Swiss Innovation

July 21, 2011 — Leave a comment

Switzerland, a country that has often been compared to an island, comes across even more as being insular with the turbulent waters of the European Union’s debt crisis surrounding it. As the single European currency, the Euro seems to be on an ever continuing downward spiral the Swiss Franc, much to the chagrin of one of the country’s most important industries is rocketing to new heights. This of course has sent the Swiss out into the world as they seem to buy up whatever they can while its to be had. Even the national airline Swiss International will give passengers an extra 3 kilograms of baggage weight to lug back their loot from shopping trips to New York.

Then last week INSEAD released their annual Global Innovation Index for 2011, which had Switzerland at the top flying its white cross on a red background as a victor over other countries like Sweden (#2), Singapore (#3), Hong Kong (#4) and the USA (#7). When the news came out many Swiss proudly gave themselves a pat on the back and went back to work, while many of the Expats in the country looked around baffled. When they think of Switzerland innovation is not exactly the first word that comes to mind. Rather words like farming, tradition, isolation and finance are tops.

So how did Switzerland top the ranking? First off one must understand that the factors that make up the ration used to calculate the index are heavily sided on input. These sets are: Institutions (political, regulator, business), Human Capital and Research (education, tertiary education, R&D), Infrastructure (ICT, energy, general), Market Sophistication (credit, investment, trade & competition), Business Sophistication (knowledge workers, innovation linkages, knowledge absorption). The higher the ranking in these factors the more apt the stew is to brew up the innovative outputs: Scientific output (knowledge creation, knowledge impact, knowledge diffusion) and Creative Outputs (creative intangibles, creative goods and services). Looking at it, we see that more inputs are needed than outputs.

It is with regard to inputs that Switzerland has a great advantage. Geographically we are dealing with a small country with a high population density. This has allowed the country to build an amazing infrastructure from rail to energy. Then there is of course its stable government structure. Add to that a very low taxation rate and wealth pours into the country as it seeks to hide from larger less efficient state tax authorities. To legitimize themselves many of these companies of course carry out massive amounts of R&D in Switzerland. Also being home to many of the world’s largest pharmaceutical companies, high-end engineering and food science firms also helps.

What one needs to understand though is that it is not the Swiss themselves that are producing all of this innovative wealth. It is taking place in Switzerland, but is in large part being done by Expats, who are filling the high paying jobs in Switzerland as the country has a huge gap in its knowledge market. The ship of Switzerland has many wholes to fill and institutions eager to fill them and keep the boat afloat are stuffing them with highly educated Germans, Brits, Indians and Americans.

This phenomenon has two lessons to be learned as well as highlighting an intrinsic fact about Switzerland.

The first lesson is that a constructive tax policy can be beneficial to many countries hoping to attract foreign capital. This comes with the caveat though that taxes remain high enough to cover the costs of infrastructure that industry and economy need. It must also work hand-in-hand with social laws that protect worker’s rights and guarantee a good quality of life. Taxes can be low if companies are then required to take proper care of their employees. In the USA companies like Walmart are actually a problem, because they pay their employees so little that they employees actually still require financial aid and other social services from the state. Anyone working a full time job should not need to rely on any government aid for their survival.

The second lesson is that even a developed country like Switzerland, where there is a high demand for highly educated people, can experience a shortage of brain power. The most valuable natural resource any country has today is not found in the ground, but in its people. Imagination and problem solving are worth more than oil and gold. Any country wishing to secure its future must invest in education and aim to be the first to solve the problems that the world faces today: climate change, energy production, disease, food production.

The last idea that I believe is often ignored when looking at Switzerland is its size. The country is one of the smallest in the world with a fairly high population density located in a few key positions. Each canton acts nearly autonomously when making tax laws. The advantage is competition between cantons to ensure the best choice for constituents. However, this too can become a race to the bottom, when short sighted tax cuts will leave coffers empty to fund the maintenance and development of infrastructure, which was one of the main attractions for foreign investment in the first place. However, it must be said that smaller units do a better job addressing problems. Thus the best performing companies have offices of maximum 150 people. With this fact it is also not surprising at Singapore and Hong Kong are also located near the top of the index.

Switzerland is a country where a great deal of innovation takes place. This is due to its strategic positioning regarding inputs. The politics of the country have allowed it to be innovative. Many of these innovative inputs are actually sourced from abroad and the innovation they produce on Swiss soil is actually exported. If Switzerland hopes to remain on top though, it would be well advised to invest more into its education system especially in regards to critical scientific thinking.

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