The Innovation Paradox: Why Countries That Need Innovation Most Do It Least

Innovation should be an equalizer. In theory, countries with lower productivity have the most to gain from investing in research and development—they have more room to grow, more inefficiencies to eliminate, and more opportunities to jump ahead. Yet, reality tells a starkly different story.

This is the innovation paradox: a phenomenon where those who would benefit most from innovation invest in it the least, while already-advanced nations continue to pull further ahead. It’s a puzzle that has profound implications for global development and economic convergence.

Two Faces of the Same Paradox

The innovation paradox manifests in two distinct but related ways, each revealing different aspects of the same underlying challenge.

The Investment Paradox

The first and most widely studied version comes from Cirera and Maloney’s groundbreaking 2017 research. Their historical analysis of R&D investments across countries revealed a troubling pattern: instead of convergence, we’re seeing divergence.

Countries with lower efficiency and productive capacity—precisely those that should be making the greatest innovation efforts—consistently underinvest in R&D. Meanwhile, nations that already possess strong productive capabilities continue to innovate at higher rates, widening the global development gap rather than narrowing it.

Why does this happen? Three critical factors emerge:

1. Resource constraints: Companies in less productive countries simply lack the financial resources and human capital necessary for sustained innovation efforts.
2. Weak innovation ecosystems: These countries often lack the supporting infrastructure—knowledge flows, scientific institutions, and complementary capabilities—that make innovation efforts successful.
3. Governance limitations: Governments struggle with the complexity of designing and implementing effective innovation policies that could break these constraints.

The Strategy Paradox

The second version, identified by Parrilli and Alcalde Heras in 2016, focuses on how countries innovate rather than how much they spend.

Traditional thinking suggests that Science and Technology-based Innovation (STI)—formal R&D investments leading to discoveries and breakthrough research—should outperform more informal approaches. But their analysis of Nordic countries revealed something unexpected.

Countries emphasizing “Doing, Using, and Interacting” (DUI)—learning through implementation, process improvement, and stakeholder collaboration—often achieved better innovation outcomes than those focused purely on STI strategies.

The Sweet Spot: It’s Complicated

Perhaps the most striking finding from this research is that innovation returns follow an inverted U-shaped curve. Neither the poorest nor the richest countries benefit most from R&D investments—it’s those in the middle stages of development that see the highest returns.

This challenges our intuitive understanding of how innovation should work. Convergence theory suggests the poorest nations should benefit most, but reality shows they often lack the absorptive capacity to translate R&D spending into productivity gains.

The most successful countries? Those that combine both STI and DUI approaches, tailoring their innovation strategies to specific sectors and development stages.

Beyond the Numbers: What This Really Means

The innovation paradox isn’t just an academic curiosity—it’s a fundamental challenge for global development policy. It suggests that simply throwing money at R&D won’t solve development gaps. Instead, countries need a more nuanced approach that includes:

• Building absorptive capacity: Developing the human capital, institutional frameworks, and governance systems necessary to translate innovation investments into real productivity gains.
• Sector-specific strategies: Recognizing that high-tech sectors may benefit more from STI approaches, while traditional industries might see greater returns from DUI methods.
• Systemic thinking: Understanding that innovation doesn’t happen in isolation—it requires complementary investments in education, infrastructure, and institutional development.

The Path Forward

For policymakers in developing countries, the innovation paradox offers both a warning and a roadmap. The warning: innovation investment alone isn’t enough. The roadmap: focus on building the ecosystem that makes innovation effective.

This means investing not just in R&D facilities, but in the people, institutions, and governance systems that can make those investments pay off. It means understanding your country’s specific development stage and designing innovation strategies accordingly.

Most importantly, it means recognizing that catching up isn’t just about doing more of what advanced countries do—it’s about doing it smarter, with strategies tailored to your unique context and capabilities.

The innovation paradox may seem discouraging, but it’s actually liberating. It shows us that there isn’t just one path to innovation success, and that countries can find their own way forward—if they understand the rules of the game.