Country level comparison of innovation systems. Germany, Israel and Norway

Table of Contents

List of figures

List of abbreviations

Abstract

1 Introduction

2 Analysis
2.1 Country Overview
2.2 Factor Conditions
2.3 Demand Conditions
2.4 Related and Supporting Industries
2.5 Firm Strategy, Structure and Rivalry
2.6 Government

3 Discussion
3.1 Triple Helix
3.2 Germany
3.3 Israel
3.4 Norway

4 Conclusion

List of references

Appendix

List of figures

Figure 1: Structure of analysis

Figure 2: GDP

Figure 3: Patent applications

Figure 4: Innovative sources

Figure 5: Quality of overall infrastructure

Figure 6: VC investments per capita

Figure 7: Buyer sophistication index

Figure 8: State of cluster development

Figure 9: Intensity local competition

Figure 10: Availability of scientists and engineers

Figure 11: Venture capital availability

Figure 12: Domestic market size index

Figure 13: Hofstede cultural dimensions

List of abbreviations

BA Business angels

BaWü Baden-Württemberg (Germany)

CAGR Compound annual growth rate

GDP Gross domestic product

NIS National innovation system

OECD Organisation for Economic Co-operation and Development

PDM Porter Diamond Model

SME Small medium enterprises

USD US Dollar

PCT Patent Cooperation Treaty (WIPO)

R&D Research and development

VC Venture capital

Abstract

Innovation lies at the heart of globalisation, whereby to stay relevant in competitive markets and improve economic growth, countries must put in place strong National Innovation Systems (NIS). Thus, the key goal of this paper is to analyse and compare the National Innovation Systems of various countries. Germany, Israel and Norway were chosen as part of this study, particularly because of their strong innovative history, high levels of innovation and the importance of innovation for their future competitiveness. Firstly, an analysis of core primary data provides a brief overview of each country. Subsequently, Porter’s Diamond model, and its four factors, helps us evaluate in detail each of the country’s NIS. After analysis, each country is methodically discussed using research, results and the Triple Helix Model. Using this, we found Israel has a highly efficient NIS, showing incredible dynamic development in recent years. Germany’s NIS was found to be deeply rooted in their economy and Norway’s lower levels of GDP and patent applications per capita indicated lower levels of innovation. It is recommended each country focus on maintaining strong NIS to combat future challenges, including the trend of climate change.

1 Introduction

”National prosperity is created, not inherited. […] A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world’s best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers.“ (Porter, 1990, online).

In the age of globalization, a country's growth and international competitiveness are closely linked to its capacity for innovation. With the increasing internationalization of the economy and the globalization of markets, the international competitive pressure on countries increases. In these rapidly changing times, it is imperative for every country to have a good national innovation system (NIS). A good NIS forms the basis for successful innovation in a country, creating incentive systems and organizational structures. Good innovation management is necessary as innovations can be very risky, cost-intensive and often require special protection and the cooperation of numerous players (Wheelwright & Clark, 1992, p. 115).

Sources of innovation in a society can be versatile, from the research and development (R&D) department of a company over individuals (inventors, users) to universities or state-funded research.

The relevance and complexity of innovations described above requires countries to maintain a comprehensive NIS in order to meet future challenges and to prosper. Therefore, the aim of this project is to analyse and compare the NIS of different countries. This paper examines the NIS of Germany, Israel and Norway. In order to compare the nations, we will first present core data on innovation in a country overview (section 2.1). We will then use the porter diamond model (PDM) to analyse the individual NISs in more detail (section 2.2 – 2.6). The exact procedure is explained in section 2. In the following discussion (section 3), the core results of sections 2.2 to 2.6 are brought up again to be discussed alongside the background of results from section 2.1 and the Triple Helix Model (section 3.1). In the final conclusion the main findings will be summarized and given an outlook.

2 Analysis

In the following, the NIS of Germany, Israel and Norway are examined. But why exactly these countries?

Germany is looked at in this study because the country is known throughout the world for its innovations, such as the car or the bike (Mannheim, 2020, online). Germany places ninth in the Global Innovation Index 2019 ranking (Cornell University, INSEAD, WIPO, 2019, p. xxxiv). In addition, Germany is an interesting object of study because there are also strong differences within Germany regarding innovative strength (see section 2.4) (Stackhouse, 2002, p. 116-119).

Furthermore, this work examines the NIS of Israel. Israel places 10th in the 2019 Global innovation index ranking (Cornell University, INSEAD, WIPO, 2019, p. xxxiv). According to the report, Israel is the leader in innovation in the Northern Africa / Western Asia region. Tel-Aviv-Jerusalem is one of the top clusters for innovation and therefore, represents an interesting object of investigation (Cornell University, INSEAD, WIPO, 2019, p. xvi, xxvii).

Norway is the third country this paper studies. According to current rankings, Norway is also among the top 20 most innovative countries in the world (Cornell University, INSEAD, WIPO, 2019, p. xxxiv). A study of Norway's NIS is relevant because a strong NIS will be needed to transform the Norwegian economy, which is still heavily dependent on oil and gas. Also in the context of climate change, innovation will play an increasing role for Norway (OECD, 2017a, p. 18).

In this work, PDM is used as the basic structure for the analysis of the NISs (Porter, 1990, online). The model describes how countries can achieve competitive advantages using various factors and therefore, is suitable for analysing the NIS of a country. In PDM, there are four main factors that essentially determine the competitiveness of a nation. These determinants limit the room for maneuver for the industries in a country. The four factors are: Factor Conditions, Demand Conditions, Related and Supporting Industries and Firm Strategy, Structure and Rivalry. Each factor will be studied in precise detail at the beginning of each section of the analysis. In addition, the influence of Government is considered in this work (Porter, 1990, online).

For a better understanding, the main structure of the analysis procedure is illustrated below (figure 1). The diagram is based on the concept of Afzal, Lawrey and Gope (Afzal, Lawrey & Gope, 2019, p. 345).

The analysis begins with an evaluation of the strength of each country’s NIS and overall economic situation using indicators such as the number of patent applications (section 2.1). Following, the paper analyses factors (PDM) which influence the NIS of a country (section 2.2 – 2.6). The primary aim of this is to reveal differences and similarities between countries’ NIS.

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2.1 Country Overview

Before we begin using the PDM, we will first take a closer look at each country. To do so, we will look at some of the key indicators to better assess each country's current state of innovation and overall economic strength (see figure 1). For this purpose we will use the data of WIPO (World Intellectual Property Organization).

Firstly, we explore the development of the growth domestic product (GDP), which gives us an overview of the general economic development of each country. As figure 2 highlights, all GDP developments indicate a clearly positive trend. However, differences can also be observed. Israel's GDP grew by 40 percent from 2009 to 2018, which is significantly faster than the respective GDP growth of Norway (15%) and Germany (20%).

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An important measure that evaluates the NIS of a country is patent applications. Therefore, in the following we will give an overview of how many patents were applied for by Germany, Norway and Israel in the period from 2009 to 2018 and whether trends can be identified. Registrations of the respective citizens with domestic (residents) as well as foreign (abroad) patent authorities will be looked at. The following graph displays the numbers for Israel and Norway (figure 3).

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First of all, it is visible that Israel has significantly more patent applications in absolute terms than Norway. In 2018, for example, there were just under 16,000 Israeli and fewer than 7,000 Norwegian patent applications. Nonetheless, the large absolute difference in patent applications can be partly explained by the different population sizes (Israel: 8.88 million, Norway: 5.31 million) (Wipo, 2020, online).

If we put the patent applications in relation to GDP (Israel: 299.04 billion USD, Norway: 347.78 billion USD), the big difference between Norway and Israel is visible. Much more astonishing than the absolute difference, from which initial judgements about the countries' innovative capacity can be derived, however, is the development in recent years. Over the last 10 years, Israel has seen an annual increase in patent applications of 4.7 percent, while the compound annual growth rate (CAGR) of patent applications in Norway was 2.61 percent.

In 2018, 180,086 patents were registered in Germany. This high number is to some extent due to the size (e.g. number of firms) of the country. However, when looking at the development of the last 10 years, we can see that the number of patent applications of Germany has grown only slowly with a CAGR of 1.04 per cent and thus lags far behind the development of Norway and especially Israel. A possible explanation could be that Germany is already at a higher innovation level, as the following calculation shows. To quantify and compare the level of innovation in each country we can compare the ratio of patent applications per capita (Stackhouse, 2002, p. 114). Despite the relatively slow increase in new patent applications in Germany over the last 10 years, Germany still has the highest ratio of patent applications per capita of the compared countries (Germany: 0.00217, Israel: 0.00174, Norway: 0.00123). This indicates that Germany has a high level of innovation that was achieved earlier than Norway and Israel.

To conclude the country overview, the 2018 most innovative companies and institutions (sources of innovation) in each country are presented, measured by patent applications to the Patent Cooperation Treaty (PCT) system (figure 4) (Wipo, 2020, online). In Germany, it is striking that two companies occupy the first places. Both are automotive suppliers and their competitiveness plays a major role for the German economy.

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Figure 4: Innovative sources

Note: Own creation, Data from Wipo, 2020, online.

This is no coincidence since innovation management plays a very important role in both firms (Schepers, Schnell & Vroom, 1999, p. 26). In Israel, the two top sources of innovation are both universities, which indicates a strong education system (see section 2.2). In Norway, as in Germany, two companies occupy the top two places. Of particular interest is the first place in Norway, Statoil Petroleum. The high level of innovation can be attributed, among other things, to the fact that the oil and gas industry is the largest industry in Norway and companies like Statoil will have to reposition themselves in the coming years to stay competitive (OECD, 2017a, p. 18).

The following sections (section 2.2 – 2.6) provide possible explanations for the figures and developments presented in this section.

Key findings:

- All three countries are growing (measured by GDP), with Israel the fastest, followed by Germany and Norway.
- Germany has the highest number of patent applications per capita of the three countries. However, Norway and especially Israel are catching up.
- While in Germany and Norway companies dominate as sources of innovation, in Israel universities apply for most patents.

2.2 Factor Conditions

Factor Conditions describe resources that either exist or do not exist in a nation or firm. They are not acquired but made in a country (Afzal, Lawrey & Gope, 2019, p. 341). Examples of factor conditions are capital resources, natural resources, human resources, knowledge resources or infrastructure. Factor conditions have a major influence on the innovation capacity of companies and industries and therefore, the competitiveness of nations. Porter further differentiates between advanced and basic factor conditions (Porter, 1990, online). Unskilled labour and natural resources are basic factors, while advanced factor conditions include capital, expertise and skilled labour. This distinction is important so as to follow Porter's argumentation. According to this, no competitive advantage can be achieved by basic factors alone, since these can be obtained from any firm. Porter argues that a competitive advantage can only be achieved through advanced factors. He points out that in the economy`s key industries the most important factors are not inherited but created. In order to build up advanced factors, heavy investments and a high degree of specialization is needed (Porter, 1990, online). To evaluate the factor conditions, we will take a closer look at the education system, workforce, infrastructure and capital resources in each country.

The strength of a country's education system has a strong influence on its capacity for innovation. The creation of human capital occurs in schools and universities and continues in firms. An indicator for the performance of the education system is the quality of scientific research institutions. According to the World Bank, Israel places 3rd, Germany 11th and Norway 18th (The World Bank, 2020, online). Israel's high ranking partly explains why universities and not companies are the main sources of innovation in Israel (see figure 4). Another strength Israel exhibits is that, according to The World Bank, the university-industry collaboration in R&D is better than in Germany and Norway (The World Bank, 2020, online).

According to Stackhouse, the innovation capacity of a country can also be measured by the number of engineers and scientists (Stackhouse, 2002, p. 114). Israel has a higher relative availability of scientists and engineers than Germany and Norway. Figure 10 in Appendix shows the availability of scientists and engineers. The lack of engineers poses major problems for Germany, as there is high demand, but a lack of available engineers on the labour market (Weiden, 2016, online). The OECD data on the density of scientists supports the data in figure 10. The “Total researchers in full-time equivalent per thousand total employment” in 2012 was 8.4 in Germany, 10.4 in Norway and 17.4 in Israel (OECD, 2017b, p. 12).

One thing is certain, in order to be innovative in the long term, a nation needs a strong education system. To meet these challenges and support the education system, it can be helpful to attract talents from other countries.

Norway tries to attract talents with its high standard of living (e.g. work-life balance, well-regulated labour market) (Garmann Johnsen, 2019, p. 3). Furthermore, immigration policy can be adapted. In 2002, an initiative was launched in Germany that allowed companies to hire IT specialists from non-EU countries, which helped to reduce a shortage (Bauer & Kunze, 2004, p. 14). Israel allows immigration through The Law of Return, a law giving every Jew the right to live in Israel (The Knesset, 1950, online). This certainly helped Israel to become the innovative country it is today (Vega, 2013, online).

Being able to attract talents is just as important as being able to retain them. According to The World Bank, Norway can score points here and ranks 4th worldwide (“capacity to retain talent”, Year 2012/2013). Germany is in 13th place, followed by Israel (19th place). It is to be noted that Israel was able to improve considerably (ranked 49th in 2008/2009) (The World Bank, 2020, online).

Furthermore, a well-developed infrastructure is a basic prerequisite for achieving a competitive advantage (Porter, 1990, online). Infrastructure includes scientific/ technological infrastructure (e.g. expansion of broadband) as well as the existence of roads, ports and airports. The following chart shows the World Bank data on the "Quality of overall infrastructure" in Germany, Israel and Norway on a scale from 1 to 7 (figure 5).

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One means extremely underdeveloped, among the worst in the world and seven indicates extensive and efficient infrastructure, among the best in the world.

The chart shows that the overall infrastructure in Germany is the best developed. This can be attributed, among other things, to its dense population and central location in Europe. However, the quality has declined in recent years, which indicates a need for investment. Norway and Israel are at a similar level, but fall significantly behind Germany. Due to the scope of this work, we refrain from an in-depth analysis of the infrastructure, but would like to stress that infrastructure is an important pillar of a strong innovation system.

The following point of analysis deals with capital, in other words, the financing of innovations. What are possible sources? If available company profits, money from "family, friends and fools", bank loans, state subsidies, capital from shareholders (IPO), capital from business angels (BA), venture capital (VC) or capital from Crowdfunding can be used to finance innovation (Moritz & Block, 2014, p. 60). In this paper, we focus on the VC activity in each country as an indicator for the financing of innovation. Studies show that patent applications, and therefore innovation, are positively affected by VC (Faria & Barbosa, 2014, p. 131). It seems to be clear, that the supply of risk capital is critical to promote innovation (Mayer, Schoors & Yafeh, 2005, p. 587).

World Bank data on “venture capital availability” in the period from 2008 to 2017 shows that availability was higher in Norway and Israel than in Germany. On the scale from one to seven, where seven is best, Norway and Israel reach 4.5 on average. Germany had a poorer availability and achieved a rating of less than 3 in the period 2011/2012 (see figure 11 in Appendix). In recent years numbers for Israel and Germany indicate a positive trend, while VC availability in Norway seems to stagnate (Mayer, Schoors & Yafeh, 2005, 587). In the 2017/2018 period, Germany enjoyed a better availability than Norway but still places behind Israel.

The following chart illustrates the strong VC activity in Israel. While only just under USD 60 per capita VC was invested in Germany, over USD 400 was invested in Israel in the same time period (figure 6). This puts Israel in first place for VC investments per capita worldwide. The government of Israel has contributed a great deal to this success.

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In the 1990s, the state established a fund, called YOZMA, and an incubator program to support start-ups and promote innovation. The programs support companies primarily in the early stages of financing, the search for complementary assets and the acquisition of skills (Avnimelech, 2009, p. 1). The advancement of the VC industry in Israel made a major contribution to the successful tech-cluster development (see section 2.4) (Avnimelech & Teubal, 2004, p. 33 – 60).

The government also plays an important role in Norway. Through its fund SND Invest, it was the largest source of equity capital (this is changing now). In order to diversify the economy, enough capital must be made available. Only in this way the economy, which is still heavily dependent on resource-based sectors (oil and gas, wood products), can become innovative and remain competitive in the future (Baygan, 2003, p. 5).

Furthermore VC industries vary greatly between countries. Israel is characterized by early-stage investments, while in Germany investments are increasingly made in later stages. While banks play a major role as sources of VC capital in Germany, corporations dominate in Israel (Mayer, Schoors & Yafeh, 2005, p. 587, 603). In Norway the state is a huge source of capital (Baygan, 2003, p. 5).

Key findings:

- Israel dominates in the education sector. Israel not only has the best research institutions and best cooperation with the business community, but also a higher relative availability of scientists and engineers than Germany and Norway.
- Germany has the best developed infrastructure, Norway and Israel are at a similar level. However, a clear downward trend can be observed in Germany.
- Norway and Israel allow solid financing of innovation with regard to the VC sector. Israel is ranked number one worldwide for VC availability per capita. Recently VC availability is improving in Germany.

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