How Switzerland Beats China In Manufacturing Innovation

Switzerland is a tiny European economy known for its financial industry. China is the world’s second largest economy known for its manufacturing. Yet Switzerland beats China in manufacturing innovation, according to a recently released 2015 Bloomberg Innovation Index.

Switzerland occupies the first position among fifty countries ranked, while China occupies the 41^st position.

What can explain Switzerland’s big lead in manufacturing innovation over China?

Three things.

First is the methodology behind the rankings. Switzerland is favored by the measure used in the Bloomberg survey—value added by manufacturing— which boosts the ranking of countries that produce high value added products like pharmaceuticals, autos, and computers.

Switzerland is home to pharmaceutical giants like Hoffmann-La Riche, Ciba, and Novartis . By contrast, while Chins is home to many manufacturing companies, they are in low-value added sectors.

Second is the big difference in population, which distorts the figures.

Third comes the “regime,” ie the institutions and policies that support manufacturing, as outlined by the Heritage Foundation and Wall Street Journal, which ranks Switzerland 5^th in the 2015 Index of Economic Freedom.

“Switzerland continues to be a regional leader in economic freedom. Efficient and transparent regulations underpin an efficient business environment and support diversified economic growth. Openness to global trade and investment is firmly institutionalized, buttressed by a dynamic financial sector and a well-functioning independent judiciary. Switzerland has a strong tradition of reliable protection of property rights, and the legal system is transparent and evenly applied. Effective anti-corruption measures are in force.”

That’s a sharp contrast to China’s “regime,” which needs to be reformed.

“A more comprehensive set of economic reforms is desperately needed, especially a loosening of the government’s stranglehold on investment flows. The Communist Party’s control of all levels of government continues to undermine confidence in the rule of law and interfere with the development of an independent judiciary. Institutionalized cronyism is prevalent.”

China ranks 139 in the 2015 Index of Economic Freedom ranking.