bdo international business compass

BDO INTERNATIONAL BUSINESS COMPASS 2016Update and in-depth look at innovation

Marie-Christin Rische, Lars Wenzel, André Wolf

BDO International Business Compass 20162

Abbreviations

FDI Foreign direct investment AfDB African Development Bank CIA Central Intelligence Agency GCI Global Competitiveness Index SME Small and medium-sized enterprise OECD Organisation for Economic Cooperation and Development UNDP United Nations Development Programme UNECA United Nations Economic Commission for Africa

Authors Marie-Christin Rische, Lars Wenzel, André Wolf (responsible Author)

Publisher Prof Henning Vöpel and Dr André Wolf Hamburgisches WeltWirtschaftsInstitut (HWWI) Heimhuder Straße 71 | 20148 Hamburg Tel +49 (0)40 34 05 76 – 200 | Tel +49 (0)40 34 05 76 – 665 Fax +49 (0)40 34 05 76 - 150 | Fax +49 (0)40 34 05 76 - 776 [email protected] | [email protected]

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TABLE OF CONTENTS

1. Introduction 8

2. Results of the IBC 2016 92.1 Overview 92.2 Updating of data 102.3 Results 102.3.1 Results of the overall index in 2016 102.3.2 Results for the market and production sub-indices in 2016 12

3. In-depth look at innovation 143.1 Innovation 143.2 Regional conditions for innovation 153.3 Investments in resarch and development 233.4 Innovation 283.5 Innovation and economic growth 343.6 Summary of the in-deph look 37

4. Conclusions 395. Bibliography 40

Annex A: Country overview 43Annex B: Overview of variables 44Annex C: Total ranking index 46Annex D: Ranking for market and production sub-indices 50Annex E: Glossary of country abbreviations 53


In the history of economics, spectacular innovations have always been groundbreaking events. They have often paved the way for numerous derivative innovations in a wide range of fields. Not only did these innovations improve productivity, but they made tangible changes to the way we live and do business. There are many indications that we are currently on the brink of a new, unparalleled innovation boom. In particular, the process of digitisation has the potential to shape the future of our society through a number of fields of application such as digital intelligence, robotics and 3D printing. As drivers of growth, innovations may compound this in the long term. As the digitisation process advances, increasingly complex solutions will be in demand. Additionally, due to the individualisation of products and marketing many more ideas can be implemented as innovations than in the past. From a business perspective, the ability of a location to produce successful innovations will therefore also become a much more significant factor in the choice of a location.

Therefore, the focus of this year’s issue of the BDO International Business Compass is the capacity of countries for innovation. We analyse the general conditions for innovation as well as research investment and successful research indicators from country to country. In addition to our in-depth look at innovation, we present the updated

„There are many indications that we are currently on the brink of a new, unparalleled innovation boom.“

ranking of the IBC overall index as a yardstick of local attractiveness. For the fifth time, we have evaluated the general economic, political and sociocultural conditions of individual countries and converted them into illustrative statistics. Furthermore, the production and business sub-indices have been updated from the previous year. This makes it possible to compare countries in terms of their attractiveness as production and marketing locations. With this analysis we hope to provide corporate decision-makers with a useful tool for selecting locations for their companies.

DR HENNING VÖPEL MANAGING DIRECTOR OF HWWI

DR ANDRE WOLF HEAD OF ECONOMICS, GLOBAL ECONOMICS AND INTERNATIONAL TRADE AT HWWI

FROM A BUSINESS PERSPECTIVE, THE ABILITY OF A LOCATION TO PRODUCE SUCCESSFUL INNO- VATIONS WILL THEREFORE ALSO BECOME A MUCH MORE SIGNIFICANT FACTOR IN THE CHOICE OF A LOCATION.

PROF DR HENNING VÖPEL MANAGING DIRECTOR HWWI

DR ANDRE WOLF HEAD OF ECONOMICS HWWI

Los empresarios tenemos grandes expectativas sobre lo que nos ofrece la industria 4.0 y la economía digital. Como parte de la transformación digital, la innovación es una herramienta clave para el crecimiento de los negocios. Estas altas expectativas se refl ejan normalmente en unos índices de capitalización muy altos, incluso cuando la compañía tiene pérdidas signifi cativas o todavía se trata de una start-up. En ocasiones, las predicciones sobre los mecanismos para generar ingresos en el futuro pueden ofrecer conclusiones o recomendaciones no acertadas, sin embargo, en otros casos, el éxito corporativo viene de las altas expectativas y vienen a confi rmar esas predicciones.

Las empresas que tradicionalmente ofrecen bienes de consumo, inversión o servicios, que normalmente se observan desde una perspectiva mucho menos eufórica, son juzgadas bajo criterios completamente diferentes. En una etapa más temprana de digitalización en la cual AOL se hizo con Time Warner, nos demostró lo grande que es esta diferencia: los pioneros en internet se valoraban bajo los mismos criterios que una empresa de la industrial tradicional. Se produjo entonces una bajada muy signifi cativa en el valor de la empresa.

Esta realidad se aplica en los casos en los que el negocio de la empresa se apoya fundamentalmente en la digitalización, frente a aquellas que solo hacen un uso de ésta: su habilidad para innovar resulta crucial para sus resultados fi nancieros, y por tanto ser competitivos y sobrevivir en un entorno en el que los éxitos empresariales son imitados por otros con una velocidad en aumento. Algunos modelos de negocio en los que para ser competitivos, se optaba por retribuir menos a sus trabajadores, han demostrado estar obsoletos en el momento en que hay localizaciones en otros países para la empresa con capital humano más formado, y modelos de producción más efi cientes.

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ALFONSO OSORIO ITURMENDI

Si una compañía pretende mantenerse en cabeza en cuanto a competitividad, necesita ser capaz de innovar. El factor clave no está tanto en el nivel de cualifi cación de sus profesionales, que ya fue analizado en la anterior edición del índice International Business Compass de BDO, sino que la capacidad para innovar está directamente relacionada con la cultura corporativa. La capacidad innovadora de la empresa depende de cómo se promueva la innovación y de las condiciones de mercado adecuadas, que varían en función de cada país.

Esta edición del IBC, elaborada por BDO y HWWI por cuarto año consecutivo, está centrada en analizar esa capacidad en 174 países, a fi n de ofrecer a información clara y representativa a todas las empresas que centran su futuro en la expansión y diversifi cación de sus negocios. Basándose en un análisis muy extenso de los datos, el índice IBC ofrece una visión general de las oportunidades de negocio y los riesgos asociados, para la práctica totalidad de los países en el mundo.

En BDO estamos presentes en la realidad cotidiana de las empresas, mirando por su desarrollo, crecimiento, y ofreciéndoles las soluciones de asesoramiento más adecuadas en cada caso, en todos los países en los que estamos presentes.

Confío en que este informe, así como la herramienta interactiva sea de tu interés y de utilidad para la toma de decisiones en el corto o medio plazo.

Un cordial saludo

Alfonso Osorio

Presidente de BDO en España

“SI UNA COMPAÑÍA PRETENDE MANTENERSE EN CABEZA EN CUANTO A COMPETITIVIDAD, NECESITA SER CAPAZ DE INNOVAR.”

Hong Kong es la primera región en capacidad de innovación del mundo. Así lo afi rma en el International Business Compass (IBC), índice anual interactivo que analiza la capacidad, características y condiciones para la innovación de 174 países de todo el mundo.

Hong Kong, que mostró el mejor desempeño en los tres planos analizados en el estudio -económico, político y sociocultural-, asciende dos puestos con respecto al informe del año anterior y precede a Singapur en la clasifi cación. De esta forma, Asia ocupa los dos primeros puestos del índice.

Con la excepción de Hong Kong y Singapur, el top ten está integrado exclusivamente por países de Europa. Holanda mejora tres posiciones desde el año anterior y se sitúa en tercer lugar, seguido de Suiza que, en 2015, encabezaba el ranking en primera posición. Noruega cierra los primeros cinco puestos, seguida de Dinamarca en sexto lugar. Ambos países han perdido una posición respecto al año anterior.

Según el IBC, Irlanda ocupa el séptimo puesto, lo que representa ganar 10 posiciones respecto a 2015, refl ejo de que las condiciones económicas generales han mejorado. Gran Bretaña, por su parte, conserva la octava posición del anterior informe. Canadá y Australia cierran las diez primeras posiciones de la clasifi cación en noveno y décimo lugar, respectivamente.

Por detrás de Lituania, Letonia, Eslovaquia y Hungría se encuentra España, que ocupa la posición número 42, dos puestos por encima que en 2015 y precediendo a Portugal, que ha ascendido seis posiciones.

El índice concluye, por orden, con la República Centroafricana, Sudán y Corea del Norte en las tres últimas posiciones. El desempeño mostrado por estos países fue extremadamente pobre teniendo en cuenta sus condiciones políticas generales.

El IBC analiza la capacidad, características y condiciones para la innovación de 174 países de todo el mundo, así como sus niveles y tendencias de gasto en investigación y los indicadores del éxito en producción de innovaciones en el pasado. Su principal ventaja reside en la posibilidad de clasifi car países en función de sus niveles de innovación y arrojar luz sobre las inversiones de empresas multinacionales y otras organizaciones a través de estadísticas ilustrativas útiles para los tomadores de decisiones corporativas en la selección de localizaciones para sus compañías.

RESUMEN EJECUTIVO


BDO, que a través del IBC analiza anualmente los niveles de crecimiento de regiones de todo el mundo teniendo en cuenta sus situaciones económica, política y sociocultural, enfoca el análisis en 2016 desde la perspectiva de la innovación dada la previsión de que la carrera tecnológica mundial se intensifi que aún más en los próximos años, tanto en países industrializados como en aquellos en desarrollo y en economías emergentes -que podrían aumentar sus propios niveles de innovación mediante la absorción de nuevas tecnologías-. Como consecuencia, en la economía global del futuro, la innovación tendrá un impacto aún mayor que el de hoy en día sobre la competitividad internacional de los países y empresas.

El índice IBC de BDO es una herramienta web única que tiene la fi nalidad de proporcionar a industrias y PYMEs información fi able sobre posibilidades y riesgos que prevalecen en mercados de todo el mundo de cara a su posicionamiento geográfi co. Los datos que ofrece son de particular importancia para empresas que actúan a nivel global o que tienen entre sus objetivos crecer más allá de sus fronteras. Desde su lanzamiento, el índice ha analizado el crecimiento global desde la perspectiva de la capacidad de empleabilidad (2015), la infraestructura (2014) y la inversión directa (2013).


EXECUTIVE SUMMARY

MOTIVATION

To a great extent, the history of economic growth is the history of major technological breakthroughs. They often occur suddenly, brin-ging with them a string of derivative innovations which permanently change the nature of human economic activity and ultimately the lives of people. The large number of product and process innovations in recent times is a sign that we are most likely on the brink of another technological upheaval in the production structure of our economy. Digitisation is only part of this, as is the trend towards greater sus-tainability. Everyone expects the global technological race to intensify further in the coming years. This applies to industrialised countries as well as developing countries and emerging economies that could increase their own levels of innovation by absorbing new technologies. In the global economy of the future, innovations will have an even greater impact on the international competitiveness of countries and companies than today. As a result, the ability of company locations to stimulate the level of innovation will become an important factor in the attractiveness of regions.

Therefore, the objective of this year’s International Business Compass’ in-depth look should be to determine the characteristics and condi-tions for innovation in an international comparison on the basis of available data. Our detailed analysis is divided into three parts. Firstly, we will discuss the various general conditions for successful innova-tion from country to country. We will then analyse levels and trends in national spending on research and development. Finally, we will eva-luate the success of countries at producing innovations in the recent past using suitable indicators. In addition, as in previous years the IBC overall ranking and both sub-indices have been updated in order for us to be able to evaluate production and business locations.

RESULTS

This year Hong Kong was at the top of the BDO International Business Compass 2016, having moved up from third place last year. The coun-try performed well in all three sub-pillars, especially the economic sub-pillar. Singapore and the Netherlands were close behind in second and third place respectively. Norway rounds off the top five, followed by Denmark. Both countries have fallen by one place compared to the previous year. Ireland is in seventh place, having gained 10 places. Following losses in the previous year, the general economic conditions can be seen to have improved. Great Britain remains in eighth place. The top 10 are rounded off by Canada and Australia. The 2016 ran-kings are largely based on data from 2014. The changes compared to the index in the previous year greatly reflect the global developments that took place in 2014. In particular, this period saw the events in Ukraine and the emergence of the so-called Islamic State. As a result, Ukraine is the big loser in the ranking. Ongoing crises continue to flare up, for example in Greece, Nigeria and Libya. This period also saw the outbreak of the Ebola epidemic in West Africa. Overall, the results are relatively familiar in spite of the events. The industrialised nations from North America and Northern and Western Europe continue to dominate the rankings. Central African countries in particular are per-forming poorly this year.

The major industrialised countries Germany, Japan and the USA are in 12th, 15th and 20th place. The top 40 places are dominated by Euro-pean and OECD countries, as well as some of the rich oil-producing nations of Asia. The bottom ten places are occupied by the most economically impoverished countries. The Central African Republic, Sudan and North Korea are in the bottom three places. These coun-tries performed extremely poorly with regard to their general political conditions. In the IBC 2016, Malawi and Kosovo made the greatest leaps forward. Both advanced by 20 places. For Kosovo, this is due to improved general conditions in all three areas, whereas Malawi impro-ved its economic and sociocultural indicators in particular. Cape Verde and Namibia are two more African countries to have moved up this year. They advanced by 18 and 14 places respectively. Likewise, Mon-golia improved its position by gaining 14 places.

Amongst the OECD countries, the Netherlands is at the top of the IBC production sub-index. This is predominantly due to its central location in Europe and the international focus of its financial policies. The Netherlands is followed by Great Britain, Belgium, Denmark, Switzerland, Germany, Canada and Ireland. In Africa, the production sub-index continues to be dominated by Mauritius. Botswana, Nami-bia and South Africa are close behind. The production sub-index for Asia is characterised by the outstanding performances of Singapore and Hong Kong. These are in first and third place respectively in the global comparison due to the great market potential of both countries as well as their investor-friendly legislation. Taiwan, Qatar, Bahrain and Brunei occupy the other top positions in Asia. In 24th place on the production sub-index, Latvia is the leading European non-OECD country. It is followed by Lithuania, Malta and Romania. The results of the production index for the Latin American countries are relatively homogeneous as most of the countries are close to the global median, between 50th and 120th place. The best performer was Barbados, fol-lowed by Uruguay, St. Lucia and Jamaica. The five countries in Oceania did not change compared to the previous year. Samoa performed the best whilst the Solomon Islands were in last place.

As expected, the OECD countries were also dominant in the business sub-index. The 15 highest index values were attributable to OECD countries. The business market category is led by wealthy Switzerland, followed by the major consumer nation, the USA. Norway, Germany and Great Britain round off the top five. In Africa, nations from the south of the continent are in the upper echelons of the business sub-index. South Africa is at the top of the list and is even one of the 60 most attractive markets on a global scale. Mauritius is in second place, followed by its neighbours Namibia and Botswana. The business sub-index for Asia is led by Hong Kong and Singapore, both of which are in the global top 20. China is in third place in Asia. Behind China are smaller states such as Taiwan and the United Arab Emirates that profi-ted from their high income per capita. In the business market rankings, the European non-OECD countries are led by Malta, Latvia and Lithu-ania, followed by Croatia, Romania and Albania. The most attractive markets in Latin America are the relatively affluent Caribbean islands of the Bahamas and Barbados. These are followed by Panama and St. Lucia. Oceania’s non-OECD countries are in the upper middle field in the international comparison. Samoa performed the best.

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The results of our in-depth look at innovation paint a diverse picture of the global innovation landscape. On the one hand, despite the growing attractiveness of countries such as China, the local policies of major research intensive companies is currently mainly focused on the established industrialised countries, especially the USA and Japan. With regard to the USA in particular, this can be explained objectively by a combination of favourable institutional conditions for innovating companies and a consistently high pool of (native and foreign) highly qualified people, regardless of market access. On the other hand, the more detailed analysis demonstrates that the global spread of multi-national R&D giants is of limited significance to the total amount of innovation work in each country. Judged by the investment volume or by the level of research success, the tectonics of R&D have visibly shif-ted within the last decade, especially since the financial crisis.

The South Korean example in particular shows how a targeted natio-nal innovation strategy can not only accelerate innovation, but also stimulate general economic growth. Amongst the emerging econo-mies, China is on a similar path and will soon make the jump from imitator to innovator in the global race for knowledge. However, it remains to be seen how sustainable these developments will be and how competitive Chinese innovations will prove to be on the inter-national level in the long term. Amongst the established industria-lised nations, countries such as the USA and Germany were able to retain or even consolidate their technological lead in many segments. Other countries have lost ground over the past few years. Japan and Great Britain are striking examples of this in our analysis. Based on the number of patent applications in recent years, Japan’s innovation has declined steadily, which is why the country lost its global lead to South Korea for the first time. Nevertheless, the decline was still at a high level; the level of innovation in the Japanese R&D sector is still high compared to other countries. Effects on the competitiveness of national knowledgeintensive industries. As ever, Great Britain posses-ses a highly educated labour force and universities with an excellent international reputation, although the conversion of these resources into successful research has been considerably lower than in other countries. Investments in R&D per capita as well as the number of patent applications in Great Britain were clearly below average when compared to other industrialised countries. When we consider the BRIC countries, with the aforementioned exception of China they have barely caught up in the race for innovation on a macroeconomic level. Despite slightly positive trends, Brazil and India are investing much less in R&D per capita and as a proportion of their economic strength than the global technological leaders. These countries are also almost completely insignificant in quantitative terms when we consider the spread of patent applications relating to future technologies. Given the recent developments in Russia, we are even forced to speak of a decline. Despite a high level of governmental subsidies for research, the total number of people working in R&D in Russia bucked the trend and decreased over the past decade, and the level of investments is low.

CONCLUSIONS

The overall ranking of the International Business Compass remained largely stable in 2016. There were slight shifts at the top of the ran-kings; having spent years in second and third place, Hong Kong now holds first place. Switzerland fell from first place in the previous year to fourth place, although its decline was only slight in absolute index values. The Netherlands was able to break into the top three for the first time following significant gains. Likewise, Ireland and Australia both made it into the top 10, Ireland having experienced exceptionally positive developments. Overall, with the exceptions of Hong Kong and

Singapore the top 10 once again exclusively comprise OECD countries. The changes in the middle and bottom of the ranking were more signi-ficant. Ukraine was the biggest loser by far, although the countries in North Africa also lost a lot of ground.

TECHNICAL DETAILS

The study comprised 174 countries across all continents. As in the previous year, the study did not include countries with fewer than 150,000 inhabitants or the countries/territories of Cuba, the West Bank, Somalia or Western Sahara. Likewise, Luxembourg was exclu-ded from the overall ranking due to its unusual economic structure, especially because of its extraordinarily high capital inflows per capita. These would have greatly distorted the weighting of direct invest-ments in the index calculation. Additionally, as in previous years Syria was excluded from the index as the civil war makes it impossible to reliably assess its future prospects.

We updated the data by referring to the selection of reliable internati-onal sources used in the previous year. This normally involves updating the 2013 values from last year’s index to the values measured in 2014. With regard to averages of variables measured over time, such as population growth, the time frame was moved into the future by a period. Compared to last year’s report, the selection of indicators used to calculate the index did not change. As before, the indicators reflect the key theoretical sub-aspects of the quality of a country as a business or production location. Like last year, each indicator was first standardised in the form of a scale from 0 to 100 and assigned to one of three pillars. The arithmetic mean of the indicators within each pillar was then calculated. In the final step, the geometric mean of the pillar values was calculated in order to determine the total index value. The values for the business and production sub-indices were calculated by determining the mean of the relevant local factors. For non-OECD countries, the index values were expressed in relation to the continental average for the purposes of intraregional compari-sons.


To a great extent, the history of economic growth is the history of major technological breakthroughs. They often occur suddenly, bring-ing with them a string of derivative innovations which permanently change the natur e of human economic activity and ultimately the lives of people. The large number of product and process innovations in recent times is a sign that we are most likely on the brink of another technological upheaval in the production structure of our economy. Digitisation is only part of this, as is the trend towards greater sus-tainability. Everyone expects the global technological race to intensify further in the coming years. This applies to industrialised countries as well as developing countries and emerging economies that could increase their own levels of innovation by absorbing new technologies. In the global economy of the future, innovations will have an even greater impact on the international competitiveness of countries and companies than today. As a result, the ability of company locations to stimulate the level of innovation will become an important factor in the attractiveness of regions. Therefore, the objective of this year’s International Business Compass’ in-depth look should be to determine the characteristics and conditions for innovation in an international comparison on the basis of available data.

In real terms, the local research infrastructure affects the attractive-ness of regions in several different ways. Favourable and reliable gen-eral conditions for local research and development work are essential for innovation and in turn success on the market. Additionally, the general level of local research work, i.e. in the public sector and other private companies, is important in terms of the transfer of knowledge and the potential for regional research collaboration.

Naturally, the level of innovation of a location is of direct interest to knowledge-intensive sectors. This also indirectly benefits suppliers and consumers. Innovations affect both production and marketing. Additionally, the link between innovation and local economic growth also affects the profitability of business markets.

This series of subjects therefore has an impact on the choice of loca-tion as well in terms of production and sales. Our detailed analysis is divided into three parts. Firstly, we will discuss the various general conditions for successful innovation from country to country. We will then analyse levels and trends in national spending on research and development. Finally, we will evaluate the success of countries at pro-ducing innovations in the recent past using suitable indicators.

1. INTRODUCTION

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2. RESULTS OF THE IBC 2016

2.1 OVERVIEW

The International Business Compass (IBC) aims to present the total level of development of countries and regions in the form of a single index value. This allows us to rank the countries based on their level of devel-opment. It will then be possible to use the index to shed light on the investments of multinational companies and other organisations. The IBC shares this ranking concept with other established country indices such as the Human Development Index (HDI) and the Global Competi-tiveness Index (GCI). However, one key difference lies in the scope of the chosen aspects. Whereas the aforementioned indices ultimately focus on specific sub-aspects of the development of countries (be they eco-nomical, political or social), the IBC is expressly attempting to integrate these various dimensions into one index value.

In this sense we can describe its structure as a combination of the three sub-pillars, i.e. the economic, political and sociocultural situations, which in turn form a group of related indicators. First, the individual indicators are standardised and the arithmetic mean of the standard-ised values within the sub-pillars is determined in order to calculate the index. Image 1 shows the chosen indicators and their allocation to the sub-pillars. To produce the total value, the geometric means of the results for the sub-pillars are then calculated. As the selection of varia-bles in this update has not changed, we refer to the 2013 edition.1

When interpreting the index, please note that it is based on the assump-tion that a country should be internationally competitive with regard to all three pillars for its overall level of development to be high. This is due to the geometric means of the pillar values: a poor value in one pil-lar cannot automatically be balanced out by excellent values in another pillar. This causes some countries to occupy a lower place in the overall

ranking than one would expect in light of their otherwise high level of development due to a poor performance in one pillar.

Besides the overall index, the data also make it possible to evaluate countries on the basis of specific aspects of local attractiveness. In this regard we differ-entiate between the attractiveness of a country as a market and its attractiveness as a production location, and allocate groups of indicators to these sub-aspects on the basis of sound economic theories (see Image 1). The arithmetic mean of the standardised indicator values is then calcu-lated in order to produce the sub-indices. Likewise, these sub-indices are updated each year. This way, we can evaluate the development of a location with regard to investorspecific characteristics as well as its overall development.

Figure 1: Composition of the International Business Compass (IBC)

Source: HWWI

– GDP per capita– Public debt– Per-capita FDI inflows– Inflation– Business freedom– Infrastructure– Total tax rate– Market potential

Economic conditions

– Political stability– Quality of regulation– Rule of law– Corruption control– Trade freedom– Investment freedom

Political-legal conditions

– Population growth– Unemployment rate– Per-capita consumption– Health– Education– Work freedom

Socio-culturalconditions

BDO INTERNATIONAL BUSINESS COMPASS

Production locationattractiveness

– Total tax rate– Infrastructure– Market potential– Wage costs– Rule of law– Work freedom– Investment freedom

Marketattractiveness

– Population– Inflation– Per-capita consumption expenditure– Political stability– Infrastructure– Trade freedom


Image 2: Global distribution of the index values of the IBC 2016

Source: HWWI (2016)

2.2 UPDATING OF DATA

The same sources as in previous years were used when selecting data in order to facilitate a reasonable comparison. The data were updated for all variables that were factored into the calculation of the rankings. This normally involves updating the 2013 values from last year’s index to the values measured in 2014. With regard to averages of variables measured over time, such as population growth, the relevant time frame was moved into the future by a period. Likewise, the market potential indicator we calculated was recalculated using updated sta-tistics on value added. Finally, we replaced the often incomplete IMF variable for unemployment with a new World Bank statistic that cov-ers considerably more countries.

As in previous years, Luxembourg has been excluded from the index: the leading position of the country as a global financial centre would otherwise greatly distort the real economic rankings of the countries based on the method used. In particular, the enormous direct invest-ment per capita in Luxembourg is problematic for our methods as it would render the indicator for country comparisons meaningless. However, wherever relevant information is available, Luxembourg is included in this year’s comparative country comparison. Likewise, Syria remains excluded as no reasonable predictions can be made for the region in light of the ongoing civil war. Otherwise, inclusion in the IBC generally requires a minimum population of 150,000 people.

INDEX

missing values

< 30.00

30.01 – 40.00

40.01 – 50.00

50.01 – 60.00

60.01 – 70.00

70.01 – 80.00

> 80.00

2.3 RESULTS

2.3.1 Results of the overall index in 2016

The 2016 rankings are largely based on data from 2014. The changes compared to the index in the previous year greatly reflect the global developments that took place in 2014. In particular, this period saw the events in Ukraine and the emergence of the so called Islamic State. As a result, Ukraine is the big loser in the ranking. Ongoing cri-ses continue to flare up, for example in Greece, Nigeria and Libya. This period also saw the outbreak of the Ebola epidemic in West Africa. Overall, the results are relatively familiar in spite of the events. Image 2 represents the global distribution of the IBC overall index for 2016. The industrialised nations from North America and Northern and Western Europe continue to dominate the rankings. Central Afri-can countries in particular are performing poorly this year. The full rankings are available in the annex.

The top 10 in the IBC 2016 show familiar patterns as eight countries from the previous top 10 are represented (see Table 1). Whereas Swe-den and New Zealand were pushed out of the top 10, Ireland and Australia made it back in. For the first time, Hong Kong reached the top of the IBC ranking with a very narrow lead over Singapore, which reached second place. Both of these countries have always been in the top three, which attests to the extraordinary attractiveness of the

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nomic conditions improved and the Irish financial crisis seems to be coming to an end. Great Britain remains in eighth place. The top 10 are rounded off by Canada and Australia

Winners and LosersIn the IBC 2016, Malawi and Kosovo made the greatest leaps for-ward. Both advanced by 20 places (see Table 2). For Kosovo, this is due to improved general conditions in all three areas, whereas Malawi improved its economic and sociocultural indicators in particular. Cape Verde and Namibia are two more African countries to have moved up this year. They advanced by 18 and 14 places respectively. Likewise, Mongolia improved its position by gaining 14 places.

regions. Compared to the previous year, both countries improved their scores for their general economic conditions. The Netherlands was in third place, gaining an impressive ten places since the IBC 2014. Like-wise, this was primarily due to improvements in its general economic conditions.

Having lost the top spot, Switzerland is now in fourth place. It expe-rienced minor losses in terms of its general sociocultural conditions. Switzerland only declined slightly overall, whereas the top three nations registered considerable gains. Norway rounds off the top five, followed by Denmark. Both countries have fallen by one place com-pared to the previous year. Ireland is in seventh place, having gained 10 places. After suffering losses in the previous year, its general eco-

Winners Increase Losers Fall

Malawi +20 Ukraine -41

Kosovo +20 Lesotho -18

Cape Verde +18 Mauritania -17

Mongolia +14 South Africa -15

Namibia +14 Azerbaijan -14

Table 2: IBC 2015 vs. IBC 2016: The greatest increases and decreases in rank

Source: HWWI (2016)Source: HWWI (2016)

No. Country Value +/-

1 Hong Kong 84.39 +2

2 Singapore 84.10 0

3 Netherlands 81.18 +3

4 Switzerland 80.69 -3

5 Norway 78.80 -1

No. Country Value +/-

6 Denmark 77.92 +10

7 Ireland 76.84 +10

8 Great Britain 76.13 0

9 Canada 75.81 -2

10 Australia 75.68 +2

Table 1: Top 10 in the IBC overall index for 2016


Region Ø Region Ø

Northern Europe 75,2 Central America 53,1

North America 74,0 West Asia 52,9

Western Europe 73,0 East Asia 52,0

Oceania 68,7 Eastern Europe 51,8

Southern Europe 60,0 Southeast Asia 49,2

Less surprisingly, Ukraine suffered the biggest setbacks in this year’s rankings. It fell by 41 places compared to the previous year due to poor results in all categories. This is of course due mainly to the political cri-sis and the ongoing civil war in the east of the country. The decline of its economic indicators was particularly dramatic. Likewise, the African nations of Lesotho, Mauritania and South Africa were amongst the big-gest losers. Lesotho suffered the largest decline in its general political conditions, Mauritania in its general sociocultural conditions and South Africa in its general economic conditions. Azerbaijan fell by 14 places due to poorer sociocultural indicators.

Breakdown by region Performances can also be compared by global region (as demarcated by the UN) if the mean index value of the countries in a region is calculated. Population size will serve to weight the results for each country in a region below.2 As can be expected given the global dis-tribution, the strongest economic regions – Northern Europe, North America and Western Europe – are at the top of the global rankings (see Table 3). Northern Europe has managed to defend its top spot from the previous year. The Northern European countries range from fifth place (Norway) to 39th place (Latvia), whilst the Western Euro-pean countries range from fourth place for Switzerland to 25th place for France. Oceania is in fourth place in the regional comparison, ben-efiting from the good performances of Australia and New Zealand.

Squarely in the middle of the field are Southern Europe, Eastern Europe, Central America and West Asia, which is highly dependent on the good performance of the Gulf States. Within Africa, only the south of the continent is approaching an average value. Due to the political unrest, North Africa has continued to fall in the rankings. As a result, the four lowest regional averages can be found in Africa. Cen-tral Africa has declined particularly starkly in this regard. None of the countries in the region made it into the top 100; in 121st place, Gabon is the most successful country.

2.3.2 Results for the market and production sub-indices

The sub-indices of the IBC rate countries based on their potential as a production location or market. Various relevant indicators are standardised and added to the related sub-index (see image 1). As in the previous year, the sub-indices are calculated additively and not multiplicatively. Consequently, there are fewer dramatic differences

between the years and extreme results from individual countries are minimised. As in the previous year, the results below are presented by continent in order to simplify regional comparisons. In order to facili-tate the comparison of countries with a similar level of development, we have limited ourselves to non-OECD countries in the continental comparison (as in the previous year). The sub-index values of the OECD countries are compared against one another in separate rank-ings. This way, we can also compare the attractiveness of the devel-oped countries as markets and production locations. A table of the results of the sub-indices can be found in annex D.

Production location Amongst the OECD countries, the Netherlands is at the top of the IBC production sub-index. This is predominantly due to its central loca-tion in Europe and the international focus of its financial policies. The Netherlands is followed by Great Britain, Belgium, Denmark, Switzer-land, Germany, Canada and Ireland. These are all in the global top 10 production locations. Portugal, Turkey, Greece and Mexico are in the bottom places amongst OECD countries. This is mainly due to their weak infrastructure and limited market potential

In Africa, the production sub-index continues to be dominated by Mauritius. Botswana, Namibia and South Africa are close behind. Compared globally, these countries are amongst the 70 most attrac-tive production locations based on the IBC production sub-index. Zimbabwe, Comoros, Eritrea, the Central African Republic and the Democratic Republic of the Congo are at the bottom of the list. Sta-tistically, these are the five poorest production locations in the world. Some changes compared to the previous year are noteworthy. Algeria fell by nine places whilst Djibouti, Ethiopia and Togo each gained six places.

The production sub-index for Asia is characterised by the outstanding performances of Singapore and Hong Kong. These are in first and third place respectively in the global comparison due to the great market potential of both countries as well as their investor-friendly legisla-tion. Taiwan, Qatar, Bahrain and Brunei occupy the other top positions in Asia. The lower end of the Asian production location index features Tajikistan, Uzbekistan and Turkmenistan. The biggest loser is Timor-Leste which fell by 12 places in the comparison of Asian countries, whereas Cambodia and the Maldives experienced the most positive developments, increasing by seven places. In 24th place on the pro-duction sub-index, Latvia is the leading European non-OECD country. It is followed by Lithuania, Malta and Romania. The young nations of Montenegro and Kosovo are in the middle field in Europe. Belarus, Russia and Ukraine are at the bottom of the list.

Region Ø Region Ø

South America 48,9 East Africa 42,8

Southern Africa 47,7 North Africa 42,2

Caribbean 47,7 West Africa 41,3

Central Asia 45,0 Central Africa 4,1

South Asia 44,3

Table 3: IBC overall index 2016: regional averages

Source: HWWI (2016)

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The results of the production index for the Latin American countries are relatively homogeneous as most of the countries are close to the global median, between 50th and 120th place. The best performer was Barbados, followed by Uruguay, St. Lucia and Jamaica. The Ameri-can production locations with the lowest index values are Haiti, Vene-zuela and Bolivia. Bolivia and Venezuela can be explained due to their lack of freedom of investment and strictly regulated labour markets. Chile would be the continental leader if it did not belong to the OECD.

The five countries in Oceania did not change compared to the pre-vious year. Samoa performed the best whilst the Solomon Islands were in last place. Due to their limited market potential, all countries with the exception of Samoa were in the lower half of the production sub-index.

MarketsAs expected, the OECD countries were dominant in the market sub-index. The 15 highest index values were attributable to OECD countries. The business market category is led by wealthy Switzerland, followed by the major consumer nation, the USA. Norway, Germany and Great Britain round off the top five. Chile, Israel, Mexico and Turkey occupy the lower ranks. Although it was in last place, Turkey remains in the middle of the field from a global perspective. Japan has fallen by four places compared to the previous year and is now in 10th place, whereas Iceland gained three ranks and is now in seventh place.

In Africa, nations from the south of the continent are in the upper echelons of the market sub-index. South Africa is at the top of the list and is even one of the 60 most attractive markets on a global scale. Mauritius is in second place, followed by its neighbours Namibia and Botswana. The Democratic Republic of the Congo, the Central African Republic and Sudan are at the bottom of the list. Alongside Eritrea, Djibouti and Chad, they are the top 10 statistically least attractive markets in the world. There have been some obvious changes com-pared to the previous year. Malawi improved its position by 24 places whilst Burundi increased by 16 ranks. Kenya and Tanzania fell by 16 places, making them the losers in this category.

The market sub-index for Asia is led by Hong Kong and Singapore, both of which are in the global top 20. China is in third place in Asia. Behind China are smaller states such as Taiwan and the United Arab Emirates that profited from their high income per capita. India is in ninth place one more. Yemen, Iran and Afghanistan are at the bottom of the list. Afghanistan and Iran are amongst the bottom six in the global comparison. The biggest winners are Timor Leste and the Mal-dives, which improved by eight and six ranks respectively. In contrast, Azerbaijan and North Korea both fell by nine places.

The European non-OECD countries are led by Malta, Latvia and Lith-uania in the market sub-index ranking. Globally, both of these coun-tries would be in the top 50. These countries are followed by Croatia, Romania and Albania. Moldova, Russia, Belarus and Ukraine are at the bottom of the list. Kosovo gained three ranks whilst Ukraine fell by five places and performed much more poorly than in the previous year. Ukraine is now in 131st place in the global rankings.

The most attractive markets in Latin America are the relatively affluent Caribbean islands of the Bahamas and Barbados. These are followed by Panama and St. Lucia. Interestingly, Brazil ended up close to the Latin American median again. Even considered globally, in 74th place Brazil is rather average due to its weak infrastructure and politi-cal instability. Colombia, Honduras, Bolivia and Venezuela were at the bottom of the index. In a global comparison, Venezuela is in the third place from the bottom. There have been no major changes in this con-text; they are limited to jumps of no more than three ranks.

Oceania’s non-OECD countries are in the upper middle field in the international comparison. The ranks of the countries range from 35 to 72. Samoa performed the best. Papa New Guinea is in last place in the continental comparison. Only Fiji and the Solomon Islands have changed places since the previous year.

1 HWWI (2013): BDO International Business Compass – international location index for medium-sized companies (published by Michael Bräuninger).

2 The allocation of countries to the global regions is set out in annex A.


3.1 INNOVATION

The wheel, the steam engine, the microchip: groundbreaking inno-vations have always been crucial milestones in the history of human economic activity. One key hallmark of such technologies is that they intellectually and technologically pave the way for a range of follow up innovations for various applications. The result is a rapid increase in productivity and efficiency combined with perceptible changes in eco-nomic activity and even mediumterm societal upheavals. This makes stimulators of innovation key drivers of longterm economic develop-ment and welfare improvements. Many experts believe that the global economy is on the brink of a new revolution that will be driven by innovation. In this case it is the networking of machines known as ‘dig-itisation’ that has been attributed revolutionary potential. Digitisation affects a number of different applications such as digital intelligence, robotics, cloud computing and 3D printing. The most significant direct consequences are the increasing decentralisation and flexibility of pro-duction processes (HWWI, 2015). Simultaneously, 3D printing in par-ticular could even transform the architecture of international trade, potentially causing the traditional advantages of commerce and loca-tions such as amount of capital and resources to lose their significance (Berenberg & HWWI, 2015).

As drivers of growth, innovations may compound all of this in the long term. As the digitisation process advances, increasingly complex solutions will be in demand; additionally, due to the individualisation of products and marketing many more ideas can be implemented as innovations than in the past. This affects the products themselves as well as the accompanying services. Established business models are facing increasing pressure and the global race to innovate is heating up. The competition for the best minds in the business will intensify and new ideas will circulate even more quickly, which will make it even more important to market them as quickly as possible. From a busi-ness perspective, the ability of a location to produce successful inno-vations will therefore become a much more significant factor in the choice of a location in several different ways. Favourable and reliable general conditions for local research and development work are essen-tial for innovation and in turn success on the market. Additionally, the general level of local research work, i.e. in the public sector and other private companies, is important in terms of the transfer of knowledge and the potential for regional research collaboration. Besides invest-ments in research and development, this activity can be gauged by means of innovation indicators such as patent registrations.

3. IN-DEPTH LOOK AT INNOVATION

Therefore, the primary focus of this year’s issue of the BDO Interna-tional Business Compass is the capacity of countries for innovation. We interpret the term ‘innovation’ below in line with its standard definition, i.e. inventions that are sufficiently developed to be real products or processes and that are introduced onto the market as such. Based on the stages of innovation processes, our examination is divided into three sections. The first section addresses the coun-tryspecific general conditions for research as a central prerequisite (or input) for successful innovation. We will examine factors such as the conditions for establishing new companies, government funding for research, the national level of education and the influx of inter-national experts. The second section focuses on the development of national research and development (R&D) activities in the recent past. Key inputs are investments in R&D and the number of employ-ees. In light of the transfer of knowledge, it is necessary to consider both private application research and (semi-)public basic research. By differentiating by fields of application and sources of finance, we can reveal structural differences between various countries’ focus on R&D investments and their volatility. The third section attempts to use a variety of methods to gauge the level of successful innovation as a result (or output) of the research process from country to coun-try. Besides the quantitative development of patent applications and similar intellectual property rights, we will also highlight innovation-related activity in terms of specific future technologies as well as the structure of international trade with hightech goods and licences to intellectual property. Finally, we will summarise our key findings with regard to future challenges and provide opinions on the development of characteristic countries.

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3.2 REGIONAL CONDITIONS FOR INNOVATION

The potential of a location for innovation is traditionally measured by the R&D investments first of all. Although, as we will see, there is actually a high degree of correlation between R&D investments and the level of innovation, this indicator alone is insufficient for us to draw conclusions as to the attractiveness of a country as a place of innovation. Efficiency, quality, favourable general conditions and future prospects play a major role in innovation-related activities, especially as the majority of innovations are brought about by compa-nies. It is therefore wise to first consider some indicators that serve as prerequisites for successful innovation. These factors serve indirectly as innovation inputs that can affect the ‘efficiency’ of R&D invest-ments to a certain extent. If these input indicators perform poorly, it might be a sign of barriers to innovation that generally make it more difficult to innovate. We can expect every country or group of countries to be facing different barriers of varying insurmountability. However, as different types of innovation are often prioritised – some of which come with specific requirements – it is generally difficult to make conclusive evaluations on the basis of individual pieces of infor-mation. In spite of this, however, the following indicators can shed light on the strengths and weaknesses of individual countries.

Institutional general conditions and founder behaviourFirst of all, the institutional general conditions are crucial for a com-pany to be innovative. Companies can only consider attempting to innovate if the legal and political conditions in the region are favour-able for innovation. This is the only way to prevent new ideas from being implemented abroad instead. Good general conditions are difficult to gauge and compare because many different factors can be at work. For companies to be willing to invest in the future, they first require a stable political situation and legal certainty. This also includes potential innovations receiving sufficient protection for the financial expenditure of the company to pay off. It is also important that companies are as free as possible in their innovation processes and are able to carry them out with no great effort. Essentially, the decisive factors in this regard are also key factors for general corporate activities.

The World Bank ease of doing business index describes the intensity with which states influence the activity of companies through regula-tions (World Bank, 2015). It focuses on potential obstacles to ten cor-porate activities such as the establishment of a company, the taking out of loans and the conclusion of contracts. General local conditions

such as corruption and macroeconomic factors are not taken into account. Fundamentally, neither a lack of regulation nor strict restric-tions are generally considered optimal. Rather, optimal regulations should allow companies to carry out their activities with no undue restrictions. As factors such as the conditions of company establish-ment and loans are also essential for start-ups and innovation, the ease of doing business index is also a good indicator of conditions favourable for innovation.

Table 4 shows the current ranking for 2016. Singapore has been at the forefront with the best corporate conditions for several years. Its excel-lent local conditions for investments and regulations have been driving innovation for years (IEG WB, 2013). However, the other top positions are also conspicuously occupied by nations considered economically liberal such as New Zealand, South Korea, Hong Kong, Great Britain, the USA and Scandinavian countries. In 2016 the best placed emerg-ing economy was Mexico, in 38th place (73.72), whilst the best BRIC3 country was Russia in 51st place (70.99). In 84th, 116th and 130th place, China, Brazil and in particular India performed relatively poorly and ended up far behind a few other less industrialised countries.

One index with a similar interpretation is the barriers to entrepre-neurship index of the OECD. It consists of the three sub-indicators ‘bureaucratic hurdles for start-ups’, ‘regulatory and administrative transparency’ and ‘limitations on competition’ and therefore also meas-ures general regulatory conditions for companies. 0 represents minimal restrictions and 6 represents maximum restrictions.

The barriers to entrepreneurship index presented in Table 5 is only available for 2013 and for fewer countries than the ease of doing busi-ness index. The top performer in the latter index, Singapore, is not covered by the OECD. The availability of data and varying reference years aside, there are other differences too. In the OECD ranking, Slo-vakia attained the position with the fewest restrictions yet performed averagely on the ease of doing business index, finishing in 29th place (75.62). In contrast, South Korea reached fourth place on the ease of doing business index yet was ranked as a country with relatively major restrictions with a score of 1.87 on the barriers to entrepreneurship index. The same applies to some Scandinavian countries. In addition to the slightly different components, the varying evaluations might also move the World Bank to not automatically rate minimal restric-tions and liberal general conditions as optimal. It must be stated that some countries such as New Zealand, Denmark, the USA and Great Britain performed exceptionally well on both indices and should be considered locations with good general conditions for innovation.

Table 4: Countries with the highest ease of doing business ranking

Top 10 DTF Score 2016*

Singapore 87.34

New Zealand 86.79

Denmark 84.40

South Korea 83.88

Hong Kong 83.67

Top 10 2013

Slovakia 1.15

New Zealand 1.18

Netherlands 1.19

Italy 1.22

USA 1.23

Top 10 2013

Denmark 1.26

Austria 1.31

Canada 1.34

Portugal 1.35

Great Britain 1.49

Top 10 DTF Score 2016*

Great Britain 82.46

USA 82.15

Sweden 81.72

Norway 81.61

Finland 81.05

Source: World Bank (2016) *Distance to frontier score: 0 = worst performance, 100 = optimal

Table 5: Countries with the best barriers to entrepreneurship index

Source: OECD (2015)* 0 = no restrictions, 6 = maximum restrictions


Favourable economic conditions and conditions for start-ups lead to the actual establishment of companies. Table 6 shows the density of start-ups, i.e. how many companies are established per 1,000 inhab-itants old enough to work. It also depicts the indicators ‘number of procedures required to establish a company‘ and ‘time required to establish a company’, which more accurately gauge the conditions for start-ups than the general regulation indicators. Favourable condi-tions for establishing companies are crucial with regard to ideas that emerge away from systematic internal research. Start-ups can trans-form these ideas into real innovations. As shown in Table 6, in 2014 the most start-ups by far relative to the population were founded in Hong Kong. Both start-up condition indicators provide a possible explanation as both score Hong Kong extremely highly. Nowhere were fewer process stages and days required to establish a company in 2014 than in Hong Kong. However, Singapore achieved identical values for these conditions, yet the density of start-ups was consid-erably lower. This shows that these administrative conditions are not exclusively crucial for the formation of companies. With start-up densities ranging from 13.11 to 17.26, Malta, New Zealand, Estonia, Australia, Cyprus and Botswana proved to have highly frequent start-ups and would therefore rank between Singapore and Hong Kong in the table. Despite the longer time required to establish a company, Russia ranked close to the median. Very few start-ups were estab-lished in South Korea, France, Germany and Japan in particular. France and Germany were therefore far below the EU average. It was also extremely expensive to establish a new company in Germany and Japan in particular, whereas South Korea and France performed rela-tively well in that regard. No data are available for the USA, which is normally a country with many new start-ups. Only data from 2012 are available for Great Britain. The density of 12.9 achieved in that year is relatively high for the EU, although it is lower than Estonia.

Goverment subsidising of R&DBesides the general conditions, there are also innovation-specific regulations that affect the attractiveness of a region as a place of innovation. In particular, this includes the question of whether innovation and research activities are actively subsidised by the government and if yes, to what extent and in which form. Government subsidies are most often the result of a market failure having prevented the optimal level of research and development for society from being reached. Companies often do not judge the success of innovations by how much they benefit society, as not all generated ‘gains’ can be claimed by the companies. As a result, some potentially advantageous research projects for society fail to materialise as companies do not invest enough funds. In general, the government might directly subsidise innovation activities with money or provide favourable loan conditions or indirect incentives such as tax relief. In both cases, the schemes can be directed at special company groups (SMEs, start-ups), institutions or sectors. Image 34 shows the governmental subsidisation of corporate R&D for selected countries. It is clear that in 2013, South Korea provided the largest subsidies for corporate R&D relative to its GDP overall. Direct and indirect measures with similarly high percentages were used. With over 0.4% of its GDP, Russia was slightly behind South Korea but its subsidies were almost exclusively direct. France was the leader in Europe. Slovenia and Belgium, relatively small countries which ranked behind France but ahead of the USA, are not depicted. Major emerging economies such as China and Brazil provided moderate subsidies, whereas Mexico barely supported companies. However, past data show that the volumes of R&D subsidies – not only relative to GDP – are largely volatile and highly specific schemes are constantly being introduced, abolished and redesigned (OECD, 2015). Overall, in spite of the financial crisis in recent years the level of investment in

Source: World Bank (2015) * Number of new companies per 1,000 inhabitants between 15 and 64 years of age ** Data from 2013.

Country Density of start-ups*Number of procedures required to establish a company

Time required to establish a company (in days)

Hong Kong 31.3 3.00 2.50

Singapore 9.51 3.00 2.50

Norway 7.72 4.00 5.00

Sweden 6.87 3.00 16.00

Denmark 4.36 4.00 5.50

Russia 4.2 4.00 11.20

Israel 3.11 5.00 13.00

South Korea 2.30 3.00 4.00

France 2.26 5.00 4.50

Germany ** 1.29 9.00 14.50

Japan 0.15 8.00 10.20

EU 6.03 5.00 11.48

OECD 5.19 5.00 8.90

World 4.00 7.00 22.49

Table 6: Start-ups and conditions for business formation in 2014

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R&D increased in almost every country with available data (OECD, 2014). Countries such as South Korea, France and the USA have been heavily fi nancing R&D for years.

Higher educationA good level of education is necessary for existing knowledge to be applied and new knowledge to be obtained. Highly educated research-ers and developers who are able to develop and drive forward inno-vations are an essential basic requirement for work on innovations and their success. By virtue of their research, PhD candidates in par-ticular are potentially highly educated R&D experts, and a majority of them work in the fi eld of research both during and after obtaining their doctorate (OECD, 2013). However, experts at the location also generally play a major role in implementing innovations. Therefore,

a country in which the majority of the population have a university degree provides the best conditions for innovation5. Image 4 shows the percentage of the population in possession of a university quali-fi cation within the group of 15 to 64-year olds, i.e. the total volume of people eligible for employment in 2014, for selected countries. The qualifi cations are subdivided into short-term programmes (specifi c to some countries), bachelor’s and master’s degrees and doctorates or equivalent qualifi cations. Overall, the percentage of people with a university qualifi cation is highest in the USA. In the USA, almost 45% of people in the relevant age category had such a qualifi cation in 2014. Additionally, at 1.64% the percentage of successful PhD candidates was the highest there. The variations are relatively low overall. Most of the countries in the index were relatively close to the OECD aver-age of around 35%. It is noteworthy that the G7 countries France and

Image 3: Governmental subsidising of corporate R&D in 2013

Image 4: Percentage of 15 to 64-year olds with a university qualifi cation in 2014

Source: OECD (2015), HWWI (2016)

In per cent of the total number of 15 to 64-year olds

Short-term tertiary education Bachelor or equivalent Master or equivalent PhD or equivalent

0.5

0.0

0.1

0.2

0.3

0.4

KOR RUS (2011) FRA USA (2012) GBR JPN CHN SWE DNK BRA (2012) GER NZL MEX (2011)

Direct subsidies Indirect subsidies Source: OECD (2015), HWWI (2016)

In per cent of GDP

50

0

10

5

15

20

25

30

35

40

45

USA GBR FIN NOR SWE OECD DNK ESP FRA GER

10.75

21.62

10.21

1.64

11.24

21.84

7.98

1.15

12.46

14.68

13.42

1.22

11.95

19.07

9.85

0.89

9.77

15.47

11.97

1.48

8.03

15.51

11.37

1.02

4.47

19.49

10.91

0.93

10.73

9.42

13.87

0.66

14.02

8.94

8.37

0.77

0.65

14.34

10.75

1.32


Germany were below the average, with Germany failing to reach even 30%. The emerging economy of China improved its level of university education through major investments; in contrast, India, for which no data are available, was far behind and suffered from poor education amongst its workforce despite having some good experts (IEG WB, 2013). Overall, however, the signifi cance of such statistics is limited as the quality of education can vary between countries in spite of the similarity of the qualifi cations, and as such the education systems are diffi cult to compare. It is clear that short-term programmes are highly distinct even in countries with a low percentage of bachelor’s degrees. The percentage of master’s degree and PhD qualifi cations vary much less from country to country, however. The percentage of PhD qual-ifi cations is the lowest, as is to be expected, although it increased in almost all OECD countries in the past (OECD, 2013; OECD, 2015b).

It is interesting how many countries are currently investing in their education systems, especially with regard to future developments. Additionally, in many countries universities carry out a large propor-tion of research and development work, especially basic research that companies consider risky and expensive, that is therefore directly fi nanced by such investments. Image 5 shows the top 10 countries that spent the most on universities per student in 2012. The coun-try which spent the most was Luxembourg with almost USD 33,000 per student. Luxembourg was followed at great distance by the USA, Switzerland and Great Britain, all of which are traditionally considered to have a good higher education system. Whereas Luxembourg, Swit-zerland and the USA are amongst the countries with the highest GDP per capita, Great Britain, which has a slightly lower GDP per capita, is investing particularly heavily in its tertiary education system. The average for the OECD countries was around USD 15,000, whereas the emerging economies of Brazil, Russia and Mexico invested USD

Image 5: Countries with the highest expenditure on higher education per student


Image 6: Percentage of master’s degrees in science and engineering in 2013*

Source: OECD (2015), HWWI (2016) *or equivalent diploma

In USD per student

As a percentage of the total number of master´s degrees

Sciences Engineering

35,000

0

5,000

10,000

15,000

25,000

20,000

30,000

LUX USA CHE GBR SWE CAN NOR NDL FIN GER

32,876

26,56224,338 22,534 22,006 20,016 19,276 17,863 17,157

25,264

30

0

5

10

15

20

20

25

DNK GER FRA FIN NOR OECD USA ESP SWE GBR RUS ISR JPN KOR

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The percentage of the disciplines in question unequivocally increases along with the number of qualifi cations. In 2013, almost half of all doctorates in France were conferred in the fi eld of science. Spain, Germany, Norway and Great Britain achieved similarly high percent-ages. In most cases, the percentage of engineering PhD titles was lower than that of PhDs in the fi eld of science. Only South Korea, Japan, Denmark and Sweden had higher percentages in this regard. France achieved the largest percentage of PhDs in both disciplines overall.

10,455, USD 8,363 and USD 8,115 respectively per student. The low-est available values were attributable to Colombia, Turkey and Chile with USD 5,183, USD 7,779 and USD 7,960 respectively. There are therefore considerable variations between individual countries. How-ever, when comparing and interpreting these data, please note that the research and development work in some countries tends to take place in private institutions, which is why the expenses for tertiary educational institutions might be lower (OECD, 2015b). Additionally, smaller countries such as Luxembourg, at the top of the rankings, do not benefi t from the advantages of a larger country and therefore have to spend more per student.

A number of skills are essential in order to generate successful inno-vations. Scientists and engineers normally play a particularly signif-icant role, although skills from fi elds such as design and marketing are also required (OECD, 2013; IEG WB, 2013). Different economic fi elds normally generate innovations at different rates, however, and are dependent on successful innovations. Industry in particular is heavily characterised by a high rate of innovation. Naturally, specifi c disciplines are particularly relevant to most research and develop-ment work. Generally speaking, these are essentially engineers and scientists.6 However, the percentage of engineers and scientists in the total number of qualifi cations in most OECD countries has decreased over time (OECD, 2015), which is why these fi elds are often at the heart of R&D politics in countries (OECD, 2014). Image 6 and Image 7 illustrate the percentage of master’s degrees and PhDs in science and engineering in 2013. It is notable that Japan in particular regis-tered an extremely high percentage of master’s degrees in the fi eld of engineering. Sweden, Russia, South Korea, Germany, France and Fin-land were also in strong positions in this fi eld in 2013. Germany was ahead in the fi eld of science. This means that it was able to occupy an above-average position in both disciplines. When we consider both disciplines combined, Japan and Sweden had the highest percentages although they were dominated by engineering. The percentages in the USA were remarkably low and far below the OECD average, with both disciplines each representing just 5% of the total number of quali-fi cations. To counter this imbalance, however, the USA has already launched programmes designed to increase the attractiveness of engi-neering in the future (OECD, 2015b). The PhD table is rather different.

Image 7: Percentage of doctorates conferred for science and engineering in 2013*

Source: OECD (2015), HWWI (2016) *Or equivalent diploma

As a percentage of the total number of doctorates

Sciences Engineering

60

0

10

20

30

40

50

DNK GER FRA FIN NOR OECD USA ESP SWE GBR RUS ISR JPN KOR


Migration and regional attractivenessThe ‘internationality’ of the education system in a country is a good indicator of its level of innovation. For example, a high percentage of international students indicates a higher education system with a good international reputation. Additionally, international exchanges and the establishment of international networks between students, and therefore potential researchers, normally stimulates future innovation. Countries that encourage these exchanges, e.g. by allowing interna-tional students into their higher education systems, therefore usually create good general conditions for innovation.

Image 8 shows the development of the percentage of international students in selected countries relative to their population and the last three available years. Great Britain achieved exceptionally high ratios,

supported by the high international reputation of the British higher education system and the easier language barriers. Sweden, Denmark and Canada also welcomed relatively high numbers of international students, given the sizes of their populations. The USA only performed averagely. In general, most of the countries with mostly low fl uctu-ations experienced a slight upwards trend. This is presumably due to increased international demand for experience abroad and does not indicate any relative change in the popularity of individual target countries.

In recent years, international cooperation has dramatically increased in terms of research as well due to more accessible communication and information channels and international subsidy programmes (OECD, 2014). Image 9 provides insights into international research

Image 9: Percentage of publications and patents with international involvement from 2003 to 2012


As a percentage of all national publications and patents from 2003 to 2012

International co-authorship International inventions with patent

Image 8: Development of the number of international students relative to the total population


International students as a percentage of the total national population

2011 2010 2012

60

0

10

20

30

40

50

BRA CAN CHN GER DNK ESP FIN FRA GBR IND JPN KOR MEX NOR RUS SWE USA

80

0

10

20

30

40

50

60

70

CAN DNK FIN GER JPN NOR ESP SWE GBR USA

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collaboration. It shows the percentage of academic publications and patents with international involvement for selected countries from 2003 to 2012.

It is evident that in terms of academic publications, there is actually a high degree of internationality in many countries. This has been particularly high in Denmark, Sweden and Norway, with around 50% of all publications being international. The percentage in Mexico was surprisingly high. China and India experienced much less international collaboration on publications. The emerging economies of Russia, India and Mexico held leading positions for patents with international involvement. International collaboration in this fi eld is signifi cantly lower than for academic publications in almost all countries, espe-cially European countries. It is generally likely that it is assumed that a high degree of international collaboration could frequently also be due to a lack of domestic capacity. As small European countries in par-ticular are ahead with publications and some emerging economies are ahead with patents, it can be assumed that large, developed countries such as the USA have less need for international collaboration as they have suffi cient options on a domestic level. However, South Korea and Japan also have remarkably low rates of international collaboration. In South Korea this is due to policies that focus instead on national col-laboration in an attempt to keep knowledge within the country (IEG WB, 2013; OECD, 2014).

The collaboration between companies in the pursuit of innovations paints a similar picture. Image 10 shows the international collab-oration between major companies in the pursuit of innovations from 2010 to 2012. Ten countries with the highest percentages are depicted, as are a few selected countries. No G8 country is in the top 10; rather, companies from smaller nations are collaborating closely on an international level. Additionally, the percentages for these coun-tries are relatively similar. South Korea is far behind once more, where less than 10% of major companies cooperated on innovations on an international level.

Besides a temporary exchange of knowledge, migration can also lead to a long-term increase in the highly qualifi ed population. A country

that attracts an unusually high number of highly qualifi ed work-ers from abroad might also have a good international reputation in related sectors as a region of growth. Therefore, not only does large-scale immigration of highly qualifi ed workers result in a larger pool of experts in the future, it also refl ects international views on the attrac-tiveness of the region. There are also indications that highly qualifi ed immigrants are having a positive effect on the number of start-ups, publications and patents (OECD, 2014).7 Image 11 shows the devel-opment of highly qualifi ed immigrants per inhabitant for selected countries. As expected, countries with traditionally high levels of immigration are at the top. By around 2010, the USA had attracted the highest number of highly qualifi ed people from other countries relative to its population. However, in Sweden and Great Britain the number increased so sharply in recent years that the countries might

Image 10: Percentage of major companies with international cooperation on innovations in 2010-2012


As a percentage of all innovating major companies from 2010 to 2012

Image 11: Development of the percentage of highly qualifi ed immigrants per inhabitant from 1980 to 2010

Source: IAB (2015), OECD (2016)

80

0

10

20

30

40

50

60

70

AUTEST SVN FIN BEL GRC DNK CZE SWE PRT GBR FRA JPN(2009-12)

GER BRA(2009-11)

KOR(2011-13)

5%

0%

1%

2%

3%

4%

6%

1980 1985 1990 1995 2000 2005 2010

Denmark Germany Finnland France

Norway Sweden Switzerland USA

GBR


have overtaken the USA in the meantime. Norway also experienced a sharp increase in highly qualifi ed immigrants per inhabitant. Overall, the trend has been positive for all of the countries illustrated here, especially in recent years. Only in Switzerland has the percentage remained more or less stable since 2000, albeit at a high level. Swe-den peaked in the mid 1980s and its performance has been extremely positive since its extreme decline in the 1990s.8

Relative to the total number of immigrants, Great Britain has a par-ticularly large number of highly qualifi ed immigrants. Almost half of all immigrants to Great Britain in 2010 were highly qualifi ed. Other countries with a similarly high percentage of highly qualifi ed immi-grants included the USA, Denmark, Norway and Sweden. At just 5%, the percentage in France was originally extremely low. Interestingly, however, the percentage increased dramatically in all countries in the period under review. In 2010 France achieved a proportion of highly qualifi ed immigrants of around 23%. The decline of Sweden in the mid 1980s can also be explained by the total number of immigrants as the percentage of highly qualifi ed people did not fall.

A similar factor that focuses even more heavily on researchers and scientists is the development of the number of academic authors and their affi liation with the research institutions of a country. Due to the fact that many authors also migrate from highly developed coun-tries, we will consider net infl uxes. Image 12 shows these for selected countries from 2006 to 2009 and from 2010 to 2013. It is clear that there have long been unmistakeable trends for most countries. Coun-tries such as Great Britain, Japan, France, Germany and the USA that used to have a strong scientifi c lead have lost scientists over the past few years when we consider the net statistics. In France and espe-cially Germany, this loss slowed down in the most recent four year period, whereas it greatly accelerated in Great Britain and the USA.

In contrast, China experienced a major infl ux of academic authors, which has increased once more in recent years. Brazil and Mexico hovered around zero, although Brazil has been registering a positive trend in recent years. India, on the other hand, was unable to attract more authors than those who emigrated, although its numbers have improved in recent years. Besides China, Switzerland is the only coun-try to attract signifi cantly more academic authors than it lost, and it has even managed to dramatically increase this net infl ux in recent years. South Korea and Canada also have clearly positive infl uxes, although these have slowed in recent years.

However, a net outfl ux does not automatically mean that a country is unattractive to academic authors from other countries. It might also be due to the fact that there are many domestic authors who wish to build up international experience. This could be the case for Great Britain in particular. Countries such as China, on the other hand, might be determined to keep as many researchers at home as possible whilst attracting as many international researchers as they can. Additionally, relatively balanced values do not necessarily mean that there have not been any exchanges, but rather that the exchanges are highly balanced. In spite of everything, China, Switzerland, Korea and Can-ada could grow in signifi cance as centres of science due to the strong infl uxes whilst the number of academic authors in previous centres of science such as Great Britain and the USA decreases.

Image 12: Development of the net infl ux of academic authors


Average of absolute numbers

2010-2013 2006-2009

GBR

JPN

FRA

GER

IND

USA

RUS

HKG

ISR

SWE

MEX

BRA

DNK

CAN

KOR

CHE

CHN

1,500-1,500 -1,000 -500 0 500 1,000

www.bdo-ibc.com 23

3.3 INVESTMENTS IN RESEARCH AND DEVELOPMENT

Like the scientific work, efforts in research and development are gen-erally far from being evenly distributed across the globe. Clear global hotspots can be seen in the location choices of research-intensive industries, as an OECD list of the headquarters of the world’s most R&D intensive companies demonstrates (see Image 13). According to the list, more than one third of the companies in the top 100 were based in the USA; the fraction is not much smaller when the list is broadened to include the top 250. The second most popular main location is Japan. Both countries are home to more than half of the global R&D elite. Within Europe, Germany, France and Switzerland are the most popular countries amongst the top 100 companies; Great Britain is also relatively highly represented within the expanded top 250. On a global scale, 80% of headquarters are spread over just seven countries. China is the only emerging economy with a remarka-ble percentage.

It goes without saying that such a representation says nothing about the relative sizes of the companies. It also does not say that only the country from which the R&D work originated is benefiting, as the majority of the companies are global groups which can spread their research centres over various locations around the globe. More detailed information on the scope of local R&D work can be gleaned from information on R&D related employment and investments on a country level. According to the internationally accepted classification, R&D comprises three specific fields: basic research, applied research and experimental development. Gross domestic expenditure is a key indicator for the purposes of comparing R&D expenses on a country level. This comprises the total ongoing and investive R&D expenses of all companies, research institutions, university-owned laboratories and government laboratories based in that country (OECD, 2013b). A comparison of countries more appropriately places these values in relation to the size of the country (based on its population) or to its production (as a reference to its total economic activities). Table 7 presents the global top 10 countries in the most recent period under observation in this regard.

As expected, a selection of the most wealthy industrialised countries is at the top of the global rankings with regard to the volume of annual R&D investments. As countries with the highest investments per capita in the world, Switzerland, Singapore, Swe-den, the USA and Finland are also all in the global top 25 for economic performance per capita. However, the rankings are not entirely determined by income per capita. For example, the top 10 nations with the highest invest-ments per capita also include Israel and South Korea, countries whose GDP per capita was average when com-pared to the industrialised countries. On the other hand, it is noticeable that an extremely wealthy country such as

Percentage of GDP

Top 10 % Value in 2001 – 2013

Israel 4.19 4.11

South Korea 3.97 2.32

Finland 3.46 3.25

Japan 3.40 3.11

Sweden 3.27 3.76

Denmark 3.02 2.43

Switzerland 2.96 2.68

Germany 2.84 2.42

USA 2.79 2.58

Austria 2.77 2.08

Per capita

Top 10 US dollars Value in 2001 – 2013

Switzerland 1,617 1,142

Singapore 1,561 1,058

Sweden 1,421 1,429

USA 1,398 1,201

Finland 1,367 1,167

Israel 1,295 1,036

Denmark 1,293 1,017

South Korea 1,271 527

Austria 1,220 819

Germany 1,215 906

Table 7: Countries with the highest R&D investments per person and value added (2011-2013)

Source: World Bank (2016)

Image 13: Headquarters of the most R&D-intensive companies

Source: OECD (2016); HWWI (2016)

Top 250

20%

4.4%

3.2%2.8%

7.6%

6.8%20.4%

34.8%

Top 100

17.0%

2.0%3.0%

5.0%

4.0%

11.0%

4.0%

36.0%USA

JPN

GER

FRA

CHE

GBR

CHN

Others


Qatar with expenditure per capita of around USD 625 (2012) occu-pies a place in the centre fi eld for R&D. The global rankings appear changed as a result when the economic performance of countries is used as a reference. In this context, Israel and South Korea are clearly at the top.

In the case of Israel, this is presumably linked to its deeprooted sci-ence and engineering tradition focusing on medicine, aviation and IT in particular. One important platform is its pool of highly quali-fi ed experts. Relative to its population, Israel has a particularly large number of engineers and scientists (Shteinbuk, 2011). The number of research universities as well as state owned and private research institutes is also high given the size of the country. Its favourable con-ditions for start-ups and its geographical concentration of R&D work in local centres (supported by government initiative such as the Israeli Centers of Research Excellence) have produced a suitable institutional framework. This is compounded by the deliberate transparency of its research for the international community. This is evident through its willingness to participate in international research partnerships and by the fact that historically, Israel has been the fi rst port of call for a number of American IT companies to establish their international sub-sidiaries (IVI, 2013).

Unlike Israel, the high intensity of R&D in South Korea is essentially the result of a catch-up process over the last decade. The number of R&D workers in South Korea relative to its population more than doubled between 2003 and 2013, which is inconsistent with the developments in other major industrialised countries (see Image 14). This process might be due to a long-term strategic plan or perhaps even the regional competition. In the 1960s, after the end of the Korean War, the country was initially one of the poorest in the world. It focused on labour intensive industries such as the textile industry, which was not expected to boost the productivity of the country by any great margin. The Korea Institute of Science and Technology was founded in order to accelerate South Korea’s industrialisation and notably to allow the country to adapt foreign technology. These research efforts were initially strictly controlled by the government before being increasingly supplemented in the 1980s by decentralised, internal development work by companies. The internalisation of previ-ously imported preliminary work was an important step. This allowed

the value creation chain of South Korea’s industry to be systematically expanded and increased expertise in this fi eld provided more leeway for product improvements, which in turn increased South Korea’s competitiveness on the export markets (Kim, 2000). Additionally, in the 1990s the global rise of information and communication tech-nology accelerated the process. South Korea took the opportunity to focus its research subsidies on the industries emerging in that context: unlike the traditional industries, it did not fi rst have to play catch up here. The subsidies initially still focused on public research institutions; only in recent years were the ties between academia (universities) and state owned and private application research strengthened by means of strategic partnerships (Lee, 2011). Additionally, the regional compe-tition on the export market can explain why the increased intensity of R&D has accelerated once more, especially in recent years. Naturally, the rapid growth of China with regard to industrial products is worthy of mention: South Korean manufacturers cannot compete on price, which increases the pressure to gain competitive advantages through higher quality. The economic policies of Japan are exerting further external competitive pressure. Its more relaxed economic policies have ultimately led to the devaluation of the yen, causing Japanese exports to decrease in price, which is placing particular pressure on the South Korean economy (especially in the hotly contested high tech segment).

The upper section of Image 15 compares the chronological develop-ment of R&D intensity in six wealthy industrialised countries. The continuous increase in the case of South Korea (since 2002) seems particularly exceptional in this context. In the same period, the inten-sity remained stable in the other countries almost without exception; only Japan occasionally experienced an upwards trend. The period of the fi nancial crisis in 2009 and 2010 deserves special attention. The intensity of R&D levelled out or decreased in all of the industrialised countries with the exception of South Korea. The economic collapse obviously reduced investments in R&D both in absolute terms and relative to economic performance. However, this effect was slightly delayed and hit most countries in 2010. Developments in the major emerging economies in the same period was much more heterogene-ous. Research work in India has increased in absolute terms over the past 20 years following its dynamic, general economic growth; how-ever, the increase in the intensity of R&D has been negligible.

Image 14: Research assistants working in R&D per inhabitant in 2003 and 2013

Source: Worldbank (2016); HWWI (2016)

Number per thousand inhabitants

2003 2013

7.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

GER

3.3

4.5

3.2

4.23.9 4.0

3.64.1

0.71.1

3.43.1

5.2 5.2

3.2

6.5

FRA USA GBR CHN RUS JPN KOR

www.bdo-ibc.com 25

The opposite is true in China: a continuous upwards trend that could not even be halted by the fi nancial crisis has caused the R&D inten-sity of the Chinese economy to overtake that of Great Britain. This is closely linked to China’s rapid progress in knowledge-intensive future industries such as the computer and electronics industries, where China was able to increase its global market share from 5% to more than 25% within the last 15 years. Developments were similar in Russia until the millennium; since then, the intensity of R&D has evened out at a lower level that is far below average compared to the industrialised countries of the West. The number of employees in the R&D segment even declined over the last decade (see Image 14). Brazil is in a similar situation, where the dynamism it hoped for failed to become manifest. Finally, the developing countries are right at the bottom. Their development prospects are certainly not to be found in their own innovation in the medium term, but rather in the adapta-tion of foreign knowledge; however, such capacity is indispensable for this process. The data for these countries are extremely fragmented, although a measurement of just 0.03 employees in R&D per 1,000 inhabitants for Gambia in 2011 (World Bank, 2016) should attest to the enormous discrepancy (see values for industrialised countries in Image 14).

Additionally, during the fi nancial crisis the investment structure shifted slightly. The percentage of investments made by the private sector in R&D decreased overall in the OECD countries whilst the per-centage of investments made by universities and public institutions in R&D increased (OECD, 2016). After the global economic recovery in the following years, the distribution returned almost to its precri-sis state. This highlights the varying extents to which the types of investment are dependent on the economy. The investments made by universities and other public institutions primarily in basic research are mostly secured in the short and medium terms, and are therefore not greatly dependent on the state of the economy. Perceptible adjust-ments are only to be expected in the longer term, i.e. if a decrease in tax revenue resulting from a recession leads to cuts in the research budget. Due to their reliance on the market, the R&D related expenses of the private sector are, on the other hand, more sensitive to eco-nomic fl uctuations (European Commission, 2011). Several different factors are relevant to this: for one, the economic situation infl uences future market expectations and therefore the perceived profi tability of R&D; additionally, fi nancing terms are also poorer in a recession, espe-cially for inherently uncertain R&D investments.

Image 15: Proportion of R&D expenditure in GDP over time

Source: Worldbank (2016), HWWI (2016)

In %

4.0

1.5

2.0

2.5

3.0

3.5

4.5

USA FRA GER GBR JPN KOR

1996 1998 2000 2002 2004 2006 2008 2010 2012 1996 1998 2000 2002 2004 2006 2008 2010 2012

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

RUS BRA IND CHN


Limited conclusions can be drawn from information on the appli-cation of resources as to their origins. The capital structures of the researching institutions can vary dramatically even within the various segments. For example, in many countries the fi nancing of industrial research is publicly supported using instruments such as tax allow-ances and public private partnerships, whereas research in universities and research institutions is partially fi nanced by private third parties. An alternative breakdown of R&D expenses by source of fi nance (see Image 17) shows that in all of the countries considered, corporate capital makes up the largest portion of fi nance. In 2013 this was also true for all OECD countries with the exceptions of the Latin Ameri-can members Chile and Mexico, not to mention Greece. Proportions of around 75% were even measured for both Asian OECD countries Japan and South Korea, and the relative signifi cance of corporate capital in China is of a similar magnitude. The long-term trends are also of interest here. The aforementioned shifts during the last crisis notwithstanding, the signifi cance of corporate R&D fi nancing has continued to increase whilst the importance of public budget fi nance has decreased. This has caused the dependency of R&D work on the health of the economy to grow overall. Finally, the role of foreign capital in R&D fi nance differs starkly from country to country. With foreign capital making up more than 25% of its total R&D expenses, the Czech Republic was in an unusual position in this context. How-ever, Great Britain and Ireland were also found to have around 20% of foreign capital; in any case, this is an indication of the special role of multinational companies within domestic research landscapes.

In this context it is informative to break down the structure of invest-ments in R&D by type in a comparison of different countries. The Main Science and Technology Indicators of the OECD provide refer-ence data on the subdivision into four key fi elds. Image 16 provides a breakdown by type in the business enterprise sector, in universities (private and public) and private non profi t organisations for selected countries9. R&D activity on a company level generally made up the largest percentage in all OECD countries. However, there are also cer-tain differences here. Amongst the countries considered, with 78.5% South Korea had the highest proportion of company related R&D in 2013. Throughout the OECD, this percentage was only beaten by Israel (82.7%). These two countries, previously identifi ed as extremely dynamic in terms of R&D, are also somewhat characterised by pri-vate sector involvement in research. In absolute per-head statistics, only in the USA were corporate R&D expenses higher than in South Korea. The rankings are different for university research. In this fi eld, the expenses per capita in Germany were even higher than in the USA. Relative to the total R&D, the role of universities in Great Brit-ain (26.3%) is even more signifi cant amongst the major industrialised countries. This highlights the low contributions by universities to R&D expenses in the BRIC countries China and Russia. When last measured, the proportions in both countries were under 10% and therefore lower than in almost every other OECD country. According to the offi cial fi gures, this is due to the prioritisation of various sectors. In China, a particularly high percentage of R&D is attributable to the business enterprise sector, perhaps due to the activities of multinational com-panies in the manufacturing industry. In Russia, the government sec-tor is most conspicuous with a share of at least 30%. Such differences could be signifi cant for long term development prospects in that they ultimately imply that the research work has varying objectives. Cor-porate research focuses on marketing objectives and therefore directly on creating suitable products for the market or process optimisations, which will improve the welfare of consumers as well as the interna-tional competitiveness of a national economy. Public research tends to focus on basic fi ndings or, in the case of weapons research, strategic national objectives that often cannot be converted directly into mar-ket innovations.

Image 16: R&D expenses per capita in 2013 by fi eld of application


USD

Business Higher education Other public institutions Private non-profit

1,600

0

200

400

600

800

1,000

1,200

1,400

GER FRA USA GBR CHN RUS JPN KOR

1,019

204

161

59

823

221

186

0

543

174

11011

401

1644512

18918400

17326860

958

169

11516

1,078

127

15018

www.bdo-ibc.com 27

These statistics are the result of highly varied strategic objectives. According to OECD data, of the investments made by US industry in R&D in 2013 just USD 152 per capita fl owed into the pharmaceutical industry and around USD 206 per capita fl owed into the electronics and optical industries. In contrast, in South Korea just USD 25 per cap-ita fl owed into the pharmaceutical industry but around USD 557 per capita fl owed into the electronics and optical industries in the same year (OECD, 2016).

Finally, we will look separately at the industrial sector as the central economic factor in the innovation of a country. Table 8 presents the R&D expenses and industrial value added in selected countries. This comparison once again highlights the increased intensity of R&D in China and South Korea. It is also interesting that Great Britain’s rela-tively low R&D intensity is apparently not exclusively due to the rather low domestic content of the manufacturing industry, as few resources are invested in R&D within the industrial sector too.

Image 17: R&D expenses per capita in 2013 by source of fi nance

Source: OECD (2016), HWWI (2016); France data from 2012

USD

2008 2013

In billion USD PPP in % In billion USD PPP in %

Country Industrial R&D expenses

Industrial value added

R&D intensity

Industrial R&D expenses

Industrial value added

R&D intensity

China 91.82 7941.20 1.16 225.82 12691.93 1.78

Germany 50.24 2019.40 2.49 58.98 2220.06 2.66

France 16.88 1325.87 1.27 17.69 1415.86 1.25

Great Britain 9.52 1489.81 0.64 9.84 1468.47 0.67

Japan 101.70 2843.18 3.58 108.19 2980.32 3.63

South Korea 29.27 950.83 3.08 47.96 1146.11 4.18

USA 203.76 9895.66 2.06 208.42 11209.68 1.86

Table 8: R&D intensity of the industrial sector

Source: OECD (2016)

Public households Business Other domestic sources Abroad

1,600

0

200

400

600

800

1,000

1,200

1,400

GER FRA USA GBR CHN RUS JPN KOR

193

8090

218

950

847

313

1,039

164

400

879

10065

367

802

458

291

461

1763

168

289

36129

52184

80


tion to the applications submitted directly to national patent offices, the database contains the so called international applications through the Patent Cooperation Treaty that correspond to simultaneous appli-cations in several countries. In any case, patent protection must be obtained from the relevant national or regional patent office for pro-tection to be guaranteed within a region or country. Therefore, in the case of international marketing an invention can be covered by several patents, a fact that has to be taken into consideration when interpret-ing aggregate patent statistics.

As our focus is on the innovative capacity of countries, our primary interest lies in breaking down patent statistics by the country of origin of the applicant. Below we apply the doctrine of equivalents whereby applications to regional (i.e. supranational) patent offices are multiplied by a factor equal to the number of member states. Therefore, the patent statistics of the WIPO are equivalent to the number of patented inventions multiplied by the average number of countries for which patent protection was requested. This seems jus-tified as the greater international marketing of inventions also tends to imply a higher market value and thus a higher level of significance for the innovation. We will also limit ourselves to patents in the legally defined sense (known as inventory patents in English speaking countries), excluding utility models as a weaker form of intellectual property right with fewer requirements. Image 18 presents the dis-tribution of absolute patent applications by country of origin on this basis. A comparison between the distributions in 2014 and a decade before shows an enormous increase in the significance of China as the country of origin of inventions. It was able to multiple its global share of new applications since 2004 by six and was the clear leader in the most recent statistical year. Almost inversely, the percentage of pat-ent applicants from Japan decreased by almost 50%. The changes are more minor in other countries, although we can generally conclude

3.4 INNOVATION

The level of investments in research and development alone still does not determine the capacity of a country for innovation; this is essen-tially also dependent on the general conditions (see 3.2) and the effi-ciency of the allocation of resources. Theoretically, one way to directly gauge the capacity for innovation would be to determine the number and significance of the innovations produced by the inhabitants of a country within the time frame. In economics, innovation is generally understood to mean the final stage in the exploitation chain for new ideas. Such an idea can take the form of a new product or a more effi-cient production process. In the concept development and technical testing phases, the idea still only tends to be an invention. In the eco-nomic sense, an innovation only exists once the development of the product/process is complete and it has been launched on the market. From this moment on, the idea can generate revenue but will also be exposed to the public, which brings with it the risk of being imitated by competitors. The theoretical problem of non-exclusivity in con-nection with innovations can impede individual research incentives. Therefore, over the past few centuries patent law has established itself internationally as an effective instrument for providing sufficient pro-tection for investments.

The principle of patenting involves granting the patent holder the legally binding option of excluding other parties from using the pat-ented invention in any way for a limited period (at least 20 years in WTO member states). With this temporary guaranteed monopoly on the market (or the sale of the licence), the patent holder is given the opportunity to earn back the money invested in the development process. Additionally, the temporary nature of the patent protection ensures that in the long term, competition from new products can generate price pressure. Another advantage for the public is that infor-mation relating to reproduction is published as part of the patenting process, which guarantees that the innovation can be utilised even after the innovator withdraws from the market. A patent is always contingent on technical requirements. In its Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), the WTO defined novelty, industrial applicability and inventive step as crite-ria an invention has to meet before it can be patented (WTO, 2012). Therefore, the decisive criterion is the suitability of an idea for future commercial exploitation as an innovation. This makes information on the geographical spread of patent applications a suitable indicator of regional innovation. The database of the World Intellectual Property Organisation (WIPO) contains all patent applications for the last few years categorised by the country of origin of the applicant (a natural person or legal entity) and the location of the patent office. In addi-

Image 18: Global patent applications by country of origin

Source: WIPO (2016), HWWI (2016)

201410.8%

1.4%1.6%

1.9%2.7%

6.6%

18.7%

30.8%

17.1%

8.5%

11.7%

2.2%1.7%

3.0%3.3%

9.6%

33.4%

21.7%

8.9%

4.5%

JPN

KOR

GER

CHN

USA

FRA

GBR

NDL

CHE

Others

2004

www.bdo-ibc.com 29

that the patent boom in China has shaken the dominance of Western countries on the patent market.

The definitiveness of these statistics is subject to certain limitations, however. The differentiation by country of origin does not mean that the knowledge was always generated domestically, i.e. with regard to domestic companies that are partially owned by international groups. Additionally, the level of innovation can of course vary greatly from patent to patent and a domestic patent might even heavily build on patented inventions from abroad. Commentators believe that this is a great source of distortion, especially with regard to China. This is because the catching up process is also the result of a specific political strategy. The current 12-year plan and therefore also the national pat-ent development strategy expect domestic patent activity to increase significantly, something which will also be consistently encouraged by various fiscal incentives (Thomson Reuters, 2014). Additionally, innovation is not limited solely to inventions covered by patents; in a broader sense it also covers the development and introduction of new product designs and brands. Ultimately, differences in population size must also be taken into consideration for a reasonable comparison of the level of innovation of countries.

Therefore, below we will examine patents alongside the global appli-cation numbers for other types of intellectual property right. We have opted to present the data per capita for the purposes of comparability. For one, we have broadened our approach to include the registration of trademarks. Generally speaking, these are legally protected char-acteristics that are intended to clearly differentiate the product of a company from those of the competition. This differentiation aims to encourage customers to associate a company’s products with certain attractive characteristics. Unlike patents, trademarks do not directly concern innovations in the sense of technical inventions, but rather the opportunity for companies to communicate their level of inno-vation to customers. In this sense they complement patent activities (Mendonca et al., 2004). However, the pressure to maintain a posi-tive brand image can also encourage innovation, as demonstrated by examples in the communications industry (Millot, 2009). At the same time, by establishing new brands a company gains the chance to sys-tematically differentiate its range of products. This makes trademark registrations interesting as an early indicator of product innovations, especially for new products where a lack of technical novelty pre-cludes a patent. Empirical studies such as those carried out by Gotsch

& Hipp (2014) and Flikkema et a. (2014) confirm that trademark reg-istrations serve as indicators, at least for some industries such as the pharmaceutical industry and services linked to the economy. We will also consider registered designs as an indicator of innovation. This type of intellectual property right entitles the holder to the exclusive use of certain aesthetic features (form, design, colour) in the manu-facturing and marketing of products. This aesthetic content differen-tiates registered designs from patents, which are limited to technical aspects. Unlike the patenting process, novelty is not examined as part of the registration. In this regard countries in the comparison are inter-esting in that they provide indications of the level of product differen-tiation as a part of innovation.

Each country with the highest average number of applications per million inhabitants from 2012 to 2014 is listed in Table 9 for the three types of intellectual property right. Based on the number of patent registrations, South Korea and Japan generated the most innovations per capita by far. The average for Japan derived from the WIPO data is more than twice as high as for the rest of the countries and the South Korean value is even more than three times as high. The similar values for the past five years also show that the current statistics are no anomaly in this regard. Otherwise, the top 10 for patents are dom-inated by Western OECD countries. In 10th place, China is the only non-OECD country; given its population, this is an exceptional result for a per capita statistic which was brought about by the recent patent boom (see above). The rankings are somewhat different for the reg-istration of trademarks. Luxembourg is far in the lead here, primarily due to the fact that its tax regulations have attracted multinational companies to the country. The following ranks are more interesting. The density of new brands was extremely high in Ireland and France too; in contrast, many major industrialised countries such as the USA, Germany and Japan are not to be found in the top ranks. Even the density of new designs is not entirely consistent with the distribution of the density of patent applications. However, China has experienced remarkable progress in this segment too.

Patents Trademarks Registered designs

Top 10 ø 2012-14 ø 2007-09 Top 10 ø 2012-14 ø 2007-09 Top 10 ø 2012-14 ø 2007-09

South Korea 3134 2611 Luxembourg 11325 8006 South Korea 1257 1109

Japan 2159 2496 Iceland 4584 4289 Luxembourg 1195 652

Switzerland 1014 988 France 4410 N/A Germany 819 687

Luxembourg 982 604 Switzerland 4367 4969 Italy 651 630

Germany 916 901 Hong Kong 3719 2250 Turkey 555 400

USA 886 765 Malta 3542 1756 Switzerland 533 515

Finland 656 670 New Zealand 3440 3475 Spain 461 344

Sweden 611 589 Austria 3127 3878 China 451 224

Denmark 573 564 South Korea 3074 2907 Austria 413 414

China 501 145 Australia 3054 3086 Malta 342 62

Table 9: Annual number of intellectual property right registrations by country of origin, per 1 million inhabitants

Source: WIPO (2016)


A breakdown of the chronological development of the annual patent registration densities in various countries (see Image 19) shows how far behind China still was in terms of innovations until the mid 2000s. A perceptible catching up process started in 2005 and has gained even more momentum in the past fi ve years. As a result, China overtook France and Great Britain in 2012. The almost inverse performances of Japan and South Korea are similarly striking. Whereas the number of patent registrations per inhabitant has almost continuously grown in South Korea, more than doubling in the past 15 years, the number of registrations in the same period in Japan fell inexorably. No similarly major trends can be identifi ed for the rest of the OECD countries.

Based on these aggregate statistics, we might wonder how large the innovative contribution of each country is in the fi eld of technological future trends that are seen as particularly important. On the basis of its Intellectual Property Database, the OECD identifi es technology categories in which the number of patent applications has dramati-cally yet sustainably increased over the past few years. Image 20 illus-trates the distribution of patent applications by country for a selection of these technology categories. The landscape is relatively heteroge-neous, even within main categories such as energy and environmen-tal technology. Japan’s efforts to prevent greenhouse gas emissions have secured it a 40% share of global patent applications. Japan is also leading in terms of new developments in the fi eld of renewable energy, although the spread is more balanced due to the larger share held by China and countries that were not considered. With regard to the manufacturing industry, Japan has a particularly high percent-age of all patent applications for battery systems, accumulators and semiconductor components. South Korea too is extremely innovative in this fi eld. From a forward-looking perspective, the fi rst two cate-gories are mainly relevant for expanding e-mobility and intelligently managing power consumption on a household level (smart homes). The optical and photovoltaic industries are signifi cant fi elds of appli-cation for innovations in semiconductor construction. However, in the same period China held a purely quantitative lead in the patenting of electronic end products, with a global share of 50%. In the fi eld of digital media, the USA was the highest ranked for mobile applications although the Asian countries China, Japan and South Korea dominated the other sub-segments.

Even overall it is clear how strongly this group of countries domi-nates the patent landscape for future technologies; collectively, they accounted for almost 75% of global patents in the fi eld of digital data transfer in the period under review. Amongst the Western coun-tries, shares of more than 10% were only achieved by Germany and the USA. The emerging economies of Brazil, India and Russia appear entirely insignifi cant in this regard, having failed to account for more than 0.5% of patent applications in any of the technologies consid-ered.

A lower frequency of patents can be the result of insuffi cient invest-ments in research, a deliberate lack of focus on marketable inventions and ineffi ciency in the appropriation of research resources. We can shed more light on this by comparing patent applications by country of origin with national investments in R&D.

Image 19: Patent applications by country of origin, per 1 million inhabitants

Source: WIPO (2016), HWWI (2016)

No.

KOR JPN GER USA FRA GBR CHN

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

www.bdo-ibc.com 31

This allows us to carry out a rough comparison of the productivity of R&D investments, even if the number of patents cannot be inter-preted as the sole factor in the success of research for the reasons mentioned above. Image 21 summarises both statistics for all coun-tries for which such information is available in a scatter diagram (all industrialised and developing countries as well as emerging econo-mies). For the purposes of better comparability within the dimensions, the statistics have been presented relative to the population and fi ve-year averages have been chosen in order to eliminate short term fl uctuations. Overall the correlation is positive, as expected, although it is overshadowed by the surprising runaway leaders South Korea and Japan. In both countries the extremely high patent related activity was not linked to an equally unquestionable lead in terms of R&D investments; both countries were actually in the middle of the fi eld compared to other industrialised countries. For example, Switzerland had signifi cantly higher R&D expenditure per capita yet registered half as many patent applications per inhabitant, resulting in it occupying third place in terms of patent density. Generating similar patent den-sities despite noticeably lower investments per capita than in the USA and Switzerland, for example, Germany can be considered another forerunner, albeit a much less distinct one. In contrast, the density in countries like Singapore, Israel and Australia is below average in rela-tion to the volume of investments. The rather small innovative contri-butions of the BRIC countries are adequately proportional to their low investment volumes, although China had a signifi cantly higher level of patent-related activity than Russia despite its lower expenditure per capita.

Fundamentally, we must consider that a low patent yield per euro of research funds invested can also be the result of a deliberate focus on basic research or applications that are not primarily commercial, i.e. armaments.

Image 21: Comparison of R&D expenditure and patent applications from 2009 to 2013

Source: World Bank (2016), WIPO (2016), HWWI (2016)

Image 20: Global spread of patent applications in 2010-2012 by selected technology categories

Source: OECD (2016), HWWI (2016) FRA GER JPN KOR GBR USA BRA CHN IND RUS Others in %

Digital data transfer

Wireless resources management

Sensitive semiconductor devices

Secondary cells; accumulators

Renewable energy generation

Mobile application services

Manufacture of electric devices

Manufacture of batteries

Greenhouse gas emissions mitigation

0 10 20 30 40 50 60 70 80 90 100

19 14 24 281

5

2

3

2

16

11

7

3

3

2

4

3 2

12

8

18 21 2 18 20 17

28 19 1 20 13 8

40 22 1 12 6 4

16 18 12 2 18 10 20

43

34

18

12 19

1

2

13

25

8

34

50

1

1 1619

19

7

3

8

6

3

5

1 1310

0

00

0

0

0

0

0

0

0

00

00

00

0

0

00

00

0

0

0

0

3

3000

2000

1000

0

0 500 1000 1500

KOR

JPN

CHEGER

FRA DNKGBR

USA

ISR SGPRUSCHN

AUS

NDL

R&D expenditure (USD) per capita (av. 2009-2013)

Pate

nt a

pplic

atio

ns p

er 1

00

m in

habi

tant

s (a

v. 2

00

9-2

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In light of these limitations in how patent statistics can be interpreted, we must ask what other factors are available that would allow us to gauge the innovative capacity of countries. One option is to consider the payments made for licences to third-party intellectual property instead of the number of registered property rights. If such trans-actions take place internationally, they will be part of the foreign trade statistics of a country. Payments made by foreigners to natives for licences to protected domestic products (protected by patents, trademarks, copyright etc.) are logged as exports. Inversely, licence payments to other countries are categorised as imports. The compiled balance of payment statistics of the IMF contain a separate category for these transactions. This allows for an international comparison of the income and expenses of countries in connection with intellectual property. The countries with the highest average income over the last three years under review are listed in Table 10. The USA is impressively dominant in absolute categories; its income was more than four times as high as Japan, which was in second place. The most decisive factor behind this was the income from copyrights to cultural and entertain-

ment services. However, the rankings also reveal the brand strength of smaller countries such as the Netherlands and Switzerland. In abso-lute terms, both countries generated higher income than Germany and France. As a result, they are the highest ranked per capita in the world. Trade with intellectual property also makes up a particularly high percentage of the economic strength of these countries.

A direct comparison of income and expenses provides further insights into the structure of the international licence business, especially comparisons of industrialised countries and BRIC countries (see Image 22). In 2014, all of the industrialised countries considered by the study, with the exception of South Korea, were net exporters of intellectual property. Not only did the USA have the highest exports per head, but it also had the largest trade balance by far. On the other hand, the trade volume in all of the BRIC countries was signifi cantly lower than in the established industrialised countries due to their weaker eco-nomic strength per capita. Unsurprisingly, these countries were also all net importers of licences. Russia had the highest exports within this

Image 22: Income and expenses per capita in trade with intellectual property in 2014

Source: IWF (2016), HWWI (2016), Data for China from 2013

US dollars

Revenue Expenditure

450

0

100

50

150

200

250

300

350

400

BRA CHN FRA GER IND JPN KOR RUS GBR USA

28.71.8

15.40.6

154.6180.0

100.4

170.6

3.7

164.7

289.7

205.6

102.2

55.8

4.6

170.4

310.1

132.1

408.8

0.5

www.bdo-ibc.com 33

group of countries, although its trade balance was particularly nega-tive. Overall, the global roles of innovator and imitator seem to still be relatively fi xed, at least when considered across all industries.

Another alternative approach is to gauge the capacity of a country for innovation indirectly using its merchandise exports, especially goods where a lot of new knowledge fl ows into their production. To differentiate between such goods, for example, we can use the OECD classifi cation of high-tech goods. Building on the more detailed dif-ferentiation of export goods in the UN Comtrade Database and infor-mation on the intensity of R&D in product groups, certain groups of goods (semi-fi nished and fi nished products) are categorised as par-ticularly technology intensive and their export values are aggregated into one fi gure for the total exports of high-tech goods.10 Image 23 illustrates the development of this fi gure per capita for selected coun-tries over time. The resulting image is largely consistent with previous results. For example, South Korea is in the lead with a particularly dynamic increase that was only temporarily slowed down by the 2009 fi nancial crisis. The large number of patent applications is clearly also refl ected in the country’s high market penetration in the high-tech segment. Germany was the only Western country to achieve simi-larly high growth rates. In contrast, the poor performance of Great Britain is remarkable. Although the country was still in front of the other countries in terms of exports per capita by the early 2000s, the data from 2007 and 2013 show signifi cant declines, with Great Brit-ain eventually exporting fewer high-tech goods per head than China. The outsourcing of fi nal assembly work abroad in order to cut costs, especially if it was less knowledge intensive, played a major role in this decline (Hardie & Banks, 2014). The USA too experienced a decrease in exports per capita in the most recent period and failed to return to pre-crisis levels. However, China was able to almost continuously increase its technology intensive exports and has now closed the gap with most Western countries in terms of the volume per capita.

However, when interpreting the data please note that the list values exports based on their production values and not their domestic content. This means that the value of an exported good is fully attributed to the country of exportation even if some of the com-ponents were manufactured in other countries. Especially in the case of China, this leads to a certain degree of distortion as the domestic content of Chinese high-tech goods is sometimes rela-tively low: many components are imported, especially from neigh-bouring countries in Asia. This is especially true of electronic devices (Kuroiwa, 2014). In the context of an international technology trans-fer, the inclusion of these imports in the measurement of capacity for innovation must be fully justifi ed as a certain amount of knowl-edge required for R&D is imported alongside technology intensive semi-fi nished products. The following section addresses the impli-cations arising from the acquisition of knowledge for the macroeco-nomic development.

Absolute

Top 10 Million US dollars

USA 125.23

Japan 30.82

Netherlands 29.04

UK 16.56

Switzerland 16.52

France 13.21

Germany 11.36

Sweden 7.14

Ireland 5.10

South Korea 4.21

Percentage of GDP

Top 10 %

Netherlands 3.37

Malta 3.19

Switzerland 2.42

Ireland 2.17

Liberia 2.06

Hungary 1.59

Luxembourg 1.37

Guyana 1.30

Finland 1.28

Sweden 1.27

Per person

Top 10 US dollars

Switzerland 2,065

Netherlands 1,733

Luxembourg 1,513

Ireland 1,111

Sweden 750

Malta 705

Finland 630

Singapore 414

USA 399

UK 260

Table 10: Countries with the highest income from trade with intellectual property (ø 2012-2014)

Source: IWF (2016), HWWI (2016)

Image 23: Development of exports per capita of high-tech goods

Source: OECD (2016), UN Comtrade (2016), HWWI (2016)

FRA GER JPN GBR USA KOR CHN

US dollars

2,500

0

500

2,000

3,000

1,000

1,500

1996 1998 2000 2002 2004 2006 2008 2010 2012


3.5 INNOVATION AND ECONOMIC GROWTH

The previous analysis showed how important suitable general condi-tions – and therefore ultimately the level of development of a country – are for successful innovation. However, it remains to be seen to what extent the R&D sector is able to contribute to sustainable economic growth and the improvement of a population’s quality of life. From a political perspective, it can only be wise to fi nance public research institutions or subsidise private research if the innovations benefi t society beyond the private revenue generated by the researching insti-tutions. Since, as explained above, R&D is at risk of being underfunded without suffi cient public resources, the nature and scope of the rela-tionship between R&D investments and long term macroeconomic growth are of particular interest to economists in particular. One key hypothesis theorises that the stimulation of research will lead to higher production growth through improved productivity in the

medium term. Image 24 documents and describes the relationship of these factors for the most recent period and a global sample of coun-tries. The growth of R&D investments is on the horizontal axis and the growth of real economic performance in the various countries is on the vertical axis. If we disregard the few extreme cases, the correlation clearly appears positive and relatively close. Naturally, this alone does not allow us to infer any specifi c effect of R&D investments or even the existence of a causal relationship. Initially, we must separate the infl uence of factors we have included, such as the amount of capital invested and the level of education. Numerous empirical studies show that such a multivariate analysis can prove that research has a causal infl uence on macroeconomic productivity and GDP growth (see Fran-zen, 2000; Goel et al., 2008; Griffi th et al., 2004; Zachariades, 2003). Generally speaking, this goes for private research that mostly focuses on applications as well as for public basic research (Park, 1995). Besides the positive effect of R&D investments on innovation, many studies also highlight a second productivity-boosting effect: the abil-ity to absorb foreign knowledge more easily and strengthen the inter-national technology transfer (Griffi th et al., 2004; Ulku, 2007).

We must still determine in what exact ways innovation can stimulate general economic growth. The economic growth theory has produced various patterns of explanation over the past few decades.

Older theories and models in particular focus on productivity increases as a basis for economic growth. These so-called neoclassical growth theories are essentially based on the Solow Model created by Robert Merton Solow and Trevor Swan (Solow, 1956). In this model, long-term economic growth (per capita) can only be achieved through technological progress that increases the productivity of the produc-tion factors. However, this simple model accepts it as is, which means that it cannot be infl uenced by R&D work, for example. Therefore, the capacity of a country for innovation is of no express signifi cance in this model.

An initial step forward in this regard is the model created by Robert Lucas (Lucas, 1986). In a sense, Lucas breaks down the technological progress growth driver from the Solow Model in order to explain it more precisely. This is because in his model, technological progress as well as a new factor, ‘human capital’, can increase the productivity of the production factors. Lucas defi nes human capital as the general skill level of the population. This is not mandatory, however, and is instead the result of a type of investment which the population of a country opts to make. By devoting time and in doing so foregoing a wage for the time being, a person can acquire knowledge through edu-cation and earn a higher salary in the future. Lucas describes this accu-

Image 24: R&D investments and GDP on a country level: correlation between growth rates

Source: World Bank (2016), HWWI (2016)

15

-5

0

5

10

-10 0 10 20 30 40Average growth of R&D-investments 2009-2013 (%)

Ave

rage

gro

wth

of r

eal G

DP

200

9-2

013

(%)

www.bdo-ibc.com 35

mulation of human capital as a social activity where the individual builds on the knowledge of other individuals. Thus, when human cap-ital is built up, productivity increases and the economy grows (under otherwise equal conditions). In the broadest sense, we can therefore speak of an investment – with a cost – in the capacity of a country for innovation in the form of the build-up of knowledge and skills (edu-cation) which increases its economic growth through productivity boosts. In a world of trade, depending on their levels of human capital it can be wise for countries of varying levels of development to spe-cialise in the production of different goods because countries with an originally higher level of human capital are able to produce relatively knowledge-intensive goods in particular more efficiently. The ‘classic’ components of technical progress remain predefined in this model, however.

The idea that knowledge and the skills of a nation form a type of capi-tal stock that increases the productivity of the economy was also used by Paul Romer in his model in 1986 (Romer, 1986). He uses the term ‘state of knowledge’ to refer to the productivity of the other produc-tion inputs. This is subdivided into a firm specific and national state of knowledge. The firm specific state of knowledge can be increased through investments in research, which involves foregoing present consumption. As it is assumed that new knowledge cannot be (suffi-ciently) protected and will spread from firm to firm, the firm-specific state of knowledge also automatically increases the general state of knowledge.

Therefore, both models are based on the principle that investments can be made in a pool of knowledge and skills that does not decrease and that increases the productivity of the economy when it grows. Through this, acquired knowledge always benefits the economy as a whole due to spillover effects. However, neither model expressly models technological progress through innovation; instead it is either accepted as is or indirectly described by the improvement of the state of knowledge. As the level of productivity in the models tends to increase continuously through the accumulation of knowledge, this correlation rather fits process innovations brought about by experi-ence instead. Changes and upheavals brought about by product inno-vations or technology advances can neither be motivated nor mapped by these simple models.

Another effect of innovation that can lead to sustainable growth is an increase in product differentiation. One key element of R&D processes is to develop products that are similar to well-established products in terms of their functionality but differ from them in terms of certain characteristics such as design, ease of use or suitability for certain

target groups. The entrepreneurial incentive to develop such product variants is to tie in with existing markets and customer groups whilst standing out from the competition with a unique selling point. If a company is able to make its unique selling point known on the market, this can lead to the generation of net profits in the form of monopoly revenue. In turn, this monopoly revenue is necessary for the company to balance out the costs of development and marketing. As a result, the number of variants available within a product category increases over time, i.e. markets are characterised by a continuous process of differentiation. On the level of consumer goods, this has a direct and positive impact for consumers: the growing diversity improves the odds of finding a product that meets an individual’s requirements. In this sense, we can speak of qualitative growth in the form of improved consumer welfare (Grossman & Helpman, 1991).

However, quantitative economic growth in the sense of increasing production volumes per capita also requires the level of productivity to grow over time. Romer (1990) argues that even such an increase in productivity can be explained by product differentiation, especially on the level of fixed assets (machines, production equipment etc.) and intermediate products (semi-finished products and product compo-nents). The key here is the increasing specialisation of product variants in the innovation process. This makes it possible to tailor equipment and intermediate products more closely to certain types of applica-tion, which in turn improves their efficiency of use. Examples include special equipment such as lasers, which are specially designed to per-form certain operations or chemical applications, developed for the medical technology and chemical industries. The underlying incentive to develop such equipment is the same as on the level of consumer goods: a unique selling point can be used to generate monopoly reve-nue from certain customer groups in order to cover the costs of devel-opment over time.


It must also be said that product innovations can stimulate economic growth not only by broadening the range of available products, but also by improving the quality of existing product variants. One key aspect of this type of innovation is that it does not complement prod-ucts that are currently on the market, but rather, as is the case with new variations, systematically replaces them. Over time, the products improved in this way are replaced in turn by new products that have been even more tailored to their intended purpose. The result is a sustainable appreciation process that is not necessarily homogeneous (as it is dependent on random research successes). Schumpeter (1939) was the first to work out the positive effect of this process on welfare. Schumpeter also coined the term ‘creative destruction’ to describe the effects: by creating a quality improvement, an innovator destroys the monopoly revenues of the previous innovator. An obvious example of the effect of such driving forces is the drastic development progress in the field of IT products within the last two decades. Aghion and How-itt (1992) show that this form of innovation can bring about steady quantitative economic growth provided that the general conditions permit creative destruction on the level of fixed assets and intermedi-ate products. In this way, quality improvements bring with them effi-ciency improvements in the production of end products and therefore an increase in income per capita. Here, as with product differentia-tion, however, the effect is dependent on crucial requirements on the institutional level. This includes access to sources of finance for R&D investments as well as the opportunity to commercially exploit inven-tions on an exclusive basis by means of patents or similar intellectual property rights.

All of these sources have something in common: logically, productiv-ity-boosting innovations can be expected to occur where the most knowledge and experience have built up in the past. This is clear in connection with learning by doing, although it also applies to growth through the accumulation of knowledge (a larger pool of highly qual-ified teachers improves the productivity of education), product dif-ferentiation (knowledge from the development of product variants can be applied to develop more variants) and creative destruction (innovations that improve quality build on existing product designs). These theories ultimately paint a pessimistic picture of the potential of emerging economies and developing countries to catch up with the economies of industrialised countries through innovation. As long as new knowledge spreads indirectly and across borders, devel-oping countries will only be able to use the information for their own research for a limited time. It seems that they will remain

in second place in the innovation competition unless some random research success in the form of an unparalleled invention leads to a spontaneous reversal of their fortunes. However, this does not mean that investments in R&D are of no macroeconomic value for these countries. Quite the contrary: domestic research is in many cases a prerequisite for the imitation and adaptation of foreign products and processes, as evidenced on an industrial level by the results of Griffith et al. (2004). As imitation and adaptation normally do not require as many resources as the underlying new development, the R&D sector serves as an excellent platform for emerging economies and develop-ing countries to catch up with the global technological elite, at least temporarily. This way, even poorer countries can benefit from strong patent protection: by virtue of its incentive effect, it stimulates inno-vations in the leading countries which are then absorbed by the rest of the world in the medium term. Additionally, the imitation process itself naturally generates experience as an input factor for the local research sector. If the general conditions for R&D are systematically improved at the same time, the efficiency of research can improve over time in such a way that despite the higher costs, it will be a more profitable strategy to innovate than to imitate and a country can take the global technological lead in many segments (Barro & Salai-Martin, 2002). The best example is a country like South Korea which has assumed a key position in global technology exchanges through its determined innovation policies and focus on research in futuristic sectors. China is also on the way to assuming such a position in fields such as electronics and data management (see 3.4).

www.bdo-ibc.com 37

3.6 SUMMARY OF THE IN-DEPTH LOOK

In summary, our analysis produces a multifaceted image of the global innovation landscape. On the one hand, despite the growing attractiveness of countries such as China, the local policies of major research intensive companies is currently mainly focused on the established industrialised countries, especially the USA and Japan. With regard to the USA in particular, this can be explained objectively by a combination of favourable institutional conditions for innovating companies and a consistently high pool of (native and foreign) highly qualified people, regardless of market access. On the other hand, the more detailed analysis demonstrates that the global spread of multi-national R&D giants is of limited significance to the total amount of innovation work in each country. Judged by the investment volume or by the level of research success, the tectonics of R&D have visibly shifted within the last decade, especially since the financial crisis.

The South Korean example in particular shows how a targeted national innovation strategy can not only accelerate innovation, but also stimulate general economic growth. Through government research subsidies, especially on the level of upstream production, the country expanded its national value creation chain by substituting imports, making it possible to build up knowledge intensive domestic industries whose privately supported innovation ultimately acceler-ated South Korea’s international competitiveness in key industries such as electronics and vehicle production. Amongst the emerging economies, China is on a similar path and will soon make the jump from imitator to innovator in the global race for knowledge, especially for future technologies such as battery systems and renewable ener-gies. However, it remains to be seen how sustainable this development will be and how internationally competitive Chinese innovations will prove to be in the long term, as the majority of the patent boom is currently the direct result of short term government incentives.

Amongst the established industrialised nations, countries such as the USA and Germany were able to retain or even consolidate their tech-nological lead in many segments. Other countries have lost ground over the past few years. Japan and Great Britain are striking examples of this in our analysis. Based on the number of patent applications in recent years, Japan’s innovation has declined steadily, which is why the country lost its global lead to South Korea for the first time. Nev-ertheless, the decline was still at a high level; the level of innovation in the Japanese R&D sector is still high compared to other countries. However, the developments are worrying in so far as they are closely linked with demographic change, which is a key issue in Japan’s popu-lation structure. If this should prove true in the coming years, besides

the consequences for the labour force and national budget, the age-ing of Japanese society would have a direct, negative impact on the competitiveness of national knowledge intensive industries. As ever, Great Britain possesses a highly educated labour force and universities with an excellent international reputation, although the conversion of these resources into successful research has been considerably lower than in other countries. Investments in R&D per capita as well as the number of patent applications in Great Britain were clearly below average when compared to other industrialised countries. This is reflected in the decline in British exports of high-tech goods. The low R&D intensity on an industrial level makes it clear that this process is not solely due to structural change in the form of a shift towards the tertiary sector. When we consider the BRIC countries, with the afore-mentioned exception of China they have barely caught up in the race for innovation on a macroeconomic level. Despite slightly positive trends, Brazil and India are investing much less in R&D per capita and as a proportion of their economic strength than the global technologi-cal leaders. These countries are also almost completely insignificant in quantitative terms when we consider the spread of patent applications relating to future technologies. Given the recent developments in Russia, we are even forced to speak of a decline. Despite a high level of governmental subsidies for research, the total number of people work-ing in R&D in Russia bucked the trend and decreased over the past decade, and the level of investments is low. The key weak point is the business enterprise sector which showed relatively weak participation in terms of financial contributions and the utilisation of R&D resources compared to other countries.

Finally, we must consider what general lessons can be derived from our various international analyses. We would summarise them into three main findings. First of all, a good education system with a well-educated labour force alone is clearly no guarantee of successful domestic innovation. Academic excellence has to be transferred to the application research that is presumably being carried out in the business enterprise sector. This requires educated talent, both native and foreign, to be kept within the country once they have graduated. Additionally, suitable innovation infrastructure has to be created by the government in order to closely intertwine basic and application research with the mutual exchange of knowledge. Secondly, the subsidising of international research collaboration is obviously not a mandatory part of a successful national research strategy. South Korea proves this. As shown in the local conditions, the percentage of patents resulting from international collaboration in South Korea was similarly low to Japan. Nevertheless, the country was able to attain global technological leadership. This is understandable in light of its initial situation: as with technology partnerships led by foreign


development associations, it is often unclear how much of the acquired knowledge will actually remain exclusively in the country to increase its competitiveness, a strategy of substituting national solu-tions in certain development phases can make sense. However, care must be taken to preserve the balance as if the degree of separation is too great, an emerging economy risks losing access to external sources of knowledge, which are an important prerequisite for it to produce its own innovations. Thirdly, with regard to innovation policies the question is not simply one of country or market. Rather, governmental and private actions are to be considered complementary for the suc-cess of the research. Again, South Korea is an illuminating example of this. By establishing research centres, the government initially paved the way for private partnerships to flourish on a national level; the gradual entry of companies onto the international markets then cre-ated stronger and stronger inherent incentives to innovate due to the increasing competitive pressure. Ultimately, public innovation policies are most successful when they are able to establish a largely self sus-taining private start-up and innovation culture.

3 BRIC countries: Brazil, Russia, India, China. 4 See annex E for a list of the country abbreviations used in this and following sections.

5 Under the assumption that the quality of international qualifications is somewhat similar.

6 Includes ‘information and communication technicians’.

7 In particular, this might be due to migrants from countries with poor general conditions for start-ups and R&D who are bringing their ideas into the country.

8 In 1985 Sweden made changes to which governmental body was responsible for receiving immigrants: http://www.migrationsverket.se/English/About-the-Migration-Agency/Facts-and-sta tistics-/Facts-on-migration/History.html.

9 According to statistical classifications, the question of market orientation highlights the difference between the business enterprise sector and public institutions. The R&D work of organisations whose main purpose is to sell goods (goods or services) to the public through markets is attributed to the business enterprise sector. R&D work in public institutions whose main purpose is to provide publicly accessible, non-marketable goods to the general public is either attributed to the higher education sector or other public institutions. The rest is attributable to private non-profit organisations (http://ec.europa.eu/eurostat/statistics-explained/index.php/Europe_2020_indica-tors_-_research_and_development#Data_sources_and_availability)

10 Eurostat provides a list of goods classified as technology-intensive using this method that can be viewed by clicking on the following link: http://ec.europa.eu/eurostat/cache/metadata/Annexes/ htec_esms_an4.pdf

www.bdo-ibc.com 39

4. CONCLUSIONS

The overall ranking of the International Business Compass remained largely stable in 2016. There were slight shifts at the top of the rank-ings; having spent years in second and third place, Hong Kong now holds first place. Switzerland fell from first place in the previous year to fourth place, although its decline was only slight in absolute index values. The Netherlands was able to break into the top three for the first time following significant gains. Likewise, Ireland and Australia both made it into the top 10, Ireland having experienced exceptionally positive developments. Overall, with the exceptions of Hong Kong and Singapore the top 10 once again exclusively comprise OECD countries. The changes in the middle and bottom of the ranking were more sig-nificant. Ukraine was the biggest loser by far, although the countries in North Africa also lost a lot of ground. As expected, the recent political crises also impaired our values for local attractiveness. The fact that for most countries this caused multiple factors to deteriorate, and not only individual economic or political indicators, underlines the useful-ness of our multi-dimensional index.

Simultaneously, this year’s focus on innovation showed that there are major differences between the countries at the top of the rank-ing with regard to the future prospects of economies. Judged by the investment volume or by the level of research success, the tectonics of R&D have visibly shifted within the last decade, especially since the financial crisis. Examples such as that of South Korea show how a targeted national innovation strategy can not only accelerate inno-vation, but also stimulate general economic growth. Amongst the established industrialised nations, individual countries were able to retain or even consolidate their technological lead in many segments. Other countries have lost ground over the past few years. The emerg-ing economies, with the exception of China, have barely caught up in the race for innovation on a macroeconomic level. These countries are also almost completely insignificant when we consider the spread of patent applications relating to future technologies. As the key con-clusions of our analysis, we can first argue that a good education sys-tem and a well educated working population alone are obviously no guarantee of technological leadership. Academic excellence has to be transferred to the application research that is presumably being car-ried out in the business enterprise sector. Additionally, the subsidising of international research collaboration is obviously not a mandatory part of a successful national research strategy, as demonstrated by South Korea. Finally, with regard to innovation policies the question is clearly not simply one of country or market. Rather, governmental and private actions are to be considered complementary for the success of the research. Subsidies to support innovation will be successful in the long term if they are able to establish a largely self sustaining private start-up and innovation culture.


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www.bdo-ibc.com 43

ANNEX A

COUNTRY OVERVIEW

Africa

East Africa EAF Ethiopia, Burundi, Djibouti, Eritrea, Kenya, Comoros, Madagascar, Malawi, Mauritius, Mozambique, Rwanda, Zambia, Tanzania, Uganda, Zimbabwe

Central Africa CAF Angola, Equatorial Guinea, Gabon, Democratic Republic of the Congo, Republic of Congo, São Tomé and Príncipe, Chad, Central African Republic

North Africa NAF Egypt, Algeria, Libya, Morocco, Sudan, Tunisia

Southern Africa SAF Botswana, Lesotho, Namibia, South Africa, Swaziland

West Africa WAF Benin, Burkina Faso, Côte d’Ivoire, Gambia, Ghana, Guinea, Guinea Bissau, Cape Verde, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, Togo

Asia

Central Asia CAS Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan

East Asia EAS China, Hong Hong, Japan, Mongolia, North Korea, South Korea, Taiwan

South Asia SAS Afghanistan, Bangladesh, Bhutan, India, Iran, Maldives, Nepal, Pakistan, Sri Lanka

Southeast Asia SEAS Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Timor Leste, Vietnam

West Asia WAS Azerbaijan, Bahrain, Georgia, Iraq, Israel, Yemen, Jordan, Qatar, Kuwait, Lebanon, Oman, Saudi Arabia, Syria, Turkey, United Arab Emirates, Cyprus

Europe

Eastern Europe EEU Bulgaria, Moldova, Poland, Romania, Russia, Slovakia, Czech Republic, Ukraine, Hungary, Belarus

Northern Europe NEU Denmark, Estonia, Finland, Ireland, Island, Latvia, Lithuania, Norway, Sweden, UK

Southern Europe SEU Albania, Bosnia and Herzegovina, Greece, Italy, Kosovo, Croatia, Malta, Macedonia, Montenegro, Portugal, Serbia, Slovenia, Spain

Western Europe WEU Belgium, Germany, France, Netherlands, Austria, Switzerland

America

North America NAM Canada, USA

Caribbean CAR Bahamas, Barbados, Dominican Republic, Haiti, Jamaica, St. Lucia, Trinidad and Tobago

Central America CAM Belize, Costa Rica, Guatemala, Honduras, Nicaragua, Panama

South America SAM Argentina, Bolivia, Brazil, Chile, Ecuador, El Salvador, Guyana, Colombia, Paraguay, Peru, Surinam, Uruguay, Venezuela

Oceania

Oceania OCE Australia, Fiji, New Zealand, Papua New Guinea, Solomon Islands, Samoa, Vanuatu


Variable Definition Description Source

Population Total population All inhabitants, regardless of legal status or citi-zenship, with the exception of refugees who have no fixed residence in the country of asylum and who are normally counted as part of the popula-tion of their country of origin.

2014 World Bank, World Development Indicators Online.

Population growth Average population growth rate

The annual growth rate is derived from the nth root of the total growth rate, where n is the number of years in the period under review.

2009-2014 World Bank, World Development Indicators Online.

GDP per capita GDP per capita adjusted for purchasing power

Gross domestic product – the total value of all goods (goods and services) converted into pur-chasing power parities

2014 IMF, World Economic Outlook Database.11

Unemployment rate Unemployment rate (%) The percentage of jobseekers in relation to all employees

2014 IMF, World Economic Outlook Database.12

National debt Gross national debt (% of GDP) Gross national debt relative to GDP; reflects the total government loans in the national currency less repayments.

2014 IMF, World Economic Outlook Database 2011.13

FDI per capita Average FDI per capita Average inflow per capita from foreign direct investments (FDI)

2009-2014 World Bank, World Development Indicators Online.

Inflation Inflation (%) Annual percentage change in average consumer prices

2014 IMF, World Economic Outlook Database.

Consumption expenditure per capita

Household consumption expenditure per capita (in con-stant USD 2000)

Average household consumption expenditure per capita. The consumption expenditure of private households is the market value of all goods and services purchased by the households, including longlife goods.

2014 World Bank, World Development Indicators Online.14

Political stability Between -2.5 and 2.5 Reflects the probability that the government will not be destabilised or topped by unconstitutional or violent measures, including politically moti-vated violence and terrorism.

2014 World Bank, Worldwide Governance Indicators.

Regulatory quality Between -2.5 and 2.5 Reflects the perceived ability of the government to formulate and implement reasonable policies and regulations that will permit and encourage the development of the private sector


Rule of law Between -2.5 and 2.5 Reflects the perceived ability of the government to formulate and implement reasonable policies and regulations that will permit and encourage the development of the private sector

2014 World, Worldwide Gover-nance Indicators.

ANNEX B

OVERVIEW OF VARIABLES

www.bdo-ibc.com 45

11 Supplemented by data from the World Bank and the CIA.

12 Supplemented by data from the CIA and the African Development Bank.

13 Supplemented by data from the World Bank.

14 Supplemented by data from the World Bank.

Variable Definition Description Source

Control of corruption Between -2.5 and 2.5 Reflects the perceived extent to which public influence is used for private gain, including petty and serious forms of corruption as well as the ‘possession’ of the state by elites and private interests


Health Life expectancy at birth Life expectancy at birth (index with a minimum value of 20 years and the observed maximum from between 1984 and 2014)

2014 UNDP, Human Develop-ment Index.

Education Average academic education Average academic education (index of mean years of schooling (adults) and expected years of schooling (children))

2014 UNDP, Human Develop-ment Index.

Freedom of business Between 0 and 100 Measures the general restrictiveness of regu-lations and the efficiency of the state in the regulatory process (indicator of the level of bureaucracy)

2014 Index of Economic Free-dom, Heritage Foundation.

Freedom of trade Between 0 and 100 Lack of trade barriers that impede the exporting and importing of goods and services


Freedom of investment Between 0 and 100 Scale of limitations on flows of investment capital


Freedom of work Between 0 and 100 Legal and regulatory conditions of the job market in a country


Infrastructure Between 1 and 5 Quality of the trading and transportation infra-structure (e.g. ports, railways, roads, IT)

2014 World Bank, Logistics Performance Index.

Aggregate tax rate Tax rate on commercial profits (%)

Percentage of taxes and contributions applicable to commercial profits, less deductions and relief

2014 World Bank, World Development Indicators Online.

Market potential Real market potential Sum of the economic output of every country in the world weighted by the bilateral distance of trade

Own calculation

Costs of labour Based on the GDP per capita adjusted for purchasing power

GDP converted to purchasing power parity 2014 IMF data, World Eco-nomic Outlook Database 2014.


ANNEX C

TOTAL RANKING INDEX

Hong Kong AS 1 2 84.39 1 85.95 9 93.20 4 75.02

Singapore AS 2 0 84.10 2 85.65 1 96.74 11 71.79

Netherlands EU 3 3 81.18 3 83.74 6 94.76 16 67.43

Switzerland EU 4 -3 80.69 9 69.50 4 96.07 1 78.66

Norway EU 5 -1 78.80 7 70.56 8 93.26 6 74.34

Denmark EU 6 -1 77.92 12 67.12 7 94.73 5 74.40

Ireland EU 7 10 76.84 5 72.53 11 92.12 15 67.90

Great Britain EU 8 0 76.13 11 67.59 15 90.13 10 72.43

Canada NAM 9 -2 75.81 14 66.15 12 91.95 12 71.63

Australia OC 10 2 75.68 21 62.16 14 91.62 3 76.10

New Zealand OC 11 -1 74.99 31 59.54 3 96.36 7 73.50

Germany EU 12 -1 74.89 8 69.63 13 91.77 21 65.73

Belgium EU 13 2 74.15 4 72.84 18 85.98 22 65.10

Sweden EU 14 -5 74.11 16 64.54 5 95.61 20 65.98

United States NAM 15 -1 73.77 22 61.67 21 82.98 2 78.45

Austria EU 16 -3 73.39 23 61.66 10 92.30 14 69.45

Finland EU 17 1 72.75 20 62.62 2 96.69 24 63.58

Iceland EU 18 1 72.25 36 58.82 16 87.56 8 73.22

Qatar AS 19 -3 71.38 6 71.08 41 72.90 13 70.18

Japan AS 20 0 68.95 56 53.55 20 84.04 9 72.85

Taiwan AS 21 2 68.61 10 67.94 23 80.91 34 58.75

United Arab Emirates AS 22 -1 68.25 15 65.43 43 72.05 17 67.42

Brunei Darussalam AS 23 3 67.57 18 63.01 34 76.42 23 64.07

Malta EU 24 9 67.43 17 63.33 22 82.77 35 58.50

France EU 25 -3 67.30 19 62.86 25 79.36 29 61.10

Czech Republic EU 26 -1 66.85 26 60.71 26 79.36 28 62.01

South Korea AS 27 -3 66.84 13 66.47 45 71.90 26 62.48

Estonia EU 28 1 66.49 25 61.26 17 86.81 44 55.27

Israel AS 29 -2 65.94 40 58.02 37 73.60 19 67.14

Chile LAM 30 -2 65.30 51 54.85 19 85.57 32 59.33

Oman AS 31 6 64.83 39 58.26 48 69.39 18 67.41

Slovenia EU 32 0 64.33 30 59.71 35 76.28 36 58.47

Cyprus AS 33 5 63.36 48 55.38 24 79.36 39 57.87

Poland EU 34 0 62.80 35 58.91 32 77.00 47 54.59

Italy EU 35 0 62.63 46 56.12 44 72.01 30 60.79

Bahrain AS 36 0 61.93 27 60.30 62 62.58 25 62.95

Malaysia AS 37 4 61.73 33 59.06 49 68.58 38 58.08

Country Conti-nent

Index General Political Sociocultural

General conditions

Rank Change Value Rank Value Rank Value Rank Value

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Lithuania EU 38 -7 61.67 32 59.24 27 78.98 79 50.12

Latvia EU 39 -9 61.59 28 60.14 31 78.13 85 49.72

Slovakia EU 40 0 61.54 34 59.04 36 75.47 64 52.30

Hungary EU 41 -2 61.26 41 57.83 40 72.94 48 54.50

Spain EU 42 2 60.99 38 58.55 33 76.76 77 50.48

Portugal EU 43 6 60.71 43 56.67 30 78.13 75 50.55

Kuwait AS 44 -2 60.46 24 61.46 77 57.92 27 62.08

Uruguay LAM 45 5 58.88 94 48.13 29 78.70 53 53.88

Mauritius AF 46 2 58.70 86 49.03 28 78.96 65 52.25

Romania EU 47 0 58.69 44 56.24 50 68.17 60 52.72

Samoa OC 48 -3 58.63 74 50.15 53 66.66 31 60.29

Saudi Arabia AS 49 3 58.61 29 60.12 84 56.54 33 59.23

Georgia AS 50 -7 58.35 55 53.70 47 71.10 68 52.03

Barbados LAM 51 2 57.59 93 48.18 38 73.26 51 54.10

Bulgaria EU 52 3 56.96 42 57.61 58 63.52 76 50.51

Bahamas LAM 53 1 56.76 62 52.40 64 61.97 41 56.33

Costa Rica LAM 54 -3 56.48 106 47.59 42 72.48 66 52.22

Saint Lucia LAM 55 -9 56.36 92 48.28 51 68.15 49 54.42

Montenegro EU 56 4 56.35 45 56.16 56 63.80 83 49.93

Croatia EU 57 -1 56.29 52 54.32 46 71.38 103 46.01

Panama LAM 58 1 56.16 57 53.24 60 62.81 58 52.95

Kosovo EU 59 20 56.06 37 58.69 83 56.65 57 52.99

Turkey AS 60 -3 55.15 49 55.18 70 60.94 84 49.88

Trinidad and Tob. LAM 61 -3 54.81 67 51.29 72 59.02 50 54.38

Jordan AS 62 0 54.79 82 49.31 63 62.47 54 53.40

Mexico LAM 63 -2 54.18 69 51.05 81 56.94 46 54.71

Kazakhstan AS 64 9 53.88 53 53.98 104 49.77 37 58.24

Peru LAM 65 4 53.83 76 49.92 76 58.62 56 53.32

Botswana AF 66 -3 53.72 85 49.05 39 72.99 126 43.29

Rwanda AF 67 11 53.50 105 47.71 54 65.42 87 49.05

Greece EU 68 -1 53.40 77 49.91 59 63.35 91 48.16

Thailand AS 69 2 53.13 47 55.74 95 51.81 70 51.94

Mongolia AS 70 14 52.90 103 47.74 82 56.66 45 54.72

Jamaica LAM 71 -1 52.85 125 45.87 66 61.81 67 52.07

Vanuatu OC 72 -4 52.70 81 49.33 57 63.73 100 46.56

Albania EU 73 -9 52.64 54 53.97 67 61.72 120 43.80

Armenia AS 74 -8 52.60 61 52.50 69 61.01 110 45.44

Colombia LAM 75 -1 52.52 96 47.96 75 58.65 73 51.49

Macedonia EU 76 4 52.41 50 54.98 55 64.50 137 40.61

Serbia EU 77 -5 52.24 65 51.76 61 62.61 119 43.99

Fiji OC 78 4 52.14 124 45.89 92 53.41 40 57.84

Azerbaijan AS 79 -14 51.87 59 52.83 108 48.99 52 53.93

Bosnia and Herzegovina EU 80 -3 51.14 63 52.24 68 61.10 133 41.91

El Salvador LAM 81 -6 50.91 104 47.73 71 60.35 106 45.80

Namibia AF 82 14 50.90 91 48.35 65 61.93 117 44.04

Dominican Republic LAM 83 -7 50.47 87 48.73 78 57.88 108 45.57

Country Conti-nent


General conditions



Moldavia EU 84 3 50.31 68 51.12 90 53.57 101 46.50

Maldives AS 85 5 50.03 66 51.72 111 48.48 82 49.93

Belize LAM 86 -5 49.91 109 47.48 93 52.36 80 50.02

China AS 87 -4 49.83 58 53.18 120 46.23 78 50.33

Philippines AS 88 0 49.68 80 49.37 91 53.46 102 46.46

Belarus EU 89 -3 49.63 84 49.19 128 44.96 43 55.27

Cape Verde AF 90 18 49.58 147 43.28 52 67.56 134 41.69

Vietnam AS 91 8 49.47 70 50.78 121 46.19 72 51.61

Brazil LAM 92 2 49.46 136 44.69 88 54.21 81 49.95

Sri Lanka AS 93 -8 49.41 123 45.98 103 49.92 63 52.55

Suriname LAM 94 -3 49.03 114 46.96 114 47.68 62 52.63

Guatemala LAM 95 -3 48.92 99 47.92 98 51.32 94 47.60

Nicaragua LAM 96 1 48.86 133 45.13 87 54.25 93 47.63

Kyrgyzstan AS 97 5 48.78 115 46.94 118 46.35 55 53.36

Lebanon AS 98 6 48.76 112 47.03 132 44.34 42 55.61

Paraguay LAM 99 -1 48.55 100 47.88 86 54.59 121 43.78

Russia EU 100 0 48.48 60 52.79 142 41.51 69 51.99

Ghana AF 101 -6 48.37 144 43.57 80 57.37 111 45.27

Solomon Islands OC 102 8 48.36 107 47.52 127 44.98 59 52.92

Bhutan AS 103 9 48.31 153 42.72 89 53.67 86 49.18

Morocco AF 104 12 48.25 97 47.95 74 58.95 144 39.72

Tunisia AF 105 4 48.20 75 50.02 119 46.32 89 48.34

Timor-Leste AS 106 7 47.87 73 50.28 129 44.81 88 48.68

Indonesia AS 107 -4 47.85 79 49.50 107 49.14 113 45.05

South Africa AF 108 -15 47.80 64 52.21 73 59.00 164 35.47

Cambodia AS 109 -3 47.02 128 45.56 109 48.65 98 46.91

Papua New Guinea OC 110 9 47.00 149 43.13 116 46.53 71 51.73

Ecuador LAM 111 -4 46.60 118 46.80 141 42.00 74 51.48

Uganda AF 112 2 46.43 145 43.39 110 48.54 95 47.52

Benin AF 113 2 46.33 117 46.81 101 50.68 132 41.92

Zambia AF 114 -13 46.28 119 46.58 85 54.97 149 38.72

Argentina LAM 115 2 46.12 151 42.80 135 43.52 61 52.67

Guyana LAM 116 -11 46.09 129 45.51 112 48.27 116 44.58

Tanzania AF 117 6 45.63 161 41.78 105 49.55 105 45.88

Senegal AF 118 -7 45.61 131 45.29 79 57.55 159 36.40

India AS 119 8 45.08 116 46.83 126 45.04 124 43.44

Honduras LAM 120 0 45.06 135 44.69 113 48.04 128 42.62

Gabon AF 121 -3 45.00 127 45.72 106 49.20 138 40.52

Malawi AF 122 20 44.93 163 41.33 97 51.50 129 42.61

Lao AS 123 5 44.67 126 45.79 136 43.39 114 44.85

Egypt AF 124 6 44.62 110 47.44 139 42.52 118 44.02

Burkina Faso AF 125 7 44.61 122 46.18 102 50.34 152 38.19

Sao Tome and Principe AF 126 5 44.49 130 45.35 99 51.16 153 37.96

Bangladesh AS 127 7 44.45 90 48.53 143 39.43 104 45.91

Madagascar AF 128 -6 44.40 141 44.01 124 45.69 123 43.54

Algeria AF 129 -8 44.23 72 50.50 151 35.79 92 47.86

Country Conti-nent


General conditions


www.bdo-ibc.com 49

Ukraine EU 130 -41 43.15 95 47.99 153 35.66 97 46.95

Iraq AS 131 -6 43.04 88 48.63 156 34.62 96 47.34

Tajikistan AS 132 3 42.97 120 46.26 147 38.25 115 44.85

Kenya AF 133 -7 42.89 139 44.09 140 42.21 130 42.41

Djibouti AF 134 -1 42.73 143 43.63 115 47.42 154 37.71

Liberia AF 135 -11 42.53 132 45.24 137 43.23 147 39.34

Burundi AF 136 11 42.39 137 44.40 138 43.15 143 39.75

Swaziland AF 137 -8 42.27 102 47.79 94 52.25 170 30.25

Togo AF 138 12 42.19 148 43.26 125 45.05 150 38.52

Ivory Coast AF 139 -1 42.17 101 47.82 123 45.80 166 34.25

Nepal AS 140 12 42.05 83 49.31 152 35.71 131 42.23

Haiti LAM 141 -2 41.85 150 42.99 144 39.28 125 43.40

Pakistan AS 142 1 41.61 78 49.55 149 36.91 146 39.38

Bolivia LAM 143 -7 41.38 160 41.80 145 38.83 122 43.64

Uzbekistan AS 144 -3 41.18 113 47.03 164 30.77 90 48.25

Ethiopia AF 145 0 40.96 121 46.24 148 37.03 141 40.13

Niger AF 146 0 40.91 146 43.33 134 43.73 161 36.14

Mali AF 147 -10 40.81 142 43.87 130 44.37 165 34.92

Myanmar AS 148 7 39.74 157 42.13 158 32.79 109 45.45

Comoros AF 149 7 39.71 170 34.32 133 44.18 135 41.29

Sierra Leone AF 150 8 39.58 159 41.95 122 45.93 168 32.19

Nigeria AF 151 0 39.56 111 47.44 160 32.39 140 40.29

Guinea AF 152 2 39.22 165 40.34 155 34.99 127 42.73

Angola AF 153 8 39.11 156 42.36 146 38.81 160 36.39

Gambia AF 154 -5 39.08 174 28.92 100 51.00 139 40.48

Iran AS 155 8 39.01 98 47.93 167 26.49 99 46.77

Cameroon AF 156 -12 38.87 154 42.63 154 35.50 148 38.81

Republic of the Congo AF 157 7 38.64 166 40.12 150 36.46 145 39.44

Lesotho AF 158 -18 38.56 138 44.18 96 51.67 173 25.12

Equatorial Guinea AF 159 1 38.13 89 48.63 163 30.81 158 37.00

Yemen AS 160 -3 37.59 155 42.61 157 33.57 156 37.13

Afghanistan AS 161 -2 37.20 134 44.83 165 28.74 142 39.95

Turkmenistan AS 162 -9 37.05 140 44.08 162 31.11 157 37.09

Mozambique AF 163 2 36.55 152 42.74 117 46.51 174 24.57

Guinea-Bissau AF 164 2 36.23 158 42.07 161 31.33 162 36.08

Mauritania AF 165 -17 35.69 167 39.72 131 44.34 172 25.82

Chad AF 166 1 35.21 164 41.09 159 32.73 167 32.45

Libya AF 167 -5 33.69 108 47.50 173 19.65 136 40.97

Zimbabwe AF 168 1 32.76 162 41.36 170 23.89 163 35.57

Venezuela LAM 169 -1 32.25 171 33.19 171 22.35 112 45.22

Eritrea AF 170 0 31.25 173 29.66 166 26.86 151 38.32

Congo, Republic of AF 171 1 30.54 172 31.35 169 24.38 155 37.27

Central African Republic AF 172 -1 29.25 168 35.36 168 24.46 171 28.93

Sudan AF 173 1 28.94 169 34.64 172 22.13 169 31.60

North Korea AS 174 -1 28.31 71 50.58 174 9.81 107 45.72

Country Conti-nent


General conditions



ANNEX D

RANKING FOR MARKET AND PRODUCTION SUB-INDICES

Country Production location Market

Value Rank Change Value Rank Change

AFRICA

Egypt 56.79 7 3 40.57 27 -4

Algeria 48.98 26 -9 39.38 35 -4

Angola 44.79 30 1 42.86 15 7

Equatorial Guinea

43.22 35 -3 39.99 30 -10

Ethiopia 44.28 31 6 38.72 39 1

Benin 51.89 18 0 43.60 12 -1

Botswana 61.99 2 0 49.73 3 1

Burkina Faso 51.59 19 2 42.40 16 -2

Burundi 43.55 34 1 40.81 25 16

Democratic Republic of the Congo

15.39 51 0 30.16 49 -2

Djibouti 52.66 14 6 35.77 47 -10

Ivory Coast 49.25 24 -1 42.97 14 2

Eritrea 31.62 49 -1 35.13 48 0

Gabon 52.58 15 0 41.54 21 -6

Gambia 37.46 46 0 39.84 32 -2

Ghana 57.48 6 -1 40.40 29 -5

Guinea 41.04 40 -6 36.66 45 4

Guinea-Bissau 39.87 42 2 40.60 26 8

Cameroon 42.96 38 -5 37.40 43 -11

Cape Verde 56.72 8 -1 46.41 7 -2

Kenya 52.33 16 -2 39.57 34 -16

Comoros 31.67 48 -1 43.45 13 0

Lesotho 51.46 20 -1 40.94 24 -12

Liberia 39.65 43 -2 41.33 22 6

Libya 45.94 29 -3 37.07 44 1

Madagascar 43.19 37 1 40.54 28 -1

Malawi 49.86 23 5 41.75 20 24

Mali 47.88 27 0 38.18 41 -8

Morocco 55.34 11 1 45.90 9 10

Mauritania 46.11 28 1 39.32 36 6

Mauritius 65.65 1 0 52.43 2 0

Mozambique 37.93 45 0 41.94 18 3

Namibia 61.86 3 1 48.45 4 -1

Niger 42.13 39 0 38.46 40 -1



AFRICA

Nigeria 54.16 13 3 37.45 42 1

Democratic Republic of the Congo

39.47 44 -4 38.89 38 8

Rwanda 58.59 5 3 47.82 5 1

Zambia 51.96 17 -4 44.76 11 -4

Sao Tome and Príncipe

49.15 25 -1 46.70 6 4

Senegal 50.57 22 0 46.38 8 0

Sierra Leone 44.05 33 -3 41.79 19 6

Zimbabwe 31.68 47 2 39.05 37 1

South Africa 61.44 4 -1 53.34 1 0

Sudan 40.07 41 2 20.95 51 0

Swaziland 56.69 9 -3 45.03 10 -1

Tanzania 51.04 21 4 39.68 33 -16

Togo 43.19 36 6 42.29 17 12

Chad 44.13 32 4 36.29 46 -11

Tunisia 55.53 10 -1 39.92 31 5

Uganda 55.20 12 -1 41.06 23 3

Central African Republic

26.63 50 0 26.67 50 0

www.bdo-ibc.com 51



ASIA

Afghanistan 47.50 37 -2 28.67 44 -1

Armenia 62.10 16 -1 47.91 19 0

Azerbaijan 58.75 21 0 43.50 29 -9

Bahrain 72.26 5 -1 49.33 18 0

Bangladesh 53.40 33 0 39.71 35 4

Bhutan 55.07 28 -2 41.00 34 0

Brunei Darussalam

72.26 6 0 59.34 8 -1

China 58.22 22 -4 67.38 3 0

Georgia 66.35 12 0 47.03 23 -8

Hong Kong 91.58 2 0 71.89 1 0

India 55.49 24 -4 58.30 9 1

Indonesia 54.65 31 -2 50.11 15 1

Iraq 55.92 23 2 38.33 40 -8

Iran 45.40 40 0 34.03 43 1

Yemen 47.83 36 1 34.98 42 0

Jordan 67.64 11 0 47.25 21 1

Cambodia 55.45 25 7 45.97 24 0

Kazakhstan 59.36 18 4 47.84 20 3

Qatar 72.69 4 1 61.94 7 -1

Kyrgyzstan 55.35 26 1 39.42 38 0

Kuwait 65.89 13 0 52.62 12 0

Lao 49.70 35 1 42.26 31 2

Lebanon 59.29 19 4 42.84 30 -1

Malaysia 69.53 8 1 57.08 10 -1

Maldives 55.16 27 7 45.47 25 6

Mongolia 60.37 17 2 44.98 27 -1

Myanmar 47.35 38 1 39.66 36 0

Nepal 44.32 41 0 38.92 39 1

North Korea 46.36 39 -1 39.51 37 -9

Oman 68.53 10 0 54.20 11 0

Pakistan 54.69 30 1 36.55 41 0

Philippines 59.20 20 4 47.04 22 -1

Saudi Arabia 64.53 14 0 52.57 13 0

Singapore 96.05 1 0 70.16 2 0

Sri Lanka 50.93 34 -4 44.98 26 4

Tajikistan 43.08 42 0 41.48 33 2

Taiwan 76.42 3 0 65.44 4 0

Thailand 62.62 15 1 50.01 16 1

Timor-Leste 54.90 29 -12 49.70 17 8

Turkmenistan 36.52 44 0 44.34 28 -1

Uzbekistan 41.75 43 0 41.54 32 5

United Arab Emirates

71.32 7 0 63.95 5 0



ASIA

Vietnam 54.48 32 -4 51.27 14 0

Cyprus 69.48 9 -1 62.16 6 2



EUROPE

Albania 63.36 12 0 55.70 6 -2

Bosnia and Herzegovina

64.99 10 0 54.00 9 0

Bulgaria 68.42 6 0 55.27 8 -1

Kosovo 67.56 8 -1 55.44 7 3

Croatia 68.82 5 0 57.46 4 1

Latvia 74.38 1 0 59.47 2 -1

Lithuania 72.39 2 0 59.12 3 -1

Malta 70.95 3 0 61.72 1 2

Macedonia 64.00 11 0 49.93 12 2

Moldova 55.18 13 1 46.23 13 0

Montenegro 67.98 7 2 53.21 10 -2

Romania 70.27 4 0 55.98 5 1

Russia 51.72 15 1 45.35 14 1

Serbia 67.54 9 -1 51.34 11 1

Ukraine 50.56 16 -1 41.51 16 -5

Belarus 54.40 14 -1 44.97 15 1




LATIN AMERICA

Argentina 44.65 22 0 48.63 13 2

Bahamas 59.96 8 -3 54.36 1 0

Barbados 64.30 1 1 53.98 2 1

Belize 56.27 14 0 48.58 14 -3

Bolivia 35.42 25 0 43.33 24 -1

Brazil 53.90 15 0 50.40 9 3

Costa Rica 59.44 10 -2 51.90 6 -2

Dominican Rep. 59.61 9 0 50.85 8 1

Ecuador 48.39 20 0 46.74 19 -2

El Salvador 58.58 11 -1 51.32 7 0

Guatemala 53.59 16 1 47.11 18 -2

Guyana 53.53 17 1 45.38 20 0

Haiti 43.97 23 0 44.54 21 3

Honduras 47.00 21 0 43.75 23 -1

Jamaica 63.50 4 0 50.30 10 0

Colombia 60.19 7 4 44.35 22 -1

Nicaragua 52.87 18 -2 47.36 16 3

Panama 60.62 6 1 53.25 3 2

Paraguay 52.73 19 0 47.22 17 1

Peru 58.16 12 0 48.88 12 1

Saint Lucia 63.88 3 -2 52.83 4 -2

Suriname 56.65 13 0 47.61 15 -1

Trinidad and Tob. 61.09 5 1 49.19 11 -3

Uruguay 64.03 2 1 52.52 5 1

Venezuela 35.96 24 0 27.96 25 0



OECD

Australia 76.27 19 -1 72.23 14 1

Belgium 88.10 3 -1 71.98 15 -3

Chile 72.18 29 -2 56.53 30 0

Denmark 87.88 4 1 72.87 12 -1

Germany 86.06 6 1 75.25 4 0

Estonia 74.40 20 0 60.12 28 0

Finland 78.79 14 2 71.85 16 0

France 76.41 17 -3 69.13 18 0

Greece 64.77 32 0 59.39 29 0

Great Britain 88.78 2 1 74.03 5 2

Ireland 84.65 8 0 73.23 11 2

Iceland 72.66 27 1 73.88 7 3

Israel 73.81 22 2 56.21 31 0

Italy 73.07 25 -2 68.47 19 0

Japan 82.07 10 1 73.31 10 -4

Canada 84.91 7 -1 73.75 8 0

Mexico 60.34 33 0 52.34 32 0

New Zealand 78.12 16 1 70.61 17 0

Netherlands 92.37 1 0 73.45 9 0

Norway 78.30 15 0 79.10 3 -1

Austria 84.48 9 0 72.23 13 1

Poland 72.97 26 -1 62.45 24 -1

Portugal 69.55 30 1 65.11 21 -1

Sweden 80.69 12 0 73.99 6 -1

Switzerland 87.44 5 -1 79.95 1 0

Slovakia 72.48 28 1 61.59 25 0

Slovenia 73.50 23 3 62.77 22 2

Spain 74.23 21 0 65.86 20 1

South Korea 76.30 18 1 60.46 27 -1

Czech Republic 79.71 13 0 62.61 23 -1

Turkey 67.78 31 -1 51.91 33 0

Hungary 73.10 24 -2 60.83 26 1

USA 81.69 11 -1 79.58 2 1



OCEANIA

Samoa 62.99 1 0 60.83 1 0

Fiji 52.82 3 0 53.45 2 1

Solomon Islands 44.75 5 0 53.10 3 -1

Vanuatu 55.98 2 0 52.21 4 0

Papua N. Guinea 47.30 4 0 50.93 5 0

www.bdo-ibc.com 53

ANNEX E

GLOSSARY OF COUNTRY ABBREVIATIONS

Abbreviation Country Abbreviation Country

AUT Austria IND India

BEL Belgium ISR Israel

BRA Brazil JPN Japan

CAN Canada KOR South Korea

CHE Switzerland LUX Luxembourg

CHN China MEX Mexico

CZE Czech Republic NDL Netherlands

GER Germany NOR Norway

DNK Denmark NZL New Zealand

ESP Spain PRT Portugal

FIN Finland RUS Russia

FRA France SGP Singapore

GBR Great Britain SWE Sweden

GRC Greece SVN Slovenia

HKG Hong Kong USA United States of America

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