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Coutinho, E.M.O.; Au-Yong-Oliveira, M. Determinants of the Performance of Countries’ Innovation Ecosystems. Encyclopedia. Available online: https://encyclopedia.pub/entry/55363 (accessed on 12 May 2024).
Coutinho EMO, Au-Yong-Oliveira M. Determinants of the Performance of Countries’ Innovation Ecosystems. Encyclopedia. Available at: https://encyclopedia.pub/entry/55363. Accessed May 12, 2024.
Coutinho, Evelina Maria Oliveira, Manuel Au-Yong-Oliveira. "Determinants of the Performance of Countries’ Innovation Ecosystems" Encyclopedia, https://encyclopedia.pub/entry/55363 (accessed May 12, 2024).
Coutinho, E.M.O., & Au-Yong-Oliveira, M. (2024, February 22). Determinants of the Performance of Countries’ Innovation Ecosystems. In Encyclopedia. https://encyclopedia.pub/entry/55363
Coutinho, Evelina Maria Oliveira and Manuel Au-Yong-Oliveira. "Determinants of the Performance of Countries’ Innovation Ecosystems." Encyclopedia. Web. 22 February, 2024.
Determinants of the Performance of Countries’ Innovation Ecosystems
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This entry is adapted from the peer-reviewed paper 10.3390/admsci14020032

The pandemic marked the beginning of a succession of events on a global scale (not the least of which is a greater concern for the environment and for quality of life/distance work) with a major impact on the economy. Innovation plays a key role in meeting the challenges of the future, but despite investment in innovation, global economic growth has fallen short of the expected performance. it is important to note that innovations depend to a large extent on a suitable market environment (i.e., one conducive to innovation) and that improving a country’s capacity for innovation improves companies’ capacity for innovation. It is, therefore, essential to understand which factors most influence innovation performance, with the aim of directing policies and investment towards the areas with the greatest impact on results.

innovation performance institutions human capital infrastructure market sophistication business sophistication

1. Introduction

In recent years, the world has faced several challenges that have put the resilience of the economy and societies to the test. The pandemic (Serban 2022; Sharma et al. 2022), escalating inflation (Manpower Group 2022, 2023), the war in Europe, and the conflict in the Middle East have added to environmental and socio-economic challenges, as new geopolitics (WIPO 2022) emerge, in addition to the fear of superhuman artificial intelligence. As in the past, innovation is considered a key element in meeting the challenges of the future; innovation has helped to improve productivity, which has increased economic output, which, in turn, has improved the socio-economic level of populations (WIPO 2022). In recent decades, there has been an unprecedented global investment in innovation by both the public and private sectors (WIPO 2022), but supporting innovation remains the main challenge for governments and managers, while the very concept of innovation is evolving from the business perspective to the regional, national, or global perspective (micro, meso, macro), increasingly becoming an area of research (Bielińska-Dusza and Hamerska 2021; Andrijauskiene et al. 2021; Akhmadi and Tsakalerou 2023; Bate et al. 2023).
Global demand for new products is high and growing exponentially as knowledge-based economies (unlike traditional economies) generate more income and employment (Powell and Snellman 2004; Hadad 2017; Bielińska-Dusza and Hamerska 2021). The competitiveness of economies increasingly depends on their ability to produce and use knowledge, and the importance of this has increased post-pandemic (Q. Wang et al. 2021; Serban 2022; Mohamed et al. 2022; Marule 2022; Xie et al. 2023). On the other hand, it is important to note that innovations depend to a large extent on a suitable market environment (i.e., one conducive to innovation) and that improving a country’s capacity for innovation improves companies’ capacity for innovation. The creation of an innovative environment can be linked to legal provisions, financial support, support for processes and products, foreign investment, and support for specific sectors with greater capacity for innovation and can also involve strategic and operational decisions in the field of commercial activity, such as international cooperation initiatives. It is, therefore, extremely important to have information that allows decision-makers to make informed decisions supported by the evaluation and measurement of existing activities in the field of innovation (broadly understood). It is, therefore, essential to understand which factors most influence innovation performance, with the aim of directing policies and investment towards the areas with the greatest impact on results.
One of the ways of assessing innovation performance is to use statistical and mathematical methods based on indices, indicators, and performance measures, with their own methodology, reported in reports distributed by various institutions worldwide. The Global Innovation Index (GII) published by the World Intellectual Property Organization reports the results of assessing the performance of 132 innovation ecosystems worldwide and is one of the most widely used tools in innovation research from a global perspective (Bielińska-Dusza and Hamerska 2021; Bate et al. 2023). The methodology involves a set of indicators that make it possible to assess the position of each country in terms of innovation (WIPO 2022). The GII considers that the innovation ecosystem is based on five pillars: institutions (Do they work, e.g., the judicial system; can it be trusted institutions and their good functioning are the pillars of progress and advancement towards a more modern society? Also, what effect does culture have on the conducting of business—namely, are meritocracy and efficiency relevant factors?), human capital and research (how qualified for research is the human capital? To what search/research tools and databases does the human capital have access, and are they taught these in higher education, even if only at the doctoral level?), infrastructure (including roads, railways, and ports, for example, and their state of digitalization, also for sustainability purposes; what information and communication technology suites and platforms do firms use?), market sophistication (how interconnected, or independent, are rival firms? How informed and organized is the consumer? How well do banks and credit lines function, and are the terms (credit rates) offered realistic and accessible?), and business sophistication (How good is intellectual property protection? Are patents duly enforced? How is knowledge absorbed by firms? Do they have that capacity?), which are considered inputs. Those ecosystems have two outputs: knowledge and technology, as well as creativity.
The determinants of the performance of countries’ innovation ecosystems are innovation policies, knowledge and skills, research and development (R&D) investment policies, intellectual property, trade and openness to the outside world, knowledge sharing and market information, legal and regulatory issues, and access to infrastructure (Queirós et al. 2019; Andrijauskiene et al. 2021; Bielińska-Dusza and Hamerska 2021; Papa et al. 2022; Bate et al. 2023). According to the methodology used by the GII (WIPO 2022), the determinants of innovation are grouped under five pillars: institutions, human capital and research, infrastructure, market sophistication, and business sophistication, which are considered inputs to the innovation ecosystem. The methodology used by the GII considers two outputs of the ecosystem: the results of knowledge and technology and the results of creativity. The following paragraphs address the impact of each of these pillars on innovation performance based on the existing scientific literature.

2. Institutions

In the institutions pillar, the GII considers the indicators political environment, regulatory environment, and business environment, measured through sub-indicators based on information collected in the various countries. Political and government stability, the quality of laws, incentives for entrepreneurship, and culture are among the aspects considered (WIPO 2022). Institutions can be formal or informal (Minto-Coy and McNaughton 2016; Okrah and Hajduk-Stelmachowicz 2020; Akhmadi and Tsakalerou 2023; Bate et al. 2023); property rights, contracts, policies, regulations, laws, and constitutions are formal institutions, while culture and social norms are informal institutions (Minto-Coy and McNaughton 2016; Bate et al. 2023). Low belief in a country’s institutions deteriorates the trust of investors, customers, and companies (Jovovic et al. 2017; Szalacha-Jarmużek and Pietrowicz 2018; WIPO 2022; Bate et al. 2023; Klett and Cozzi 2023). Trust in political systems encourages innovation, and a solid legal and regulatory framework fosters growth and the ability of companies to innovate (Nyarku and Oduro 2018); the same is true of government support and the protection of intellectual property by legal institutions (C. Wang et al. 2020; L. Wang et al. 2020). Reinforcing the role of institutions in innovation and economic performance, Castaño-Martínez et al. (2015) revealed that the difficulty experienced by entrepreneurs in setting up new companies due to complex administrative procedures negatively affects the growth of the economy and, consequently, societies with complex legal systems and difficult access to credit have a lower level of economic performance. The culture of countries influences organizational culture, which, in turn, is closely related to knowledge management. In companies with a high level of mutual trust, collaboration and learning and knowledge exchange activities (creation, storage, and transfer) are more likely to occur frequently and effectively (Lam et al. 2021). Similarly, the establishment of a collaborative network with external partners, essential for benefiting from the experience and knowledge of others, is influenced by organizational culture. Since organizational sustainability is increasingly linked to the ability to manage new knowledge and ideas and transform them into new business value (Pereira et al. 2021; Scaliza et al. 2022), the role of culture is central to the growth of companies.

3. Human Capital and Research

In the human capital and research pillar, the GII considers indicators relating to education, tertiary education, and research and development. Investment in education, the length of schooling, science and engineering graduates, the mobility of people with higher education, investment in research and development, and university rankings are among the aspects considered (WIPO 2022). Investment in human capital by policymakers has positive effects on business innovation, and countries that invest more in human capital achieve greater business culture and economic performance (Castaño-Martínez et al. 2015; Nunes et al. 2019; CastroSilva and Lima 2023). Human capital is an essential determinant of innovation since education improves capacities for the creation, dissemination, and sharing of knowledge (You et al. 2021; Bate et al. 2023; Coutinho and Au-Yong-Oliveira 2023), and the lack of highly qualified resources limits the absorption of knowledge (CastroSilva and Lima 2023). The availability of skilled labor in a certain territory increases opportunities for knowledge exchange, which may have been created in the region or elsewhere (Nunes et al. 2019). The study by C. Wang et al. (2020) and L. Wang et al. (2020) reveal that human capital and R&D are essential factors that explain innovation, particularly technological innovation in advanced economies.

4. Infrastructure

In the infrastructure pillar, the GII considers indicators relating to information and communication technologies, general infrastructure, and ecological sustainability. The access to and use of ICT, participation in networks and certification, and environmental performance are among the aspects considered (WIPO 2022). Information and communication technology infrastructures and digital technologies facilitate the storage, dissemination, and exchange of information, making knowledge more accessible, and highly innovative SMEs are distinguished from those that are not very innovative in terms of knowledge and information technology infrastructures (Popa et al. 2022). Innovation-oriented companies are more likely to use new methodologies and technologies (Dobni and Klassen 2021; Wilson and Dobni 2022; Wilson et al. 2023). A high level of innovation and technological complexity is often associated with dynamic economic development, which allows companies to achieve better financial results and strengthen their competitive advantage (Nawrocki and Jonek-Kowalska 2022). The work by Wilson et al. (2023) explores the relationship between companies’ orientation towards innovation and performance in a global context; identifies crowdsourcing, design thinking, open innovation, stage-gate systems, big data analytics, innovation management software, innovation measurements, scientific research and prototyping as common practices of innovators with a high orientation; and shows that the dimensions of this orientation are consistent with company performance, although there are differences in this agreement between countries in different regions of the world. In fact, countries with greater environmental awareness, fewer restrictions on foreign investment, and greater business sophistication provide the perfect setting for the establishment of large companies with a strong innovative profile (Puertas et al. 2022).

5. Market Sophistication

In the market sophistication pillar, the GII considers the availability of credit lines to support innovation in companies; the formation of start-ups or scale-ups; investment in companies; and access to international markets, diversification, and market size, including competition and the protection of small companies (WIPO 2022). The study by Akhmadi and Tsakalerou (2023) revealed that most of the companies studied consider the main barriers to innovation to be the very high costs of innovation and the lack of investment on the part of companies. Difficulties in obtaining state support and high competition in the target market are considered relevant factors, as are the lack of skilled workers and the lack of partnerships. When examining the relative importance of barriers to innovation and, consequently, economic growth, company size is the most significant variable (Akhmadi and Tsakalerou 2023). Compared to large companies, SMEs can be more agile and flexible in response to changes in the markets. However, they face more difficulties in turning innovation into new businesses, as they usually have limited financial, human, and technological resources compared to large companies (Queirós et al. 2019; Nunes et al. 2019). The lack of specialized knowledge to navigate the processes of commercializing innovation can create additional obstacles for SMEs, namely, greater difficulty in obtaining market research, protecting intellectual property, and developing products and marketing strategies; greater difficulty in accessing markets and establishing brand presence; more limited distribution channels and competition from larger, established operators; greater risk aversion due to limited resources and the potential impact of failure; and limited access to strategic partnerships and regulatory and legal obstacles in target markets. The study by Wellalage and Fernandez (2019) on innovation and SME financing in developing countries revealed a positive relationship between financing (formal and informal) and a company’s capacity for innovation (product and process).

6. Business Sophistication

In the business sophistication pillar, the GII considers indicators relating to highly qualified work, strategic partnerships, and knowledge absorption. Highly qualified employment, strategic alliances and patents, intellectual property, and high-tech imports are among the aspects considered (WIPO 2022). According to Kirikkaleli and Ozun (2019), business sophistication is based on the quality of the country’s business networks and the strategies and operations practiced by individual players and, along with innovation, are essential components of competitiveness. Organizations with a high innovation orientation engage in value-creation strategies such as market segmentation, developing new products/services for new markets, and customizing products or services. Organizations with a low innovation orientation generally practice less aggressive strategies focused on internal competencies, underestimating strategies based on cooperation, partnerships, and alliances (Dobni 2010). The creation, dissemination, and sharing of knowledge as well as the free access to information, collaboration, and knowledge transfer between different players, such as universities, research institutions, companies, and individuals, are drivers of innovation and productivity and translate into economic results and competitive advantages for companies (Tubbs 2007; Costa et al. 2021; Boiko 2022; Scaliza et al. 2022). The protection of intellectual property rights is crucial to ensure that creators and inventors benefit from their ideas and creations; patents, copyrights, and trademarks safeguard the value of knowledge. Networking with multiple organizations is a performance enhancer, promoting access to a wider range of knowledge, which increases the likelihood of finding specific resources capable of responding to internal needs (Nunes et al. 2019; Wilson and Dobni 2022; Wilson et al. 2023). Networks are the organizational support that allows economic agents to exploit new business opportunities through joint efforts, resources, and skills (Nunes et al. 2019; Öber 2019; Costa et al. 2021; Ferreira et al. 2021; Scaliza et al. 2022; Costa and Moreira 2022; Coutinho and Au-Yong-Oliveira 2023). Entrepreneurs with larger and more diversified networks tend to be more successful than those with smaller networks (Nunes et al. 2019).

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