The Innovation Paradox: Developing-Country Capabilities and the Unrealized Promise of Technological Catch-Up

Abstract

Landes’ (1969) classic metaphor of The Unbound Prometheus, referring to the Greek god who released the power of fire to mankind. Defined as the introduction of new products, technologies, business processes, and ideas in the market, as well as the invention of new ideas, innovation drives Schumpeter’s creative destruction process (Schumpeter [1942] 2008), underlies modern growth theory, and is the critical ingredient in historical accounts of how countries achieve prosperity. In turn, the gains from Schumpeterian catch-up afforded to follower countries, arising from the radiation of ideas, products, and technologies to developing countries, represents an externality of truly historic proportions that should rise with increased distance from the technological frontier. Yet Prometheus remains bound in developing countries. This study documents that, despite the vast potential returns to innovation, developing countries invest far less, measured along a variety of dimensions, than advanced countries. Firms and governments appear to be leaving billions of dollars on the table in forgone productivity growth and lost competitiveness. Indeed, policy advice to move into production baskets thought to be more growth-friendly misses the critical point that countries unable to innovate in their present industries are unlikely to do so in new industries. To explain this innovation paradox the report focuses on three central determinants of innovation performance: (1) the critical complements to innovation investment needed to realize the high potential returns; (2) the range of firm capabilities required to undertake innovation and take it to market; and (3) the required government capabilities for implementing effective innovation policies. The analysis draws on two important traditions, the neoclassical and the National Innovation Systems (NIS) literatures, highlighting the common ground between them, with the ultimate goal of contributing to more coherent and effective policy making in developing countries.