Innovation ecosystems are a complex process that span the generation of ideas, their translation into products, and the commercialization of these products to a large scale. The success of this progression depends on multiple factors, such as a business culture that rewards entrepreneurship, risk-taking and a will to embrace change, a set of regulations and administrative norms that incentivize this attitude, a strong knowledge-generation sector (universities, research centres and laboratories), and collaboration between these knowledge centres and commercial businesses. Innovation can be successfully steered towards applications particularly valuable to society (e.g. green energy).

This section focuses on trends in business culture and R&D as the main drivers of innovation, while also considering proactive policies to direct technological progress towards accelerating the goals of sustainability and shared prosperity. Section 4.1, using historical data, shows trends in national innovation, highlighting weak spots in processes that should deliver sustained technical change, partially explaining productivity slowdown in the past few decades. Section 4.2 provides a set of priorities for policy interventions for the next short run (1-2 years), designed to re-start innovation and growth past the COVID-19 crisis, focusing attention on measures that could benefit, simultaneously, employment creation, socially-valuable services and energy transition. Section 4.3 offers policy recommendations for the longer run (3-5 years) that embed social and environmental outcomes and patient investment into innovation objectives.

Entrepreneurial culture has strengthened in the past decade but has not resulted fully in the creation of new firms.

A number of national and global initiatives have scaled efforts to instil an entrepreneurial culture among students, recent graduates and workers. Overall, entrepreneurial culture, measured by attituded towards risk, has increased. Among advanced economies, countries in continental Europe have tried to close their gap vis-à-vis the United States (Figure 4.1). This has led to new innovation ecosystems around leading metropolitan areas. Germany and France, for example, appear to have achieved some success over the past 3-5 years—in parallel with the emergence of Berlin and Paris as hotspots for start-ups and the establishment of a few unicorns in both countries. Among emerging economies, India shows a similar success path, fuelled by the visibility of some of its tech hubs, particularly Mumbai and Bangalore.

Yet measures of business creation have stalled or regressed, signalling an incomplete conversion from business culture to successful commercial activities. In many advanced economies, firm foundations never recovered to pre-crisis levels after 2008–2009, raising concerns about the long-term consequences on competition and productivity. Early numbers from the aftermath of the COVID-19 crisis signal a mixed picture. A unique case among advanced economies, the United States experienced an unprecedented spike in new business creation during the third quarter of 2020. This has been attributed to the combined effect of the immediate support to the financial sector that avoided a credit crunch, generous unemployment subsidies that provided laid-off workers with the safety nets necessary for new entrepreneurial ventures, and the severe disruption of established routines, social structures and business models brought about by the pandemic.

It is too early to know whether this new wave of business creation will turn into long-term job creation, and whether the reallocation is happening towards economic activities that will provide better livelihoods for workers and more sustainable business models. Without diminishing the importance of ‘animal spirits’ to maintain a competitive and dynamic business sector, COVID-19 has contributed to rethinking of whether societies should more proactively orient market forces and direct innovation on the basis of shared values and future challenges.

There is a lack of sustained creation of breakthrough technologies and, where there has been innovation, it has not been widely successful at delivering solutions to increasing energy consumption, managing emissions and meeting the demand for inclusive social services.

Over the past decades, despite fast progress in digital and communication technologies, there has been a slowdown in significant technological breakthroughs, especially in domains which could potentially combine high economic growth with sustainability and inclusivity. On the one hand, digital technologies have had a limited return for economic and social outcomes when compared to the progress made through, for example, sanitization or electricity. On the other hand, publicly-funded, long-term research projects that can generate the type of risky, breakthrough innovation the world needs have slowed down, as governments have stepped back from the kind of research-intensive programmes that were the basis of the space race and other mission-driven approaches to innovation.

The pandemic and its aftermath have shown that we have not invested enough in the right type of innovation that could make our societies more inclusive, sustainable and resilient. For example, programmes to develop antivirals had been underfunded, and many of the digital services and technologies which had been developed by the IT industry—while necessary to continue economic and social activities avoiding physical interaction—were not fit-for-purpose to support the frontlines of the pandemic response.

In the last several years, the development and adoption of green technologies and more sustainable products and services have not kept up with the pace of economic growth. Global emissions have increased, particularly in low- and middle-income countries that have experienced a tumultuous process of economic development as of the early 2000s (Figure 4.2).

A similarly slow rate of progress exists in the markets for education, care and other social services where new technologies have not resulted in vastly different social outcomes. This calls for more proactive efforts to combine technology, investment and incentives to enhance social outcomes.

Expand public investments in R&D, and incentivize venture capital and R&D in private sector and the diffusion of existing technologies that support the creation of new firms and employment in "markets of tomorrow".

Directing innovation and technological diffusion will be among the top priorities for the immediate revival of the economy. As governments design ambitious support packages for the economy, leveraging favourable financing conditions, they will have to balance the urgency for immediate results— particularly in terms of job creation—with the need to start preparing a broader economic transformation towards the markets of tomorrow.

Public R&D funding is among the types of investments that can generate the highest number of good-quality jobs. It has been estimated that in OECD economies five new jobs are created with every 1 million dollars invested on public R&D, and twice as many when the investment is channelled through higher education institutions. This is higher than the job creation triggered by investment in any type of infrastructure in advanced economies (electricity, roads, health and education, water and sanitation). In order to achieve a timely disbursement of resources, governments may want to channel funding to existing research programmes and funding schemes rather than designing brand-new ones. Yet, they should aim to prioritize research that is directed towards the invention of products, services and technologies that can help better position their countries in developing the markets of tomorrow.

Venture capital and private equity support will remain fundamental to accompany the private sector in the transformation of economies. Some countries had already embarked on a process of green and digital transformation prior to the pandemic, and COVID-19 has both increased the demand for a third dimension of social transformation and also triggered a revival of entrepreneurial activity in some countries. Venture capital will be needed convert these ventures into long-term sources of jobs and growth. Early evidence shows that the crisis has had a limited impact on both the value of current VC portfolios and on their ability to fund additional ventures. Yet, governments—especially in those countries with a weaker VC ecosystem—might want to consider the launch of dedicated innovation funds for seed and early-stage financing, prioritizing the transformation towards the future sources of economic, social and environmental value. Funds such as Israel’s Yozma provide examples for the creation of public-private funds-of-funds as pathways for setting the foundations of a broader VC ecosystem.

Finally, governments should also consider the innovation capacity of the existing firms and their need to upgrade their production and business processes and product portfolio. In advanced economies, a credit crunch has been largely avoided thanks to unprecedented monetary interventions, and private equity and debt financing remains available to support the transformation of the traditional economy. Governments should, in particular, reinforce and direct their efforts to create more favourable conditions for the adoption of greener technologies and the development of more job-creating, socially oriented and sustainable product portfolios. This can be achieved through conditionality attached to public funding and guarantee schemes, targeted R&D incentives (grants, innovation prizes) and a more strategic use of public procurement.

Incentivize and expand patient investments in research, innovation and invention that can create new “markets of tomorrow”.

Long-term economic transformation and the transition to a more sustainable and inclusive paradigm will only be possible by investing in the right type of products, services and technologies that will allow our society to generate economy growth and prosperity while safeguarding the planet, empowering people and strengthening our communities and institutions. Such a paradigm shift requires long-term thinking and patient capital that is compatible with the failures, risks and timeframes of breakthrough research and development. Countries should define, through a consultative process, the key priorities of their innovation and industrial strategy, and identify the key markets they will invest in to sustain long-term economic growth and their transition to a more inclusive and sustainable economy. For each of these markets, research and innovation should be oriented towards solving the use cases that can address societal and environmental challenges and generate economic value.

In spite of high expectations from governments, businesses and the public, the potential of many of these markets of tomorrow remains untapped. We have not yet witnessed the kind of breakthrough innovation and diffusion that could make educational technology (edtech) a widespread, effective and engaging complement of traditional education. We are only starting to map and create new sequences of genes and DNA that could revolutionize the way we produce the objects we use, the food we eat and the drugs we take. We are still waiting for better deployment of existing technology and new technologies that could support eldercare, childcare and healthcare. And our aspiration to explore space is still undercut by the stalling in R&D of relevant technologies, from propulsion engines to spacesuits and interplanetary communication. The inventions needed for some of these new markets might not necessarily come from a technology lab. Innovative financial products, new business models and new policy incentives might revolutionize the way we manage water resources or provide health or unemployment insurance or the exchange of data and the use of artificial intelligence.

Strengthening the capacity of public and private actors that are responsible for designing and implementing innovation strategies is a prerequisite for a successful transformation. Tasks and roles are likely to be distributed among a number of institutions along the innovation chain: national innovation agencies, local innovation and technology parks, university and research institutions, individual companies, private sector research centres, etc. Coordination and communication are key to ensure that there is a shared vision and a timely exchange of information regarding recent developments and future plans.

Incentivize firms to embrace diversity, equity and inclusion to enhance creativity.

Innovation benefits from interaction from experts with different views or backgrounds. As such, improving the diversity, equity and inclusion across the entire innovation chain will be fundamental to broadening the pool of potential talent, improving the capacity of new solutions to reflect the needs of society, and making sure that all segments of society participate fairly in the economic benefits generated through innovation.

Research institutions, incubators, venture capitalists and all the relevant actors of the innovation ecosystem should strengthen their efforts to provide equal opportunities to women inventors, researchers and entrepreneurs, and, similarly, address any form of discrimination on the basis of race, religion, disability and sexual orientation. They should equally experiment with new ways to close opportunity gaps across different socio-economic backgrounds and contribute to bridge the growing divides between urban and rural areas.