 7% 2%Quality of IT and communications infrastructure53% 39% 6% 2%Broadband penetration28% 51% 19%2%Very significant Somewhat significant Not significant Don’t knowIf your organisation was looking for a country in which to conduct innovationactivities, how important are these national characteristics to the decision?(% of respondents)Political stability56% 36% 6% 1Macroeconomic stability39% 51% 9% 2%Institutional framework (eg, public administration, rule of law, extent of corruption)53% 40% 5% 2%Regulatory environment (eg, ease of doing business, licensing, opening new businesses)54%39% 4 5% 1Tax regime (eg, tax burden, fairness and consistency of tax system, incentives for investment)30% 52% 17% 1Flexibility of labour market27%53% 18% 2%Openness of national economy to foreign investment35% 49% 14% 2%Ease of hiring foreign nationals26% 51% 21%2%Openness of national culture to foreign influence22% 49% 25% 3%Popular attitudes toward scientific advancements20% 42% 31% 6%Access to investment finance20% 45% 32% 3%Protection of intellectual property60% 29% 10% 2%Very significant Somewhat significant Not significant Don’t know© The Economist Intelligence Unit 2007 1

AppendixInnovation: Transforming the way business createsIn which region are you personally based?(% of respondents)Asia-Pacific 20%Latin America 4%North America 21%Eastern Europe 9%Western Europe 40%Middle East& Africa 6%What are your organisation’s global annual revenuesin US dollars?(% of respondents)$500m or less 48%$500m to $1bn 10%$1bn to $5bn 16%$5bn to $10bn 6%$10bn or more 20%361326What is your primary industry?(% of respondents)Aerospace/Defence2%Agriculture and agribusiness1%Automotive2%Chemicals2%Construction and real estate3%Consumer goods5%Education2%Energy and natural resources4%Entertainment, media and publishing2%Financial servicesGovernment/public sector4%Healthcare, pharmaceuticals and biotechnology6%IT and technology14%Logistics and distribution

AppendixInnovation: Transforming the way business creates3.571428Which of the following best describes your title?(% of respondents)Board member4%CEO/president/managing director14%CFO/treasurer/comptroller3%CIO/technology director4%Other C-level executive6%SVP/VP/director13%Head of business unit8%Head of department14%Manager5Other109%204027%What are your main functional roles? Please choose no morethan three functions. (% of respondents)Customer service11%FinanceGeneral managementHuman resources3%Information and research14%IT16%Legal4%Marketing and salesOperations and production12%Procurement4%Risk14%R&D10%Supply-chain management4%Strategy and business developmentOther2%24%25%33%40%While every effort has been taken toverify the accuracy of this information,neither The Economist Intelligence UnitLtd. nor the sponsor of this report canaccept any responsibility or liability forreliance by any person on this whitepaper or any of the information, opinionsor conclusions set out in the white paper.© The Economist Intelligence Unit 2007

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