Innovation, Productivity, and Enterprise: Wealth of Nations

Innovation Leads to Greater Productivity and Wealth

Both innovation in new products and innovation in new processes tend to contribute to higher productivity for both individual firms — large and small — and for nations. “Disruptive innovation” contributes more than “sustaining innovation” assuming the innovating party is capable of exploiting the innovation in timely fashion.

World’s Most Innovative Countries

2016 TOP 10
1. Switzerland
2. Sweden
3. United Kingdom
4. United States
5. Finland
6. Singapore
7. Ireland
8. Denmark
9. Netherlands
10. Germany

Government policy, strong R&D spending and coordination characterise groupings such as HBP and EUREKA. These factors also make countries more innovative. Switzerland yet again tops this year’s Global Innovation Index (GII), ahead of seven other European countries in the top 10, Singapore (ranked 6th) and the U.S. (4th). Switzerland and its peers got top marks across major pillars of our index, such as the strength of institutions, infrastructure, human capital and research and market sophistication.

… The index, a collaboration in itself between INSEAD, Cornell University and the World Intellectual Property Organisation (WIPO), finds that investments in R&D and innovation are central to economic growth; helping developed countries reinvent themselves in times of economic decline and emerging countries answer their societies’ growing needs. __

There are many ways to measure both innovation and productivity. Nations of Europe and the Anglosphere tend to stay near the top of such rankings, year after year. Here is a graphic assessment of science and innovation by nation:

In scientific innovation, a few East Asian nations such as South Korea and Japan rank well in comparison with European and Anglospheric nations. Russia does very poorly in innovation, however, suggesting that future Russian productivity is likely to fall.

World’s Most Productive Countries

Productivity is calculated by dividing each country’s GDP by the average number of hours worked annually by all employed citizens. Hours worked include full-time and part-time workers, excluding holidays and vacation time. __ Time

Most Productive Countries, 2015
Rank Country GDP per hour worked Employed Population GDP (USD) Average work week (hrs)
1 Luxembourg $ 93.4 405,600 $57b 29
2 Ireland $ 87.3 1,989,400 $302b 33.5
3 Norway $ 81.3 2,753,000 $318b 27.3
4 Belgium $ 69.7 4,601,200 $498b 29.8
5 United States $ 68.3 151,000,000 $18,037b 33.6
6 Denmark $ 67.6 2,829,000 $270b 27.2
7 France $ 65.6 27,523,000 $2,648b 28.2
8 Germany $ 65.5 43,057,000 $3,857b 26.3
9 Netherlands $ 65.4 8,792,000 $818b 27.4
10 Switzerland $ 64.2 4,962,600 $506b 30.6
11 Austria $ 60.2 4,290,700 $415b 30.9
12 Sweden $ 59.1 4,809,700 $458b 31
13 Finland $ 54.8 2,497,400 $225b 31.6
14 Australia $ 54.6 11,860,000 $1,101b 32.7
15 United Kingdom $ 52.1 31,293,000 $2,701b 31.9
16 Italy $ 51.9 24,476,100 $2,191b 33.1
17 Spain $ 51 18,490,800 $1,594b 32.5
18 Canada $ 50.9 18,285,700 $1,589b 32.8
19 Iceland $ 45.1 183,700 $16b 36.1
20 Japan $ 41.9 65,801,200 $4,741b 33.1
21 New Zealand $ 40.9 2,360,600 $170b 33.8
22 Slovenia $ 40.4 941,500 $64b 32.5
23 Israel $ 40.3 3,947,100 $300b 36.3
24 Slovak Republic $ 39.7 2,267,100 $158b 33.7
25 Czech Republic $ 38 5,179,700 $346b 33.8
26 Portugal $ 35.4 4,575,800 $303b 35.9
27 Greece $ 35.3 4,019,800 $288b 39.1
28 Hungary $ 33.5 4,327,500 $254b 33.6
29 Lithuania $ 32.6 1,334,700 $81b 35.8
30 Korea $ 31.9 25,936,300 $1,749b 40.7
31 Estonia $ 31.6 622,900 $36b 35.6
32 Latvia $ 28.3 887,900 $48b 36.7
33 Chile $ 25.9 7,802,200 $402b 38.2
34 Russia $ 25.1 72,187,700 $3,580b 38
35 Mexico $ 20.3 50,262,900 $2,188b 41.2
Source: OECD

Source: Time

The US is Not at the Top of Either List

The US is not ranked highest in either innovation or productivity, based upon most of the popular methods and indexes. But the US ranks near the top on all such serious rankings. Given the size of the US economy, and the ability of the US to attract top international talent, staying near the top in the various rankings of innovation and productivity is all that is needed to maintain competitiveness.

Entrepreneurship is a Crucial Ingredient of National Success

Enterprise is a crucial engine of economic growth. Without enterprise and entrepreneurs, there would be little innovation, little productivity growth, and few new jobs.

Entrepreneurial success does not take place in a vacuum. Entrepreneurs exist in the context of their particular geography – be that their local, national, or even supranational economy and society.

This mix of attitudes, resources, and infrastructure is known as the entrepreneurship ‘ecosystem’. The Global Entrepreneurship Index is an annual index that measures the health of the entrepreneurship ecosystems in each of 137 countries. It then ranks the performance of these against each other. This provides a picture of how each country performs in both the domestic and international context.

The GEDI methodology collects data on the entrepreneurial attitudes, abilities and aspirations of the local population and then weights these against the prevailing social and economic ‘infrastructure’ – this includes aspects such as broadband connectivity and the transport links to external markets. This process creates 14 ‘pillars’ which GEDI uses to measure the health of the regional ecosystem. __ Global Entrepreneurship and Development Index

2017 Global Entrepreneurship Index rankings

Showing 1 to 10 of 138 entries

Table Source

Adding Entrepreneurship to the Mix Helps Explain National Economic Achievement

For the particular entrepreneurial index shown above, the US ranks at the top of the list. But again, given the overall size of the US economy, ranking near the top would be good enough. It is not surprising that one must drop down the list to number 48 to find China, and to number 72 to find Russia. Both Russia’s and China’s national economies are highly corrupt, and distrustful of strong enterprises that arise outside of the total control of government.

The amount of economic freedom allowed within a nation combined with the average strength of pre-frontal executive functions — a highly heritable trait — will help one to predict innovation, productivity, and entrepreneurial strength of a nation.

Looking at National Corruption and Average Population IQ Further Clarifies the Picture

Transparency International Corruption Map 2015

Transparency International
Corruption Map 2015

Of course we expect to see different levels of corruption within different regions of the same nation. In US cities such as Chicago, Detroit, Washington D.C., Baltimore, Birmingham (Alabama), etc. levels of corruption probably approach those of nations such as Russia or Zimbabwe. Fortunately for the US, most legal jurisdictions at all levels have much less corruption, making the ease of doing business greater than in most of the third world.

Global IQ by National Average IQ Scores

Global IQ by National Average IQ Scores

The US national average IQ is only 98, but the nation has a significant “smart fraction” which does most of the heavy intellectual lifting for the rest, in terms of high end innovation and entrepreneurship. The smart fraction is also largely responsible for developing and providing the technological tools of production that make average workers more productive.

Innovation, Productivity, and Entrepreneurship Should All Be High

In an optimally competitive economy, innovators and entrepreneurs would work together to create high levels of productivity overall. Governments would ideally provide protection against fraud and violence, a stable monetary system, and avoid disincentives (taxes, excess torts, and regulations) that unduly restrict opportunity and business risk-taking.

In many areas, the US performs far below optimal levels, largely thanks to dysfunctional government policies. Obama played a huge role in making the US less friendly to small business and startups, but administrations going all the way back to Woodrow Wilson share much of the blame. If Trump is serious about “draining the swamp” of Washington, D.C., he has his work cut out for him.


According to the pioneering work of Nobel Prize winner Robert Solow, technological innovation is the ultimate source of productivity and growth. It’s the only proven way for economies to consistently get ahead — especially innovation born by startup companies. Recent Census Bureau data show that most of the net employment gains in the United States between 1980 and 2005 came from firms younger than five years old. Without startups, the average annual net employment growth rate would actually have been negative.

Economist Carl Schramm, president of the Kauffman Foundation, which analyzes entrepreneurial economics, told us that “for the United States to survive and continue its economic leadership in the world, we must see entrepreneurship as our central comparative advantage. Nothing else can give us the necessary leverage.

__ Start-Up Nation from Introduction

More Reading: The 2017 INSEAD Global Talent Competitiveness Index (Talent and Technology) 359 pp PDF An excerpt:

As rich countries become more self-sufficient with robots and automation, many emerging countries are losing their main source of competitive advantage—namely cheap labour for manufacturing operations and call centres. Even China will be losing more jobs to automation than to competition from cheaper countries. __ Chapter 1

More on the simplicity of basic prosperity under wise government policy-makers:

Prosperity = Abundant Work + Low Cost of Living

This may seem obvious, but the conditions required for work to be abundant and the cost of living to be low are not so obvious. For work to be abundant:

It must be easy to start a business.
It must be easy to operate the new business.
It must be easy to make a profit so the business can survive the first few years and,
It must be easy to hire employees.

All these factors require an environment of low-cost compliance with regulations, low tax rates, low costs of transactions, reasonable transport costs, reasonable cost of money (but not near-zero), reasonable availability of capital for small enterprises, local and national governments that actively seek to smooth the path of new enterprises and existing enterprises seeking to expand, and a transparent marketplace that isn’t dominated by politically dominant cartels and subservient-to-cartels government agencies. __ MisesWire

Under wise and minimal government economic policies, investors and entrepreneurs work with inventors and other innovators to bring about both sustaining and disruptive innovations of all kinds — which quickly propagate across markets from pole to pole. Intellectual property rights, patents, contract law, reasonable constraints on tort suits and punishment for filing frivolous suits, all contribute to a sober and more productive climate for innovation — along with low taxes, minimal regulations, low to nonexistent levels of corruption, a stable and flexible monetary system, and populations with high average IQ and EF. The market will facilitate the rest.

A populist government may attempt to short-circuit market forces with a “Universal Basic Income,” but the market fallout from such an intervention would be dire — similar to the effect of an arbitrarily high government mandated “minimum wage.” Markets always have the final say, as one might surmise from a deep understanding of the bloody purges that animated and defined the French, Bolshevik, and Cuban revolutions — and the disastrous economic fallout that humbled all such bloody revolutions born of desperate folly.

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