Political Economist Joseph Schumpeter proclaimed, “carrying out innovations is the only function which is fundamental in history”. Growth in any economy comes from three sources: increases of inputs of production, efficiency improvements, and innovation. Of these, innovation is the biggest difference between developed and developing economies and is increasingly becoming key to making growth more inclusive and sustainable.

What are the key factors that contribute to an ecosystem of innovation?  Klaus Schwab, head of the World Economic Forum, stressed in a recent op-ed in the New York Times: “A strong scientific and technological base, investment from public and private sectors, links between businesses and research centers, a high-quality education system, political transparency, and a culture that encourages entrepreneurship and risk-taking.”

The World Bank Group (WBG) is uniquely positioned to help developing countries increase the supply of inclusive innovations. In 2013, IEG reviewed the World Bank Group Support for Innovation and Entrepreneurship looking into its $18.7 billion portfolio dedicated to innovation and entrepreneurship interventions over the past decade. The findings suggest that although the amount spent on this type of interventions is sizable and can contribute to major changes, it has to be complemented by other actions to be more effective.

Having a clear vision and strategy of how innovation should be used to solve major development challenges is key to the WBG’s effectiveness. This means that the institution needs to coordinate better among its networks, regions and teams as well as across the three institutions, and with public/private partners.  For instance, the evaluation shows that about 77% of World Bank projects supporting public Research and Development activities were satisfactory in achieving this objective, among which the best performers were those projects that fostered linkages between research and industry.

The WBG made a positive shift moving away from a narrow focus on market and government failures in innovation and entrepreneurship toward a much broader focus on other bottlenecks impeding innovation and entrepreneurship. The new focus and need to provide sustainable solutions require experimentation with different mechanisms and implementation arrangements. Also it means that WBG needs to carefully monitor and evaluate which interventions and mechanisms work effectively and which need to be improved.  

This brings up the issue how to best deal with risky investments into early-stage start-up firms that are known for their innovation and entrepreneurship work.  The evaluation shows that the WBG needs to do better in assessing and developing plans on how to work with such start-ups throughout their growth cycle. The WBG also needs to ensure that knowledge and learning generated from its work across countries and regions is captured better and shared systematically.

The evaluation also points out the need to better leverage existing instruments. One of such instruments is research grants used for the creation, application, and diffusion of knowledge and technology that enable innovation. Lessons from this experience suggest that these interventions must be designed and implemented in ways that are demand-driven, incorporate end-users, and support multi-stakeholder collaboration. IEG’s work shows that competitive research grants are most effective when there are transparent and rigorous selection procedures and strong institutional capacity in the research system or where additional investments were made in capacity building activities to improve proposals from weaker institutions. Yet outreach to the extreme poor has been problematic because competitive projects of this sort are not effective at targeting people without land or other productive assets.

The WBG’s pressing challenge is to harness innovation to provide sustainable solutions for the poor who live on less than $2 a day both in middle and low income countries.  Broadening involvement in inclusive innovation will be a critical strategy for achieving the WBG’s new corporate goals for poverty reduction and shared prosperity.

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