Analysis of sources of economic growth finds that the biggest differences between developed and developing economies are in innovation performances. Innovation is critical for economic growth, but it also becomes increasingly important for addressing major development challenges, such as the ones related to inclusion and sustainability.

Recognizing this pattern, many countries are attempting to promote innovation and entrepreneurship. Market and government failures and other bottlenecks impede innovation and entrepreneurship, particularly in developing countries. These countries need to build the capacity to find, absorb, and use new technologies and processes as well as foster entrepreneurs who can take risks, look for finance, and bring new products and processes to market. The most important source of innovation in developing countries involves the adaptation of technologies and processes that exist elsewhere but may be new to the country or firm. However, innovation can also come from local efforts, with many low- and middle-income countries becoming important sources of incremental innovation. Given its global role, developmental mandate, and combination of public and private sector expertise, the World Bank Group is uniquely positioned to play an important role in helping countries build their innovation capabilities.

IEG identified an investment portfolio of $18.7 billion in innovation and entrepreneurship interventions over the past decade across the World Bank Group. IEG found that this investment is substantial, but its  effectiveness can be enhanced through broad, systemic efforts on a set of complementary actions. At the corporate level, the Bank Group has to articulate a clear vision of how innovation will be used to solve major development problems and how this vision can be transformed into workable solutions. Given the rapidly changing development context, urgent action is required to enhance coordination, consultation, or linkages on innovation and entrepreneurship initiatives across networks, sectors, and regions, as well as across the Bank Group institutions.

Another challenge is to develop practical solutions for people who earn less than $2 a day. This is not a low-income country agenda but one that is also relevant for middle-income countries with large segments of their population living in poverty. Sustained efforts are required to experiment with different mechanisms and implementation arrangements. Also important are monitoring and evaluation systems to facilitate scale-up of promising interventions and mechanisms to effectively capture and share knowledge from operations within and across the Bank.