Necessity is the mother of invention. Indeed, during the global coronavirus crisis, the world needed to move work, education and play to the digital realm very quickly. One example of an accelerated adjustment is how Slack, the online collaboration hub, has managed to innovate to help companies around the world pivot to remote working (as well as hiring, onboarding and training) within days. Innovation in such times is crucial, but may also increase inequalities among countries, sectors and groups of population.
As the world continues to face a prolonged, massive health crisis, and prepares for the accompanying economic and social shocks, the question of “Who Will Finance Innovation?”, the theme of this year’s Global Innovation Index (GII), is critical in solving the seemingly insurmountable problems ahead of us.
Any crisis calls for a variety of short-term responses to the emergency at hand. But longer-term objectives must be safeguarded. Innovation financing is generally regarded as a long-term investment (especially in science and technology); a growing concern is that it may be sacrificed to more immediate economic and social demands.
A collaboration between INSEAD, Cornell University and the World Intellectual Property Organization (WIPO), the GII measures a country’s innovation performance based on its innovation inputs (such as national R&D spending, higher education, the regulatory environment and infrastructure) and innovation outputs (like intellectual property or other knowledge creation). This 13th edition of the index ranks 131 countries. Our aim is to provide insightful data on innovation and, in turn, assist policymakers in evaluating their innovation performance and making informed innovation policy decisions.
The impact of the current crisis on innovation is uncertain and highly dependent on a range of recovery scenarios, as well as business and innovation practices and policies. In any scenario, financial resources – both private and public – will be strained. Countries and corporations alike might find it harder to pursue investments and innovation. Historically, pandemics have been followed by sustained periods of depressed investment. Investment rates are already low to date, including foreign direct investment, which is now expected to drop sharply in 2020 and 2021.
Yet, prior to Covid-19, financing had been growing and diversifying. Since the financial shock of 2008, there were positive signs of recovery around the globe. Over the last decade, average innovation expenditures worldwide have been growing faster than GDP. In 2017, R&D expenditure grew by 5 percent and by 5.2 percent in 2018 – in line with the strong growth of the pre-crisis period and significantly stronger than global GDP growth. This growth was sustained by increased expenditures in key emerging markets, such as China (14) and India (48), and by leaders in high-income economies.
When governments started to phase out the innovation stimulus measures created after the 2008 crisis, private sector funding drove much of the growth in innovation expenditure. In 2018, the top 2,500 R&D companies invested €823 billion in R&D, an annual increase of 8.9 percent. Venture capital (VC) and other sources of innovation financing were at an all-time high. Novel innovation financing mechanisms, including sovereign wealth funds, IP marketplaces, crowdfunding and fintech, contributed to the spike in innovation finance.
Now, in the time of Covid, financial resources will be more restrained as the International Monetary Fund has predicted global GDP will shrink by 4.9 percent this year. The massive recovery packages announced (such as those by the European Union or the United States (3)) will largely dictate where available resources will go.
Impact of the coronavirus recession
As global economic growth declines this year, the question is whether R&D expenditures will fall or remain resilient in the face of the crisis. Past crises have had heterogeneous effects on different sectors and countries, with some stimulating innovation and others weakening it with austerity measures.
Certain innovative sectors are expected to thrive. Even within such sectors however, the picture will remain contrasted. Let us take the example of information and communication technology (ICT), where software and hardware face different opportunities and challenges.
- Large ICT software firms hold vast cash reserves, and with the pandemic-fuelled increase in internet activity, online education and remote work, revenue may in fact increase for some companies. In the GII, software and ICT represent only 15 percent of R&D top spenders.
- On the other hand, the largest global R&D spending sector, ICT hardware and electronic equipment, will see more direct revenue impact, due to a combination of global supply chain issues and falling consumer demand. Although firms like Samsung, Huawei and Apple have already seen a downturn in their first quarter results, most technology companies have significantly increased their first quarter 2020 R&D expenditures.