The well-organized economic system and its continuous development are very important for economic growth and stability of the country. The importance of innovation is inevitable and significantly crucial for sustainable economic development. Today’s giant high and medium-tech companies, pharmaceuticals and industries achieving remarkable market shares primarily through their research and development (R&D) activities, namely innovation. Sustainable innovation requires well-structured market regulation, competitive market, reliable business atmosphere, as well as rule of law and efficient institutions. In this article, we are going to analyze the functionality and productivity of innovation activities in planned economies, in comparison with free-market economies.
Being one step up from the traditional system, planned economy is the main feature of communist countries where incomes, investments, distributions, prices and other economic decisions about the production is determined, regulated and controlled by central authority or government. While most of these are determined by individuals and market in free-market economies, in other words here the market intervention of government is significantly low in comparison with planned economies.
Initially granted, one particular reason is why the planned economy cannot be innovative is because of the lack of competition. Even though competition is one of the major forces of innovation, the government controls all companies and does not encourage competition, even instead attempts to eliminate it. In a planned economy, central authority does not allow companies or industries to carry out R&D. There is no need to make production more qualified or more sophisticated for the future than they are today. The government authority makes a decision about what, how and where to produce. The point is that they cannot be well informed about production decision, because the economy is designed to meet consumer’s needs, not their wants or preferences. Planned economies are reluctant to the improvement or diversification of the product, which in other words exerts unconcerned approach to consumer satisfaction. In addition to this issue, this centralized administrative planning does not even allow employees to take risks to improve the standards of products. Workers have to accept and obey the rules of the central authority. Typically, the government rewards all company-makers for following the directives rather than discovering and inventing new ways to raise the quality of goods. This trend in itself limits employee’s freedom, creativeness, and productivity. Consequently, that hinders their ability to bringing and applying innovative ideas. All planned economies like Cuba, North Korea, and the former Soviet Union go through the problem of producing useless and low qualified items, which are not competitive in the market.
Since it is obvious that the vast majority of innovations; advancements in technology, medicine or science have come from countries with a free-market economy or less government engaged economies. According to the below Global Innovation Index report 2019, it is possible to notice that global innovation leaders are countries which are mainly free-market economies. The significant part of global innovation is carried by US giant companies which are perfect examples of the US free-market economic system.
Top Innovative Countries: 2019
Source: Cornell SC Johnson College of Business, INSEAD, and the World Intellectual Property Organization
Note: HI = high-income, UM=upper-middle-income
In careful analyzing of the above report, China draws attention with its remarkable change by taking 14th place in the table. Even though Chinese government maintained a planned economy for a while, but at the end of 1978, China adopted gradual transition to the free market economy by allowing both private and public companies to compete with each other and stimulate growth. Since then this long-term transition contributed to China a lot and it made a social and economic development. According to the researchers, China’s GDP (Gross Domestic Product) has in average approximately 10 % annual growth and over 850 million people were able to lift themselves out of poverty in the last three decades.
Briefly, government intervention decreases the level of competition and productivity, where both companies and talented employees are reluctant towards product and process innovation. Free market economies create enormous opportunities for competition and innovation, which are the main driving forces of economic growth and development around the globe, without an exception.
01 China Overview/ The World Bank in China, Available on: https://www.worldbank.org/en/country/china/overview#1
02 Global Inovation Index, 12th Edition, Cornell SC Johnson College of Business, INSEAD, and the World Intellectual Property Organization , 2019 Available on: https://www.globalinnovationindex.org/Home
03 The World’s Most Innovative Countries, 2019 Available on: https://knowledge.insead.edu/entrepreneurship/the-worlds-most-innovative-countries-2019-12016
04 The 4 Types Of Economic Systems Explained, Available on: https://blog.udemy.com/types-of-economic-systems/