Northern Europe and East Asia are the global hotspots for idea creation

From an early age children are encouraged to think creatively and come up with new ideas. As adults, these thoughts are fundamental to innovation and productivity, and ultimately raising living standards. Global productivity growth has slowed markedly since the 2008 financial crisis, leading to a renewed focus on idea creation among governments. But how successful have these administrations been in fostering innovative economies?

Patent datasets are an appropriate proxy for measuring technological innovations, albeit with some limitations (not all innovations are patentable and not all patentable innovations are patented.) Patents are exclusive rights for an individual or company to make or sell a new product for a specified period of time (generally 20 years). The patent owner has the right to prevent others from exploiting the invention commercially in the countries and regions where the patent has been filed and granted.

According to the World Intellectual Property Organisation, the number of patents granted around the world has more than doubled since 2000, from 510,000 to nearly 1.4m in 2017. Although some of this increase is the result of more stringent recording processes, it is clear that there has been impressive growth in the creation of patent-worthy ideas.

The world’s 20 largest economies recorded over 90% of the patents granted in 2017. China, Japan and the US topped the table in terms of the absolute number of patents granted, followed by South Korea and a group of European countries.

We would expect the developed economies with large urban populations to make the largest contribution to idea creation, given economies of scale. A more useful proxy is to compare idea intensity. We have calculated the number of patents granted per million population in Table 1.

South Korea comes out as the most idea intensive economy. Part of South Korea’s success can be attributed to government investment in PangyoTechno Valley (PTV), an innovation hub established in 2011. Firms with a presence in PTV have access to tax cuts and low-interest loans, in the hope that PTV can act as an incubator for ideas. Its reputation as the Silicon Valley of South Korea suggests that the model is working.

Our analysis shows that the level of idea intensity varies significantly, even among the top performers. Germany is almost three times as idea intensive than the UK, according to our analysis. Table 1 shows that idea intensity is also concentrated in two distinct regions: Northern Europe and East Asia. All of the Scandinavian countries (other than Iceland), feature in the list. There is some indication that these regions have specific areas of expertise which may have helped to spur idea intensity.

Of the 36 technology groups defined in the International Patent Classification (IPC), around 10% of Nordic ideas were focused on environmental technologies in 2017. This aligns with information released by Enerdata, which showed that electricity generated from renewables for Norway (98%) and Sweden (55%) far exceeded the global average (26%) in 2018. This sectoral focus on innovation across the Nordics can be explained in two parts. First, their geography suggests that these countries are well placed to benefit from renewable technologies, particularly in wind and hydropower. Second, all five countries have set ambitious targets for emissions reductions by 2050.

China, South Korea and Japan also rank highly for idea intensity, and there is evidence of specialisation here too. Three sectors prevail across the region: computer technology, electrical machinery and digital communication technologies. Growth in the number of patents in these sectors in these three economies has risen rapidly since 2010, averaging 11% a year, compared with 8% in the US. In 2017, China had more patents granted in computer technologies alone (28,700) than the total number of patents granted to Canada, Australia and Spain combined.

How can other economies raise their idea intensity? Higher spending on research and development (R&D) is one potential policy. Indeed, there is a strong positive relationship between R&D expenditure and idea intensity, as shown in Figure 2. More than 100 economies are included in this analysis and the resulting correlation coefficient is estimated to be around 0.7, implying that around 70% of a change in a country’s idea intensity can be explained by a change in its research and development spending.

Our analysis shows that some regions are much more idea intensive than others. Scandinavia and East Asia are the stand-out performers in terms of their idea creation capabilities. This success seems to be in part explained by honing in on a small number of patent technology areas, which has allowed these economies to develop specialist capabilities.

A consensus is also beginning to build around the link between innovation and economic growth. For example, Maradana et al (2017), found that for 19 European countries there was a strong long-run relationship between six different indicators of innovation (including patents) and economic growth on a per-head basis. This emphasises the point that a country’s ability to generate new ideas has a meaningful impact on whether it can continue to push up living standards of its residents.

In the developed world there is evidence that younger people are less financially successful than their parents and grandparents. In the US, the Federal Reserve has found that millennials’ propensity to spend is similar to previous generations but that their incomes are lower and they have fewer assets. To what extent is this true elsewhere?

Figure 4 shows the change in real income growth of different generations in the G7 between 2000 and 2015. The oldest cohort—born between 1960 and 1964—saw their incomes rise by an average of 20% over the period. But the income of the 1980-84 group grew by just 4%. This cohort saw the slowest growth in incomes in every G7 member.

In some ways, this is to be expected. By 2015 the 1960-64 cohort were reaching the apex of their careers. But the magnitude by which the income of older cohort outperformed that of the youngest is a concern. Growth of 4% over 15 years shows the effect of the global financial crisis on young workers. Members of this cohort were in the formative years of their careers when the crisis put downward pressure on wages, limiting job opportunities and remuneration. Other factors are at play too. The lack of inflation in Japan hit all incomes, but those of the young the most.

Figure 5 shows the change in disposable income for those in various age brackets in 2015 relative to those of the same age 20 years earlier. Generally those in 2015 were better off, with the exceptions of several groups in Japan and Italy. But the pace of expansion was very uneven. On an average basis across the G7, those aged 51-65 in 2015 had disposable incomes that were 17% higher than those of the same age 20 years earlier. Growth in the incomes of other age groups were much slower. Those aged between 41 and 50 in 2015 saw the smallest improvement.

Why should the past 20 years have been so different for two groups of relatively similar ages? The financial crisis may be important here too.

The older group are likely to have been more senior (and less vulnerable) at a time of acute labour market distress, while those aged 41-50 in 2015 may have missed out on a period when they may have expected their wages to rise quickly. Another consideration might be the rapid growth in executive and senior remuneration over the past two decades, which is likely to have disproportionately benefited the oldest group.

There are significant country variations in the fortunes of the younger age groups. In Canada and France, the growth in the disposable income of 18-25 year-olds and 26-40 year-olds more or less kept pace with that of the 51-65 group over the period. This is not the case in the UK or Germany, where the young fared worse than their predecessors.

One likely reason for this is the prevalence of part-time work, which has grown fastest for young workers in the economies which have seen the slowest growth in disposable income, such as Germany. In Canada, the incidence of young workers in part-time employment has barely moved.

The high disposable incomes of the baby-boomer generation looks set to continue, barring the implementation of redistributive policies. The slower income growth of younger workers also shows the long-term effects of major financial crises, which continue even after economic stability has been restored.