Is the world leveraging its innovation capabilities?

In the 21st century, economic competitiveness increasingly depends on the ability to create, adapt and commercialize new knowledge (see Figure 2.1). Innovation ecosystems that fail to build innovation capabilities risk being relegated to low-value production activities while innovation leaders capture the highest economic returns.

Global innovation expansion and growing complexity

Since 2000, economic growth has increased alongside innovations per capita across exports, trademarks, and scientific publications, though growth in patents has been more modest. This upward trajectory reflects the global shift toward knowledge-based economies where innovation capabilities increasingly determine national competitiveness.

However, growth has been highly uneven across countries (see Table 2.1). While some economies have expanded dramatically – with China showing a 62-fold growth rate in scientific publications and 65-fold increase in entrepreneurial activities, and the Republic of Korea demonstrating an over 12-fold entrepreneurial growth – established leaders like the United States of America (US), Japan and European countries have seen modest gains, typically only doubling or tripling output. This divergence suggests a fundamental restructuring, with Asian emerging economies rapidly building innovation capabilities while traditional leaders face the challenge of sustaining growth from an already high baseline.

Beyond volume, innovations are becoming increasingly sophisticated and interdisciplinary (see Figure 2.2). The average international trademark now covers nine fields of innovation – for example, a smartphone brand spanning electronics, software, telecommunications, and entertainment – while scientific publications span four fields,  for example, artificial intelligence research combines computer science, neuroscience, ethics, and statistics. Patents remain more focused at 1.5 fields on average, typically addressing specific technical solutions. This cross-field integration suggests that modern innovations increasingly require diverse knowledge capabilities.

In sum, while innovations are becoming increasingly sophisticated and global innovation capacity continues to expand, growth remains highly uneven. This raises a deeper strategic question: beyond generating individual innovations, are economies successfully building and leveraging their capabilities so as to adapt to a rapidly evolving knowledge economy?

Most innovation ecosystems have diversified their capabilities; however, many are falling behind

Modern innovation increasingly depends on the diversity of knowledge capabilities within innovation ecosystems. While knowledge embodied in tools, codes and processes can move across borders, tacit knowledge, and the ability to understand and combine this knowledge, resides within the human mind and thus subject to natural limitations. Historically, when humanity's knowledge base was smaller, brilliant individuals like Da Vinci, Newton, and Descartes were able to master multiple disciplines simultaneously. Today, rapid knowledge growth makes such broad individual mastery impossible.

The solution has been collective specialization: individuals develop deep expertise in narrow domains while collaborating in diverse teams. A breakthrough in artificial intelligence, for instance, requires that specialists in computer science, neuroscience, ethics, and engineering work together. Hence, individuals specialize, but ecosystems diversify.

At the innovation ecosystem level, this translates to a diversity of capabilities. Successful innovation ecosystems are characterized by high diversity – they can combine specialized knowledge to tackle complex, interdisciplinary challenges (see Box 2.1).

Diversification is happening globally, though unevenly (see Figure 2.3). More than half of innovation ecosystems worldwide – 54 percent – now master more diverse innovation capabilities than they did at the beginning of the century. The most dramatic transformation has occurred in East Asia, where economies have collectively expanded capability diversity from 25 percent to 64 percent of all tracked innovation fields over the past 23 years. This remarkable 39 percentage point increase represents the largest regional shift in innovation capability building of the modern era.

The fact that 46 percent of innovation ecosystems have not significantly diversified their capabilities is not necessarily problematic. Strategic specialization in an economy's most competitive fields can be an effective path to short- and mid-term success. The critical question is whether ecosystems are developing higher-quality, more sophisticated capabilities over time – regardless of breadth.

Once again, East Asia leads the transformation toward complex capabilities, with complexity levels that have surpassed those of Oceania and are closing the gap with Europe and Northern America (see Figure 2.4). African economies have made notable progress in building more sophisticated capabilities, though they remain significantly behind other regions. This pattern reinforces East Asia's emergence not just as a source of innovation volume, but as a region developing increasingly advanced innovation ecosystems.

Population size influences but does not determine innovation capability diversity (see Table 2.2). Large developing economies like India leverage scale effectively, mastering nearly a third of all tracked fields, while Austria achieves 77 percent capability coverage with just nine million inhabitants. More revealing are comparisons between similarly-sized economies with vastly different outcomes. Brazil exhibits almost nine times Nigeria's capability diversity despite having a comparable population. Similarly, Japan demonstrates five times Mexico's diversity despite a similar demographic scale.

These disparities reveal that factors beyond population – including educational system, institutional quality and innovation policies – play a decisive role. Success depends less on demographic advantages and more on strategic choices about knowledge infrastructure investment.

Building innovation capabilities proves significantly more challenging than achieving economic growth (see Figure 2.5). While 68 percent of economies have increased GDP per capita over the past two decades and a similar share (66 percent) achieved greater diversity, only 30 percent managed to increase innovation complexity – revealing complexity to be the most elusive development goal.

Year-on-year progress tells an even starker story. In the last decade, excluding the 2020 pandemic, GDP has grown in 55–65 percent of economies annually. Diversity gains have proved harder to achieve, reaching only 35–50 percent of ecosystems each year. Complexity improvements are the rarest to achieve, occurring in just 30–40 percent of countries annually. These patterns suggest that while economic growth remains challenging, developing sophisticated innovation capabilities requires the sustained, strategic effort that most economies struggle to maintain consistently.

The most complex capabilities are now harder to get

Innovation capabilities have become increasingly concentrated among a small group of leading economies. Over the past decade, most global innovation capabilities have concentrated in just 30 percent of economies, reversing earlier trends toward broader diffusion.

However, capabilities remain more democratically distributed than economic wealth – they are three times more spread than GDP and six times more spread than population. Most capability diffusion occurred during the first decade of this century; the process has since significantly slowed.

Despite this deceleration, several economies have successfully entered the global innovation landscape as relevant players: Brazil, India, Jordan, Kazakhstan, Latvia, Lebanon, Lithuania, Malta, Morocco, Qatar, the Russian Federation, Saudi Arabia, Serbia, Tunisia, Ukraine and Viet Nam. These newcomers demonstrate that capability building remains possible, though increasingly difficult in today's concentrated innovation environment.

Most of these newcomers inserted themselves by developing entrepreneurial and scientific capabilities (see Figure 2.6). Scientific (7.4 percent of ecosystems) and entrepreneurial capabilities (7.7 percent) became less concentrated over time, enabling broader global participation. In contrast, technology (4.5 percent) and production capabilities (5.2 percent) remained more exclusive among established leaders.

Technological capabilities remain the most complex innovation field and are increasingly diverging from the other dimensions (see Figure 2.7). Over the last five years, technology complexity has accelerated beyond other fields, creating a widening gap with scientific, entrepreneurial, and production capabilities.

Interestingly, scientific and production domain complexity has actually decreased, making these capabilities less dependent on related knowledge for mastery. While these capabilities remain relatively rare globally, they have become more accessible as standalone competencies. This trend suggests that while technology development requires ever-deeper interconnected knowledge, other innovation domains are becoming more modular and independently acquirable.

Among the 100 fastest-growing innovation fields, 40 percent represent complex capabilities, but exhibit vastly different diffusion patterns across ecosystems (see Table 2.3). Some high-growth fields are concentrating among fewer players, while others are spreading to new economies. The internet of things exemplify concentration. This complex technology field has grown by 4.1 times over the past five years, yet is present in fewer innovation ecosystems, suggesting an increasing specialization among leading players. Conversely, the scientific field related to the impact and application of artificial intelligence demonstrates a broader diffusion, growing 3.6 times and spreading to 30 percent more economies. This field is, surprisingly, at the lower end of the complexity spectrum. This is because, much like many capabilities within the realm of scientific progress in artificial intelligence, it has diffused into economies that are not highly diversified and yet able to contribute significantly.

These contrasting patterns reveal that rapid innovation growth does not guarantee widespread adoption. The most complex emerging technologies tend to concentrate among established leaders, while moderately complex fields can diffuse more broadly across the global innovation landscape.

These divergent patterns highlight a critical strategic challenge: not all diversification is created equal. Simply expanding into more innovation fields may prove insufficient if those capabilities remain isolated or lack the complexity needed for sustained competitiveness. The question becomes whether economies can strategically navigate this landscape – identifying which emerging capabilities to target based on their existing knowledge base and the incremental complexity required for successful adoption.

Who is taking a strategic approach to capability development?

Strategic capability diversification as a path to development

Strategic capability diversification requires simultaneously gaining diversity while increasing ecosystem complexity – a significantly more challenging endeavor than simple field expansion. The principle of relatedness, where economies naturally diversify into fields closest to their existing capabilities, creates a potential trap for developing ecosystems. Those starting with low diversity and complexity may find themselves systematically acquiring only low-complexity capabilities, perpetuating their position in the global innovation hierarchy.

This challenge is compounded by path dependency patterns visible across different development levels (see Figure 2.8). Less diversified ecosystems tend to acquire capabilities very close to their current capabilities, while more diverse ecosystems can successfully master fields further from their existing knowledge base.

However, there is a notable heterogeneity among diversification strategies. Fast-growing economies like India and Poland are managing to leapfrog into more distant, complex fields, while others like Australia and Chile are taking a more incremental, step-by-step diversification approach.

Measuring smart diversification reveals concerning trends in global capability building (see Figure 2.9). The number of economies simultaneously gaining both diversity and complexity has declined over the past decade, whereas those losing both dimensions in the same year has increased – suggesting that many innovation ecosystems are struggling to navigate the twin challenges of breadth and sophistication.

However, recent data suggests potential signs of recovery after 2020, hinting that some ecosystems may be adapting their strategies to overcome these dual development challenges.

The most successful performers are those fast-growing economies that achieved consistent smart diversification throughout the decade (see Table 2.4). China, Indonesia and Viet Nam excelled with simultaneous diversity and complexity gains in eight out of 10 years. In contrast, economies like South Africa and Austria frequently experienced simultaneous losses in both dimensions. Such economies might benefit from more strategic capability targeting, focusing on acquiring capabilities that bridge existing competencies with higher-complexity domains.

However, the data reveals another strategic pattern: highly diversified economies like the United States, despite not having gained any new capabilities, increased complexity most years by shedding lower-value ones while retaining the most rewarding competencies. This suggests that beyond acquiring new capabilities, successful innovation ecosystems must also strategically manage their existing portfolio of capabilities.

Deepening specialization as complement to diversification

Deepening specialization involves strategically focusing resources on the most complex, high-value capabilities while protecting them with complementary knowledge that enables them to flourish. Unlike diversification strategies that seek breadth, this approach emphasizes depth and interconnectedness – identifying which capabilities generate the highest returns and ensuring they remain viable through supporting competencies.

Consider biotechnology: mastering genetic engineering requires not just laboratory skills, but complementary capabilities in regulatory compliance, clinical research, data analytics, and ethical frameworks. Economies that abandon these supporting fields may find their core biotechnology capabilities weakened or unsustainable.

This management approach explains how established innovation leaders can maintain competitiveness despite losing some of their diversity – they strategically concentrate on their most sophisticated capabilities while maintaining the ecosystem of knowledge that sustains them.

Deepening specialization is achievable but challenging. Every year, around 40 percent of innovation ecosystems successfully increase intensity in their most complex capabilities while simultaneously gaining overall complexity – demonstrating the dual focus required for sophisticated innovation leadership (see Figure 2.10).

However, this balance proves fragile during crisis periods. The 2020 pandemic created a notable disruption, forcing most economies to choose between specializing in existing capabilities or improving complexity, but not both simultaneously. Fortunately, performance had stabilized again by 2022, suggesting that capability management disruptions during crises may be temporary rather than structural.

Performance in specialization strategies varies dramatically across economies (see Table 2.5). China, India and Viet Nam lead with eight out of 10 years successfully increasing intensity in complex capabilities while gaining overall complexity. These three economies demonstrate strategic focus on the most rewarding capabilities without sacrificing sophisticated competencies.

Conversely, South Africa and the Russian Federation have faced significant challenges, struggling to achieve this balance in most years. Their difficulties highlight how resource constraints or strategic misalignment can prevent economies from simultaneously deepening their most valuable capabilities while maintaining innovation sophistication.

So, is the world leveraging its innovation capabilities?

While global innovation capacity continues expanding, only a select group of economies has mastered the sophisticated strategies needed to transform this growth into sustained competitive advantage.

The data paint a picture of two distinct innovation worlds. In one world, fast-growing Asian economies – led by China, India and Viet Nam– have cracked the code of smart capability development. They have consistently achieved both smart diversification (gaining breadth and complexity simultaneously) and smart capability management (intensifying focus on high-value capabilities while protecting them with complementary knowledge).

In the other world, many established and emerging economies struggle with the dual challenge. Despite global capability expansion, 46 percent of ecosystems have not meaningfully diversified. Complexity gains remain elusive for 70 percent of countries, and capability diffusion has stagnated over the past decade. Even advanced economies like the United States have succeeded primarily through selective capability management rather than broad-based capability building.

The implications are clear: in an increasingly knowledge-based global economy, generating innovations is no longer sufficient. Success requires mastering the delicate balance between diversification and specialization, between acquiring new capabilities and deepening existing ones. The economies that learn to navigate this strategic complexity will shape the innovation landscape of the coming decades, while those that don't risk being relegated to the periphery of the knowledge economy.