Jul 31, 2020
No, Germany is not the Most Innovative Nation
This chart identifies the world’s top 20 most innovative economies — at least if we believe the annual index created by Bloomberg.
The annual Bloomberg Innovation Index, in its eighth year, analyzes dozens of criteria using seven metrics […] Germany took first place in the 2020 Bloomberg Innovation Index, breaking South Korea’s six-year winning streak, while the U.S. fell one notch to №9.
Living and working in Germany for quite some time, the result bewildered me. I don’t feel like I’m in the most innovative nation.
Is this typical german understatement? To find out, I looked up the metrics Bloomberg chose to value innovative capacity. You’ll see how they got to their conclusion.
R&D Intensity
Annual research and development spending, as a % of an economy’s gross domestic product (GDP).Patent Activity
The number of annual patent and grant filings, and the 3-year average growth of filings abroad and filings growth, as a share of the world’s total patent growth.Tertiary Efficiency
The total enrollment in higher education, the share of labor force with advanced education levels, and the share of STEM graduates and in the labor force.Manufacturing Value-added
Manufacturing output levels — contributing to exports — as a % of GDP, and per capita.Productivity
GDP and gross national income (GNI) in the working age population, and the 3-year improvement.High-tech Density
The volume of domestic, high-tech public companies as a share of the world’s total companies. Examples of high-tech companies include: aerospace and defense, biotech, internet services, and renewable energy.Researcher Concentration
Professionals (including postgraduate PhD students) engaged in R&D across the population.
These are KPIs for innovative Industrialisation — not for innovative Knowledge work.
Albert Wenger talks about the difference in his book World After Capital. He divides the historical progress of humanity into four stages.
- Forager Age. Scarcity: Food.
- Agrarian Age. Made possible by agriculture. Scarcity: Land.
- Industrial Age. Made possible by machine power. Scarcity: Capital.
- Knowledge Age. Made possible by digital technologies. Scarcity: Attention.
Knowledge workers are in a completely different paradigm than Industrial workers. While the Industrial Age needed to understand physics or chemistry in order to improve its machines, the Knowledge Age has to deal with the implications of zero marginal costs and universal computation.
In my words, we are in the transition of moving up one step of the pyramid: From foremost material (e.g. hardware) to foremost immaterial (e.g. software) outputs.
With that in mind, take a look at Bloomberg’s metrics.
- R&D activities are often a misleading proxy. In general Tech companies have a high R&D spend. But it’s often for so-called moonshots. Apple on the other hand invested only 3% of its revenues in R&D, yet I wouldn’t call them not innovative.
- Manufacturing and Productivity output metrics are totally meaningless, because Software isn’t going to get manufactured and gets more productive without additional manual labor.
- STEM graduates and Researchers are important, but it depends highly on the practical appliance. I heard anecdotes were legions of automotive physics engineers optimize the chassis suspension to get a marginally better traction— yet customers are complaining about confusing onboard menus and missing USB sockets for their children’s iPad.
- Patents matter in the physical world and maybe Biotech— in the Software world they are not as relevant and should probably be abandoned.
So, Tobi Lutke is right when he says that Germany should be proud of its Engineering. But (Civil) Engineers where needed for the Industrial age — now we need Knowledge Workers in an immaterial sense.
Also, I stressed the practical applicability of innovations. Horace Dediu went so far to say: Without adoption by customers you aren’t innovative in the first place.
If the aforementioned metrics are for the Industrial Age, what are metrics for the Knowledge Age?
What we should measure
Age of Companies
Given Schumpeter’s concept of Creative Destruction, it’s always a good sign when an economy hosts young companies. This gets amplified the moment we are really in a paradigm shift as Wenger described. You want more of the new, less of the old.
But the 'old continent' is old, indeed. In terms of companies and in terms of its inhabitants. Ingo Sauer from Goethe University Frankfurt explains the connection.
Entrepreneurial Activity
Of course, to get ‘more of the new’, you’ll need founders and entrepreneurs who build stuff.
The ‘Build’ essay from Marc Andreessen is good. What bugs me about it: The problem description thinks in institutions, systems and cultural norms. The proposed solution thinks highly individualised. With that, his essay captures the most valued characteristics of Venture Capital and Silicon Valley:
- libertarian
- entrepreneurial spirit
- sheer willpower
- individual maker = hero
Those characteristics form a system that runs the risk of becoming numb of the societal issues it creates. A very ego-centric system.
But the focus on “It’s up to you!” has some pretty good side effects. From countless data points I picked the study Global Entrepreneurship Monitor 2019/2020.
The US hosts approximately double the entrepreneurial activity than Germany. So from that (narrow) perspective it’s not a bug, it’s a feature.
Market Valuation
Stocks are not a good proxy because of their volatile and psychologic nature — in SARS2 times more than ever. But Stocks are maybe the best proxy we have, given that they represent a crowd sourced metric of all discounted cashflows of the future.
Who will own the economic future according to Wall Street?
Big “Tech”. It’s no coincidence that the most valuable companies are also Tech companies.
(See this separate article for a deep dive into the numbers and a clearer distinction of what should be counted as Tech.)
“Tech” companies as share of total companies
Tech companies enabled the financial V-shaped recovery of the S&P 500 after the Corona crash. It’s “Nasdaq vs. The World”, and at the moment it seems like the Nasdaq is winning. Obviously an economy should want to have the companies enabling this.
But it cuts deeper. Silicon Valley enables growth loops that foster its ecosystem to this day: Founders and even middle managers or engineers get rich by participating in the first wave of capital accumulation (rising stock price) and use that capital to either
- start their own company (see for example the illustrious PayPal Mafia)
- or switch into Venture Capital to get rewarded financially and socially.
Compare that to Europe, where the best and brightest minds of the universities go to the established incumbents in legacy industries.
After the demise of Wirecard, the only digital company left in the DAX is 48 year old SAP. Seems fitting.
Regulation that is willing to take risks
Following a new idea is — in the efficient market hypothesis — always aside the proven path. If we know that a Startup will work beforehand, then it would have been tried before.
Therefore it needs some kind of loose regulation, at least for the upstarts. I know the dangers of this approach, but on the other hand by over-regulating you get an even worse result.
Ben Thompson on why Europe isn’t suited to be the home market for many Startups:
Any company that wishes to achieve scale needs to do so in its home market first, before going abroad, but it seems far more likely that Europe will make the most sense as a secondary market for companies that have done the messy work of iterating on data and achieving product-market fit in markets that are more open to experimentation and impose less of a regulatory burden.
In 2010 Michael Mace foresaw the downfall of RIM while revenues were still rising. You can do the same kind of analysis for every platform or ecosystem.
I think Germany (or Europe for that matter) has to be really, really careful to not fall behind, just like RIM did.
The very important first step: Don’t feel a false sense of security because of something like the ‘Bloomberg Innovation Index’.
