How Switzerland Stays at the Peak of Global Innovation

By Laurent Carbonneau‍

Canada and Switzerland have a lot in common on the surface. We’re both multilingual federations with beautiful mountains, deep lakes, and heart-stopping cheese-and-potato dishes.

But one of us – and, just a hint, it’s not Canada – has managed to reign unchallenged at the top spot on the World Intellectual Property Organization’s Global Innovation Index for a preposterous 13 years in a row, beating out Sweden and the United States in this year’s rankings. (Canada, for what it’s worth, ranked 15^th).

Casual observers looking at similarities might be forgiven for wondering what makes Switzerland such a powerhouse while Canada is so far from the podium. Like Canada, Switzerland is a small country with limited pools of venture capital and human capital, limited public R&D spending, high prices and limited domestic competition. So how has Switzerland managed to stay on top for so long? Let’s take a look at some key differences in the innovation performances of both economies.

In 2022, Canada spent 1.55 per cent of its GDP on R&D overall. The same figure for Switzerland in 2021 was 3.36 per cent. Zooming in further, the Swiss spent over 2 per cent of their GDP on business-financed research (BERD), while Canadian businesses spent the equivalent of 0.86 per cent. I’m far from the first person to point out that Canadian BERD is troublingly low.

So, what drives investment in R&D? I’ll take a moment to talk about two concepts here that help explain both the big differences in Canada and Switzerland’s innovation results.

The first is economic complexity. This is expressed through the Economic Complexity Indicator (ECI), essentially a compressed set of statistics that captures the amount and the complexity of products that a country exports. This is an empirical analysis based on hard trade data that captures not just the industrial capabilities of a country in terms of capital stock, but how successful the country is at actually selling its products globally. Further empirical work suggests that it is the measure that most closely correlates to future income growth.

It probably won’t surprise you to learn that Switzerland has ranked consistently very high, at 2^nd or 3^rd, since 2000. Canada ranked 41^st in 2021, down from a high of 22^nd in 2000. Our economy has actually become about half as complex as it used to be over the course of a generation.

Since complexity is a measure of capabilities and results, it has certain self-reinforcing features. With the exception of the dramatic ascent of South Korea from 20^th to 3^rd, the top 10 most complex economies have remained remarkably consistent since 2000. Consistent reinvestment by leading firms in refining processes and developing new products drives and maintains complexity, and makes it easier for countries to jump into and compete in ‘adjacent’ capabilities. Losing capabilities makes it harder to make back that ground.

This leads us to the other concept I want to lay out, which is ‘Nokia risk.’ This is a very useful concept articulated by Herman Schwartz that basically takes the basic conclusions of innovation-driven disruption and dominance seriously – as companies grow to become global leaders in a given niche or industry, the risk that they themselves get disrupted by new technologies or economic or political factors becomes a risk for their home countries, particularly when those countries are small. Schwartz helpfully points to some statistics that can help make Nokia risk more concrete, like the share of business R&D done by the single biggest investor (33 per cent in Switzerland, 14 per cent in Canada) and the share done by the top five (78.3 per cent for Switzerland versus 52.9 per cent for Canada). Switzerland has a very top-heavy innovation economy dominated by home-grown, globally competitive firms that serve as an accelerant for a vibrant ecosystem.

Looking back at recent Canadian business history, the roughly concurrent shocks to Blackberry after the introduction of the iPhone in 2007 and the demise of Nortel in 2009 demonstrate Nokia risk in action. Looking at ECI, Canada went from 30^th in 2006 to 42^nd in 2011, and we’ve never managed to crack the top 30 since. Similarly, business R&D as a share of GDP began to downwards from 1.1 per cent in 2006 to .95 per cent in 2011, only cracking 1 per cent once since then (in 2020).

So, what is the One Big Thing that the Swiss do right? The One Big Thing Canada has struggled to do: grow innovative scale-ups into globally competitive, IP-rich firms that are able to build on their success to mitigate risk. But disruptions happen, and we should think of how we can be the beneficiaries.

You can read more from me here on how AI is an opportunity for Canada to build a new generation of titans.

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