Innovation Policy in Candidate Countries: the challenges*

INNOREGIO International ConferenceOn Dissemination of InnovationThessaloniki, 16 & 17 May 2002

*Studies funded by the European Commission, DG Enterprise, Innovation Policy Division

Presentation by Alasdair ReidADE S.A., Belgiumwww.ade.be / alasdair.reid@ade.be

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Why a study on innovation policy in candidate countries ?

EU ‘acquis’ on innovation Green Paper (1995), Action Plan (1996),

Communication (2000) “Innovation in a knowledge driven economy”;

but low visibility in negotiation procedure - no specific chapter, etc.

Objective : “examine and analyse the current framework conditions for selected innovation issues”.

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Priority issues of the study

Innovation policy framework Major actors. Policy developments. Data on innovation performance. Legal and administrative environment.Fostering human resources for innovation Teaching and training for innovation. Awareness and use of innovation management tools.Business innovation support measures Research-industry co-operation. Support for technology based start ups. Business networks.

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Two separate studies First study (May 2000 to July 2001) covered

: Cyprus, Czech Republic, Estonia, Hungary, Poland and Slovenia (CC6) Carried out by ADE in co-operation with School

of Slavonic and East European Studies (UK), MERIT (NL) and national experts;

Second study (October 2001 to December 2002) covering Bulgaria, Latvia, Lithuania, Malta, Romania, Slovakia and Turkey (CC7) Carried out by ADE in co-operation with SSEES

(UK), Logotech (Gr) and national experts.

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Six key questions:

How did the transition process influenced the potential for business innovation ?

Where do the candidate countries stand in terms of innovation performance ?

Is there a legal and institutional environment conducive to stimulating innovative activity?

Who is responsible for innovation policy matters? Is there an innovation policy in each country ? What types of initiatives have been taken in

specific areas of innovation policy

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How has the transition process influencedbusiness innovation: key conclusions

Economic growth cannot be sustained by the same factors (reorientation of markets, low-cost base for FDI serving EU markets, etc.) as during the nineties : new mechanisms for supporting innovation and industrial upgrading

will be needed if productivity growth is to be sustained. New firm creation is brisk and more often due to highly educated

people but has not created a group of smaller more innovative firms. Barriers to growth in part due to inadequacy of financial system

but more attention need to be paid to underlying incentives for entrepreneurs by CC6 governments

Restructuring of the enterprise sector has been led in majority of CC6 by FDI. Led to situation of dual economy... Attraction of (high-tech) FDI remains a key priority - but EU State Aid rules

will limit future support - need to switch attention to fostering spill-over and linkages (technology, know-how) to local economy.

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How has the transition process influencedbusiness innovation: macro-economic trends

Most countries benefited from high growth rates from about 1995 onwards Yet by 2000, the CC6

remain at the lower end of EU rankings in terms of income per capita.

Commission forecasts suggest growth 1-2% above EU for 2000-02 maintaining high rates

essential for EU cohesion will require “pro-growth” policies.

0

5000

10000

15000

20000

25000

GDP per capita (PPS, 1999)(Eurostat 2001)

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How has the transition process influencedbusiness innovation: productivity

Strong fluctuations in rates of productivity growth - driven by “defensive restructuring”;

Rate of growth has slowed suggesting that initial sources of growth and productivity are exhausted

Innovation and technological change must complement cost cutting and layoffs if growth is to be sustained.

Annual rate of change of manufacturing labour productivity (Source: EBRD, 2000)

-15

-10

-5

0

5

10

15

20

1994

1995

1996

1997

1998

1999

Cyprus Czech Rep. Estonia

Hungary Poland Slovenia

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How has the transition process influencedbusiness innovation: trade liberalisation

Trade/GDP figures indicate major differences amongst CC6: Estonia and Slovenia are most integrated in world economy;

Shift over time from export of labour intensive industrial products toward increased share of skill, capital and technology intensive products.

But largely driven by FDI.

0

5

10

15

20

25

Share of high-tech exports in manufactured goods (1999)

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How has the transition process influencedbusiness innovation: foreign direct investment

FDI/GDP rates comparable to to high income EU countries; FDI has brought capital but

also access to technology, business processes, etc.;

Result is a large difference in productivity & profitability between foreign & domestic owned firms in CC5 Trends suggest gap is

increasing and leading to dual economy.

0102030405060708090

100

Share of foreign investment entreprise in manufacturing, 1999

Sales Profits Employment

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Where the do the CC6 stand in terms of innovation performance

Bias of education systems to vocational training led to low creativity and flexibility plus skills-mismatch for “new economy”;

Low levels of public expenditure on R&D and low levels of commercialisation (knowledge diffusion);

Potential for catching up based on new technologies is severely restricted by weak demand for R&D by business sector;

Lower number of innovative small firms in CC6 - and weakness in (venture) capital markets is key barrier to growth.

No. Indicator Year Cyprus Czech Rep Estonia Hungary Poland Slovenia EUHuman resources1.1 S&E grads/20-29 pop 9.321.2. % ec.actv. pop w 3rd Educat 1999 22.60 11.30 40.80 15.60 14.80 15.90 23.251.3 Life-long learning 9.651.4 % emp. h-tech manuf 1999 1.85 10.63 5.71 8.49 7.54 10.18 6.291.5 % emp h-tech serv 3.27Knowledge creation2.1 Public exp. R&D / GDP 1999 0.18 0.47 0.48 0.37 0.44 0.64 0.622.2 BERD / GDP 1999 0.03 0.82 0.12 0.26 0.30 0.75 1.14

2.3 EPO h-tech pats /pop 19.142.3b USPTO h-tech pat/pop 1998 0 0 0 2.08 0 1.52 11.65Transmission and application of knowledge3.1 % SMEs innov in-hse 4.1 16.9 41.013.2 % SMEs innov co-op 15.423.3 % innov exp /total sales 4.1 3.9 3.41Innovation finance, output and markets4.1 % vent capital / GDP 1999 0.021 0.016 0.045 0.094.2 % new capital /GDP 1999 0.24 0.15 1.534.3 % new-to-mark prods 5.404.4 Home Internet access 33.404.5 % ICT markets / GDP 1999 8.49 6.42 4.9 4.31 5.864.6 % 93-97 h-tech share 9.50

Available Indicators 5 7 5 7 10 9Above EU average 0 2 1 2 2 3

Six Applicant Countries: innovation scoreboard 2001

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A legal environment conducive to innovation ?

International appraisals underline progress but little attention to innovation impact of legal reform process;

State aid policy : incompatible aids (for FDI) and low “incentive effect” of R&D schemes (e.g. Hungary);

Administrative simplification : gaining political priority - number of initiatives - new private entrants key to profitability and innovation;

Corporate taxation: only Hungary has tax benefit for business R&D - debate in several countries over merits;

IPR: compared to EU, still low priority - few identified schemes to support business in patenting, etc.

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Institutional framework for innovation policy

Majority of governments attribute innovation to economics ministry Hungary, Romania and Malta - Ministry of Education/Research;

Poland and Turkey - State Committees for Research however, no clear remit for co-ordination - implementation of

policy left to ‘line’ ministries. Innovation/technology agencies exist in only a minority

(Estonia, Turkey) re-organisation of agencies and intermediary structures ongoing: concern about effectiveness of delivery (low level of take-up of

industrial R&D support) and sustainability of BICs, etc. Advisory bodies play weak role and dominated by

“science”; But Growth of ‘innovation constituency’ during second half of nineties

- largely through external funding (IRC, BICs,...).

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Institutional framework: Estonia

Executive level

Implementing agencies

Types of support

Academy of Sciences

Ministry of Economic Affairs

Estonian Patents Board

Tiger’s Leap Foundation: new technologies to

schools & raising awareness.Patents ,

IPR issues

Ministry ofEducation

Science & Research Council

Technology AgencyESTAG

Project funding of R&D in firms &

research institutes

Technology & Innovation Division

Estonian Business Development Foundation

“Enterprise Estonia”

Programmes for raising awareness,

spin-offs and innovation

management

Technology and Innovation Council

Science Competence Council

Planning & managing policy

Grants for Science Projects

Other agencies: Investment, Export, etc

Financial support for innovation support structures:

• science & technology parks;

• centres of competence.

Estonian Science Foundation

Estonian Government

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Innovation policies in the candidate countries – fact or fiction?

Only 2-3 ‘innovation policy’ documents : Ambitious goals "national innovation system” (Turkey); Policy documents reflect EU goals (Baltic states).

Innovation as a policy issue best embedded in Hungary, Turkey and Baltic states (Estonia) But lengthy time lags to adopt policy framework; Significant gap between policy aims and funding

available – low to non-existent; Bulgaria, Czech Rep., Cyprus, Malta, Slovakia:

lack structured and coherent debate on innovation as a distinct policy objective.

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Hungary leads the field in terms of longevity and range of instruments –policy focus on FDI;

Estonia - strong emphasis on innovation and ambitious programmes foreseen; other Baltic states playing catch-up;

Poland and Slovenia were precursors but policy declarations not followed by implementation;

Czech and Slovak Republics - traditional focus on science and research - some recent effort to create linkages;

Romania & particularly Turkey have policy framework but suffer from lack of macro-economic stability;

Bulgaria lags behind with limited debate on high-tech parks; Cyprus & Malta - few ad hoc initiatives and little policy

awareness – issue of lack of own knowledge base.

Innovation policies in the candidate countries – fact or fiction? (II)

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Higher recognition of importance of innovation not matched by integrated policy framework;

Policy design driven by concepts and not analysis (lack of data and studies, weak policy fora, evaluation, etc.).

Gap between policy declarations and implementation (Euros, co-ordination across line ministries, etc.)

Low awareness of firm needs when designing schemes and innovation/technology infrastructure (reflected in limited use of R&D loan schemes).

Innovation policies in the candidate countries – fact or fiction? (III)

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Issues: Innovation Management Tools Use of IMT not yet widespread:

Only reliable indicator is ISO certification - Czech Rep, Hungary, Slovenia ahead - average growth in CC6 higher than in EU;

Strong statistical link between trade-openness and rate of penetration of international quality standards (used as proxy for IMT awareness).

IMT have not been the focus of significant policy initiatives: first funding programmes planned for 2002

(Estonia).

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Key conclusions (I) Growing recognition of importance of innovation;

end of transition and “recipes for change”; need to switch from defensive to offensive

restructuring; debate on role of R&D vs dissemination of innovation.

But, considerable problems remain with framework conditions which constrain innovation activities: limited access to finance & small capital markets; unfinished privatisation & restructuring; continued uncertainty of legal environment for

business; changes to state aid policy in line with EU ‘acquis’.

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Key conclusions (II)

Paradox of highly educated human resources vs skills mismatches high share of population with specialised vocational skills; limited practical experience for managing change (low IMT

awareness); low priority to training and policy incentives.

Uneven progress to an “information economy”different indicators place different countries in lead; infrastructure improvements not matched by “e-business

developments” (cost factors). CC5 economies have relatively high share of industry

(in terms of employment, etc.) compared to EU15 : greater emphasis on transferring knowledge needed if

industry is to remain competitive.

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Key conclusions (III) Limited pool of small innovative firms...;

Small and large domestic firms still struggling to sell and restructure rather than innovate;

High rates of new firm creation but problems in sustaining growth (investment)

Markedly higher productivity and profitability of foreign owned firms Linkages to and attraction of FDI remain a key

policy aim (but conflict with EU state aid rules;) FDI seen as a vector for technological and

organisational change.

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Challenge 1 : Promote a culture open to innovation and creativity

Options for the candidate countries Undertake a review of teaching of creativity and

innovation in education systems(2003); amend teaching practices and materials (2004-5);

Develop programmes to diffuse IMTs in enterprises; Identify exemplars of innovation in enterprises -

promote through innovation awards (annually) Foster business led forums on innovation and skills.Options for the Commission Promote a special innovation award for CC firms.

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Challenge 2 : Place innovation at the core of further legal and regulatory reforms

Options for the candidate countries Include impact on innovation as a criteria when drafting

new legislation & draw on EU best practice; Investigate importance of law governing IPR and

cost/administrative aspects of IPR protection; Appraise in line with EU state aid rules, the possibility of

introducing tax incentives for R&D and hiring personnel.Options for the Commission Ensure that CC have early access to initiatives aimed at

diffusing good practice on regulatory aspects of innovation.

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Challenge 3: Increase the number of (small) innovative firms

Options for the candidate countries Strengthen seed capital/start-up funds, linked to

viable intermediaries & research structures; Consider possibility for guarantee funds, etc. as

means of increasing incentive to undertake risky projects;

Develop funding measures for “knowledge carriers” or mentoring schemes in firms.

Options for the Commission Consider a specific initiative in favour of high-tech

start-ups in CC.

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Challenge 4 : Strengthen diffusion of knowledge in the economy

Options for the candidate countries Revise award criteria for pre-competitive research

funding to increase importance of industrial exploitation; Adapt performance criteria for industrial research

organisations to ensure pro-active approach to smaller firms;

Provide funding for collaborative projects involving groups of smaller firms with research infrastructures;

Options for the Commission Support preparatory actions to assist manufacturers in

the CC6 to prepare for 6th RTD Framework programme.

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Challenge 5 : Establish a policy-making process conducive to innovation policy

Options for the candidate countries Organise “CC-CIS” (2002-2003); Establish innovation policy units - design, co-ordinate

and evaluate initiatives for innovation; Support for business led forums on innovation issues; Undertake technology foresight (by 2004).Options for the Commission Part-funding/TA for a CC-CIS task-force; Pre-accession funding for pilot actions arising from

RIS/RITTS type initiatives.

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For further information & copies of study

Innovation Help-deskDG Enterprise, European Commission

Email: innovation@cec.eu.int

http://www.cordis.lu/innovation-smes/src/studies.htm