64505 1 ORGANIZER PROFILES The Ruder BoÅ¡kovic The Korea Development The World Bank Group Institute of Croatia Institute The initiative was jointly delivered by the World Bank Institute and the The Ruder BoÅ¡kovic Institute (RBI) is The Korea Development Institute Europe and Central Asia Private and the largest multidisciplinary research (KDI) is an autonomous policy-ori- Financial Sector Development De- center in Croatia with strengths in ented research organization founded partment (ECSPF). basic science and applied science in 1971. KDI was established by the research as well as higher education. Korean government as an economic The World Bank Institute (WBI) is The multidisciplinary character of the think tank to provide a rigorous a global connector of knowledge, Institute is manifested in different academic perspective on the various learning and innovation for poverty research fields in physics, chemistry, economic policy issues that had aris- reduction. It is part of the World oceanography (including marine en during rapid growth and devel- Bank Group. WBI connect practi- and environmental research and opment in the 1960s. Since then, the tioners, networks and institutions geosciences), biology, biomedicine, scope of KDI’s activities has grown, to help them find solutions to their computer science and electronics/ and it is now called upon to pro- development challenges. With a fo- engineering. The Ruder BoÅ¡kovic vide expert analysis and advice on cus on the ’how’ of reform, WBI link Institute seeks to achieve its objec- all aspects of long- and short-term knowledge from around the world tive of advancing knowledge in these government policies in areas ranging and scale up innovations. They work research fields by continually improv- from domestic economic policy to with and through global, regional ing and enhancing its facilities and international trade and investment. and country-based institutions and capabilities as well as by establishing practitioner networks and help them strategic partnerships and links with KDI strives to set new targets for develop customized programs that recognized organizations, scien- Korea to achieve greater prosper- respond to their needs. WBI con- tific and academic institutions and ity. With its eyes on the economic nects globally and delivers locally. industry. The activities of the RBI also horizon, KDI will focus on research result in various forms of intellectual activity that can provide vision and ECSPF contributes to private sector creations. One important mission of direction for greater prosperity. In development reforms in response to the RBI is the protection of intellectu- doing so, KDI aims to answer the challenges of: improving the invest- al property and its commercialization. need for growth models suited to the ment climate, privatization, and ever-changing domestic and interna- creation and growth of private firms. tional environments. ECSPF engagement in Europe and Central Asia (ECA) includes a variety of lending projects, and analytic and advisory services in over 20 coun- tries. ECSPF is supporting reforms in private sector development and financial sector development areas in the region of Europe and Central Asia, as well as playing a key role in new economy themes such as Knowl- edge Economy. 2 ACKNOWLEDGEMENTS The World Bank gratefully acknowl- edges the support and participation in the high-level Policy Workshop “Innovating Through the Crisis – How To Do It?â€? received from the Ruder BoÅ¡kovic Institute (RBI), the Korea Development Institute (KDI), and the European Commission (EC). The presenters, panellists, and chairpersons at the workshop all volunteered their time and energy to bring the lessons of their experi- ences to the workshop participants. We thank all the speakers and par- ticipants for their time, dedication, and assistance. Preparation of this report was a collaborative process. The following individuals took the lead in preparing the summaries of the individual workshop sessions: Arabela Aprahamian, Evgeny Evg- eniev, Gabriel Goddard, Kurt Larsen, and Michael Mowlam. The report was prepared by Natalia Agapitova, Program Officer from the World Bank Institute, Yvette Torres-Rahman, Founding Director of Inspiris, and Stephanie Shankland, Research Asso- ciate at Inspiris, under guidance from Paulo Correa, Lead Economist at the World Bank. We are also grateful to Jang Saeng Kim (from KDI), Evgeny Evgeniev and Shahid Yusuf (from the World Bank) for their insightful comments on an earlier draft of this report. Dr Danica Ramljak, Director of RBI, Dr MoonJoong Tcha, Managing Di- rector of the KDI Center for Interna- tional Development, Peter Harrold, Country Director for Central/South Europe and the Baltics, and Hongjoo Hahm, Country Manager for Croatia (both from the World Bank), pro- vided guidance and support for the preparation for, and execution of, the overall initiative. Dirk Reinermann, Head of the Europe and Central Asia Unit at the World Bank Liaison Office in Brussels provided guidance on collaboration with the European Commission. 3 CONTENTS Executive summary 7 1. Innovation in a European context after the crisis Overview 10 Challenges, Opportunities and Policy Responses 11 Graph 1: Impact of the crisis on the growth rate of innovative firms in ECA countries 12 Graph 2: Share of government expenditure on R&D as a percentage of GDP 14 Graph 3: Evolution of Tekes´ Public Funding for industrial R&D 15 Country case-study 1: Korea’s forward-thinking innovation policy 13 Country case-study 2: Finland’s counter-cyclical responses 15 Country case-study 3: Croatia’s political commitment to innovation 17 Table 1: The effects of Lisbon Agenda R&D target in 2025 16 Country case-study 4: Bulgaria’s national 2020 R&D strategy 18 2. Mainstreaming innovation policy Overview 20 Box 1: Successfully mainstreaming innovation policy checklist 21 Key take-away of lessons learned from the international experience 21 Country Case-study 5: Korea’s structural adjustment and innovation 22 Box 2: Education and innovation in Korea and Switzerland 23 Case-study 1: MARIBIC – Innovation driven at an industry-wide level 25 Map: Bulgaria’s major transport corridors accessing major markets 27 Case-study 2: New approach to promoting innovation and R&D in Bulgaria – JEREMIE Holding Fund 27 Box 3: Common themes in mainstreaming innovation policy 31 3. Increasing business investment in R&D – could FDI provide a solution? Overview 31 Innovation-intensive FDI can be growth promoting 33 Graph 4: Poland FDI trends 34 Attracting FDI in R&D in Eastern Europe 35 Box 4: Common factors in attracting FDI 35 Case-study 3: Yahoo! – what it looks for in FDI locations 36 Country case-study 6: Poland – Attracting R&D-intensive FDI 37 Maximizing Returns from FDI in R&D 37 Case-study 4: Hewlett Packard’s Best Shore business model 38 Country case-study 7: Romania – Renault’s creation of Regional Hubs 39 Concluding Summary 39 Box 5: Workshop Reflections 40 APPENDIX I: Checklist of Europe 2020 innovation targets 41 APPENDIX II: List of Workshop Participants 42 4 LIST OF ABBREVIATIONS AND ACRONYMS APJ Asia Pacific, and Japan BICRO Croatia’s funding agency for innovation CEE Central and Eastern Europe CEO Chief Executive Officer CIS Commonwealth of Independent States DGR Directorate-General for Research DM Deputy Minister EC European Commission ECA Europe and Central Asia ECSPF Private and Financial Sector Development, Europe and Central Asia EIF European Investment Fund EMEA Europe, the Middle East and Africa, ERA European Research Area EU European Union EUREKA Pan-European Research and Development Cooperation FCS Financial Crisis Survey FDI Foreign Direct Investment GDP Gross Domestic Product ICT Information and Communication Technologies IP Intellectual Property IPR Intellectual Property Rights IRCRO R&D Cooperation between research groups and SMEs IRR Internal Rate of Return ISCED International Standard Classification on Education ISCED 6 Second stage of tertiary education ITO Infrastructure Technology Outsourcing KDI Korea Development Institute KOSDAQ Korean Securities Dealers’ Automated Quotation MNC Multinational Corporations NBU New Bulgarian University NGO Non Government Organization NPV Net Present Value OECD Organization for Economic Co-operation and Development PCT Patent Cooperation Treaty POC Proof of Concept PPP Public Private Partnerships PPS€ Purchasing Power Standard Euros PRO Public Research Organizations PSD Private Sector Development Q&A Question and Answer R&D Research and Development RAZUM Seed capital for innovative firms RBI Ruder BoÅ¡kovic Institute RTD Research and Technology Development RTR Renault Technologie Romanie SEZ Special Economic Zones SME Small and Medium Enterprise STEPI Science and Technology Policy Institute STI Science Technology and Innovation TEHCRO Innovation & business infrastructure funding program TU Technical University VAT Value Added Tax VP Vice President WB The World Bank STP Technical Permanent Secretariat VC Venture Capital WBI The World Bank Institute 5 EXECUTIVE As private companies feel the effects of an economic downturn, in the effective in creating growth will look at national reforms in order to create form, for example, of a reduction in favorable long-term conditions in SUMMARY sales income, net revenues and core capital, they reallocate internal funds line with this framework. to finance their working capital, However, having these factors in On June 9-11, 2011, the Ruder leading in some cases to a reduction place does not by itself create BoÅ¡kovic Institute of Croatia, the in private R&D expenditure. At the innovation-led growth: the responses Korea Development Institute and the same time, fiscal constraints for many must be tailored to the country World Bank organized a high-level countries have meant that context. Countries differ in the way policy workshop in Dubrovnik, governments have been unable to they promote innovation. In many Croatia, which was the culminating release public funds to support R&D ways national innovation strategies event of a joint capacity and innovation during a downturn. are path-dependent and reflect the development initiative “Innovating traditional thinking and historical through the Crisis – How to Do It?â€?, relationships between key actors, conducted between February and representing business, universities May 2011, covering Bulgaria, Counter-cyclical innova- and research institutes. They are also reflections of the country’s natural Croatia, Poland and Romania. The tion policy is becoming a environments, cultural inheritance, initiative comprised a series of common practice among activities (position papers, country economic developments and geo- case studies and a policy workshop) the OECD countries graphical locations. targeting key actors in resource allocation for innovation policy within Advanced economies, however, have In the context of fiscal constraints, broader development agendas. The adopted counter-cyclical innovation governments face key common workshop’s objective was to help the policies to create a basis for new challenges in adjusting the group of four economies mainstream growth. Innovation activities – innovation policy agenda namely innovation and R&D policies into defined broadly as conceiving, competing development priorities, their development agendas designing and implementing drops in private financing of R&D including in the context of aligning changes in the available set of and innovation and declining foreign with the requirements of the Europe products, services and processes, investments, among others. At the 2020 Strategy. The event was (i.e. production, organizational and same time, as exemplified by the attended by policymakers and marketing processes) may have a experience of Korea and Finland, private sector leaders from all positive contribution to export, the effects of the crisis can present participating countries. Moreover, competitiveness and economic a number of opportunities which, if delegations of high representatives growth. 1For example R&D, capitalized upon, can act as a and key experts from the Korea especially when financed and springboard for post-crisis Development Institute, the European conducted by private firms or with innovation-led growth. These Commission and the World Bank their participation, encourages challenges and opportunities, along took part in the workshop. scientific advancement which has with current policy responses, are Speakers included high level officials commercial or social value. discussed in Chapter 1: from the European Commission as Innovation after the Crisis: How well as public officials from Finland, Framework conditions that need to Central European Countries Ireland, Korea, and Switzerland and be in place to foster innovation in- Compare with International Best top management of multinational clude public and private investment Practice. Two main questions that corporations, like Hewlett Packard, in R&D, simplified and skilled labor _________________________________ Yahoo!, Renault Technologie and markets, a favorable taxation rate, 1 This definition of innovation includes, but others. This report outlines the main along with an efficient public is not limited to R&D activities. Innovation findings of the workshop. administration system and tax means new to the firm, new to the market, or regime. Innovation policy that is new to the world. 6 arise for innovation policy in an • An enabling business context, EU-wide innovation and economic crisis are: how can the environment and technological funding policy can spur beneficial private sector be incentivized to infrastructure. macro-regional collaboration, which invest in innovation even during a requires cross-country cooperation to downturn? What methods are there match regional to national targets. to leverage these investments to areas most conducive to growth? R&D-intensive FDI can en- courage local innovations, Some take-aways for the if conditions for capturing participant countries In the context of fiscal spillovers are in place constraint, it is important Workshop participants, in discussion with experts and policymakers from to continue the reform in The role of FDI in increasing invest- the four ECA countries, identified ments in innovation is discussed order to increase the in Chapter 3: Increasing Business ways to prioritize innovation policy. efficiency of public They brought together promising so- Investment in R&D – Could FDI lutions to country challenges based expenditure Provide a Solution? Attracting on international lessons of experi- R&D-intensive FDI is seen as one of ence and good practice including: The answer is essentially found the solutions to increase business in the improvement of returns on investment in innovation. However, • Counter-cyclical innovation policy public investment in innovation and to successfully capture the full spec- allows the country to turn crisis R&D through (i) mainstreaming and trum of benefits from foreign R&D, into opportunity for new growth improved coordination of innovation government policies should aim at – several examples illustrated how policies across sectors and public undertaking measures that improve OECD countries tackle the structural agencies, which reduces duplication the host country’s characteristics foundations of the crisis. Countries and inefficiency in public spending; determining its absorptive capac- (ii) increased relevance and ity and, sustaining business climate commercialization of public research; friendly to investors, domestic and and (iii) the establishment of cross- foreign alike. cutting policies that are long-term in nature and which ensure the market environment is conducive to innovation. Incentivizing long- Promising lessons of in- term investments in innovation, for ternational experience instance, can tap the potential of includes examples from innovation as a new growth source. Finland, Ireland, Korea, Governments, however, face a and Switzerland number of common challenges when formulating and implement- In the age of ICT and globaliza- ing long-term innovation strategies, tion, political will should focus on which are discussed in Chapter 2: knowledge sharing and collabora- Mainstreaming Innovation Policies. tive approaches. Knowledge can be It is found that framework conditions traded, just as we trade in commodi- and culture often do not support the ties and goods. As a result, “Stories development of innovation and an of failure and success must be shared entrepreneurial environment with many countries,â€? as one way of (including lack of support through improving cross-cutting productiv- intellectual property (IP) law; gov- ity (Dr MoonJoong Tcha, Managing ernance and monitoring indicators; Director, Center for International competitiveness needs and labor Development, Korea Development markets). In addition, skills needed Institute). by innovative firms are in shortage, domestic private sector investments This workshop and the key take- in innovation need to be encouraged aways from it share knowledge from and there is limited innovation and previous success stories of Finland, research infrastructure in place. Korea, and Switzerland and of cur- rent or planned policy responses For successful mainstreaming of from Bulgaria, Croatia, Poland and innovation policy, political commit- Romania. The stories from the coun- ment centered on three main pillars tries discussed demonstrate how is required: collaborative approaches between the private and public sectors bring • Continuous support to technical employment gains and increases in skills, entrepreneurship and R&D standards of living. The stories show talent ; the importance of the cross-fertiliza- tion of ideas, technology and policy • Adequate and sustained funding initiatives, as emphasized by Mr Hon- sources for innovation policy; gjoo Hahm, Country Manager Croa- tia, the World Bank. In the European 7 emerging from the current crisis have and acquisition of technology. Mean- • Encouraging R&D-intensive FDI – the “followerâ€? advantage and can while technology transfer in Croatia Bulgaria, Poland and Romania have successfully learn from the experi- is seen as a key gap to fill, whereas developed attractive incentives to ences of Korea and Finland which the Irish experience provided an encourage foreign investment in in- emerged from the 1990 crisis with example of how a country could novation. But these countries could more productive and competitive take advantage of EU membership only capture full benefits from these economies. to facilitate technology transfer and investments if they support absorp- access new markets. tive capacity of local firms, continu- • Establishing monitoring frame- ously invest in high quality human works for innovation policy – It • Encouraging public and private capital, and maintain attractive was suggested, while discussing the sector collaboration – the MARIBIC framework conditions for innovation. case of Poland, for example, that the Center in Croatia is a strong example development of a unified framework of successful collaboration between Strengthening of existing financial of key performance indicators across public and private sectors to fill a support programs and regulation Europe, would help provide a clearer market gap whilst playing to the (particularly in the form of strong definition of innovation for countries country’s competitive advantages; Intellectual Property (IP) laws). A which have not already established strong factor in Finland’s success, for monitoring indicators as part of their • Introducing venture capital fund- example, has been simplified patent- national innovation strategies. ing – Korea introduced targeted ing acquisition and strong regula- Venture Capital (VC) funding oppor- tion, and Poland’s restructuring of its • Introducing incentives for tech- tunities for small and medium enter- patenting system was highlighted nology transfer and commercializa- prises (SMEs), which were undertak- during the discussions as an essential tion of research outputs – for ex- ing the bulk of innovative activities. factor in its ongoing transition to an ample Korea’s successful innovation innovation economy. policy was centered on the transfer 8 1 INNOVATION IN A EUROPEAN CONTEXT AFTER THE CRISIS Overview The recent financial crisis unveiled But what is the rationale for in- Key policy areas included: several weaknesses of a growth pat- creasing focus on long-term cross- tern based on increasing consump- cutting innovation policies in a • Enhancing the efficiency of tion, public expenditures, and de- post-crisis economy? In its simplest public expenditure on innovation pendency on large inflow of capital. terms, countries can leverage long- and R&D The crisis has led to sharp declines term cross-cutting innovation policy • Fostering market relevance and in GDP growth and export volumes as a means of kick-starting growth commercialization of public R&D; for many European countries. This and consequent economic recovery. • Building a basis for new growth has presented a significant obstacle As Mr Mikko Alkio, Adviser to the through supporting new start- for emerging economies hoping Prime Minister (former State Secre- ups; to foster export-led growth and for tary, Ministry of Employment and • Facilitating wide-ranging policy countries looking to maximize the Economy) put it “Innovation Policy in reform; benefits of recent accession to the an economic downturn can act as a • Exposing local markets to inter- European Union (EU). At the same spring-board for new growthâ€?. national competition and col- time, the crisis offers a number of laboration. opportunities for innovation policy Case-studies from Korea and Finland adjustments to catalyze post-crisis demonstrate how they seized op- growth. portunities presented by the 1990s’ crisis to transform their economies Many developed nations have in- and to foster new growth through cluded R&D and innovation incen- innovation. tives in their stimulus packages. In fact, three-quarters of OECD coun- tries look to foster innovation after the crisis (Correa, P.).The European “Innovation Policy in an economic Commission (EC), for its part, aims to mainstream innovation policy by downturn can act as a including it as part of a country’s na- tional recovery strategies through its spring-board for new growthâ€? Europe 2020 plan for green growth and jobs (Silvia Viceconte, Policy Mikko Alkio, Adviser to the Prime Minister Coordinator, Strategic Objective Prosperity, European Commission). ,former State Secretary, Ministry of Employment and Economy. 9 However, in the context of fis- of developing an innovation econ- cal constraints resulting from omy. As a result, countries promote the recent global financial crisis, innovation through different meth- countries face a number of specific ods. In many ways national innova- challenges in adjusting the inno- tion strategies are the reflections of vation policy agenda. Workshop the countries´ natural environments, participants set the scene by discuss- cultural inheritance, economic devel- ing these challenges encountered in opments and geographical location. catalyzing growth through innova- The policy focus for Bulgaria and Po- tion, including: land, for example, which have come out of the crisis with low sovereign • Private firms reduce their R&D public debt, will be based on dif- expenditures and increasingly ferent priorities to countries such as rely on internal funds to finance Romania, which has been struggling Workshop participants set the scene their working capital and swift with severe fiscal deficits. While the by discussing the key common payments gain importance; country situations vary, a common challenges and opportunities they • Riskier and longer-term R&D area of agreement amongst work- encounter in catalyzing growth projects are delayed or can- shop participants was that all view through innovation during and after celled; innovation as a means of producing an economic downturn. These are • Public-private partnerships suffer. growth. discussed along with current, past and possible policy responses, below. “More bang for the buck will be Challenge: private expen- necessaryâ€? Paulo Correa, Lead diture on innovation falls Economist, ECSPF, World Bank The primary characteristics of a severe economic downturn are a reduction in GDP growth rates and declining exports. For private com- In that context, the quality and effi- panies, this translates into a reduc- ciency of public spending, and return tion in sales, incomes and core capi- on investment in R&D and innovation Challenges, tal. The World Bank’s Financial Crisis become of paramount importance. In the brainstorming sessions, Opportunities and Survey (FCS) of 2,819 firms across six countries in the ECA region to workshop participants discussed a broad range of key common op- Policy Responses capture the impact of the crisis, shows that sales declined steeply portunities for innovation policy in The national stimulus packages at the onset of the crisis; across the European countries in a post-crisis of many nations include R&D and six countries, net sales decreased economy. Country case-studies from innovation incentives. The rationale between 15 per cent (Hungary) and Bulgaria, Croatia and Poland show behind including these incentives 40 per cent (Latvia; Lithuania) during how these countries are stimulating is that innovation fosters growth. June 2008-June 2009. As a result, post-crisis growth though innovation Reaching the Lisbon R&D target companies often have to reallocate policy adjustments in response to (3 per cent of GDP) is expected to internal funds to finance their work- the current crisis. Additional oppor- raise GDP up to 13 per cent and ing capital (Paulo, C.) as companies tunities for European countries in the exports up to 16 per cent 2 (Soete, start to feel these effects, private context of the current crisis include: L.). Investment in R&D generates expenditure on innovation dives. A results: R&D increases commercial survey conducted during the 1990s’ • increased awareness of com- potential through inculcating higher crisis, for example, showed that petitiveness and innovation as level skills and generating scientific Korean businesses in 1998 planned drivers of growth – the ability papers, patents and findings. R&D to reduce R&D investments and to draw on lessons learned and also leads to technology absorption personnel by 20 per cent during the the possibility of building broad and builds technological capabilities. year (Chung, S.). Consequently, the consensus for reforms; (Mr Shahid Yusuf, Chief Economist, first common challenge governments • the availability of EU funding - The Growth Dialogue, George Wash- face is stabilizing or compensating leverage and EU commitment ington University). Government in- for reduced private funding in the to increase R&D and innovation tervention is called upon when the short-medium term. In the Korean expenditures; country fails in providing adequate case, as the country relied on the pri- • and a paradigm shift of the support to any of the three key vate sector for 80 per cent of invest- knowledge base from West to factors – pressure for innovation, ments in R&D, the expected 20 per East innovation capability and environ- cent reduction would have resulted ments conducive to innovation in a virtual collapse of the R&D and The specific mix of challenges and (Dr Sungchul Chung, Senior Fellow, innovation system (Chung, S.). opportunities relies heavily on the Emeritus, and Former President of country context. Fiscal constraints Science and Technology Policy of in some ECA countries resulted in Korea (STEPI). governments´ inability to leverage public funds for innovation and some countries are far advanced in terms 10 In the context of the ECA region, the to the onset of the crisis, innovative Opportunity: Govern- current crisis has affected innovative firms´ sales growth was faster than firms more than non-innovative firms, that of non-innovative firms and ments are aware that and nearly 28 per cent of innovative there was a positive premium on the innovative firms are companies in 2009 and 25 per cent ability to innovate. The sales growth in the first quarter of 2010 reduced rate for innovative firms reduced by essential to post-crisis their R&D expenditure 3(Correa, P). an estimated 9.32 percentage points growth While the current downturn has hit between June 2008 and June 2009.4 private manufacturing, retail and From the onset of the crisis to June Countries emerging from the cur- service sector companies hard in 2010, there was also a clear declin- rent crisis have the advantage that ECA countries, it has affected the ing trend in the innovation premium they are aware of the importance position of innovating firms greater (bringing it to negative).5 of innovation for growth after the than non-innovating ones, according crisis. Korea´s growth following the to data from the FCS survey. Prior economic crisis of the 1990s, for Graph 1: Impact of the crisis on the growth rate of innovative firms in ECA countries June08 - June09 Jan09 - Jan10 June09 - June10 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 Hausman Taylor Estimator Hausman Taylor with propensity score matching “Innovation is the key driver in increasing productivityâ€? Mikko Alkio, Adviser to the Prime Minister, former State Secretary, Ministry of Employment and Economy. example, has been shown (see case- success stories that came out of the ments of each country’s private economy, such study below) to be largely attribut- crisis in the 1990s and in response, as sales, employment, finances and R&D. 4 Correa, P., Lootty, M., Ramalho, R., Rodrí- able to innovating SMEs in the ICT try to encourage private investment guez-Meza, J. and Yang, J., 2010. How Firms sector (Chung, S.)6. Similarly, Finland in innovation. in Eastern and Central Europe Fared through emerged as one of the most produc- _________________________________ the Global Financial Crisis: Evidence from tive countries in the world, in part by 2008–2010. Enterprise Note Series, No.20. 2 Soete, L., (2010) Towards a Sustainable developing a cross-cutting system 5 However, the impact of the crisis on innova- of innovation with efficient public Knowledge-based Economy in Europe: from tive firms has not been enough to erode the the Costs of “Non-Europeâ€? to the Costs of institutions and competitive private positive difference in sales between innovative Europe, Intereconomics, vol. 45, nr. 3, pp. sectors (Chung, S.) . Mr Alkio empha- and non-innovative firms (which is still positive 160-166. sized that there are only two paths to 3 The World Bank conducted the third round in favor of innovative companies) presented creating growth: through capital and before the crisis (Correa, P). of its Enterprise Financial Crisis Survey in Bul- 6 Chung, S., Senior Fellow, Emeritus, and productivity, “and innovation is the garia, Hungary, Latvia, Lithuania, Romania and Former President of Science and Technology key driver in increasing productivityâ€?. Turkey in June 2010, covering firms in both Policy of Korea (STEPI). Chair´s summary of the manufacturin g and service Workshop Day 2 Session: Counter-Cyclical Governments are in a position to sectors. The survey’s objective is to assess the Innovation Policies – Common Agenda for draw on lessons learned from effects of the global financial crisis on key ele- Action. 11 Country case-study 1: Korea’s forward-thinking innovation policy The Korean economy has been transformed from a producer and exporter of low-/mid- tech commodities to a high-tech, ICT-orient- ed industrial power. Korea has established world prominence in technology areas such as semi-conductors, electronics, mobile handsets, displays, automobiles, steel, and shipbuilding, among many others. In the Korean case, public support for R&D is a clear feature of the success story. The strength of innovation strategy lay in it being part of the country’s overall recovery plan and economic structural adjustment. This ensured innovation policy cut across eco- nomic policy and was framed in a long-term perspective. When the downturn first hit in the 1990s, public support included: • The government initiated massive R&D investments and launched specialized diverse policy programs to promote the ICT industry as a new source growth in response to the declining growth potential of na- tional innovation. It established the ICT Promotion Fund which mobilized 1-1.5 billion dollars every year for investment in ICT R&D and innovation. • Strengthened governance through the creation of the Ministry of Information and Communication. • The provision of necessary innovation infrastructure through the launch of a ten-year Information Infra- structure Initiative to lay a foundation for ICT industry. • Various incentive programs, including tax deduction programs, R&D subsidies, loan programs, informa- tion services, technical and legal consulting services, among others, have been offered to promote R&D and innovation in the private sectors. • A regulatory framework to meet the requirements of the new trade regime. The new trade regime also provided an enabling environment for innovation through measures including the liberalization of trade and investments, strengthening of IPR protection, and realignment of the subsidy programs for industries. This was a relatively forward-thinking policy at the time for the region and Korea benefitted from significant first mover advantage. Perhaps this presents a lesson for new policies in that while they should provide cer- tain common conditions for innovation through long-term policy in order to capitalize the potential of innova- tion, policies should also think about how they can be pioneering. The 1997 East Asian Financial Crisis hit the science and technology sectors hard in Korea. The government responded to this in two ways: first the government increased the R&D budget in order to make up for the expected decline in R&D activities in the private sectors: most of the increased fund was used for SMEs and ICT sectors; and second the government took a broad range of reforms in both public and private sectors to enhance the efficiency of the economy. These reforms brought about big changes in many sectors of the economy, such as in business structures, business practices and through increased transparency in public sectors, to name a few. What is most notable, though, was the level of increased entrepreneurship among young people in Korea. New technology-based start-ups mushroomed around the end of the 1990s, which helped lead to a quick financial recovery. The number of new start-ups increased from about 2000 in 1998 to over 11,000 in 2001. This phenomenon was led by young people in the ICT sectors taking advantage of the new regulatory framework and support for SME creation. 12 Drawing on lessons tions for new growth. Bulgaria, Po- intra sectorial allocated efficiencies. land and Croatia, which are emerg- However, in focusing on total factor learned, governments ing well from the current crisis, are all productivity, countries can often fail compensate for reduced also providing fiscal stimulus for the to maximize the returns from R&D sector. investment (Yusuf, S.). private R&D investment In ECA countries (and middle income Fiscal constraints in many Central Governments (if they can) compen- countries in general) innovation is European countries did not allow for sate for reduced private R&D invest- often used as a means of increas- the adoption of fiscal stimulus pack- ments by providing fiscal stimulus for ing factor productivity, which is an ages. For example, Latvia, Lithuania the sector. During the 1990s’ crisis, important growth source for these and Romania need to undergo fiscal with the prospect of the collapse of countries (Correa, P., Yusuf, S.). Mid- adjustments of at least 7 per cent of the innovation system in Korea, the dle income countries with low rates government supported the sector of investment become increasingly GDP (primary balance). As a result, with an increased R&D budget to reliant on total factor productivity, these countries imposed dramatic make up for the expected decline which is a function of technological expenditure cuts. In Romania, for (Chung, S.). This ensured the survival catch-up and innovation (for which example, the share of public expen- of the sector and laid the founda- R&D is the driver) and of inter and diture of R&D in total R&D declined Graph 2: Share of government expenditure on R&D as a percentage of GDP 3.73 3.75 3.61 3.48 3.5 3.0 2.76 2.65 2.5 2.0 1.66 1.51 1.45 1.5 1.271.35 1.21 0.97 1.0 1.0 0.810 .8 0.81 0.9 0.59 0.61 0.57 0.61 0.52 0.58 0.48 0.49 0.5 0.0 Bulgaria Spain Latvia Poland Portugal Finland Sweden Croatia United States Lithuania Hungary Romania Slovenia 2007 2008 Source: Paulo Correa, Lead Economist, Europe and Central Asia Region, Finance and Private Sector Development, the World Bank. from 1.28 per cent in 2007 to 0.78 countries use both methods, such as institutes suffers. This results in a per cent in 2010, suggesting that France and Norway, but the question lower level of technology transfer R&D was relatively more affected by of how to tap the growth potential of and commercialization of research fiscal consolidation (Correa, P.). innovation in the long-term, needs outputs, as well as an imbalance to be explored, especially in the con- between basic and applied research. text of tailored funding options. This The headline challenges for Croatia, Challenge: short to me- is because successful government for example, when it developed its incentives focus on areas which are National Science and Technology dium solutions alone do immediately affected by a reduction Plan, was commercialization of re- not compensate for areas in private investments in innovation, search outputs from public research namely: organizations and a lack of collabora- in which investments fall tion between private companies and There is less private funding for academia (Dalibor Marijanovic, CEO, Governments often fail to provide riskier and long-term projects which Croatian Funding Agency for Innova- adequate short- to medium-term are often also the most innova- tion (BICRO)). support for the areas in which invest- tive and potentially higher yielding ment has declined. Many responses investment areas. An economic It is also worth remembering that to reduced private sector invest- downturn increases risk averseness in corporate spending on science and ments in innovation include the companies resulting in these types of innovation are reduced in times of short- to medium-term responses of projects being cancelled or delayed. economic crisis. For example, the increasing R&D tax credits or provid- Collaboration between the private cost of R&D of enterprises in ing additional grants. Indeed, some sector and universities/research Bulgaria in 2009 increased by 6.98% 13 compared with 2008. For 2010 more strategic approach to innova- ICT industry (Chung, S.) compared to 2009 their cost of R&D tion, which has led to the Innovation increased by 94.68% Union Initiative (one of seven flag- Longer-term R&D and innovation ship initiatives of the Europe 2020 investments play an essential role Strategy for jobs and growth) setting in turning the crisis into an oppor- Opportunity: Long-term out such an approach. 7 The Korean tunity for “creative destructionâ€? and government in the 1990s, for exam- in building a basis for new growth. innovation policy can tap ple, launched diverse policy pro- Mr Alkio also emphasized that the growth potential of grams to promote the ICT industry long-term counter-cyclical innova- as a new growth source including the tion policies and funding create the R&D and innovation creation of the Ministry of Informa- foundations for growth. The Tekes´ tion and Communications, the ICT Foundation increased public support Cross-cutting long-term innovation Promotion Fund mobilizing US$1- during periods of downturn help- policy is needed. An EU commu- 1.5 billion every year for investment ing to spur growth: (see graph 3). niqué acknowledges that perhaps in ICT R&D and innovation, and a Funding from the foundation peaked the biggest challenge for the EU ten-year Information Infrastructure during Finland’s financial crisis of the and its Member States is to adopt a Initiative to lay a foundation for the 1990s, when exports had declined by an average of 20 per cent Graph 3: Evolution of Tekes´ Public Funding for industrial R&D from 1991 to 1994 and GDP fell 13 per cent. The same was the case when the recession intensi- fied in 1997. When the recent 600 crisis started to take effect in 550 2007, more public funds were 500 again made available to com- 450 pensate for scarcity of private 400 financing at firm level. 350 ________________________________ 300 250 7 Europe 2020 Flagship Initiative, 200 Innovation Union, SEC (2010) 1161, 150 Communication from the Commission to 100 the European Parliament, The Council, The European Economic and Social 50 Committee and the Committee of the 0 Regions. (COM(2010) 546 final) Brussels, 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 6.10.2010. Country case-study 2: Finland’s counter-cyclical responses Finland suffered from a significant economic downturn in the crisis of the 1990s but emerged as one of the most productive economies in the world. The country’s successful counter-cyclical policy response to the crisis hinged upon the notion of how wealth is created: innovation is a key component of intangible value and productivity, which are essential to wealth creation and growth. Based on this notion of wealth creation, innovation was seen by the government as essential to growth. As a result, it responded to the crisis by introducing cross-cutting policy reforms to create a wider   sion of public procurement, venture funding and internationalization enabling environment for innovation. The government’s strategy involved creating an efficient innovation system; including the provi- services. The central piece of which was a well-developed IP system. A strong and streamlined IP system allowed the number of patents from the mobile phone industry – in which innovation-led growth for the country was concentrated – to boom. The government, however, faced a number of key challenges in adjusting the innovation policy agenda: re- duced private R&D spending; long-term and riskier projects were delayed or cancelled; collaboration with universities decreased; and the private venture market for innovation was frozen. The government responded by introducing funding which encouraged long-term projects and projects in collaboration with universities and research institutes through the setting up of the Finnish Funding Agency for Technology and Innovation. Mikko Alkio, Adviser to the Prime Minister (former State Secretary, Ministry of Employment and Economy). 14 Policy response: the target increase in R&D is that it gives doing so, they can leverage EU impact on the ground (Viceconte, S.). strategies to promote innovation. European Commission Reaching this target by 2020 could Switzerland has a high-employment is putting innovation at create 3.7 million jobs and increase economy and has made critical annual GDP by close to €800 billion contributions to innovation in Europe the heart of its long-term by 2025. 10 in the areas of its specialty; it already strategy for jobs and spends 3 per cent of its GDP on R&D. Poland is close to the target growth with 2.7 per cent of GDP spent on Table 1. The effects of Lis- R&D, and the new national target for The European Commission views the bon Agenda R&D target R&D spending in Bulgaria is to triple in term of its percentage of GDP by EU’s competitiveness, its ability to in 2025: Simulations on 2020 (from 0.5 per cent baseline).11 create jobs to compensate for those lost in the crisis, as well as Europe’s the World Scan Model future standard of living, as being Access to EU funds offers a fur- GDP Exports ther opportunity for collaboration. dependent on innovation in prod- ucts, services, processes and busi- Macro-regional cooperation is an ness models. It also sees innovation Croatia 6.0 12.9 opportunity, but can sometimes be as the best bet for meeting climate Poland 5.5 8.5 in conflict with the national tar- change, energy and resource scarcity gets. Cross-country collaboration is Romania 11.7 13.5 needed to minimize this conflict and challenges.8 Unlike the previous Hungary 6.4 8.0 Lisbon plan 2000-2010, which it the EU funding system can play a replaces, it is tied to the Growth and Slovakia 8.9 10.4 central role in this; collaboration is a Stability Growth Pact, allowing bet- Slovenia 6.9 10.5 requirement for qualifying for certain ter monitoring and evaluation and EU funds, for example. Charlina Bulgaria 13.1 8.3 Vitcheva, Deputy Director, DG Regio, giving the EU the mandate to pres- sure governments that lag behind Correa, P. Lead Economist, Europe and EC, said on this subject in one of the in meeting 2020 targets. Specific Central Asia Region, Finance and Private discussion sessions that “smart spe- innovation targets for governments Sector Development, The World Bank. cialization strategies (are) to be as- are listed in Appendix I: Checklist of Presentation: “Innovation and R&D dur- sessed by peers. The process needs Europe 2020 innovation targets. ing the crisis: Evidence from firm-level to be steered into collaboration.â€? data for selected ECA Countriesâ€? Europe 2020 presents a pivotal Bulgaria, Croatia and Poland have shift in policy thinking towards strong potential for leveraging ´smart´ sustainable growth based innovation for growth. Bulgaria is Sustainable Growth – This is based emerging rapidly from the financial on knowledge and innovation and on promoting a more efficient, away from the unsustainable growth crisis. In the third quarter of 2010, greener and competitive economy Bulgarian exports totaled approxi- experienced in the boom periods through enabling “20/20/20â€? cli- (Viceconte, S.). It aims to address mately €4.3 billion, up 6 per cent mate/energy targets to be met (i.e. on the pre-crisis highs reached at key main challenges of the European 20 per cent lower emissions and 20 innovation system: under-investment the end of 2008 and up 44 per cent per cent of energy to be produced from the third quarter of 2009. GDP in knowledge generation and diffu- from renewable energy sources by sion; insufficiently innovation-friendly growth has returned to positive 2020). figures, reaching 3.7% per cent at framework conditions; fragmentation and duplication of effort; low involve- the end of 2010, up from the lows of Inclusive Growth – Through foster- -8.9% per cent at the end of the year ment of users and insufficient align- ing a high-employment economy ment of public actions.9 It is built before (Evgeny Angelov, Ministry delivering social and territorial cohe- of Economy, Energy and Tourism). around a number of key interlinked sion. The headline targets for this priorities: which are to be achieved Similarly, Poland’s GDP growth rate are: a 75 per cent employment rate outpaces that of the European aver- through fiscal consolidation; tackling for 20-64-year-olds by 2020 and 40 macroeconomic imbalances and age: in 2009, its GDP growth rate per cent of 30-34-year-olds to have was 1.7 per cent, compared with an structural reforms “transforming completed tertiary education. One economies to create new growth and EU average of -4.2 per cent. key failing of the Lisbon strategy jobsâ€? (Silvia Viceconte, Policy coordi- was that it did not include education nator, Strategic Objective Prosperity, targets. European Commission). ______________________________ Smart Growth – The headline target Countries that are emerging in 8 Europe 2020 Flagship Initiative, Innovation which is for 3 per cent of EU GDP good positions from the crisis, Union, SEC (2010) 1161, op. cit. to be invested in R&D by 2020. share policy commonalities with 9 Europe 2020 Flagship Initiative, Innovation The technical rationale behind the The Europe 2020 Strategy. In Union, SEC(2010) 1161, op. cited. 10 Zagamé, P., 2010. The Cost of a non-in- novative Europe cited in EU communiqué) 11 (from discussion session flipchart). “Smart specialization strategies (are) to be assessed by peers. The process needs to be steered into collaboration.â€? Charlina Vitcheva, Deputy Director, DG Regio, EC 15 Country case-study 3: Croatia’s political commitment to innovation The World Economic Forum (2010) classifies Bulgaria and Romania as economies in the stage of efficiency-driven growth and Croatia and Poland in a transition stage from efficiency- to innovation- driven economic growth. In terms of global competitiveness, Croatia ranked behind the other three countries, at 77th, by the World Economic Forum in its 2011 Global Competitive Rankings. Croatia faces key challenges in the transition to an innovation-driven economy, primarily centered on issues of commercialization. These key challenges include: low commercialization of research results generated by public research organizations (PROs); poor collaboration between PROs and compa- nies; low level of private investments in R&D and poor governance of national innovation policies. As the crisis hit, the country’s original policy response was to address public budget constraints. Public budget cuts, however, were coupled with reducing funding needs through the introduction of impact assessment strategies and an emphasis on targeted support and incentives for SMEs. Following a World Bank loan of €30m for the development of a National Innovation System, Croatia has been able to focus policy on those areas in which the country’s innovation system faces particular challenges, namely enabling R&D institutions to commercialize research outputs and R&D activities to develop, adapt, commercialize and use technology (Marijanovic, D. et al.). A necessary prerequisite for this policy change was political commitment centered on three pillars: an excellent scientific research base; appropriate funding sources; and adequate business and tech- nological infrastructure. In terms of technological infrastructure and adequate funding sources, for example, the government set up the TEHCRO – building innovation & business infrastructure funding program. Through the Croatian Funding Agency for Technology and Innovation (BICRO), the program provides funding for the establishment of Science & Technology Parks, Incubators and Centers of Competence (R&D Centers), as well as post-establishment growth funding for these innovation centers. TEHCRO con- tributes up to fifty per cent of total project costs over five years, in the form of grants, soft loans and equity investments. Involvement of a technology provider is a must and funding is provided through a competitive procedure (i.e. through the evaluation of multi-annual business plans). To secure long-term viability, the program builds in a requirement for self-sustainability after five years, providing financing on a declining scale until self-sustainability is reached. A system of gov- ernance is also built into the program through close monitoring of progress (in the form of quarterly reporting, on-site visits, mid-term evaluations, among others). Other challenges that came out of the round table discussion sessions on the country include: lack of continuity of funding and lack of funds; and difficulties in prioritization and resistance to change within existing structures. Broader market challenges included a lack of entrepreneurial skills and skilled management in science; a small market size and a lack of VC funding. As a result, suggested further policy responses that are needed to address these challenges are: • Establish governance across the innovation system by setting up monitoring systems and indica- tors. This provides a benchmark, against which priorities and change can be met and a mandate to enforce structural change. • Restructure higher education curricula, primarily through creating an advancement system for academics to address issues of specialized management structures. • Strengthen IP Law – a necessary prerequisite for any innovation economy, as it provides the basis on which innovative goods and knowledge can be traded. Alongside these key aspects, policy response in Croatia, it was suggested, should also strengthen existing innovation support programs, introduce VC funding and raise public awareness. Dalibor Marijanovic, CEO, Croatian Funding Agency for Innovation (BICRO), Dr. Ivana Nagy, Sr. Executive Director, BICRO R&D and Ivo Friganovic, Sr. Executive Director, Innovation, BICRO. 16 They share commonalities with pre- sector, including a strengthening 50 percentage points) (Angelov, E.). vious success stories in formulating of professional academic qualifica- and implementing cross-cutting tions and providing support to R&D Governments, however face a num- long-term innovation policies and infrastructure. ber of key challenges in develop- wide-ranging reforms. Bulgaria’s ing, formulating and implementing new economic strategy, for example, Similarly, an added opportunity long-term innovation strategies. was developed focused on Intensive ECA countries have in the current Framework conditions and culture Innovation sectors and included the crisis, as compared to that of the often do not support the develop- amendment of investment law to 1990s, is the access to EU markets. ment of innovation and an entre- allow government grants of up to Many of the country case-studies preneurial environment, and there 50 per cent of R&D project costs. presented and discussed in the work- is a lack of innovation infrastructure. Croatia’s National Innovation Plan shop (Bulgaria, Croatia, and Poland) In some cases there is a lack of an also involved long-term policies to highlighted the importance of the entrepreneurial base (Bulgaria, Croa- support the country’s innovation EU as a trading partner. For example, tia, Romania); and there is a lack of infrastructure and national strat- 91 per cent of Poland’s FDI inflows monitoring and evaluation indicators egy included the strengthening of are from countries within the EU (Mr (Poland, Croatia). These challenges Intellectual Property (IP) regulation. Marek Å?yzwa, Member of the Man- are discussed along with effective so- Poland’s National Scientific Research agement Board, Polish Information lutions and details of success stories and Development Program pro- and Foreign Investment Agency) and in Chapter 2 ´Mainstreaming long- vides a medium- to long-term plan, the EU´s share of Bulgaria’s exports term innovation strategies´. covering the period between 2007 in absolute terms, is five times higher and 2013 to support the innovation now than it was in 1995 (increasing Country case-study 4: Bulgaria’s national 2020 R&D strategy There are several preconditions for Bulgaria to attain the full benefits of integration into the Europe- an Research Area (ERA), especially improving the institutional and policy framework, increasing R&D investments to 1.5 per cent of GDP and strengthening the capacity of public research organizations and private companies. In view of this, the objectives of the strategy are to encourage: • Concentration of public resources and investment in priority scientific areas; • Support for the scientific infrastructure; • Strong inclusion of the private sector; • Encouragement of mobility of the human capital, knowledge and technologies. Strategy implementation will be supported by an Action Plan for the period 2011-2013, which in- cludes: • Introduction of a new model for R&D financing, which will translate into a better balance of the institutional and competitive program financing. Longer-term scientific programs in priority areas will be introduced, which will be subject to regular evaluation by external experts; • Prioritizing scientific research in five areas that will concentrate 70 per cent of the national R&D financing. This is expected to concentrate a critical mass of intellectual potential and scientific infrastructure; • Improving the conditions for scientific careers, professional development, qualification and spe- cialization of scientists; • Integration of the Bulgarian science in the ERA through support offered to Bulgarian scientific communities to take part in European Community initiatives; • Strengthening the knowledge triangle through improvement of the institutional coordination and development of schemes for start-ups; availability of business angels; supporting the capacity of SMEs to absorb technologies and increased financing by the private sector in R&D; • Development of the scientific infrastructure through the establishment of regional partnership structures, which can be integrated with large European scientific infrastructures; • Introducing an assessment system for science; • Reinforcing the social dimensions of science via support of national scientific awards, support for publications in journals with a high-impact factor, among others. The Action Plan for the national R&D strategy for Bulgaria specifies the public authorities that are responsible for the implementation of each measure and introduces new instruments to be used for financing. Specific indicators are outlined that will be measured and reported by March 31st, 2014. Source: Bulgaria Innovation Policy Note (World Bank, 2011), forthcoming. 17 18 2 MAINSTREAMING INNOVATION POLICY Overview It is increasingly recognized that mainstreaming innovation policy can be a means of increasing growth “Innovation can take place only in a post-crisis period. Long-term cross-cutting policies that ensure the when there is pressure for it.â€? market environment is conducive to innovation and incentivizing long- Sungchul Chung, Senior Fellow, Emeritus, term innovation investments, can tap the potential of innovation as and Former President of Science and a new growth source. The difficulty Technology Policy of Korea (STEPI) is mainstreaming innovation policy when an economy is not in crisis: a main challenge for the innovation tion policy needs political commit- base and create a commercially sector is that financing varies greatly ment to be found, guided by three enabling environment for innovation depending on the economic climate requirements: through wide-ranging policy reforms (Alkio, M.). and during the downturn they sup- Continuous support to technical port the industry by providing public Workshop participants in discussion skills, entrepreneurship and R&D funds in the absence of private with experts and policymakers from talent ; adequate and sustained financing. the four ECA countries identified funding sources; enabling business ways to prioritize innovation policy. environment and technological infra- They brought together promising so- structure. lutions to country challenges based on experience and good practice Countries that are in a better posi- from around the world. tion to formulate and implement forward-looking national innova- A necessary prerequisite for the tion policies to foster growth begin formulation of a successful long-term nurturing innovation policy prior to innovation policy is political will. the main post-crisis innovation policy Indeed, countries that promote inno- drive. Countries that are fostering vation “have in common the fact that (Poland, Croatia, and Bulgaria) or innovation can take place only when have fostered a strong post-crisis in- there is pressure for it.â€? (Chung, S.). novation sector (Finland, Switzerland, Korea) share this in common. They Successful mainstreaming of innova- build themselves a strong knowledge 19 BOX 1. SUCCESSFULLY MAINSTREAMING INNOVATION POLICY CHECKLIST • Broad based public support for innovation is essential to ensure country ownership of innovation policy reforms. Attractive costs, including a low corporate tax rate (10 per cent) and the lowest labor costs in European Union. • The key contribution of a comprehensive innovation policy is not in putting forward new instruments for R&D financing, but in ensuring cross-sector collaboration and coordination of policy agendas that facilitate local innovations.A skilled workforce and one of the highest proportions of students studying abroad in EU. • The array of policy instruments that can be used to support innovation means that policy-making needs to be highly selective in choosing instruments that are most suitable for country context.Benefitting from having the EU as trading partner. • The innovation policy will only achieve impact if government actions are predictable, but predictability does not mean that innovation policy is designed once and for all: it should be periodically reviewed and, if necessary, ad- justed, to changing conditions.A strengthened IP legislative system. • Focus on results and M&E is critical for enabling the points above. • Strong knowledge base needs to be fostered through higher education reforms and long-term investment in the education system. the commercialization of research this framework. outputs and a secure, regulated Governments can use a reduction Key take-away of market for innovation in products, in private innovation financing as lessons learned from the processes and services. an opportunity for increased market Country situations vary, and any solu- efficiency international tion must be tailored to the country experience context. A reduction in funding can present an opportunity to foster favor- able conditions for investments in “There is a general consensus innovation. Workshop participants highlighted that this can be achieved through encouraging more efficient about key framework conditions general market conditions and, in particular, by creating more efficient that make a country, or a region, innovation systems. At the end of the 1990s, for example, when Korea’s innovative.â€? high growth period came to an end and the rapid expansion of the Mauro Dell’Ambrogio, State Secretary for country’s labor unions led to a less- ening of its competitive advantages, Education and Research, Federal Depart- Korea used the opportunity to create a more efficient economic system ment of Home Affairs, Switzerland and foster innovation. It did this in part through setting up information services, along with the provision of technical and legal consultancy services for innovating firms and indi- During the workshop, a number of Indeed, “there is a general consen- viduals. As innovative companies are common, key lessons learned on sus about key framework conditions essential to growth, innovation strat- mainstreaming innovation policy as that make a country, or a region, egies need to increase the impact of a means of fostering growth, were innovativeâ€? (Mauro Dell’Ambrogio, innovation policies on competitive- drawn out: State Secretary for Education and ness, especially during an economic Research, Federal Department of downturn. Real commitment to innovation must Home Affairs, Switzerland). These start with long-term investment in include levels of investment in R&D, A reduction in private innovation the education system. efficiency of public spending, along funding can also offer an opportu- While any serious innovation policy with a skilled and well-regulated nity for the structural transforma- must start with setting up monitoring labor market and an attractive taxa- tion of a country’s economy. The indicators to ensure an efficient and tion rate. Countries must also ensure Korean government, for example, effective innovation system. a good standard of living to at- turned the crisis into an opportunity Continued investment in the inno- tract and maintain skilled labor. It for the structural transformation of its vation system needs to be largely is also agreed that for a country to economy. By investing heavily in stra- driven by the private sector, with be innovative, public services and tegic technologies and by improving public investments flexibly structured administration need to be fit for the business climate through a broad to compensate for market and sys- purpose and efficient. To create range of public and private sector temic failures. growth, mainstreamed innovation reforms to enhance the efficiency policies will need to consider na- of the economy, Korea fostered a Meanwhile, governments need to tional reforms that create attractive, quick recovery from the crisis of the foster an enabling environment for long-term conditions aligned with 1990s (Chung, S.). This may be even 20 more applicable in the future as Effective innovation ensuring political commitment. The economies move toward innovation- EC, for example, has built M&E into led growth. As Mr Alkio explains, policy must start by its Europe 2020 innovation policy there is paradigm shift taking place establishing governance by linking innovation targets to the in the way wealth is being created Growth and Stability Pact. from those who control the means through the set-up of of industrialization as the creators of monitoring indicators Better monitoring and evaluation wealth to “…in the future, those who is identified as a need in the ECA control the means of innovation will region, and workshop discussions be the creators of wealth.â€? A monitoring and evaluation frame- about Poland pointed to a lack of work ensures from the start that both clear evaluation indicators in the the resultant innovation policy and country, resulting in a lack of any innovation system are efficient and clear definition for innovation in the effective. It does this, in part, by re- country. Similarly, for Croatia, poor ducing the need for funding and by governance of the national Country case-study 5: Korea’s structural adjustment and innovation Innovation played a central role in the country’s ability to implement changes in its trade regime as part of its wider structural adjustment to export-led growth from import-substitution-led growth. Suc- ceeding in the country’s structural transformation into high-tech high-value added products played a central part in its story to export-led growth. The emergence of a new trade regime in the 1990s, calling upon Korea to revise policy programs designed to support an export-oriented growth strat- egy, added to the challenges Korea faced during the downturn of the 1990s. By being forced to sup- port the R&D sector as private investment fell, and through the need to foster technology transfer to remain competitive in the shift to export-led growth, Korea’s innovation policy cut across its structural adjustment plan. The regulatory framework to meet the requirements of the new trade regime favored an innovation economy, such as: liberalization of trade and investments; strengthening of IPR protection and re- alignment of the subsidy programs for industries provided an environment conducive to innovation. Sungchul Chung, Former President, Science and Technology Policy Institute, Korea. innovation system was one of its main challenges (Marijanovi, D., et al.). It was suggested in discussions “Unless politicians are bound by a on Poland that a European-wide framework of key performance indi- concrete target, their commitment cators, unifying them across Europe, would help provide clarity in defini- to innovation will be an tion for innovation in countries which do not have monitoring indicators in empty promise.â€? place. Silvia Viceconte, Europe 2020 Strategy An innovation society coordinator, Secretariat-General, European must start with long-term Commission investment in the educa- tion system to build a high-performance team tion and falling numbers of which benefit from constant qualifi- _________________________________ This is required as the basis for pro- cation and a high-performance envi- ducing world-class science and the 12 Kaminiski, B. Snapshots of R&D-intensive ronment (Sasha Bezuhanova, Hewlett specialization required to compete FDI in Bulgaria, Croatia, Poland and Romania. Packard CEE Public Sector Director). internationally (Alkio, M.). Hewlett Background paper for the high-level Policy A major concern for companies in Packard, for instance, conducts Workshop on “Innovating through the Crisis Bulgaria, Croatia, Poland and Roma- a market skills test as part of its – How to Do It?â€? June 8-11, 2011 Dubrovnik, nia was the quality of tertiary educa- Croatia. process of off-shoring and goes on 21 graduates in fields at the frontier of context. Bulgaria and Poland have entrepreneurship was highlighted in R&D activities (i.e., computer scienc- high university completion rates, sim- the discussions as key challenges for es, engineering, biology, mathemat- ilar to Finland and Korea (see box 3 Romania´s innovation system. ics, etc.)12. Indeed, Mr Broder high- below). Subsequent innovation poli- While Croatia had a reasonable lighted that “bad research is worse cies are able to use this knowledge number of graduates, there has been than no researchâ€? (Andrei Broder, base to kick-start an entrepreneurial a lack of entrepreneurial skills and Vice-President, Yahoo! Research). innovation economy (as in Finland managerial competence in science. and Korea) and to attract FDI in R&D Planned education policies to ad- Country situations vary and success- (for example, Bulgaria and Poland). dress this include the introduction ful policies are tailored to the country In contrast, low human capital and of competitive research grants to BOX 2. Education and innovation in Korea and Switzerland Korea’s successful response to the 1998 financial crisis is largely attributable to: (i) the visionary government committed to the innovation agenda; (ii) sustained investment in R&D capacity, in- cluding institutional capacity since early 1960; and (iii) a large base of entrepreneurial-educated youth that created its vast SME innovation sector. The financial crisis of 1998 led to a dramatic decrease of business expenditures in R&D – from 80 per cent of all R&D expenditures in 1997 to 70 per cent in 1998. At the same time the crisis reduced job opportunities in large industrial firms, especially for recent university graduates. To counterbalance the effects of the crisis and tap into the large pool of young talent, the Korean government decided to increase its financial support for innovation, with a particular focus on SMEs and the ICT sector. This approach, combined with the corporate sector reforms and improvements in business transpar- ency, led to “new technology-based start-ups mushrooming around the end of the 1990sâ€?, espe- cially in the ICT sector (Chung, S.). The number of new technology start-ups grew from about 2000 in 1998 to 9,000 in 2000 and 11,000 in 2001, helping produce a quick financial recovery for the Korean economy (Chung, S.). Switzerland has developed a sophisticated apprenticeship system that fosters an innovation economy. Having historically resisted European-wide changes in education systems that focus on tertiary university education, apprenticeship is still today in Switzerland the main form of education, as it was in the middle ages across much of Europe. About 70 per cent of 15-year-olds leave the full-time education system to go to an apprenticeship position in the real working world and it has become a societal commitment to find a job for everyone at this age. Professional education is seen as an equally important form of education and there is the opportunity to go on to university later, which is then usually undertaken part-time. “In Geneva, to be admitted to an apprenticeship as a ju- venile between the age of 16 and 19, is more selective and prestigious than to study at high school. It is not unusual in Switzerland that a president of a bank started his career as an apprentice in a bankâ€? (Alkio, M.). The result is among the lowest unemployment rates (at only 2.7 per cent) among 20-30-year olds in Europe. These two systems may not be replicable in other country contexts, but they highlight the ef- fectiveness of forward-thinking policies tailored to country situations. The Korean model, for example, would not have been as effective if its large pool of unemployed young people in the 1990s had not been through tertiary education and provided a specialized skills base. The Swiss ap- prenticeship system requires the full commitment of the private sector: it cannot be implemented by a ministry of education alone, “….especially small and medium companies, ready to take charge of the professional education of young people, with the risk that they will later work for the competi- tionâ€? (Dell´Ambrogio, M.). This system is effective in Switzerland because of a certain cultural attitude that has historical roots in the system of guilds in the middle ages – a system Switzerland built upon, rather than rejected in historical periods of Europe-wide educational reform. Companies need to have a cultural attitude of competing with each other to assume the teaching of a future generation of skilled people in their field as a common mission and goal (Dell´Ambrogio, M.). The Swiss exam- ple also highlights the importance of knowledge sharing internationally: “40 per cent of professors in Swiss universities are foreign nationals, you have to integrate and tap into global knowledge to be successfulâ€? (Alkio, M.). Dr Sungchul Chung, Senior Fellow, Emeritus, and Former President of Science and Technology Policy of Korea (STEPI). 22 increase math and science specializa- tions and the restructuring of higher- education curricula to incorporate an “40 per cent of professors in advancement system for academics. Poland too, has a large labor pool, Swiss universities are foreign but this is largely unutilized due to a mismatch between workforce skills nationals: you have to integrate and the needs of employers. As a result, Poland’s policy should address this skills gap, which is an obstacle and tap into global knowledge to modernization and growth for the private sector. to be successful.â€? Mikko Alkio, Adviser to the Prime Minister, Discussions suggest the emergence of a critical mass that will enable the Finland (former State Secretary, Ministry of current transition of these econo- mies to efficiency and innovation-led Employment and Economy) development, provided that govern- ments take further steps to nurture a business-facilitating environment and nanotechnology involve mostly R&D – Mr Correa elaborated in one of increase their country’s absorptive activities requiring tertiary education, the discussions – is that “tons of capacity. Among these initiatives, the production processes, per se, in money are thrown for research and gearing education to satisfy demand other sectors, for example the auto- there is no assessment whether this of the private sector for skilled labor, motive and chemicals sectors, may can be commercializedâ€?13. It was with qualifications in science and not be necessarily R&D-intensive and concluded that since markets are not engineering, is considered to be may not necessarily require labor good in providing information, the key objective of technology transfer offices should be to be engaged in commercialization. Incentives “People are key for innovation could be put in place for technology transfer offices and linkage offices at and competitiveness: steal, buy, Public Academic Organizations, for instance. borrow or grow talent.â€? Mr Benedikt Herrmann, RTD, Euro- Andrei Broder, Vice-president, pean Commission opinioned that technology transfer centers rarely Yahoo! Research pay off, citing an example from the UK, where a professor found a way to go through a foundation that created a start-up instead of going through the University. Therefore, one of the most important measures with tertiary education (Kaminski, B.). the recommendation was “Be careful (Kaminski, B.). with the incentives!â€?14. All case-studies present an impor- Korea and Switzerland provide tant consideration when looking at Similarly, in workshop discussions, particularly insightful case-studies on education reform, primarily the need it was suggested that one of the how country situations vary and how to allow technology transfer and the main reasons that Ireland had stood successful reforms are tailored to the commercialization of research out- back from investing significantly in country context. An important con- puts and an accompanied balance the public research system, was that sideration which the Korea and Swiss of focus between basic and applied “nothing was coming out of itâ€? (Mr stories also show is that the educa- research. Keith O’Neill, Director of Lifescience tion system must be designed with & Food Commercialization Depart- accompanying high levels of employ- ment, Enterprise Ireland). Indeed, ment in mind, which again depend Market relevance of commercialization policy often needs on the country context. While some to focus on encouraging technology innovative sectors, such as artificial public research should transfer (Yusuf, S., Correa P.). In the intelligence, biotechnology and be encouraged Korea case, for example, “R&D was Promoting the potential for com- _________________________________ mercialization of public research 13 (from discussion session The Unfinished was generally highlighted as a Reforms Agenda: Accelerating the commer- common need in workshop discus- cialization of public research and fostering sions. It is identified as an ongoing business innovationâ€?, Summarized by Evgeni need in the ECA region (Correa, P.) Evgeniev, PSD Specialist, World Bank) and was the headline challenge for 14 From discussion session The Unfinished Croatia when it came to developing Reforms Agenda: Accelerating the commer- its National Science and Technology cialization of public research and fostering Plan (see Croatia box) (Marijanovic, business innovationâ€?, Summarized by Evgeni D., et al.).The problem in Croatia Evgeniev, PSD Specialist, World Bank 23 CASE-STUDY 1. MARABIC – Innovation Driven at an Industry-wide level Workshop participants visited MARIBIC, Croatia´s leading Technology and Business Innovation Cen- ter for Mariculture - a prime example of how innovation can be driven at an industry-wide level in partnership with local government and scientific institutions. MARIBIC was established in 2008 as part of the Croatian Government’s TEHCRO program. It was endowed with initial funds of €4.2m. The World Bank provided €1.8m (70 per cent grant, 30 per cent loan) and €2.4m was secured through the University of Dubrovnik, Croatia, in conjunction with BICRO and the Ministry of Science and Education. Through its center for research, practical education and technology and innovation, MARIBIC pro- vides a vital link between the aquaculture industry and University-level theoretical education and science. “MARIBIC provides continuous education and information about new technologies, trends, equip- ment, marketing, and about the problems shared by the local aquaculture industry and aquaculture producers. The center is also active in the scientific field, working with the University of Dubrovnik and other scientific institutions, local governmental institutions and producers’ organizations on sci- entific and development programsâ€? http://maribic.com/. Indeed, its mission is to fill the gap between science and education, and active and prospective aquaculture companies. It aids market development, by selecting locations which specifically require investment and technology transfer. “MARIBIC’s mission is to become a missing link between scientific/educational institutions and active and prospective aquaculture producers, taking a vital role in the advancement of practical education and student research, and in the development of the aquaculture industryâ€? http://maribic.com/. MARIBIC provides multi-level support for the mariculture industry in Croatia as a response to a market need for the consolidation and modernization of the industry. It enhances innovation infra- structure and production along the aquaculture value chain through facilities which include: specialist installations for breeding and farming of saltwater fish and shellfish; aquaculture R&D laboratories; a purification unit, shellfish collecting and shipping center (under construction). Jurica Jug-Dujakovic, Director of MARIBIC. not at the center of innovation policy, “In Korea’s case R&D was not technology transfer and acquisi- tion was at the center of innovation at the center of innovation policyâ€? (Chung, S.). policy; technology transfer and In the discussions, it emerged that in order to commercialize the knowl- acquisition was at the center of edge created by research institutes, Ireland would need to invest in innovation policy.â€? promoting technology transfer: lack of technology transfer was the key reason nothing was coming out of Sungchul Chung, Senior Fellow, the research system (O´Neill, K.). Emeritus, and Former President of Technology transfer requires Science and Technology Policy of background conditions that gov- ernments should provide for in Korea (STEPI). mainstreaming innovation policies. These key determinants of technol- ogy transfer and assimilation include: a competitive and globally 24 through innovation (Alkio, M.). In- novation policies that achieve this, focus legislative reform on strength- ening country IP systems and regu- latory efficiency while enhancing innovation infrastructure and consid- ering alternative methods for raising private funds. To do this, political will and commit- ment are needed. For example, Fin- land and Korea, made a remarkable transformation in the second half of the twentieth century into industrial powers and emerged as some of the most productive economies in the world (Chung, S)15. The Finnish government played an important role in transforming the country integrated market environment; an from Finland and Switzerland would from a resource-based economy industrial mix favouring tradable queue to work in CEE countries be- into an industrial one. The govern- goods and subsectors where SMEs cause of the nature of the countries ment developed a well -structured are active; investment in productive and the work. system of innovation with efficient activities and sources of, and tech- public institutions and competitive nology content of, imports; manage- There also needs to be a balance private sectors (Alkio, M.). Even rial skills and quality of workforce; between basic and applied re- though it is a small country in terms volume and composition of FDI; search. Successful programs, like of population, it has free access to technology licensing and reverse en- the MARIBIC center depicted above the EU market which is large enough gineering, and R&D and its composi- (case-study 1) link basic and applied to sustain its mobile phone industry tion (Yusuf, S). research. A better balance between (Chung, S.). The weakness, however, these research types is identified as is that it has concentrated heavily on The issue of technology transfer has a need in the ECA region (Correa, P.) the mobile phone industries, where no easy solution, however, and large and initiatives such as these go some markets are already overcrowded companies such as Yahoo! make this way in filling this gap. However, (Alkio, M.). However, like most work through complex processes country situations vary and this must small countries, Finland needed to and long-term vision. Mr Andrei be taken into account. find specialized niches in order to Broder, the VP for Research of Ya- compete with global giants: other hoo!, pointed out that companies are Switzerland successfully balances examples of successful specialization reluctant to invest and pay a lot for funding for applied and basic include industrial machinery, marine an idea that comes from a University research by splitting the funding engines, pulp and paper, among which is isolated from the company. priorities between the private and others. In Korea, political leadership Mr Broder explains “If there is an public sectors. More than 70 per was also important: science, technol- idea with a professor, he is invited at cent of R&D investment in Switzer- ogy and innovation (STI) had to be Yahoo! for sabbatical, for instanceâ€?. land is made by business companies. mainstreamed across all policies. The private sector in the country This is something the EU is doing Mr Benedikt Herrmann, RTD, Eu- is accustomed to asking for public (albeit to a lesser degree than was ropean Commission, spoke about support for good teaching, good done in Korea, which was ingrained the feedback he received from SME financing of fundamental research in in structural adjustment to export-led entrepreneurs in Romania and Bul- universities, and good PhD pro- growth) with Europe 2020. garia. They said that the European grams. One thing they ask not to be Commission can do something more interfered with is applied research, Both hard and soft infrastructure powerful by introducing an EC Label considering applied research as a needs to be developed. Examples that could increase inter-firm trust, matter that should be exclusively for from Eastern Europe show how a which is particularly low in these the business sector. “There are some central geographical location, with economies. He also spoke about exceptions, but if you compare the good through-country transport the recommendation from Danish Swiss figures with other countries, links, fosters a healthy innovation universities to invite, on a regular you can be surprised by seeing that market that can lead to increased basis, successful high-tech entre- 80 per cent of the spending of the exports and FDI. Bulgaria’s hard preneurs. Mr Herrmann was asked public funding in R&D in Switzer- infrastructure is well developed and by the audience about the linkage land is spent on fundamental basic encourages innovation-led export programs and how well they work. researchâ€? (Dell’Ambrogio, M.). growth and FDI in R&D. Based on replies from companies, Mr Herrmann said that the impact _________________________________ of these programs is very positive. Favorable market What the European Commission representative further emphasized conditions need to be 15Chung, S., Senior Fellow, Emeritus, and Former President of Science and Technology was the need to develop measures fostered Policy of Korea (STEPI), Chair´s summary of Workshop Day 2 Session: Counter-Cyclical to support creation of talents. He Innovation Policies – Common Agenda for added that the CEE countries have Competition and innovation-friendly Action. an advantage: the best of talents markets are essential for growth 25 For example, it has good through- markets. Similarly, Romania´s geo- among other countries in the region. country transport links leading to graphical location allows good ac- Cases such as these are playing a major established and emerging cess to Turkey, Slovenia and Russia, part in the shift from West to East. Map: Bulgaria’s major transport corridors…accessing major markets Bulgaria: major transport corridors… …accessing major markets     Case-Study 2: New approach to promoting innovation and R&D in Bulgaria – the JEREMIE Holding Fund A holding fund with capital of EUR 199 million will be registered under the JEREMIE Initiative, called the JEREMIE Holding Fund. The JEREMIE Holding Fund is foreseen to exist for 10 years with an op- tion of a further 2 more years, targeting SMEs that have their main economic activity in Bulgaria. It will manage funds on behalf of the Bulgarian government. Three funds for equity investments in the Bulgarian economy will be set up as part of the holding fund, namely, for small start-up companies (venture capital), for small companies in the process of development (growth equity), and a mixed instrument between equity investments and loans (mezzanine). It is envisaged that the Fund for small start-up companies will begin operations with a capital of EUR 30 million. EUR 21 million of this will be under the “JEREMIEâ€?, the remaining amount will come from external financing. The Fund for small start-up companies will invest up to a ceiling of EUR 1.5 million annually in a business, while there is no such restriction for the other two funds. The other two funds will have a capital of EUR 60 million, half provided by JEREMIE and the other external funding must be secured by their future managers. Finding this extra financing will be one of the criteria for select- ing the risk fund managers. Risk financing for businesses will benefit from a total of EUR 81 million in borrowed capital from the JEREMIE Initiative, while the amount will reach EUR 150 million with the external financing. The JEREMIE Program will provide EUR 74 million for guarantees covering losses of a portfolio of debt instruments and the total guarantees are estimated at EUR 370 million for SMEs under the JEREMIE Holding Fund. The key decisions affecting the operation of the three private equity funds will be taken only after prior coordination with the Ministry of Economy, Energy and Tourism. Its representatives will partici- pate in the Board of Directors of the JEREMIE Holding Fund. Source: Bulgaria Innovation Policy Note (World Bank, 2011), forthcoming. 26 While hard infrastructure was well- Program released approximately centers and universities is instrumen- developed, soft infrastructure in €8bn in funds, attracting an addition- tal in raising absorptive capacity and Bulgaria required more attention. al estimated €3bn of EU funds for in- attracting more R&D investments.19 The Ministry of Economy, Energy novation for the period 2007-2013.16 According to Sasha Bezuhanova, and Tourism in Bulgaria conducted a It includes innovation vouchers of up Hewlett Packard CEE Public Sector study in 2010 of 35,000 companies to €2m for R&D services, however, Director, “technoparks have proven to develop an understanding about their revenue, R&D and innovation spending. Two issues emerged as key findings “Technoparks have proven their a) Access to finance is an issue worth in many regions as catalysts for companies; b) Access to Infrastructure (in for innovation and economic the broader sense) is problematic. The JEREMIE program and the Fund of Funds, developed in cooperation development.â€? with the European Investment Fund Sasha Bezuhanova, Hewlett Packard CEE (EIF), are to be key ways of solving these constraints for companies. Public Sector Director “We found a market gapâ€?, added the Deputy Minister (DM) Evgeny Angelov “and through the JEREMIE funding we are trying to fix itâ€?. spending on R&D as a percentage of their worth in many regions as cata- GDP remains low in the country – at lysts for innovation and economic The strategies of Bulgaria, Croa- an estimated 0.4 per cent of GDP developmentâ€?. They could improve tia and Poland include a variety annually.17 competitive abilities of local firms of instruments to support private Venture Capital (VC) is one aspect and have been seen as the basis innovation and R&D. The Bulgarian highlighted as a potential for many of regional development for some government offers investors, who economies looking to mainstream Asian countries, through technoparks invest a minimum of €10m (or €2m in innovation policy. Alongside public such as Cyberabad in Hyderabad high-tech services) faster administra- funding for innovating SMEs, Korea and Electronics City in Bangalore, tion procedures, preferential acquisi- also provided for VC as a means India. “Bulgaria has the potential of tion of municipal land, and financial of raising private capital for R&D, becoming the ´Silicon Valley´ of Bal- support for training and infrastruc- with a particular focus on SMEs – its kansâ€? (Bezuhanova, S.). To do this, ture subsidies (Angelov, E.). Croatia main growth source in the post-crisis governments need to encourage has five main support programs that period. In 1996, as a branch of the the broader requisites for successful run across different stages of de- Korean Stock Exchange, the Ko- mainstreaming of innovation policy, velopment of the innovative sector: rean Securities Dealers’ Automated with a particular focus on: from POC (Proof of Concept) and Quotation (KOSDAQ) was opened to RAZUM (seed capital for innovative facilitate the financing of technology- • Education, in particular in ICT, firms); to longer-term TECHCRO based SMEs. This opens a new languages, management and (creating sustainable innovation and source of private capital for SMEs in entrepreneurial skills; business infrastructure); IRCRO (Co- the sector. • A legislative framework designed operation between research groups to stimulate knowledge invest- and SMEs on R&D projects; EUREKA One of the challenges in Ireland ments; (Pan-European Research and Devel- has been to attract experienced • Infrastructure, including high opment Cooperation) (Marijanovic, fund managers and the question speed internet, business and in- D. et al.). Poland’s National Scientific arose in one of the Q&A sessions as novation parks; Research and Development to whether Bulgaria faced this chal- • Stimulating entrepreneurial in- lenge. The response of DM Evg- novative concepts, through seed eny Angelov, Ministry of Economy, and grow incentives; Energy and Tourism, Bulgaria, was • Encouraging innovative business quite optimistic in that Bulgaria was based in Bulgaria, with local and attracting high-level fund manag- international focus; ers, and they have been able to _________________________________ secure decent managers with soft 16 The Ministry of Science and Higher commitments.18 The DM, however, pointed out that raising risk capital Education, Poland http://www.nauka.gov. has two challenges: a) who is the pl/mn/index.jsp?place=Menu08&news_cat_ id=894&layout=2, accessed 28/07/2011. fund manager? and b) the raising of 17 DG Economic & Financial Affairs, European co-financing. Economy, European Papers 367, 2009. 18 Q&A session (Summarized by Evgeni Evg- Long-term innovation policies eniev, PSD Specialist, World Bank). should also include programs for 19 Kaminiski, B. Snapshots of R&D-intensive developing industrial clusters and FDI in Bulgaria, Croatia, Poland and Romania. local and international innovation Background paper for the high-level Policy hubs. The promotion of linkages Workshop on “Innovating through the Crisis amongst firms, foreign owned R&D – How to Do It?â€? June 8-11, 2011 Dubrovnik, corporate centers, local research Croatia. 27 • Stimulating modern R&D in Bul- Better regulation does not mean Director, DG REGIO, European Com- garia, making it part of a world more regulation; it means, in part, mission20 iIllustrated by asking “How R&D network; capitalizing on the opportunity to to smartly spend money on smart • Creating a ´Brand Bulgaria´ as create a more efficient system. For innovation?â€? best shore location; example, it can mean reducing the • Positioning Bulgaria as regional administration procedures for SMEs It emerged that a key policy re- hub. (as suggested in workshop discus- sponse from Poland, for example, Intellectual Property (IP) is crucial sions on Poland) through the cre- should be to have a clearer priori- when fostering open innovation ation of ´one-stop shops´ and remov- tization of funds. The problem with and is needed for the second-order ing barriers. The countries discussed the current national plan is that is creation of IP and technology mar- are taking steps in this direction. sprinkles funds across a number of kets (Alkio, M.). IP Law must be part Poland, for instance, simplified VAT priorities and so renders spending of mainstreaming innovation policies. and excise duties. Bulgaria, Poland less effective. Mr Sorin Buse, Executive Director, and Croatia all provide simplified Renault Technologie, in discussing administrative procedures, includ- The fundamental fact is that tech- challenges in Romania, highlighted ing land acquisition and permits to nology takes a long time to de- that “there is a huge issue with IP “There is a huge issue with IP legislation in Romania. Leakage of information from employees and suppliers is difficult to deal with – nobody gets properly punished. The R&D investment is not coming because of the legislation.â€? Sorin Buse, Executive Director, Renault Technologie legislation in Romania. Leakage of operate as part of specific incentive velop, and it is important to have a information from employees and packages. long-term perspective in terms of suppliers is difficult to deal with – funding support mechanisms. R&D nobody gets properly punished. Continued commitment to innova- expenditures, nonetheless, need to The R&D investment is not coming tion means sustained funding. be focused on relevant topics and because of the legislationâ€?. Continued funding support is a innovators need to be educated necessary condition for maximizing about what is available. An example Mr Andrei Broder, VP of Yahoo! Re- the benefits of innovation in terms of from Croatia shows that even with search, echoes this when discussing growth. the current low levels of R&D spend- the main reasons why multinational ing, things can be done better. A corporations (MNCs) establish inno- Strengthening existing support new Science Law in Croatia has been vation operations in other countries streams means prioritizing spend- developed to improve efficiency of stating that: “The IPR is a crucial ing not just increasing it. One public R&D spending and its rel- issue, a good IPR protection is a key question is how to frame these evance for the market. While current mustâ€?. targets as Ms Charlina Vitcheva, and 2012 budgets are set and the “Innovation policy should be about not adding more regulatory burden under its name, but reducing the burden of regulatory constraints on innovators and entrepreneurs.â€? Cornelia Simeon, Director, Romanian Ministry of Economy, Commerce and Business Environment 28 “A one per cent increase in public R&D will not turn you into Silicon Valley, but without public investment in innovation infrastructure and resources it is very difficult to jump-start innovation-led growth.â€? Benedikt Herrmann, RTD, European Commission R&D budget is fixed, there is EUR 0.5 of innovation-based companies by internationalized branches, and this billion in public tenders that can be funding R&D activities towards de- type of decentralization can be seen flexibly used. velopment of new products. in Croatia, Poland, Bulgaria and Funding should also include incen- Romania (as discussed below in One topic of relevance, which work- tives for collaboration between Chapter 3: Increasing business shop participants highlighted (as well private companies and public re- investment in R&D – could FDI as the case-studies from Korea and search institutes. As seen in the sec- provide a solution?). Finland show) is the importance of a tion above, this is a key challenge, particular focus on providing funding particularly during a downturn to _________________________________ mechanisms for SMEs. This is based which private companies respond by on the fact that “people not organi- 20 Vitcheva, C., Director, DG REGIO, Euro- reducing collaboration with research zations innovateâ€? (Alkio, M.). institutes (Alkio, M.). This was identi- pean Commission, quotation from one of the fied as a key challenge for Croatia discussion sessions. And so there is a need to incentiv- when putting together its Technical ize the individual. As Dr Cornelia Permanent Secretariat (STP). The STP Simeon, Director, Romanian Ministry set up a funding stream dedicated of Economy, Commerce and Busi- to financing collaboration between “We need to teach people what responsible R&D spending means.â€? Danica Ramljac, Director General, RBI business and academia. It provided ness Environment, points out “The 50:50 match funding for SMEs, crisis presents an opportunity for partnering with research institutes investing in people.â€? This can be on R&D. This has increased public- in the form of early stage financing private collaboration on research and strengthening policies to nurture outputs and has leveraged private start-ups, which is also needed to capital for R&D: Every €1 invested support commercialization of both from the public budget has attracted public and private research outputs €1.35 of private capital intended for (Correa, P.). Examples from Croatia R&D (Marijanovic, D., et al.). include RAZUM – the Seed Capital funding stream, which has provided The managers of public R&D 14.4 million Euros in funding, gener- institutes need to be re-educated. ating 22.3 million Euros (inclusive) of The culture of the private sector also investment to date. RAZUM provides needs to change since they do not funding of up to 70 per cent of know what they can do in R&D, and project costs (30 per cent must be neither how they could, nor why they contributed by the private sector) should, get involved in it. Human re- in the form of conditional loans (i.e. sources are still the largest constraint repayable advances). Planned effects in Croatia: a local pharmaceutical of the program include generating a leader Pliva, for example, decided net present value (NPV) of 82.9 mil- to fund 5-10 independent training lion Euros (up four times on the cor- organizations, because the necessary responding figure before the incep- skills are hard to find locally. tion of RAZUM) and an internal rate of return (IRR) of 60.8 per cent. Net National innovation strategies, while income tax on salaries generated focusing on the individual and on through the program is expected to home-grown SMEs should at the total 20.2million Euros (one and half same time not neglect policies to times higher than before RAZUM was encourage FDI. In fact, the innova- in place). Poland similarly stimu- tive departments of MNCs are often lates the development and growth 29 BOX 3: COMMON THEMES IN MAINSTREAMING INNOVATION POLICY International Best Practice Current/Planned Policies Country/ Innovation Policy Lessons Learned Country Region • Start with long-term investment Bulgaria – • Has fostered a strong education sys- Finland in the education system. current tem with 60,000 graduates every year. experience • Keep investing in the innovation policies • Good system of government incen- system through world-class sci- tives with the Investment Promotion ence and commercialization (in Plan. the short-term need to increase • Good market conditions with land-ac- public investment for these in quisition breaks for foreign investors; periods of downturn). cross-cutting infrastructure. • Competition and innovation- • Encourages collaboration between friendly markets are key. universities and the private sector. • Incentives, thinking of indi- viduals as innovators rather than organizations. • Intellectual Property (IP) is crucial when fostering open in- novation and is needed for the second-order creation of IP and technology markets (Alkio, M.) Korea • Achievements owing to several Poland • Fostered a strong education system factors: well educated human with 40,000 graduates every year. resources, private industries’ • Is looking to close the skills gap by R&D capabilities, focused matching skills to those needed by strategy of the government, employers. and most important, the sense • Continues to support research insti- of crisis that was shared by the tutes that provide public goods, but is Korean population. considering the restructuring of those institutes that provide private goods. • Simplification of VAT. • Simplification of company start-up. • SME one-stop shops. • Prioritizing innovation policy that will have highest impact on employment. • Science and R&D reform. Swiss Innovation Policy: Croatia • Commercialization. Switzerland • Investments in R&D. • Public support for R&D during down- • Human Resources. turn with obtaining WB loan. • Incentives to entrepreneurship. • Loan helped institutions to commer- • Education to work. cialize research outputs. • Government regulation of the • Technology Transfer. private sector market. • Increase ability of SMEs (links in with • Public administration: light and Finland point of individuals not orga- efficient, tax system and tax nizations). rate. • Investment in R&D activities to de- velop, adapt, commercialize and use technology. ECA • Preserving public support to private Countries R&D. • Promoting the commercialization of public research. • Rebalancing country priorities on pub- lic R&D expenditures. • Adopting cost-saving measures in public research organizations. • Better monitoring and evaluation of existing programs (Correa, P.). 30 “People not organizations innovateâ€? Mikko Alkio, Adviser to the Prime Minister, Finland, former State Secretary, Ministry of Employment and Economy 31 3 INCREASING BUSINESS INVESTMENT IN R&D – COULD FDI PROVIDE A SOLUTION? OVERVIEW To encourage business investments the offshoring of R&D, MNCs seek to The ultimate answer as to whether in R&D and innovation activities, es- tap local knowledge and lower their FDI can provide a solution to re- sential framework conditions need to costs in order to cope with pressures duced private and public invest- be put in place, as discussed in the of global competition and the rapid ments in innovation, however, is previous section. To entice foreign pace of technological change. that it depends on the country investors and MNCs, which have a and the response of the domestic wide scope of investment locations MNCs can encourage technology private sector (Yusuf, S.). Neverthe- to choose from, targeted FDI policy transfer, internationalization, and less, countries that convert FDI in is required to add further impetus global integration through embed- R&D into spillovers and consequent and for a country to remain attractive ding R&D into their value chain. growth, share some commonalities. and competitive. This is particularly Many successful business mod- These commonalities highlight the the case during an economic down- els, such as those highlighted at importance and success of long-term turn when the importance of exter- the workshop of Hewlett Packard, investment in education systems, nal sources of capital increases as Yahoo!, and Renault Technologie Ro- technological transfer, industrial insufficient credit supply and higher manie include strong communication hubs, and market conditions and risk aversion result in lower capacity networks and information sharing positioning. They also highlight the for many countries’ domestic firms to across their subsidiaries. MNCs also importance of implementing FDI finance R&D investments. generate employment directly and policies alongside policies to support indirectly and their investments can the home-grown innovation industry In Bulgaria, Croatia, Poland and be leveraged to provide community to avoid larger MNCs crowding out Romania, the foreign owned R&D regeneration and innovation, and smaller innovative domestic firms. sector is well established and ex- R&D education. panding. It has not been particularly affected by the recent slump in the However, many countries often fail Innovation-intensive FDI global economy, suggesting that it to maximize returns from FDI R&D. can be growth promoting, has helped cushion these countries In East Asia, for example, FDI in R&D from the most severe effects of the has not been a significant source of provided local conditions financial crisis. start-up activity or cluster formation. for capturing positive Benefits are also often internalized Furthermore, given that MNCs by firms and the growth effects of spillovers are in place undertake the bulk of global R&D R&D-intensive FDI are uncertain; expenditure, their location decisions and MNC R&D can enhance national R&D-intensive FDI can bring signifi- determine, to a large extent, the research capacity but can also crowd cant benefits to host countries by en- geography of R&D activity (Jaruzel- out local research (Yusuf, S.). abling an upgrading of technological ski, B. and Dehoff, K., 2008). With capabilities as well as better access to international markets (Cantwell, 32 j. and Piscitello, L., 2000; Carlsson, S.). This is in part because MNCs B., 2006; Santangelo, G., 2005).21 It conduct R&D activities not only at can also create spill-overs, increase home but across their networks of patenting, and enhance national subsidiaries across the world. The research capacity (Yusuf, S.). Mr Keith largest 1,000 companies by R&D O’Neill, Director of Lifescience & expenditure allocate, on average, Food Commercialization Depart- 55 per cent of their R&D budget ment, Enterprise Ireland, emphasized outside the countries where they are that a lot of the success of Ireland headquartered and 91 per cent of is attributed to attracting FDI which MNCs conduct some R&D in over- had positive spillovers that were seas centres.23 MNCs’ activities are captured by local firms. It was also organized on a global scale and allo- suggested in discussions on the ECA cated through intra-firm information region, that R&D-intensive FDI has networks, of which R&D is an organic helped cushion some countries from component. Establishing distribu- the impact of the financial crisis on tion, information sharing, virtual and R&D. informal networks is consequently a core part of their R&D business In the ECA countries discussed – models, as insightful information on Yahoo!, Hewlett Packard from the fact that initial FDI may not and Renault Technologie qualify as being an R&D-intensive Graph 4: Poland FDI Trends provided by representa- activity. If the government offers 20 18 17.2 16 15.7 14 12 10.3 10.2 10.1 10.0 10 8.3 8 7.5 6.8 6.4 6 5.7 4.3 4.4 4.1 3.6 4 2.8 2 1.6 1.4 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Marek Å?yzwa, Member of the Management Board, Polish Information and Foreign Investment Agency. Bulgaria, Croatia, Poland and tives of these companies shows. _________________________________ Romania – the foreign owned R&D 21Cantwell, J. and Piscitello, L., 2000. Ac- sector has not been particularly R&D by MNCs is mostly, albeit not cumulating technological competence: its affected by the recent global eco- exclusively, based on “captive off- changing impact on corporate diversification nomic downturn. Poland has been shoring,â€? i.e., conducted in a foreign and internationalization. Industrial and Corpo- experiencing an upwards trend in affiliate of the same MNC. This may rate Change 9(1), 21-51. Carlsson, B. (2006). FDI inflows, attracting approximately take two forms: first, R&D centers are Internationalization of innovation systems: A USD 11.5 billion in 2009 and the part of wider industrial development survey of the literature. Research Policy 35(1), highest amount among 12 new EU complexes with initial investment 56-67. Santangelo, G. (ed.), 2005. Techno- states (Å?yzwa, M.).22 Similarly, FDI to preceding the establishment of an logical Change and Economic Catch-up. The Bulgaria has been growing steadily R&D corporate center; and second, Role of Science and Multinationals. Edward over the last ten years (Angelov, E.). R&D centers are established directly, Elgar, Cheltenham. 22 Quoting Source: World Investment Report, Bringing in external sources of capi- without any link to manufacturing, as UNCTAD 2010, AmCham, KPMG, January ‘10 tal has reduced the impact of limited illustrated by software R&D related 23 See Jaruzelski, B. and Dehoff, K., 2008. domestic funding capacity during the centers in Bulgaria, Croatia, Poland, “The Global Innovation 1000,â€? Strategy + recent economic crisis on the R&D and Romania. While the second form Business, Issue 54, 2008 quoted in World sector in these countries. can be linked directly to R&D-inten- Bank, 2011. “R&D-intensive FDI: Overview sive activities, the first form cannot of global trends and policy implications,â€? MNCs effectively integrate R&D into and, thereby, the policy implication background paper prepared for a High-Level their innovation value chain and FDI is different, as attracting R&D FDI Policy Workshop “Innovating Through the in R&D links national innovation sys- cannot be detached from attracting Crisis—Counter-Cyclical Innovation Policies – tems with international ones (Yusuf, FDI in general. The difference stems How to Do It?â€? held in Dubrovnik, Croatia, on June 8-11. 33 preferential treatment to R&D- international companies generated general, as the global strategies of intensive FDI and, by the same larger employment gains, compared multinationals change in response to token, discriminates against other to those in Irish ownership. evolving conditions in global mar- investments, an opportunity to have kets, governments should not erect a follow-up, in the form of an invest- barriers but rather assist a local sub- ment in an R&D corporate center Attracting FDI in R&D in sidiary in making necessary adjust- may be missed. Eastern Europe ments and enhancing its ‘bargaining MNCs can also bring benefits in position’ vis-à-vis headquarters. terms of employment. Although it The development of information was suggested that one drawback To attract FDI in R&D in the first and communication technologies, may be that small companies never instance, the business environment combined with a more liberal trade make it to the big time because they must be conducive to innovation and investment environment in de- get bought. In the discussion ses- (including favorable market and veloping countries, have made them sions, though, it was drawn out that labor conditions, IP protection, and increasingly attractive for allocation the practice in Ireland shows that so on, covered above in Chapter 2: of both production and R&D companies that were acquired by Mainstreaming Innovation Policy). In activities. “Build up [of] countries’ reputation and trust of the MNCs takes time and a lot of work from various stakeholdersâ€? Sasha Bezuhanova, Hewlett Packard CEE Public Sector Director BOX 4. COMMON FACTORS IN ATTRACTING FDI • Stability (including low government debt). Bulgaria • Attractive costs, including a low corporate tax rate (10 per cent) and the lowest labor costs in European Union. • Good market access to EU, Russia & CIS, Turkey & Middle East markets. • A skilled workforce and one of the highest proportions of students studying abroad in EU. • Major transport corridors passing through the country (see Bulgaria Map in Chapter 2: Main- streaming Innovation Policies). • Benefitting from having the EU as trading partner. • The government supports specific industries under the Investment Promotion Act, which has attracted high-impact programs. Leading global investors include IBM, EoN, Solvay and many more (Angelov, E.). • A strengthened IP legislative system. • Sources: Evgeny Angelov, Ministry of Economy, Energy and Tourism, Bulgaria and discussion session notes. • Stability (including low government debt). Poland • An effective incentives’ system including those derived from EU funds. • A skilled workforce, with 20 million enterprising and young people and 2million students. • High-impact programs have been attracted, with the vast majority of FDI inflows coming from the EU (Å?yzwa, M.). • Strengthened IP law and protection. • Sources: Marek Å?yzwa, Member of the Management Board, Polish Information and Foreign Investment Agency and discussion session notes. • Good market access to EU, Russia & CIS, Turkey & Middle East markets. Romania • A skilled workforce. • An effective incentives’ system which includes leveraging EU funds. • IP regulation, however, is an ongoing challenge. • Source: Discussion session notes. • Economic and political stability. Croatia • An effective incentives’ system which includes leveraging EU and World Bank funds. • The government provides targeted support for specific industries. • An increasingly skilled workforce. • Sources: Dalibor Marijanovic, CEO, Croatian Funding Agency for Innovation (BICRO); Dr Ivana Nagy, Sr. Executive Director, BICRO R&D; Ivo Friganovic, Sr. Executive Director, Innovation, BICRO, and discussion session notes. 34 Box 4 below, which details common of employment in MNC R&D facili- fiscal incentives that foster inclusive factors in attracting FDI, shows how ties are small. R&D by MNCs is also growth. Poland, for example, pro- the countries discussed have created rarely a significant source of start-up vides incentives for investments in an environment conducive to com- activity and cluster formation. The Special Economic Zones (SEZ) to aid panies in innovation and conducive aggregate effects of FDI on R&D is regional development and raise stan- to FDI in R&D. The theme running uncertain: while FDI in R&D increas- dards of living. At the end of 2010, throughout these is that a long-term es patenting, the benefits of this are more than 10 per cent of Poland’s view to creating this environment is internalized by firms; while R&D by FDI was in these regions. In these needed. As Ms Sasha Bezuhanova, MNCs can enhance national research 14 zones, manufacturing or distri- Hewlett Packard CEE Public Sec- capacity directly and through spur- bution activities can be conducted tor Director, put it “build up [of] ring a competitive response from lo- on preferential terms. Benefits in countries reputation and trust of the cal firms, it can also supersede local being granted a permit to operate in MNCs takes time and a lot of work research, soak up the best research- these zones include the eligibility for from various stakeholdersâ€?. ers and lead to brain drain (Yusuf, S.). income tax exemption; a plot of land prepared for an investment project However, many countries often fail Governments, however, can foster and assistance with formalities relat- to maximize returns from FDI R&D FDI in a way that creates spillovers ing to the investment. There is also as FDI spillovers are mainly vertical, and ensures inclusive growth. One state aid of €100,000 available for in that they are linked suppliers and interesting vehicle is the provision of qualifying projects. One key feature buyers, and direct multiplier effects targeted business environment and of these projects is that they must Case-study 3: Yahoo! – what it looks for in FDI locations Yahoo! is a major player in ICT and it is a highly creative and innovative company. It is a Fortune 500 company with $600 billion in sales, has been profitable since its inception and affects 700 million users. During the Tsunami, for example, one billion people consulted the Yahoo! website in 3 days. Innovation in the service industry is poorly understood, and as Yahoo! is a service industry player, it provides valuable insight into innovation in this sector. Its success is powered by technology behind the scenes: technology powers the development of the company, and R&D is the critical input. For example, advertising tied to search engines depend on complex mathematical modeling; if the es- timation increases by a small percentage, it has a large impact on profits; also substantial economic research is required (experimental eco, game theory, etc.) if Yahoo! is looking to have an impact on the community of science as an innovative company in the services industry. Yahoo! – what it looks for in FDI locations: • Technology powers the development of the company, therefore looking for top people who can make an impact on the community of scientists (many papers in top conferences). The value of people: very specific calculations about profits and R&D. Strategies for governments: Where do you get talented people? - Grow, steal, buy or borrow? Grow – local education is key, talent is “stickyâ€?. The more excellent education and research systems you have, the better talent it breeds (takes a long time); - Buy – make them an offer they can’t refuse (Texas, UAE), if enough money is available; - Borrow – bring the well-established diaspora or other people on temporary assign ments, rovide excellent working conditions, financial incentives (happens a lot in China and India). Bring people back through Public Private Partnerships (PPP) – can promote the creation of centers of excellence. It is probably the most concrete strategy for jump-starting the process (attractive, particularly if there is a large diaspora, good quality of life—e.g., India, China). • Major lab in US; satellite labs in large cities in emerging countries (Haifa, Bangalore, Beijing, Santiago, Barcelona), to tap the pool of talented people, sometimes through partnerships with universities; they tweak products for local markets, can also work on central problems outsourced from center – but only if there is senior management that can enable the technology transfer; leadership is key! • Why have labs in distant locations with the added complexity, language, time difference? Be- cause some talented people will not relocate; research should be close to major markets to understand local trends and behaviors. Satellite R&D - why do MNCs go to these places? They 35 already have large developments in these places (Bangalore and China) Tapping into infrastruc- ture and people (Haifa) university connections, cross-employment, financing arrangements, joint appointments (30-40 people), cross-seeding, cross-fertilization (Spain and Colombia) Mr Andrei Broder, Vice-President, Yahoo! Research. R&D should be a part of strategy for growing technology-intensive Country case-study 6: Poland – At- subsectors and foreign R&D should complement specialized domestic tracting R&D-intensive FDI research capacity building. Mr Yusuf highlighted key aspects of strategy for governments to consider when thinking about how to best leverage In 2010, Poland ranked 2nd in Europe and 6th worldwide in MNC R&D. Strategy should em- Kearney´s FDI Confidence Index, showing the largest increase brace: in confidence worldwide since 2007, when it ranked 22nd. • SME and linkage development Poland has been successful in attracting FDI due to having as in Ireland, especially with smaller MNCs. the background conditions in place conducive to business • Lowering the impact of `crowd- investments, which include: ing-out´ effects; policy must in- clude incentives for research and • Stable economic conditions: Poland is the only EU country innovation by leading national to exhibit stable GDP growth during the crisis. The coun- companies. try’s GDP growth rate at the end of the third quarter of • University research focus, 2010 stood at 4.7 per cent. scholarship and post-doctorate • The country’s main competitive advantages, namely programs, entrepreneurship and geographical location and the size of its market: with business linkages. an internal market of 38 million people, unlimited access • Services and extension to in- to the EU market and strong relations with CIS and Balkan crease new entry and growth of firms. states. • Urban development that fosters • A skilled workforce: “there is no cheap labor in Poland, entrepreneurship, innovation and but a very skilled oneâ€? (Marek Å?yzwa, Member of the Man- R&D: key ingredients – skills, so- agement Board, Polish Information and Foreign Investment cial services, affordable housing , Agency). recreational amenities, and sup- • Specific policies to attract FDI in the form of CIT exemp- porting infrastructure (as is the tion in special economic zones, which has been maximizing case with Bulgaria, for example). the impact of FDI on growth and on lifting people out of • Business environment and fiscal poverty. Government grants have been made available and incentives for FDI – Irish experi- these are managed through individual relationships and ap- ence. proved at the Ministry of the Economy to ensure adequate • Centralized agency to coordinate economic and technological and efficient governance. In some cases, real estate exemp- development, as in Finland. tion is granted and cash grants are available through EU funds. FDI has been seen to be a solution across a number of varied countries Marek Å?yzwa, Member of the Management Board, Polish Infor- – case-studies from Ireland, Poland, mation and Foreign Investment Agency Bulgaria, and Romania have drawn out some key common take-aways of how to best leverage FDI in R&D. maintain their investment for at least Maximizing Returns from In particular, the discussions five years (three years in the case showed that these countries share of SMEs) ensuring not only longer- FDI in R&D important common features in term investments but also economic maximizing the potential of cross- stability for the region. FDI in the The effect of FDI depends heavily cutting spillovers from FDI in R&D: Special Economic Zones (SEZs) had on the country circumstances and created an estimated 167,000 new response but there are ways to 1. Foreign owned R&D centers in jobs by the end of 2010, which itself maximize returns from R&D and to countries discussed are fully em- has created spillover effects: every leverage MNC R&D. These include bedded in respective companies’ work placement generated in a SEZ, having an environment conducive to global innovation networks. generated 0.75 work placements research; a mix of basic and applied Through being mutually embedded, outside the SEZ (Å?yzwa, M.). research, global networking, special- foreign R&D can encourage growth ization, and a strategic focus of firms in technology-intensive subsectors, on innovation (Yusuf, S.). To do this, and should complement specialized 36 sectors. It has set up consultative engaged in different forms of educa- bodies, IT strategies, and business tion. For example, Hewlett Packard concepts for the public and private in Bulgaria has set up IT academies sectors, including SMEs (Bezuha- and collaborated in the design and nova, S.). sponsoring of university programs, collaborating with Technical Universi- 2. Foreign owned firms have been ty (TU), Sofia University, and the New a catalyst for establishing various Bulgarian Univarsity (NBU). It sees forms of clusters. Hewlett Packard, the growth of high profile engineers for example, is positioning itself as a as an essential demonstration of its catalyst for establishing technopark commitment to the country. It saw clusters. Ms Sasha Bezuhanova, CEE its collaboration with public research Public Sector Director, Hewlett Pack- institutes as part of its efforts to sell ard, is vocal about Bulgaria’s poten- Hewlett Packard within Bulgaria. tial of becoming “the `Silicon Valley´ However, according to Ms Bezu- of the Balkansâ€? and outlines how the hanova “confidence building and government can foster this develop- long-term relationship-building takes ment (see Chapter 2: Mainstreaming time, you cannot jump directly into Innovation Policies). Nevertheless, R&D-intensive FDI.â€? hubs often grow organically (Yusuf, S.) such as Renault Technologie Romanie (RTR) development of a re- domestic research capacity build- gional hub for automotive engineer- ing. Hewlett Packard in Bulgaria, for ing, with core activities in Romania example, sees itself as having a key and spoke activities across Turkey, role in transferring the world-leading Slovenia and Russia (Buse, S.) (See know-how that it enjoys. It has set up Case-Study 7 below). key projects with the government, Foreign owned firms have been and national telecoms and banking Case-study 4: Hewlett Packard’s Best Shore business model Hewlett Packard ensures that it contributes economically, intellectually, and socially to the countries and communities it does business in. Its policy ensures that its FDI and offshore locations benefit from widened access to technologies and transfer of world-leading know-how. Its model hinges upon ´Best Shore´ strategy. Hewlett Packard has been in Bulgaria for more than 40 years and employs 4000 people. It has been recognized as the number one IT company in the Bulgarian market for the last 10 years and the Hewl- ett Packard Bulgaria team has contributed to Hewlett Packard worldwide best practice. Best Shore is a strategy for providing a homogeneous network of high quality, cost advantaged de- livery centers. The Best Shore Delivery Centers work closely with the regional teams and the global functions to deliver a comprehensive suite of ITO (Infrastructure Technology Outsourcing) services to Hewlett Packard’s customers, using standard tools and processes. It becomes embedded in the country’s processes and systems by establishing long-term relationships and commitment to the country, for instance, it took two years to sell Hewlett Packard within Bulgaria. This involves working closely with the public sector and building trust and public awareness through collaboration with universities, community programs and through providing consultancy services. These activities and close relationships with the public sector, Non Government Organizations (NGOs) and companies have led to Hewlett Packard achieving a strong place in the country’s innovation sec- tor, exemplified by Ms Sasha Bezuhanova, Hewlett Packard CEE Public Sector Director, being voted most influential woman in Bulgaria. Hewlett Packard also ensures strong linkages by having an end-to-end portfolio in the country. This includes ITO services, data centers, workplace network, security services desk and remote manage- ment. R&D activities in the Americas and EMEA regions are closely linked with large-scale cost advan- taged APJ Centers (Asia Pacific and Japan), supplementing their activities, which helps create regional clusters. Ms Sasha Bezuhanova, Hewlett Packard CEE Public Sector Director 37 Country case-study 7: Romania – Renault’s creation of Regional Hubs Renault Technologie Romanie (RTR) has positioned itself as the biggest Renault engineering center outside of France, and the only automotive engineering center in Eastern Europe, building a basis for a regional automotive engineering hub based in the country. This situation, in part, grew organically out of a long-term relationship between Renault France and the Romanian State. The state-owned car company’s relationship with Renault dated back to a ten- year licensing agreement it signed with the firm, running from 1968-1978. When privatization of the company became a possibility, with a general liberalization of the Romanian economy in the 1990s, Renault had the competitive advantage when starting negotiations on absorbing the public company as it already had a proven track record, and knowledge of systems and processes in-country. In 1999 Dacia, the Romanian state-owned car manufacturer signed a privatization contract, becoming Dacia Renault Group. Dacia Renault Group has produced bench-mark products, the existence of which help produce a ´Brand Romania´. In 2004, it produced the Dacia Logan, a bench-mark in terms of performance and price and reaffirmed this bench-mark through the Dacia Duster, launched in 2010. These achieve- ments provide the background conditions for skills transfer in the long-term and enable the future growth of an automobile engineering specialty in Romania. Renault Technologie Romanie has positioned Romania as a regional hub for the automotive industry. Its activities’ hub in Romania employs 2,400 people across three sites and its spoke activities employ a further 1,470 people across Turkey, Slovenia and Russia. It is building on this model through the Titu Technical Center, inaugurated in September 2010, which houses the second biggest test center for Renault Worldwide. Importantly, Renault is, at the same time, linking these regional activities to home country R&D and integrating R&D activities further along its value chain. The Titu Technical Center, for instance, complements technical centers in Aubevoye and Lardy (France). Mr Soren Buse, Renault Technologie Roumanie, General Manager. “Confidence building and long-term relationship- building takes time, you cannot jump directly into R&D-intensive FDIâ€? Sasha Bezuhanova, Hewlett Packard CEE Public Sector Director CONCLUDING Although R&D fosters growth, much depends on the country context. Indeed, Dr MoonJoong Tcha, Managing Director, Center for SUMMARY That is, it depends on a country’s International Development, KDI, in particular mix of challenges (for his summary of the workshop, talks It is clear that R&D and innovation example, the areas in which private about playing to a country’s current can promote growth and can help investment needs most encourage- or desired comparative advantage. countries recover from an econom- ment) and opportunities (such as If a country wants to foster labor- ic downturn. R&D and innovation competitive advantages, geographi- intensive comparative advantage it provide new growth products and cal location and access to markets). must have a good labor base; if it services, lead to higher level skills Perhaps one of the key points arising wants to foster a capital-intensive and greater knowledge and tech- from the discussions of innovation is comparative advantage it must have nology absorption, while building that our need to understand country- sufficient capital; and if it wants to technological capabilities. They also specific policy requirements warrants foster a knowledge-intensive com- encourage scientific advancement further research. Policy responses parative advantage it must have a and the generation of patents, which should play to a country’s starting strong knowledge base. The way to have potential commercial value endowment, which varies, although achieve this is through cross-cutting (Yusuf, S.). the issues encountered are similar innovation policies. (Hahm, H.). 38 Having said this, one commonal- post-doctorate programs and on outputs due to insufficient technol- ity of success stories and solutions providing services to increase new ogy transfer, which highlights the currently being explored in the entry, efficiency and growth of in- importance of technology transfer in countries discussed is that long-term novative firms. fostering an innovation economy. cross-cutting innovation policies can provide a basis for an innovation-led Alongside this, urban development Mr MoonJoong Tcha, Managing economy and post-crisis growth. needs to foster entrepreneurship, Director, Center for International To implement and mainstream in- innovation and R&D. The key ingre- Development, KDI, points out that novation policies successfully, we dients of this are adequate skills, knowledge is a public good and should take into account the follow- social services, recreational ameni- as we are living in the era of ICT ing key points: ties, affordable housing and support- and globalization, we should trade ing infrastructure (as is the case with knowledge, just as we trade in com- • Strategies to mainstream inno- Bulgaria, for example). modities and goods. The previous vation policy need to consider success stories of Finland, Korea, factors in raising public aware- All workshop participants agreed and Switzerland and of current or ness, because to ensure country that innovation policy can be part planned policy responses from Bul- ownership of resultant reforms, it of a continued recovery and growth garia, Croatia, Poland and Romania, is necessary to have broad-based strategy. As has been emphasized, show how the private and public sec- support for innovation. country specific policies should be tors, along with research institutes, • The key contribution of a com- formulated in the context of the come together for the benefit of prehensive innovation policy is in organic nature of growth in the R&D their countries by bringing employ- ensuring cross-sector collabora- sector and by prioritizing those areas ment gains and human welfare. The tion and coordination of policy which show signs of becoming new stories show the importance of the agendas that facilitate local growth areas. Finland, for example, collaborative approaches that lead innovations. focused on the promotion of the to the cross-fertilization of ideas, • Many successful innovation mobile phone industry. Whereas, in technology and policy initiatives (Mr policies prioritize and reduce the Croatia and Korea, the most appro- Hahm, H.). need for public funding, rather priate use of innovation policy was than develop new instruments to develop the aquaculture and ICT The issues raised in the workshop for R&D financing. industries, respectively. discussions have provided a basis for • Policy-making needs to be highly analysing the next steps to be taken selective in choosing policy in- As Mr Hongjoo Hahm, Country in innovation policy decision-making. struments that are most suitable Manager Croatia, World Bank, The size of R&D public and business to the country context. summed up, we can learn as much, expenditure, for example, one of the • The innovation policy will only if not more, from stories of failures as targets of the Europe 2020 Strategy, achieve impact if government from stories of success. The Finland should be used as a measure of actions are predictable, which mobile phone industry case also progress in shifting towards knowl- can be achieved, in part, through illustrates the fact that in the prioritiz- edge-intensive economy, rather than effective monitoring and evalu- ing of certain areas for development, an objective. The take-away points ation systems and indicators. we should take care not to over- discussed in the workshop report can Predictability, however, does saturate any given market. Croatia be used as a measure for success as not mean that innovation policy and Ireland have been held back in well as a guide to policy prioritiza- is set: it should be periodically their commercialization of research tion. reviewed and, if necessary, ad- justed, to changing conditions. • A strong knowledge base is essential, and can be fostered Box 5. Workshop Reflections through higher education re- forms and long term investment in the education system as well Dr MoonJoong Tcha, Managing Director, Center for international as through encouraging interna- Development, KDI and Mr Hongjoo Hahm, Country Manager Croatia, tional knowledge transfer. World Bank, provided insightful reflections on the workshop as part of their closing remarks. These include: All these factors not only increase innovation impact on growth but Through being one of the most “vocal and activeâ€? conferences also incentivize FDI in R&D. FDI on the subject (Mr Hongjoo Hahm, Country Manager Croatia, World in R&D can be part of countries’ Bank), the workshop has facilitated valuable knowledge sharing: success stories, but it must be bal- “Stories of failure and success must be shared with many countries; this anced with promoting SMEs (this is one way of improving cross-cutting productivityâ€?. (Dr MoonJoong can be achieved through SME and Tcha, Managing Director, Center for international Development, KDI). linkage development, as in Ireland) and incentives for home-grown As the workshop has helped increase connectivity and cross-fer- research to avoid negative effects of tilization of ideas, Dr Tcha said he had found it very “interesting and crowding-out. A centralized agency insightfulâ€? and admitted that he had “learned a lotâ€? from the workshop. to coordinate economic and techno- logical development, as in Finland, Mr Hahm concluded that the workshop had provided “practical can help ensure this balance. MNC hands-on knowledgeâ€? of what other countries are doing in the field of R&D spillover effects and returns can innovation policy and has allowed policymakers to learn from other also be encouraged by focusing on policymakers. university research, scholarship and 39 APPENDIX I: CHECKLIST OF EUROPE 2020 INNOVATION TARGETS The list of indicators below provides Member State, for the European and/or new policy orientations. The the basis for an annual performance Union, and for main non-EU coun- Commission will look for an addition- score-board, as part of the monitor- tries. The score-board will be main- al performance indicator reflecting ing of the Innovation Union. The tained until 2020 and will be subject gender for inclusion in the score- data, using the latest available to review periodically, depending on board. statistics, will be presented for each the availability of new data sources EUROPE 2020 INNOVATION TARGETS CHECKLIST 1. Human Resources New doctorate graduates (ISCED 6) per 1000 population aged 25-34 New doctorate graduates (ISCED 6) per 1000 population aged 25-34 Percentage population aged 30-34 having completed tertiary education Percentage youth aged 20-24 having attained at least upper secondary level 2. Education International scientific co-publications per million population Scientific publications among the top 10 per cent most cited publications worldwide as a per- centage of total scientific publications of the country Non-EU doctoral students per million population 3. Finance and Support Public R&D expenditures as a percentage of GDP Venture capital (early stage, expansion and replacement) as a percentage of GDP 4. Firm Activities Business R&D expenditures as a percentage of GDP Non-R&D innovation expenditures as a percentage of turnover SMEs innovating in-house as a percentage of SMEs Non-domestic doctoral students for non-European countries. Innovative SMEs collaborating with others as a percentage of SMEs Eurostat Public-private co-publications per million population PCT patents applications per billion GDP (in PPS€) PCT patent applications in societal challenges per billion GDP (in PPS€) (climate change mitigation; health) Community trademarks per billion GDP (in PPS€) Community designs per billion GDP (in PPS€) 40 5. Outputs SMEs (more than 10 employees) introducing product or process innovations as a percentage of SMEs SMEs (more than 10 employees) introducing marketing or organizational innovations as a per- centage of SMEs High-growth enterprises (with more than 10 employees) as a percentage of all enterprises Employment in Knowledge-Intensive Activities (manufacturing and services) as a percentage of total employment Medium and High-tech manufacturing exports as a percentage of total product exports Knowledge-Intensive Services exports as a percentage of total service exports Sales of new-to-market and new-to-firm innovations as a percentage of turnover License and patent revenues from abroad as a percentage of GDP APPENDIX II: LIST OF WORKSHOP PARTICIPANTS Bulgaria Invitee Position 1 Mr Evgeny Angelov Deputy Minister, Ministry of Economy, Energy and Tourism 2 Prof. Kostadin Kostadinov Chief Secretary of the Bulgarian Academy of Sciences 3 Ms Sasha Bezuhanova Hewlett Packard CEE Public Sector Director Croatia Invitee Position 4 Ms Danica Ramljak Director, Ruder BoÅ¡kovic Institute 5 Mr Hrvoje MeÅ¡tric Director for Science, Ministry of Science, Education and Sports 6 Mr Dalibor Marijanovic Director, Business Innovation Center of Croatia – BICRO 7 Ms Ivana Nagy Sr Executive Director, R&D, Business Innovation Center of Croa- tia – BICRO 8 Mr Branimir Berkovic Executive Director, Croatian Bank for Reconstruction and Devel- opment – HBOR 41 9 Nico Raic Director, Ministry of Finance 10 Branko Glamuzina Vice Rector for Science and Technology, Dubrovnik University 11 Jurica Jug-Dujakovic Director, Technology and Business Innovation Center for Mari- culture - Maribic Poland Invitee Position 12 Mr Marek Radzikowski Chief of the Policy Cabinet of the Minister of Finance 13 Mr Leszek Grabarczyk Deputy Director, National Center for R&D 14 Mr Zbigniew Kamienski Deputy Director of the Innovation Policy Unit, Ministry of Economy 15 Ms Beata Lubos Head of Innovation Policy Unit, Ministry of Economy 16 Mr Marek Lyzwa Member of the Management Board, Polish Information and Foreign Investment Agency Romania Invitee Position 17 Mrs Cornelia Simion Director, Ministry of Economy, Commerce and Business Environ- ment Youth and Sports 18 Mr Alexandru Cabuz Adviser to the President, National Authority for Scientific Re- search 19 Ms Roxana Petrescu Director, Ministry of Public Finance 20 Mr Sorin Buse Executive Director of Renault Technologie Romania International Experts Invitee Position 21 Andrei Broder Vice President of Yahoo! Research 22 Anna Vidos Expert, RBI 23 Arabela Aprahamian Senior Operations Officer, World Bank 24 Benedikt Herrmann RTD, European Commission 25 Charlina Vitcheva Director, DG Regio, European Commission 26 Evgeny Evgeniev Country Officer, Bulgaria 27 Gabriel Goddard Economist, ECSPF 28 Hongjoo Hahm Country Manager for Croatia, World Bank 42 29 Jang Saeng KIM Education and STI Specialist, Policy Research Division, Center for International Development of KDI 30 Igor Radusinovic Associate Professor at the University of Montenegro, former Deputy Minister for science, research and technological devel- opment at Ministry of Education and Science 31 Keith O’Neill Director of Lifescience & Food Commercialization Department, Enterprise Ireland Head of Research and Innovation, Enterprise Ireland 32 Kurt Larsen Senior Innovation Specialist, World Bank Institute 33 Ljiljana Kundakovic Serbia Innovation Fund 34 Mauro Dell’Ambrogio State Secretary for Education and Research, Federal Depart- ment of Home Affairs Switzerland 35 Michael Mowlam Director, Inspiris 36 Mikko Alkio former State Secretary of the Ministry of Employment and the Economy and adviser to the Prime Minister on globalization issues 37 Moon-Joong Tcha Managing Director, Center for International Development, KDI 38 Natalia Agapitova Program Officer, WBI 39 Natasha Kapil Private Sector Specialist, Poland 40 Paulo Correa Lead Economist, World Bank 41 Sabine Germe European Commission, Directorate General for Regional Policy 42 Sereen Juma Senior Country Officer, World Bank 43 Shahid Yusuf Economic Adviser, World Bank Institute 44 Silvia Viceconte Policy Coordinator, Strategic Objective Prosperity, European Commission 45 Sungchul Chung Korean Experience in Prioritizing Innovation, Representative from Korea 43 REFERENCES Alkio, M. 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