Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PRODUCTIVITY AND GROWTH: THE ROLE OF UNLOCKING FIRM LEVEL INNOVATION IN ETHIOPIA PROMOTING MORE INCLUSIVE 102923 Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation i in Ethiopia. Contents ACKNOWLEDGEMENTS........................................................................................................................ 1 EXECUTIVE SUMMARY ......................................................................................................................... 2 Innovation Performance in Ethiopia ........................................................................................................ 3 Role of Government ......................................................................................................................................... 6 Policy Recommendations .............................................................................................................................. 7 Summary of Policy Recommendations and Timelines ................................................................... 12 CHAPTER 1: Innovation and Economic Growth in Ethiopia ................................................. 13 1. Country Context ..................................................................................................................................... 13 2. Role of Innovation ................................................................................................................................ 14 3. Objective, Scope and Methodology ................................................................................................ 19 CHAPTER 2: Firm Level Innovation in Ethiopia........................................................................ 21 1. Data and Methodology ........................................................................................................................ 21 2. Innovation and its Correlates ........................................................................................................... 22 3. Correlates of Innovation: Regression results ............................................................................. 28 4. Innovation and firm performance .................................................................................................. 34 5. Summary and Conclusion .................................................................................................................. 39 CHAPTER 3: Innovation Landscape in Ethiopia........................................................................ 41 1. Ethiopia’s current innovation performance ............................................................................... 41 2. Enabling Environment - Government’s Policy: ......................................................................... 45 3. Industry-Research Linkages - Effectiveness of academic and research institutions . 52 4. National Quality Infrastructure ....................................................................................................... 62 5. Government Initiatives to support the development of innovative enterprises ......... 66 6. Role of the government to support Innovation in Ethiopia.................................................. 67 CHAPTER 4: Recommendation and Policy Options for Promoting Innovation in Ethiopia................................................................................................................................................... 68 1. Implementation of the Science, Technology and Innovation Policy ................................. 68 2. Promoting Greater Firm Level Innovation .................................................................................. 70 3. Upgrading the National Quality Infrastructure ......................................................................... 74 4. Promoting Effective Industry- Research Linkages .................................................................. 75 5. Providing an Incentive Framework to foster Inclusive Innovation .................................. 78 6. Raising Awareness ............................................................................................................................... 82 APPENDIX: Regression Results of Enterprise Survey ............................................................. 84 REFERENCES.......................................................................................................................................... 93 i Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation ii in Ethiopia. Boxes Box 2.1: Ethiopian financial sector .............................................................................................................. 31 Box 2 2: CASE STUDY: Credit Constraints for Scaling Up ................................................................... 32 Box 3.1: Productive Safety Net Program ................................................................................................... 49 Box 3.2: Institute of Textile and Fashion Technology .......................................................................... 54 Box 3.3: Pocket sensors for precision agriculture – Product Innovation ..................................... 57 Box 3.4: Household Irrigation Help Line – Process Innovation ....................................................... 58 Box 3.5: Wheat value chain development ................................................................................................ 60 Box 4.1: Malaysia: Skills Development for SMEs through matching grants ................................ 73 Box 4.2: Joint projects between university and corporation funded by the Government initiatives (Armenia) ........................................................................................................................................ 76 Box 4.3: Technology Transfer Office: Case of University of Antioquia (Colombia) .................. 76 Box 4.4: Public Research Organization and Agricultural Development in Brazil: .................... 78 Box 4.5: AAKASH Tablet: Bringing Low-Cost Computers to Students in India .......................... 80 Box 4.6: India Inclusive Innovation Fund: ................................................................................................ 81 Box A3.1: List of major Ethiopian Institutes of Agricultural Research ......................................... 89 Figures Figure 2.1: Share of Firms that Innovate by country ........................................................................... 23 Figure 2.2: Share of Firms that Innovate by Country and Firm size .............................................. 25 Figure 2.3: Share of Firms that Innovate by Country and Sector .................................................... 26 Figure 2.4: Measures of Firm Performance by Innovating Status and Country ........................ 36 Figure 3.1: Ethiopia’s score on GCI.............................................................................................................. 41 Figure 3.2: Research and development expenditure (% of GDP).................................................... 43 Figure 3.3: Areas that Ethiopia has competitive scientific output in the period of 2011-12 45 Figure 3.4: National Innovation System envisaged in the STI policy............................................. 47 Figure 3.5: Cycle of Value Chain ................................................................................................................... 60 Figure 4.1: Implementation Arrangement of the STI policy.............................................................. 69 Tables Table 2.1: Main Sources of Information for Innovative Activities .................................................. 27 Table 2.2: How are new products developed and who develops them ........................................ 28 Table 3.1: Ethiopia Research and development expenditure composition................................. 43 Table 3.2: Selected sectors for inclusive innovation ............................................................................ 48 Table 3.3: List of selected IoTs in Ethiopia .............................................................................................. 53 Table 3.4: Agricultural researchers of key indicators.......................................................................... 61 Table A2.1: Marginal Effects on Probability of Innovation from Probit Regression................ 84 Table A2.2: OLS estimation of Real Sales Growth and Innovation.................................................. 85 Table A2.3: OLS estimation of Employment Growth and Innovation ............................................ 86 Table A2.4: OLS estimation of Labor productivity and Innovation ................................................ 87 Table A3.1: Selected Technology and Innovation Indicators ................................................. 88 Table A3.2: Major responsibility of each NQI institution and their achievements ................ 91 Table A3.3: Selected programs to support the access to finance ............................................ 92 ii Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation iii in Ethiopia. ABBREVIATIONS AND ACRONYMS AAU Addis Ababa University iOTEX Institute of Textile and Fashion AFRIMETS Intra-Africa Metrology System Technology ASTI Agricultural Science and ISO International Organization for Technology Indicators Standardization ASTU Adama Science and Technology IT Information Technology University IVR Interactive Voice Response ATA Agricultural Transformation LIC Low-Income Country Agency MFI Micro Finance Institution BoP Base of the Pyramid MoA Ministry of Agriculture DA Development Agent MoI Ministry of Industry EARC Ethiopian Agricultural Research MoST Ministry of Science and Council Technology ECAE Ethiopian Conformity MoU Memorandum of Understanding Assessment Enterprise NGO Non-Governmental Organization ECF Ethiopian Competitiveness NMIE National Metrology Institute of Facility Ethiopia ECIC Ethiopia Climate Innovation NQI National Quality Infrastructure Center NSTIC National Science, Technology EIAR Ethiopian Institute of and Innovation Council Agricultural Research OECD Organization for Economic Co- Embrapa Empresa Brasileira de Pesquisa operation and Development Agropecuária PEPE Private Enterprise Program ENAO Ethiopian National Accreditation Ethiopia Office PSNP Productive Safety Net Program ES Enterprise Survey RARI Regional Agricultural Research ESA Ethiopian Standards Agency Institutes FDI Foreign Direct Investment R&D Research and Development GCI Global Competitiveness Index S&T Science and Technology GDP Gross Domestic Product SME Small and Medium Enterprise GIZ Deutsche Gesellschaft für SMS Short Message Service Internationale STI Science, Technology and GoE Government of Ethiopia Innovation GSP Global Supplier Program TTO Technology Transfer Office GTP Growth Transformation Plan TVET Technical and Vocational GVA Gross Value Added Education and Training HLI Higher Learning Institution UCBP University Capacity Building ICT Information and Program Communications Technology IIIF India Inclusive Innovation Fund IIT Indian Institute of Technology ILAC International Laboratory Accreditation Cooperation IoT Institute of Technology iii Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 1 in Ethiopia. ACKNOWLEDGEMENTS This study was carried out by a team led by Smita Kuriakose (Senior Economist and TTL, Trade and Competitiveness GP, World Bank) and authored by Smita Kuriakose, Hiroyuki Tsuzaki (Private Sector Development Specialist and Co-TTL, Trade and Competitiveness GP, World Bank) and Gemechu Aga (Private Sector Development Analyst, DEC, World Bank). Significant inputs were received by Andres Felipe Lopez de Meza (Consultant, World Bank), Senidu Fanuel (Senior Private Sector Development Specialist, Trade and Competitiveness GP, World Bank), Aly Salman Alibhai (External Term Consultant, World Bank) and Welela Ketema (Program Officer, Trade and Competitiveness GP, World Bank). Susan Kayonde (Private Sector Development Specialist, Trade and Competitiveness GP) helped with the final dissemination of the study. The team has greatly benefited from constructive comments at various stages of the preparation from Ganesh Rasagam (Practice Manager, Trade and Competitiveness GP), Lars Christian Moller (Program Leader for Ethiopia), Asya Akhlaque (Senior Economist and T&C Lead for Ethiopia), Vinod Goel (Senior Consultant, World Bank), Jean Louis Racine (Senior PSD Specialist and Peer Reviewer) and John Gabriel Goddard (Senior Economist and Peer Reviewer). The team would like to acknowledge the detailed comments received from stakeholders in Ethiopia including Ministry of Industry, Ministry of Science and Technology and Ministry of Finance and Economic Development. The final report has incorporated comments and feedback received from all these stakeholders. The work has been produced under the overall guidance of Guang Z. Chen, World Bank Country Director for Ethiopia; Cecile Fruman, World Bank, Director, Trade and Competitiveness Practice, Catherine Masinde, World Bank Practice Manager for Trade and Competitiveness, Africa Region and Asya Akhlaque (Senior Economist and Ethiopia T&C Lead and TTL for the Programmatic AAA). The team also gratefully acknowledges the guidance provided at the conceptualization of the study by Ganesh Rasagam, former Practice Manager, Trade and Competitiveness Practice, Africa Region. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 2 in Ethiopia. EXECUTIVE SUMMARY Technological adoption and innovation will play a crucial role in delivering the goals laid out in the Government of Ethiopia’s Growth Transformation Plan (GTP). Innovation is now widely recognized as a major engine for productivity growth. “Innovation implies technologies or policies that are new to a given country context or society. They are not necessarily new in absolute terms but can be technologies and practices that are being diffused or absorbed in that society or economy1.”This is particularly important for Ethiopia that is aiming to move up the domestic value chain and move up the quality ladder. The role of government in fostering innovation is crucial. In addition to facilitation and enhancing enabling environment, the state may have to play a more active role to address market failures and coordination across multiple stakeholders. While the world is becoming increasingly competitive, it is important for many businesses to be innovative by challenging themselves to come up with new and different ways of doing things. Innovation is widely regarded as the important element that enables firms to thrive in today's global business environment. However, empirical evidence shows that there is a low level technological innovativeness amongst Ethiopian firms.2 Innovation also plays an important role in the GTP which seeks to transform of the Ethiopian economy from a predominantly agrarian to an industrialized economy. Ethiopia has not been able to foster and accelerate structural transformation as envisioned in the GTP. In fact, Ethiopia’s past high growth decade has been fueled by large services and agricultural sectors. These two sectors are very important to the economy, together accounting for almost 90 percent of GDP between 2003/04 and 2013/14. At the same time the manufacturing share in GDP is at just above 4.1 percent of GDP3. The Government plays a pivotal role in facilitating inclusive innovation as well. The large size of the Base of the Pyramid (BoP) calls for innovative ways to ensure that this population has access to basic services such as health and education. 66 percent of the population comprises the BoP in Ethiopia subsisting on less than US$ 2 a day. “Inclusive innovation4” is any innovation that leads to affordable access of 1 World Bank (2010) 2 Talegeta (2014) 3 World Bank (2015b) 4 Ramesh A. Mashelkar and Vinod K. Goel, “Inclusive Innovation: More for Less for Many”, draft Manuscript forthcoming, 2012. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 3 in Ethiopia. quality goods and services creating livelihood opportunities for the excluded population, primarily at the base of the pyramid and on a long term sustainable basis with a significant outreach. It seeks to provide better access to essential goods and services with affordable prices, thereby improving quality of life, and enhancing economic empowerment of the excluded populations, primarily at the BoP. With this in mind, this study seeks: (i) to empirically analyze the extent of innovative activities that formal firms are undertaking in Ethiopia using the World Bank Enterprise Survey data; (ii) to conduct a review of the existing innovation landscape; and (iii) to identify challenges and opportunities to foster innovations at the base of the pyramid (BoP) in Ethiopia. By drawing on lessons from ongoing innovation-focused interventions around the world, this study aims to provide concrete policy recommendations to create an enabling environment for private firms to undertake innovative activities to increase productivity, as well as to provide innovative solutions to help alleviate poverty and facilitate more equitable growth in the economy. Innovation Performance in Ethiopia Ethiopia’s innovation performance stifles its overall competitiveness. According to the World Economic Forum’s Global Competitiveness Index (GCI), Ethiopia ranks 109th out of 140 countries with a score of 3.7 out of 7.0 in the 2015-16 report. While the overall score of innovation indicators increased 0.5 points in the past six years (3.2 in 2015-16 from 2.7 in 2009-10), Ethiopia still lags behind in global benchmarking on key innovation indicators and has room for improvement. Increase in the R&D budget was a result of the increased headcount of R&D personnel5 and not researchers. From 2010 to 2013, Government’s spending on R&D, increased from 931.3 million ETB to 5,242.6 million ETB. As such, the share of R&D spending as a share of GDP has increased from 0.24 percent to 0.61 percent. However, a large share of this increase is on account of the increased headcount of R&D personnel. The number of R&D personnel in the country has increased to 18,435 in 2013 from 13,095 in 2010, which is approximately a 41 percent increase. Meanwhile, the percentage of the number of researchers6 that increased during the same period was about 13 percent (from 7,283 to 8,218). This implies that the 5 R&D Personnel are all persons employed directly on R&D (researchers, technicians and equivalent staff), as well as those providing direct services such as R&D managers, administrators, and clerical staff. 6 Researchers are professionals engaged in the conception or creation of new knowledge, products, processes, methods and systems and also in the management of the projects concerned (UNESCO Institute for Statistics) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 4 in Ethiopia. majority of the increase of R&D personnel was on account of the increase of personnel other than researchers. On the other hand, business sector spending on R&D has sharply declined. Contrary to higher education and government institutions, the R&D spending by business sector has decreased from 144.6 million ETB to 61.5 million ETB during the same period, which accounts for only 1.2 percent of the total R&D spending in 2013. Given increased global competition, success of Ethiopia’s industrial sector depends on the firms’ ability to innovate7. Innovation has a positive correlation to firm performance in Ethiopia. This study explores the patterns of innovation levels and attempts to establish innovation correlates in Ethiopia using data from the World Bank’s Enterprise Survey (ES)8. Innovation is captured by product, process, marketing and organizational changes and improvements. Firms that have introduced product or process innovations in Ethiopia show higher sales growth than those that have not. Similarly, process innovation and spending on R&D appear to be triggers for employment creation in Ethiopia, and finally, the analysis shows that process innovation and spending on R&D enhance labor productivity. Firm level innovation compares less favorably to other comparator countries. About a third of the surveyed firms report having introduced new products or having improved their production or business processes (Figure A). However, the country performs unfavorably vis-à-vis the selected comparators, as the share of firms that innovate in Ethiopia is about half of the share of the firms that do so in both China and Kenya. Figure A: Share of Firms that Innovate by Country and Firm size Panel 1. Product or Process Innovation 88% 87% 82% 82% 77% 77% 68% 67% 56% 53% 49% 42% Ethiopia China Kenya LICs Small Enterprises Medium Enterprises Large Enterprises 7 Talegeta (2014) 8 Starting in 2011, the ES questionnaire introduced a section on innovation, designed to collect information about firm-level innovative activities in selected developing countries. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 5 in Ethiopia. Panel 2. Spending on Research and Development 46% 40% 40% 35% 31% 32% 31% 27% 28% 21% 18% 7% Ethiopia China Kenya LICs Small Enterprises Medium Enterprises Large Enterprises Source: Author’s calculations based on WB Enterprise Survey Larger firms undertake a disproportionately large share of innovative activity in Ethiopia. Among large firms, the share of firms who do innovate is larger, especially in Ethiopia where the figure reaches just under 70 percent. In line with this, smaller firms are less likely to spend in research and development, a fact that is particularly noticeable in Ethiopia once again, vis-à-vis similar countries. Smaller firms in Ethiopia report a lower rate of product or process innovation than similar firms in China and low income countries and almost half the corresponding figure for Kenya. Also, innovation varies depending on certain firm characteristics, such as the sector in which the firm operates. Ethiopian manufacturing firms are more likely to innovate than service firms are. While this pattern is not specific to Ethiopia, the gap is substantially larger in Ethiopia than in the comparator countries. This could be due to the fact that services firms are more heterogeneous than manufacturing firms, pulling the average for the services sector firms’ down. Another possible explanation is that services firms tend to be smaller than manufacturing firms. Further, firms in the textile and garment, and in the food sectors seem to have a higher prevalence of product and process innovation than firms in other sectors. This is also consistent with the finding that Ethiopian exports of textiles and apparel goods increased from 0.1% to 3.3 % of total goods exported between the period 1997 – 2013. Access to credit and the quality of the human capital, and the firm’s commitment to invest in developing it, are also important for innovation. The analysis shows that limited access to credit poses a significant barrier to product innovation in Ethiopia. Firms that are credit constrained are about 14 percentage points less likely to undertake product innovation than are non-credit constrained ones, everything else remaining equal. The analyses also shows that providing training to employees and allowing employees’ time to experiment are both factors Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 6 in Ethiopia. that positively correlate with the probability to engage in product innovation. These findings corroborate the importance of human capital for innovation. Role of Government The Government plays an essential role in ensuring entrepreneurs, financial institutions, academia and industry create wealth for the society through innovation. By providing a conducive regulatory and policy environment, promoting greater competition through openness to trade and Foreign Direct Investment (FDI) and promoting an education system that is responsive to industry needs, the government plays a central role in promoting innovation. The State will play a particularly important role in increasing innovation for the BoP before the private sector is able to build a profitable and scalable business solution. Hence, the successful implementation of the STI policy would be one of the most critical factors to ensure that innovative activity is undertaken in the economy and there are returns to firms on these innovation investments in terms of increased firm level productivity. The Government of Ethiopia’s efforts to establish an enabling environment for innovation have been initiated more than two decades ago, but its weak implementation has deterred its effective establishment. The national Science and Technology (S&T) policy of the country was originally adopted by the transitional Government of Ethiopia in 1993 to boost innovation activities for economic development through the application of science and technology9. However, it was not followed up by detailed implementation of strategies and programs aimed at achieving the envisaged policy objectives. Recognizing the important role and the urgent need for innovation to increase the country’s sustainable development, Ethiopia adopted a new Science, Technology and Innovation (STI) policy in February 201210. In addition, the Government has developed the STI policy implementation strategy which supports the implementation of strategies envisioned in the GTP. The implementation of the STI policy is crucial to facilitate linkages between different actors and institutions involved in the innovation ecosystem. Figure B shows the various actors and institutions relevant to the policy areas envisioned in the STI policy. The key actors are structured into three broad stakeholder categories namely: public sector; academic institutions; and industry. The public sector, include 9Ethiopian Science and Technology Agency (2006) 10The Ethiopian Science and Technology Agency, which is the current Ministry of Science and Technology, reviewed 1993 S&T policy and prepared an initial draft of National Science, Technology and Innovation Policy in 2006. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 7 in Ethiopia. government and its relevant agencies, support the import, adoption, and creation of innovation knowledge and goods and services. Academic institutions, including researcher, scientists and engineers affiliated with universities and research institutions generate innovative knowledge, while industry, including large corporation, SMEs, and start-up companies, produce goods and services. Furthermore, academic institutions and industry would need to collaborate to introduce and create new innovations that contribute to increased industrial productivity. Figure B: National Innovation System envisaged in the STI policy Source: World Bank staff Policy Recommendations Implementation of the Science, Technology and Innovation Policy The implementation of the STI policy for Ethiopia is crucial to facilitate linkages between different actors and institutions involved in the innovation ecosystem. While the current implementation arrangement is in line with international practice, key lessons learned from global experience emphasize the importance of inter- ministries and inter-agency bodies creating a coordinated and coherent implementation of STI-policies. A few recommended policy actions that Government of Ethiopia (GoE) could undertake include: Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 8 in Ethiopia. • Good Coordination mechanism. Given that the STI policy covers a wide range of topics which involve a number of organizations/institutions, a clear communication strategy among these stakeholders needs to be developed. • Monitoring & Evaluation mechanism implemented. To monitor the progress of STI policy (and implementation strategy), the Key Performance Indicators need to be developed in line with GTP, national development strategy and disclosed to the public, together with their progress. This could potentially help inform future policy making. • Feedback Mechanism from the Private Sector. Given the crucial role that STI Policy plays in the move towards an export led industrial growth transformation, the implementation of the policy needs to have clear ownership from the private sector. • Robust National Quality Infrastructure (NQI). The STI Institutional and policy framework needs to support the development strategies for further strengthening the NQI which is crucial for the country’s transformation to an industrial led economy. • Framework for Inclusive Innovation Policy. The STI Policy has been framed under the vision of “alleviating poverty and joining the mid-level income earning countries”. Herein lies the clear role for Government to spearhead a strategy to develop an adequate policy framework for inclusive innovation. Promoting Greater Firm Level Innovation Facilitating Early Stage Financing and Capacity Building The distinct credit constraints for young and small firms in Ethiopia is a clear impediment to innovation. Impediments to accessing finance for small and young firms stem from the demand side of financial markets. Like in other developing economies, credit in Ethiopia is more readily available to businesses that have fixed assets such as land or buildings to be used as collateral than to those having movable assets, as banks strongly prefer property to secure a loan. An increase in the support in other areas of the economy towards early stage innovation financing would be beneficial to entrepreneurs who are unable to find sources of financing through commercial banks. Facilitating Learning from Exporting and Fostering Backward Links through Foreign Direct Investment Growth There is a need to promote linkages with and spillovers from foreign investments with domestic firms. The Government has adopted policy focused on the development of the manufacturing sector through the use of industrial parks to Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 9 in Ethiopia. attract FDI and to support SMEs11. It would be beneficial for the investment agency to work actively with the investor community and seek out input providers and support services they require that could be provided by domestic SMEs. The Government thus acts as a facilitator and gathering information on possible opportunities for links,12 assisting in identifying partners (and arrangements) by matching suppliers’ capabilities and buyers’ needs (legal assistance, fairs, missions, conferences and exhibitions, and so forth), and providing economic incentives to multinationals to promote training and technology transfer from buyer firms to local supplier firms and for SMEs to invest in training and capacity building. Upgrading the National Quality Infrastructure The government’s continued support to develop NQI is crucial for the country’s transformation to an export led economy. Access to a good NQI is imperative to assure that Ethiopian firms are able to enter and be competitive in international markets by assuring that the quality of their services and products are aligned with required standards in the international markets. To support innovation in the firm level, in particular for exports, NQI services should be developed by incorporating demand from the private sector. There is a need to develop a long term implementation strategy for the NQI policy framework in Ethiopia. While the NQI institutions have developed their strategies, in particular the steps required to obtain international recognition, it is important to develop a long term strategy which includes the government’s commitment of budget allocation, as all NQI institutions require long term financial support from the government. This will ensure that all these institutions can make medium to long term action plans to implement their strategies. To increase client satisfaction, the development of demand-driven NQI institutions is important. NQI institutions need to ensure that firms and academic and research institutions that receive NQI services are able to market their products and services successfully. However, weak participation from these key stakeholders in the governance of NQI institutions often hinders the development of demand- driven NQI services. The development of a robust monitoring and evaluation system is also critical to regularly review the effectiveness of the council and operation of these NQI institutions. 11World Bank (2015b) 12 Either directly or by supporting private institutions, governments promote the creation of information exchanges that could range from lists of inputs and materials available locally—which might include prices and qualities—to names, locations, and profiles of local suppliers. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 10 in Ethiopia. Promoting Effective Industry- Research Linkages Government can also provide its support to strengthen university-industry linkages in order to promote innovation. A critical misalignment exists between the research outputs from academic institutions and the technology needs of industry. Furthermore, the type of curricula and skills endowments of the graduates of universities do not match the immediate skill needs of industry13. To promote collaboration and partnership between university and industry, government programs; such as mini-grants and matching grants, to increase the incentives for the cooperation is required. There is a need to better utilize the technology transfer system that has been initiated in the Institute of Technologies (IoTs). Creating incentives for researchers to collaborate with industry with this experience counting towards a tenure track could ensure that researchers would be motivated to work with industry. Finally, academic institutions should tap into the vast Ethiopian diaspora to leverage on the global expertise and knowledge that they have by offering them attractive short term assignments to work in the universities. The development of the national implementation strategy for the newly established Ethiopian Agricultural Research Council (EARC) is crucial. While the development of innovation in agriculture sector has been prioritized, the emphasis on the effective coordination among the relevant stakeholders and improvement of the quality of the staff and research needs to be stressed. According to the Agricultural and Transformation Agency (ATA) annual report, the establishment of EARC was approved by the government. The EARC will coordinate and oversee the integration of various research efforts made by the different research institutions. To support the existing coordination issues, the development of the detailed strategy to address the existing issues and strengthen the national agricultural research system is critical. This should be actively coordinated with the National Science, Technology and Innovation Council that plays an important role in promoting and implementing the necessary support mechanisms to adopt innovative technologies. Providing an Incentive Framework to foster Inclusive Innovation It is important role for the government to increase innovation for the BoP by addressing their low demand due to limited access to information. Inclusive innovation can boost the welfare of the BoP by providing innovative products and finding innovative ways to address their needs. However, several examples show that 13 Working paper prepared by Open African Innovation Research & Training in 2012. Also, situation analysis of research activity at Addis Ababa University found that none of the units at the university had set research priorities based on national development objectives (Lemma 2008). Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 11 in Ethiopia. low levels of education among the BoP population hinder opportunities to gain knowledge about potentially useful products. Establishing partnership with local NGO or intermediaries to reach out to the targeted BoP population will be an important element. The government has a role to play in developing a market for inclusive innovation technologies that bear a high upfront cost leading to a lack of incentives for the private sector to produce. The case of AAKASH Tablets in India indicates the market for inclusive innovations can be developed by the government, wherein the Government of India used demand side policies such as public procurement by creating a market for low cost tablets. The government can also provide its support to stimulate the adoption, adaptation, and generation of innovative technologies by entrepreneurs, before the private sector is able to build a profitable and scalable business solution. Ethiopia can leverage on existing initiatives around the world by facilitating international linkages with firms and industry- academia linkages to work on providing solutions. Raising Awareness The government has a key role to play in raising awareness of the private benefits of undertaking innovative activities. This study has elaborated on how government can facilitate innovative activity both to increase firm level productivity and provide solutions aimed at addressing issues faced by the base of the pyramid. Key barriers to inclusive innovation include consumer behavior, traditional business models and information asymmetries that exist. The low rate of farmers’ adoption rates of improved seeds is a case in point of risk aversion behavior that exists preventing farmers from trying out something new. It is thus important for the state to address this by increasing awareness and showcasing successful pilots to ensure greater adoption of new technologies and processes. Finally, there is a role for innovation to be encouraged amongst the young minds and for the school curricula to encourage an innovation driven culture. The objective of all the policy instruments reviewed here is to create an ecosystem that fosters greater levels of innovative activity promoting greater productivity and increasing Ethiopian firm competitiveness and increasing the supply of innovative ideas aimed at addressing the needs of the base of the pyramid thus bridging growth and equity for the Ethiopian economy. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 12 in Ethiopia. Summary of Policy Recommendations and Timelines Policy Measure Timeline Implementing the Science, Technology and Innovation Policy Development of a good coordination mechanism that includes all stakeholders Short Term including the private sector. The development of a robust monitoring and evaluation framework for STI Medium policy implementation strategy, in line with GTP and relevant sector strategies. Term Development of a strategy for the implementation of National Quality Medium Infrastructure, in line with the GTP and the relevant sector strategies. Term Development of a framework for Inclusive Innovation Policy within the Medium overarching STI Policy framework. Term Promoting Greater Firm Level Innovation Introduce and scale up existing programs to finance early stage financing and Short Term capacity building amongst exiting firms Design programs to promote linkages with and spillovers from foreign Medium investments with domestic firms. Term Upgrading the National Quality Infrastructure Development of a long term implementation strategy for the NQI policy Medium framework in Ethiopia. Term Development of demand-driven NQI institutions representing private sector Medium demands and monitored by a robust monitoring and evaluation system. Term Increasing Industry- Research Linkages Develop short-term and longer term engagements with the Ethiopian diaspora Short Term in industry and research organizations. Introduce programs and policies to incentivize researchers to undertake Short Term industry-relevant research and to strengthen collaborations between industry and researchers. E.g. Introducing “on the job training” as part of course curriculum for graduate students and introduce incentives for researchers to collaborate with industry. Development of the national implementation strategy for newly established Medium Ethiopian Agricultural Research Council (EARC) in close coordination with the Term National Science, Technology and Innovation Council. Providing an Incentive Framework to Foster Inclusive Innovation Facilitate crowdsourcing of innovative ideas that provide solutions for the base Medium of the pyramid Term Facilitate access to international sources of innovation through MoUs with Medium countries embarking on these initiatives and facilitating international joint Term ventures (industry to industry; industry-academia and academia-academia). Raising Awareness Showcase successful pilot programs to increase awareness amongst potential Short Term users and providers of these new technologies and solutions. Introduce changes to the school curricula that encourage innovative thinking. Long Term Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 13 in Ethiopia. CHAPTER 1: Innovation and Economic Growth in Ethiopia 1. Country Context 1. Rapid and consistent economic growth of Ethiopia over the past decade has contributed to reducing the number of people living in poverty. The country has shown rapid and robust growth at a steady pace of around 9 percent since 2000, when it was ranked the second poorest in the world, to around 10 percent in the last ten years. This growth has been accompanied by a consistent decline in poverty rates: in this same period of time, the proportion of people living under the national poverty line has dropped from a staggering 44 percent14 to 29 percent. Ethiopia’s macroeconomic conditions have also improved; deficits have declined and inflation is lower. 2. Nevertheless challenges to sustain its economic growth remain. In relation to other countries in the region, Ethiopia has one of the lowest participations of industry and manufacturing in GDP. Trade and services and manufacturing have steadily grown since the 1990s, but remain relatively small when compared to agriculture: in Gross Value Added (GVA) terms, agriculture represents about 45 percent of the economy, while trade and other services represent 19 and 21 percent, respectively. Manufacturing, which is often most associated with structural change only represents 4 percent of total GVA. In employment and productivity terms, the gaps are spread even further. 3. As is the case with economic growth, the challenges to reduce poverty remain. While poverty incidence has declined, it still remains high. The poorest, who despite being engaged in agricultural activities, tend to be net buyers of agricultural goods. Productivity rates and exports have performed poorly (in 2013; the trade and services deficit was around 16 percent of GDP), and the country’s output is highly concentrated. Indeed, the share of agricultural employment to total employment in 2011 was around 78 percent, while its share in GDP was 45 percent15. Trade, other services and agriculture are between 3 and 10 times less productive than the most productive sectors, while employing almost 95 percent of the population16. This renders Ethiopia both uncompetitive, as its trade deficit continues to creep up, and highly vulnerable, especially to price shocks and natural phenomena such as droughts, common in the region. 14 World Bank (2014a) 15 Martins (2014) 16 Ibid. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 14 in Ethiopia. 4. The Government of Ethiopia has created the Growth and Transformation Plan (GTP)17, focusing on two overarching themes: fostering competitiveness and employment and enhancing resilience and reducing vulnerabilities. This plan recognizes that for poverty reduction and economic growth to be sustainable, the Ethiopian economic structure will have to undergo a fundamental transformation. Workers engaged in low-productivity jobs in the agricultural and informal sector need to be reallocated to economic activities of higher productivity such as manufacturing18. 5. However, there still remains an unfinished agenda for the successful structural transformation from a predominantly agrarian to an industrialized economy. Economic growth in FY2014, which grew real GDP by 10.3 percent compared with 9.8 percent in FY2013, was driven mainly by the services sector, which accounted for 5.3 percentage points of the growth, followed by industry of 2.8 percentage points thanks to a construction boom19. Agriculture, in turn, contributed 2.3 percentage points. However, the manufacturing sub-sector contributed only 0.5 percent to the GDP growth, less than the 0.7 percent contribution of the preceding year. Moreover, the share of employment in the manufacturing sector has changed only slightly and is virtually unchanged since 1999 at below 5 percent of total employment. 6. In accordance with a focus on poverty reduction and economic growth, the GTP has identified five main levers for change: public sector investment in infrastructure to lay the ground for private sector development, enhancement of policies and regulations to provide an environment conducive to competitiveness and productivity, expanding access to credit for small and medium size enterprises, provision of training and education to augment the supply of skilled labor and improved access to land. While a new GTP, covering FY 2016 and forward will still consider agriculture as a fundamental element for growth, there will be an added emphasis to structural change and an additional focus to foster the development of the private industrial sector. 2. Role of Innovation 7. Technological adoption and innovation will hence play a crucial role in delivering the goals laid out in the GTP. Innovation is now widely recognized as a major engine for productivity growth. “Innovation implies technologies or policies 17 GoE is finalizing the second Growth and Transformation Plan (GTP II: 2015/16 – 2020/21)). 18 Dinh et al. (2012) 19 World Bank (2015b) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 15 in Ethiopia. that are new to a given country context or society. They are not necessarily new in absolute terms but can be technologies and practices that are being diffused or absorbed in that society or economy20.” This is particularly important for developing economies that have potential for tremendous gains from tapping into the global knowledge pool and adapting these to the local context. This ability will be important notably in service industries, improving agricultural and industrial productivity and for increasing service delivery in social sectors such as health and education. 8. The large size of the BoP calls for innovative ways to ensure that this population has access to basic services such as health and education. With the majority of the population residing in the rural areas, agriculture is still the major source of national income, accounting for about 40 percent of GDP, more than 80 percent of employment, and 70 percent of national export earnings in 2013/14, according to the African Economic Outlook. 66 percent of the population comprises the BoP in Ethiopia subsisting on less than US$ 2 a day. Ethiopia ranked 172nd out of 187 countries on the United Nations Development Program's 2013 human development index, and average per capita incomes are less than half the current sub- Saharan average21. 9. “Inclusive innovation22” is important to address the needs of the BoP. It seeks to provide better access to essential goods and services with affordable prices, thereby improving quality of life, and enhancing economic empowerment of the excluded populations, primarily at the BoP. The Government would play a pivotal role in promoting technology either by directly supporting the development (and adoption/absorption) of technologies or more indirectly by creating the enabling environment to foster greater technological capabilities and innovative activity. 10. Most industrial sectors in Ethiopia are highly fragmented and characterized by a large number of very small enterprises and a small number of large firms. This structure favors heavily large businesses, and leaves small and medium businesses small and uncompetitive, constrained by lack of access to land, to capital, to inputs and to markets at large23. 20 World Bank (2010) 21 UNDP (2013) 22 Inclusive Innovation is any innovation that leads to affordable access of quality goods and services creating livelihood opportunities for the excluded population, primarily at the base of the pyramid and on a long term sustainable basis with a significant outreach. Ramesh A. Mashelkar and Vinod K. Goel, “Inclusive Innovation: More for Less for Many”, draft Manuscript forthcoming, 2012. 23 Country Partnership Strategy Report for the Federal Democratic Republic of Ethiopia for the Period FY12 to FY16. Ethiopia Country Management Unit, Africa Region, IFC and MIGA. October 2014. (Report no. 90893-ET) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 16 in Ethiopia. 11. This competitive structure inhibits innovation across the economy (see Aghion et al. 2005). Firms far behind the technological frontier may find investment in innovation far too costly, while firms far ahead in the technological frontier see little incentive in innovating, as their technological edge keeps them ahead of their competitors in their current operating markets without the need for additional investment. 12. Promoting competition in the Ethiopian economy would therefore create greater incentives to innovate. Moreover, further enhancing competition by promoting openness to trade and FDI would increase the presence of foreign competitors, which would in turn increase exposure, search and adoption of more advanced technologies by both export and import competing firms (see Schiff and Wang, 2006). 13. Participation in foreign markets also induces firms to become more innovative, a phenomenon known as “learning through exporting”, as observed among Ethiopian leather exporters. As firms begin participating in foreign markets, customers begin providing signals such as quality standards and requirements for market access, which serve as an incentive to absorb methods and technologies to become or remain competitive. Lederman (2009) shows using firm-level data from enterprise surveys in several countries, that a firm’s export status (whether the firm exports more than 10 percent of its sales) is positively correlated with the probability that a firm innovates. 14. Furthermore, research and development (R&D) is also a crucial determinant of the ability for firms to innovate. In the same study, Lederman (ibid.) finds evidence that a firms’ investment in R&D is significantly and positively correlated with the probability that it will innovate. In developing countries however, R&D falls within what Cohen and Levinthal (1989) refer to as the “second face of R&D”, that is research and development oriented at absorbing new technologies and keeping up with existing technologies worldwide, more so than aimed at developing technologies that are new in absolute terms, an objective mostly limited to innovators from the developed world. 15. Another vital determinant of innovative activity is the accumulation of human capital and the skill level of the workforce. An educated workforce can be considered a pre-condition for a country to have the capacity for knowledge acquisition and adaptation, especially in an environment in which firms face competitive pressures that call for frequent changes in product mix and production Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 17 in Ethiopia. technology24. In his study, Lederman (ibid) finds evidence that the probability that a firm innovates is related to the level of education of its personnel, and that there is a link between the firm’s level of training and its degree of technological adaptation. It follows therefore, that higher levels of skills and training typically will lead a firm to identify new technologies that need to be adopted, in order to increase competitiveness. 16. Ethiopia, not unlike other countries in Sub-Saharan Africa presents significant potential to vastly increase its output for the manufacturing sector: a broad base of low-skilled labor and low wages and labor costs relative to competitors. It also enjoys an abundant endowment of natural resources, and Ethiopian exports receive preferential tax and tariff-free access to the US and European markets. The potential is particularly latent in light manufacturing, which, if spurred by innovation should provide the ideal platform to help Ethiopia move away from exports of primary commodities and become an export of value added products. While certainly not the sole substitute to agriculture, light manufacturing presents the advantage within the context of Ethiopia of not requiring large capital investments while being able to absorb a large pool if low-skilled laborers. 17. In pursuing industrial upgrading, Ethiopia can fill the missing links in the domestic value chain and move up the quality ladder, given the competitive nature of the globalized economy. Moving up the value chain ladder is instrumental if the Government of Ethiopia is to capitalize on the country’s comparative advantages to foment growth and increase welfare. While the process of structural transformation in many cases has been propelled by the private sector, in a transitional landscape such as that of Ethiopia, the role of government in fostering innovation is crucial. 18. On the other hand, by helping reduce reliance on natural resources, innovation can also foster resilience, especially among populations in exposed areas or regions. In agriculture, for instance, innovation can come in the form of improved crops or irrigation systems to help insulate vulnerable populations from the effects of weather or plant diseases. In manufacturing, on the other hand innovation could represent improved production systems, better machinery improved inputs or new management techniques. 19. Inclusive innovation however, can only thrive within a supportive institutional framework. In many cases, institutional reforms are essential in order 24 World Bank (2011) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 18 in Ethiopia. to eliminate constraints such as policies that favor rent-seekers, or that favor a particular social group or a gender over the other. Moreover, inclusive innovation should needs to be demand-driven and include stakeholder in the business model design and value chain. Stakeholders have to be involved in the process of identifying their own needs such that innovation truly adapts to the local realities. 20. The private sector can play an important role in fostering inclusive innovation. It could do so by creating and generating products and services that serve low-income markets, and by integrating small producers into their supply and distribution chains. In doing so, firms should be encouraged to participate in the process of identification of challenges of those most in need, and to help in the creation and dissemination of solutions to these problems, thus bolstering the participation of the private sector in servicing the needs of the poor. 21. Enacting public policies that encourage companies to develop and use technology, along with their marketing and distribution capabilities to provide goods and services at affordable prices to the poor can have effects in more than one level: they can help satisfy the needs of the poorest, generate profit for the companies while spurring growth, and help create jobs. By including the Ethiopian poor in the value chain, companies are ultimately helping enhance human capital and increase incomes. This will in turn deepen their own market and increase their potential for additional business. To this end, government policies should further focus on removing legal and regulatory constraints while establishing public-private partnerships that entice investment in the poor. 22. Within the framework of inclusive innovation, the Government of Ethiopia could also provide stronger and targeted incentives and funding to incite public and private institutions and universities to engage in R&D focused on socially relevant issues. Universities, for instance, can support inclusive innovation in four specific ways: they can train future creators of innovation, they can engage in research that develops new systems, products and processes, they can provide technical assistance to innovators and finally, they can establish network systems that promote research and development of innovative approaches and solutions. NGOs, laboratories and research institutions can collaborate in a similar manner to the process of innovation of the country, provided the government creates appropriate mandates, grants, and research prizes for pro-poor initiatives to guarantee the creation and dissemination of pro-poor knowledge. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 19 in Ethiopia. 3. Objective, Scope and Methodology 23. With this in mind, this study seeks: (i) to empirically analyze the extent of innovative activities that formal firms are undertaking in Ethiopia; (ii) to conduct a review of the existing innovation landscape, and (iii) to identify opportunities to foster innovations at the base of the pyramid (BoP) in Ethiopia. By drawing on lessons from ongoing innovation-focused interventions around the world, this study aims to provide concrete policy recommendations to create an enabling environment for private firms to undertake innovative activities to increase productivity, as well as to provide innovative solutions to help alleviate poverty and facilitate more equitable growth in the economy. 24. This study seeks to analyze the level of innovative activities that formal private sector firms are undertaking as well as conduct a review of the existing innovation landscape with a view to identify opportunities to foster innovations for the base of the pyramid. To do so, it follows the following methodology: 25. The empirical analysis will be conducted using the World Bank enterprise surveys with the aim of distilling the specific traits that differentiate innovative private sector firms from those that do not innovate. The analysis will be conducted at two levels using the World Bank Enterprise Survey (2011) and the specific Innovation module (2011). The enterprise survey will enable comparison across a greater number of countries. 26. The variables in the database that would represent entrepreneurial activity would include: • Introduction of a new or improved product; • Introduction of a new or improved process; and • Introduction of a new or improved technology. 27. The objective here would be to determine the variables that are correlated to innovative activity within these existing private sector firms. The surveys examine wide range of factors affecting the business environment. These data possess many indicators of the factors that would enhance the underlying capability of firms to undertake innovative activities – including, among others, the skills mix of the workforce, training levels, R&D spending, and measures of international connectedness and both domestic and international competition. The data would be used to analyze how innovative firms differ from non-innovative ones within countries- in terms of age, size, productivity and industry. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 20 in Ethiopia. 28. At the more detailed level, the innovation module that has been conducted in Ethiopia will be analyzed to gain greater insights into the characteristics of innovative firms. The focus of the detailed innovation module will be to understand better the determinants of innovative activity amongst existing firms. There will be an attempt to identify in greater detail specific links between the firm’s exposure to international technical best practices through trade and FDI, its skill levels, and investments in R&D to the level of innovative activity. The detailed analysis would help investigate better the incentives for the firms to undertake innovative activity. However since this was one of the pilot countries and is not a representative sample, this analysis will not use comparator countries. The empirical analysis has been conducted in the context of the national innovation ecosystem. 29. This study is structured as follows: Chapter 2 provides a detailed overview of the characteristics of growth and innovation, by providing key insights based on the enterprise survey analysis on the characteristics, motivations, operational and market environment and constraints of the innovators in Ethiopia. Chapter 3 assesses the innovation landscape in Ethiopia, by looking at the governmental and private agencies responsible to promote innovation, as well as active programs, and donor initiatives which may play a role in promoting firm level and pro-poor innovations. Chapter 4 provides policy recommendations to promote innovation in Ethiopia both at the firm level and in the form of pro-poor initiatives. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 21 in Ethiopia. CHAPTER 2: Firm Level Innovation in Ethiopia This chapter uses data from the World Bank’s Enterprise Surveys to analyze innovative activity in existing private sector firms. Identifying what types of firms undertake innovation activities, how much they innovate, and how they differ from firms that do not innovate is essential for policymakers. While average innovation rates among Ethiopian firms is modest, they are low compared to other comparator countries. Innovation also has a relationship with firm level performance indicators in Ethiopia. 30. As discussed in Chapter 1, modern theories of economic growth suggest that sustained economic growth and improvement in living standards require sustained technological progress, underpinned by innovation. In developing countries such as Ethiopia, located well within the global technological frontier, innovation is incremental and synonymous with adopting and adapting technologies developed in advanced economies. Such incremental innovation is central to the growth and survival of firms and to the process of industrialization and structural change. 1. Data and Methodology 31. This chapter explores the patterns of innovation levels and attempts to establish innovation correlates in Ethiopia using data from the World Bank’s Enterprise Survey (ES). Various empirical studies have explored firm-level determinants of innovation and of technology adoption. Most studies, however, focus on firms in developed (and upper middle income) countries, mainly because of data availability but also because innovation is often considered to be the domain of large firms with intensive R&D structures, located in developed countries. Nevertheless, growing firm-level data collection has allowed for an increasing number of studies to explore the rates and the determinants of innovation in developing countries. 32. Innovation is captured by product, process, marketing and organizational changes and improvements. Starting in 2011, the ES questionnaire introduced a section on innovation, designed to collect information about firm-level innovative activities in selected developing countries. At its core, innovation is conceptualized by the standard defined in the Oslo Manual (OECD, 2005)25. The measures used to specify whether innovation activities have taken place are the following four: i) product innovation, based on the following question in the survey: “During the last three years, has this establishment introduced new or significantly improved products or services?”; ii) process innovation based on the following 25 http://www.oecd.org/science/inno/2367580.pdf Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 22 in Ethiopia. question in the survey: “During the last three years, has this establishment introduced any new or significantly improved methods of manufacturing products or offering services?”; iii) R&D activity based on the following question in the survey: “During the last three years, did this establishment spend on formal research and development activities, either in-house or contracted with other companies?”; and iv) process or product innovation, indicating whether the firm has answered affirmatively to either i) or ii) and hence introduced a new or significantly improved product or method of production/rendering services. 33. It is important to note that a potential issue with these measures of innovation is, that for an activity to be considered as innovation, suffice that it be new or significantly improved to the firm. This means that there is a potential for measurement error arising from the respondent’s view as to what constitutes new or significantly improved26. Although the ES questionnaire provides respondents with lists of examples of new or significantly improved products or processes in order to minimize this subjectivity, the responses are likely to vary based on the knowledge and on the judgment of the respondent. 2. Innovation and its Correlates 34. This section explores innovation by firms in Ethiopia and how its incidence compares to that of selected comparators27. It further explores how some of the key firm-level attributes correlate with a firm’s propensity to innovate. Finally, we look at certain measures of firm performance and how these relate to whether a firm introduces a new product or introduces changes to its production or business processes. It is structured in the following way: first we provide comparisons between the incidences of innovation in Ethiopia and in selected comparators, followed by a brief discussion of the nature of innovation in the country using a follow-up innovation survey. We then proceed to present and discuss two sets of regression analyses; in the first we attempt to establish links between key firm specific attributes and the likelihood that firms will introduce innovations; followed by analyses of the potential correlations between innovation and three different measures of firm performance controlling for the same key firm attributes mentioned above. The section concludes with a brief summary of the findings. 26 Mairesse and Mohnen (2010) provide an excellent review of the potential issues with these types of innovation measures. 27 We use two main comparators, Kenya (2013) and a group of low-income countries. The latter consists of low- income countries for which the latest Enterprise Survey has questions on innovative activities, excluding Ethiopia (2011), namely: Afghanistan (2014), Bangladesh (2013), Central African Republic (2011), Democratic Republic of Congo (2013), Kenya (2013), Myanmar (2014), Nepal (2013), Rwanda (2011), Tajikistan (2013), Tanzania (2013), Uganda (2013) and Zimbabwe (2011). Where data is available, we also include China (2012) as an additional comparator.or. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 23 in Ethiopia. 35. Close to 40 percent of the firms in the country have engaged in either product or process innovations, but this is lower rate than those of selected comparators. Figure 2.1 summarizes the incidence of the four measures of innovation in Ethiopia and in the selected comparators, as collected through the Enterprise Survey. More than one third of the firms in Ethiopia report having introduced new products or services during the course of the three years prior to the time of the survey, while over 40 percent of the firms indicated introducing new methods of production or new methods of rendering services during this same period of time. 36. Only 20 percent of the surveyed firms in Ethiopia indicated spending on R&D. This low rate of spending on R&D is, however, usual in low-income countries like Ethiopia where most innovation involves adopting and adapting existing products and methods of production which require limited R&D activities, if any. 37. Overall, Ethiopia compares unfavorably to China, Kenya and a group of low-income countries (LIC) in terms of innovation. The share of firms reporting process innovation and spending on R&D in China is almost double that of Ethiopia, and, except for R&D, the portion of firms that innovate in Ethiopia is about 10 to 20 percentage points smaller than that of the LICs. The difference between Ethiopia and Kenya is particularly stark, as innovation rates in Kenya are almost double those of Ethiopia in all four observed measures (Figure 2.1). Figure 2.1: Share of Firms that Innovate by country28 85% 81% 78% 79% 70% 66% 60% 48% 45% 43% 41% 38% 36% 26% 19% 20% Ethiopia China Kenya LICs Product Innovation Process Innovation Product/Process Innovation Spending on R&D Source: Author’s calculations based on WB Enterprise Survey For China, figures represent manufacturing only since information on process innovation and spending on 28 R&D in the service sector, is unavailable in the 2012 China ES. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 24 in Ethiopia. 38. Innovation varies depending on different firm characteristics, firm size in particular. Firm size often serves as a proxy for other unobservable firm attributes that could affect the propensity to innovate, such as access to finance and to product and labor markets. Figure 2.2 presents shares of firms that have introduced innovations, disaggregated by firm size using three categories: small (5 to 19 employees), medium (20 to 99 employees) and large (100 and more employees)29. Results are reported only for two of the four measures of innovation: whether the firm undertook either product or process innovation and whether the firm spent on R&D in the three years prior to the survey. 39. Over two thirds of large firms in Ethiopia undertook either product or process innovation, that is about 20 percentage points more than the share of small and medium firms. Moreover, the gap in innovation share between large and small firms in Ethiopia is 26 percentage points, second only to that of China and 6 percentage points above the sample average. Notwithstanding, large firms in Ethiopia tend to innovate less than those in the comparator countries: in China and Kenya, over 80 percent of large firms have engaged in either product or process innovation, while 77 percent of firms in the group of LICs have done so. 40. The share of small sized firms that report introducing product or process innovation during the three years prior to the survey is 42 percent. This share is smaller than the share of firms in the same category in China that introduced innovations as well as the share in the group of low income countries (53 and 56 percent, respectively). The share of firms in this category in Kenya (82 percent), which have innovated products or processes, is almost double the corresponding figure for Ethiopia. 41. Existing evidence indicates that the limited amount of R&D spending in developing countries corresponds mostly to large firms. In line with this, there is a clear difference in Ethiopia between small, medium and large firms in terms of their respective R&D spending: a third of both large and medium sized firms in the country report having spent on R&D while only 7 percent of small firms report to have done so (Figure 2.2, Panel B). In fact, the rate of spending on R&D by small firms in Ethiopia is the lowest, when compared to China, Kenya and the group of LICs, by 24, 14 and 11 percentage points, respectively. The proportion of firms spending on R&D is overall higher in China than in all the other comparators in all the three size categories, although the difference in proportions between the size categories is not as stark as it is in the other three comparator countries (Figure 2.2 Panel B). 29 The Enterprise Survey uses these three levels for classifying the firm size, Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 25 in Ethiopia. Figure 2.2: Share of Firms that Innovate by Country and Firm size Panel A. Product or Process Innovation 88% 87% 82% 82% 77% 77% 68% 67% 56% 53% 49% 42% Ethiopia China Kenya LICs Small Enterprises Medium Enterprises Large Enterprises Panel B. Spending on Research and Development 46% 40% 40% 35% 31% 32% 31% 27% 28% 21% 18% 7% Ethiopia China Kenya LICs Small Enterprises Medium Enterprises Large Enterprises Source: Author’s calculations based on WB Enterprise Survey 42. The share of firms that report introducing innovations in the manufacturing sector is larger than the share of firms that do so in the services sector by between 18 and 20 percentage points. Figure 2.3 provides a closer look at this, by splitting firms into two broad sectors: manufacturing and services. This pattern is not specific to Ethiopia, although the gap is substantially larger in Ethiopia than it is in the comparator countries. The lower rates of innovation in the service sector could be explained by the fact that product and process innovations naturally favor the manufacturing sector, while marketing and organizational innovation tend to be the most common forms of innovation undertaken by firms in the services sector. It could also be due to the fact that services firms are more heterogeneous than manufacturing firms, which would pull down the average share of firms who innovate Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 26 in Ethiopia. in the services sector. Yet another possible explanation could be that services firms tend to be disproportionately smaller than manufacturing firms, and as discussed above, smaller firms are proportionally less likely to innovate. In Ethiopia for instance, more than 30 percent of the sampled firms that operated in the manufacturing sector fall into the “large” category, while only 11 percent of firms in the services sector do so. Therefore, the lower proportions of innovation by firms in the services sector is a reflection of the variation in the shares of innovation rates across firm size. Figure 2.3: Share of Firms that Innovate by Country and Sector Panel A. Manufacturing 88% 83% 78% 81% 68% 70% 66% 64% 59% 52% 47% 41% 38% 34% 23% 19% Ethiopia China Kenya LICs Product Innovation Process Innovation Product/Process Innovation Investment on R&D Panel B. Services 84% 78% 71% 63% 57% 45% 46% 44% 41% 34% 22% 20% 19% Ethiopia China Kenya LICs Product Innovation Process Innovation Product/Process Innovation Investment on R&D Source: Author’s calculations using Enterprise Survey 43. Innovative activities in developing countries rely less on knowledge generated through internal R&D activities, than they do on knowledge Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 27 in Ethiopia. generated through interactions with the external environment30. Thus, a critical component of successful innovation is the ability of a firm to source and utilize external knowledge. To better understand this in Ethiopia, information in a follow-up survey that focuses on innovation, administered to manufacturing firms selected from those included in the 2011 Ethiopia Enterprise Survey31 is analyzed. 44. Through this survey important insights regarding the main sources of information that drive innovative activities within firms is captured. It is found that almost one third of interviewed firms cited customer feedback as the main source (See Table 2.1). The second most important source, according to 17 percent of the interviewees, were products from other firms that already existed in the domestic market, corroborating the view that most innovation in developing countries consists of diffusion of existing knowledge. Transfer of knowledge from parent firms constitutes the third most important source of information for innovation as cited by 13 percent of the firms. Further, and in line with anecdotal evidence of the limited interaction between the private sector and formal education and research institutions in Ethiopia, only 1 percent of the interviewed firms indicated that these institutions were their main sources of information for innovative activities. Finally, while not as important as the three main sources of information, still a noteworthy 7 percent of the interviewed firms said fairs, exhibitions and conferences were their main source of information to innovate. Table 2.1: Main Sources of Information for Innovative Activities (based on 2011 innovation follow-up survey) Main Source of Information for Innovation Percent Recent Hires from other firms 3% Products or services available in the Domestic Market 17% Know-how transfer from parent firms 13% Know-how transfer from other firms 11% Client firm for which respondent is subcontractor 4% Consultancy firms 2% Government ministries or programs 3% Fairs, exhibitions, professional conferences 7% Business or industry associations 2% Professional journals and trade publications 2% Education and research institutes 1% Internet 6% Customer feedback 28% N 124 Source: Author’s calculations using Enterprise Survey 30Cotic Svetina and Prodan (2008) 31This was part of a pilot survey, undertaken in 2011, designed to test an innovation-specific questionnaire. The survey is not nationally representative and therefore results are not generalizable to all manufacturing firms in the country. Nevertheless, this survey contains useful information to better understand the nature and process of innovation taking place within the interviewed firms. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 28 in Ethiopia. 45. About 47 percent of the firms that had introduced innovations to their products indicated that they had done so by adapting existing goods. These had been developed by someone else and were already available in the market32. About 12 percent of the firms recognized entirely reproducing an already existing product. About a third of the firms reported that the innovation of their product resulted from an original idea. About 15 percent of the firms said their product was developed through a blueprint that was purchased or licensed from a third party. 46. Close to half of the interviewed firms indicated that the innovation occurred entirely in-house and was developed by the firm, when attempting to determine who was directly responsible for developing the new product. Meanwhile a quarter of the respondents indicated that it was developed in collaboration with other firms. Yet another quarter of the firms indicated that third parties were responsible for the development of the new product. Table 2.2: How are new products developed and who develops them Percent How was the product developed? It is an original idea 27% Adapting a product already sold by another firm 47% Reproducing a product already sold by another firm 12% Design or blueprint which was purchased 8% Design or blueprint which was licensed or subcontracted 7% Total number of firms 60 Who Developed the product? developed entirely by this establishment 48% developed by this establishment in cooperation 25% developed by other firms or institutions 27% Total number of firms 60 Source: Author’s calculations using Enterprise Survey 3. Correlates of Innovation: Regression results 47. Relationship between firm characteristics and firm level innovative activity exist. As discussed in the previous section, there seems to be a relationship between the size of a firm and the sector in which the firm operates and whether the firm is or isn’t an innovator. In this section, regression analyses is applied to analyze some of the key firm-level attributes that appear to be correlated with the propensity 32 Firms that undertook product innovation are further asked questions on how the new or improved product was developed and who within the firm developed it. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 29 in Ethiopia. of firms to engage in innovation. Given that the dependent variables of interest are categorical33, the following probit equation for the conditional probability that a firm will innovate was estimated: Inov = α + β1 ∗ β X + ε ……………………….. (1) Where i is index for firms, j is index for the covariates, is one of the four measures we have established as innovation, namely product innovation, process innovation, product or process innovations, and spending on R&D. Various firm-level characteristics that could influence the propensity of a firm to innovate are controlled for and are represented by the vector X. 48. Existing studies indicate that firm size and age are among standard observable covariates associated with various firm-level outcome measures. As discussed above, the size of the firm may serve as a proxy for various unobservable firm attributes that might affect the likelihood to innovate, such as the ability to attract highly skilled workforce and talented managers. Size is measured as the (log of) a firm’s total employment, and firm age as the (log of) the year of the ES minus the year in which the firm started operating. The sector in which the firm operates is another important correlate, as it captures the fact that firms in different sectors have different needs and capacities to innovate (Agarwal and Gort (2002)). In the regression, sector is controlled for by disaggregating it into several subsectors: textile and garments, food, leather, information technology, and retail. A residual category is included to capture all other subsectors34. 49. A large body of literature shows that exposure to foreign markets can be an important determinant of a firms’ need and ability to innovate35. Access to foreign markets, for instance, may force firms to innovate in order to be competitive in international markets. Exposure to foreign markets can also enhance firms’ innovative capability by improving their access to better human and better financial capital. Two proxy measures are used to control for these phenomena: a dummy variable indicating whether the firm is an exporter or not, and an indicator of whether the firm is foreign-owned36 or not. The measure of investment in human capital is controlled for by using a dummy to reflect whether the firm provides training to 33 Equation is estimated using weighted probit to account for the fact that ES data is collected using a stratified sampling method. 34 The base (excluded) sectors include all other services, except Information Technology; and all other manufacturing sectors other than the textile & garments, leather and food sectors. 35 For instance, Almeida and Fernandes (2008); Seker (2012); and Alvarez and Robertson (2004). 36 We consider a firm foreign-owned if 10% or more of its equity is owned by foreigners. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 30 in Ethiopia. employees or not and another dummy to capture firms which give their employees time to experiment. 50. A number of theoretical and empirical studies have shown that access to external finance is one of the most critical factors to spur innovation37. The dummy variable indicating whether a firm is credit constrained or not is used as a control, constructed based on a series of finance-specific questions in the ES designed to capture a firm’s access to external finance38. 51. Firm size does not matter for innovative activity when controlling for other firm level attributes. Table A2.1 provides estimates39 of the probit regression for Ethiopia and for the three comparators. The first three columns of the table show the estimation results when using product innovation as the dependent variable. The model shows that firm size doesn’t appear to have a significant correlation with product innovation in Ethiopia or Kenya, indicating that the importance of size in these two contexts disappears once we control for other firm-level attributes. In the group of LIC countries, however, we observe that there is a positive effect of firm-size over the firm’s propensity to develop new products, albeit small in relative terms. 52. In Ethiopia, the results show that the older a firm gets, the less likely it is that it will conduct product innovation. This falls in line with existing evidence that performance tends to slow down as firms get older. In Kenya, however, the age of the firm is positively correlated with the probability to innovate, suggesting that older firms are more likely to engage in product innovation than young firms are. Finally, the age of the firm is not significantly correlated with product innovation in the group of low income countries. 53. The sector of the firm matters when it comes to the probability that a firm will innovate in Ethiopia. Firms in the textile and garment and in the food sectors in particular, are more likely to engage in product innovation than do those in the base category. This is likely due to the recent emergence of the textile and garment industry in the country as an alternative to traditional activities, and to the inherent heterogeneity of the food sector. In Kenya, conversely, there doesn’t appear to be any correlation between the probability that a firm will innovate its product line, and the sector in which it operates. Lastly, in our group of LICs, operating in the leather sector increases the likelihood of engaging in product innovation. 37 For instance, King and Levine (1993); Levine (2005); Bronwyn and Lerner (2010). 38 Kuntchev et al (2013) for the definition and construction of the measure of access to credit based on ES data. 39 All reported estimates are marginal and impact effects. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 31 in Ethiopia. 54. Providing training to employees and allowing employees’ time to experiment are both factors that positively correlate with the probability to engage in product innovation. This is not only true for Ethiopia but also in the comparator group of LICs. In the case of Kenya, providing time to experiment increases the probability that a firm will innovate, but there is no correlation between providing training and product innovation. These findings corroborate the importance of human capital for innovation. 55. Limited access to credit poses a significant barrier to product innovation in Ethiopia. Firms that are credit constrained are about 14 percentage points less likely to undertake product innovation than are non-credit constrained ones, everything else remaining equal. Credit constraint however, does not affect the likelihood to innovate in the two comparator countries. It is important to note that practically none of the proxy variables for access to foreign markets predict innovation, except in Kenya where exporter firms are more likely to innovate than non-exporters are. In the case of Ethiopia in particular, this may be due to the fact that exports are highly concentrated in commodities where margins tend to be very low and value-added very limited. Box 2.1: Ethiopian financial sector At present, the Ethiopian financial sector services only a small fraction of the country’s population, with some estimates suggesting that less than 10 percent of Ethiopian households have access to formal credit (African Economic Outlook, 2013). For firms, the main source of funds is loans from banks or MFIs, since capital markets do not function effectively and more tailored and sophisticated financing products such as leasing and equity funds are not widely available. Constraints for ‘Start-up’ and ‘Scale-up’ Innovators While access to finance is a major obstacle for all Ethiopian firms, the challenge is particularly acute for young firms and small firms, which are most likely to be the sites of innovation. According the World Bank’s Enterprise survey data, only 1.9 percent of small enterprises have access to a loan or line of credit, compared to 6 percent of micro- enterprises and 20.5 percent of medium enterprises. Small firms are also much more likely to be rejected for a loan. Young firms, aged five years or less, also face distinctive barriers. Only 7.3 percent of young firms have a loan, compared to 14.0 percent of old firms. 55.9 percent of young firms have loan applications rejected, compared to 32.6 percent of old firms. Figure A: Access to finance for young firms and small firms Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 32 in Ethiopia. 60 48.8 55.9 32.1 32.6 40 25.3 7.3 14.0 9.9 8.4 20 6.7 0 Access to Finance Loan application Has a Loan or Line Has an overdraft Has External is a Major was rejected of Credit facility Financing Constraint Young (Age 0-5) Old (Age 6+) Source: WB Enterprise Survey, 2011 Impediments to accessing finance for small and young firms stem from the demand side of financial markets. Like in other developing economies, credit in Ethiopia is more readily available to businesses that have fixed assets such as land or buildings to be used as collateral than to those having movable assets, as banks strongly prefer property to secure a loan. The average value of collateral needed for loans in Ethiopia (234 percent of the loan amount) is also very high compared to other regions of the world as well as to other developed economies in Africa. The distinct credit constraints for young and small firms in Ethiopia is a clear impediment to innovation. The use of external financing is associated with greater innovation (GFDR, 2014), because it allows firms to take innovative ideas from concept to implementation, and to absorb the high-start-up costs related to design and proof- of-concept stages of an innovative product or service. The constraints to finance not only prevent innovative ideas from attracting investment to reach scale, they also deter entrepreneurs from investing in start-up technologies. Box 2.2: CASE STUDY: Credit Constraints for Scaling Up Online Hisab is an innovative Ethiopian tech start-up which offers a cloud-based accounting package for Ethiopian SMEs. Online Hisab’s innovative product offering is premised on the idea that many Ethiopian SMEs don’t use accounting software because the licenses are too costly, the software is too difficult to understand, or their computers are too dated to run the programs. Online Hisab allows Ethiopian SMEs to use simplified, Amharic-language, cloud-based versions of the latest accounting software developed on a subscription basis, removing the need for upfront capital investment in terms of hardware and software, as well as upgrade costs. Online Hisab has generated excitement and attention for its innovative product offering. It was awarded the Pivot Prize for Innovation, East Africa’s premier award for innovative start-ups. It was also featured as one of the ‘Top Five Tech Companies to Watch in Ethiopia’ by Selamta Magazine, and it was selected as one of the top 20 innovative ideas in Africa at this year’s Demo Africa technology conference. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 33 in Ethiopia. Online Hisab’s founder, Asmeret Gebre, describes herself as a ‘childhood entrepreneur’, having had an entrepreneurial spirit from her earliest years. The expansion of her innovative idea, however, has stalled due to her inability to access credit. Asmeret used her own start-up capital to develop and pilot test the product, and identified significant market opportunity. She now needs a loan of 2.5 Million Birr to market the product, hire sales staff, and fund the scale-up of Online Hisab. She has been denied a loan from both commercial banks and MFIs, since the value of her collateral is not high enough to secure the loan size she needs. As a result, the scale-up of Online Hisab, a promising and tested innovation, seems likely to falter. 56. In Ethiopia, three of the control variables, sector, measure of credit constraint, and whether the firm provides employees time to experiment, are correlated with process innovation. The second set of the three columns in the Table A2.1 provides estimates for the likelihood of innovation of processes. Firms that operate in the textile and garments, leather, food and IT sectors, show a significantly higher likelihood of introducing new or upgrading existing methods of production or rendering services. Operating in the food industry in particular, increases the probability of introducing innovative processes by as much as 50 percentage points. Operating in the IT and textile and garments sectors increases the probability of process innovation by 36 and 41 percentage points, respectively. Finally, firms in Ethiopia that offer employees time to experiment are about 40 percentage points more likely to engage in process innovation than those who do not, while credit constrained firms are about 17 percentage points less likely to undertake process innovation. 57. Firm size, age, and sector have no significant correlation with the probability of spending on R&D in Ethiopia. Counterintuitively, in the case of Ethiopia, the fact that the firm is at least partly owned by foreigners lowers the firm’s propensity to spend on R&D by 6 percent (Table A2.1). This may indicate that foreign- owned firms in Ethiopia, particularly those that operate as subsidiaries of companies headquartered in other countries, conduct all the necessary fine-tuning and adaptation of their product lines or their production processes in their home country and, therefore, do not need to conduct any R&D activity in Ethiopia. While one would expect that being an exporter could be correlated to whether a firm would spend on R&D, this was only the case of firms in the group of low income countries, where being an exporter increased the propensity to carry out R&D activities by 8 percentage Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 34 in Ethiopia. points. While surprising, further research is required in order to explore the role of foreign firms in facilitating technological transfer to the host country40. 58. Based on traditional economic theories human capital would be an important determinant of the likelihood to undertake R&D activities. In fact one would expect that it would be a more important determinant for undertaking R&D activity than it would be to affect the likelihood to generate product or process innovations. In line with such expectations, the two proxy measures of human capital have a positive and significant effect on the likelihood of spending on R&D in Ethiopia: firms that offer training to employees are about 13 and a half percentage points more likely to spend on R&D, while firms that allow employees time to experiment are 14 percentage points more likely to spend on R&D than are those who don’t provide either one of these benefits. Similarly, providing training and allowing the employees additional time to experiment has an effect on the likelihood of spending on R&D in both Kenya and in the group of low income countries, but the magnitudes of the coefficients are still larger for Ethiopia than they are for these two comparators. 59. Finally, in Ethiopia, access to credit is another important predictor of firms’ propensity to spend on R&D, as credit constrained firms are about 11 percentage points less likely to spend on R&D than non-constrained firms. Similar results hold for LICs, where credit constrained firms are about five percentage points less likely to spend in R&D. In Kenya, there does not appear to be any correlation between access to credit and the likelihood that the firm will spend on R&D. 4. Innovation and firm performance 60. A stark difference between innovators and non-innovators in terms of real sales growth is observed in Ethiopia. This section considers the association between innovation and different measures of annual firm performance, namely: employment growth, real sales growth and labor productivity growth. Firms that innovate their product line present on average, annual real sales growth of about 8 percent, compared with a sales decline of 8 percent in those firms that have not undertaken any product innovation (Figure 2.4, Panel A). A similar pattern holds for process innovation: firms that have introduced new processes in Ethiopia present real sales growth of around 9 percent, compared to a 9 percent sales decline in firms that have not introduced any new processes. Similarly, in the three other comparators, a similar pattern holds: firms that have introduced new products or 40Almeida and Fernandes (2008) show, using firm-level data for a large set of developing countries, that major foreign-owned firms are less likely to engage in innovation, perhaps because the firms fear expropriation in the host country. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 35 in Ethiopia. processes have performed better in terms of sales growth, on average, than those firms that have not introduced either. In the case of Kenya, however, this translates into a lower sales decline, as both firms with and without innovations present negative sales growth, although the extent of the decline is smaller in the case of firms that have indeed innovated. Notably, the magnitude of the sales growth performance gap between innovators and non-innovators is considerably higher in Ethiopia than it is in the comparators. 61. In terms of employment growth, a similar trend can be observed between innovating and non-innovating firms in Ethiopia: firms that did innovate added employment at about 20 percent per annum, 8 percentage points more than did non-innovators. China and the LICs, show a similar pattern, although the magnitude of the difference in employment growth between innovators and non- innovators is less substantial than it is in Ethiopia. In Kenya, the difference between the two groups is not distinctly clear, as firms that have introduced new products have increased employment less than one percentage point more than firms that have not introduced any new products, while firms with and without process innovations have both presented similar employment growths at 2.4 percent. 62. In terms of labor productivity, the survey yields interesting results. While in Ethiopia a similar pattern is observed as that of employment and sales growth, that is firms that have introduced new products or new processes have outperformed those that have not introduced a new product or process; the trend is not as cut-clear across the other comparators except for Kenya. Further, a systematic deterioration is observed in the labor productivity of firms across most comparators except China. In the case of Ethiopia and Kenya the situation appears particularly dire, as labor productivity has in fact declined between 10 and 22 percent per year depending on whether the firm has introduced any innovations or not. In Ethiopia, Kenya and the group of LICs, however there was a smaller decline when the firm had introduced innovations. The difference is largest in Ethiopia, where companies without product innovations experienced a labor productivity decline of 18 percent, while the decline for firms with product innovations was of 11 percent. Similarly, Ethiopian firms that did not introduce any innovations to their processes experienced a decline in labor productivity of 19 percent, while firms who did introduce new processes only experienced a 10 percent decline in productivity. In China firms did experience labor productivity growth, but interestingly enough, firms with new products experienced a larger productivity growth than firms without new products while firms with new processes experienced less than half the productivity growth than did firms which did not change their processes. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 36 in Ethiopia. 63. Overall, the association between innovation and firm performance appears to be stronger in the case of Ethiopian firms. This will be explored in more detail using regression analyses to see whether this association holds after controlling for other firm characteristics. For this analyses the following parsimonious model is estimated: Perf = α + β Inov + β X + ε ………………………… (2) Where i represents firm id, j represents the id of the covariates; Perf represents one of the three measures of performance; Inov represents one of the four measures of innovation discussed in earlier sections; and ε is the error term. In addition to controlling for the four measures of innovation that were introduced in earlier sections, standard firm characteristics that would affect firm performance are also controlled for, notably firm sector, age, size, exporting status, foreign ownership status, and a measure of whether the firm is credit constrained or not. Equation 2 is estimated using a simple OLS method41 and the results of the model for annual real sales growth, employment growth and productivity, are presented in Tables A2.2, A2.3 and A2.4 respectively. Figure 2.4: Measures of Firm Performance by Innovating Status and Country Panel A. Real Sales Growth 17.2% 14.0% 11.4% 10.5% 9.4% 8.2% 0.4% 0.5% -1.3% -0.7% -7.8% -9.1% -18.2% -17.9% -19.9% -20.5% Ethiopia China Kenya LICs Product Innovation No Product Innovation Process Innovation No Process Innovation 41 The estimation includes survey weights. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 37 in Ethiopia. Panel B. Employment Growth 19.6% 18.0% 12.0% 12.1% 10.9% 9.8% 7.7% 8.1% 7.5% 7.0% 7.0% 6.4% 2.6% 2.4% 2.4% 1.8% Ethiopia China Kenya LICs Product Innovation No Product Innovation Process Innovation No Process Innovation Panel C. Labor Productivity Growth 6.9% 4.9% 3.0% 2.2% -5.3% -5.6% -5.9% -6.4% -9.7% -11.3% -18.0% -19.1% -20.1% -19.7% -21.0% -22.2% Ethiopia China Kenya LICs Product Innovation No Product Innovation Process Innovation No Process Innovation Source: Author’s calculations using Enterprise Survey 64. Product and process innovations both show a positive and significant correlation with sales growth in Ethiopia and Kenya. In Ethiopia in particular, product and process innovations explain an increase in the sales growth of about 18 percent each, all other factors being constant (Table A2.1). Spending on research and development, on the other hand, does not present a statistically significant relationship with sales growth, suggesting either a limited role of R&D in firm sales performance or possibly the fact that there is a lag between the expenditure on R&D and it translating into increased sales revenue. In Kenya, product and process innovations are positively correlated with sales growth as well, although the magnitudes of the correlation coefficients are almost half of those observed in Ethiopia. Product innovation accounts for about 8 percent of the change in sales growth in Kenya, and process innovation for about 11 percent. In LICs, only product innovation is correlated with sales growth: the fact that a firm has introduced new products explains about 2 percent of the increase in the firm’s growth in sales. There Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 38 in Ethiopia. is no correlation between sales growth and process innovation nor between sales growth and spending on R&D. 65. There is a significant correlation between access to credit and sales growth in firms in Ethiopia. Access to credit is the only control variable that has a significant correlation with sales growth in Ethiopia and in all comparators. While in Ethiopia and in the group of LICs this relationship is negative, it is positive in Kenya. This means that in Ethiopia and in the group of LICs, credit constraint drives a decline in the sales growth of the interviewed firms, while in Kenya –surprisingly, lack of access to credit is responsible for around ten percent of the increase in sales growth. 66. Firm age, on the other hand, is negatively associated with sales growth. These associations are significant in Ethiopia and in the group of low-income countries, and insignificant in Kenya. This would be in line with what one would expect, that the older a firm is and the longer it has been in the market, the less sales growth it will experience as revenue will plateau within a captive market. On the other hand, and although not the case for all model specifications, firms that operate in Ethiopia and that are owned at least in part by foreigners, present a deceleration in sales growth of around 20 percentage points indicating that not only do foreign- owned firms are less likely to spend on R&D, but also that they have a lower sales growth than do firms that are more than 90 percent owned domestically. 67. Product innovation is not significantly correlated to job creation in any of the geographic areas of the study. In table A2.3 the results of the estimations wherein employment growth is the dependent variable are presented. While spending on R&D is positively correlated with employment growth across all regions, it is not clear whether this growth is directly related to additional employees directly involved with R&D activities. Finally, process innovation is positively correlated to employment growth only in Ethiopia, where it explains 3 percent of the change in employment growth, all other things equal. 68. The rate of employment growth is correlated to firm size. In Ethiopia this relationship is negative while positive in the LICs. Thus, the larger a firm is in terms of number of employees in Ethiopia, the slower its hiring rates will be, and possibly the more jobs it will shed. The opposite occurs in the group of LICs. This further suggests that labor in Ethiopia is not operating at full productivity, thus presenting an output gap that results in idle employees. Firms in Ethiopia can thus easily cover surges in demand, without the need for additional employees, and growth in revenue would not necessarily translate into additional job creation. In Kenya, firm size and employment growth appear to be independent. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 39 in Ethiopia. 69. The age of the firm is also correlated with employment growth in Ethiopia and in the LICs in a similar fashion as the size of the firm is; that is negatively correlated to employment growth in Ethiopia and positively correlated in LICs (except for one model specification in which a positive correlation is observed). In Ethiopia this too may be connected with the productivity levels: as labor costs are inherently low in the country, it is relatively cheap to start a business with excess labor capacity. As the firm ages however, some of these extra labor is shed in favor of more optimal productivity levels, and absent growth, employment growth rates decline or become negative. There appears to be no correlation between the age of a firm and employment growth in these model specifications in the case of Kenya. 70. In Ethiopia, there is a negative correlation between being an exporter firm and employment growth rate. This could be due to the fact that exporters tend to be more capital intensive than non-exporters, given the fact that most of the export portfolio of the country consists on commodities. 71. There is a positive correlation between labor productivity growth and innovation activity. When looking at labor productivity growth in the regression analyses, there is a positive correlation of similar magnitudes with product and process innovation in both Ethiopia and in Kenya, explaining between 8 and 10 percent of the change in productivity growth rates (Table A2.4), while spending on R&D doesn’t seem to have an impact over labor productivity in either of the two countries. None of the three measures of innovation however, appear to be significantly correlated with labor productivity growth in the group of LICs. Credit constraint is the only control variable that is correlated with labor productivity growth, and we find this to be the case in Ethiopia, Kenya and in the LICs. However, in Ethiopia and in the LICs, the relationship is negative while in Kenya not only is the relationship positive, but the magnitude of the coefficient in fact larger than observed on the two other comparators. This suggests that there may be a higher premium to credit access in Kenya, causing additional pressure on the productivity of the employees in Kenyan enterprises. 5. Summary and Conclusion 72. Firm level innovation compares less favorably to other comparator countries. About a third of the surveyed firms report having introduced new products or having improved their production or business processes. However, the country performs unfavorably vis-à-vis the selected comparators, as the share of Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 40 in Ethiopia. firms that innovate in Ethiopia is about half of the share of the firms that do so in both China and Kenya. 73. Among large firms, the share of firms who do innovate is larger, especially in Ethiopia where the figure reaches just under 70 percent. In line with this, smaller firms are less likely to spend in research and development, a fact that is particularly noticeable in Ethiopia once again, vis-à-vis similar countries. Also, innovation varies depending on certain firm characteristics, such as the sector in which the firm operates. 74. Ethiopian manufacturing firms are more likely to innovate than service firms are. Further, firms in the textile and garment, and in the food sectors seem to have a higher prevalence of product and process innovation than firms in other sectors. 75. The quality of the human capital, and the firm’s commitment to invest in developing it, are also important for innovation. The analyses conducted shows that firms that offer employees training and time to experiment tend to be the firms that introduce new products or that develop new production processes or services. 76. There is no difference between foreign and domestic owned firms in Ethiopia, and its likelihood to create new products or new or improved processes. One of the arguments advanced in favor of foreign investment is not only that it enhances job creation, but also that it facilitates the transfer of technology. That doesn’t seem to be the case in Ethiopia, at least based on this data. However, there is a high possibility that FDI resulted in a one-off transfer of technology at the time of establishment of a subsidiary which is not captured in the data. 77. Innovation also has a correlation to firm performance. Firms that have introduced product or process innovations in Ethiopia show higher sales growth than those that have not. Similarly, process innovation and spending on R&D appear to be triggers for employment creation in Ethiopia, and finally, the analysis shows that process innovation and spending on R&D enhance labor productivity. It is important to note however, that all these results are associations, and while they do not necessarily indicate a causal impact of innovations on firm performance they can enrich future discussions for innovation policy or help guide further research. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 41 in Ethiopia. CHAPTER 3: Innovation Landscape in Ethiopia This chapter assesses the innovation landscape in Ethiopia, by reviewing the various governmental and private agencies responsible to promote innovation, as well as active programs, and donor initiatives which may play a role in promoting firm level and pro- poor innovations, with the aim to highlight some potential gaps that need to be addressed in order to increase innovation led industrial growth. 1. Ethiopia’s current innovation performance 78. Ethiopia’s innovation performance stifles its overall competitiveness. According to the World Economic Forum’s Global Competitiveness Index (GCI), Ethiopia ranks 109th out of 140 countries with a score of 3.7 out of 7.0 in the 2015-16 report. The overall score has gradually improved, compared to its performance in 2013-14 and 2014-15 where it ranked 127th with a score of 3.5 and 118th with a score of 3.6, respectively. However, the comparison of the country’s GCI scores between 2009-10 and 2015-16 reveals significant improvements in the “Macroeconomic environment” and “Health and primary education” indicators, while progress was slow in other areas, including Technological readiness, Business sophistication, and Innovation (see Figure 3.1). Figure 3.1: Ethiopia’s score on GCI Source: The Global Competitiveness Report 2009-10 and 2015-16 79. Although the overall GCI score of innovation increased 0.5 points in the past six years (3.2 in 2015-16 from 2.7 in 2009-10), Ethiopia still lags behind in Global Benchmarking on key innovation indicators and has room for improvement (see Table A3.1 in annex). Even though the global ranking/score shows weaknesses and strengths of competitor countries among the selected Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 42 in Ethiopia. indicators, these countries keep and retain their competitive advantage in certain innovation indicators. For instance, while China ranked lower in the indicators under “Technological Readiness” than the other four competitors, it is ranked higher in the indicators “State of cluster development” and “Company spending on R&D” as compared to others. Development of the innovation capabilities is required to enable increased innovation led growth in Ethiopia. 80. Low level of Technological Readiness is indicative of the fact that modern technology and knowledge, which provide economic benefits to the economy, are not effectively adapted and utilized. According to the Oslo Manual (OECD, 2005), “an innovation is the implementation of a new or significantly improved product, or process, a new marketing method, or a new organizational method in business practice”. These new methods or practices are not necessarily new in absolute terms42. In other words, for developing countries such as Ethiopia, acquiring new technologies and knowledge plays a crucial role in increasing the competitiveness of the business sector and the academic institutions. While these latest technologies and knowledge are usually brought into the country through direct purchase from overseas and technology transfer to domestic firms through FDI, the GCI rankings show the lack of adoption and utilization of these in Ethiopia (Table 3.1). 81. In addition, “Business Sophistication”, which encourages and increases efficient production of goods and services, needs to be improved. The quality of a country’s business networks and supporting industries, as measured by the quantity and quality of local suppliers and the extent of their interconnection (value chain breadth), are regarded as important factors to foster innovation. Despite its importance, Ethiopia is ranked poorly in these indicators. In particular, the quantity and quality of local suppliers are ranked 127th and 125th out of 140 countries. 82. Adequate private sector R&D spending and the quality of scientific research intuitions as well as scientists and engineers are critical to increase Ethiopia’s innovative capabilities. The score of key innovation indicators showed a significant improvement in the GCI 2015-16 report, compared to that of GCI 2014- 15 report. In the GCI 2015-16 report, “quality of scientific research intuitions”, “company spending on R&D”, and “availability of scientists and engineers” indicators were scored at 3.6, 3.5, and 3.8, respectively43, while these indicators in the GCI 2014- 15 report were 3.1, 2.6, and 3.3. This is considered a good trend, but it is also 42 World Bank (2010) 43 These improvements were achieved partially because of the Government’s investment in R&D. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 43 in Ethiopia. important for the Government and relevant institutions to further strengthen the foundations that support the innovation capabilities. The Government’s current investment in innovation (R&D) 83. The Government’s expenditure on R&D has significantly increased. From 2010 to 2013, Government’s spending on R&D, increased from 931.3 million ETB to 5,242.6 million ETB (see Table 3.1). As such, the share of R&D spending as a share of GDP has increased from 0.24 percent to 0.61 percent. Ethiopia is thus well positioned to achieve one percent of GDP share of R&D spending, a target which was endorsed by the 2006 Executive Council of the Africa Union on Science and Technology held in Khartoum to introduce and foster innovation in African countries. Although Ethiopia’s R&D spending to GDP share is smaller than competitor countries, its 2013 R&D spending is similar to the level of Turkey’s R&D spending in 2006 and South Africa’s R&D spending in 2010 (see Figure 3.2). Table 3.1: Ethiopia Research and Figure 3.2: Research and development development expenditure composition expenditure (% of GDP) Sectors / 2010 2013 Unit Share Share (ETB’000) Amount Amount (%) (%) Government 392,675 42.2 1,283,897 24.5 Higher 394,032 42.3 3,884,890 74.1 Education Business 144,673 15.5 61,581 1.2 Non-profits - - 12,239 0.2 Total 931,380 100.0 5,242,608 100.0 % of GDP 0.24% 0.61% Source: Ethiopia Science and Technology Indicators Source: World Development Indicators Report 2014 84. Increase in the R&D budget was a result of the increased headcount of R&D personnel44 and not researchers. In 2013, about three-fourth (74.1 percent) of Government spending was allocated to higher education, and 24.5 percent went to government institution’s R&D activities. The number of R&D personnel in the country has increased to 18,435 in 2013, which is approximately a 41 percent increase, compared to 13,095 in 2010, according to the 2014 Science Technology Information Center Report. Meanwhile, the percentage of the number of researchers45 that increased during the same period was about 13 percent (from 7,283 to 8,218). This 44 R&D Personnel are all persons employed directly on R&D (researchers, technicians and equivalent staff), as well as those providing direct services such as R&D managers, administrators, and clerical staff. 45 Researchers are professionals engaged in the conception or creation of new knowledge, products, processes, methods and systems and also in the management of the projects concerned (UNESCO Institute for Statistics) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 44 in Ethiopia. implies that the majority of the increase of R&D personnel was on account of the increase of personnel other than researchers. 85. In addition, the increase in R&D spending can be explained by the rapid expansion of the higher education sector and the government’s continued investment in research institutions, but coordination is critical to use the limited budget effectively. Since 2000, Ethiopia’s higher education sector has grown from three public universities to 22 public universities by 201146. At present, there are 35 public universities47. Many of the new public universities are located in rural areas, and it often requires new investment both in R&D personnel and facilities. Moreover, the government has continued providing investment in agricultural research, given the fact that agriculture is still the major source of national income. The main governmental agricultural research institute, the Ethiopian Institute of Agricultural Research (EIAR) has increased its federal research centers from 13 (in 2011) to 16 (as of today). Increasing the number of graduates from universities and researchers at research institutes is a key component of the country’s development with skilled personnel. At the same time, however, these efforts will be in vain, if effective quality assurance of education and research is not implemented. 86. On the other hand, business sector spending on R&D has sharply declined. Contrary to higher education and government institutions, the R&D spending by business sector has decreased from 144.6 million ETB to 61.5 million ETB during the same period, which accounts for only 1.2 percent of the total R&D spending in 2013. Given increased global competition, success of Ethiopia’s industrial sector depends on the firms’ ability to innovate48. Ethiopia’s Current Research Strengths 87. Ethiopia ranks 80th out of 239 countries on the measure of scientific influence of academic journals. According to SCImago Journal & Country database, which takes into account the number of research articles, total number of citable documents, number of citations and self-citations, citations per document published and h-index49 , Ethiopia ranks 80th, while China, Turkey, South Africa, and Kenya are ranked 2nd, 20th, 35th, and 67th, respectively. 46 Ashcroft and Rayner (2012) 47 According to website of Ministry of Education (MoE), 31 universities are owned by the MoE plus the Ethiopian Civil Service University, Defense University College, Kotebe College of teacher education, and Telecommunications and IT College. Also, here were 59 accredited non-government universities or colleges awarding degrees. 48 Talegeta (2014) 49 The index is based on the set of the scientist's most cited papers and the number of citations that they have received in other publications. The index can also be applied to the productivity and impact of a group of scientists, such as a department or university or country, as well as a scholarly journal. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 45 in Ethiopia. 88. Ethiopia has strengths in two specific research fields which could serve as the basis for strengthening R&D and applying it towards sectoral development. In terms of research specification (see Figure 3.3), Ethiopian science, as measured with quantity and quality of scientific output (i.e., number of citable documents, citations and h-index) appears to perform well in the following areas: Medicine and Agricultural and Biological Sciences. Medicine accounts for approximately 25 percent of academic journals produced by Ethiopia in 2011-12, while Agricultural and Biological Sciences accounts for about 20 percent. Major subjects that are written in Medicine are: infectious diseases; and public health, environmental and occupational health. Under Agricultural and Biological Sciences, agronomy and crop science and animal science and zoology are leading subjects. Given the country’s economic conditions, the health and agricultural sectors are considered primary areas in which advanced research could provide substantial benefits to the society at large. Figure 3.3: Areas that Ethiopia has competitive scientific output in the period of 2011-12 Source: SCImago, March, 2015 2. Enabling Environment - Government’s Policy: 89. The Government of Ethiopia’s efforts to establish an enabling environment for innovation have been initiated more than two decades ago, but Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 46 in Ethiopia. its weak implementation has deterred its effective establishment. The national Science and Technology (S&T) policy of the country was originally adopted by the transitional Government of Ethiopia in 1993 to boost innovation activities for economic development through the application of science and technology50. The S&T policy served to provide general directions to guide scientific and technological activities for innovation. However, the policy was not properly implemented, due to the fact that it was not followed up by detailed implementation of strategies and programs aimed at achieving the envisaged policy objectives. Also, there was no strong and legitimate body that could coordinate the use of limited resources among key stakeholders. 90. Recognizing the important role and the urgent need for innovation to increase the country’s sustainable development, Ethiopia adopted a new Science, Technology and Innovation (STI) policy in February 201251. The STI policy envisaged the establishment of a national innovation system that would support the building of a sound science and technology foundation in technological learning, adaptation, utilization, and creation through searching, selecting and importing effective foreign technologies in manufacturing and service providing enterprises. In addition, the Government has developed the STI policy implementation strategy which supports the implementation of strategies envisioned in the GTP. 91. The new STI policy has identified direction and major strategies under 11 critical policy areas that the government intends to support. Based on the analysis conducted by the government, the identified areas include the followings: i) technology transfer; ii) human resource development; iii) manufacturing and service providing enterprises; iv) research; v) financing and incentive schemes; vi) national quality infrastructure development; vii) universities, research institutes, Technical and Vocational Education and Training (TVET) institutions and industries linkage; viii) intellectual property system; ix) science and technology information; x) environmental development and protection; and xi) international cooperation. 92. The implementation of the STI policy is crucial to facilitate linkages between different actors and institutions involved in the innovation ecosystem. While it is true that key changes in society are brought on by innovation deriving from science and research efforts, innovation driven by sources other than science and 50Ethiopian Science and Technology Agency (2006) 51The Ethiopian Science and Technology Agency, which is the current Ministry of Science and Technology, reviewed 1993 S&T policy and prepared an initial draft of National Science, Technology and Innovation Policy in 2006. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 47 in Ethiopia. research also have a considerable impact on the origin of new industries, jobs, and incomes52. Figure 3.4 shows the various actors and institutions relevant to the policy areas envisioned in the STI policy. The key actors are structured into three broad stakeholder categories namely: public sector; academic institutions; and industry. The public sector, include government and its relevant agencies, support the import, adoption, and creation of innovation knowledge and goods and services. Academic institutions, including researcher, scientists and engineers affiliated with universities and research institutions generate innovative knowledge, while industry, including large corporation, SMEs, and start-up companies, produce goods and services. Furthermore, academic institutions and industry would need to collaborate to introduce and create new innovations that contribute to increased industrial productivity. Figure 3.4: National Innovation System envisaged in the STI policy Source: World Bank staff 93. Although the policy specifies a major set of directions and strategies, the inclusion of the BoP into the nation’s innovation system needs to put in place. While Ethiopia achieved rapid economic growth with an average of 10 percent per year during the last decade, the country remains the ninth poorest country in the world (in income per capita), leaving about 30 percent of the population who live 52 World Bank (2010) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 48 in Ethiopia. below the national poverty line. 66 percent of the population comprise the BoP subsisting on less than USD2.0 a day. In 2013, approximately 83 percent of the population was living in rural areas, where income generation is mainly from agriculture relying on limited land. The Government’s focus on improved linkages among various actors under STI can create a foundation of innovation which contributes to job creation, social development, and export promotion for the country’s growth. However, this will not be achieved without addressing the need for improved access to services and improved quality of life for the BoP. Potential areas of intervention on inclusive innovation are included in Table 3.2. Table 3.2: Selected sectors for inclusive innovation Areas Situations Role of innovation (examples) Agriculture • Around 85 percent of the • R&D to improve the country’s population survives production of agricultural on growing crops on small products plots of less than five acres • Improved processes for • Frequent droughts and soils production and delivery that have been depleted of through new technology and nutrients often leading to low equipment crop yields and considerable • Pro-poor value chain to include food insecurity BoP through organizational innovation Education • Access to good quality of • Using new technologies and education is an issue equipment (such as tablet) as particularly for rural educational tools. populations • A low primary education completion rate Health • Access to health care facility, • Low-cost primary health care especially for maternal and delivery and outreach newborn care, is an issue for • New delivery channels to the rural populations provide basic vaccinations and • Limited clean water supply, medicines low levels of hygiene and • Building a network of health sanitation services contribute workers using new technology to health problems and equipment (such as mobile • More than half of the phone) country’s population of 83 million is malnourished Social • Basic food requirements are • Using low-cost and safer Safety Net not met by vulnerable technologies (such as mobile households during the lean electronic payment) for cash harvest season and the transfer program (see box 3.1) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 49 in Ethiopia. periods of unpredictable shocks or disasters 94. Inclusive innovation is important to address the needs of the BoP. In particular, innovative solutions, such as using advanced technologies, can contribute to filling the shortfalls in critical areas of education, health and social safety net services in rural Ethiopia. Several attempts have been initiated by the government to provide better access to public service to the BoP by using technologies such as mobile phone, laptop, tablet, and other ICT tools. 95. To deliver quality education in all regions of the country, ICT has been one of the priority areas for the education sector. Funded in part by the United Nations Development Program (UNDP), the government has introduced broadband connections to all government secondary schools in the country in order to provide nationally broadcasted lessons of about 45 minutes. This approach addresses the issues of access by enabling the students to use the same material and standards at all government schools, regardless of their geographic location. It is important to highlight the need for the content used in these materials to be produced keeping international standards in mind. Furthermore, the One Laptop per Child (OLPC) initiative piloted in Ethiopia revealed immediate improvements in the classroom environment mostly through the utilization of e-books, while showing significant potential to expand both media and computer literacy among students. 96. As with the education sector, ICT in the health sector has also contributed to improving the healthcare delivery for the BoP. Using ICT in supply chain management allows hospitals and clinics to keep sufficient supplies and medicines by monitoring the number in the system. Moreover, the government has supported telemedicine as a tool to provide primary healthcare services to remote areas. Health extension workers in distant posts can access health information systems remotely and connect with health professionals and receive information and assistance to diagnose, treat and refer patients. The patient data can also be collected by using mobile phones and tablet for records. Box 3.1: Productive Safety Net Program – using electronic payment system for cash transfer – The Productive Safety Net Program (PSNP) is a multi- donor financed program, started with the aim of shifting focus away from short-term food needs met through emergency relief to addressing the underlying causes of household food-insecurity. PSNP IV is the fourth phase of the program with an objective to increase access to safety net and Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 50 in Ethiopia. disaster risk management systems, complementary livelihoods services and nutrition support for food insecure households in rural Ethiopia. Under the Program, the government had initiated a pilot program to use electronic payment systems to reach to PSNP beneficiaries who did not have access to financial services. The electronic payment system required an appropriate technological platform which could be used by the selected Micro Finance Institutions (MFIs) enrolled in the Program. The pilot of the electronic payment system targeted Oromia region, with a total of 52,000 beneficiaries. An evaluation of the pilot found that the electronic payments increased the security and speed of the payment system, with 99% of participants in the pilot reporting that the electronic payment system was safer and more secure than the traditional manual payment system. In addition to increasing security and reliability of transfers, the pilot also revealed several other positive results, including increased financial literacy and savings amongst beneficiaries. This was achieved, since they became more familiar with financial institutions through the mobile transfer process. The pilot also noted the significant cost savings that could be realized from an electronic transfer system, which would eliminate the need for extensive staffing and local intermediaries. The estimated cost per transaction of a scalable electronic payment system would be less than 2% of the amount of each transfer, representing significant savings over the current manual transfer system. Several challenges were also observed during the pilot phase, including the limited availability of telecom coverage in rural Ethiopia and the need to develop a sustainable business model that is profitable and makes sense for financial institutions and technology providers. Based on the largely positive results of the pilot, discussion are underway with mobile money provider to further expand the program. 97. A functional organizational structure is required to implement the STI policy. The STI policy covers a broad range of areas, government needs to have a strong and legitimate body that can mobilize the relevant ministries. Currently, the main actors of innovation system are the National Science, Technology and Innovation Council (NSTIC), Ministry of Science and Technology (MoST), and other related ministries. To facilitate the efficient development of the national innovation system, these main actors require a clear mandate and increased capacity for policy implementation. The key roles of these main actors are as follows: • National Science, Technology and Innovation Council. According to the policy, the council is the highest decision making body for the STI policy and is chaired by the Prime Minister. Participation and active engagement from all key ministers, along with top representatives of the business, academic, and Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 51 in Ethiopia. civil society are required. The council is focused on developing strategic policies, priority setting and policy coordination which are articulated in the STI policy. The Council’s long-term focus reduces inconsistencies in policymaking generated by the political cycle and the subsequent short-term horizon of many policy decisions. • Ministry of Science and Technology. MoST serves as a secretariat of the NSTIC, and it has the overall responsibility of coordinating, supporting, monitoring STI development activities based on the strategic decisions made at the NSTIC. MoST plays a pivotal role in the implementation of the STI policy, together with other respective ministries. Also, the Science and Technology Information Center, established in 2011, will play an important role in collecting and disseminating the information gathered. • Other ministers and relevant governmental agencies. It should be noted that all science and technology related ministries and their relevant agencies have significant roles to play in the national innovation system through their active involvement in human resource development, research, and technology transfer. These ministries include: Ministry of Finance and Economic Development; Ministry of Industry; Ministry of Trade; Ministry of Agriculture; Ministry of Health; Ministry of Education; Ministry of Labor and Social Affairs; Ministry of Communication and Information Technology, etc. 98. Given the complex organizational arrangements involving various stakeholders, strong political leadership is critical to facilitate communication and collaboration to implement the STI policy. While the current organizational structure is in line with international practice, key lessons learned from global experiences emphasize the importance of inter-ministries and inter-agency bodies creating a coordinated and coherent implementation of STI-policies. These lessons include: (i) involvement of the right people with the needed qualities (experienced, and both knowledgeable on content and process) at implementing/coordinating body; (ii) fairly broad mandates for implementing/coordinating body to enhance coordination between the various actors involved; and (iii) early identification of cross departmental themes in order to keep the interdepartmental agenda fulfilled53. 53 Tekes (2008) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 52 in Ethiopia. 3. Industry-Research Linkages - Effectiveness of academic and research institutions 99. Successful implementation of STI activities also depends on the effectiveness of the country’s academic institutions: universities; research institutes; TVET institutions; and industry development institutes (e.g. Leather Industries Development Institute, Textile Industries Development Institute, etc.). Strong leadership led by Ethiopian academic institutions plays a central role in establishing and strengthening the linkages with industry. Effective and well organized linkages between academic institutions and industry would help Ethiopia transform its economy from an agricultural led to a knowledge-based industrial led. For industry, in spite of the fact that integration of innovation into products and services is critical for their existence and competitiveness, they are often reluctant to invest their own resources into activities related to innovation, as the result of acquired innovation is uncertain. 100. Effective and efficient linkages between academic institution and industry, which contribute to increased industrial productivity have not been established in Ethiopia. A critical misalignment exists between the research outputs from academic institutions and the technology needs of industry54. Cooperation with industry is important for academic institutions to create scientific and innovative knowledge and address solutions that address industry needs. Research conducted by academic institutions could increase agricultural productivity and expand investment in the industrial sector (particularly in small and micro enterprises of manufacturing industry). These in turn could increase economic growth by providing solutions for the BoP population. Industry-research linkages can vary ranging from joint research and consultancy services, to creating opportunities for student internships, staff exchanges, and curriculum development for students. Public Universities 101. There has been a steady increase in the number of universities in Ethiopia. Currently, there are 31 public and approximately 80 private universities in Ethiopia. The rapid increase of the number of universities is accompanied by a huge increase in student numbers, teaching staff and administrative personnel. While in 2000 only a few thousand students had a chance to receive a university degree, 54Working paper prepared by Open African Innovation Research & Training in 2012. Also, situation analysis of research activity at Addis Ababa University found that none of the units at the university had set research priorities based on national development objectives (Lemma 2008). Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 53 in Ethiopia. mostly at Addis Ababa University (AAU)55, more than 500,000 students were enrolled in public universities in 2012/13. 102. Some government initiatives that were carried out to facilitate the university-industry linkage in the past were not continued, due mainly to the lack of financial support. These initiatives include: i) the cooperation program between AAU and the Ministry of Industry (1986- 1991), which focused on research relevant to industry and provided university generated technologies and training to industry; and ii) establishment of Technology Faculty - Industry Linkage Unit under Faculty of Technology of AAU in 2000, which provided research, training, and consultancy services to industry. However, these programs were discontinued when government’s financial support was terminated. 103. Recent positive fundamental change undertaken by the government was the establishment of Technology Transfer Office (TTO)56 in the reformed or newly established Institute of Technology (IoT) across the country. University Capacity Building Program (UCBP)57 supports the setting up of IoTs in Ethiopia by converting the Engineering and Technology Faculty of the existing universities or establishing new IoTs. While remaining accountable to the university, IoTs are considered as autonomous units which have flexibility in their budgets and programs. More importantly, the IoTs are allowed to use any unused funds from the State on a rolling basis, and are allowed to generate revenue from various income activities for their own purposes, which increase the sustainability of the programs. Under the organizational structure of IoTs, there are TTOs which are responsible for leading direct linkage with industry. Selected IoTs established under the UCBP are as shown in Table 3.3. Table 3.3: List of selected IoTs in Ethiopia University Name of IoTs Addis Ababa University Institute of Technology Institute of Architecture, Building Construction and City Development Adama Science and Institute of Technology Technology University 55 AAU is the largest and oldest university in Ethiopia, originally established in 1950. Presently, it has 12 compasses and a total student population of above 50,000, running 225 graduate programs of which 69 are Ph.D. programs. Postgraduate students constitute about 20% of the student population. 56 Or University-Industry Linkage Office 57 ECBP was provided under Engineering Capacity Building Program by Germany government (Overall term: 2005-2012), which were structured around four components: i) University reform; ii) Reform of the technical and vocational education and training system; iii) Improvement of the quality infrastructure; and iv) Private sector development Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 54 in Ethiopia. Bahir Dar University Institute of Technology Institute of Textile and Fashion Technology Haramaya University Institute of Technology Hawassa University Institute of Technology Jimma University Institute of Technology Mekelle University Institute of Technology Box 3.2: Institute of Textile and Fashion Technology Experience in Bridging the Gap & Increasing Competitiveness of the Textile & Garment Industry Institute of Textile and Fashion Technology (iOTEX) of Bahir Dar University is the only higher education institution in Ethiopia focused on the level of 'Institute of Technology' to educate specialized professionals in the field of textile, garment and fashion design in the country. The iOTEX Institute has a history of more than 40 years. Currently, more than 1,300 students are receiving education through five undergraduate Programs (Fashion Design, Garment Engineering, Textile Engineering, Technical and Vocational Education and Training (TVET) in Textile Engineering, TVET in Garment Engineering), and one graduate programs (Textile Technology). The Government of Ethiopia has identified the textile and garment industry as a priority industry keeping in view its potential as an engine that generates employment opportunities, import substitution, export earnings, and easy linkages to pursuing the Agriculture Development Led Industrialization Strategy for the development of the country. However, the major challenges hampering the competitiveness of the Ethiopian textile and garment sector are: - Lack of sufficient raw materials; - Lack of Qualified Human Resources; - Low quality and productivity; - Unsatisfactory product development capability; - Lack of strategic company and production management philosophies; and - Lack of Sustainability To address these issues, the following measures have been put in place. 1) Involvement of industry professionals in restructuring the curriculum at iOTEX - All programs in the institute were developed in response to industry needs. 2) Establishment of Student Industrial Internship through Institute – Industry Linkage Office for one semester in all curriculums. This helps the student to understand the reality of different kinds of work and allows them to apply what they have learnt. 3) Established Institute – Industry Linkage Office (Technology Transfer Office) to: coordinate the work of student internships; establish a strong relationship between Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 55 in Ethiopia. industries and the institute for their common benefits; identify core problems of the textile and garment industries and research areas through interns and mobilizing iOTEX staff members to tackle these problems. Some results from the iOTEX’s initiative include the establishment of partnership with Bahir Dar and Kombolcha Textile Share Company, state owned fabric manufacturing company established in 1961. The company faced some problems, including low capacity in management, lack of technical and marketing professionals and a lack of maintenance personnel. The first initiative for student internship and research collaboration started in 2011. Through the collaboration, iOTEX estimated that the company could save as much as ETB 10 million/year to ETB 30,493,769 /year only with the implementation of simple changes. Source: iOTEX 104. While university-industry linkages has gradually begun in Ethiopia, new initiatives to strengthen the direct linkages with industry have been initiated. These are: technology business incubation at AAU and the establishment of Research Park planned by Adama Science and Technology University58. The objectives of these initiatives are to strengthen the local economy through enhanced knowledge and technology transfer from university research to the industry. • Addis Ababa University – Technology Business Incubation: In 2012, the first Technology Business Incubation was launched as a pilot program at AAU and admitted a few entrepreneurs from the university. In 2015, AAU is planning to expand its program by increasing the number of entrepreneurs (from AAU academic staff and students) who will receive comprehensive incubation support at Technology Business Incubation Center. The main activity is classified into the following three: pre-incubation activities; activities during incubation; and post-incubation activities59. • Adama Science and Technology University (ASTU) – Research Park: With the support of University of Leipzig and Conoscope GmbH, ASTU is setting up a Research Park in Ethiopia. According to ASTU, the Research Park is intended to be an important mechanism for the interaction between academia and industry in terms of transferring academic research findings 58 Establishing a strong tie with German institutions since its inauguration in May 2006 as Adama University, it has established strengthening on training students in engineering, technology and applied sciences. The Ministry of Education has nominated the university as Center for Excellence in Technology in 2008. 59 Addis Ababa University (2013) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 56 in Ethiopia. and serving as a source of knowledge. It also provides space and facilities and other value addition services. 105. Rapid expansion also brings several challenges to universities. University and research infrastructure has not expanded in response to the increase in the student numbers. Despite the construction of new buildings there is a shortage of suitable classrooms and laboratories. Academic staff, particularly in new public universities, are very young and are often found to be underqualified. Department heads hold Bachelor or Master degrees only, and in one exceptional case a PhD. Freshly graduated Bachelors or Masters or even current Master students are employed as instructors or teachers60. One of the other issues that prevents qualified personnel from entering the academic profession is the low salary scales for academic staff leading to low levels of motivation amongst academics. Finally, academia do not have the incentives to closely interact with industry implying that their research is often not linked to the industrial needs and on the other hand, industry does not recognize the potential resource academia can bring to firm capabilities and needs. Agricultural Research Institutes 106. Significant public efforts have been made in the Agricultural sector. Recognizing the agricultural sector as a key economic engine to transform Ethiopia into an industrial led economy and to support the BoP population, the Government has made significant public efforts in the agricultural sector. Agriculture is the major source of livelihood for the majority of Ethiopians, and it contributes to approximately 40 percent to the national GDP and employed over 80 percent of the population in 2013/14. Since the 1990s, the Government has been implementing agriculture support programs through various strategies: notably; the adoption of the Agricultural Development Led Industrialization Strategy in 1994; the Plan for Accelerated and Sustained Development to End Poverty (2005-2010); and the Growth and Transformation Plan (GTP, 2010-2015). 107. Innovation plays a critical role in addressing issues facing Ethiopia’s agricultural sector, dominated by small-scale farmers with low productivity. In spite of the government’s continuous commitment to the development of the sector, there is still large room to improve its productivity, production processes and market linkages. By recognizing the importance of innovative technology to support the growth of the agricultural sector, the Government has invested in the development of the National Agricultural Research System, which is comprised of the Ethiopian Institute of Agricultural Research (EIAR), Regional Agricultural Research Institutes 60 Steinbrunn (2012) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 57 in Ethiopia. (RARIs) and Universities/Higher Learning Institutions (HLIs). The research outputs vary from improved agronomic and protection practices that can be used in crop diversification and specialization for both traditional food crops, to introducing high value crops such as vegetables, spices and other horticultural crops61. The Government established the Agricultural Transformation Agency (ATA) to support the introduction of innovative technologies into the agricultural sector (Box A3.1 in annex). 108. Total number of public agricultural researchers has grown significantly since 2000. While the number of full-time researchers at government agricultural institutions was 743 in 2000, the number increased to 1,410 personnel in 2008 and 1,876 personnel in 2011. This number is very high compared to neighboring countries such as Kenya (1,150), Uganda (353), and Tanzania (814). According to the Agricultural Science and Technology Indicators (ASTI 2014)62, Ethiopia is considered to have one of the fastest-growing pools of agricultural researchers in Africa. The rapid increase has been due to both the increase in the number of universities in the country which have faculty in agriculture and the government’s decentralization of the agricultural research system from the mid-1990s, which resulted in the establishment of RARI administrated by regional state governments. 109. Several initiatives, which adopt and introduce innovation to increase agricultural productivity, have been implemented. These typically include: research, product introduction, rural infrastructure, education, improving quality of inputs, improving land property rights or land distribution, etc. The key initiatives that have been introduced in Ethiopia are mainly structured around the following areas: product innovation; process innovation; and knowledge innovation. Box 3.3: Pocket sensors for precision agriculture – Product Innovation A new pocket-sized sensor could bring precision agriculture within the reach of smallholder farmers in Ethiopia. Precision agriculture uses data from high-tech observations to assess and address crop variability and help farmers to employ their resources more effectively. Crop performance readings from satellite or sensor- based technologies are used to “do the right thing, at the right place, at the right time.” Marketed by Trimble since August 2012, the Green Seeker 61 Mamo, Mekuriaw, and Woldehanna (2014) 62 http://www.asti.cgiar.org/pdf/factsheets/Ethiopia-Factsheet.pdf Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 58 in Ethiopia. handheld crop sensor reads near-infrared and red light reflected from plants to measure photosynthesis rates and crop vigor. When used with the normalized difference vegetation index, the readings can help farmers decide exactly how much nitrogen fertilizer to apply to get the best yields. This is especially important in Ethiopia whose soils – like those in many parts of Africa – typically lack nitrogen, a highly mobile element whose availability is affected by rainfall and soil characteristics. At a cost of about US$500, the sensor could make precision agriculture affordable for farmers in Ethiopia. It does not have the accuracy of bigger sensors, but is less expensive and better adapted to smallholder circumstances. Because most countries in Sub-Saharan Africa import fertilizer, this input is relatively expensive. On average, farmers in the region apply only 9 kg/ha of nitrogen fertilizer, compared to an average of 100 kg/ha in South Asia or more than 70 kg/ha in Latin America. This greatly limits their crop yields. When farmers do apply fertilizer, most follow broadly-targeted application rates recommended by extension agents, rather than site- or season-specific rates that would make the best use of this costly input to raise crop yields. CIMMYT agronomists with the Nutritious Maize for Africa project, funded by the Department of Foreign Affairs, Trade and Development (DFATD, formerly CIDA) of Canada, have introduced handheld sensors in Ethiopia and are testing them with agronomists from the Ethiopian Institute of Agricultural Research (EIAR). Source: International Maize and Wheat Improvement Center (http://blog.cimmyt.org/pocket-sensors-for- precision-agriculture-to-reach-ethiopian-farmers/) Box 3.4: Household Irrigation Help Line – Process Innovation Typically, extension information is cascaded through various levels of the extension systems before reaching its intended recipient. For example, agronomic information is developed and crafted by the Ethiopian Institute of Agricultural Research and the federal Ministry of Agriculture for use by smallholder farmers. This information is then passed down to regional, zonal and woreda staff during annual training sessions. The information will then be delivered to Development Agents (DAs), who will eventually disseminate it to smallholder farmers at training meetings. This modality is often stretched out over the course of 6-9 months, with many instances when the intended information may never actually reach the smallholder farmer. In order to enhance the existing approach, the Ministry of Agriculture (MoA) and ATA have come up with an inventive way of distributing information to smallholder farmers. The Interactive Voice Response (IVR) and Short Message Service (SMS) system is a technology that will allow individuals to call into a hotline and access a wide range of relevant agronomic information. Through the IVR/SMS system, once the information has been agreed upon and uploaded, smallholders and DAs will have direct Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 59 in Ethiopia. access to the pertinent agronomic content whenever it is needed. Users will be able to access pre-recorded messages, in a wide range of languages, at their own convenience. Distributing agricultural extension materials can be costly and time consuming; however, through this new system, information will be available around the clock. Once the content has been agreed upon, it will be available for anyone to access. Based on the user’s responses to various prompts, and information they enter using their keypads, the user will get specific, tailored agronomic information, in local languages they can understand, thus supplementing the training provided by DAs in the traditional approach. During 2013, this mobile based IVR/SMS system was piloted with smallholder farmers engaged in irrigated agriculture (more details in the Special Projects section of this Annual Report). Based on this success, the ATA and MoA have begun to scale up this approach to all farmers in Ethiopia. Source: ATA 110. There is an important role for Government interventions to support agricultural innovation adoption. While there have been various efforts made by government research institutes to support smallholder farmers to adopt innovative technologies, all innovation adoption decisions are typically influenced by the farmers’ individual risk preferences and their ability to bear the risk of a new and uncertain endeavor. They require certain guarantees that their future access to land, inputs and outputs will not be a point of uncertainty. Without some level of assurance that their access to future benefits is not at risk, farmers have little incentive to invest their time, labor and capital into technology adoption. • Farmer’s adoption rates of improved seeds are low. While Ethiopian seed research is quite established and has released hundreds of new varieties, farmer adoption rates of improved seeds - even in reliable rain fed areas - are Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 60 in Ethiopia. low. Around 12 to 15 percent of farmers use improved wheat and maize; less than 1 percent of farmers use improved seed for teff, barley, and sorghum (International Food Policy Research Institute 2010). • The availability of financial services is very much associated with the capacity of smallholders and emerging commercial farmers to adopt improved agricultural practices. Access to credit or finance is considered a major constraint in adopting almost all types of innovative technologies (Tiwari 2010, Olaleye 2005, Doss et al. 2003 on production technologies). This includes both short term seasonal credit for crop inputs and medium-longer term finance for capital investments. 111. In order to transform Ethiopia’s farmers, in particular smallholder farmers, into innovative and market oriented producers, strengthening the value chain is critical. The core assumption behind ‘pro-poor’ value chain interventions is that vulnerable upstream agents (such as smallholder farmers) can be ‘pulled’ into specific markets, and therefore successfully integrated into economic dynamics from which they were excluded, or, at best, only participated under very unfavorable conditions. To service the end market downstream actors need to secure a regular supply of produce from upstream smallholders. This requires processors, traders or exporters to invest in the upstream supply side of the chain in order to secure desired products in the right quantity and quality. Such investments may include sharing market intelligence with farmers or providing them with specific services including technical, financial and organizational services. Figure 3.5: Cycle of Value Chain Farmer Processor Input Retailer Consumer Farmer Organizat /Exporter Supplier ion /Trader Market Source: SNV Netherlands Development Organization (2012): Pro-Poor Value Chain Development Box 3.5: Wheat value chain development The objective of the Wheat Program is to support significant and sustainable increases in the productivity and incomes of smallholder farmers producing the crop, through the promotion of several key interventions, including access to high quality seeds and fertilizers, training in new and better agronomic practices (i.e., planting in rows with the appropriate seed rate), more efficient post-harvest processing and handling by using agricultural machineries, and access to financing resources. The program further Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 61 in Ethiopia. aims to support the growth of efficient, sizeable, and sustainable markets to help farmers convert their increased production into additional income. As has now been demonstrated by many farmers in various regions of the country, wheat’s national average yield can be easily doubled simply by improving agronomic practices, providing improved access to technologies, and addressing market problems, such as the price difference between local wheat and subsidized imports. In 2013, 400,000 farmers were targeted for productivity enhancing training and support. Source: ATA 112. Ethiopia’s agricultural sector continues to face challenges. The development of Ethiopia’s agriculture sector has been supported by the government’s strong commitment; however, rapid expansion of the supporting system is confronted with challenges to maintain its quality. The country’s research system relies on highly skilled professionals to identify, test, and avail of innovative technologies and techniques that can help Ethiopian farmers grow a higher volume of better agricultural commodities more efficiently. However, this system has suffered from systemic and operational bottlenecks. • Quality of researchers. Although the total number of researchers employed at governmental institutions has dramatically increased, many of the new recruits are young and only trained to the BSc level (Table 3.4). As of 2011, according to ASTI 2014, more than half the country’s agricultural researchers held BSc degree, and 48 percent were under 31 years old. Also, the share of PhD researchers is significantly low, compared to the neighboring countries63. Table 3.4: Agricultural researchers of key indicators Total number of Growth in number of Share of PhD (2011) researchers researchers, 2008-11 researchers Ethiopia 1,876 33% 9% EIAR 669 - 14% RARIs 981 - 4% 63 As of 2008, average share of PhD researchers in Sub Saharan African countries was approximately 30 percent. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 62 in Ethiopia. HLIs 226 - 15% Kenya 1,150 13% 32% Uganda 353 13% 31% Tanzania 814 18% 20% Source: ASTI, 2014 • High Staff Turnover. Ethiopia’s agricultural research system has suffered from high staff attrition rates, negatively impacting the quality of the work and its potential to positively contribute to the transformation of the agricultural sector as a whole. The primary reasons for the high turnover rates have been low researcher salaries, unfavorable working conditions, and dissatisfaction with the current career path/incentive structure (ATA Annual Report 2013/14). Also, since the EAIR’s restructuring process undertaken by the government in 2008, a number of long-serving researchers have continued to leave EAIR in pursuit of better remuneration and working conditions. During 2008-2012, 195 researchers, including 38 PhD researchers left the EIAR. Though efforts to improve researchers’ salary package have been initiated, whether this actions will be sufficient to halt the high rate of staff attrition remains uncertain (ASTI 2014). • Coordination among research institutions. Research and extension activities are carried out by different organizations without much coordination (International Food Policy Research Institute 2010). At least 55 research centers conduct agricultural research in Ethiopia. While EIAR is responsible for the overall coordination, the linkages among research institutions are insufficient. In fact, the low quality of researchers and high staff turnover often makes it difficult for the EIAR’s coordination mechanism to work properly. • Facility of the research institutions. Despite the development of the agricultural research system, studies have shown that all the research centers are not well equipped or laboratory facilities are not updated. (Dept. Agriculture, ESTC, 2005). 4. National Quality Infrastructure 113. A well-functioning National Quality Infrastructure (NQI) supports the country’s transformation to an industrial led economy. NQI services support the acquisition, handling and use of, maintenance, and disposal of scientific equipment at various facilities, including academic and research institutions, where a number of Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 63 in Ethiopia. laboratories exist. Access to a good NQI is imperative to assure that Ethiopian firms are able to enter and be competitive in international markets by assuring that the quality of their services and products are aligned with required standards in the international markets. 114. Recognizing the importance of NQI, significant reforms have been initiated to modernize Ethiopia’s existing NQI institutional framework and technical regulations. One of the key reforms undertaken was the MoST’s initiative in February 2011 that restructured the former Quality and Standards Authority of Ethiopia into four separate institutions which are responsible for the fields of metrology, standards, accreditation, and conformity assessment. These are: National Metrology Institute of Ethiopia (NMIE); Ethiopian Standards Agency (ESA); Ethiopian National Accreditation Office (ENAO); and Ethiopian Conformity Assessment Enterprise (ECAE). 115. The reforms contributed to establishing a foundation of NQI institutions for improved NQI services and international recognition. The reform brought a clear division of responsibilities among NQI institutions, allowing them to handle each task efficiently and further meet the pre-conditions for international recognition. Major responsibility of each NQI institution and their achievements through the reform are provided in Table A3.2 in annex.64. Importance of International Recognition 116. Continuous efforts to create internationally recognized NQI institutions are critical to introduce innovation that supports the integration of Ethiopian firms into global markets and update the quality of research facilities at academic institutions. Ethiopian exports are dominated by semi- or un-processed and undifferentiated agricultural products65. Internationally recognized NQI institutions can support the Ethiopian firms to improve their competitiveness in international markets with higher value-added products by ensuring that their products meet the required quality and standards in international markets. They can also support the academic institutions’ adoption of innovation by updating the standards of their facilities, resulting in better research to support the development of businesses. 64 The reform was implemented through the GIZ programs, which have completed in September 2015 65 World Bank (2014c) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 64 in Ethiopia. 117. Active engagement in regional metrology organizations and proper operation of the established laboratories will be required to obtain international recognition for NMIE. NMIE has the primary responsibility of ensuring that any measurements made in Ethiopia can be traced to the international system of units by using international standards. While calibration services provided by NMIE are not yet internationally recognized, Ethiopia has been an active member of the continent-wide Intra-Africa Metrology System (AFRIMETS)66. The proactive engagement with the regional metrology organization is very important for international recognition, as NMIE’s calibration and measurement capabilities needs to be recognized through key comparisons and peer evaluations from the AFRIMETS. Currently, NMIE holds metrology laboratories, which have been accredited by German accreditation organizations in March 2014, in the following six fields: mass; temperature; pressure; volume; electricity; and weight. In order to apply for the international recognition, NMIE’s continued engagement with AFRIMETS and service provision through its laboratories is critical. 118. Ethiopia’s active membership of international organizations is important for standards. While there is no formal international recognition system in standards, becoming members of international organizations is a key element to adopting international standards. ESA has become a member of the International Organization for Standardization (ISO) and Codex Alimentarius Commission67. It has been a member of the African Regional Organization for Standardization since its beginning, and also has close relations with the International Electro-technical Commission (IEC)68. Maintaining the active engagements with these international organizations are crucial for ESA to deliver required services on standardization and technical regulation for its customers. 119. Gaining international recognition for ENAO is a positive development. ENAO has already applied for a full membership of the International Laboratory Accreditation Cooperation (ILAC) and has received its peer evaluation. Availability of competent accreditation services to local laboratories and certification/inspection bodies will reduce the requirement for re-testing, re-inspecting, and re-certification of Ethiopian products in importing countries. Since its establishment, ENAO sets its target to obtain full membership of ILAC and to be a signatory to the Mutual Recognition Agreement managed by ILAC and the International Accreditation Forum, 66 Ethiopia hosted the AFRIMETS’s 8th general assembly from July 16-20, 2014 67 An intergovernmental body jointly managed by FAO and WHO that coordinates international recommendations and rules for food safety and quality. Governments (members of FAO and/or WHO) are the members 68 A non-governmental body that manages the development and publication of international electro-technical standards Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 65 in Ethiopia. which grant international recognition to ENAO. This can be achieved when ENAO receives and passes the peer evaluation by an international team at ILAC. As of date, ENAO is waiting for the feedback and result from the peer review. 120. Recognition of international level of conformity assessment services is provided by accreditation. ECAE is responsible for inspection, laboratory testing and certification services. The facilities of ECAE are currently accredited by ENAO. The international recognition of ENAO will also provide ECAE with access to international recognition as a competent institution in international markets. Common Challenges to be addressed 121. To ensure sustainable service, the contributions of the state budget and financing from NQI services and projects need to be defined. In the case of the metrology services, the development of the national measurement standards is usually considered as a public good, and the metrology institutions in almost all countries are maintained significantly through the state budget. As accreditation is a fee-based service, an accreditation body can in theory become self-sufficient. While ENAO has committed to accredit 60 conformity assessment bodies seeking accreditation, it has been shown empirically that 200 to 250 accredited organizations are required to be self-sufficient69. Until ENAO becomes internationally recognized and develops a market, financial support from the state will be required. In most countries, the national standardization activities are not financially sustainable and require additional sources of revenue. The government mostly leaves conformity assessment to the private sector in developed countries, while the state still plays a major role in developing countries. It is ideal for the government to facilitate the development of conformity assessment provider from the private sector as well, while maintaining its services until the market for conformity assessment services grows. 122. To ensure the provision of qualified services, development of strategies to further strengthen the NQI institutions is critical. While the implemented reforms to date were articulated in the NQI strategy for 2009-2015, the development of another mid- and long-term strategy and time bound action plan is critical to further strengthen the NQI institutions. It is also important that the new strategy will be consistent with the vision and goals envisioned in the GTP and relevant sector strategies. 69 Kellermann and Keller (2014) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 66 in Ethiopia. 123. To increase client satisfaction, the development of demand-driven NQI institutions is important. NQI institutions need to ensure that firms and academic and research institutions that receive NQI services are able to market their products and services successfully. However, weak participation from these key stakeholders in the governance of NQI institutions often hinders the development of demand- driven NQI services. For example, each NQI institution has set up a council for its fiduciary and strategic responsibilities. Common practice in developing countries is to fill these with representatives from the public sector, while the private sector remains underrepresented. In the case of ESA, the Ethiopian National Standardization Council has one member representing the private sector out of the total of 12 members. It is important to have greater private sector representation such that client demand feeds into the decision making process as well as the monitoring and evaluation of the NQI services provided. 5. Government Initiatives to support the development of innovative enterprises 124. Several programs to improve the access to finance for entrepreneurs have been initiated by the government. While access to finance is one of the pressing issues for the private sector to be innovative, it has been critical for the government to provide direct and indirect support to the private sector. The most successful of these interventions are those that have injected much-needed liquidity into the financial sector, and have targeted the right segment of the client. However, considering the major limitations of the financial sector in Ethiopia in lending to small and young entrepreneurs, there remains much need for targeted support to improve access to finance for innovative firms. The existing programs serve only a fraction of the enormous demand from innovative enterprises for access to financial services. Some of the major existing programs are summarized in the Table A3.2 (annex). 125. The World Bank Info Dev’s initiative- Ethiopia Climate Innovation Center (ECIC), supported through a multi donor trust fund provides entrepreneurial support to early stage, growth oriented SMEs participating in the clean tech sector. The ECIC targets early stages of innovation as well as more advanced growth- oriented entrepreneurs reach their objectives. The types of support provided by the ECIC includes: i) access to finance, by providing grants up to US$50,000 as well as investment facilitation for more advanced firms; ii) business advisory support through mentorship, seminars, and trainings; iii) marketing support, by providing market studies and case reports relevant to the clean tech sector; iv) networking Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 67 in Ethiopia. opportunities by creating discussion forums and regular meet-ups70; and v) influencing policy decisions by conducting and sharing research and best practice data as well as leading policy forums and dialogues with government and stakeholders. The ECIC’s support has been provided to the following sectors: agriculture; bio-fuels and bio-mass; transportation technologies; hydropower; energy efficiency; waste management; and other clean-tech or clean-tech support businesses. 6. Role of the government to support Innovation in Ethiopia 126. The government’s strong initiative to foster the innovation eco-system in Ethiopia is crucial, but it requires a lot of coordination among stakeholders. Promoting innovation for the Ethiopian economy, including the BoP requires more resources and redistribution of resources to policy implementation and relevant action plans articulated in the STI policy. Also, policies for innovation cannot be considered in isolation. They must take into account the entire innovation ecosystem, market failure affecting the development of inclusive innovations, and the roles played by different agents in the generation, transfer, and dissemination of innovations for the country’s development71. 127. The role of the government should be focused on the creation of a functioning innovation infrastructure. The major role should be to facilitate, support, incentivize and leverage the strengths of all stakeholders in order to create sustainable inclusive solutions with significant outreach at maximum efficiency with the least possible burden on the public resources. Contributions from the private sector, the research and academic community, NGOs, and global partnerships – as well as the BoP itself are essential to an effective innovation ecosystem. There are regional hubs in Hawassa and Bahir Dar and a forthcoming regional hub in the city of Adama 70 The World Bank Inclusive Innovation, harnessing Creativity to Enhance the Economic Opportunities and 71 Welfare of the Poor. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 68 in Ethiopia. CHAPTER 4: Recommendation and Policy Options for Promoting Innovation in Ethiopia This study has analyzed the extent of innovative activity that formal firms in Ethiopia are undertaking and has reviewed the existing innovation ecosystem. The analyses reviewed the ongoing initiatives to promote innovation in firms as well as those targeted to the Base of the Pyramid. This chapter informs policymakers on how the environment can be made more conducive for firms to undertake more innovative activities to increase productivity as well as to provide innovative solutions to help alleviate poverty and facilitate more equitable growth in the economy. 128. The Government plays an essential role in ensuring entrepreneurs, financial institutions, academia and industry create wealth for the society through innovation. By providing a conducive regulatory and policy environment, promoting greater competition through openness to trade and FDI and promoting an education system that is responsive to industry needs, the government plays a central role in promoting innovation. The State will play a particularly important role in increasing innovation for the BoP before the private sector is able to build a profitable and scalable business solution. Hence, the successful implementation of the STI policy would be one of the most critical factors to ensure that innovative activity is undertaken in the economy and there are returns to firms on these innovation investments in terms of increased firm level productivity. 1. Implementation of the Science, Technology and Innovation Policy 129. The implementation of the STI policy for Ethiopia is crucial to facilitate linkages between different actors and institutions involved in the innovation ecosystem. Recognizing the important role and the urgent need for innovation to increase the country’s sustainable development, Ethiopia adopted a new STI policy in February 201272. As described in Chapter 3, there are various actors and institutions relevant to the policy areas envisioned in the STI policy for Ethiopia. 130. Strong political leadership is critical to facilitate the effective communication and collaboration among key stakeholders, given the complex organizational arrangements involved in the implementation of the STI policy (See Figure 4.1). While the current implementation arrangement is in line with international practice, key lessons learned from European countries emphasize the 72The Ethiopian Science and Technology Agency, which is the current Ministry of Science and Technology, reviewed 1993 S&T policy and prepared an initial draft of National Science, Technology and Innovation Policy in 2006. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 69 in Ethiopia. importance of inter-ministries and inter-agency bodies creating a coordinated and coherent implementation of STI-policies. These lessons include: (i) involvement of the right people with the needed qualifications (experienced, and both knowledgeable on content and process) at implementing/coordinating body; (ii) fairly broad mandates for the implementing/coordinating body to enhance coordination between the various actors involved; and (iii) early identification of cross departmental themes in order to keep the interdepartmental agenda fulfilled . Figure 4.1: Implementation Arrangement of the STI policy Source: Authors’ World Bank 131. Based on the key lessons from the European countries and the importance of the implementation of an effective STI policy, there are a few recommended policy actions that GoE could undertake. • The development of STI policy implementation strategy. While the policy identifies basic objectives and strategies, it is important for all the stakeholders to understand a clear path to promote innovation in Ethiopia, including the BoP. The development of the implementation strategy for the STI policy will also support the identification of the priority sectors and cross- cutting areas, such as agriculture and health for this initiative. • Good Coordination mechanism. Given that the STI policy covers a wide range of topics which involve a number of organizations/institutions, a clear communication strategy among these stakeholders needs to be developed. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 70 in Ethiopia. • Monitoring & Evaluation mechanism implemented. To monitor the progress of STI policy (and implementation strategy), the Key Performance Indicators need to be developed and disclosed to the public, together with their progress. This could potentially be done through the website of MOST and can help sensitize the public to developments in the area and initiate feedback and discussion from the public including the private sector to help inform future policy making. • Feedback Mechanism from the Private Sector. Given the crucial role that STI Policy plays in the move towards an export led industrial growth transformation, the implementation of the policy needs to have clear ownership from the private sector. Ensuring representation from the private sector in stakeholder consultation and working groups would be pivotal to this exercise. • Robust National Quality Infrastructure. The STI Institutional and policy framework needs to support the development of the NQI which is crucial for the country’s transformation to an industrial led economy. • Framework for Inclusive Innovation Policy. The STI Policy has been framed under the vision of “alleviating poverty and joining the mid-level income earning countries”. Herein lies the clear role for Government to spearhead a strategy to develop an adequate policy framework for inclusive innovation. 2. Promoting Greater Firm Level Innovation 132. Analyses shows that firms in Ethiopia undertake lower levels of innovative activities than those in comparator countries. The analysis conducted in Chapter 2 shows limited access to credit poses a significant barrier to product innovation in Ethiopia. Firms that are credit constrained are about 14 percentage points less likely to undertake product innovation than are non-credit constrained ones, everything else remaining equal. The analyses also shows that providing training to employees and allowing employees’ time to experiment are both factors that positively correlate with the probability to engage in product innovation. These findings corroborate the importance of human capital for innovation. 133. Innovation also has a correlation to firm performance in Ethiopia. Analyses conducted shows that firms that have introduced product or process innovations in Ethiopia show higher sales growth than those that have not. Similarly, process innovation and spending on R&D appear to be triggers for employment Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 71 in Ethiopia. creation in Ethiopia, and finally, the analysis shows that process innovation and spending on R&D enhance labor productivity. The government thus has a role to play in alleviating some of the market failures that exist to ensure that there is adequate skills and training and there is an incentive for firms to undertake innovative activities. 134. In particular, a wide range of funding options can be used to stimulate the supply of the innovation. Government funding for skills development for firms, early stage technology, and pre-commercialization technology is a vital element of many innovation systems, including direct funding of public labs and universities; grants, matching grants, and indirect R&D tax subsidies (which allow firms to choose the most profitable research opportunities, switching some marginal projects from being unprofitable to profitable)73. Facilitating Early Stage Financing and Capacity Building 135. The distinct credit constraints for young and small firms in Ethiopia is a clear impediment to innovation. Impediments to accessing finance for small and young firms stem from the demand side of financial markets. Like in other developing economies, credit in Ethiopia is more readily available to businesses that have fixed assets such as land or buildings to be used as collateral than to those having movable assets, as banks strongly prefer property to secure a loan. The average value of collateral needed for loans in Ethiopia (234 percent of the loan amount) is also very high compared to other regions of the world as well as to other developed economies in Africa. 136. Through the Ethiopia Climate Innovation Center (ECIC) the government provides support to early stage financing in green sectors. The ECICs target early stages of innovation, they also support more advanced growth-oriented entrepreneurs reach their objectives. The types of support provided by the ECIC includes: i) access to finance, by providing grants up to US$50,000; ii) mentoring through seminars and trainings; iii) marketing support, by providing market studies and case reports; iv) networking among entrepreneurs by creating regional hubs within Ethiopia74; and v) policy support which provides advice on policy framework of climate change to stakeholders. An increase in the support in other areas of the economy towards early stage innovation financing would be beneficial to entrepreneurs who are unable to find sources of financing through commercial banks. 73 World Bank (2012) 74 There are regional hubs in Hawassa and Bahir Dar and a forthcoming regional hub in the city of Nazreth Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 72 in Ethiopia. Facilitating Learning from Exporting and Fostering Backward Links through Foreign Direct Investment Growth 137. Openness to trade is an important source of knowledge transfer and an important motivation for firms to undertake innovative activities that increase market share, productivity, and growth. Referred to as “learning from exporting,” exporting firms are often under pressure to meet quality standards, including safety and environmental regulations, established by their customers or the regulatory authorities of destination countries. Such pressures can either strengthen incentives for exporting firms to upgrade their technology or hinder other firms that lack the requisites for exporting to more sophisticated markets. 138. There are a few initiatives that have been introduced in Ethiopia to address this market failure. These include the Ethiopian Competitiveness Facility (ECF) which is a matching grants program initiated under the World Bank funded Private Sector Capacity Building project and now further supported under the DFID funded Private Enterprise Program Ethiopia (PEPE), managed by Ethiopia’s MoI. The ECF is designed to improve the competitiveness of the Ethiopian private sector, in particular those focused towards the export market. The facility provides matching grants up to US$200,000 to qualifying enterprises and funds are channeled through four windows that include the export development window; the institutional development window, chamber of commerce and sectoral association window and domestic firms that are currently not exporting. Exporters were able to access business development services and training to increase their firm level productivity and decrease costs by using better production methods. The relative success of the export window under the ECF led to the introduction of a new window under the PEPE for the domestic firms that are not exporters which is a positive development as many SMEs would benefit from the access to these business development service and training opportunities that can be funded through the ECF. Firms benefit from not having to bear the entire cost of the investment, and since they match the portion paid for by the government, the program attracts genuinely committed firms. 139. There is a need to promote linkages with and spillovers from foreign investments with domestic firms. The GTP for Ethiopia seeks to transform the economy towards an industrialized economy and to increase per capita income of its citizens by 2025. To this effect, the Government has adopted policy focused on the development of the manufacturing sector through the use of industrial parks to attract FDI and to support SMEs75. It would be beneficial for the investment agency to 75 World Bank (2015b) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 73 in Ethiopia. work actively with the investor community and seek out input providers and support services they require that could be provided by domestic SMEs. The Government thus acts as a facilitator and gathering information on possible opportunities for links,76 assisting in identifying partners (and arrangements) by matching suppliers’ capabilities and buyers’ needs (legal assistance, fairs, missions, conferences and exhibitions, and so forth), and providing economic incentives to multinationals to promote training and technology transfer from buyer firms to local supplier firms and for SMEs to invest in training and capacity building. The Global Supplier Program was an initiative that was successful in developing SME capabilities in the Malaysian electronics industry and integrating them into the global value chain (see Box 4.1). Box 4.1: Malaysia: Skills Development for SMEs through matching grants The Global Supplier Program (GSP) funds training and skill development for SMEs in order to make them more innovative firms and to allow them to participate in global supply chains. Originally created in 2000 as an initiative by the regional Penang Skills Development Center, the GSP was quickly expanded at the country-level. Under the GSP, grant which covers up to 80 percent of training cost at a variety of regional centers and institutes are provided by government to SMEs. The key element of the GSP in terms of linkage creation is that Multinational Corporations (MNCs) representatives design the content of the training programs and participants are selected based on MNC criteria. Also, the selected SMEs are requested to co-finance at least 20 percent of the training cost; thus, acquiring the practical skills through the training is considered as a critical financial investment for the companies. Within its first year, the GSP had trained 813 employees from 225 SMEs, with the involvement of 23 MNCs or large domestic companies. Intel, for instance, has made significant use of the PSDC and the GSP. Global Supplier Program Objective To develop SMEs into competitive suppliers of parts and components, not only to MNCs in Malaysia, but also their worldwide operations through the mentoring activities and the linkage initiative of the GSP How it Involves training in critical skills with MNC input into works curriculum, and SME selection criteria Incentives • The training initiative is implemented in collaboration with local Skills Development Centers (government has appointed 42 training providers to undertake skill training for SMEs: e.g. Penang Skills Development Center 76Either directly or by supporting private institutions, governments promote the creation of information exchanges that could range from lists of inputs and materials available locally—which might include prices and qualities—to names, locations, and profiles of local suppliers. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 74 in Ethiopia. • SMEs that send their employees for courses at any of the training providers will be eligible for up to 80 per cent training grant from government. Source: UNCTAD (2011) 3. Upgrading the National Quality Infrastructure 140. The government’s continued support to develop NQI is crucial for the country’s transformation to an export led economy. Access to a good NQI is imperative to assure that Ethiopian firms are able to enter and be competitive in international markets by assuring that the quality of their services and products are aligned with required standards in the international markets. To support innovation in the firm level, in particular for exports, NQI services should be developed by incorporating demand from the private sector. 141. There is a need to develop a long term implementation strategy for the NQI policy framework in Ethiopia. While the NQI institutions have developed their strategies, in particular the steps required to obtain international recognition, it is important to develop a long term strategy which includes the government’s commitment of budget allocation, as all NQI institutions require long term financial support from the government. This will ensure that all these institutions can make medium to long term action plans to implement their strategies. 142. There is a need to develop career paths and incentive structures for skilled staff in NQI institutions. The delivery of NQI service relies heavily on trained and skilled staff. While international donor agencies spend large amount of time for training of staff, continued support to develop the necessary skills at each staff level is required for NQI institutions. Moreover, these skilled people often leave NQI institutions, because their salary and benefits sometimes do not meet their expectations. The development of the new career path, including provision of various training programs, and incentive structures for skilled staff will have a positive impact on the stable operation of NQI institutions. 143. To increase client satisfaction, the development of demand-driven NQI institutions is important. NQI institutions need to ensure that firms and academic and research institutions that receive NQI services are able to market their products and services successfully. However, weak participation from these key stakeholders in the governance of NQI institutions often hinders the development of demand- driven NQI services. For example, each NQI institution has set up a council for its Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 75 in Ethiopia. fiduciary and strategic responsibilities. It is important to get representatives from key stakeholders, including prominent industry, and academic and research institutions, to serve on these councils. This would ensure that NQI institutions obtain direct feedback from stakeholders, and additionally that these stakeholders act as marketing agents in their fields. The development of a robust monitoring and evaluation system is also critical to regularly review the effectiveness of the council and operation of these NQI institutions. 4. Promoting Effective Industry- Research Linkages 144. Government can also provide its support to strengthen university- industry linkages in order to promote innovation. There is a need to strengthen the effective linkages between academic institutions and industry, which contribute to increased industrial productivity in Ethiopia. A critical misalignment exists between the research outputs from academic institutions and the technology needs of industry. Furthermore, the type of curricula and skills endowments of the graduates of universities do not match the immediate skill needs of industry77. 145. Measures to increase incentives for greater academia-industry collaboration need to be introduced. Industry-research linkages can vary ranging from joint research and consultancy services, to creating opportunities for student internships, staff exchanges, and curriculum development for students. To promote collaboration and partnership between university and industry including foreign direct investors, government programs; such as mini-grants and matching grants, to increase the incentives for the cooperation is required (see Box 4.2). In addition, there is a need to better utilize the technology transfer system that has been initiated in the IoTs. The successful operation of technology transfer system is a big task, but it is also a good opportunity to improve the income situation of staff by generating new projects and even jobs (see Box 4.3). Measures to include “on the job training” that contribute towards the credit for a student could provide incentives for students to take these internships seriously as a source of learning and for firms to benefit from new ideas and research to help solve real issues that it may face. Creating incentives for researchers to collaborate with industry with this experience counting towards a tenure track could ensure that researchers would be motivated to work with industry. Finally, academic institutions should tap into the vast Ethiopian diaspora to leverage on the global expertise and knowledge that they have by offering them attractive short term assignments to work in the universities. 77 Working paper prepared by Open African Innovation Research & Training in 2012. Also, situation analysis of research activity at Addis Ababa University found that none of the units at the university had set research priorities based on national development objectives (Lemma 2008). Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 76 in Ethiopia. Box 4.2: Joint project between university and industry funded by the Government initiatives (Armenia) Microsoft Innovation Centre - Microsoft Innovation Centre was launched in September 2009 to provide the IT industry with programs and services to support the development of startups that are competitive and successful in the marketplace. It serves as an innovative and effective approach to build core competencies in business, soft skills and technical part among a growing number of small and medium companies, as well as to help education institutions to embrace new knowledge to meet the current and future market demands by providing infrastructure and resources to create innovative new products and services; bring those products and services to market; build well-managed competitive businesses; develop qualified workforce and maintain their expertise. It is located in the Armenian National Engineering Laboratory building in the State Engineering University. The Project was jointly implemented by Microsoft which contributed US$1.35 million and USAID which contributed US$1.35 million on behalf of the government. Source: Enterprise Incubator Foundation (http://www.eif.am) Box 4.3: Technology Transfer Office: Case of University of Antioquia (Colombia) The University of Antioquia (UA) is a public university located in Medellin, Colombia’s second largest city. Founded in 1803, it is Colombia’s oldest public university with 12 regional campuses. The UA is also recognized as Colombia’s highest percentage of excellence research group according to the National Board of Science and Technology. In 2000, UA recognized the importance of creating the linkage between the University, Industry and Government in the region in order to identify and develop business partnerships. By April of 2002, UA established “Technological Management Program” with the responsibility of developing guidelines and managing policies on R&D activities with private partners. This led to an increase in the share of research projects being financed by outside sponsors to 60 percent in 2004 from a mere 10 percent in 1994. This positive shift was achieved through the establishment of the University and Industry Committee on Research and Technology, which is comprised of University board members and successful private businesses in the region. The committee is divided by sector and is led by a CEO of a successful private company. The committee meets the first Friday of every month at UA’s R&D Headquarters by representing strategically chosen sectors in the region, including food, car manufacturer, energy, textiles, chemistry, health, wood, and agricultural. The topics discussed at the committee include: i) identification of R&D needs of the private sector; ii) interaction between university and industrial research groups; and iii) promotion of a risk capital fund for R&D projects and new enterprises. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 77 in Ethiopia. A key result from this active collaboration with the private sector included the Development of a low-cost and effective car paint: While a Colombian enterprise that assembles imported RENAULT requested to develop a six-year anticorrosive paint for the car manufacturing, a UA professor and the mechanical engineers came up with the new design of Surface Treatment Tunnel by which the outer casing of the car is submerged in a tunnel where anticorrosive paint is spread over every part of the car structure. This new Colombian engineering design was approved by RENAULT and the cost for development was half of what it would have cost them to use the available foreign technology. Through this development, UA received approximately $200,000 USD for technology invention and around 13 local small companies benefited with this technology. Source: University of Antioquia (http://www.udea.edu.co/) and Reichelt (2007) While the development of innovation in agriculture sector has been prioritized, the emphasis on the effective coordination among the relevant stakeholders and improvement of the quality of the staff and research needs to be stressed. 146. The development of the national implementation strategy for newly established Ethiopian Agricultural Research Council (EARC) is crucial. According to the ATA annual report, the establishment of EARC was approved by the government. The EARC will coordinate and oversee the integration of various research efforts made by the different research institutions. To support the existing coordination issues, the development of the detailed strategy to address the existing issues and strengthen the national agricultural research system is critical. In particular, the national strategy should identify activities which have quick impacts on increasing productivity, activities which would address medium term (upgrade of value chain), and long term objectives to support agricultural sector development in Ethiopia. Brazil was successfully able to develop an agricultural research institute which served to create solutions that benefited the farmers and were thus readily adopted (see Box 4.4). 147. Coordination with National Science, Technology and Innovation Council. There is a need to actively coordinate these initiatives with the National Science, Technology and Innovation Council that plays an important role in promoting and implementing the necessary support mechanisms to adopt innovative technologies. 148. Development of career path and incentive structure for researchers. Currently, MoA is working with Oxfam America and ATA to introduce attractive career paths and incentive structures in line with international benchmarks. The Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 78 in Ethiopia. development of these new career paths and incentive structures will have a positive impact in increasing the quality of agricultural research. Box 4.4: Public Research Organization and Agricultural Development in Brazil: Case of Embrapa One of the government’s initiatives to strengthen Brazil’s agriculture sector and food security was the establishment of an effective and leading agricultural research organization, which is Embrapa (Empresa Brasileira de Pesquisa Agropecuária). Embrapa has succeeded in adapting, creating, and transferring technologies to Brazilian farmers for the past 30 years, helping transform Brazil into one of the world’s largest food exporters. Since its founding in 1973, Embrapa has created and transferred to Brazilian farmers more than 9,000 technologies and built an intellectual property portfolio of more than 350 cultivars and about 200 international patents. It is currently considered as the world’s leading tropical research institute. Embrapa generated and transferred new technologies and techniques tailored to Brazil’s climate and soil conditions. The use of these technologies by Brazilian farmers facilitated the expansion of Brazilian agriculture and increased exports at internationally competitive prices. The main success factor of the initiatives conducted by Embrapa is Embrapa’s mission orientation, focusing from the outset on the improvement of agricultural productivity rather than the production of scientific work. Its mission driven culture has been supported by various elements, including: i) an open IPR policy and a network of offices spread throughout the country which help to facilitate the dissemination of Embrapa’s discoveries; ii) adequate level of State funding to support its activities for more than two decades; and iii) its priority to invest in the human capital of researchers. As a result, researchers worked on finding solutions for the agricultural sector, and technology and innovations sourced through Embrapa were quickly adopted by farmers. By reacting to market signals and focusing on activities for which demand was increasing in international markets, Embrapa avoided being supply driven. Source: Correa and Schmidt (2014) 5. Providing an Incentive Framework to foster Inclusive Innovation 149. The government will also play a particularly important role in increasing innovation for the BoP by addressing their low demand due to limited access to information. Inclusive innovation can boost the welfare of the BoP by providing innovative products and finding innovative ways to address their needs (i.e., energy- efficient cook stoves, water purifiers, or certain vaccines). However, several examples show that low levels of education among the BoP population hinder opportunities to Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 79 in Ethiopia. gain knowledge about potentially useful products and about how best to use them78. Also, poor individuals’ investment decisions tend to be inefficient, thereby lowering demand for innovative products. 150. As is the case for Ethiopia as well, the strong community involvement is critical. For this purpose, it is important to establish partnership with local NGO or intermediaries which communicate with the targeted BoP population through regular and well publicized visits about the benefits of adopting innovative products as well as innovative service delivery. Using the existing community network and their knowledge; such as door-to-door distribution and advertising strategies, has been used as successful practices by businesses to reach to the BoP, and this approach can be replicated for the government initiative. The examples are the followings79: • VisionSpring, a social enterprise, is a network of women in India and El Salvador selling eyeglasses at a low price through the Vision entrepreneur program; • Hindustan Unilever (India) through the Shakty Initiative trains women to become micro-entrepreneurs by selling personal care products. Consumers benefit through better personal hygiene and prevention of illness, and the women improve their bargaining positions inside their households and their communities; and • The NGO Gyan Shala provides primary education in India at low cost by using standardized curricula and lesson plans to exploit economies of scale. The approach has also made it easier to monitor the quality of the education service provided. 151. The government has a role to play in developing a market for inclusive innovation technologies that bear a high upfront cost leading to a lack of incentives for the private sector to produce. The case of AAKASH Tablet (see Box 4.5) indicates the market for inclusive innovations can be developed by the government, wherein the Government of India used demand side policies such as public procurement by creating a market for low cost tablets. 78 OECD (2013) 79 Ibid. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 80 in Ethiopia. Box 4.5: AAKASH Tablet: Bringing Low-Cost Computers to Students in India The Aakash Tablet is a good example of how public procurement can help create a market for inclusive innovations and of the importance of setting clear procurement evaluation to avoid disruptions in the process. In 2010, the Indian government announced the development of the Aakash tablet to provide low-cost computers to the nation’s growing college student population. It assigned the Indian Institute of Technology (IIT) Rajasthan the task of producing the first 100,000 tablets at the US$35 price point. IIT Rajasthan followed an open bid process and selected the lowest bidder (DataWind) among all bids deemed eligible. In mid-2011, DataWind sent three batches of tablets for testing, all of which did not meet the standard required by IIT Rajasthan. Despite these disagreements, the Indian government unveiled the manufactured tablet at the scheduled launch in October 2011. The government also announced that there would be two versions of the tablet: (i) Aakash computers, subsidized by the government and distributed to students at US$35; and (ii) the Ubi Slate 7, commercially available at US$60. Continued testing of the Aakash tablets by students highlighted the need for several improvements, such as longer battery life and a faster processor. In November 2011, the government and DataWind agreed that the remaining tablets of its 100,000 order would have such upgrades and IIT Rajasthan would send its specific testing criteria. However, the testing criteria included measures such as ability to withstand four inches of rain, which Data Wind contended was not included in the original specifications. While the effort was eventually successful, it was delayed a long time. Quad Electronics, Data Wind’s consortium partner, had never manufactured a tablet before and was producing fewer than 700 tablets a day. DataWind opened new manufacturing facilities in India to raise its productivity and eventually ended its agreement with Quad Electronics. Several financial and legal disputes also contributed to the delays. Quad Electronics and IIT Rajasthan claimed that DataWind owed them US$1.12 million and almost US$500 million, respectively. DataWind in turn claimed that the school owed it US$100,000 from a bid deposit. The Indian government maintained that production would continue and that Aakash 2 would be unveiled to the rest of the students in November 2012. The government and DataWind met that goal. The device was sold at US$21 for students of engineering colleges, with the government subsidizing the other half of the cost. The case of the Aakash tablet provided several lessons: • Clear procurement evaluation criteria. First, clear procurement evaluation criteria are necessary. Because of the unclear criteria in the initial public procurement, expectations were not met. Furthermore, the government chose a company that had never produced a tablet before, making timely and cost- efficient production difficult. • Market Creation. Second, while procurement processes hampered the government from providing tablets to students at the price point it wanted, it did Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 81 in Ethiopia. succeed in creating a market. Because DataWind proved it could make a tablet for under US$60, more tablet makers entered the market at this price point. • Incorporating customer feedback. Third, the government listened carefully to the feedback from customers and endeavored to improve the design based on that feedback. Such public procurement of a consumer product, while it was delayed by several disputes, represents a first of its kind in India. Source: World Bank (2014d) 152. The government can also provide its support to stimulate the adoption, adaptation, and generation of innovative technologies by entrepreneurs, before the private sector is able to build a profitable and scalable business solution. An example where the government has played a pivotal role in fostering inclusive innovation is India. A Public-private partnership model, the Inclusive Innovation Fund (see Box 4.6) in India is built on the principle that innovative enterprises can profitably, scalably, and competitively engage the BoP: and, in doing so, provide goods and services that will transform their lives for the better. Ethiopia can leverage on existing initiatives around the world by facilitating international linkages with firms (through joint ventures) and industry-academia linkages in other countries to work on providing solutions relevant for the BoP in Ethiopia. The large Ethiopian diaspora provides a further opportunity to effectively leverage these linkages. Box 4.6: India Inclusive Innovation Fund: India Inclusive Innovation Fund (IIIF) is one of the examples for the government’s financial intervention to address social issues by increasing access to finance for innovations aimed at tackling inclusive businesses. Despite having a large publicly funded science and technology infrastructure and an established higher education system, India has not fully exploited its innovation potential. While a number of initiatives to enhance the country’s innovation ecosystem have been implemented, one of the critical actions undertaken was to establish the National Innovation Council in 2010 as a high level coordination body to develop a national roadmap for innovation over the next decade and to manage various innovation-related activities. Inclusive growth has been one of the most important economic strategies of the Indian government, being incorporated into its national development strategy – both in 11th five year plan 2007-12 and the 12th five year plan, 2012-17. While majority of the labor force is in the informal sector, this sector lacks science, technology, and innovation support mechanism. In an effort to address more than half of India's population who are considered as the BoP, three years after announcing the setting up the IIIF, the National Innovation Council and the Ministry of Micro, Small and Medium Enterprises Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 82 in Ethiopia. (MSME) officially announced the launch of the IIIF in January 2014 with the initial capital of Rs 500 crore. The IIIF would be eventually scaled up to ten (10) times of the fund size over the next two years by raising funds from external investors. The IIIF’s principle concept is to combine innovation and the dynamism of business to solve the problems the BoP is facing in India. The IIIF focuses on creating a new class of capital which helps set up and scale entrepreneurial skills and innovation. The fund will invest in innovative ventures that are scalable and sustainable, but address social needs of the population in areas of agriculture, healthcare, education and skills development, energy, financial inclusion, water, sanitation employment generation, etc. While conventional commercially-focused companies do have access to finance to some extent, ventures and start-ups which focus on BoP business find it much harder to access finance, in particular risk funding, ranging from seed to early-stage ideas. The IIIF supports the entire ecosystem in this space, including incubators, angel groups, and also public research and development programs and laboratories to support the commercialization and deployment of socially relevant innovative technologies and solutions. Source: Abhyankar (2014) 153. At the same time, there are several elements that need to be considered when it comes to government supported fund for inclusive innovation. Main issues are: having an appropriate business model and exit strategy. There are opportunities for for-profit driven inclusive innovation. However, relatively few companies have so far managed to realize the potential of inclusive innovation for business growth and development impact at larger scale. While high sensitivity to price is the most obvious characteristic of the BoP, the appropriate economic model with reasonable returns is critical for the sustainability and expansion of the business. Moreover, without clear exist strategies, including valuation of the companies, and regulatory framework on early stage financing, it would be difficult to justify the use of the public fund in terms of accountability and transparency. 154. As access to the BoP markets often involve higher costs due to the costs imposed by intermediaries and other distortions, public intervention for the inclusive innovation can be effective by supporting the establishment of the entire ecosystem, including lack of information, access to local resources, distribution channels, and supportive business regulations. 6. Raising Awareness 155. The government has a key role to play in raising awareness of the private benefits of undertaking innovative activities. This chapter has elaborated on how Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 83 in Ethiopia. government can facilitate innovative activity both to increase firm level productivity and provide solutions aimed at addressing issues faced by the base of the pyramid. Key barriers to inclusive innovation include consumer behavior, traditional business models and information asymmetries that exist. The low rate of farmers’ adoption rates of improved seeds is a case in point of risk aversion behavior that exists preventing farmers from trying out something new. It is thus important for the state to address this by increasing awareness and showcasing successful pilots to ensure greater adoption of new technologies and processes. Finally, there is a role for innovation to be encouraged amongst the young minds and for the school curricula to encourage an innovation driven culture. 156. The objective of all the policy instruments reviewed here is to create an ecosystem that fosters greater levels of innovative activity promoting greater productivity and increasing Ethiopian firm competitiveness and increasing the supply of innovative ideas aimed at addressing the needs of the base of the pyramid thus bridging growth and equity for the Ethiopian economy. Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 84 in Ethiopia. APPENDIX: Regression Results of Enterprise Survey Table A2.1: Marginal Effects on Probability of Innovation from Probit Regression Product Innovation Process Innovation R&D Ethiopia Kenya LIC Ethiopia Kenya LIC Ethiopia Kenya LIC ln (Size) -0.009 0.026 0.034*** -0.044 -0.012 0.038*** 0.014 0.005 0.017 0.037 (1.002) (2.657) 0.044 (-0.716) (3.067) 0.015 (0.335) (1.551) Textile & Garments 0.399** -0.075 0.045 0.405** 0.080 0.123*** 0.017 0.018 0.124*** 0.173 (-0.629) (0.883) 0.164 (1.270) (2.657) 0.06 (0.271) (2.607) Leather 0.187 -0.172 0.141* 0.257* -0.035 -0.023 0.017 -0.130 0.057 0.162 (-0.915) (1.840) 0.131 (-0.294) (-0.325) 0.076 (-0.876) (0.626) Food 0.535*** -0.041 -0.040 0.525*** 0.032 0.015 0.08 0.027 -0.031 0.112 (-0.566) (-0.959) 0.07 (0.723) (0.391) 0.066 (0.816) (-1.048) IT 0.26 0.135 0.032 0.358** -0.092 0.033 0.036 -0.084 0.022 0.188 (1.243) (0.333) 0.167 (-0.703) (0.401) 0.101 (-0.641) (0.257) Retail 0.143* 0.046 0.052 0.044 -0.002 0.009 0.032 0.008 0.004 0.08 (0.748) (1.566) 0.081 (-0.033) (0.287) 0.043 (0.235) (0.125) ln (Age) -0.115** 0.080* 0.017 -0.067 0.001 -0.006 -0.008 -0.007 0.024 0.055 (1.694) (0.829) 0.061 (0.033) (-0.342) 0.023 (-0.306) (1.467) Manager's Experience -0.002 -0.004 -0.001 -0.002 -0.001 -0.001 0.002 -0.000 -0.001 0.005 (-1.451) (-0.500) 0.005 (-0.423) (-0.589) 0.002 (-0.221) (-0.428) Exporter Dummy 0.151 0.107* -0.056 0.076 0.047 -0.006 -0.021 0.047 0.083* 0.187 (1.742) (-1.153) 0.2 (0.964) (-0.115) 0.035 (1.615) (1.888) - Foreign Ownership -0.157 -0.162 -0.013 -0.108 0.031 0.038 0.063*** -0.023 -0.006 0.122 (-1.648) (-0.281) 0.177 (0.407) (0.880) 0.02 (-0.310) (-0.181) Training Dummy 0.252*** 0.075 0.149*** 0.046 0.041 0.146*** 0.135** 0.022 0.139*** 0.087 (1.245) (4.868) 0.092 (0.989) (5.122) 0.056 (0.647) (5.083) Time for experiment 0.310*** 0.281*** 0.271*** 0.387*** 0.304*** 0.310*** 0.137** 0.227*** 0.295*** 0.092 (4.786) (9.773) 0.088 (5.867) (11.419) 0.055 (4.714) (12.346) Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 85 in Ethiopia. - Credit Constrained -0.138** -0.024 -0.029 -0.170** 0.039 -0.005 0.112*** 0.012 -0.049** 0.068 (-0.389) (-1.068) 0.07 (0.976) (-0.187) 0.04 (0.366) (-2.049) Country fixed effects? Yes Yes Yes N 442 583 4,472 442 579 4,465 444 585 4,463 Table A2.2: OLS estimation of Real Sales Growth and Innovation Ethiopia Kenya LIC Product Innovation 18.358*** 8.817* 1.923** 3.937 4.679 0.883 Process Innovation 17.854*** 10.522** 0.759 3.651 4.533 0.846 R&D 9.015 -3.226 -0.237 5.9 4.662 1.214 ln (Size) -2.6 -2.204 -2.305 -0.877 -0.371 -0.438 0.907** 0.957** 1.042** 1.885 1.811 1.837 2.039 2.046 2.047 0.432 0.432 0.431 ln (Age) -5.682** -5.915*** -7.551*** -2.629 -1.989 -1.659 -3.469*** -3.433*** -3.450*** 2.242 2.125 2.592 2.974 2.956 2.928 0.7 0.699 0.704 Exporter Dummy 3.8 4.337 3.522 8.155 8.428 9.69 1.482 1.357 1.469 8.164 8.274 10.759 5.661 5.744 5.879 1.68 1.679 1.692 Foreign Ownership -22.590* -22.937* -20.29 -2.248 -3.799 -2.303 -0.109 -0.074 -0.078 12.858 12.95 15.461 7.716 7.99 7.956 2.455 2.451 2.463 Manager's Experience 0.254 0.191 0.239 0.08 0.048 0.046 0.172*** 0.165*** 0.165*** 0.277 0.264 0.25 0.206 0.206 0.203 0.051 0.051 0.051 Credit Constrained -8.900** -8.103** -11.933*** 10.785** 10.411** 10.749** -3.213*** -3.187*** -3.178*** 3.983 3.74 3.982 4.279 4.415 4.352 0.807 0.806 0.811 - - - Constant 13.842 10.617 25.127*** 26.233** 31.901** 23.167** 2.454 2.743 2.771 8.956 8.229 9.138 11.939 12.404 11.592 2.208 2.223 2.209 Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 86 in Ethiopia. Country fixed effects NA NA NA NA NA NA Yes Yes Yes Sector fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes N 259 258 260 473 467 471 2993 2986 2980 Table A2.3: OLS estimation of Employment Growth and Innovation Ethiopia Kenya LIC Product Innovation 2.615 1.733 0.676 1.762 1.477 0.436 Process Innovation 3.192* 1.101 -0.668 1.71 1.739 0.426 R&D 5.455** 3.515** 1.635*** 2.711 1.488 0.583 ln (Size) -1.447* -1.186 -1.590* 0.863 0.937 0.832 1.599*** 1.718*** 1.589*** 0.862 0.871 0.868 0.597 0.622 0.607 0.228 0.229 0.228 - - ln (Age) -3.399** -3.520** -3.838*** -0.956 -0.779 -1.033 1.313*** 1.299*** -1.335*** 1.332 1.359 1.303 0.961 0.967 0.945 0.358 0.358 0.358 Exporter Dummy -6.490** -5.898* -6.141* 0.368 0.494 -0.032 -1.099 -1.096 -1.332 3.294 3.165 3.46 1.488 1.488 1.553 0.904 0.905 0.907 Foreign Ownership 0.438 0.476 1.092 1.505 1.183 1.237 -1.402 -1.446 -1.355 1.831 1.926 1.934 2.053 2.028 1.888 1.13 1.132 1.132 Manager's Experience -0.103 -0.111 -0.119 0.018 0.015 0.012 0.019 0.014 0.016 0.101 0.101 0.094 0.065 0.067 0.066 0.028 0.028 0.028 Credit Constrained -2.633 -2.561 -2.18 -0.882 -0.985 -0.757 -0.41 -0.448 -0.342 1.642 1.57 1.589 1.556 1.559 1.559 0.413 0.413 0.415 Constant 25.400*** 23.834*** 27.170*** 0.772 0.344 1.345 2.034* 2.384** 2.115* 3.799 3.891 3.458 3.759 4.079 3.523 1.122 1.131 1.123 Country fixed effects NA NA NA NA NA NA Yes Yes Yes Sector fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes N 392 391 393 554 549 552 4461 4454 4437 Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 87 in Ethiopia. Table A2.4: OLS estimation of Labor productivity and Innovation Ethiopia Kenya LIC Product Innovation 8.160* 9.367** -0.006 4.461 4.389 0.902 Process Innovation 10.793*** 10.763** -0.54 4.109 4.264 0.86 R&D 6.685 -6.028 0.635 5.488 4.236 1.241 ln (Size) -0.756 -0.894 -0.877 -2.152 -1.662 -1.65 -0.306 -0.29 -0.314 1.772 1.704 1.76 2.124 2.117 2.105 0.448 0.448 0.447 ln (Age) -2.812 -2.026 -3.481 -1.32 -0.615 -0.075 -0.045 -0.051 -0.078 3.595 3.185 3.575 3.291 3.237 3.211 0.749 0.748 0.752 Exporter Dummy -4.268 -3.721 -3.896 7.209 7.598 9.233* 2.266 2.32 2.31 9.093 9.299 7.95 5.284 5.392 5.413 1.719 1.717 1.729 - Foreign Ownership 23.848 -23.488 -22.067 -1.883 -3.445 -1.868 -3.757 -3.757 -3.849 16.341 15.887 17.409 8.728 8.962 8.814 2.564 2.558 2.569 Manager's Experience 0.458 0.373 0.409 0.199 0.156 0.156 0.078 0.075 0.079 0.316 0.286 0.311 0.194 0.195 0.191 0.053 0.053 0.054 Credit Constrained -7.737* -6.31 -8.689** 12.429*** 11.943*** 12.256*** -3.514*** -3.462*** -3.509*** 3.934 3.897 3.732 4.144 4.276 4.236 0.823 0.821 0.827 - Constant -8.161 -12.143 -2.721 -32.303** 37.800*** -28.972** -5.647** -5.246** -5.799** 9.41 9.036 8.374 12.483 12.88 12.237 2.332 2.342 2.331 Country fixed effects? NA NA NA NA NA NA Yes Yes Yes Sector fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes N 259 258 260 459 453 457 2885 2878 2872 Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 88 in Ethiopia. Table A3.1: Selected Technology and Innovation Indicators GCI 2015-16, Key South Ethiopia China Turkey Kenya Rwanda indicators under Africa technology and innovation Rank Score Rank Score Rank Score Rank Score Rank Score Rank Score Overall (all the 109 3.7 28 4.9 51 4.4 99 3.9 58 4.3 49 4.4 indicators) Technological Readiness (in total 7 indicators) Availability of latest 119 3.9 95 4.3 55 5.0 50 5.1 45 5.2 41 5.3 Technologies Firm-level technology 128 3.8 66 4.7 36 5.2 54 4.8 47 5.0 28 5.4 absorption FDI and technology 97 4.0 69 4.4 52 4.7 56 4.6 31 4.9 64 4.5 transfer Business Sophistication (in total 9 indicators) Local supplier quantity 127 3.7 15 5.2 27 4.9 21 5.1 93 4.2 51 4.6 Local supplier quality 124 3.5 63 4.3 49 4.6 58 4.4 76 4.2 38 4.8 State of cluster 103 3.3 24 4.5 52 3.9 37 4.1 43 4.0 33 4.2 development Value chain breadth 71 3.8 43 4.2 63 3.8 44 4.2 65 3.8 56 3.9 Innovation (in total 7 indicators) Capacity for innovation 112 3.5 49 4.2 83 3.8 42 4.3 62 4.0 32 4.6 Quality of scientific 79 3.6 42 4.2 82 3.6 44 4.2 68 3.8 33 4.7 research institutions Company spending on R&D 49 3.5 23 4.2 79 3.1 33 3.8 65 3.3 32 3.8 University-industry 78 3.5 32 4.4 61 3.7 37 4.2 64 3.7 31 4.5 collaboration in R&D Availability of scientists 81 3.8 36 4.5 50 4.2 55 4.2 71 4.0 106 3.4 and engineers Source: The Global Competitiveness Report 2015-16 Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 89 in Ethiopia. Box A3.1: List of major Ethiopian Institutes of Agricultural Research Ethiopian Institute of Agricultural Research (EIAR) – responsible for providing the overall coordination of agricultural research countrywide, and advising Government on agricultural research policy formulation. Agricultural Transformation Agency (ATA) – The government has established an agency, Agricultural Transformation Agency, with the mandate to increase agricultural production and marketing in 81 benchmark Weredas in five regions. Currently, there are 55 research centers and sites located across various agro-ecological zones. The research centers vary in their experience, human capital, and other resources capacities. Some of the research centers and sites have one or more sub-centers and testing sites. Major agricultural research centers and institutes are as follows: Federal Research Centers (16) – Administrated by EIAR • Ambo Plant Protection Research Center • Assosa Agricultural Research Center - Bamboo • Bako Agricultural Research Center - Maize • DebreZeit Agricultural Research Center - Teff • Pawe Agricultural Research Center - Soybean • Werer Agricultural Research Center - Cotton Oil crops and Irrigated Agriculture • Wondo Genet Agricultural Research Center - Aromatic, Medicinal and Bio energy plants • Holetta Agricultural Research Center - Dairy Research activities and Highland pulses • Jimma Agricultural Research Center - Coffee and Tea Plant Research • Kulumsa Agricultural Research Center - Wheat, Fatabean and Field Pea • National Fish and other Aquatic Lives Research Center • Tepi Agricultural Research Center - Spice • Mehony Research Center - Lowland high value crops • Fogera Research and Training Center – Rice • Chiro Research Center - Sorghum Research • Melkassa Research Center – Tropical Fruits Regional Research Institutes (7) – Administrated by the Regional State governments • Oromia Agricultural Research Institute • Amhara Region Agricultural Research Institute • Southern Agricultural Research Institute • Tigray Agricultural Research Institute • Somali Region Pastoral and Agro Research Institute • Afar Pastoral and Agro Research Institute • Gambella Agricultural Research Institute Universities / Higher Learning Institutes (12) • Haramaya University • Hawassa College of Agriculture • Wondo Genet College of Forestry • Mekelle University • Veterinary College of Debre Zeit Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 90 in Ethiopia. • Jimma University • Ambo University • Semera University • Jigjiga University • Bahir Dar University • Soddo University • Debre Birhan University Source: ATA Annual Report 2013/14 and EIAR website Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 91 in Ethiopia. Table A3.2: Major responsibility of each NQI institution and their achievements Institution Major responsibility Achievements NMIE • Establishing and maintaining • Became a full member of Intra-Africa Ethiopian measurement Metrology System (AFRIMETS) and applied standards membership of Bureau International des Poids • Ensuring the national et Mesures (BIPM) calibration service is • Accredited for services of six (6) areas: Mass; established and maintained Temperature; Pressure; Volume; Electricity; for use by industry and Weight ESA Confirming and publishing the Became active member of the International national and international Organization for Standardization (ISO) and the standards and promoting the African Regional Organization for implementation of standards Standardization (ARSO) ENAO Supplying accreditation services • 47 laboratoties accredited to conformity assessment • Audited for a full membership for the bodies (testing and calibration International Laboratory Accreditation laboratories, inspection Cooperation (ILAC) agencies and certified bodies). ECAE Providing testing, inspection Accredited for services of nine (9) areas: Soap & and certified services Detergent; Wire & Cable; Cement; Bar; Steel Sheet Brewery; Soft Drinks; Edible Oil; and Food Additives Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 92 in Ethiopia. Table A3.3: Selected programs to support the access to finance i) Lines of Credit Rural Financial Intermediation Women’s Entrepreneurship Program Development Program Amount $248 Million $42.4 Million The number of loans 45,000 loans 6,000 loans (on-going) Sector Rural households and Trade, Services, Manufacturing, enterprises (mainly agriculture) Agriculture, Construction Description Liquidity for microfinance banks World Bank-funded program to to improve rural lending support growth-oriented women-owned enterprises. ii) Guarantee Schemes Donor-funded Partial Credit Export Credit Guarantee Guarantee Amount - $4.5 Million in guarantee funds The number of loans 1,000 loans (on-going) 300 loans Sector Manufacturing, Agriculture Agriculture, Health Description Exporters can obtain credit DCA scheme has provided $4.5 directly from the Development Million in guarantee funds, Bank of Ethiopia with collateral opening up $66 Million of lending equivalent to 40 to 50% of the to Ethiopian businesses over the amount of the loan amount past decade iii) Loan Application Support Entrepreneurship FeMSEDA and One Stop Shops Development Centre The number of support 578,000 enterprises 5,700 enterprises trained Sector Trade, Services, Agriculture, Trade, Services, Agriculture, Construction, Manufacturing Construction, Manufacturing Description The Federal Agency for MSE The Entrepreneurship Development (FeMSEDA) and a Development Centre, a quasi- network of over 1097 one stop governmental entrepreneurship shops (OSSs) in towns across the institute, launched in 2013 with country to assist enterprises with funding from UNDP, was formed accessing credit. to provide entrepreneurship training and business development services to Ethiopian entrepreneurs Unlocking firm level productivity and promoting more inclusive growth: The Role of Innovation 93 in Ethiopia. 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