“Our country must remain innovative.”

Germany’s Chancellor Angela Merkel declared that when talking about the country’s 2015 federal budget. It sure sounds great, but according to the Global Innovation Index 2014 — published by the Cornell University, INSEAD, and the World Intellectual Property Organization last September — Germany is actually not among the top 10 in the world.

These are the most innovative countries in the world

The list may surprise you.

Rank Country
1 Switzerland
2 UK
3 Sweden
4 Finland
5 Netherlands
6 United States
7 Singapore
8 Denmark
9 Luxemburg
10 Hong Kong
13 Germany

Germany doesn’t seem to belong to the crème de la crème when it comes to innovative countries. Even Ireland and Canada were ahead of us. For me, that raised the question of what this ranking is based on. The answer isn’t that simple: It’s based on 81 indicators across the following seven categories:

  1. Political, regulatory, and business environment
  2. Education, tertiary education, R&D
  3. Information & communication technologies, general infrastructure, ecological sustainability
  4. Credit, investment, trade & competition
  5. Knowledge workers, innovation linkages, knowledge absorption
  6. Knowledge-creation, -impact, -diffusion
  7. Intangible assets, creative goods & services, online creativity

You can find more details on page 287 in the report linked above, if you are interested. There you find the individual indicators and how each of the 143 nations that were evaluated rank in each of them. Just to give you an idea of what this looked like for Germany, here are the three categories where we stacked up the best.

Indicator Description Rank
Citable documents H-Index The H index is the economy’s number of published articles (H) that have received at least H citations in the period 1996 – 2013 1
State of cluster development How widespread and well-developed are deep clusters (geographic concentrations of firms, suppliers, producers of related products and services, and specialized institutions in a particular field) in the country 3
Logistics performance The logistics performance Index 4

…and here are the three worst

Indicator Description Rank
Foreign direct investment net inflows How much money flows into the country in the form of investments (as a percentage of GDP) 120
Gross capital formation How much of the additionally created capital was spent on investments (rather than consume) 112
Cost of redundancy dismissal In plain language: How easy it is to let employees go 99

Particularly interesting for investors: Germany was ranked 81 at “Ease of protecting investors“, along with the Dominican Republic, Kenya, Lesotho, and a few others.

Why Germany isn’t the most innovative country

Now we could closely examine the 81 lists to come up with a theory around what Germany lacks versus Canada and the others who are considered more innovative. But we don’t have to do that, because I believe there are two simple reasons for why there are, and will always be, more innovative countries than Germany.

The main reason is Germans’ tolerance for risk. We are not really well known for taking the highest risks. We have to look no further than the stock market as a contemporary example. Innovative US companies such as Linkedin, Facebook, and Twitter have trailblazed new markets and are valued several billions each. Meanwhile, their high-profile counterparts in Germany are Zalando and Rocket Internet.

That’s not meant as a discredit to those two companies. But we know that in both cases their business models are based on copying what has already proven successful in other markets (like the US). And creating the copy of something is the opposite of being innovative.

The second reason is Germany’s economic backbone — the high number of strong small and medium sized companies. Several of those have positioned themselves as market leaders in niches of their industries over many decades. The reason for the success has often been these companies’ exceptional experience and product quality. Many of them don’t have to be innovation leaders in order to defend their market-leading position.

This argument is backed by the latest Innovation Survey of the Centre for European Economic Research (ZEW). According to this study, Germany has spent more money on innovation in 2013 than ever before. However, the majority of the spending is at big corporations. The picture looks different if you look at smaller companies:

The ZEW survey also shows that small and medium-sized enterprises (SMEs) are increasingly retreating from the innovation business.

Why Germany doesn’t have to be the most innovative country in the world

It seems questionable, whether Germany will ever make a major step forward in the Innovation Index. And Angela Merkel seems to be content with Germany’s position (“Our country must remain innovative”).

And I share the opinion that we don’t have to become an innovation powerhouse. “Made in Germany” will remain will remain a sign of quality and, if we continue to rely on our virtues, I believe we will always find industries with German companies as market leaders. Maybe not necessarily in the most innovative industries… at least not right at the start.

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Bernd Schmid does not own any of the stocks mentioned. The Motley Fool recommends Facebook, LinkedIn, and Twitter. The Motley Fool owns shares of Facebook, LinkedIn, and Twitter.