The financial press often uses the term “innovation” in vastly different ways. Many financial innovations, such as mortgage-backed securities, are simply new methods to monetize other products, creating fees and often problems in their wake. Innovations can also encompass more useful products. Thomas Edison’s lab tested thousands of filament designs before finding the one best suited for commercialization of the incandescent light bulb. Wikipedia, one of my favorite places to visit, provides little help in clearing up the confusion by offering up nine different definitions for innovation.
Even with the lack of clarity, innovation remains important to businesses and governments alike given its leading role in driving economic growth. But how best to spark innovation? Rather than the flash of brilliance from a singular “beautiful mind,” innovation is often the product of the numerous attempts from a multitude of people. Edison and his team, for example, did not create the incandescent light bulb but instead were the first to find its practical implementation. To spark innovation in a more structured manner, Edison launched the first industrial research laboratory in Menlo Park, NJ which helped develop many of his 1,093 patents. More recent research efforts include Bell Labs, Xerox PARC, and Google’s Area 20% project that created AdSense and Google News.
The U.S. government has also spent billions to fund research and labs for science, military, and space exploration. Some of this funding has gone to government labs like the Defense Advanced Research Projects Agency (DARPA), best known for contributions to GPS and the internet. However, much of the funding has gone to private labs and universities with limited oversight. This combination of private and federal spending on innovation has helped drive America’s rise to its spot as a global economic superpower.
The Global Innovation Index (GII) from the World Intellectual Property Organization (WIPO) examines around eighty different indicators to rank the innovation performance of approximately 130 different countries. While the U.S. ranks in third place behind Switzerland and Sweden, the more interesting changes have happened at the bottom of the top ten. China, which ranked in 35th place in 2013, ascended into the top ten for the first time in 2025, displacing Germany. So, what helped to spur the change?
Like its U.S. counterpart, the Chinese government spends billions on research. Its state-run labs and universities serve as the starting line for an “innovation chain” that transforms ideas into marketable products. Over 2,000 government-guided investment funds underpin this chain, and local governments help spur not only innovation but entire ecosystems and supporting supply chains. The model has driven the tremendous advancements over the last 15 years in EVs, lithium batteries, and robotics, areas in which the U.S. now lags. Despite sparking the tremendous innovation gains, the Chinese model does have some downsides. Local governments and funds often crowd into similar markets resulting in overproduction and price wars as competitors try to gain share at any price. Less appealing but still important industries, like commercial aviation, too may struggle to attract funding.
The U.S. is unlikely to adopt China’s government-centric innovation model. But adapting aspects from both models may help lower-middle income countries move up WIPO’s innovation list. For countries like India (#38), Vietnam, (#44), and the Philippines (#50), the list and its methodology offers important lessons about how to create durable ecosystems to foster innovation.
