This paper focuses on the role of capabilities for economic development. In recent years data on different aspects of development have improved a lot. This provides new opportunities for in-depth research on capabilities and their measurement. The analysis, based on a factor analysis on 25 indicators and 115 countries from the 1992-2004 period, identifies four different types of "capabilities"; the development of the "innovation system", the quality of "governance", the character of the "political system" and the degree of "openness" of the economy. Innovation systems and governance are shown to be of particular importance for economic development.
Is innovation important for development? And if so, how?One popular perception of innovation, that one meets in media every day, is that has to do with developing brand new, advanced solutions for sophisticated, well-off customers, through exploitation of the most recent advances in knowledge. Such innovation is normally seen as carried out by highly educated labour in R&D intensive companies, being large or small, with strong ties to leading centers of excellence in the scientific world. Hence innovation in this sense is a typical "first world" activity. There is, however, another way to look at innovation that goes significantly beyond the high-tech picture just described. In this broader perspective, innovation -the attempt to try out new or improved products, processes or ways to do things -is an aspect of most if not all economic activities. It includes not only technologically new products and processes but also improvements in areas such as logistics, distribution and marketing. The term may also be used for changes that are new to the local context, even if the contribution to the global knowledge frontier is negligible. In this broader sense, it is argued, innovation may be as relevant in the developing part of the world as elsewhere. The paper surveys the existing literature on the subject with a strong emphasis on recent evidence on the macro and -in particular -micro level.
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