In May 2024, WIPO published a report titled “Making Innovation Policy Work for Development” on the need for economies to diversify for better utilization of knowledge and eventually economic prosperity. SpicyIP Intern Deepali Vashist discusses the key aspects of this report and its observation on India. Deepali Vashist is a third-year law student at NLSIU Bangalore. Her passion lies in understanding the intersections of AI regulation and intellectual property rights.
Diversification and Economic Development: Insights from the WIPO “Making Innovation Policy Work for Development” Report 2024
By Deepali Vashist
The World Intellectual Property Organisation (WIPO) on May 2, 2024, released its report titled “Making Innovation Policy Work for Development” focusing on the question “how economies diversify”? Why does this question become relevant? In a world where the divide between high-income and low-income nations grows every day, the report argues that bridging this gap requires economies to boost innovation and development by building, diversifying and applying knowledge embodied in technology. Yet, the report’s insights, while valuable for India, raise important questions about the general feasibility and practical challenges of such diversification. To that extent this post analyses these insights by first, discussing the need for economic diversification; two, understanding how nations can and should diversify; three, highlighting India’s success in diversification; and finally, advocating for diversification while considering the context and challenges faced by nations.
Why Diversification Matters?
At the core of WIPO’s report is the idea that knowledge itself is a dynamic resource that drives economic development. What begins as a conceptual idea can develop into a scientific publication and, in lesser cases, a patented product. And while these products are easily traded internationally, the knowledge or capabilities to produce them are not as easily transferred. This leads to concentration, where a few countries dominate specific sectors. WIPO categorizes these “innovation capabilities” into three dimensions – scientific, technological, and production capabilities – which remain concentrated in wealthier countries (such as the United States, France, Germany, Japan, and South Korea) and in large economies like China and India.
This concentration of knowledge fosters specialization, where countries focus on particular capabilities to increase productivity and boost innovation. The report, however, also highlights that over-reliance on specialization can make economies more vulnerable to external disruptions, such as supply chain disruptions or market shifts. To counter these risks, it emphasizes the importance of diversification by venturing into new sectors or activities that enhance or complement a nation’s current strengths. For example, Brazil, previously reliant on coffee, encountered a significant disruption in 1975 when frost ravaged its coffee plantations. In response, Brazil moved into ethanol production from sugarcane, a strategic shift that bolstered its agribusiness sector’s resilience.
How Does this Diversification Work?
The report indicates that economic diversification frequently occurs when nations combine their existing specialized capabilities, facilitating their expansion into related sectors. Affluent nations or those with diverse economic activities typically navigate this shift with greater ease. India has advanced significantly in the past two decades, with scientific capacities increasing from 42% to 68% and technical capabilities from 9% to 21%. And as economies diversify, their specialized capabilities tend to become less common globally. For instance, Afghanistan specializes in merely two widely available capabilities (spices and fruit/nuts), whereas Germany, possessing over 500 specialized capabilities, engages in distinct sectors where less than 12% of other nations exhibit specialization.
To inform the process of diversification, WIPO emphasizes two important factors: innovation complexity and relatedness. They present an interesting analogy to understand innovation complexity. Just as an orchestra’s sophistication depends on the diversity of instruments and skills among its musicians, an economy’s complexity depends on the range and intricacy of its innovation capabilities. Complex capabilities are rare and often require diversified innovation ecosystems to flourish. Notably, technological capabilities are frequently the most complex and difficult to develop, and they are usually present in highly evolved, diversified economies. The report illustrates that India has attained significant scientific advancements; nevertheless, it falls short of terms of production and technological capabilities, highlighting the difficulty of advancing these intricate domains. Consequently, economies advance by transitioning from low-skill, widely accessible capabilities to distinctive, knowledge-intensive capabilities that depend on specialized human capital.
The second factor, relatedness, indicates the desired incremental nature of diversification. Economies are more inclined to diversify into areas closely aligned with their current strengths, thereby mitigating the risks associated with entering wholly new domains. Nonetheless, apparently unrelated capabilities can combine to generate novel opportunities, as exemplified by the U.S. video game industry, which arose from the amalgamation of computing proficiency and Hollywood’s artistic creativity.
India’s Motorcycle Industry: A Success Story
The most catching part of the multi-chapter report was its illustration of India’s motorcycle sector as a prime example of successful diversification. The evolution of India’s motorcycle industry, influenced by its historical technology, institutional framework, and policy pathways, is fundamentally linked to the capabilities developed in the related bike, aviation, and automobile sectors. Now ranking fourth in motorcycle exports ($2.3 billion annually from 2017–2022) and tenth in motorcycle-related patent filings, India’s success stems from its emphasis on cost-effectiveness, localization, and technological innovation.
This, along with the report’s other case studies, highlights how robust science, technology and innovation (STI) ecosystems, supported by effective innovation policies, may stimulate investment in emerging technologies that serve as the basis for future innovation and industrial advancement. Recent years have witnessed a resurgence of industrial policy, prompted by issues including the global pandemic and climate change. In light of the same, WIPO highlights significant potential for India’s electric vehicle development, particularly two and three-wheelers. Although electric motorcycles account for about 2% of exports, the market exhibits potential as firms such as Hero Electric, Ather Energy, and Ola augment their production capabilities. Sales forecasts predict a 50% rise in two-wheelers and a 70% rise in three-wheelers by 2030.
Recent data from the WIPO 2024 IP Indicators supports this optimistic outlook. As highlighted by WIPO’s chief economist Carsten Fink, India’s intellectual property ecosystem is notably dynamic. As per this report, in 2023, resident patent filings increased by 29.3%, with Indian residents representing 55% of overall patent filings, a rise from 24.8% in 2013. Concurrently, resident industrial design work expanded by 27.6%, elevating the resident share from 61.0% to 86.7% during the same period.
Towards a Balanced View
In the end, the “Making Innovation Policy Work for Development” report sheds light on how economies might harness diversification for growth. But its suggestions are not without challenges. While it rightly identifies the value of knowledge and innovation, the report may overestimate the ease with which nations especially those from the “third world” can overcome hurdles to diversification. The factors outlined may indeed help economies become more balanced and resilient, however, it also presents this Theory with a capital T, generalising how diversification could be replicated in countries across the globe. Without addressing the root causes of inequality in access to education, financial capital, and basic infrastructure, as numerous scholars from the “global south” have highlighted, these strategies may fall short of achieving the inclusive progress that WIPO envisions. The report while citing data and cases from high and upper-middle-income countries, does not underscore the very serious difficulties faced by the “third world”. I contend that unequal concentration of capabilities might intensify this already pervasive inequality, since nations with restricted access to these resources find it challenging to compete on the same level as those already dominating these sectors. Not every country possesses the infrastructure or resource pool to leverage unrelated capabilities in such creative ways. The report could hence, in my opinion, benefit from a deeper analysis of how socioeconomic and infrastructural disparities affect a country’s ability to implement these recommended policies.
In a world seeking equitable development, the report emphasizes nuanced and context-sensitive innovation policies. However, as policymakers examine WIPO’s findings, they must remain mindful of the unique local contexts encountered by economies at different phases of development. Only then can innovation, drive sustained global economic growth.