State of an Innovation System: Theoretical and Empirical Advance towards an Innovation Efficiency Index

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Innovation is currently seen as a cornerstone not only for economic development but also as an
intrinsic human activity that could help to face the great challenges of human kind. Given the
importance of innovation in the new European 2020 Strategy, measuring progress but also monitoring
what drives innovation becomes crucial for policy development. Following upon this strategy the new
European flag initiative “Innovation Union” called for a new “single” indicator on innovation. Currently
the information infrastructure on innovation in Europe contains a number of indicators. Most of the
current indicators at the national or sector levels use a performance theoretical framework based on
an efficiency model of inputs and outputs. The last five editions of CIS have been a bastion of
innovation policy research during the last decade. Despite this, CIS has been criticised for not having
an umbrella framework that unifies its different underpinnings to explain what drives innovation to
actual innovation and economic outcomes. In this paper we propose a framework that enables the
theoretical and empirical linkages between the drivers of innovation to innovation performance via the
integration of core features determining innovative behaviour in to a single composite. This index
enables to assess the total propensity of firms to innovate and assess the relative innovation
performance at the sector and country level. The approach adopted here to create the index
overcomes long standing theoretical and methodological issues related to the reduction of complexity
in a meaningful form, scope, aggregation, normalisation and validation of innovation composites. The
empirical demonstration of the index was done using CIS4 data and the results validate the theoretical
structure and robustness of the proposed model. This enables its replication for innovation policy
analysis in different settings. The model underlying the proposed index provides not only a depiction of
the efficiency of the innovation system but also a link to economic performance and to the factors that
determine relative performance.