'Like no other country, Switzerland has succeeded for many years in keeping the other emerging and innovation-oriented countries at a distance. Switzerland has had a consistently high rating on the Innovation Indicator for almost the complete evaluation period. Only few nations have succeeded in achieving similarly good positions.
This leading group (Switzerland, Singapore, and Sweden) is followed by a broad midfield of countries. This ranges from Germany with an indicator rating of 57 to South Korea with 43 points. Germany lies neck and neck with Finland, just ahead of the Netherlands (56) and Norway (55). These four countries thus differ only marginally in their overall innovation capacity.
Erosion of USA
Behind this group of countries in this year's ranking are Austria and the USA (rating 53). Austria especially has advanced several places in the past years. After hovering around the 14th place since the beginning of the new millennium, it now lies in 8th place, according to the forecasts for 2010.
This year's analysis clearly revealed that the USA no longer belongs in the leading group and that with the ranking 9th place (rating 53) in 2010 they belong only in midfield - behind Germany. Due to the banking and economic crisis which began in the USA and had its worst impacts there, the country has dropped down several places in the past two years.
An erosion of the US-American position, however, was clearly recognizable even before 2009. For a long time they were able to defend second place behind Switzerland, but in the wake of the New Economy crisis at the millennium they were overtaken already by Sweden and Finland as well as finally Singapore and the Netherlands. Now the USA have slid down even further and have fallen behind - even if only just - Germany, Finland, the Netherlands, Norway and Austria.
As this development results from structural problems, the USA threatens to remain permanently in the midfield, if not to slide down even further. It is still the largest R&D nation and its science system is also the largest worldwide, in absolute terms. However, more could be expected of the USA because of the size of the country. In addition, greater dynamics are presently found in other countries.
A particular challenge for the USA is the enormous balance of trade deficit, especially for high-technology products. The USA imports around 40 percent more high technology than it exports. All things considered, the massive investments in R&D and science no longer bring advantages for the USA on the international scene to the former extent. This is partly because other countries have also recognized the significance of research and innovation and competition has increased.
The American economic system
Ultimately, the American slide down the Innovation Indicator is also a symptom of more fundamental problems in the entire economic system. A currently sharply rising budget deficit, and in particular a notoriously negative balance of trade exert pressure on the system, whereby the high budget deficit is already almost a tradition in the USA since the days of the Reagan administration in the 1980s. At that time, significant tax cuts and state investments were intended to boost the economy.
These debt levels exploded as a result of the massive military expenditures since 2001. This was accompanied by the challenges to the welfare systems caused by the current banking and economic crisis. The budget deficit of the Obama administration has more than tripled from 2008 to 2009. Despite the ideal of lean government that all political parties claim to represent, which the Americans have associated for decades with dynamic growth, it is questionable in the meantime whether a paradigm shift towards a debt-financed government activity has not taken place.
Experiences from the 1970s as well as from the 1990s in Japan indicate that such politics are not sustainable in the long term. Rather, the state expenditures financed by excessive borrowing increase the money supply and, under certain circumstances, discourage private investment. Possible consequences are inflation and a lower medium-term economic growth.
Budget deficits in the USA
In addition to the federal deficit, the USA also has an enormous current account deficit, which increases the need for capital inflows and thus exerts pressure on the US dollar, which again increases inflation. The problem of American indebtedness to foreign countries is in many respects more problematical than Germany's.
Firstly, the German budget deficit is lower - not only in absolute terms, but also measured in terms of economic power. Secondly, in Germany the budget deficit is countered by a high surplus from the private sector, so that in net terms the state is indebted to its own citizens, while in the USA the private sector is becoming increasingly indebted to foreign countries, i.e. the nation as such is also becoming ever more dependent in the medium term.
The problem is also how the debt-financed resources are utilized. The US trade deficit is primarily due to consumer goods. Many consumer goods such as, for instance, electronic articles are subject to stronger price competition today than was the case several years ago, so that producing these goods cheaply is absolutely imperative. However, the western industrialized nations - also including the USA - have not been able to offer cheap production sites for some time now.
For this reason, the significance of innovations and new technologies at a qualitatively high level are a basic pre-requisite for the success of western industrialized countries, at least for those that have no raw materials to offer, like Norway or Russia. It can be assumed that the incurred debts will not be utilized in such a way that economic returns in the form of strengthening the US-American competitive position are to be expected.
The USA is losing importance
According to the analyses in the new Innovation Indicator, the USA will no longer be among the leaders in the coming years, not only in relation to its size and expenditures. In the medium term, it will no longer occupy a leading place in absolute terms, neither for R&D expenditures nor in scientific publications or patents. In a far distant future it will also no longer be the largest economy in the world.
This is already foreseeable today, because the USA's population is too small. It is to be expected that at least China and possibly even India, if they continue to increase the productivity of labor and capital inputs at the present pace, will catch up with the USA in terms of economic power and ultimately overtake it. This must, however, not be a fundamental problem for the USA or for other countries.
With an indicator rating of 52, just behind the USA, Belgium is in tenth place. This is followed by a group consisting of Canada (51), Taiwan (50), Denmark (50) and the two large European industrial nations France (50) and Great Britain (49), with Australia (48) and then Ireland (47), which is unlikely to maintain even this place in future in view of the austerity policies resulting from the economic crisis.
Read the full report here.