Innovation Capacity


Increasing Australia's innovation capacity is essential if we are to make a due contribution to the global project of developing a resource-lean, knowledge-intensive civilisation.

What is Innovation Capacity?

C, D, N

A region's innovation capacity is its ability to:

National innovative capacity is distinct from both the purely scientific or technical achievements of an economy, which do not necessarily involve the economic application of new technology. N

Innovation Capacity - Determinants

What creates the innovative capacity of a nation?

Why is it that certain nations are able to relentlessly innovate over long periods of time? Innovation in a nation is more than just science and technology. It has to do with the whole environment for competition in the nation. C

You cannot innovate if you do not have the inputs necessary for innovation: high quality scientific and technical personne, a sound basic scientific infrastructure within the higher education system, a supply of risk capital, and so forth. C

Simply pumping up your R&D budget is not enough! If you double your R&D budget without having more scientists and engineers in your workforce, without protecting intellectual property you are going to waste the investment. C

While some determinants of competitiveness are national in scope or the result of national policies, many are regional and local. Such things as the quantity and quality of specialized skills, infrastructure, and technology, and the presence of clusters vary markedly across regions. This leads to substantial differences in prosperity among states and regions within a nation. States and cities need economic strategies not just nations. Co

The innovation capacity of a particular region can be fostered by investments, policy choices, and creating an environment for innovation. N

National innovative capacity depends on the strength of a nation’s common innovation infrastructure (cross-cutting factors which contribute broadly to innovativeness throughout the economy), the environment for innovation in a nation’s industrial clusters, and the strength of linkages between these two. D

Although the innovative performance of an economy ultimately rests with the behavior of individual firms and industrial clusters, some of the most critical investments that support innovative activity operate across all innovation-oriented sectors in an economy - the economy's common innovation infrastructure. U

National innovative capacity depends in part on the technological sophistication and the size of the scientific and technical labor force in a given economy. It also reflects the array of investments and policy choices of the government and private sector that affect the incentives for and the productivity of a country ’s research and development activities. N

Environment for Innovation


The following factors are favorable for innovation by a firm.

Context for Firm Strategy and Rivalry

Related and Supporting Industries

Knowledge Flow

Venture Capital

Demanding Customers


Innovation is driven by:

It is very hard to be innovative if your local market is not demanding. There is a role for the customer; part of what makes a nation innovative is customers that are sophisticated, and demanding, looking for better products and services. C

Common Innovation Infrastructure


A nation’s common innovation infrastructure is the set of crosscutting investments and policies supporting innovation throughout an entire economy.

It includes:

A strong common innovation infrastructure requires a set of national investments and policy choices stretching over decades.

Technological sophistication


An economy's technological sophistication is fostered by:

Innovation policy


Crosscutting innovation policy areas include:

Three measures, each with a strong and robust relationship to international patenting controlling for population, the patent stock, and the number of scientists and engineers in the workforce:

Innovative capacity relates to a set of policy choices and resource commitments that a nation makes. R&D personnel, R&D spending and business share of R&D spending are important variables in terms of their impact but other factors are significant [to] innovative output. This suggests a need for a whole national innovation strategy. C

Industry Clusters

Innovation is fostered by industry clusters - geographical concentrations in a particular country or region - of a group of related and supporting firms. C

An isolated company, one that is isolated from other institutions, other companies and other suppliers, is much less likely to be innovative. Innovation grows out of this concentration, it is like a critical mass effect. Clusters create information flows, incentives, spin-offs, new companies - an innovative vitality. C

While the common innovation infrastructure provides resources for innovation throughout an economy, it is the firms in specific industrial clusters that introduce and commercialize those innovations. U

Although the common innovation infrastructure sets the basic conditions for innovation, it is ultimately companies that introduce and commercialize innovations. N

Innovation and the commercialization of new technologies take place disproportionately in clusters - geographic concentrations of interconnected companies and institutions in a particular field. N

The innovative capacity of an economy depends upon the extent to which a county’s industrial clusters support and compete on the basis of technological innovation. U

Example: the oil and gas cluster in Houston, Texas - an enormous concentration of companies, and R & D, and suppliers and institutions - all in the energy, oil and gas business. C

That concentration, that cluster, that juxtaposition of suppliers and customers and skilled people and specialists in university departments, is a tremendous engine of innovation. C

Houston is really the centre of almost all of the innovation in the oil and gas technologies around the world. Even though much of the drilling and most of the reserves exist outside of Houston - Texas is not a big oil producer any more - the cluster that has been built in Texas is an enormous innovation centre. C

Similar clusters exist for the automotive industry, for electronics and for many industries. C

Cluster-Specific Innovation Orientation


The global competitiveness of a cluster depends on its innovation orientation.

A strong innovation environment within national clusters is the foundation for innovation-based competitive advantage in many fields, from pharmaceuticals in the United States to semiconductor fabrication in Taiwan.

Example: The Finnish pulp-and-paper cluster benefits from the multiple advantages of pressures from demanding domestic consumers and paper companies, intense local rivalry, and Finnish process-equipment manufacturers that are top of the line, with companies such as Kamyr and Sunds leading the world in the commercialization of innovative bleaching equipment.

Industry Clusters - Benefits


Clusters reflect important externalities in innovation that are contained in particular geographic areas.

Powerful spillovers and externalities between discrete industries (eg printers) within an cluster (eg information technology) are vital to the rate of innovation.

Presence within a cluster offers potential advantages to firms in perceiving both the need and the opportunity for innovation.

Clusters provide the flexibility and capacity to act rapidly to turn new ideas into reality.

A company within a cluster can often more rapidly source the new machinery, services, components, and other elements to implement innovations.

Local suppliers and partners can and do get involved in the innovation process. The complementary relationships involved in innovating are more easily achieved among participants that are nearby.

Reinforcing these advantages of clusters for innovation is the sheer pressure - competitive pressure, peer pressure, customer pressure, and constant comparison - that is inherent within a concentrated group of firms in the same field.

Clusters - Innovation Environment

N, U

Four key elements of the microeconomic environment that influence the rate of innovation in an industrial cluster:



Innovation is fostered by:

The extent to which the potential for innovation supported by the common innovation infrastructure is translated into specific innovative outputs in a nation’s industrial clusters will be determined by the quality of linkages between these two areas. In the absence of strong linking mechanisms, upstream scientific and technical activity may spill over to other countries more quickly than opportunities can be exploited by domestic industries. U

It is good to have a science and research infrastructure but unless that science and research infrastructure is connected to companies, it is not very useful. C

Such linkages can be measured by the percentage of research and development in a nation funded by industry, albeit performed by universities and other research institutions. C

If companies are funding R&D it is a sign that companies feel they are in an environment where that R &D is worth spending. C

Conversely, if much of the R&D is being funded by government, it suggests that vitality in the industrial sector for innovative investment is not so great and government is trying to 'prime the pump'. C

R&D funded by business tends to be more productive than R&D funded by government. If you have a lot of R&D in a country funded by government it actually has a negative effect - it works against the overall innovative vitality of the economy. C

Institutions of Collaboration


The relationship between the common innovation infrastructure and a nation’s industrial clusters is reciprocal: Strong clusters feed the common infrastructure and also benefit from it.

A variety of formal and informal organizations and networks - institutions for collaboration - can link the two areas.

An especially important example is a nation’s university system, which provides a particularly strong and open bridge between technology and companies.

Without strong linkages, a nation’s upstream scientific and technical advances can diffuse to other countries more quickly than they can be exploited at home.

Example: Although early elements of VCR technology were developed in the United States, it was three companies in the Japanese consumer electronics cluster that successfully commercialized this innovation on a global scale in the late 1970s.


The university is the most open environment for innovative activity. If you can get a lot of innovative activity occurring within universities it tends to spread and diffuse widely throughout the economy. This is much more powerful in spreading ideas than if the R&D is being conducted only in companies or only in government laboratories. C

The university system does matter; if there are high levels of R&D in universities, it is a positive driver of innovative output. C

Public-Private Complementarity

Competitiveness advances when the public and private sectors together promote a favorable environment for innovation. N

On the one hand, firms and the private sector are the ultimate engines of innovation. On the other hand, the innovative activities of firms within a country are strongly influenced by national policy and the presence and vitality of public institutions. In other words, innovation intensity depends on an interaction between private sector strategies and public sector policies and institutions. N

Research and Development Productivity

While a great deal of variation across countries is due to differences in the level of inputs devoted to innovation (R&D manpower and spending), an extremely important role is played by factors associated with differences in R&D productivity - policy choices such as the extent of IP protection and openness to international trade, the share of research performed by the academic sector and funded by the private sector, the degree of technological specialization, and each individual country ’s knowledge “stock”). D

The innovative capacity in a nation or region is heavily rooted in its microeconomic environment, in areas such as the intensity of scientists and engineers in the workforce, the degree of protection of intellectual property, and the depth of clusters. I

A country’s R&D productivity will depend upon the a county’s accumulated stock of knowledge, and the extent of available scientific and technical talent dedicated to the production of new technologies. In addition to the size of a country’s knowledge stock and talent pool, R&D productivity will also depend on national investments and policy choices, such as spending on higher education, intellectual property protection, and openness to international competition, which will exert a cross-cutting impact on innovativeness across economic sectors. U

R&D funded by business tends to be more productive than R&D funded by government. If you have a lot of R&D in a country funded by government it actually has a negative effect - it works against the overall innovative vitality of the economy. C

Scientific output alone is not enough. What matters is converting it into a patent - something that is commercially relevant. C

Intellectual Property Protection

innovation requires an attractive 'climate' to encourage the levels of investment required for innovative activity. A critical component here is intellectual property protection. C


Innovation is dramatically influenced by the intensity of competition. If you don't have to compete at home, there is almost no chance that you will be able to compete abroad - much less be innovative. Innovation emerges increasingly out of local rivalry, and so those nations that have not opened their internal environment to competition are not very innovative. C

Corporate Practices and Innovation


Successful innovation depends not just on a favorable business environment but also on supportive company operating practices and strategies.

National innovative capacity in the business environment and corporate behavior tend to move together. Companies must adjust their competitive approaches to attain higher levels of innovative output.

Innovative companies:

Measures of Innovation Capacity


International Patenting

International patenting is strongly linked to productivity growth and exports in technology intensive sectors.

If you spend a lot on R&D, if you have intellectual property protection, if you have a lot of scientists and technologists in your workforce and so on, that determines what your patenting rate is.

An international patent is a patent that has been filed not just in the home country of the company but also in another country. In the case of all non US countries, to be significant, that other country has to be the US. We therefore looked at patents that had been filed in the UK but also filed in the US. We looked at patents that had been filed in Sweden but also in the US. For US companies, we looked at patents that had been filed in the US but also in another major country - such Germany, UK, Sweden.

An international patent is a sign of some commercial significance. The patent must be significant before someone makes the high investment needed to file in another country.

Also we found that by having the US patent office involved in every patent that we counted, we created a consistent measuring system for the quality of the patent. If a UK patent can also be filed in the US that says something about the quality of the patent. Since we were trying to measure innovations that were at the world frontier of technology, the US patent system is an effective filter.

Although patents do not measure all innovations, they are highly correlated with other kinds of innovative activity. If we look at the correlation, for example, between patents and world export share in an industry, or if we look at the correlation between patents and productivity, we find a high correlation. Thus, although we have not measured trade secrets and copyrights, we are quite confident - and the literature is quite clear - that the patenting rate at the national level is a pretty good proxy for how much original innovative activity is going on.


(D) The Determinants of National Innovative Capacity. Jeffrey L. Furman, Michael E. Porter & Scott Stern. 2002

(Co) Competitiveness of States and Regions. Institute for Strategy and Competitiveness. Harvard Business School.

(C) Creating Innovative Capacity. Michael Porter. Leeds Metropolitan University

(I) Innovation and Innovative Capacity. Institute for Strategy and Competitiveness, Harvard Business School

(N) National Innovative Capacity. Michael Porter & Scott Stern

(U)Understanding the Drivers of National Innovative Capacity. Jeffrey Furman, Michael Porter, Scott Stern. Boston University