By Asoka S. Seneviratne –

Prof. Asoka.S. Seneviratne

Knowledge-based Product & Global Innovation Index and Sri Lanka

Innovation (i.e., the TRIO) is essential for a knowledge-based economy and for penetrating and capturing significant global market share through knowledge-intensive products and services. The Global Innovation Index (GII) is crucial in this context. It comprises two sub-indices: the Innovation Input Sub-Index and the Innovation Output Sub-Index. The first sub-index is based on five pillars: Institutions, Human capital and research, Infrastructure, Market sophistication, and Business sophistication. The second sub-index is founded on two pillars: Knowledge and technology outputs, and Creative outputs. Each pillar is divided into sub-pillars, and each sub-pillar contains individual indicators.

According to the Global Innovation Index (GII) for 2024, which ranges from 0 to 100, the average score across 132 countries was 31.57 points. Switzerland held the highest value at 67.5 points, while Angola recorded the lowest at 10.2 points. The indicator has been available since 2011 and extends to 2024. Following Switzerland, other high-scoring countries include Sweden with 64.5 points, the USA with 62.4 points, Singapore with 61.2 points, the UK with 60.0 points, New Zealand with 45.9 points, Malaysia with 40.5 points, India with 37 points, and Sri Lanka with 22.6 points. Notably, Sri Lanka falls below the world average of 31.57, indicating significant room for improvement. As mentioned, GII encompasses numerous sub-pillars, each consisting of individual indicators. GII plays a crucial role in penetrating and capturing a substantial share of the global market through knowledge-intensive products and services resilient to shocks in world trade. In line with this, what I stated in the introduction remains essential: “Innovation, creativity, and dynamism arise from human talent, underscoring the importance of education and skill development in fostering economic growth.” Furthermore, the development of entrepreneurship is vital. Entrepreneurs start, own, and operate a business, typically accepting financial and operational risks to pursue profits or innovations. Conversely, entrepreneurship refers to identifying opportunities, taking risks, and establishing a company to create value and potentially drive innovation.

Export market diversification with Africa, Latin America & Asia

Export market diversification has long been discussed, but its implementation remains sluggish. Sri Lanka’s overreliance on a narrow range of export products and limited markets has made it vulnerable to external shocks. The tariff introduced by Trump’s administration should serve as a stark reminder that strategic and results-oriented action is overdue in international trade, particularly with market diversification among many other considerations. Given the above, Sri Lanka should now expand into new markets in Africa, Latin America and Asia.

Africa is the second-largest continent in the world, with a population of over 1.2 billion, which is projected to reach 1.7 billion by 2030. This growth creates a high demand for various products and services to satisfy the needs of the ever-growing population and a large labor market constantly seeking new and better job opportunities.

It is noted that e-commerce industry in Africa has experienced tremendous growth over the years. Numerous business opportunities exist, ranging from general merchandise to agriculture, digital products, and services. Industrialization is also rapidly advancing, with over four hundred African companies generating annual revenue of $1 billion, surpassing their global market counterparts. Although there are many e-commerce opportunities in this vast and growing continent, starting or expanding a business in Africa requires more than simply setting up a shop and waiting for customers to arrive. Entrepreneurs must invest significant effort and innovative ideas to succeed; the fast-growing IT industry and the factors mentioned above will aid them in achieving this success.

Latin America is an exciting place to invest. Most countries in the region have experienced solid growth for decades, and many made significant advancements at the start of this century due to the resource boom. Like everywhere else, there was a wobble during the COVID-19 pandemic, but that has been overcome, and the region is back to growth. With a US$7 trillion economy, over 600 million citizens, and a growing middle class, Latin America represents an attractive market for foreign investment and company expansion. There is enormous diversity among the markets, ranging from giants like Brazil and Mexico to specialized operators like Chile and Guyana. Covering over 12% of the world’s landmass, the region has much to offer, including open and transparent financial markets, appealing incentives for investment, an abundance of natural resources (lithium, copper, oil, gold, etc.), an available supply of human talent, well-developed infrastructure, and lower market entry costs compared to European and North American markets. Now is the perfect time to consider expanding from Europe to Latin America, with positive outlooks for the region’s economies. However, you should take the time to assess which territory best suits your needs, as each offers specific advantages for different sectors.

Many successful businesses seeking to expand their horizons find the Asian market attractive due to its large and growing consumer base. With over 60% of the world’s population, Asia is a vast region with formidable and diverse market-entry barriers. The adage, “businesses don’t plan to fail, they fail to plan,” is particularly true in Asia. To successfully enter the region, it is essential to have a well-considered strategy focused on specific target countries. Planning is key for those seeking to sell products in the area or establish manufacturing facilities. This guide offers valuable insights and strategies for successfully expanding into Asia. A market entry report is essential for identifying opportunities, challenges, and methods for entering Asian markets. Companies can choose from three main market entry strategies: exporting, licensing, or direct investment. Many Asian countries offer incentives like tax breaks, streamlined procedures, and access to skilled labor through special economic zones. Evaluating these benefits can reduce costs and enhance profitability.

Economic cooperation is vitally important, particularly through bilateral trade agreements (i.e, Free Trade Agreements- FTAs). Sri Lanka has an FTA with Pakistan, Thailand, and Singapore. The trade gap between China and Sri Lanka is significant and has been widening, with China maintaining a large trade surplus with Sri Lanka. In 2024, China’s trade surplus with Sri Lanka surged to over US$4 billion, nearly double that of the previous year. This situation reflects a considerable imbalance in bilateral trade, as Sri Lanka’s exports to China were much smaller than its imports from China. In 2024, Sri Lanka’s exports to China were valued at USD 251.91 million, a 2% decrease compared to 2023, when they were USD 257.73 million. Despite this, imports from China to Sri Lanka rose by 40% in 2024, reaching USD 4 billion. Talks regarding the China–Sri Lanka FTA have stalled due to disagreements. China wants Sri Lanka to liberalize 90% of tariff lines and their corresponding value, but Sri Lanka has disagreed. Meanwhile, Sri Lanka has proposed a review of a 20-year tariff liberalization program in its 10th year, which China has also disagreed with.

Talks between China and Sri Lanka on a Free Trade Agreement (FTA) have stalled since 2018 following disagreements on specific issues, including the level of liberalization. For example, China wants Sri Lanka to liberalize 90% of tariff lines and their values, but Sri Lanka has disagreed. Meanwhile, Sri Lanka had proposed reviewing a 20-year tariff liberalisation program in the 10th year, which China disagreed with. Following President Anura Kumara’s official visit to China, the FTA between Sri Lanka and China is expected to become a reality soon. Also, FTAs with India, Indonesia, Malaysia, and Vietnam are essential to ensure Sri Lanka’s economic stability and prevent future downturns. They open up new markets for Sri Lankan businesses, contributing directly to the nation’s economic growth.

FDI enables businesses to adopt new technologies and practices unavailable in their home countries, focus on new products, or utilize the TRIO, which allows them to expand into different regions or go global. As I detailed in the above article for the Colombo Telegraph, “AKD/NPP Government: New Chapter in Foreign Direct Investments,” I do not write about it again.

Conclusion

The external shock generated by the Trump administration has created an opportunity to work towards a paradigm shift in resource-based production, a limited basket of exports, and a highly narrowed market in international trade. Given the situation, short-term and long-term measures can be implemented to address the challenges permanently. Engaging with the Trump administration regarding the 44% tariff increase and retaining GSP+ status represents short-term to medium-term measures. Sri Lanka urgently needs long-term strategies rooted in expanding knowledge-based production and exports, as international trade increasingly centers on services, ideas, intellectual property, brand value, and advancements in digital technology and innovation. Instead of traditional trade theories, innovation has become the mother of all trade or the gateway to going global and acquiring a substantial share of world trade. Unfortunately, Sri Lanka’s Global Innovation Index (GII) value stands at 22.6, placing it 89th out of 132 countries. India’s GII value is 37 (40), and Malaysia’s is 40.5 (33). At the same time, Sri Lanka’s GII value is lower than the world average of 31.57 points. Switzerland has a GII of 67.5 (1) and the USA has a GII of 62.4 (4). For Sri Lanka, it is a long way to climb. It should be noted that countries prioritizing investment by viewing people as valuable resources tend to experience more pronounced economic and social progress. Innovation, creativity, and dynamism arise from human talent, underscoring the importance of education and skill development in fostering economic growth. Furthermore, the development of entrepreneurship is vital.

Part I can be read here

*The writer, among many, worked as the Special Advisor to the Office of the President of Namibia (2006-2012) and was a Senior Consultant with UNDP for 20 years. He was a Senior Economist with the Central Bank of Sri Lanka (1972-1993), asoka.seneviratne@gmail.com