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INNOVATION is one of those concepts that attracts almost universal agreement. Every strategy document mentions it. Every political speech cele- brates it. Every business con- ference places it at the centre of discussions about the future. Yet when we examine how cap- ital is actually allocated within an economy, innovation often becomes the exception rather than the rule. Incentives, not aspirations, determine behav- iour, and economies ultimately invest in whatever offers the most attractive combination of return, certainty and risk. That is perhaps the most important lesson emerging from the latest European In- novation Scoreboard and the accompanying data on pub- lic investment in research and development. Europe contin- ues to improve its innovation performance, having increased its overall innovation capac- ity by 12.6 percentage points since 2018. At the same time, the pace of improvement has begun to slow, prompting re- newed concern about produc- tivity, competitiveness and the ability of European firms to scale. The European Commis- sion is increasingly framing innovation not as an isolated research policy but as the foun- dation of economic security, industrial resilience and long- term prosperity. Malta should pay particular attention to this shift because it mirrors many of the questions we have been asking about our own economic model. The challenge is no longer wheth- er Malta can generate activity. It is whether that activity is increasingly generating pro- ductivity. Innovation sits at the very heart of that transition be- cause productivity growth ulti- mately depends on discovering new ways of creating more val- ue with the same resources. The difficulty is that innova- tion rarely wins the competi- tion for capital. Economists often speak about market failures in innovation. The phrase is technically cor- rect but somewhat misleading because it suggests that mar- kets are malfunctioning. In reality, markets are behaving exactly as incentives encour- age them to behave. If lending against property offers pre- dictable returns, tangible col- lateral and relatively low risk, while financing an innovative technology company involves uncertainty, longer investment horizons and intangible assets, it should surprise nobody that capital overwhelmingly prefers the first option. Banks are not making irrational decisions. They are responding to the in- centives embedded within the financial system. This is why discussions about innovation frequently become detached from economic reali- ty. We celebrate entrepreneurs for taking risks while simul- taneously designing financial systems that reward avoiding them. We encourage startups to innovate but expect them to provide collateral that, al- most by definition, innovative firms do not possess. We ask banks to finance transforma- tion while measuring success through conventional lending metrics. We then express dis- appointment when the flow of capital follows the path of least resistance. Innovation is therefore not primarily a technology prob- lem. It is a returns problem. Every economy allocates re- sources towards the activi- ties that generate the highest risk-adjusted returns. If prop- erty consistently delivers at- tractive and relatively certain returns, capital will contin- ue flowing towards land and buildings. If speculative in- vestment appears safer than research, research will remain underfunded. If expanding ex- isting business models offers greater certainty than creating entirely new ones, incremen- talism will consistently outper- form disruption. This is where Malta finds itself today. Over recent years we have dis- cussed productivity, education, infrastructure, carrying capaci- ty and the need to prepare for the economy envisaged in Vi- sion 2050. These are not sep- arate debates. They are all dif- ferent expressions of the same structural question. How do we shift incentives away from ex- panding yesterday's economy towards building tomorrow's? The European Innovation Scoreboard offers a useful re- minder that innovation eco- systems are far broader than research laboratories. Coun- tries that perform strongly combine excellent research systems, access to finance, firm investment, collaboration be- tween business and academia, intellectual property creation and strong commercialisation pathways. Innovation is not a single policy intervention. It is an ecosystem in which in- centives consistently reinforce each other. Malta's position as a moder- ate innovator should therefore not simply be viewed as a rank- ing. It should be interpreted as evidence that the innovation ecosystem remains incomplete. Encouragingly, Malta recorded one of the strongest annual im- provements in the 2025 score- board. That demonstrates that progress is possible. The chal- lenge now is ensuring that this improvement becomes struc- tural rather than cyclical. This inevitably brings us to the banking sector. Banks occupy a unique posi- tion within any economy be- cause they do far more than intermediate savings. Through their lending decisions they shape the productive structure of the economy itself. Every loan is effectively a vote about what type of economy should expand. When the overwhelm- ing majority of lending sup- ports property, construction and asset-backed activities, the financial system is not simply responding to demand. It is re- inforcing the economic model that generated that demand in the first place. This is not an argument that banks should stop financing property. Real estate remains an essential component of every modern economy. The issue is one of balance. If vir- tually every entrepreneur with tangible collateral can secure financing while businesses built around intellectual prop- erty, software, deep technology or research struggle to access growth capital, then the econ- omy gradually becomes locked into a development model where physical assets consist- ently outperform productive ideas. That is precisely why public institutions matter. The Malta Development Bank was never intended to become another commercial lender. Its purpose is to intervene precise- ly where markets, acting ra- tionally, choose not to go. De- velopment banks exist because innovation frequently gener- ates substantial social returns that exceed private returns. A successful technology company creates knowledge spillovers, highly skilled employment, export opportunities and pro- ductivity gains that benefit the wider economy, yet these wider benefits are rarely reflected in the commercial lending deci- sion of an individual bank. This is why I believe the Malta Development Bank now needs to become significantly more innovation aggressive. Its mission should increas- ingly extend beyond correct- ing isolated market failures towards actively shaping mar- kets. Instead of asking how innovative businesses can fit within traditional lending cri- teria, it should ask how finan- cial products can be redesigned around the realities of innova- tive firms. Revenue-based fi- nance, co-investment vehicles, innovation guarantees, ven- ture debt and scale-up finance should become mainstream rather than exceptional. Government also has an im- portant role to play. Across the EU, public invest- ment in research and develop- ment reached €130.2 billion in 2025, equivalent to 0.69% of GDP. Over the past decade this investment increased by more than 60%, reflecting a growing recognition that research and innovation are becoming cen- tral to competitiveness. Malta, however, remains among the countries allocating the lowest public resources to R&D both as a share of GDP and on a per-capita basis. This matters not simply be- cause of the amount being spent but because of the sig- nal it sends. Public investment shapes expectations. When governments consistently pri- oritise research, commerciali- sation and industrial technolo- gy, they reduce uncertainty for private investors and encour- age complementary investment from business. Innovation eco- systems emerge when public and private incentives move in the same direction. Ultimately, innovation is less about inventing new technol- ogies than about redesigning incentives. Countries rarely become in- novation leaders because they ask entrepreneurs to take great- er risks. They become innova- tion leaders because they cre- ate environments where taking those risks becomes economi- cally rational. They reduce the gap between private returns and public benefits. They en- sure that talent finds capital, that research finds markets and that ambitious ideas are not constrained by financial struc- tures designed for a different economy. Malta has now reached a stage in its development where this conversation can no longer remain peripheral. Innovation is not another policy objective sitting alongside productivity. It is productivity. 15 maltatoday | SUNDAY • 16 AUGUST 2026 OPINION Malta has now reached a stage in its development where this conversation can no longer remain peripheral. Innovation is not another policy objective sitting alongside productivity. It is productivity JP Fabri Incentives and innovation: The missing link Economist