Countries can grow by expanding their labour resources, such as by encouraging more women to remain in the labour force, or through capital deepening, in the form of higher levels of investment. However, it is innovation which can ensure permanently higher growth rates.

The World Economic Forum considers innovation as one of the pillars for global competitiveness, stating that for countries to move towards higher value-added activities there is need for “an environment that is conducive to innovative activity and supported by both the public and the private sector”.

When one thinks of innovation, it is easy to focus only on large innovations such as the discovery of new medicine or a breakthrough in engineering technology. However, innovation is much wider as a concept. It also includes new ways of doing things or small improvements to existing products. This perspective is more relevant to a small country like Malta, since the resources which can be allocated to research and development are limited when compared to large economies.

Nonetheless, when one considers that products which have revolutionised business in recent years – such as Facebook, to name just one – have been initiated by young people with limited initial resources, one should not a priori exclude the possibility of revolutionary ideas emerging from a small country.

In Malta, however, there seems to be lack of an innovative spirit. Indeed, the education curriculum and mentality do not foster an inquisitive and entrepreneurial spirit. There seems to be excessive reliance on the government to spearhead economic activity. People seem to believe that it is the government’s exclusive role to come up with ideas for growth. There is also need for a vibrant private sector, not only companies but even individuals who are working hard to innovate.

In order to foster an innovation culture there is need for a young cadre of entrepreneurs who are willing to challenge the status quo in every aspect of business. This requires people who are able to think outside the box, and take nothing as given. This is the idea behind creative destruction, associated with modern growth economics (referred to as endogenous growth in the literature) which focuses on the process of how new technology/ideas/products constantly replace older ones.

There is lack of venture capital in Malta, which needs to be addressed

In this respect, one has to be very careful when designing education curricula. Too much emphasis on the teaching of know-how is backward looking, in the sense that students are being brought up to be familiar with existing products rather than how to improve existing products. Students need to also understand the fundamentals underpinning a product, in order to be able to experiment how to improve on it.

A recent example of a business idea, called Lending Club, shows the extent to which innovative entrepreneurs are not willing to take anything as given. Normally one would consider banks as being the specialist lenders, but the people behind Lending Club were able to challenge that view and move towards peer-to-peer lending. This enables borrowers to undercut bank interest rates and offer lenders the possibility of earning higher returns than on traditional deposits. So far this was a success story, as certified through the launch of the company on the New York Stock Exchange on December 11.

Besides a rethink of curricula to encourage students from a young age to be innovative, rather than indoctrinated copycats, there is also need for a supporting financial infrastructure. In this respect there is lack of venture capital in Malta, which needs to be addressed. Investing in innovation is inherently risky – most of the attempts will fail – but the few which succeed make such attempts worthwhile to consider. A country which does not innovate is doomed to lag behind the other more innovative economies.