Towards a Private Sector led Growth Model Bosnia and Herzegovina Innovation and Entrepreneurship Assessment June 2019 Acknowledgments This report is authored by Anwar Aridi (Private Sector Specialist) and Anne Ong Lopez (Consultant). The report draws on a background paper prepared by Sabina Silajdzic (Consultant). The team was led by Ruvejda Aliefendic (Senior Private Sector Specialist, Task Team Leader TTL) and Anwar Aridi (Co-TTL) with support from Yanchao Li (Young Professional) and Nejra Hadziahmetovic (Consultant). The report greatly benefited from the guidance of the World Bank management, Linda Van Gelder (Country Director), Emanuel Salinas (Country Manager), and Mario Guadamillas (Finance, Competitiveness, and Innovation, Practice Manager) and from valuable comments provided by Marcio Cruz (Senior Economist), Slavo Radosevic (Professor of Industry and Innovation, University College London). Jaime Frias (Senior Economist) provided guidance throughout the report preparation. The BiH communications team provided helpful support on the production and dissemination of the report’s findings. We would like to thank the counterparts at the respective ministries in FBiH and RS for excellent collaboration and for providing the needed data for the analysis. Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement: The material in this publication is copyrighted. 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CONTENT ABBREVIATIONS AND ACRONYMS ................................................................................................... 1 EXECUTIVE SUMMARY........................................................................................................................ 3 I. INTRODUCTION ................................................................................................................................ 6 II. ANALYTICAL FRAMEWORK TO ASSESS DEMAND FOR I&E POLICY ...................................... 7 III. SELECTED I&E OUTCOMES .......................................................................................................... 8 IV. Demand for I&E Policy ............................................................................................................... 15 1. Firm-level R&D Investments and Capabilities for I&E ..................................................... 15 2. Local Framework Conditions for I&E .................................................................................. 16 3. External Factors Affecting Local I&E Activities ................................................................. 23 V. I&E Policy Framework ................................................................................................................. 25 1. I&E Institutions and Governance......................................................................................... 25 2. Other I&E Actors and Stakeholders..................................................................................... 28 3. Policy Aspirations, Agenda, and Programmatic Rationale ............................................. 29 4. Characteristics of the I&E Policy Mix: By Budget, Objectives, Types of Beneficiaries, and Instruments Used ................................................................................................................... 34 5. Quality of the Policy Mix: Summary of the Assessment .................................................... 40 VI. Key Policy Recommendations................................................................................................... 41 1. Improving Business Environment Conditions ....................................................................... 42 2. Improving Governance, Coordination, and Implementation of I&E Policy at the BiH and Entity Levels .................................................................................................................................... 43 3. Stimulating Business Innovation and Promoting Entrepreneurship ................................ 44 4. Enhancing Research Excellence and Relevance in Public Research Institutes and Universities ..................................................................................................................................... 45 References .......................................................................................................................................... 46 Annex ................................................................................................................................................... 47 ABBREVIATIONS AND ACRONYMS 7STEE Seven Small Transition Economies of Eastern Europe APIF Agency for Intermediary, IT, and Financial Services BD Brčko District BERD Business Expenditure in Research and Development BESP Business Environment Strengthening Project BiH Bosnia and Herzegovina BIP Business Innovation Program BIT Business Innovation and Technology BMZ German Federal Ministry for Economic Cooperation and Development CEFTA Central European Free Trade Agreement COST Cooperation in Science and Technology DBFBiH Federal Development Bank EASME Executive Agency for Small and Medium-sized Enterprises EFSE European Fund for Southeast Europe EPA Export Promotion Agency EU European Union EUREKA European Research Coordination Agency FBiH Federation of Bosnia and Herzegovina FDI Foreign Direct Investment FMDEC Ministry of Development, Entrepreneurship, and Crafts of Federation BiH FTE Full-time Employee GCI Global Competitiveness Index GDP Gross Domestic Product GEM Global Entrepreneurship Monitor GERD Gross Expenditure in R&D GIZ German Agency for International Cooperation GVC Global Value Chain HACCP Hazard Analysis and Critical Control Points HRST Human Resources in Science and Technology I&E Innovation and Entrepreneurship ICBL Innovation Center Banja Luka ICT Information and Communication Technology ILO International Labour Organization IMF International Monetary Fund ISO International Organization for Standardization LIFE Local Investment Friendly Environment M&E Monitoring and Evaluation MIT Massachusetts Institute of Technology MoCA Ministry of Civil Affairs of BiH MoFTER Ministry of Foreign Trade and Economic Relations MST Ministry of Science and Technology NGO Nongovernmental Organization NQI National Quality Infrastructure NSI National System of Innovation PRO Public Research Organization R&D Research and Development RCC Regional Cooperation Council RDA Regional Development Agency REDAH Regional Development Agency for Herzegovina 1 RS Republika Srpska S&T Science and Technology SAA Stabilization and Association Agreement SERDA Sarajevo Economic Region Development Authority SIDA Swedish International Development Cooperation Agency SMEs Small and Medium Enterprises STEM Science, Technology, Engineering, and Mathematics STI Science, Technology, and Innovation TEA Total Early Stage Entrepreneurial Activity UN United Nations UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme UNESCO United Nations Educational, Scientific and Cultural Organization USAID United States Agency for International Development VC Venture Capital WBES World Bank Enterprise Survey WDI World Development Indicators WEF World Economic Forum WHAM Workforce and Higher Access to Markets Activity WITS World Integrated Trade Solution 2 EXECUTIVE SUMMARY This report provides a comprehensive assessment of the current I&E landscape in BiH and offers a roadmap for innovation policy reforms. It showcases current I&E outcomes in BiH and provides analysis of whether current support policies and programs in BiH (including public budget allocations) address existing market failures. The report concludes that recent policy measures have not effectively addressed BiH’s needs for supporting I&E, specifically in terms of access to skills, ease of business regulations, and predictability of business environment. To this end, this report offers a roadmap for policy reforms as well as suggestions for pilot programs. BiH’s new pathway of growth starts with companies and firms with internationally prioritizing private sector productivity recognised quality certificates in BiH. 2 3). growth. One key source for private sector Knowledge intensity of exports, radical productivity growth is boosting innovation innovation, and business entry are and entrepreneurship (I&E), whereby existing relatively weak. BiH tends to export low- firms introduce new products and processes skill/technology products found in traditional (through, for example, adoption of and resource-based industries. This relatively technologies, compliance with international weak economic complexity coupled with quality standards, and enhancement of lagging innovation outputs 3 suggests a lack of managerial capabilities) and new capability to pursue more novel innovation. entrepreneurs are encouraged to enter the Finally, there is a substantially low incidence market. This in turn can help the private sector of new business entry in BiH, averaging just create and sustain more and better jobs. Yet, over 1 new registration per 1,000 active improving I&E outcomes necessitate a population. 4). conducive business environment that encourages business entry, exit, and growth as BiH’s investments in innovation remain well as adequate firm capabilities. lagging. BiH has the lowest gross expenditure in R&D (GERD) intensity among peers at 0.2 There is a high level of demand for percent of GDP. 5). Also, business investment in incremental innovation among BiH firms R&D is limited (29 percent of the total and this is a positive sign. Accumulating expenditure), compared to 69 percent in imitative and absorptive capabilities by Slovenia and 47 percent in Croatia. Further, investing in new technologies and firm-level cooperation in innovation activities implementing proven production methods are inside and outside firms (an important critical for increasing firms’ productivity channel for knowledge transfer) are levels. In 2018, 56 percent of firms in BiH lackluster. mentioned introducing new or improved products or services in the last three years 1 . Weaknesses in I&E outcomes are linked to Further, there is a rather high share of firms the lack of a conducive and predictable using technology licensed from foreign business environment for firms to invest in innovative activities. BiH’s private sector is 1 Regional Cooperation Council (2018). 4 World Bank (2016). 2 World Bank (2013). 5 UNESCO (2016). 3 BiH is one of the poorest among Western Balkan countries in terms of patent applications (WEF 2018) 3 largely fragmented, dominated by micro and and implementation among entity-level small firms (which are unable to scale up), and institutions are fragmented, and coordination concentrated in the low-skilled services between entities remains inefficient. BiH’s sector. There is a low supply of knowledge and combined I&E budget from 2015 to 2018 entrepreneurship, as reflected in the low stock totaled KM 73.7 million (approximately US$42 of R&D personnel, low incidence of population million), an insignificant amount if the object with completed tertiary education, and is to leverage and encourage private sector significantly low incidence of population who investments. intend to start a business within three years 6. The current policy mix does not sufficiently Further, BiH ranks lowest among peers in Ease address I&E policy needs for upgrading of Doing Business, with deficiencies in starting capabilities of existing firms and a business and paying taxes 7. Moreover, BiH internationalization. One channel for lags its Western Balkan peers across most improving productivity and growth among governance dimensions creating a difficult existing firms is technological upgrading, operation environment for local and foreign either through adoption of new-to-the-firm investors. technologies or compliance with international Availability of SME-related infrastructure certification standards. However, the current and policy improvements around BiH-level objectives are more focused on enterprise skills and public procurement innovation through R&D, including basic and are BiH’s current strengths. Infrastructure scientific research. This reliance on a R&D- for entrepreneurship is at par with peer based model is problematic given the missing countries (GEM 2017). There are efforts to complementarities and the high cost and establish a nationwide lifelong failure rates associated with research-based entrepreneurial learning system such as innovation and does not necessarily match the introducing entrepreneurial skills into school objective of improving productivity of curricula. Further, a new public procurement enterprises and boosting growth of the private law was adopted in 2014, and the Stabilization sector. and Association Agreement (SAA) with the EU The policy mix shows an overreliance on was signed in 2015 to allow BiH firms access grants as the most common type of I&E to EU public procurement markets. 8 However, instrument, a lack of scale and relatively financing for entrepreneurs remain small budgets for SME support challenging with weak participation of banks instruments, and a strong perception of in financing the private sector 9. Nonbank lack of transparency on process, targeting financial resources are likewise limited, given and reach of the instruments. Grants are the an underdeveloped market for leasing and most common type of I&E instrument (69 factoring as well as risk financing. percent of the budget share from 2015 to BiH’s I&E institutions and governance 2018). Yet, grant funding for SMEs 10 tends to system is characterized by a highly be limited in both size (KM 7,700 or about USD fragmented structure and lacks a coherent 4,000) and time frame (one-off and up to 1 vision for a private sector-led growth year). Further, the average number of SME model. Due to the country’s complex beneficiaries per instrument is 100. 11 Given governance structure, I&E policy formulation the lack of substantial and sustainable funding 6 about 5 percent in BiH, compared to 18 percent in Estonia 9 Domestic credit by banks to the private sector is 54 percent in 7 It takes 13 procedures and 81 days to start a business, BiH in 2017, compared to 72 percent in Estonia and 60 percent compared to Kosovo at 3 procedures and 5.5 days. Also, firms in Latvia (WDI). suffer from cumbersome tax payments, totalling 411 hours and 10 This is for FBiH entity only where data is available. 33 payments annually. In comparison, firms in Estonia conduct 11 In contrast, there are significantly more SMEs that remain 8 tax payments totalling 50 hours (World Bank Doing Business unsupported: there were over 18,000 SMEs in FBiH in 2017 2019). (BHAS 2018). 8 OECD (2016). 4 and low beneficiary take-up, the impact of acquisition of international certifications), these policy instruments is likely to be consolidating redundant instruments (to minimal, especially on improving firm level reduce implementation inefficiencies), innovative capabilities. Despite small-scale considering alternative instrument efforts to improve transparency, such mechanisms beyond grants, and initiatives have yet to become systematic. As a institutionalizing an M&E framework to result, private sector perceptions of the maintain feedback loops for I&E support. application process and the targeting and reach of the instruments remain negative. • Enhancing research excellence and relevance in public research institutes and For BiH to progress towards a private universities (medium- to long-term): Due sector-driven economy, I&E ecosystem to weaknesses in R&D capabilities, lack of reforms must start by placing enterprise funding for public research organizations, innovation agenda to the forefront. This and lack of systematic industry-academia assessment presents a road map for I&E policy collaboration, policy reforms in this area reforms focusing on four key areas and should include increased investments in suggests a pilots that can be introduced in the human capital capabilities and public short, medium and long term: research infrastructure, industry-relevant research activities, and aligning research • Improving business environment conditions activities and school curricula with private (short-term): prioritize areas of quick sector needs. wins, including specific actions to address taxation and legislative loopholes related to business taxation (e.g., corporate income tax), and investment laws as well as harmonizing and digitizing of business registration, licensing and other service delivery procedures. • Improving governance, coordination, and implementation of I&E policy at the BiH and entity levels (short- to medium-term): A fragmented governance structure can be addressed by developing BiH-level and entity-level I&E strategies that articulate a common vision to improve firm level I&E capabilities, aligning public funding for support programs based on the country’s capability needs, and building institutional capacities to design and implement I&E support programs. • Stimulating business innovation and promoting entrepreneurship (short- to medium-term): Current BiH policy needs on improving existing firm capabilities and incentivizing new business entry for internationalization necessitates approaches related to piloting and scaling instruments that address I&E gaps (e.g., trade finance, matching grants to support 5 I. INTRODUCTION Moreover, transitioning to a private sector-led model of growth has the potential to improve productivity. A private sector-led model encourages existing firms to introduce new The growth landscape of Bosnia and products and processes (through the adoption Herzegovina (BiH) is undermined by of technology, international quality standards, adverse productivity developments and and managerial capabilities) and encourage weak private sector development. While new entrepreneurs to enter the market. This economic growth recovered over time (since in turn can help the private sector create and the negative rate of 3 percent in 2009), it sustain more and better jobs. To date, averaged only 1.7 percent between 2010 and however, the private sector is primarily 2017. Economic recovery is dragged by the dominated by micro and small firms, which slowdown in productivity growth since the face a myriad of structural (horizontal) crisis (IMF 2018; World Bank 2017). Overall, constraints and firm-level (vertical) labor productivity and total factor constraints, such as the existence of business productivity growth remain low when environment barriers that dis-incentivize compared to peers (estimated at 1.1 percent market entry, exit, and growth as well as the and 1.6 percent in 2017, respectively). 12 lack of adequate firm capabilities for I&E (for Unemployment remains high, although some example, capability to adapt existing improvements are observed in the labor technologies to enhance productivity). market. Per Labor Force Survey data the unemployment rate fell from 20.5 percent in The twin challenges of improving the to 18.4 in 2018, driven by a reduction in business environment and addressing activity rate and a slight rise in employment bottlenecks to efficiency and productivity (mainly in manufacturing and construction). improvements among firms require an Further, limited job creation in the private orchestrated policy effort to alleviate some sector has been fueling emigration, especially of BiH’s binding impediments and set the among the educated, skilled and youth. stage for additional structural improvements in the medium to long term. BiH is still finding a pathway to rebalance For BiH to achieve sustainable and private its current public sector-led growth model sector-led economic growth, substantial to a private sector-led one. In this light, reforms are needed in the medium term to enhancing innovation and realign incentives and policies toward entrepreneurship (I&E) is a key priority improving the business environment, for BiH. The private sector’s share of gross enhancing private sector competitiveness, and domestic product (GDP) at 60 percent remains fostering I&E. smaller compared to the average public sector share of 66 percent among Western Balkan The World Bank is supporting the countries and 74 percent among Seven Small Government’s efforts on this agenda Transition Economies of Eastern Europe through the US$60 million BiH Business (7STEE) countries (World Bank 2018). Weak Environment Strengthening Project private sector development and investment (BESP). The project consists of two are unsustainable in the long run given the components addressing horizontal and evidence that long-run growth is private vertical barriers to competitiveness and sector-led (for example, East Asia growth private sector growth. miracle, 20th century Industrial Revolution). 12 The Conference Board (2019). Total Economy Database. 6 Box 1. Components of the BiH BESP decentralized institutional environment in BiH creates an unpredictable business Component 1 focuses on improving the environment for firms and thus is not business environment by reducing the administrative burden and implementing conducive to growth and I&E. selected integrated service delivery for businesses. The expected results will be an This report is structured along three upgraded institutional and regulatory segments. First, it provides a brief overview framework that provides a predictable and of the analytical framework used to increasingly transparent, efficient, and conceptualize and structure this report. Next, accountable government to support business services. it elaborates on key findings related to demand for innovation by assessing and Component 2 focuses on fostering I&E within comparing key I&E outcomes and analyzing the private sector. The component will address the needs of existing firms, especially local framework conditions. Finally, it small and medium enterprises (SMEs), for provides a thorough review of the I&E technological upgrading and adoption of governance structure and policy mix. The international quality standards and report concludes with key policy certifications with the objective of improving recommendations to improve the I&E policy productivity, enhancing innovation, and creating jobs. In addition, the component aims environment in BiH. to improve firm formation through building a pipeline of new entrepreneurial ventures II. ANALYTICAL FRAMEWORK TO supported by existing intermediaries. ASSESS DEMAND FOR I&E POLICY This assessment feeds into the project preparation for the BESP, by comprehensively reviewing policy The proposed framework aims to answer structures related to I&E demand in BiH. It the following questions: (a) How well is aims to answer the following questions: (a) the business innovation policy framework What is the current demand for I&E policy? addressing market and system failures? (b) How do current BiH support policies and and (b) Is public resource allocation for programs promote I&E and address existing I&E consistent with policy aspirations? To market failures that constrain development answer these questions, the country’s needs of I&E activities? and (c) Is the current analysis provides an overarching approach to allocation of public resources for I&E understand how consistently the country’s consistent with its policy priorities and does existing policies and instruments respond to it address current gaps in I&E outcomes? The I&E demand. The observed I&E demand gaps main conclusion is that recent policy will enable policy makers to identify policy measures have not effectively addressed measures addressing these unmet needs. BiH’s needs for supporting innovation and Foremost, the framework considers firms to entrepreneurial growth, indicating that there be the main unit of analysis. As such, firm- are policy demands to address I&E level investments and capabilities are constraints. For example, BiH’s I&E outcomes considered as part of the identification of I&E (such as, productivity and export complexity) demand gaps. Further, this framework are especially subpar when compared to recognizes that not all observed outcomes other transition economies in Eastern Europe remain within the control of policy makers. (e.g., Estonia and Latvia). Moreover, firms As such, many demand determinants are face severe internal and external constraints exogenous (for example, external that significantly inhibit their I&E potential, competitive pressures, level of demand for such as lack of access to skills and significant BiH exports, and availability of foreign regulatory burdens in starting a business. capital). Figure 1. provides an overview of Further, the complex and highly the framework. 7 Figure 1: Analytical framework to assess unmet needs for I&E policies Source: Adapted from Frias (2015). Note: BERD = Business enterprise expenditure on R&D; R&D = Research and Development. This analysis relies on primary and and Herzegovina (FBiH) and Republika secondary data sources. BiH is Srpska (RS). In parallel, the assessment of the benchmarked against its neighbors in the I&E policy mix draws primarily from Western Balkans and 7STEE 13 on a list of qualitative interviews with public entities, indicators. The analysis relies on a systematic private stakeholders, and international review of research, relevant reports, and donors active in the BiH. For a full list of primary data from the Federation of Bosnia stakeholders consulted, see Table A5. Table 1: BiH regional and transitional peers Peers Country Western Balkan countries Albania, Kosovo, North Macedonia, Montenegro, and Serbia 7STEE Bulgaria, Croatia, Estonia, Latvia, Lithuania, Slovak Republic, and Slovenia III. SELECTED I&E OUTCOMES worst among Western Balkan peers: Serbia (65th), Montenegro (71st), Albania (76th), and North Macedonia (84th). Moreover, BiH’s innovation capability is the weakest among Overall levels of competitiveness in BiH this set of peers. Based on the 2018 WEF’s show symptoms of weak I&E outcomes. 12th Pillar on innovation capability, BiH ranked 91st out of 140 countries in the deficiencies can be seen across all measures, World Economic Forum (WEF) (2018) Global including in (a) the quantity and quality of Competitiveness Index 4.0 and ranks the formal R&D (scientific publications and 137STEE group comprises seven small transition economies in the EU), these are peers that BiH can learn from (World Bank Eastern Europe that have become European Union (EU) 2017). members. Due to geographic proximity, structural similarity, and parallelism in goals (for example, BiH is a candidate to join 8 patents); (b) the extent to which the BiH average. Nevertheless, its average labor environment encourages collaboration productivity growth performance between (international co-invention and multi- 2010 and 2018 is the best among Western stakeholder collaboration), connectivity Balkan peers, while it lags that of some 7STEE (cluster development), and diversity countries such as Slovak Republic, which (diversity of workforce); and (c) BiH’s leads the pack at close to US$77,000 (Figure capacity to translate ideas into goods and 2.) Like its Western Balkan peers, growth in services that buyers demand (buyer BiH’s total factor productivity (efficiency sophistication). (Table A1) with which labor and physical capital are used) has been lackluster since the global There are improvements in BiH’s labor financial crisis in 2009. In fact, productivity productivity, but this has not converged decline has subtracted from BiH’s economic with 7STEE country peers to date. At the growth between 2009 and 2012. There is economy level, BiH’s labor productivity has some modest recovery in productivity from increased from US$32,000 in 2000 to about 2013 to 2016, although not to the level of US$57,000 in 2018. Moreover, labor growth before the crisis (Figure 3). productivity is only over 25 percent of the EU Figure 2: Labor productivity per person employed (in 2017 US$) and average labor productivity growth (2010–2018) 3.5 3 2.5 2 1.5 1 0.5 0 Source: The Conference Board (2019). Total Economy Database. Note: 7STEE peers are highlighted in blue; Western Balkan peers in orange. 9 Figure 3: Growth of Total Factor Productivity Source: The Conference Board (2019) and IMF (2018). The knowledge intensity of BiH’s export and metal exports primarily comprise ores basket is below that of Western Balkan and unwrought items (World Bank 2017) and and 7STEE peers (Figure 4) as the country its labor-intensive manufactures have low- tends to export low-technology products technology content (Table 2). The share of found in traditional and resource - based high skill- and technology-intensive industries. Weak economic complexity may manufacture exports are well below all suggest an inability to innovate and develop 7STEE countries and most Western Balkan sophisticated exports. In fact, BiH’s export peers, except for Albania (Figure 5). basket in 2014 comprised resource-based Moreover, BiH’s global value chain products: agriculture, metals, and minerals participation remains on the low value added comprise one-third of its exports (that is, and final assembly stages of production agricultural exports are largely unprocessed (World Bank 2017). Figure 4: Economic Complexity Index, 2000–2016 Source: Massachusetts Institute of Technology (MIT). The Observatory of Economic Complexity. 10 Table 2: Composition of goods exports in BiH relative to Western Balkan peers Composition Albania BiH North Montenegro Serbia Kosovo Macedonia Animal 1.0 2.0 0.6 2.4 1.5 0.1 Vegetable 4.0 3.5 3.9 3.1 11.6 2.2 Foodstuffs 2.3 3.2 7.4 11.5 8.3 4.0 Minerals 15.9 8.2 5.1 21.0 3.3 7.4 Chemicals 0.5 7.7 21.6 3.9 5.4 0.5 Plastic/rubber 0.5 3.1 1.9 0.5 8.6 4.4 Hides and skins 0.9 1.8 0.2 1.2 0.6 5.2 Wood 3.4 10.4 0.6 11.3 4.7 1.2 Textiles and 16.7 5.5 13.2 0.3 5.2 7.9 clothing Footwear 17.7 7.1 1.3 0.2 1.9 0.2 Stone/glass 0.4 0.6 0.8 0.3 1.0 5.2 Metals 9.9 17.8 15.3 32.8 12.8 51.0 Machinery 2.3 11.3 21.5 6.5 16.6 6.9 Transportation 0.5 4.5 5.2 2.9 12.7 1.9 Miscellaneous 1.2 11.3 3.4 2.2 4.4 1.8 Special 23.0 3.1 0.0 0.0 1.5 0.1 Source: UNComtrade (2014, except for Kosovo which is 2012/2013); reproduced from World Bank (2017). Note: Columns sum to 100 percent. Figure 5: Manufacture exports by level of skill and technology intensity, 2015 Source: UNCTAD; reproduced from World Bank (2017). Concentration of exports in low-value is similar, medium- and high-tech industry’s segments of production is also reflected in share in manufacturing value added is close the low overall industry contribution to to 30 percent. Moreover, BiH’s industrial gross value added, which is about 23 production grew by just 2 percent on average percent from 2015 to 2017. Medium- and between 2011 and 2017 compared to high-tech industry’s share in manufacturing Estonia’s 5 percent. 14 This is evidence of value added was only 18 percent in 2015. In weak recovery and revitalization of existing comparison, while Estonia’s overall industries following the global financial crisis industrial contribution in gross value added as well as existence of structural weaknesses 14 World Bank. World Development Indicators (WDI). 11 in the BiH economy that remain unaddressed. new or improved products or services in the These weaknesses translate to modest last three years, these innovations are not improvements in industrial employment necessarily radical (new to the market). throughout the transition process, remaining Rather, these innovations are new to the below 50 percent of its prewar level (Silajdzic enterprise (and thus more related to 2018). adoption). This supports the finding of Silajdzic (2014) that improvements relating Weak export complexity likewise reflects to product and process innovation BiH’s status as an adopting innovator, 15 particularly among manufacturing firms with a focus on less novel and more reflect efforts to adopt new technology. In incremental firm-level innovation comparison, a higher percentage of its outcomes. Nevertheless, given BiH’s level of Western Balkan peer firms such as those in development, accumulating imitative and Kosovo and Albania demand for a more absorptive capabilities by investing in new radical type of innovation. Overall, this technologies and implementing proven suggests that there is a high level of demand production methods are critical in increasing for incremental innovation among BiH firms firms’ productivity levels. While 56 percent of (Figure 6). firms in 2018 mentioned having introduced Figure 6: Product innovation and type of innovation Source: RCC (2018). Note: DK = Do not know; Left panel - Respondents were asked the following question: Have you introduced new or significantly improved products and/or services in the last three years?; Right panel - Respondents were asked the following question: Were any of your product innovations (goods or services) new to your market or only new to your enterprise? Despite high incremental innovation patenting among local firms. Between 2008 demand, outcomes related to more radical and 2014, for example, there were 40–65 innovation are extremely poor in BiH. The patent applications annually by individuals, country ranks the poorest among Western while there were none (or up to two Balkan peers in terms of trademark applications annually) from local enterprises. applications 16 and the second poorest in terms While this reflects commercialization of patent applications, only outperforming potential for innovation by individuals, this Albania. Patent applications by local residents also reflects scarce knowledge and innovation are mostly done by individuals, with little capability among local firms (Figure 7). 15 EIB (2018) defines an adopting innovator as one that reports 16 Weak trademark application is a sign of weak product no substantial R&D expenditures and that develops products differentiation and export capacity. This is likely a reflection of that are new only to the company. BiH’s industry structure, i.e., a high share of resource-based industries and small and inward-looking market. 12 Figure 7: Patent and trademark applications Source: WEF (2018) Global Competitiveness Index 4.0 Data Set. Note: Respondents were asked the following question: In the past three years, did you cooperate with any of the universities on R&D or technology development projects to help develop new products or services? Entrepreneurial outcomes are also percent in 2017 compared to Estonia’s 19 extremely weak in BiH and lag most percent during the same year. There is also a Western Balkan and 7STEE peers (Figure 8 substantially low incidence of new business and Figure A1) this poses a serious concern entry, averaging just over 1 new registration for a country seeking to rebalance its per 1,000 active population in 2016. In growth model into a private sector-led one. comparison, its Western Balkan peer The percentage of adult population engaged in (Montenegro) had over 6 applications during early stage entrepreneurial activity has the same year. Weak entrepreneurship can be dropped from 7.4 percent in 2014 to a mere 4 due to factors internal or external to the firm—these are explored in the next subsections. Figure 8: New business density Source: World Bank (2016). Note: New business density refers to new registrations per 1,000 people ages 15–64 in 2016. 7STEE peers are highlighted in blue; Western Balkan peers in orange. 13 IV. DEMAND FOR I&E POLICY BiH has the lowest gross expenditure in R&D (GERD) intensity among peers at 0.2 percent 1. Firm-level R&D Investments and of GDP in 2016. Countries that intensively Capabilities for I&E invest in GERD tend to primarily be funded by the private sector, such as in Slovenia (69 Lack of critical I&E inputs, such as R&D percent), Croatia (47 percent), and Estonia (41 investments, underpin low I&E outcomes percent). BiH ranks in the middle for its and explain gaps between BiH and peers. investment in business R&D (Figure 9). Figure 9: GERD (% GDP) in 2016 and R&D investments by source of funding in 2015/2016 Source: United Nations Educational, Scientific and Cultural Organization (UNESCO). Note: Left panel - Montenegro data in 2015. 7STEE peers are highlighted in blue; Western Balkan peers in orange. Right panel - BiH, Serbia, and North Macedonia data in 2016 and the rest in 2015. Beyond R&D investments, technological foreign supply chains. While ranking above- capabilities within BiH firms rank rather average, these capabilities however have not highly among country peers, although translated to more competitive I&E outcomes. collaboration within and between firms is Firm-level cooperation in innovation activities lagging. Over one-fifth of manufacturing firms is another channel for knowledge transfer. Yet, use foreign technology, whereas close to one- in BiH, these types of cooperation inside and third of firms have an international quality outside firms are lackluster, only performing certification (Figure 10). The latter can be a better than firms in Croatia (Figure A2). sign of increasing integration of firms into 14 Figure 10: Firms using technology licensed from foreign companies and firms with an internationally recognized quality certification Source: World Bank Enterprise Survey (WBES) (2013). 7STEE peers are highlighted in blue; Western Balkan peers in orange. 1. Local Framework Conditions for I&E prevalence of micro and small firms (which are unable to scale) can explain in part the I&E Composition of Firms gaps in the BiH economy. Many SMEs are found in wholesale and retail (43 percent), BiH firms are largely fragmented and with only 19 percent being in the dominated by micro and small firms. SMEs manufacturing sector (Figure 11). As for the represent more than 99 percent of the total tradable sectors such as manufacturing, global business population (over 27,000 firms) in value chain (GVC) participation by BiH has 2017, and small and micro firms are about 95 focused on clothing, footwear, machinery, and percent of the total business population automotive although participation is mainly in (Figure 11). The size structure of SMEs in BiH assembling components imported from the EU has not changed over time. In fact, changes in (with its foreign direct investment (FDI) the average number of employees across all invested firms having little backward links to sizes of firms (small, medium, and large) have local suppliers), necessitating firms to been negligible. Moreover, a significant upgrade to deepen GVC participation as well portion of the value added (40 percent) and as expand GVC participation in other skill- employment (30 percent) are captured by intensive sectors such as processed large firms, despite their small share in the agriculture and information and economy (0.9 percent). communication technology (ICT) services The sectoral distribution of SMEs (World Bank 2017). Overall, this sectoral showcases SMEs’ high concentration in the distribution—location of SMEs in low-skilled non-tradable service sector. This service sectors—is indicative of poor specialization in low-knowledge sectors and industrial development and diversification of the SME base. 15 Figure 11: Business demography in BiH and sectoral distribution of SMEs (%) Source: BHAS (2018). Availability and Use of I&E Skills educated potential workers who have the capability to contribute to I&E are left Weaknesses in internal firm capabilities unemployed in BiH. This figure is 12 percent are because of the lack of available I&E in BiH compared to just 3 percent in Lithuania inputs, resulting in a low knowledge supply (Figure 12), pointing to a lack of good jobs in in the economy. For one, there is limited BiH. The lack of skilled labor usage contributes availability of skilled labor. The stock of BiH’s to significant emigration and brain drain: in R&D personnel (including researchers, fact, BiH has the highest number of emigrants technicians, and other support staffs) in the among Western Balkan countries at close to workforce is smaller than that of all 7STEE 1.8 million from 1990 to 2017 compared to the peers. There is also a low incidence of next highest emigrant stock (over 1 million in population with completed tertiary education, Albania). 17 Over 40 percent of emigrants in at 8.4 percent compared to 34 percent in 2010 also completed at least postsecondary Lithuania (Figure A3). Among college education. Apart from unemployment, graduates in BiH, one-fifth complete more emigration desires are fueled by perceptions technologically intensive courses (science, of connections-based hiring in the technology, engineering, and mathematics government sector (the largest employer in [STEM] programs), although a higher the country). Overall, the low level of percentage of its peers complete such courses availability and use of educated workforce in (for example, close to one-third in Estonia) BiH hinders the development of I&E in (Figure A4). contributing to BiH’s growth outcomes (productivity and knowledge complexity of Even with the scarcity of skilled labor, a exports) and reflects weak radical innovation relatively significant percentage of highly outcomes and entrepreneurial activities. 17 United Nations (UN) Statistics (2018). 16 Figure 12: Labor force with advanced education and unemployment with advanced education in 2017 Source: WDI. Note: Left panel - Labor force with advanced education is expressed as the percentage of total working-age population with advanced education. Right panel - Unemployment with advanced education is expressed as the percentage of total labor force with advanced education. 7STEE peers are highlighted in blue; Western Balkan peers in orange. Lack of use of skilled labor, despite their in the country. The percentage of adult availability in the economy, points to a population who are latent entrepreneurs and wedge between the education system (on who intend to start a business within three the supply side) and demand for labor. years are less than 5 percent in BiH, the lowest BiH’s public expenditure on education among peers. Lack of keenness to engage in comprises about 5 percent of GDP. However, entrepreneurial activity is due to the lack of while this is in line with peers, the education perceived opportunities in the area where sector does not enroll as many upper they live (87 percent), lack of perceived secondary and tertiary students (enrollment capabilities/belief that one has the required rates are below regional averages) and has skills and knowledge to start a business (65 declining rates for vocational and technical percent), and fear of failure (27 percent). This training. 18 These complexities contribute to is despite the country ranking comparatively the lack of skills that meet business needs in well in terms of expert ratings on BiH’s labor market (IMF 2015). entrepreneurial education, ranking next to Estonia and Latvia (frontiers) (Figure 13). Entrepreneurial supply is even weaker in BiH, contributing to weak business density 18 There are also issues such as training programs not equipping employment on the one hand, and SME managers face learners with applied skills needed by the private sector. As a additional costs in finding, training, and educating their result, most vocational training graduates are unable to find workforce on the other (Silajdzic 2018). 17 Figure 13: Entrepreneurial culture and entrepreneurial education in 2017 Source: Global Entrepreneurship Monitor (GEM) (2017). Research Institutions scientific and applied research, as well as At the institutional level, BiH’s I&E-related research with a commercialization potential to institutions remain nascent, and the boost collaboration between research and country has been unable to revive its science organizations and industry and science, technology, and innovation (STI) business. Because of this, experts rarely base during the postwar transition period. engage in basic or applied research, but rather Reforms related to rebuilding institutional operate based on short-term consultancy infrastructure conducive for I&E have not needs. These institutions also operate in a been prioritized, such as supporting public vacuum, with largely no systematic research organizations (PROs) to be active in collaboration between the Government and applied R&D activities, creating strong links industries, except more recently between the between foreign and domestic firms through agriculture industry and agriculture-related joint ventures, and addressing technology research institutions. While there is a good upgrading and reindustrialization issues. BiH number of surviving institutions (that is, 22 has only started to formulate entity-level STI licensed science and technology [S&T] policies in the past decade, although there institutions in RS versus 36 in the FBiH), their remains no permanent and competitive effectiveness in contributing to BiH’s funding for R&D-related institutions (Silajdzic innovation outcomes is insignificant (Silajdzic 2018). 2018). These policy governance failures resulted Business Environment in the closure or privatization of prewar BiH currently has stable macroeconomic PROs, and the surviving institutions mostly conditions but lacks a predictable business perform consulting rather than basic or environment for firms to invest in applied R&D activities. There are also poor innovative activities. While BiH’s links between innovation agents. Currently, macroeconomic conditions are stable the surviving public institutions face (considering recent progress to reduce deterioration of their research capabilities, internal and external imbalances, a prudent due to the lack of funding opportunities and fiscal position, and a stable financial system human capital, as well as the lack of well- with ample capital and liquidity in the defined missions for research organizations economy level) (IMF 2018), there is a lack of (both public and private) within the National predictability for businesses to invest in System of Innovation (NSI). For example, there productive activities, such as I&E. For one, are limited funding opportunities to support business environment indicators over the 18 lifecycle of firms show difficulties in starting, regulations. In starting a business for example, operating, and closing a business. In fact, BiH company registration processes are different ranks lowest among peers in the World Bank’s in FBiH and RS: new BiH firms that wish to overall Ease of Doing Business ranking, with operate in both entities must spend deficiencies in starting a business and paying significantly more time and costs to meet taxes. BiH scored last among Western Balkan registration procedures compared to firms in and 7STEE peers in these indicators. A major other peer countries that need to undergo reason for uncertainty in the business registration once (Figure 14). environment is lack of harmonization of BiH’s Figure 14: Ease of Doing Business - selected indicators Source: World Bank Doing Business (2019). Business environment constraints result in Estonia conduct 8 tax payments totaling 50 high business operating complexities for hours only. Part of the reason is due to the lack firms. In fact, the time and costs related to of e-government services: there is no online starting a business and making tax system for paying taxes, even though there is a payments in BiH are exceptionally higher limited online filing of taxes available than both Western Balkan and 7STEE peer specifically for income and property taxes countries. BiH by and large exceeds the (OECD 2016). There are also tax concerns number of procedures (13) and days (81) to faced by private enterprises, such as high start a business, compared to Kosovo at 3 social contributions to labor and unfavorable procedures and 5.5 days, for example. BiH business tax conditions. Overall, this shows firms’ payments for taxes are also one of the that BiH needs to boost efforts in reducing most cumbersome, totaling 411 hours and 33 regulatory burdens for BiH firms (Figure 15). payments annually. In comparison, firms in 19 Figure 15: Starting a business (left) and paying taxes (right) Source: World Bank Doing Business (2019). Note: 7STEE peers are highlighted in blue; Western Balkan peers in orange. A complementary GEM assessment in 2017 promote SMEs in BiH is next to the level of focused specifically on the SME Estonia (frontier among peers). While BiH entrepreneurship ecosystem shows that ranks in the middle in terms of physical and BiH dwarfs all its 7STEE peers on financing services infrastructure and internal market for entrepreneurs, although it has openness, its Government’s support policies comparable commercial and professional and programs for SMEs as well as taxes and infrastructure for SMEs. Figure 16 shows bureaucratic regulations imposed on new that there is a lack of financial resources for firms and SMEs consistently lag those of SMEs, such as equity, debt, grants, and frontiers like Estonia and Latvia. Indeed, weak subsidies, compared to all selected peers. For Doing Business results for BiH on starting a example, credit to the private sector by banks business and paying taxes support this GEM is 54 percent in BiH in 2017, compared to 72 assessment, while an assessment of the policy percent in Estonia and 60 percent in Latvia.19 mix of government support programs is the Nonetheless, the availability of commercial objective of the next section. and professional institutions that support or 19 World Bank WDI. Domestic credit to the private sector by corporations except central banks), such as through loans, banks refers to financial resources provided to the private purchases of non-equity securities, and trade credits and other sector by other depository corporations (deposit taking accounts receivable, that establish a claim for repayment. 20 Figure 16: Entrepreneurship ecosystem Source: GEM (2017). Note: Financing for entrepreneurs - The availability of financial resources (equity and debt) for SMEs (including grants and subsidies). Governmental support and policies - The extent to which public policies support entrepreneurship— as a relevant economic issue. Taxes and bureaucracy - The extent to which public policies support entrepreneurship— taxes or regulations are either size-neutral or encourage new and SMEs. Governmental programs - The presence and quality of programs directly assisting SMEs at all levels of government (national, regional, and municipal). Commercial and professional infrastructure - The presence of property rights; commercial, accounting, and other legal and assessment services; and institutions that support or promote SMEs. Internal market openness - The extent to which new firms are free to enter existing markets. Physical and services infrastructure - Ease of access to physical resources (communication, utilities, transportation, land, or space) at a price that does not discriminate against SMEs. Another complementary assessment Association Agreement (SAA) with the EU was focused on the maturity of SME policies (in signed in 2015 to allow BiH firms access to EU aligning with Small Business Act public procurement markets. Nevertheless, principles) shows some SME policy some dimensions that have not improved (or improvements in BiH between 2012 and have weakened) include (a) the operational 2016, particularly around enterprise skills environment for SMEs, (b) the innovation and public procurement. In comparison to policy for SMEs, (c) the regulatory framework Western Balkan peers, however, OECD for SME policy making, (d) SME (2016) finds that BiH lags its peers across internationalization, and (e) bankruptcy and all SME policy dimensions. There are efforts second chance for SMEs. In terms of regulatory to establish a nationwide lifelong framework for SME policy making, for entrepreneurial learning system such as example, lags in aligning with Small Business introducing entrepreneurial skills into school Act principles are due to inactive and expired curricula, as well as aligning training curricula strategies that initially sought to improve SME for job seekers and SME needs better. Further, capabilities, limited business support services 2014 saw the adoption of a new public for SMEs, and lack of policy coordination procurement law, and the Stabilization and between BiH and entity-level institutions (hindering alignment of SME policies and programs) (Figure 17). 21 Figure 17: Small Business Act scores for BiH, 2012 and 2016 Source: OECD (2016). Limited access to finance is a critical significant number of firms using line of credit constraint to BiH firm growth and or considering using them in the future at 58.1 technological upgrading. While there are percent 20. However when seeking bank credit, some improvements in the legal and SMEs continue to face difficulties as regulatory framework for finance in BiH commercial banks lend mainly to state-owned from 2012 to 2016, access to finance enterprises, large corporates and individuals. remains problematic especially for SMEs. In addition, nonbank financing is focused on Nonbank financial resources are also microfinance, and there remains an limited. Improvements in the legal underdeveloped market for leasing and framework include having a framework for factoring as well as venture capital (VC) credit rights that is in line with EU laws and financing. While both entities allow operational systems such as an online investment in VC funds, there are no laws that registration system for security over movable facilitate SME investments and no government assets, a cadaster system, and a public credit initiatives to develop VC as a financing tool for information system. These systems are SMEs (OECD 2016). implemented at the entity level as per constitutions. However, such systems may benefit further from enhanced coordination and interoperability going forward. The banking sector remains to be the primary financing source for BiH SMEs, with a 20Global Findex Database (2017); SAFE (2018); World Development Indicators (WDI) 2017. 22 2. External Factors Affecting Local I&E are also issues that inhibit import demand Activities among BiH firms, such as the lack of mutual recognition of technical standards even among Demand for BiH’s exports affects firms’ Central European Free Trade Agreement propensities to engage in I&E. As part of the (CEFTA) members (Silajdzic 2018). integration process into the EU, BiH has liberalized its trade regime. However, its FDI inflow is another channel to transfer trade openness performance suggests a knowledge and technology from foreign to rather weak trade dynamism for BiH domestic enterprises through spillover (Figure 18). In 2017, exports and imports’ effects. Yet, BiH receives insignificant FDI share in BiH’s GDP stood at 87 percent of GDP, compared to other Western Balkan peers significantly lagging behind 7STEE peers such (Figure 19). BiH’s FDI inflows amounted to less than 5 percent of GDP, and this is the as the Slovak Republic (189 percent), Slovenia lowest in the region in 2016. Time series wise, (155 percent), and Lithuania (161 percent). its FDI inflows have also not recovered since Exports as a share of GDP are likewise one of the financial crisis, albeit similar to most the lowest (36 percent of GDP), above only peers. Estimated net FDI inflows increased in Albania and Kosovo. BiH’s export structure nominal terms but decreased in terms of GDP shows that it exports a more limited variety of by 0.1 pp, financing 42 percent of the cash products: about 3,000 (of which the top five against documents (CAD) 22. Apart from the product exports account for less than 20 issue of lack of FDI inflows, most of these FDIs percent of exports), compared to 7STEE are channeled to non-tradable sectors such as countries which tend to export a larger variety real estate and retailing (70 percent in BiH), of products. The 7STEE countries also export similar to peers such as Albania (80 percent), to a larger number of countries, compared to Serbia (65 percent), and North Macedonia (50 BiH which has a more restricted set of export percent). Yet, capital inflows into the non- tradable sectors instead of export-oriented destinations (for example, 72 percent of its sectors are not conducive for growth as this exports went to EU-28 countries in 2017). This can put a drag on export competitiveness suggests the importance of product and (World Bank 2017). BiH has attracted the least market promotion and diversification through FDI, mainly because the political environment upgrading via I&E to drive export growth is difficult and the country’s reforms have not (World Bank 2017). progressed much 23.. Among others, BiH suffers from the lack of harmonized business Access to imports among firms is an laws and multiple enforcing authorities across important channel for technology transfer BiH. Lack of harmonization results in varying and thus affects firm capabilities for I&E. interpretations of the law depending on On balance, access to factor inputs at jurisdictions and thus creates policy competitive prices for BiH can be observed uncertainty. Administrative burdens also through its imports from abroad, mainly EU create disincentives for entry of potential new countries. However, access to certain investors who have yet to learn to navigate BiH’s complex structure. This is despite BiH intermediary products and factor inputs is having liberal investment policies open to found to be problematic for some industries FDIs. Moreover, investment promotion in BiH (that is, fabricated metal processing, plastic suffers from a lack of strategic guidelines, such and rubber industry, and processed food as having clear FDI objectives to attract industry) in light of nontariff barriers. 21 There investors (UNCTAD 2015). 21 22 For example, the time and cost to import as part of Regular Economic Report, April 2019. World documentary and border compliance remain higher Bank. 23 than 7STEE peers in 2019. Source: World Bank Ibid. Doing Business (2019). 23 Figure 18: Trade openness - Exports and imports as share of GDP in 2017 and number of products and destination countries in 2015 Source: World Bank WDI and World Integrated Trade Solution (WITS); right graph reproduced from World Bank (2017). Figure 19: Foreign direct investment inflows (% of GDP) Source: World Bank staff calculations. V. I&E POLICY FRAMEWORK implementation (government effectiveness); (c) political instability/violence; (d) government capacity to formulate and implement regulations that promote private 1. I&E Institutions and Governance sector development (regulatory quality); and (e) ability of citizens to participate in selecting Overall, BiH lags its Western Balkan peers their government (voice and accountability). across most governance dimensions Indicators most concerning for private sector creating a difficult operating environment development (that is, regulatory quality and for local and foreign investors. BiH ranked government effectiveness) show that most the worst on perceptions related to (a) peers (North Macedonia, Montenegro, corruption; (b) quality of public services, civil Albania, and Serbia) have achieved positive service, and policy formulation and gains, but not for BiH (Figure 20). 24 Figure 20: World Governance Indicators in 2017 Source: World Bank (2017). Note: Estimates give the countries’ score in units of a standard normal distribution, that is, ranging from approximately −2.5 to 2.5. BiH’s I&E institutions and governance Development, Higher Education and system is characterized by a highly Information Society of RS has a mandate to decentralized and fragmented structure. At implement the innovation support agenda and the BiH level, the Ministry of Civil Affairs of BiH is responsible for programs that target (MoCA) coordinates on scientific research researchers, innovators, and organizations policies and on international cooperation in that provide support to I&E activities, such as research activities, such as supporting Innovation Center Banja Luka (ICBL). It has organizations in accessing European also developed the Strategy for Technology Cooperation in Science and Technology Development 2017–2021, which has an (COST), European Research Coordination overarching goal of connecting science and the Agency (EUREKA), and H2020 projects. In real economic sector by improving addition, the Ministry of Foreign Trade and innovativeness among firms. As part of this Economic Relations (MoFTER) coordinates commitment, the strategy seeks to create a SME policies at the BiH level. However, there Science and Innovation Fund, which will is no BiH authority responsible for support scientific research and innovativeness coordination of innovation policies (OECD of firms. In FBiH, the Ministry of Education and 2016). The Science Council of BiH is an Science (FMoES) and Ministry of advisory entity to the MoCA and is tasked to Development, Entrepreneurship, and Crafts of monitor the implementation of state-level S&T FBiH (FMDEC) are two ministries involved in strategies (for example, 2010–2015 Strategy I&E policies. For example, the FMDEC is for Science Development). Despite having leading the development of entrepreneurship these coordinating bodies for research and and SME policies as well as implementing entrepreneurship at the BiH level, I&E policy action plans and programs of incentives for formulation, implementation, and funding entrepreneurship in FBiH. Further, there are responsibilities are delegated separately to separate policy implementation bodies across two BiH entities: In RS, for example, the Brčko District (BD) and across FBiH cantons. Ministry of Scientific and Technological 25 Figure 21: Current I&E governance structure BiH: MoCA (science/innovation), Ministry of Foreign Trade and Economic Relations (entrepreneurship) Advisory body: Science council of BiH Entity level: Entity level: BD FBiH RS Ministry of Economy FBiH Ministry of Ministry of Scientific and Cantons Education and and Technological Entrepreneurship of Science of FBiH Development, RS Higher Education and Information Society of RS Republic Agency for FMDEC the Development of SMEs (RARS) Ministry of Energy, Mining, and Industry of FBiH Source: Author’s own illustration. Due to the complex structure of BiH, there strategy to support innovation and remains fragmentation on science and technological upgrading: both have their own innovation policy formulation and strategies, but time frames are not implementation among entity-level coordinated, and funding objectives vary. institutions, and coordination between Given the MoCA’s limited responsibilities, BiH- entities has remained weak and inefficient. level support to innovation is largely confined While BiH has adopted the Strategy for the to international cooperation. Development of Science and Technology at the BiH level, BiH authorities (MoCA) lack Likewise, there is a lack of alignment of competences in implementing an integrative SME policy objectives. Weak coordination strategy to support innovation and at the BiH and entity levels impedes SME technological upgrading. While this BiH-level policy development and implementation. strategy stipulates funding objectives for R&D, While the MoFTER leads SME policy operationalizing the strategy is the coordination in BiH, the institutional setup has responsibility of RS and FBiH entities. been ineffective and is less advanced than Likewise, financing is decentralized between other Western Balkan peers: for example, the the two entities, and there is limited funding at Strategy for the Development of SMEs 2009– the BiH level. As a result, the MoCA has limited 2011 was not implemented at all, and the SME authority over policy formulation and Consultative Committee set up initially as part implementation within the entities. The of the strategy became inactive. As a result, entities, however, do not have an integrative efforts to support firms are confined at the entity level (both have their own separate strategies to support SMEs or entrepreneurship). This fragmentation 26 extends to the lack of harmonized definition of 2. Other I&E Actors and Stakeholders SMEs at the entity level (at the BiH level, no legal definition for SMEs exists) as well as in The international organization/donor BD: each has its own definition of SMEs based community provides sizable support for on its own laws, although one of the criteria I&E in BiH. Current support programs focus (employment size) at least coincides with the on a wide range of I&E areas, such as EU definition. Weak coordination translates to improving BiH’s business environment, youth fragmentation in the implementation of and women entrepreneurship, business and business environment procedures, which skills development, innovation, and sectoral differ between entities: on the one hand, RS’s competitiveness. Many of these organizations procedure for company registration and provide direct support to enterprises and obtaining licenses and permits can be entrepreneurs, while few are focused on completed in any of the 11 Agency for building government capabilities to enhance Intermediary, IT, and Financial Services I&E. Current donor-supported instruments (APIF) branches across RS. On the other hand, are listed in Table A3. there is no one-stop contact point for company registration and licenses and permits in FBiH There are many business advisory service (OECD 2016). providers to support SMEs in BiH, although their effectiveness is unclear. It consists of While institutions supporting I&E are regional development agencies (RDAs) on the mainly fragmented since different one hand, and knowledge service providers ministries are accountable for different that were established from international I&E topics, there are efforts within the RS donor support on the other. RDAs in BiH total entity to increase harmonization of five and are key SME training providers (OECD governance structures for I&E. For 2016), and there are 25 business support example, complementary governance centers in BiH. These agencies provide structures are recently put in place to business advice and development, such as support effective implementation of services related to business planning, access innovation-related policies in RS. While to credit, marketing, and market surveys innovation programs are administered by the (DANUBE-INCO.net 2016). Given the lack of a Ministry of Scientific and Technological certification system on business Development, Higher Education and advisory/training service delivery in BiH, it is Information Society of RS, there are unclear which of these service providers are independent commissions comprising experts effective in addressing SME needs. Yet, from various fields. These experts are informal discussions suggest that weak responsible for the distribution and allocation capabilities in some areas exist among existing of funds, as well as on monitoring and incubators and accelerators, such as lack of evaluation of I&E programs. This mechanism international networking capabilities. 24 allows government officials to consult with key experts on I&E-related best practices, as Innovation networks and intermediaries well as integrate feedback from innovation tend to be stand-alone initiatives and lack beneficiaries, into enhancing policy design of systematic links with other knowledge various innovation instruments and programs providers. These are found in larger BiH (Silajdzic 2018). It remains to be seen whether cities, such as Sarajevo, Banja Luka, Mostar, these structures are effective over time in Tuzla, and Zenica. Activities include supporting I&E implementation. supporting start-ups’ product development, training, and match-making. Their 24 Focus group discussion result with intermediaries in December 2018. 27 effectiveness to date remains unclear; support collaboration). Due to the lack of activities may also be too broad to meet coordination between industry and academia, specific business needs (for example, legal the impact of efforts by these intermediaries support and management consultancy tends to be negligible. These intermediaries’ services). These intermediaries number 13 in survival will also depend on boosting BiH, such as Business Innovation and innovation awareness and encouraging firms Technology (BIT) Center Tuzla, INTERA to engage in technological upgrading Technology Park Mostar, and ICBL (Box 2). (DANUBE-INCO.net 2016). Overall, while some of these incubators/centers have links with universities (for example, BIT Center and the University of Tuzla partner to source potential 3. Policy Aspirations, Agenda, and start-up projects), these links are not Programmatic Rationale systematic (in part due to lack of funding to BiH has developed a list of I&E-related aspirations that were captured in its BiH- and entity-level strategies. 25 These strategies’ rationale is mainly driven by the Box 2. Examples of entrepreneurship R&D-based innovation model, and there is support organizations a lack of coherent vision for a private • BIT Center Tuzla was established in 2005 sector-led growth model and strategic to provide young entrepreneurs an goals. At both BiH and entity levels, the opportunity to create ICT-related innovation agenda is primarily targeted at businesses and runs an incubator to support prototyping and training and improving the R&D capacities of universities research units. and research institutes. Nonetheless, more recent strategies have started to emphasize • ICBL was jointly established as a prime example to support entrepreneurship in collaboration between industry and academia. the RS entity by the RS Government, city of On the entrepreneurship agenda, there is no Banja Luka, University of Banja Luka, adopted SME strategy at the BiH level, and University of East Sarajevo, RARS, and a while both entities have their own strategies, private sector company, Athene these are separate and thus not cohesive. Prosjektledelse AS. It runs a business incubator, education and training units Table 3 provides details (that is, objectives and (for example, providing vocational thematic areas) about these BiH- and entity- trainings), and a conference center. level strategies. • INTERA in Mostar was created in 2008 with a vision to boost research and In addition, some of these strategies were innovation among SMEs and help left unimplemented. For those that were transform universities to become research implemented, few have undergone expert and innovation driven. INTERA was assessment concluding that effectiveness established through links between the of implementation reforms was minimal. Government, university, and the private sector (that is, City of Mostar, two Mostar- While these strategies are good on paper, based universities, Government of some were not implemented at all, as in the Herzegovina-Neretva Canton, FBiH case of BiH-level Export Growth Strategy Chamber of Commerce, Chamber of Trade 2012–2015 (which includes support for of FBiH, Regional Development Agency for internalization of SMEs) and SME Herzegovina (REDAH), and a private firm, Development Strategy 2009–2011. For ALFA THERM). strategies that are implemented, effectiveness of implementation is difficult to be assessed 25 While there are canton-level strategies, these are not the focus of this report. 28 given the lack of robust monitoring and strategies recognize that firms require funding evaluation (M&E) system in BiH, including to realize R&D and innovation projects. In this adequate data to monitor results on I&E. sense, this shows efforts to link universities Those that have undergone some sort of and research institutes’ innovative efforts assessment were found to be ineffective. For with industry needs. However, harmonization example, measures to address regulatory between I&E strategic documents remains to burdens (a cross-cutting I&E issue) as outlined be seen within FBiH. For example, the Strategy in the Regulatory Reform Strategy 2012–2015 for Scientific and Technological Development (RS) and Strategy for Regulatory Reform under the Ministry of Education and Science in 2013–2016 (FBiH) were considered to not FBiH is targeted to support scientific R&D have been well institutionalized, with capabilities primarily among public higher implementation relying significantly on education institutions. Yet, these programs are international donors (OECD 2016). not connected to SME-related programs housed under the FMDEC. As both ministries There are heterogenous efforts to are important in boosting FBiH’s innovation harmonize strategies across entities. potential, lack of coordination between Within the RS, for example, the Strategy for innovation-related ministries is undesirable Scientific and Technological Development and unlikely to lead to effective collaboration 2017–2021 recognizes its connection to the and links between businesses and universities Strategy of the Development of Small and (Silajdzic 2018). Medium Enterprises of RS 2016–2020: both 29 Table 3: BiH’s I&E strategic documents at the BiH and entity levels Implementation Overarching objective of Strategic document Thematic areas and goals body strategy Innovation Previous: No innovation-specific 2010–2015 strategy: 2010–2015 strategy: strategy, but there was the 2010–2015 • Enhance the role of • Develop stronger collaboration with the EU. Strategy for Science Development in BiH R&D as a long-term (complemented by an action plan) 26 • Develop research infrastructures that meet EU and global standards. development strategy Current: 2017–2022 Strategy for Science in BiH. • Improve participation rates of researchers in international networks and Development in BiH programs. • Promote stronger collaboration between industry and academia (university BiH level and research institutes). 2017–2022 strategy (selected goals): • Ensure the leading role of S&T as a factor in the long-term development of the country. • Increase allocation of financial assets for public and private sectors in BiH for S&T areas, and ensure support to innovation, technology transfers, commercialization, and application of scientific accomplishments. Previous: Strategy on Scientific and Strategy for Scientific and Strategy for Scientific and Technological Development 2017–2021: Technological Development 2012–2016 Technological Development • Improve scientific research quality and excellence. Current: Strategy for Scientific and 2017–2021: • Encourage internationalization of science and innovation. Technological Development 2017–2021 • Improve the efficiency (Government of RS) of scientific research • Encourage cooperation between scientific research community and the real and innovation economic sector (including by transferring knowledge and technologies RS system. from research organizations to firms and establishing a Science and Innovation Fund to support scientific research and innovativeness of firms). • Create conditions for boosting science and research funding. • Develop human resources in science and innovation. • Encourage smart specialization areas (that is, ICT, energy development, food production, and creative industry). 26 Despite not having a state-level strategy, the state-level authority MoCA’s support for innovators started in 2007 through the Support for Innovation and Technical Culture in BiH program (OECD 2016). 30 Implementation Overarching objective of Strategic document Thematic areas and goals body strategy Previous: 2013 Western Balkan Regional Strategy for the Development Strategy for the Development of Science in FBiH 2010–2015: R&D Strategy for Innovation (regional); of Science in FBiH 2010– • Improve business environment conditions (that is, reduce administrative Strategy for the Development of Science 2015: burden and introduce tax subsidies) for private sector investment in FBiH in FBiH 2010–2015 • Enhance innovation in research and innovation. Current: Strategy for Science and FBiH. • Establish regional centers of excellence across FBiH and implement financial Development in FBiH 2011–2021 grants to support innovation-related organizations (implementation was (drafted in 2011 but not adopted) limited and significantly relied on donor support). SMEs development/entrepreneurship Previous: Export Growth Strategy 2012– Entrepreneurial Learning Entrepreneurial Learning Strategy: 2015 27; Strategy for the Development of Strategy: • Put entrepreneurship topics in school curricula. SMEs 2009–2011 (both not • Enhance • Engage students in school-based entrepreneurial activities. BiH level implemented) entrepreneurial Current: Entrepreneurial Learning learning at all Strategy adopted in 2012 (including an education levels. action plan) Previous: SME Development Strategy for Strategy of the Development Strategy of the Development of Small and Medium Enterprises of RS 2016–2020: 2014–2018; Regulatory Reform Strategy of Small and Medium • Improve business environment conditions for SMEs. 2012–2015 Enterprises of RS 2016–2020: RS • Promote entrepreneurship and entrepreneurial skills. Current: Strategy of the Development of • Improve SME Small and Medium Enterprises of RS competitiveness. 2016–2020 Previous: Strategy for Regulatory Reform 2009–2018 Small and — 2013–2016; 2009–2018 Small and Medium Entrepreneurship Medium Entrepreneurship Development Development: (including action plan for 2016–2018) • Promote FBiH Current: SME Development Strategy in entrepreneurship and FBiH for 2021–2027 (expected to be SME development prepared) (based on the action plan for 2016–2018). Source: Synthesized from OECD (2016) and current BiH- and entity-level strategies. 27 While not adopted, there are some limited support programs implemented by the state-level Export Promotion Agency (EPA), such as export promotion activities. 31 4. Characteristics of the I&E Policy Mix: By I&E activities. In comparison, FBiH spent 26 Budget, Objectives, Types of percent of its ministry budget (the FMDEC; Beneficiaries, and Instruments Used Ministry of Energy, Mining, and Industry; and Ministry of Education and Science combined) BiH’s combined I&E budget from 2015 to on I&E activities. At the BiH level, significantly 2018 totaled KM 73.7 million less was spent on I&E (5 percent of the MoCA’s (approximately US$42 million), an budget) between 2015 and 2018 (Figure 22). insignificant amount compared to the Overall, this suggests that I&E are left to the annual direct support for state-owned entities for implementation. Moreover, enterprises (SOEs) in FBiH (about KM 153 support for I&E activities remain million). Majority (about 75 percent) of underrepresented, even for ministries that budget funding during this period came from have mandates to support I&E. In fact, the FBiH entity, and only 3 percent is comparing direct support for SOEs (subsidies, accounted for at the BiH level. Within entities, grants, and transfers) in FBiH with support for the RS entity spent close to 40 percent of its I&E activities, I&E support in FBiH represents ministry budget (that is, Ministry of Industry, a meager 9 percent of direct support for Energy, and Mining and MST combined) on SOEs. 28 Figure 22: Cumulative 2015–2018 budget share for I&E at the BiH, FBiH, and RS levels 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% BiH FBiH RS Share of total I&E budget in the country Share of ministry budget Source: Author’s own illustration based on budget data from various ministries. The current mix of I&E policy instruments BiH- and entity-level instruments as well as in BiH covers three broad sets of I&E donor support (Table A2 and Table A3). BiH- objectives, namely (a) supporting level objectives are more focused on innovation through R&D, (b) supporting innovation through R&D, including basic and new business creation, and (c) upgrading scientific research. In contrast, entity-level within existing firms (for example, objectives are more dispersed across these adoption of technology and certification three sets of objectives (Table 4). Comparing standards). The current policy mix the FBiH and RS entities, the RS entity has less considered in the mapping involved a mix of focus on upgrading within existing firms. In 28 This is based on World Bank (2016) calculations that FBiH support to SOEs (for example, tolerance for accumulation of SOEs received about KM 153 million on average from 2011 to arrears for taxes and social contributions) are not accounted for 2015 as part of direct budgetary support. Indirect government in the figure. 32 contrast, the FMDEC has provided competitive the RS entity (Table 5). As for donor- grants to support technological adoption (that supported instruments, the tendency is to is, acquisition of technology and equipment emphasize on supporting new business and adoption of technical standards) as part of creation especially on supporting its support to the development of potential/early stage entrepreneurs such as entrepreneurship in FBiH program. Overall students and unemployed youths, in part budget from 2015 to 2018 by the I&E objective motivated by the high unemployment rates in across BiH and entity levels shows that FBiH BiH (Table A3). spent significantly more on I&E compared to Table 4: I&E instruments, 2015-2018 Objective Number of Supporting new Ministry Upgrading instruments Innovation business creation within Cross-cutting through R&D (potential existing firms entrepreneurship) BiH 3 1 0 0 2 FBiH 19 4 5 5 5 RS 8 4 1 0 3 Source: Author’s own illustration based on budget data from various ministries. Table 5: Distribution of I&E budget in 2015–2018 Objective Total I&E Supporting new budget, Upgrading Ministry business creation 2015–2018 Innovation within Cross-cutting (potential (KM) through R&D (%) existing firms (%) entrepreneurship) (%) (%) BiH 2,294,000 77 0 0 23 FBiH 54,861,834 26 11 41 21 RS 16,564,000 61 5 0 34 Source: Author’s own illustration based on budget data from various ministries. While the current mix of I&E policy existing firms. One channel is technological instruments aligns with the authorities’ upgrading, either through licensing of foreign I&E objectives and aspirations, it does not technology or adoption of international necessarily align with policy needs to certification standards. While the WBES has diversify the economic structure and shown that BiH scored well in these indicators improve productivity. Despite government- in 2013, there remains room to maximize the stated efforts to boost R&D as a long-term potential of technology adoption and improve strategy for BiH growth, these, as expected, firm-level capabilities more generally. Yet, in have not translated into market innovations. the FMDEC, I&E instruments supporting In addition, MSMEs still represent over 99 productivity improvements among existing percent of the formal economy, and this firms (technological harmonization / proportion has hardly changed over time. The introduction of standards and strengthening current economic structure, particularly on the competitiveness of technologically exports, further shows that the country is modernized SMEs) represent just about 17 producing lower value-added exports. This percent of the total I&E budget in the ministry overall picture demonstrates the policy need from 2015 to 2018 (Figure 23). for improving productivity and growth among 33 Figure 23: FMDEC budget distribution, by I&E instrument from 2015 to 2018 16000000 45.0% 14000000 40.0% 12000000 35.0% 30.0% 10000000 25.0% 8000000 20.0% 6000000 15.0% 4000000 10.0% 2000000 5.0% 0 0.0% harmonization/introduction of… chambers and educational… Building entrepreneurial zones of technologically modernized SMEs Incentives for traditional and old Scholarships for students entrepreneurial infrastructure Credit subsidy for SMEs Incentives for innovators-individuals Support to youth entrepreneurship Incentives for the development of Support to women entrepreneurship Incentives for associations, Mentoring services to small Incentives for new small businesses Strengthening the competitiveness Incentives for donor-funded projects Improvement of institutional bonded/special crafts businesses Technical crafts 2015-2018 cumulative budget (left axis) Percent (right axis) Source: Author’s own illustration based on ministry data. Further, the current portfolio of I&E policy The target beneficiaries of the country’s instruments does not match the country’s I&E instruments include SMEs, individuals I&E capability needs for (entrepreneurs), entrepreneurship internationalization. Despite the policy need support organizations, and public research to support diversification of BiH’s economic institutes and universities. The beneficiaries structure, recent policy aspirations and the of I&E instruments are primarily SMEs (41 targeting of existing I&E instruments do not percent), followed by research and academic prioritize SME internationalization. Literature organizations and individual researchers (30 shows that firms that internationalize and percent) (Figure 24). This distribution access foreign markets are more likely to be suggests overall that firms are at the core of productive and grow, given potential spillover I&E support in BiH, although SME support is effects through learning by exporting and primarily provided by the FMDEC (Table A2). through scale effects. Yet, the BiH-level Export As for beneficiaries of donor-supported Growth Strategy 2012–2015 has not been instruments, focus is geared toward implemented, and there are no follow-up improving the capabilities of SMEs strategies prioritizing export / (particularly of start-ups) and individuals internationalization. Further, budgetary (Table A3). In terms of support to individuals, support and services provided for export donors’ instruments tend to place emphasis promotion at the BiH and entity levels are on vulnerable groups such as the unemployed inadequate. These institutions generally do and youths. Nevertheless, the FMDEC ran not coordinate on export activities, and export programs supporting women and youth promotion agencies suffer from limited entrepreneurship in 2015, which were financial and human capital resources (OECD discontinued the following year. 2016). 34 Figure 24: I&E instrument beneficiaries in 2015–2018 (%) Enterprise support Individuals Municipalitie Block (innovators, s, Enterprise organizations, 2.7 transfer to students), 0.5 support government organizations agencies, (regional 10.2 development agencies), 0.3 Enterprise support SMEs (enterprises organizations, and entrepreneurs), research and 40.6 academic organizations, Research and individuals/SMEs, academic 15.4 organisations (including individual researchers), 30.2 Source: Author’s own illustration based on budget data from various ministries. These I&E instruments target the different based on the GEM assessment and low new stages of the entrepreneurial life cycle, business registration rates based on World including potential entrepreneurs, start- Bank data), the current stock of entrepreneurs ups, and existing firms. However, the may be left behind in part due to a lack of focus existing policy mix seems to emphasize and tangible support for existing firms. support to potential entrepreneurs. The FMDEC targets business start-ups, women Grants are the most common type of entrepreneurs, young entrepreneurs, and instrument among I&E instruments for existing firms, although the RS entity’s both the Government (Figure 25) and instruments are more limited in scope and donors (Table A3). Grants represented 69 vaguely focus on creating an ‘innovative percent of the budget share from 2015 to culture’. At the BiH level, there is also focus on 2018, followed by credit subsidies (20 entrepreneurial learning and skills percent). Out of 30 instruments in the country, development in schools. Donors also tend to 25 used grants as a mechanism of intervention have their niche life cycle support areas, during this period, and only 1 instrument gave particularly on entrepreneurial learning and out a credit subsidy (a scheme to support SME improving the start-up ecosystem. Overall, the growth and technological development in Government and donor support on I&E seems FBiH 29). Four instruments were block to emphasize on potential entrepreneurship. transfers to government agencies (for While this addresses a policy need (given the example, academic institutions) and an significantly low score on entrepreneurship enterprise support organization (ICBL). 29 In this scheme, the FMDEC is the financing body, while the Subsidized loans charge an interest rate of around 1.5 percent Federal Development Bank (DBFBiH) is the implementing body. with a seven-year grace period. 35 Figure 25: Instrument type as a share of cumulative 2015–2018 budget 11% 20% 69% Grants Credit subsidies Block transfer Source: Author’s own illustration based on budget data from various ministries. Grant funding tends to be limited in both year. 30 Overall, given the constraints in both size and time frame. On balance, the average grant size and length, the impact of these grant size in the FMDEC for SMEs is around KM policy instruments is likely to be minimal, 7,700 (about US$4,000) and ranges between especially on improving BiH’s innovative KM 1,000 and KM 21,590 (Figure 26). Grants capabilities. also tend to be one-off and limited up to a Figure 26: Average funding per SME-grantee (left) and average number of SME beneficiaries in the FMDEC (right) 25,000 250 21,590 216 20,000 200 165 15,000 150 142 10,000 100 82 90 7,731 7,676 7,242 7,059 5,392 55 5,000 3,931 50 37 1,000 9 - 0 harmonization/introduction of… harmonization/introduction of… Strengthening the competitiveness Incentives for development of Incentives for traditional and old Mentoring services to small Support to youth entrepreneurship Support to woman Incentives for newly established Strengthening the competitiveness Incentives for development of Mentoring services to small Incentives for traditional and old Support to youth entrepreneurship Support to woman Incentives for newly established entrepreneurship entrepreneurship of technologically modernized… of technologically modernized… bonded and special crafts bonded and special crafts small businesses small businesses businesses businesses Technical Technical crafts crafts Source: Author’s own illustration based on ministry data. 30In contrast, SOEs in FBiH receive about KM 348,000 annually 2011 to 2015. There were 440 SOEs operating during this on average as part of direct government subsidy. FBiH SOEs period (World Bank 2016). received about KM 153 million of direct subsidy annually from 36 Further, some grants receive a low number (or 100 beneficiaries on average). Yet, there of applicants and beneficiaries. The average are significantly more SMEs that remain number of applications among eligible SME unsupported: there were over 18,000 SMEs in beneficiaries ranges between 23 and 355 FBiH in 2017 (BHAS 2018). applications for the FMDEC instruments (Figure 27). Given the competitive nature of The lack of scale and the relatively small the grants, acceptance rates among SMEs budgets of these instruments raise range from 38 percent to 63 percent only (47 fragmentation concerns. There are too many percent acceptance rate on balance) and from instruments with small budgets. As an 33 percent to 60 percent for instruments example, if the FMDEC was to award all catering to entrepreneurship support eligible applicants, the total program budget organizations (Table A4). The low acceptance (on a per-instrument basis) would become rate translates into a limited number of insufficient (Table A2 and Table A4). This may beneficiaries: in the FMDEC, the average indicate that low take-up could be more a number of project beneficiaries per supply issue rather than a lack of interest from instrument ranges from just 9 SMEs up to 216 potential beneficiaries (demand). Figure 27: Average number of SME applications and acceptance rates for the FMDEC instruments Source: Author’s own illustration based on ministry data. Institutional approaches to design, selection and creating formal processes to monitor, and evaluate implementation of generate beneficiary feedback on instrument I&E instruments are in their incipient implementation. Nonetheless, there are stages. At the entity level, there is generally a initiatives to apply rigorous standards to lack of ministry capacity to design, monitor, instrument design and grant selection in the and evaluate I&E instruments, such as MST as well as track inputs, outputs, and engaging with an expert committee for grant 37 outcomes at the FMDEC. 31 Both initiatives • Despite efforts to improve transparency, however are in the early stages and have yet private sector perceptions of the to become systematic. 32 Further, given the application process and the targeting and complex institutional structure in BiH (and reach of the instruments remain negative. thus overlaps between entities and lack of harmonization of instruments), there are likely to be high operating costs for BiH VI. KEY POLICY RECOMMENDATIONS overall, although the magnitude of these costs is unclear. 5. Quality of the Policy Mix: Summary of For BiH to progress toward a private the Assessment sector- and innovation-driven economy empowered by its capable human capital • The current policy mix is not aligned with and entrepreneurial skills, it must reform the policy needs for upgrading its I&E ecosystem and put the enterprise capabilities of existing firms (through innovation agenda front and center. The adoption of technical and managerial challenges articulated within this diagnosis capabilities) and internationalization of suggest that BiH faces major structural issues SMEs. on both the supply and demand sides of the I&E ecosystem that need to be addressed to • Yet, the policy mix is aligned with stated be able to develop a functioning I&E objectives. For example, at the BiH and RS ecosystem in the long term. On the supply levels, aspirations focused on R&D-based side, I&E activities are focused on public innovation model as a long-term strategy sector-led R&D that is delinked from the real translate into support instruments economic sector. Structural issues on the targeting research institutes and supply side such as lack of skilled labor academic organizations. further dampen BiH’s growth prospects. On • There is an overreliance on grants as the the demand side, many firms are disengaged most common type of I&E instrument. from the global economy, thereby inhibiting Yet, grant funding for SMEs is limited in prospects for learning and upgrading of terms of size and scope: I&E instruments capabilities. While there are reported have a small grant size and limited time incremental innovation outcomes among frame (often one-off). firms (for example, adoption of existing technology), these have not necessarily • Due to the lack of substantial and translated into improved firm productivity. sustainable funding, the scale of Further, the lack of collaboration between instruments, in terms of number of industry and academia inhibits innovation beneficiaries, is small. synergies between these actors. To address • There remains a lack of institutional these structural issues and to place firms at capacity to design, monitor, and evaluate the center of I&E policymaking in BiH, this I&E instruments. For example, there is an assessment presents a road map for I&E underdeveloped targeting mechanism policy reforms. This road map (Figure 28) (for example, selection criteria) for I&E identifies four key areas for reform, namely support instruments. 31 Because of the availability of some form of applicants) grew in terms of employment and monitoring mechanisms at the FMDEC, IFC (2017) revenues, but not on labor productivity, worker was able to conduct an ex post evaluation of the salaries, or export incidence. 32 FMDEC instruments between 2009 and 2015. The Mission interview with the RS and FMDEC study found that enterprises that received grants ministry officials (December 2018). (compared to those that did not, that is, unsuccessful 38 (a) Improving business environment (c) Stimulating business innovation and conditions; promoting entrepreneurship; and (b) Improving governance, coordination, (d) Enhancing research excellence and and implementation of I&E policy at the relevance in public research institutes BiH and entity levels; and universities. Figure 28: Road map for I&E policy reforms in BiH Source: World Bank. 1. Improving Business Environment climate. This requires clear commitment Conditions to business environment-related policy reform at the highest levels of the Time frame: Short term (1–2 years) governments to prioritize areas of quick wins, including specific actions to address Problem: Horizontal constraints such as high registration, licenses and permits, cost of doing business mean that the time and taxation and legislative loopholes related financial resources that could have been to business taxation, and investment laws. allocated to improve firm capabilities are used to pay and complete excessive • Harmonize and digitize service regulatory procedures. BiH currently lags all delivery. This leverage international its 7STEE and Western Balkan peers in the experiences in piloting digital solutions overall Ease of Doing Business score, as well for the harmonization and removal of as in particular areas such as starting a administrative burdens related to business and paying taxes. business entry operation and exit. • Continue existing reforms. This Approach: includes reforms in key areas related to • Improve general conditions for strengthening the judicial system business operation and investment (anticorruption/transparency) and 39 improving the regulatory framework for capability needs (for example, business operation. technology adoption and industry- academia links). Because of the • Stimulate competition to enhance importance of recognizing weak investment in I&E activities. This can be capabilities in both the private sector and done by addressing issues on industrial the Government, aligning public funding structure to allow for competition, such as based on these needs helps increase strengthening competition policy and effectiveness and relevance of public reforming SOEs. support. 2. Improving Governance, Coordination, • Build governments’ and institutional and Implementation of I&E Policy at the capabilities to design and implement BiH and Entity Levels innovation policy and support programs. This can be done by enhancing Time frame: Short term (1–2 years) to governments’ analytical and medium term (3–7 years) programmatic capabilities to introduce and implement innovation reforms. Given Problem: BiH has a fragmented governance the availability of existing capabilities for structure that does not address current I&E reforms at the entity levels, these existing policy needs. BiH policy focus fails to capabilities can be strengthened to recognize firms’ technological and institutionalize I&E public support managerial capabilities and develop STEM programs through (a) piloting of skills as a short- to medium-term strategy. innovation agencies and entities tasked Given the country’s current level of with upgrading the capabilities of existing development, its policy mix need should focus businesses and (b) building a pipeline of on addressing basic capabilities and innovative and entrepreneurial firms. complementarities within the ecosystem. 33 o In this context, the planned efforts by Approach: the RS ministry to establish a Technology and Innovation Fund • Develop national- and entity-level I&E could be an opportunity to leverage strategies that articulate a common the experiences and lessons learned vision based on the country’s current from such initiatives in neighboring development path and aspirations. and other eastern and central This can be done by improving European countries. coordination and cooperation between ministries and agencies to avoid 3. Stimulating Business Innovation and duplication and ensure Promoting Entrepreneurship complementarities. A common vision for I&E also necessitates improving Time frame: Short term (1–2 years) to cooperation with and outreach to the medium term (3–7 years) private sector and private sector representative institutions. Problem: While the current I&E policy mix aligns with government aspirations, it does • Increase and align public funding for not match current policy needs on improving support programs based on BiH’s (a) firm managerial and technical capabilities 33 Cirera and Maloney (2017) in the Innovation Paradox report underdeveloped ecosystem that lacks basic capabilities and call this approach the ‘capabilities escalator’ (see figure p.148). resources to implement or absorb such support. Based on this A capability view emphasizes the alignment of policy support approach, the sequencing and complementarity of innovation instruments and associated public resources with the specific support instruments—‘the innovation policy mix’—is capability needs of a given economy. Thus, it would be less important for building private sector innovative capabilities relevant to introduce Stage 3 (advanced) instruments in an over time. 40 and (b) new innovative firms’ entry for and further supported in the medium internationalization and improving firm-level term. Moreover, entrepreneurship productivity. The current stock of capabilities support activities can be enhanced and in BiH (for example, technology adoption and upgraded to address missing skills) has not been able to rebalance BiH’s complementarities within the growth model from being public sector heavy entrepreneurial ecosystem: to being private sector led. o Support and scale up entrepreneurship and investment Approach: This can be done by improving the readiness support programs quality of the I&E policy mix and developing a delivered by local intermediaries. robust M&E framework to institutionalize I&E support. o Strengthen intermediaries and bridging institutes through technical • Develop and pilot instruments that assistance and introduction of address existing I&E gaps. Given the international practices. policy need for firms to internationalize, o Improve access to early stage risk instruments related to trade finance can capital through removing legal be considered, particularly for SMEs that barriers for the establishment and are more likely to face higher risks in operation of early venture funds. export promotion, integration of SMEs into GVCs, and product and market • Revisit the current I&E policy mix and diversification. Instruments supporting consolidate redundant instruments. the development of firms’ managerial There is a need to rationalize the I&E capabilities can also be considered. instrument portfolio to reduce Despite the lack of empirical evidence implementation inefficiencies at the BiH gauging firms’ competency in and entity levels. This can be done by management practices, there is a growing terminating instruments that do not literature providing evidence from address market or system failures, developing countries on how minimizing duplications and management practices within firms are redundancies. This study provided an correlated with productivity (Bloom et al early step toward analyzing the existing 2013). To date, no strategic document in policy mix of support provided on both BiH highlights the need to support the the Government and donor sides and managerial capability of BiH firms as a identifying instruments with similar priority. These management practices can goals. These efforts can support come in the form of adoption of quality scalability and harmonization of policy standards, lean manufacturing, human mix at both the BiH and entity levels. This resource incentives management, target can also help channel BiH’s scarce setting and monitoring, and operational resources toward addressing the most management. Current innovation centers, binding policy needs. S&T parks, and RDAs can play a role in • Consider alternative instrument providing management consultancy mechanisms (apart from grants) by services for existing firms, for example. adopting a pilot approach that allows • Scale existing instruments that for experimentation, adjustment, and address existing I&E gaps. Existing and improvement in targeting as well as functioning policy instruments that uptake. support firm upgrading, digitization, and o Address enterprise innovation and adoption of existing technologies (such as upgrading through enterprise in the FMDEC) can be institutionalized innovation support instruments and 41 use of financial incentives such as the program (for example, number of jobs innovation vouchers, matching created and productivity growth of firms). grants, and credit guarantees. The World Bank’s Public Expenditure Review for Science, Technology, and  Vouchers have the advantage of Innovation (Correa 2014), components of enabling collaboration or connection which are applied throughout this report, of SMEs with knowledge service could provide useful guidance for providers. Explore mechanisms for designing and implementing an M&E stimulating the market supply of system. knowledge services targeting SMEs through training and certifying local 4. Enhancing Research Excellence and consultants and technical experts. Relevance in Public Research Institutes  Matching grants do alleviate financial and Universities pressures and support the adoption of productivity improving technology Time frame: Medium term (3–7 years) to and quality standards. long term (8–10 years)  Credit guarantees are optimal for Problem: Current PROs face deterioration of addressing financial market their research capabilities, due to the lack of imperfections as well as working with funding opportunities and human capital, as the financial sector to ease financial well as the lack of well-defined missions for constraints. research organizations within the NSI. • Introduce an M&E framework to Research institutes also lack systematic maintain feedback loops and collaboration with innovation agents (for institutionalize I&E support. A example, the private sector). systematic approach to M&E implementation of instruments is needed Approach: at the BiH and entity levels to improve I&E policy governance. This would • Reform university-based research and identify and measure the impact of gradually increase public R&D funding instruments. M&E systems should include with double focus on relevance and logical frameworks, particularly excellence. This can be done by aligning indicators at the input, output, and research activities with private sector outcome stages (moreover, information needs, allocating R&D funding based on systems to systematically track these competitive selection, and piloting indicators can be adopted for efficiency targeted support programs that address purposes). For example, input indicators industry needs. can measure costs (for example, payroll • Invest in the capabilities and and operational costs) relative to actual infrastructure of public research support provided to beneficiaries on a institutions and universities. This can per-instrument basis. Stakeholder be done by piloting investments in key ministries and institutions can monitor industry-oriented testing and which instruments are cost-effective and measurement lab facilities. which are inefficient. Further, tracking the use of inputs across instruments is • Introduce concentrated efforts to important given the limited resources to update curriculum to ensure support I&E in BiH. Output indicators alignment with the private sector’s measure how many beneficiaries are increasing demands for skilled and supported by the instrument, whereas qualified labor. outcome indicators measure the impact of 42 REFERENCES Bloom, N., et al. 2013. Does Management Matter? Evidence from India. 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Washington, DC. 43 ANNEX Table A1: Comparative performance of innovation capabilities Pillar 12: Diversity State of International Multi- Scientific Patent R&D Quality of Buyer Trademark Innovation of cluster co-inventions stakeholder publications applications expenditures research sophistication applications capability workforce development collaboration institutions 0-100 1-7 (best) 1-7 (best) applications/ 1-7 (best) H Index applications/ % GDP index 1-7 (best) applications (best) million pop. million pop. /million pop. Serbia 39.7 4.6 3.6 1.2 3.5 156.7 3.0 0.9 0.0 2.5 648.9 Montenegro 34.9 4.5 3.5 0.3 3.7 41.7 1.9 0.4 0.0 3.4 622.4 Albania 31.7 5.0 3.1 0.1 3.6 54.3 0.2 0.2 0.0 3.2 336.5 Macedonia, FYR 31.1 3.9 3.2 0.1 3.0 93.0 0.5 0.4 0.0 2.7 783.6 Bosnia and Herzegovina 28.2 3.9 3.2 0.2 2.9 73.7 0.5 0.2 0.0 2.3 208.1 Source: WEF (2018) Global Competitiveness Index (GCI) 4.0 2018 Data Set. Figure A1: Total early stage entrepreneurial activity (TEA) Source: GEM (various years). Note: TEA is the percentage of population of ages 18–64 who are either a nascent entrepreneur or an owner-manager of a new business. 7STEE peers are highlighted in blue; Western Balkan peers in orange. 44 Figure A2: Collaboration as an innovation capability Source: WEF (2018) GCI. Note: Indicators are based on WEF Expert Opinion Survey. Multi-stakeholder collaboration represents the average score of the questions: (Collaboration inside company) In your country, to what extent do people collaborate and share ideas within a company? [1 = not at all; 7 = to a great extent]; (Collaboration between companies) In your country, to what extent do companies collaborate in sharing ideas and innovating? [1 = not at all; 7 = to a great extent]; (University- industry collaboration in R&D) In your country, to what extent do businesses and universities collaborate on R&D? [1 = do not collaborate at all; 7 = collaborate extensively]. Figure A3: Total R&D Personnel (full-time employee [FTE]) and population 25+ years with at least bachelor’s degree or equivalent in 2016 Source: UNESCO. Note: All data in 2017, unless otherwise noted. 7STEE peers are highlighted in blue; Western Balkan peers in orange. 45 Figure A4: Percentage of graduates from STEM or non-STEM programs in tertiary education Source: UNESCO. Note: 2017 data for Albania, BiH, and Serbia; 2016 data for Bulgaria, Croatia, Estonia, Latvia, Lithuania, and Slovenia; 2015 data for North Macedonia and Slovak Republic. 46 Table A2: Mapping of BiH and entity-level I&E instruments in BiH Mechanism of Ministry Objective Instrument Beneficiaries 2015 2016 2017 2018 intervention Program for projects Enterprise support preparation and preparation of Innovation organizations, research BiH (MoCA) potential candidates for Grants 444,000 444,000 444,000 444,000 through R&D and academic application to EU funds organizations, and SMEs (FP7/H2020) Enterprise support organizations and Support to technical culture and BiH (MoCA) Cross-cutting Grants research and academic 117,000 117,000 117,000 117,000 innovations in BiH organizations (including individual researchers) Financing of BiH coordination Enterprise support BiH (MoCA) Cross-cutting desk for EU Creative Europe Grants — — — 50,000 organizations program Research and academic FBiH (Ministry of Education and Innovation Support to the field of science of Grants organizations (including 1,850,000 1,500,000 1,500,000 1,475,000 Science) through R&D relevance to FBiH individual researchers) Support to the development of Research and academic FBiH (Ministry of Education and Innovation institutions of science and Grants organizations (including 1,000,000 850,000 850,000 850,000 Science) through R&D encouragement of scientific individual researchers) work of relevance for FBiH Support to institutions of science Research and academic FBiH (Ministry of Education and Innovation and culture of importance for Grants organizations (including 1,100,000 1,100,000 1,100,000 1,050,000 Science) through R&D BiH individual researchers) FBiH (Ministry of Energy, Mining, Subsidies to private enterprises Cross-cutting Grants SMEs — — 500,000 1,000,000 and Industry) and entrepreneurs Innovation Incentives for innovators- Individuals (innovators FBiH (FMDEC) Grants 42,000 49,350 58,400 10,000 through R&D individuals and students) Scholarship for students who are Supporting being educated for traditional Individuals (innovators FBiH FMDEC new business Grants 58,000 45,000 41,600 90,000 and old crafts and for jobs that and students) creation are in deficit Incentives for associations, Enterprise support FBiH FMDEC Cross-cutting chambers, and educational Grants 135,150 201,488 108,956 99,450 organizations institutions 47 Mechanism of Ministry Objective Instrument Beneficiaries 2015 2016 2017 2018 intervention Improvement of institutional Enterprise support FBiH FMDEC Cross-cutting Grants 77,000 48,511 138,379 135,292 entrepreneurial infrastructure organizations Incentive for EU and other Enterprise support FBiH FMDEC Cross-cutting Grants 137,850 100,000 — — foreign donors funded projects organizations Technical harmonization/introduction of Upgrading the International Organization FBiH FMDEC within for Standardization (ISO) and Grants SMEs 303,540 217,800 — — existing firms Hazard Analysis and Critical Control Points (HACCP) standards and CE marking Upgrading Incentives for traditional and old FBiH FMDEC within Grants SMEs 397,036 347,875 180,000 174,222 crafts existing firms Supporting Incentives for newly established FBiH FMDEC new business Grants SMEs 776,518 692,000 967,693 787,130 small businesses creation Supporting Support to women FBiH FMDEC new business Grants SMEs 441,780 350,000 — — entrepreneurship creation Supporting Support to youth FBiH FMDEC new business Grants SMEs 339,194 347,889 — — entrepreneurship creation Strengthening the Upgrading competitiveness of FBiH FMDEC within Grants SMEs 1,381,823 1,503,434 1,684,126 1,469,804 technologically modernized existing firms SMEs Enterprise support organizations, research and academic FBiH FMDEC Cross-cutting Building entrepreneurial zones Grants 1,538,792 1,354,822 940,368 5,262,826 organizations (including individual researchers), and SMEs Supporting Incentives for the development FBiH FMDEC new business Grants SMEs — — 695,795 478,985 of bonded and special crafts creation 48 Mechanism of Ministry Objective Instrument Beneficiaries 2015 2016 2017 2018 intervention Upgrading Provision of mentoring services FBiH FMDEC within Grants SMEs — — — 9,000 to small businesses existing firms Upgrading Support to SME growth and Credit FBiH FMDEC within SMEs 4,946,565 3,318,271 6,653,120 — technological development subsidies existing firms RS (MST, now Ministry of Scientific Research and academic and Technological Development, Innovation Current grants for science Grants organizations (including 80,000 65,000 65,000 65,000 Higher Education and Information through R&D promotion individual researchers) Society) Research and academic Innovation Current grant for activities of RS (MST) Grants organizations (including 1,545,000 1,545,000 1,545,000 1,545,000 through R&D scientific institutions individual researchers) Research and academic Innovation Current grants for activities in RS (MST) Grants organizations (including 523,000 278,000 400,000 400,000 through R&D area of technology individual researchers) Transfer to the Agency for RS (MST) Cross-cutting Transfer Government agency 500,000 500,000 600,000 1,000,000 Information Society Innovation Transfer for Academic and RS (MST) Transfer Government agency 463,000 463,000 561,000 561,000 through R&D Research Network of RS Supporting Enterprise support RS (MST) new business Transfer to ICBL Transfer — 250,000 250,000 250,000 organizations creation Grant for the implementation of Municipalities and RS (Ministry of Industry, Energy, strategy of SME development, Cross-cutting Grants enterprise support 100,000 50,000 50,000 50,000 and Mining) entrepreneurship and organizations establishment of business zones RS (Ministry of Industry, Energy, Transfer to the Agency for SME Cross-cutting Transfer Government agency 960,000 630,000 630,000 640,000 and Mining) development (RARS) 49 Table A3: Mapping of current donor I&E instruments Mechanism of Donor Objective Instrument Beneficiaries Period intervention German Federal Ministry for Local development strategies (program for Economic Cooperation and local self-government and economic Development (BMZ) and German Cross-cutting development) - support to increase — SMEs 2015–2022 Agency for International Cooperation economic capacity of MSMEs at selected (GIZ) business locations in core sectors Business consultancy services (growth and development program), crowdsourcing and open SMEs and individuals (students, Norwegian government Cross-cutting Business Innovation Programs (BIPs) innovation instruments Since 2012 youths, women) and awards (student entrepreneurship programs), and trainings (start-up programs) Grants, convertible loan, SMEs (in areas affected by EU (funder) and United Nations Local Integrated Development project - and incubation program Supporting new floods in 2014 and with high Until January Development Programme (UNDP) support to technological development and (education, training, and business creation concentration of returnees or 2019 (implementor) implementation of new investments business plan internally displaced persons) development) SECO Entrepreneurship Program - support for strengthening of entrepreneurship ecosystem organizations, development of Supporting new Enterprise support Swiss government business start-ups, and growth-oriented Mentoring services Since 2016 business creation organizations small businesses (program also implemented in North Macedonia, Albania, Serbia, Peru, and Vietnam) Grants, convertible loan, and incubation program Swiss government and GOPA mbH (a Supporting new Individuals (unemployed young Support youth to harness business ideas (education, training, and — German company) business creation workers) business plan development) 50 Mechanism of Donor Objective Instrument Beneficiaries Period intervention European Fund for Southeast Europe (EFSE)/Finance in Motion, in Grants and mentoring Supporting new EFSE Entrepreneurship Academy and SMEs (registered start-ups of at partnership with Sarajevo Economic services (including — business creation Entrepreneurship Tournament least 1 year) Region Development Authority pitching preparation) (SERDA) and Mozaik Foundation EU4Business Project (ILO component) - Enterprise support promote entrepreneurship development of International Labour Organization Supporting new Grants and mentoring organizations (incubators, April 2018– unemployed youths and women from rural (ILO) business creation services accelerators, business March 2022 areas by improving capabilities of support associations, and so on) networks EU4Business Project (GIZ component) - introduction of innovation, improvement of innovation capacities, and digitalization of Upgrading within export-oriented companies to increase their Grants and technical April 2018– GIZ Individuals and SMEs existing firms competitiveness in the domestic and foreign assistance March 2023 markets; development of new tourism products, and better access to the international markets Local Investment Friendly Environment World Bank Group Cross-cutting Technical assistance Government — (LIFE) World Bank Group and Swedish Technical assistance International Development Cross-cutting Employment Support Project (business advisory SMEs — Cooperation Agency (SIDA) services) (implemented by Deloitte) United States Agency for Upgrading within Workforce and higher access to markets Enterprise support Grants 2017–2020 International Development (USAID) existing firms activity (WHAM) organizations and SMEs Establishment and promotion of mentoring Upgrading within Consultancy/mentoring JICA (implemented with RARS) service for SMEs in the Western Balkans SMEs Since 2017 existing firms services (Phase 2) C2C program (Challenge to change) - SIDA (implemented with SERDA and Cross-cutting support to innovation and business Grants SMEs 2014–2020 RARS) development SIDA and USAID (implemented with Cross-cutting Credit guarantees Credit guarantee SMEs 2014–2020 three banks) USAID (implemented with Mozaik Supporting new Credit guarantee and Diaspora Invest Program SMEs — Foundation and Restart) business creation technical assistance 51 Mechanism of Donor Objective Instrument Beneficiaries Period intervention Developing accelerators to provide better Equity financing, Supporting new SMEs, enterprise support EU (implemented with RARS) access to innovation finance for SMEs consultancy/mentoring — business creation organizations project services Individuals (entrepreneurs Supporting new Danube Chance 2.0 Interred Danube Consultancy/mentoring whose first business failed) and EU (implemented with RARS) — business creation Transnational Programme services enterprise support organizations Enterprise Europe Network of RS/COSME - support to strengthen the competitiveness Consultancy/mentoring EU/Executive Agency for Small and of SMEs, better access to information - Domestic SMEs (primary target Cross-cutting services and information Since 2015 Medium-sized Enterprises (EASME) easier access to markets and transnational group) services economies, encouraging innovation, and building innovative capacities Enterprise Europe Network of RS/H2020 - Consultancy/mentoring Upgrading within Domestic SMEs (primary target EU /EASME Enhancing the Company’s Innovative services and information Since 2015 existing firms group) Capacities services 52 Table A4: Illustration of grant sizes per beneficiary and take-up rates of the FMDEC instruments Average Total grant Average Minimum number of Total grant Number of Average Maximum size if length of funding per applications size Acceptance Instrument Beneficiaries beneficiaries funding per funding per applicants each grantee received from accepted, rate (average) grantee (KM) grantee (KM) accepted, project (KM) eligible annually annually beneficiaries Individuals Incentives for innovators- (innovators Half a year 9 4,666 4,201 4,999 17 41,994 79,322 53% individuals and students) Scholarship for students who are Individuals being educated for traditional and (innovators 1 year 64 1,000 1,000 1,000 94 64,000 94,000 68% old crafts and for jobs that are in and students) deficit Incentives for associations, Enterprise chambers, and educational support Half a year 36 5,631 2,500 6,000 71 202,716 399,801 51% institutions organizations Enterprise Improvement of institutional support Half a year 7 15,400 6,000 20,000 13 107,800 200,200 54% entrepreneurial infrastructure organizations Enterprise Incentive for EU and other foreign support Half a year 6 27,570 20,000 40,000 10 165,420 275,700 60% donors funded projects organizations Technical harmonization/introduction of ISO SMEs 1 year 37 7,059 4,200 9,000 97 261,183 684,723 38% and HACCP standards and CE marking Incentives for traditional and old SMEs Half a year 165 3,931 500 4,000 260 648,615 1,022,060 63% crafts Incentives for newly established SMEs 1 year 216 5,392 220 8,000 355 1,164,672 1,914,160 61% small businesses Support to woman SMEs Half a year 90 7,242 2,406 8,000 214 651,780 1,549,788 42% entrepreneurship Support to youth entrepreneurship SMEs Half a year 55 7,676 3,953 8,000 126 422,180 967,176 44% 53 Average Total grant Average Minimum number of Total grant Number of Average Maximum size if length of funding per applications size Acceptance Instrument Beneficiaries beneficiaries funding per funding per applicants each grantee received from accepted, rate (average) grantee (KM) grantee (KM) accepted, project (KM) eligible annually annually beneficiaries Strengthening the competitiveness of technologically modernized SME SMEs 1 year 82 21,590 8,000 50,650 215 1,770,380 4,641,850 38% subjects Enterprise support organizations, research and academic Building entrepreneurial zones 9 months 14 148,242 78,400 250,000 42 2,075,388 6,226,164 33% organizations (including individual researchers), and SMEs Incentives for the development of SMEs Half a year 142 7,731 2,800 10,000 269 1,097,802 2,079,639 53% bonded and special crafts Provision of mentoring services to SMEs Half a year 9 1,000 1,000 1,000 23 9,000 23,000 39% small businesses Support to SME growth and technological development (credit SMEs 7 years 18 213,444 20,000 500,000 n.a. 3,841,992 n.a. n.a. subsidy) 54 Table A5: List of stakeholders consulted Stakeholder Category Organization Government agencies FBiH: • FMDEC • Ministry of Transport and Communications RS: • Ministry for Scientific and Technological Development, Higher Education and Information Society (formerly, MST) • Ministry of Economy and Entrepreneurship (formerly, Ministry of Economic Relations and Regional Cooperation) • Republic Administration for Inspection Activities-RS Inspectorate • Republic Agency for the Development of Small and Medium Enterprises Enterprise support organizations Nongovernmental organizations (NGOs)/foundations: • Foreign Investors Council, Employers Association/Employers’ Union (FBiH and RS), Foundation Networks, Mozaik Foundation, BIT Alliance, Finance in Motion, Restart, Seeba, and Academy387 Incubators/accelerators: • ICBL, QLAB, Networks, BIT Center Tuzla Donors British Embassy, USAID, and SIDA Private enterprises Around 20–25 firms participated in focus group discussions conducted by the World Bank in Banja Luka and Sarajevo. Specific companies are not mentioned for confidential reasons. 55