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In a tiny town in central Switzerland surrounded by velvety green mountains and punctuated with whiffs of cow dung, a 126-year-old factory churns out 60,000 Swiss Army knives and other pocket tools each day for a hungry global market.

All the folding blades at Victorinox AG are still made in Ibach, population 3,500. The company is run by the founding Elsener family, now in its fourth generation. Its brand has, over the years, become synonymous with Switzerland itself: quality, precision, reliability.

Yet Victorinox is anything but static. Back in 1891, its main product was a heavy, wood-handled knife built for the Swiss army. Now, its knives come equipped with laser pointers and USB drives with biometric sensors. The factory has been upgraded to the latest high-tech gadgetry (machines that look like fingers do the finicky job of assembling the knives), leaving workers free to develop new tools. Sales are roughly $200-million a year, 90 per cent of its products are exported, and it is expanding into new markets such as Brazil, Argentina and China. All this, and employees still get 1½-hour lunch breaks.

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Carl Elsener Jr., Victorinox's approachable chief executive officer, proudly proclaims that his company has never outsourced production or axed jobs due to recession - in fact, it has a history of boosting investment, not cutting it, during economic downturns. He credits its endurance to innovation, which is helping Victorinox face its biggest challenge yet: competition from cheap Asian counterfeits.

"Innovation is in our blood here in Switzerland - since the beginning, we've always tried to make things better," Mr. Elsener said in an interview at his company's headquarters. "Maybe it's because we were forced early to be global and to think about exports."

Innovation seems to seep from Swiss pores. The Alpine nation of 8 million people was named the world's most competitive economy in a recent ranking by the World Economic Forum, and regularly leads the world when it comes to innovation. The Swiss hold the most patents per capita in Europe - Albert Einstein once worked in the Bern patent office - and the country is a hub for global giants such as Swatch, UBS and Nestlé.

Canada, meanwhile, is still struggling to shed its hewer-of-wood image. The Conference Board of Canada slapped the country with yet another "D" in innovation this year, and it slid to 10th place in the WEC rankings. For Canada to thrive in a global, knowledge-based economy, it must focus on turning good ideas, of which we have plenty, into marketable products, which we're not so good at. Switzerland offers plenty of lessons on how to do it.

"It's about desire," said Roger Martin, dean of the Rotman School of Management. "European countries are more practised in how to compete in sophisticated ways. They can't chop down trees, dig out rocks, or fish. So they've been at it longer to upgrade their products."

It's tough to imagine it now, but in the late 1800s, as Victorinox founder Karl Elsener was training as a master cutler, Switzerland was one of the poorest nations in Europe. Its economy was largely based on agriculture, and robbers ruled the roads. It had no coal, steel or iron - no natural resources at all, in fact - and for a time, the industrial revolution bypassed the tiny mountain nation.

Out of necessity, much like Japan, it developed a knack for importing goods and putting them together in smarter ways, or copying other people's products and making them better.

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Over the years, said Oliver Gassmann, chair of innovation management at the University of St. Gallen, Switzerland developed a unique innovation policy.

"It's bottom-up, science-based and market-oriented," he said.

Education is key to the country's position as an innovation hub. Its school system produces world-class scientists who are focused on the pragmatic implementation of new ideas, Mr. Gassmann said. And Swiss universities and technical schools collaborate with multiple partners, including businesses, to bring ideas to market.

Government programs play their part: The Innovation Promotion Agency, for instance, has a $106-million fund to support "market-oriented" R&D projects, and encourage companies and universities to work together on products and services. While the agency helps support startups, it refrains from setting state priorities - unlike Canada, where government funding of R&D has been criticized for being too stringent in its guidelines.

Political stability and the nation's small size have also helped spur innovation, Mr. Gassmann said, and low taxes attract entrepreneurs from around the world.

"The bottom-up innovation policy could work in Canada too," he said.

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At Victorinox, Carl Elsener is a firm believer in kaizen - a Japanese term that means constant improvement.

It has helped the company survive countless crises. At the turn of the 20th century, for instance, when Germany flooded the market with knock-offs, Victorinox grew by developing new gadgets and eventually jumping into a new material, stainless steel, to produce knives that resist corrosion.

The biggest blow came after Sept. 11, 2001, when blades were banned from carry-on luggage, and duty-free shops - a key retailer - stopped selling them. Sales plunged 30 per cent overnight. They've since stabilized in part thanks to a "flight" version of the classic Swiss army knife - minus the knife. (Victorinox is negotiating with airport security officials to allow key-chain versions of its tool on board).

But the dozens of fakes that spokesman Urs Wyss keeps in a drawer may pose the gravest threat. Mr. Wyss, a 25-year veteran of Victorinox, said many of the knock-offs retail for a fraction of the price of the real thing. Most are too stiff to close or impossible to open. But it's only a matter of time before the rip-off artists get it right. "We have to expect, one day in the future, that Chinese quality will be similar to Swiss quality," he said.

Since nifty knives account for 40 per cent of Victorinox's sales (it also makes watches, luggage, even perfume), its R&D efforts are focused on protecting that business.

To help brainstorm new ideas, an "innovation circle" brings together workers from across the company. This is where the idea for a USB drive originated.

Management also encourages all 900 workers at the Ibach facilities to send proposals via e-mail. One security guard, who also works part-time at the local fire department, suggested Victorinox develop a tool to break glass after a car accident, enabling rescue workers to reach victims more quickly.

Thus was born the rescue tool, which includes a blade to cut seat belts.

Victorinox even gathers ideas from customers and distributors. Its golf tool was created by two elderly fans who worked for years to produce a plastic prototype of a gadget with a tee punch, a ball marker and a groove cleaner.

A nearby flight instrument company, Flytec, approached Victorinox with a suggestion for a gadget geared to mountain climbers. Flytec now supplies the knife maker with electronics for an altimeter, barometer, thermometer and clock.

The company has made mistakes - a tool for in-line skaters that came with a separate pouch for different-sized keys wasn't a success - but Victorinox continues to tinker and add new features to its products. Mr. Elsener's top goal is to boost the appeal of Swiss Army knives among women, who tend to buy them more for the men in their lives.

In the global scheme of things, Victorinox is a small company. But like other Swiss firms - from online scheduler Doodle to Thermoplan, which supplies coffee machines to Starbucks - it has found its niche. And that's reason to believe Switzerland's economy may keep on thriving.

"I strongly believe in the future of Switzerland because of globalization, because open economies can play advantages in innovation even better than protected economies," Mr. Gassman said. True, it costs more to make stuff there, but that "can be overcompensated by productivity - and even more innovative products and design."

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Top 10 reasons Switzerland is an innovation hub



Lack of patent laws until 1907 made it easier to copy goods - and improve on them.



Scant natural resources forced it to rely on knowledge-based industries.



Top-notch schools focus on pure research and commercialization of technology.



Clusters of companies and institutions in similar fields such as chemicals, watch-making, and banking help spur competition and new ideas.



Political and economic stability, with tame inflation and low unemployment.



Location at the heart of Europe, which makes it easy to test and adapt new products to different markets.



Government supports innovation, without dictating the direction projects must take.



Low marginal tax rate on average-income workers of just 20 per cent.



Advanced infrastructure makes transportation fast and easy.



Culture of valuing hard work, practicality and the notion that all ideas are worth discussing.

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A culture of invention



A history of Swiss invention and innovation



1783: hygrometer to measure humidity



1807: internal-combustion engine



1855: artificial silk, or rayon



1875: milk chocolate



1904: Ovaltine



1938: LSD



1948: Velcro



1967: first quartz wristwatch



1981: commercialized computer mouse

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