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TRANSITION REPORT 2014

tr.ebrd.com

Innovation in Transition

18.11.14

Produced by the Office of the Chief Economist, EBRD.

© European Bank for Reconstruction and Development

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Stuck in Transition?

A wake-up call Reform fatigue is slowing the

process of convergence

TRANSITION REPORT 2013

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Transition slow-down… E

con

om

ic t

ran

siti

on

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…means convergence slow-down

Sources: IMF WEO, EBRD REP, weighted averages.

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Innovation in Transition

FranklinGothic DemiCondITC 38pt

A wake up call Reform fatigue is slowing down

the convergence process

Innovation by

companies as a

driver of growth…

…re-energises

transition

TRANSITION REPORT 2014

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Adopt, Adapt, Advance: Picking the low-hanging fruit

Innovation = improving productivity within firms

Innovation goes well beyond R&D in high-tech sectors

Products and production processes new to the firm

Firms need to Adopt, Adapt and Advance towards technological frontier

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BEEPS V:

Around 16,000 firms in

30 countries and similar

surveys in Jordan and Israel

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Taking the pulse on firm innovation

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Innovation: New products

Sam Mills in Satu Mare, Romania. A corn milling company since 1994

Significantly increased value added through in-house R&D since mid-2000s

New products: gluten-free pasta, products with a low glycaemic index

Selling through chains in US, EU and Asia: via Amazon and specialist health-food stores

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Innovation: New production processes

Russia’s NLMK founded in Lipetsk in 1931

One of the world’s largest steel producers

New process (pulverized coal injection) helped reduce costs (cut gas consumption by 70%)

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Firm innovation gets countries unstuck

Morocco

Azerbaijan

Belarus

Czech Republic

Egypt

Estonia

Hungary

Jordan

Latvia

Macedonia Romania

Russia

Slovenia

Slovak Republic Tunisia Ukraine

0

20

40

60

80

100

120

140

160

180

200

0 10 20 30 40 50 60 70 80

Inn

ova

tio

n in

ten

sit

y o

f e

xp

ort

s

GDP per capita, in per cent of EU-15 average

1993/1994 → 2010/2011

Source: USPTO, UN Comtrade, Feenstra et al. (2005)

Sh

are

of

firm

s

Productivity

Transition region

Sh

are

of

firm

s

Productivity

Transition region

Israel

Sh

are

of

firm

s

Productivity

Transition region

Israel ?

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In each country firms can innovate to improve their productivity

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Firm innovation can improve productivity everywhere

• Some firms are as productive as leaders in advanced markets…

• …but laggards must adopt and adapt – or die – to raise aggregate

productivity and get countries unstuck

Sh

are

of

firm

s

Productivity

Central Asia

Sh

are

of

firm

s

Productivity

Central Europe and the Baltic states

Sh

are

of

firm

s

Productivity

Central Asia

Israel

Sh

are

of

firm

s

Productivity

Central Europe and the Baltic states

Israel

Sh

are

of

firm

s

Productivity

Central Asia

Israel

?

Sh

are

of

firm

s

Productivity

Central Europe and the Baltic states

Israel

?

0

50

100

150

200

250

Higher-tech sectors Medium-low-tech sectors Low-tech sectors

Pe

rce

nta

ge

in

cre

ase

in

la

bo

ur

pro

du

cti

vity

Pe

rce

nta

ge

of firm

s th

at in

no

vate

Percentage of firms engaged in product innovation Impact of product innovation on productivity13

0

50

100

150

200

250

Higher-tech sectors Medium-low-tech sectors Low-tech sectors

0

5

10

15

20

25

30

Pe

rce

nta

ge

in

cre

ase

in

la

bo

ur

pro

du

cti

vity

P

erc

en

tag

e o

f firms th

at in

no

vate

Percentage of firms engaged in product innovation Impact of product innovation on productivity

Pay-off from innovation highest in low-tech industries…

Albania

Armenia

Azerbaijan

Belarus

Bosnia and Herzegovina

Bulgaria

Croatia

Czech Republic

Estonia

FYR Macedonia

Georgia Hungary Jordan

Kazakhstan

Kosovo

Kyrgyz Republic

Latvia

Lithuania Moldova

Mongolia

Montenegro

Poland

Romania

Serbia

Ukraine

Uzbekistan

Slovak Republic

Tajikistan

Turkey Russia

Slovenia

Israel

0

2

4

6

8

10

12

14

16

18

20

22

24

26

0 2 4 6 8 10 12 14 16 18

Pe

rce

nta

ge

of

firm

s t

ha

t m

ak

e o

r m

ak

e a

nd

bu

y

Percentage of firms that only buy

Buy

Make and Buy

Low

innovation

14

Source: BEEPS V

…and is often best achieved by simply acquiring foreign know-

how

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Innovative firms are more sensitive to the business environment

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In particular: corruption, skills and access to finance

Gre

ate

r co

nst

rain

t fo

r in

no

vato

rs

Corruption

Skills Finance

Tax administration

Informal sector

Electricity

Transport

Telecommunications Customs/trade

regulations Access to land

Crime

Licences/permits

Labour regulations Courts

Greater constraint for non-innovators

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Variation in local banking markets affects firms’ access to

credit…

Source: BEPS II

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…and their ability to innovate

0%

5%

10%

15%

20%

Product innovation Process innovation

Pe

rce

nta

ge

of

firm

s t

ha

t in

no

vate

No credit demand Unfulfilled credit demand Fulfilled credit demand

0%

5%

10%

15%

20%

Product innovation Process innovation

Pe

rce

nta

ge

of

firm

s t

ha

t in

no

vate

No credit demand Unfulfilled credit demand Fulfilled credit demand

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What can policy-makers do?

Countries’ innovation policies are too similar

• Too focused on high-tech, R&D, university-industry transfer of technology

• Not enough to adopt policies from advanced economies, must also adapt them

Tailor policies to account for distance to technology frontier and local institutional capacity

Help firms export and enter global value chains through:

Quality certifications Streamlined export

procedures VAT refunds

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Embrace economic openness

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Embrace economic openness

Armenia:

Cisco, Microsoft partnerships, special events. ICT

companies now receive 44% of revenues from

exports

Estonia:

focus on international cooperation, foreign R&D

investment grew by 15 per cent a year

Slovak Republic:

Special incentives for foreign firms, including

SMEs, to come to less-developed regions

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Right mix of horizontal vs. vertical policies

Focus on horizontal

policies where governance is

weak

Use vertical policies to

crowd in the private sector

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Right mix of horizontal vs. vertical policies

Israel - Yozma VC programme:

Government intervention most effective when

taking minority stakes

Turkey - smart specialisation, automotive:

Further developing East Marmora cluster –

increased R&D input, specialised technoparks,

targeted university programmes

Finland – centres of excellence programme:

Gradually phases out government funding to

prevent dependence

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Getting ‘unstuck’: a double act

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Needed: firms willing to innovate and governments facilitating innovation

Innovation must be nurtured and supported with a tailored approach:

Adopting/adapting phase:

•Tackle general barriers like corruption, lack of skilled labour, red tape and limited access to finance

•Help firms access international technology and value chains

•Promote smart specialisation

More advanced economies:

•Nurture creativity

•Encourage highly specialised human capital

• Improve competition policies

•Facilitate access to VCs and private equity for young start-up firms

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TRANSITION REPORT 2014

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