Creative Productivity Index Analysing creativity and innovation in Asia A report by The Economist Intelligence Unit for the Asian Development Bank August 2014 Commissioned by www.eiu.com Creative Productivity Index: Analysing creativity and innovation in Asia Contents Preface 2 Disclaimer 3 Executive summary 4 Chapter 1: Introduction to the Creative Productivity Index 9 Chapter 2: The production of innovation: Methodology and indicators 12 Chapter 3: Index results and economy summaries 15 Conclusion 31 Appendix 35 Literature 79 © 2014 The Economist Intelligence Unit Ltd., and Asian Development Bank. All rights reserved. The fi ndings and methodology paper was written by The Economist Intelligence Unit Ltd. and commissioned by Asian Development Bank. All intellectual property rights in and to the Creative Productivity Index and its methodology are owned exclusively by The Economist Intelligence Unit Ltd. The fi ndings of the Creative Productivity Index, in the context of this research for the Asia-Pacifi c region, are jointly owned by The Economist Intelligence Unit Ltd., and Asian Development Bank. 1 Creative Productivity Index: Analysing creativity and innovation in Asia Preface This report presents the results and analysis of the Creative Productivity Index (CPI) for a select number of Asian economies. The CPI was built by The Economist Intelligence Unit (The EIU). The Asian Development Bank (ADB) commissioned the work on developing the CPI as part of an overall study on Asia’s knowledge economies. The report provides a benchmarking of a number of economies in Asia on creative productivity, an important attribute for strengthening knowledge-based economic development. This index gives policymakers a unique tool to assess how to foster creativity and innovation in Asia. Innovation-led growth is crucial for developing Asia to maintain and accelerate the pace of growth of its economies. Although the CPI has been analysed for a single point in time, it can be updated regularly based on the interests of policymakers and researchers. Developing Asian economies have done exceedingly well in terms of growth in recent years and a number of them have also been investing signifi cantly in innovation and research and development (R&D). A unique contribution of the CPI is to raise awareness of the productivity and effi ciency of various investments that contribute to knowledge based economic development. While many developing economies of Asia need to increase the quantity of their investments, whether for higher education and training, ICT or R&D, they also equally need to address how effectively their investments and inputs are translating into outputs in the most effective and effi cient manner. The CPI provides a valuable tool to measure such productivity. 2 Creative Productivity Index: Analysing creativity and innovation in Asia Disclaimer The views and opinions expressed in this publication are those of the authors and do not necessarily refl ect the views and policies of ADB or its Board of Governors or the governments they represent nor do they represent the views of The EIU or its affi liates. Neither ADB nor The EIU can accept any responsibility or liability for reliance by any person on the content of this publication. The report follows the editorial style of The EIU and follows the ADB nomenclature for countries and territories. By making any designation or reference to any particular territory or geographic area, or by using the term “country” in this document, ADB and The EIU do not intend to make any judgements as to the legal or other status of any territory or area. 3 Creative Productivity Index: Analysing creativity and innovation in Asia Executive Summary Many Asian countries are suffering diminishing returns from capital investment, cheap labour and natural resources, and having to re-evaluate economic growth strategies as a result. The transition from resource-driven, export-led economies to more sustainable growth models based on human capital development, new technology and innovation will be a key challenge for many Asian countries over the next decade. In more advanced economies, long-term economic growth is ultimately sustained through innovation and creativity. Developing Asian countries must cultivate creativity and innovation if they are to achieve sustainable high-income status. The Creative Productivity Index (CPI) aims to give policymakers a unique tool to measure progress in fostering creativity and innovation in 22 Asian economies (along with the United States and Finland for comparison purposes). The CPI measures the innovative and creative capacity of economies by relating creative inputs to outputs. On the input side, creative productivity is measured on three dimensions: the capacity to innovate, incentives to innovate and how conducive the environment is to innovation. The output side measures innovations by considering both conventional indicators, such as the number of patents fi led, as well as a broader set of measures of knowledge creation. Unlike other innovation-related indexes, such as the Global Innovation Index published by INSEAD and the World Intellectual Property Organization, the Knowledge Economy Index published by the World Bank and the Global Creativity Index published by the Martin Prosperity Institute, the CPI focuses on effi ciency. It measures how profi cient economies are at turning innovation “inputs” such as skills or infrastructure into innovation “outputs” such as patents or scientifi c publications. Each economy in the CPI was scored on 36 input indicators and 8 output indicators, and then assigned an effi ciency score based upon the ratio between the two to illustrate how well economies are putting their innovation inputs to effective use. The CPI is also unique because it captures elements of creativity that are more important in non-Organisation of Economic Cooperation and Development (OECD) economies, such as agricultural innovation, and includes two agriculture-specifi c metrics. (See the appendix for a full description of the methodology and list of indicators.) The CPI’s focus on effi ciency identifi es barriers between inputs and outputs, and allows policymakers in resource-constrained environments to focus on the most effective interventions—to eliminate 4 Creative Productivity Index: Analysing creativity and innovation in Asia barriers or to redouble efforts where current policy is working well. Following are the key fi ndings of the CPI. 1. Japan leads the CPI, followed by Finland and the Republic of Korea Japan is most effective at turning creative inputs into outputs. Although the country is eighth in the CPI in terms of creative inputs alone, it has employed its resources well to produce innovation. It tops the ranking, for example, for the number of patents fi led per capita, an issue the government has prioritised in recent years. Finland is second overall in the CPI. It scores well on inputs such as infrastructure, competition, fi nancial institutions and governance, and outperforms most other economies on outputs, with a particularly strong performance in scientifi c output. The Republic of Korea is third overall and the second among Asian economies, and the United States; Taipei,China; and New Zealand round out the top six. Table 1 summarises the ranking of economies in the CPI. The ranks (very high, high, medium and low) are assigned according to an economy’s relative performance in the CPI. Table 1: Ranking economies along the Creative Productivity Index, coloured by ranking: Very high, high, medium and low Very high High Medium Low Economy Overall Input Output Japan 1 8 4 Finland 2 6 1 Republic of Korea 3 9 8 United States 4 3 3 Taipei,China 5 7 9 New Zealand 6 5 5 Hong Kong, China 7 2 2 Australia 8 4 7 Lao People’s Democratic Republic 9 23 17 Singapore 10 1 6 People’s Republic of China 11 11 11 Indonesia 12 21 16 Malaysia 13 10 10 India 14 15 13 Thailand 15 12 12 Viet Nam 16 14 14 Kazakhstan 17 13 15 Philippines 18 17 18 Sri Lanka 19 20 19 Bangladesh 20 22 21 Fiji 21 18 20 Myanmar 22 24 23 Pakistan 23 16 22 Cambodia 24 19 24 Note: Japan and the Republic of Korea are the two leading Asian economies in the Creative Productivity Index (CPI). 2. Cambodia and Pakistan, with much room for improvement, are ranked lowest in the CPI Although Cambodia scores relatively well for fi rm dynamics, including relatively fl exible labour markets, it lags behind other economies in the CPI in most other indicators. It has the most room for improvement in human capital, infrastructure and competition metrics, and poor governance also remains a problem following a disputed election in 2013. Pakistan is ranked 23rd with weaknesses in 5 Creative Productivity Index: Analysing creativity and innovation in Asia fostering a competitive business environment and it provides little incentive for fi rms to innovate. Myanmar is third from bottom, as it lags across all three dimensions of creative inputs (knowledge- skills base, creative destruction, and appropriate institutions). Fiji, Bangladesh and Sri Lanka are also among the bottom six economies in the CPI. 3. Singapore leads the CPI for innovation inputs Singapore provides the starkest example of the importance of effi ciency in turning creative inputs into creative outputs. The city-state is far from an innovation laggard: it is ranked fi rst in the level of creative inputs and sixth in the level of creative outputs. However, given its level of creative inputs, Singapore could be achieving even more creative outputs. Japan; Hong Kong, China; and New Zealand all have a lower level of creative inputs than Singapore, yet achieve a higher level of creative output. This is because Singapore is less effective at turning creative inputs into outputs, as evidenced by its ranking of 10th in the CPI. Singapore’s high creative input score comes from its strong political institutions, intellectual property (IP) protections, investment protection and contract enforcement. Corruption is also rare and the city-state has a very fl exible labour market. Singapore performs relatively poorly in terms of mean years of schooling and the enrolment of students in technical and vocational programmes, where it ranked 13th in the CPI. However, on measures of output, Singapore produces fewer patents than Japan; Taipei,China; and the Republic of Korea, and it is a laggard when it comes to production of books and movies. The reasons behind Singapore’s lagging score on outputs are complex, but The EIU believes that democracy and free debate are critical for innovation and, in the 2013 edition of our global Democracy Index, we rank Singapore lower than Japan; Hong Kong, China; Taipei,China; the Republic of Korea; Australia; and New Zealand on this measure. 4. Finland and Hong Kong, China are best in the CPI for innovation outputs Finland is second overall in the CPI, but fi rst based on outputs alone. This is driven by strong showings in the number of scientifi c publications per capita, its level of export sophistication, agricultural productivity and fi lms produced per capita. Hong Kong, China ranks seventh overall for creative productivity, but is second for outputs among the Asian economies in the CPI. It has high scores for proximity to the total factor productivity frontier (also referred to as the technological frontier, a metric comparing economies’ productivity to a benchmark country—in this case the United States), a high level of export sophistication and the number of fi lms produced per capita. 5. Low- and middle-income economies will benefi t most from policies to increase creative inputs The CPI results show two distinct groups of economies: one group of nine mainly higher-income economies has both high innovation inputs and outputs. The second group of 15 mainly lower-income economies shares both low innovation inputs and outputs. However, a deeper analysis of effi ciency shows that the economies in the second group have the most to gain from policies to improve inputs. Appropriate investments in these economies will have a higher marginal benefi t and could help close the creativity gap between Asian economies. This is partly due to the diminishing marginal returns on creative inputs that richer economies experience, but this remains an encouraging fi nding for often cash-strapped emerging-market governments. This fi nding is shown in Figure 2 (The relationship between creative inputs and outputs). The distribution of creative inputs and outputs across the 6 Creative Productivity Index: Analysing creativity and innovation in Asia economies suggests that the impact of creative inputs on outputs is stronger for lower levels of creative inputs. Graphically, this can be seen in Figure 2 where the slope of the line through the poorer economies is steeper than the line drawn through the rich economies. Understanding the causal drivers of this relationship is a subject for future research. However, the CPI does show cases where economies perform worse in these categories relative to others. For example, the Republic of Korea, while ranked consistently high in all sub-dimensions, appears to be lagging in fi rm dynamics. 6. There are many different dimensions of creativity that are captured in this report Key challenges for policymakers are to understand how increasing certain inputs can lead to an increase in outputs, and how to create an enabling environment for the effective transfer of creative inputs into outputs. Policymakers reading this report can focus on three contributions. First, a systematic literature review established for which creative inputs there is real evidence to suggest they contribute to creative outputs. The literature review ensured that each indicator was chosen on a sound intellectual basis. Though taken together in this study to measure creative effi ciency, each indicator can also be studied on an individual basis. Second, the focus on the concept of creative effi ciency, the effi ciency with which creative inputs are transformed into creative outputs. The focus on effi ciency shows there are some economies where appropriate investments will yield higher marginal benefi ts. Third, the calculation of the CPI to benchmark economies in Asia on creative effi ciency, as well as more traditional measures of inputs and outputs. The performance of leading and laggard economies, as well as the common features of economies which are more effi cient, point to areas of interest for policymakers and for further research. These are discussed in Chapter 3. 7 Creative Productivity Index: Analysing creativity and innovation in Asia Table 2: Input and output dimensions with the most room for improvement Economy Top 3 output dimensions Top 3 input dimensions Japan Books, scientific publications, films FDI, enrolment ratio of tertiary students in science, trade intensity Finland Books, cereal yield, patents FDI, Mincerian return, trade intensity Republic of Korea Scientific publications, books, agricultural value FDI, venture capital, enrolment in tech. and voc. programmes added United States Movies, patents, books Trade intensity, share of FDI in total investment, enrolment of students in tech. and voc. programmes Taipei,China Books, films, scientific publications FDI, trade intensity, gross enrolment ratio New Zealand Patents, books, agricultural value added FDI, trade intensity, enrolment in tech. and voc. programmes Hong Kong, China Patents, cereal yield, scientific publications Enrolment in tech. and voc. programmes, top-500 universities, R&D Australia Cereal yield, patents, films Trade intensity, FDI, enrolment ratio of tertiary students in science Lao People's Democratic Republic Patents, scientific publications, agricultural Enrolment in tech. and voc. programmes, top-500 universities, value added trading across borders Singapore Patents, books, films Enrolment in tech. and voc. programmes, top-500 universities, FDI People’s Republic of China Books, agricultural value added, films Trade intensity, share of FDI in total investment, microfinance penetration rate Indonesia Books, patents, scientific publications Top-500 universities, protection of IP, insolvency Malaysia Patents, books, scientific publications R&D, share of FDI in total investment, enrolment in tech. and voc. programmes India Patents, agricultural value added, books Mincerian return to education, resolving insolvency, enrolment in tech. and voc. programmes Thailand Patents, books, agricultural value added Top-500 universities, microfinance-penetration rate, share of FDI in total investment Viet Nam Patents, scientific publications, books Top-500 universities, microfinance-penetration rate, resolving insolvency Kazakhstan Scientific publications, cereal yield, books Top-500 universities, enforcing contracts, freedom to compete Philippines Patents, scientific publications, agricultural Top-500 universities, ease of getting credit, public spending on R&D value added Sri Lanka Films, patents, scientific publications Top-500 universities, urbanisation rate, ease of labour turnover Bangladesh Patents, scientific publications, distance to TFP Top-500 universities, venture capital, App Gap Fiji Patents, scientific publications, agricultural Top-500 universities, protection of IP, venture capital value added Myanmar Patents, scientific publications, films and books Top-500 universities, fixed broadband subscribers per 1,000, share of credit per GDP Pakistan Patents, scientific publications, films and books Top-500 universities, gross enrolment ratio (secondary), App Gap Cambodia Patents, scientific publications, distance to TFP Top-500 universities, access to electricity, paved roads Note: The Creative Productivity Index (CPI) demonstrates that each economy is different, requiring varying policy mixes to improve performance. However, almost all economies in the CPI would benefit from marginal improvements in investments in research and higher education. 8 Creative Productivity Index: Analysing creativity and innovation in Asia Chapter 1 Introduction to the Creative Productivity Index • Fostering innovation, entrepreneurship and creativity translates into direct and tangible economic outcomes. • As low-income countries approach middle-income status, traditional models of growth will need to be re-examined. • Sustaining growth through innovation is an important area of focus for policymakers to overcome the middle-income trap. • Unlike several existing innovation indicators that only focus on levels of creative inputs or outputs, the key contribution of the CPI is to focus on effi ciency by relating inputs to outputs. 1. Introduction Creativity pervades all aspects of human life: Associated with originality, ingenuity and inventiveness, 1 UNCTAD (2008): “Summary: creativity not only refers to the “formulation of new ideas and to the application of these ideas to Creative Economy Report 2008”, p.11, available from produce original works of art and cultural products”; it also refers to the formulation of “functional http://unctad.org/en/Docs/ creations, scientifi c inventions and technological innovations.”1 ditc20082ceroverview_ en.pdf. [Accessed: 13 August Creativity, as elusive as it may seem, plays an important role in shaping societies and economies. 2014.] Fostering innovation, entrepreneurship and creativity translates into direct and tangible economic 2 Romer, P.M., (1990): outcomes. In Romer (1990a), for example, technology is embodied in physical capital, which in turn “Endogenous Technological Change,” in Journal of drives growth through positive externalities—in this case, the savings rate (or investment share) not Political Economy, University only has an immediate impact on short-run but also long-run growth.2 In other cases, technology is of Chicago Press, vol. 98(5). treated as a part of the human capital stock, and knowledge spill-overs in the accumulation of human 3 Lucas, R. (1988): “On the capital help overcome diminishing returns.3 Finally, some models interpret technological progress mdeevcehloanpimcse notf, e”c ionn Joomuricn al as the result of innovation, in which case the stock of innovations increases through deliberate of Monetary Economics, vol. 22(1), pp. 3-42. investments in research and development (R&D). The invention of new technologies creates new fi rms and markets and the introduction of new production techniques and organisational structures 4 Burger-Helmchen, T. (Ed.) (2013): The economics of increases the productivity of existing production processes.4 creativity: Ideas, fi rms and markets, London, New York: Routledge. 9