By Stefan Schaible and David Born

Modern industrial societies require innovation to simultaneously grow and sustainably operate. Without radical transformation and consistent innovation, these countries cannot maintain their competitiveness and the prosperity of their citizens. The Innovation Indicator 2023, a collaboration between the Federation of German Industries (BDI) and Roland Berger, provides empirical insights into how 35 economies compare regarding their innovation capacities. It examines where they excel, where they perform at an average level, and where they lag behind. Based on these questions, the Innovation Indicator 2023 comprehensively analyzes the innovation system. With an additional focus on key technologies and sustainability, it addresses the major challenges of our time, including increasing technology competition, digitalization, geopolitical shifts, and decarbonization.

Visit the interactive website of the Innovation Indicator to learn more: Innovation Indicator 2023

Switzerland ranks as the country with the highest capability to innovate in our 2023 assessment. Singapore follows and Denmark is in third place. The first large economy to be found is South Korea in ninth, with Germany in tenth. The likes of the US, UK and France follow in mid table, with China 26th and Japan 27th. The high scores of smaller economies show that they find it easier to allocate a larger share of the available human and financial resources to the creation and economic exploitation of new knowledge. But not all small countries that have focused on innovation have been able to maintain top performance. Sweden and Finland once scored highly, but they had a heavy focus on the highly dynamic digital tech sector, where it is tough to stay ahead.

Areas of strength matter. Other countries are gaining on Switzerland in terms of overall innovation, but this need not be a disadvantage per se for Switzerland, because its specific competitive advantages in education and knowledge generation, as well as Switzerland’s specific technological focus (mechanical engineering, high-tech instruments, pharmaceuticals, chemicals, medical technology) differs from that of other countries at the top.

While small countries like Singapore can improve innovation relatively quickly, large economies tend to display a more stable development. On the one hand, this is because they cover a much larger number of technologies and innovation topics, with the result that abrupt changes in one technology area do not have a strong impact on the overall ranking. On the other hand, large economies would have to shift considerably more financial and human resources in order to change innovation performance noticeably.

This makes the progress of South Korea all the more impressive. Since 2017, South Korea has been the most innovative of the major economies in the Innovation Indicator. South Korea scores highly due to high R&D spending in business and science, a well-educated population, and efficient translation of innovation into economic returns.

By comparison, Germany has a balanced approach that results in a stable but less dynamic innovation system. The UK and France have strong scientific focus to thank for a recent revival. The US continues its steady decline – offshoring of processes in innovation fields and a shift of economic focus. China, by contrast, continues to improve its ranking, although for the first time in a decade, its overall index score has stalled.

Elsewhere, Southern and Eastern European countries rank low but are gaining on those ahead of them. Most of the emerging economies such as India, Indonesia, Brazil and Mexico have struggled to improve significantly. Only Turkey has shown strong recent growth.

Innovation thrives on 7 key technologies

We look at seven key technologies with broad cross-industry importance: digital hardware, digital networks and software, advanced production tech, energy tech, advanced materials, biotech, and circular economy.

The top 10 is closely grouped and includes a mix of smaller and larger nations. Finland – a strong VC investor – leads, just ahead of Switzerland, with Japan, China, Germany and the US all in the top 10. Some major nations are living more off established assets and failing to keep up the momentum shown by other countries – this is particularly true for Germany, the US and Japan.

Despite the small gaps between countries at the top and in the middle of the index, performances vary across the criteria. Some score solidly across the board, while others excel in certain areas but score poorly in other areas.

Individual breakdown:

• Digital hardware: Forms the basis for numerous applications ranging from consumer electronics, vehicles, and machines to medical technology. Japan is comfortably top, although this may change in the future as other countries close the gap and technology trends shift. China and South Korea continue to catch up, particularly in microelectronics. Germany scores well in sixth, followed by the likes of Scandinavia, the UK and the US, which despite a strong knowledge base has little domestic production.
• Digital networks: Communications technology like semiconductors and software like AI and cloud computing. Things are very close at the top, with China first, ahead of smaller nations like Finland and Switzerland. Germany and the US are part of the second group, just ahead of the UK and Japan.
• Advanced production technologies: Includes modern machines, sensors, control systems and processes. Once again, Germany leads the way, just ahead of Switzerland, but their lack of strength in software here could be costly in the future. The US has lost considerable ground and is in 10th – mostly due to gains made by other countries.
• Energy technologies: Covers renewable energy tech, hydrogen, energy storage and energy efficiency. Denmark is miles clear of China and Germany with strong scores across the board. Japan is in 6th but continuing to fall; the same goes for the US in 10th. Russia is bottom of the table – a trend likely to continue as the world shifts away from fossil fuels.
• Advanced materials: Includes composites and coatings as well as their production processes. Japan is the clear leader here. Finland, South Korea and China form the chasing pack, some way clear of Germany in 5th. The US is 11th, while France is way down in 25th due to poor scores in scientific publications and patent applications.
• Biotech: Covers applications in health, industry, environment and food production. Denmark is top, while the US fares better here, in 5th. Only a handful of countries score highly in this sector, indicating it may not be a priority. Germany ranks 14th despite an index score of just 27, while Japan is 29th.
• Circular economy: Includes the sharing economy and recycling. Finland is top, just ahead of Germany, while Switzerland continues to fall. The US is 6th, China 13th, just ahead of the UK and South Korea.

Sustainability drives innovation and benefits society and industry

To achieve sustainability oriented innovation systems, civil society, science, government, and business must all make contributions. We assessed countries on a variety of factors, including R&D for renewables, environmental taxes, and eco-focused scientific publications.

The ranking for the sustainability indicator is led by Denmark by a wide margin, followed by Finland and then Germany. Indeed, Europe dominates here, especially the continent’s northern nations. Switzerland, the top innovator, just misses out on the top 10 in 11th. China and other major European nations are in midfield, but the US comes in 28th and scores poorly across the board in this area. In Southern and Eastern Europe, Italy and Portugal in particular improved their rankings, with most others remaining fairly steady. Among emerging nations, India, Brazil and Indonesia improved their rankings. For many emerging economies, environmental regulation is a drawback, and scientific work in sustainability areas is at a low level.

Economies' successful path to fostering innovation

The Innovation Indicator 2023 shows where nations can improve in comparison to their peers. It provides valuable and empirically supported facts for forthcoming decisions regarding their political and economic future. This future can only be successful if industry and the state, businesses and policymakers work together. Market-oriented innovations within an appropriate industrial policy framework, combined with an effective state that activates market forces, are the basic prerequisites for a successful transformation of modern industrial societies.