The European Commission just announced a new indicator to measure innovation in its economy. I think it shows how the bureaucrats favour big companies, want to make it easy for themselves and hold a simplistic view of how innovation leads to positive net effects for the economy.

To quote, here are their new ingredients to the indicator:

• Technological innovation as measured by patents.

• Employment in knowledge-intensive activities as a percentage of total employment.

• Competitiveness of knowledge-intensive goods and services. This is based on both the contribution of the trade balance of high-tech and medium-tech products to the total trade balance, and knowledge-intensive services as a share of the total services exports.

• Employment in fast-growing firms of innovative sectors.

1. First, the view that patents are important favours big established companies over small innovative ones. Small innovative software companies are often better off to just move on and not waste their time trying to get a patent. And don't forget that (luckily) in Europe it is difficult to patent software. So comparing to the rest of the world here is even more questionable. Patents are also often used by companies for no other purpose than to block out other companies, which is maybe good for Europe (only if a European company bocks out a non-European one), but it is hardly helping substantial innovation in the economy to form. Another point: I think the EU has the view that innovation has this standard way to lead to positive impacts for everyone: Someone (a big company, see above) invents something, then they patent it and then hire people to develop the invention. As they start producing, they will hire other companies as subcontractors, and so the positive effect trickles down from the inventors to the others. I think that this sometimes happens, but only for big companies. This view is neglecting large parts of the economy. Innovation often happens in non-formal open spaces and/or in collaboration.
2. And about the second ingredient - simply hiring people in "knowledge-intensive activities" gives you points, no matter their actual effects on innovation. That makes it easy to count, but what are we measuring? Are we measuring that these employees are doing something useful with their knowledge-intensive work or are we simply celebrating that people are getting paid to think? For example, I'm sure the banking and lawyer industry has lots of jobs that would count as knowledge-intensive. A reason to celebrate them? Also, government spending on research gives a country points here, no matter what is actually researched.
3. The third ingredient is the only one that makes at least some direct sense to me. One can compare the contribution of high-tech and high-knowledge activities to other services and get some information out of it (albeit my point about the second indicator holds here, as well).
4. The fourth ingredient is based on the assumption that fast-growing companies must be more innovative than other ones. Might sometimes be true, but often probably not. Growth != innovation. A dangerous way of thinking in my opinion. Most often, rapid growth is merely the ability to attract capital - capital that is interested in rapid returns. The substance below the company is indirectly related to the jope on rapid returns, but often not necessary for this capital attraction effect (as the last couple bubbles should have tought us). If your concept of innovation is to enable turnover, it has not been formulated in society's best interest.

I think that behind this formalism there is a dangerous fan-boy attitude toward big companies/big finance and telling the story that they like to tell - an effect of lobbyism. What about small companies? They'll have an even harder time being "sexy" to EU bureaucrats now.

There is so much more happening in an economy, which is one of the most complex systems on earth. One example that comes to mind: what about innovation that isn't directly making money but enabling others to make money? For instance, what if people create an intelligent new way of doing things, but don't directly sell this new way? Maybe they open-source their powerful idea and run a successful little consultancy based on their newly-found reputation. With their help, a part of the European economy considerably improves, in more than just one way (they provde direct services and they shared their knowledge to enable many others), but without the bureaucrats taking notice - their innovation is flying completely under the EU radar.

I know it is difficult to "measure innovation", and that is why I have not yet come up with a better way to measure it. However, it seems to me that to not measure would have been better than to measure like this. A counter-question: why do we actually need this number? It's as if the numbers we have (like GDP) aren't already alchimistic and misleading enough.