The potential gains from innovation in terms of boosting incomes, jobs, and economic growth are vast. Yet, paradoxically, developing countries do surprisingly little when it comes to adopting advanced-country experience to upgrading their products, technologies, and business processes says a new report launched by the World Bank.

The report finds that the lower level of technological adoption in developing countries is a rational response of firms to a range of constraints that they face: barriers to accumulating physical and human capital, low managerial capabilities, and weak government capacity.

Managing these constraints to meet the challenges of an intensely competitive and rapidly evolving global economy requires a reconsideration of innovation policies and how we measure innovation progress say the report’s authors.

The report, The Innovation Paradox: Developing-Country Capabilities and the Unrealized Promise of Technological Catch-Up, underscores the challenges that policymakers and entrepreneurs face in realizing the potential fruits of innovation. “Understanding how to promote innovation in developing countries is more important than ever, given the new wave of digitalization and automation that is rapidly altering economies around the world,”said Jan Walliser, Vice President, Equitable Growth, Finance, and Institutions.

For the private sector in developing countries, the report asserts that adopting better firm managerial and organizational practices are overlooked ingredients that are critical to innovating in products, processes, and upgrading the quality of their goods. These practices are also the building blocks to developing more sophisticated innovation projects that include the invention of new products and technologies.

“The potential gains from bringing existing technologies to developing countries are vast and dwarf foreign aid,”said William Maloney, one of the report’s authors. “Yet, developing country firms and governments invest relatively little to realize this potential. Our research finds this is a result of weak firm capabilities to recognize and adopt these technologies, weak enabling environments, and limited government capabilities to design and implement the necessary support policies. Therefore, unlocking the enormous growth potential of moving countries closer to the technological frontier is not as simple as, say, providing additional incentives for research and development.”

The report argues that developing-country ministries and agencies often lack human capital and effective organizational structures at a time when designing and implementing innovation policy is becoming even more complex. Effective innovation policy requires choosing the appropriate combination of policy instruments in the context of scarce government capabilities. The report proposes a conceptual framework, the “capabilities escalator,” where policies to support firm upgrading are sequenced in accordance with the level of capabilities of the private sector, as well as of policymakers and institutions, and ratchet up through progressively higher stages of sophistication.

“Developing country firms need to focus on building the foundations for successful innovation,” said co-author Xavier Cirera.“Therefore, developing country innovation policy cannot focus primarily on research and development but must begin with strengthening managerial and organizational practices.”

The Innovation Paradoxis the first volume of the World Bank Productivity Project that seeks to bring frontier thinking on the measurement and determinants of productivity to global policy makers.