Is Innovation Still the Road to Prosperity?

Innovation usually comes with a glow around it. It sounds like the answer to almost everything: slow growth, weak productivity, climate change, ageing societies, global competition. New ideas are expected to rescue economies from stagnation and open the door to a richer future.

But the story is not so simple. The world has never looked more innovative. New technologies appear every day. Artificial Intelligence is spreading quickly. Firms invest in research, governments support science, universities produce knowledge, and patents continue to be filed. Yet productivity growth has slowed in many parts of the world. Economies are full of new technology, but the growth engine often feels weaker than expected.

In a joint work with by Guido Cozzi, Antonio Minniti we look looks at 115 countries between 1964 and 2019 and asks a simple but important question: Does innovation still help countries become more productive and prosperous? The answer is yes, but with an important qualification. Innovation helps when it continuously expands useful knowledge, and when countries have the right conditions to turn that knowledge into productivity growth.

Figure 1. The global productivity puzzle

Figure 1 shows a striking pattern. Productivity growth has slowed over time, and this slowdown is mirrored by a weakening in the growth of patenting activity, especially after the global financial crisis of 2008–09. At the same time, patents per inhabitant flatten out. In plain terms, the world has kept innovating, but the pace at which new technological knowledge expands has become less dynamic.

The traditional story says that innovation should raise productivity. Better machines, better methods, better software, better medicines, better transport systems, and better ways of organizing production should allow economies to do more with less. But the evidence suggests that innovation does not automatically translate into growth. It depends on the type of innovation, the stage of development, and the institutions surrounding it.

Not all innovation is the same

A key message that innovation has two different sides.

The first is knowledge expansion. This means the pace at which new technological knowledge is created, as captured by patent growth. The idea is simple: if the stock of knowledge keeps growing, economies have more material from which new products, processes, and business models can emerge.

The second is innovation intensity. This means the amount of innovation activity relative to the size of the economy or population, which can captured by patents per capita. This tells whether a country has a high level of patenting activity compared with its population.

These two dimensions may sound similar, but they are not the same. A country may have many patents per person but still experience slow growth in new knowledge. Another country may have fewer patents overall but a faster-growing innovation base. The paper finds that productivity growth is mainly linked to the continuous expansion of technological knowledge. What matters most is not simply the amount of innovation already present, but whether the economy keeps renewing its knowledge base.

The development threshold

One of the most interesting findings is that innovation works differently depending on a country’s level of development. The paper identifies a threshold of around $17,000 per capita. Below this level, the effect of patent growth on productivity is positive but modest, while innovation intensity does not play a clear role. Above this level, the relationship changes sharply: patent growth becomes much more important for productivity, while innovation intensity turns negative.

This does not mean that innovation becomes harmful in richer economies. Rather, it means that simply having more patenting activity relative to population is not enough. In advanced economies, productivity depends more on the ability to create genuinely new and useful knowledge than on the volume of innovation activity itself.

This is an important distinction. Mature economies are closer to the technological frontier. They cannot grow simply by copying or adapting technologies invented elsewhere. They need to push the frontier outward. But this is difficult. Many easy discoveries have already been made. New ideas often require larger research teams, more complex organizations, more expensive equipment, and longer periods of experimentation. In this context, more innovation activity does not automatically mean more productivity. What matters is whether that activity produces real renewal.

Figure 2. A tale of two growth regimes

Figure 2 compares productivity growth in countries below and above the $17,405 income threshold. From the mid-1970s onward, the two groups follow visibly different productivity paths. Countries above the threshold show a different growth regime, suggesting that innovation begins to operate differently once economies reach an intermediate level of development.

This has a practical meaning. Poorer countries and richer countries do not need the same innovation strategy. Lower-income economies may benefit more from building the foundations that allow them to absorb and adapt existing technologies: education, infrastructure, management capabilities, trade links, financial systems, and basic institutional reliability. In these countries, innovation may often be less about frontier invention and more about diffusion, adaptation, and practical problem-solving.

Higher-income economies face a different challenge. They already have more advanced firms, universities, laboratories, financial markets, and legal systems. Their problem is not only to increase innovation activity, but to make that activity productive. They need ideas that open new technological paths rather than simply adding more patents to crowded fields.

Institutions matter

We also show that the development threshold is closely connected to institutions, especially intellectual property rights. The idea is not that stronger patent protection is always better in every case. Rather, some degree of protection helps innovators capture returns from their ideas. If firms and inventors cannot benefit from innovation, they may invest less in risky research. The paper finds that the productivity payoff from innovation is strongly linked to appropriability conditions, meaning the ability to benefit economically from new knowledge.

This is a delicate balance. Too little protection can discourage innovation because ideas are easily copied. Too much protection can slow diffusion because knowledge becomes locked away. Prosperity requires a middle ground: enough protection to reward discovery, but enough openness to allow other firms and sectors to build on new ideas.

The future: innovation meets demography

In the paper, we also turn to the future. Using demographic projections and estimated relationships between innovation and productivity, we simulate productivity growth up to 2100. The results are sobering. Average productivity growth is projected to decline over the century, from around -0.75% in the early 2030s to about -1.75% by 2100 in the baseline scenario. These projections are not predictions in a mechanical sense; they are scenario-based simulations. But they show what could happen if historical innovation trends and demographic patterns continue.

The key point is that demography and innovation interact. Ageing and shrinking populations may weaken the incentives and capacity to innovate. Smaller or older economies may have fewer young firms, fewer researchers, less entrepreneurial experimentation, and weaker market expansion. This can make productivity slowdowns more severe.

This changes how population ageing should be understood. It is usually discussed as a problem for pensions, healthcare, and public budgets. But it may also be a problem for innovation. A society with fewer young people and weaker demographic momentum may become less experimental, less dynamic, and less willing to take risks.

We show the projected path of average productivity growth for 63 countries under a middle-of-the-road socioeconomic scenario which indicate that productivity growth weakens over time.

This result connects with broader concerns about secular stagnation. If ideas are becoming harder to find and populations are ageing, then advanced economies may face a double pressure: weaker knowledge renewal and weaker demographic dynamism. Innovation remains essential, but it becomes harder to sustain.

We divide countries according to their demographic prospects. Countries with declining populations face the steepest deterioration in productivity growth. Countries with growing populations experience milder slowdowns. A second panel groups countries into high-growth, moderate-growth, and declining-population economies. The message is clear: demographic trajectories are likely to create increasingly different productivity futures.

This does not mean that population growth automatically creates prosperity. A young and growing population still needs education, jobs, infrastructure, investment, and institutions. But demographic decline can make the innovation challenge harder, especially in advanced economies where growth depends heavily on frontier knowledge creation.

What this means for policy

The policy message is not “innovate more” in a generic sense. It is more specific: build the conditions that allow innovation to become productivity-enhancing.

For lower-income economies, this means strengthening absorptive capacity. Education, infrastructure, trade openness, managerial skills, technology adoption, and basic institutional quality can help countries benefit from existing knowledge. Innovation policy here should not focus only on frontier research. It should also support diffusion and adaptation.

For middle-income economies, the challenge is to move from adoption to creation. These countries need stronger links between firms, universities, finance, and public institutions. They need to support firms that can move into more sophisticated activities and create new technological capabilities.

For high-income economies, the central task is renewal. These economies need to make sure that research produces genuinely useful knowledge, that new technologies diffuse across sectors, and that ageing does not reduce experimentation. Policy should support scientific infrastructure, young firms, human capital, competition, and institutions that reward innovation without blocking diffusion.

Note that patents are only one measure of innovation. They are useful because they are available for many countries over a long period, but they do not capture everything. Modern innovation also includes software, data, design, organization, branding, management practices, and intangible assets. Future research will need broader measures to capture these dimensions.

All in all, innovation is still helpful for global prosperity. But it is not a magic button. It is not enough to have more patents, more laboratories, or more technology headlines. What matters is whether societies can turn new ideas into better ways of producing, working, organizing, and living.

The countries that prosper in the future will not simply be those that invent the most. They will be those that keep learning. They will be those that combine science with skills, institutions with incentives, protection with diffusion, and technological ambition with social adaptability.

Innovation remains one of the great engines of prosperity. But like any engine, it needs fuel, maintenance, and the right road. The last half century shows that ideas still matter. The next half century will show whether societies can keep turning them into progress.

References

• Cozzi, Guido and Minniti, Antonio and Venturini, Francesco, Is Innovation Helpful for Global Economic Prosperity? Lessons from the Last Half Century (January 09, 2026). Available at SSRN: https://ssrn.com/abstract=4182392 or http://dx.doi.org/10.2139/ssrn.4182392