Tapping innovation

SRI LANKA is attracting fresh interest on the global investment stage. Lord Mayor of the City of London Alderman Alan Yarrow during a visit here this week to assess investment opportunities praised progress made by the country but also urged a raft of key measures Sri Lanka should prioritise if it is keen on becoming a competitive financial centre in the region. 

Yarrow spoke on key factors such as innovation, legal structure, skills, product development, English, geography, ethics, infrastructure and hard work, which Sri Lanka should focus on in order to become a major financial hub. 

Yet Sri Lanka is ranked 19th out of 24 economies in terms of its creative productivity in the Creative Productivity Index (CPI) released by the Asian Development Bank (ADB) mid-2014. The study attempts to map out policy structures that are essential for a knowledge economy to evolve and the island’s relatively poor performance has sounded warning bells.

Sri Lanka performs averagely in the provision of the knowledge-skill base and appropriate institutions, but challenges remain in its sluggish creative capacity, driven by the rigid labour market and the poor quality of its financial institutions.

The report also added the country performs poorly on scientific output and creative-industry goods. Although Sri Lanka has fairly well-developed competition laws, enforcement is lax, as reflected in the country’s middling score for competition in the CPI. Its human capital score is average, with a ranking of 12th out of 24.

The report however, points out that the country’s low score for technical and vocational enrolment in secondary school highlights the problem of labour shortages in a number of sectors that require specific c skills, typically IT and English-language skills, which is exacerbated by outward migration.

Sri Lanka’s low overall ranking is also characterised by its poor firm dynamics, which means that innovation is not encouraged. On the labour side, productivity is hampered by the country’s large number of holidays and generous leave entitlements.

Many Asian developing economies face a challenge to avoid being stuck in the middle-income trap. They need to transition from an imitation-driven economy to an innovation-based growth model more commonly found in developed countries. Richer economies are clearly able to invest more in physical infrastructure such as transport networks, communications, and power generation, which are key underlying factors in economic creativity and innovation. However, some differences are a result of the enabling environment that facilitates the generation of creative outputs from creative inputs.

A poorer country may not be able to muster the same level of creative inputs as a richer country, but can still benefit by using what resources it does have efficiently. While the precise policy recommendations will differ for each economy, the results of this report highlight a number of important policy areas where an increased emphasis would be beneficial for many Asian economies.

Actions to promote knowledge-based economies will differ by country. But they will require strong, coordinated government policies coupled with investment in ICT including universal, affordable and high-speed broadband connectivity, better education notably tertiary and skills-focused training, and a culture of research and innovation with strong intellectual property rights. Flexible capital and labour markets are also crucial.

A shift to innovation-based growth would help countries avoid the middle-income trap and also address rising income inequalities. Sri Lanka cannot afford to fall behind.