RESTRUCTURING OF INNOVATION SYSTEMS IN

CENTRAL AND SOUTH EAST EASTERN EUROPE

ASESSING THE BASIS FOR

TRANSFORMATION TOWARDS KNOWLEDGE BASED ECONOMY

Slavo Radosevic

School of Slavonic and East European Studies

Background

• 1990s: CEECs - R&D has not been directly linked to recovery and growth

• 1990s: Growth = initial conditions * reform policies

• Sources of long-term growth in the post-transition period: NSI?

Key arguments

• Growth during the 1990s: Static modernization effects driven by reallocations/FDI/subcontracting vs. Dynamic modernisation effects (technology accumulation/FDI spillovers)

• Growth is not automatically accompanied by recovery in R&D and domestic innovation (demand vs. demand for technology)

• Disjunction between accumulation of production capability vs. technology capability of the CEECs > weak systems of innovation unable to meet challenges of KBE

• Innovation policy between ‘surrogate modernisation’ and search for own solutions

G D P 1999/94 v s R e sid e n t p ate n ts , 1999/94

y = -0 .2 8 3 x + 1 .1 4 5 8

R 2 = 0 .1 8 0 1

0 .6 0

0 .6 5

0 .7 0

0 .7 5

0 .8 0

0 .8 5

0 .9 0

0 .9 5

1 .0 0

1 .0 5

0 .6 0 0 .7 0 0 .8 0 0 .9 0 1 .0 0 1 .1 0 1 .2 0 1 .3 0 1 .4 0

GDP c ons t 1 9 9 5 , $ m n, 1 9 9 9 /9 4

Re

sid

en

t p

ate

nts

, 19

99

/94

U K R

B G R F

C ZR

S KP L

R O H U

Growth and recovery have not been accompanied by recovery

in demand for technology …….

Different rates of GDP ….. similar falls of GERD/GDP

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2.2

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

0

20

40

60

80

100

120

140

plrdgdp

rusrdgdp

plgdp

rusgdp

PL-GDP

RUS-GDP

-60

-50

-40

-30

-20

-10

0

La

tvia

Lith

ua

nia

Slo

vak

Re

pu

blic

Bu

lga

ria

Ro

ma

nia

Est

on

ia

Slo

ven

ia

Hu

ng

ary

Cze

ch R

ep

ub

lic

Po

lan

d

Clients short of funds

Too much competition

Market price low

Business not sufficiently well-known

Lack of marketing ability

Change in proportion of demand side difficulties of enterprises today (2001) and at start up (established in

1998)

… while demand side constraints have improved ….

… but, this improvement in demand side conditions has not been followed by equally strong improvement in supply side conditions

-10

-5

0

5

10

15

20

Latvia Lithuania Slovak

Republic

Bulgaria Romania Estonia Slovenia Hungary Czech

Republic

Poland

Lack of funds

Limited access to credit

Non or late paying customers

Limited access to trained workers

Lack of technology

Lack of raw materials

Change in proportion of supply side difficulties of today (2001) and at start up (established in 1998)

GERD as share of GDP (%)

0.2

0.7

1.2

1.7

2.2

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Bulgaria

Czech Republic

Estonia

Hungary

Lithuania

Latvia

Poland

Romania

Slovenia

Slovak Republic

Russia

Moldova

Belarus

Decline…. stabilisation …….and partial recovery in early 2000 ….…

The shares of R&D funded by business enterprise sector have remained relatively stable > business enterprise sector has shared the destiny of the overall decline, absolute and relative, of R&D sector Sh ar e o f R& D p e r fo r m e d in b u s in e s s e n te r p r is e s e cto r , 1992-99

0

10

20

30

40

50

60

70

80

90

1992 1993 1994 1995 1996 1997 1998 1999

% o

f to

tal G

ER

D

Bulgar ia

Cz ec h R

Es tonia

Hungary

Latv ia

L ithuania

Poland

Romania

Rus s ian F

Slov ak R

Slov enia

GERD financed by industry (in %)

0

10

20

30

40

50

60

70

80

90

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

BG

CZ

EE

HU

LT

LV

MT

PL

RO

SI

SK

… while the overall share of industry in R&D funding (except Slovenia) remains stable …. i.e, no structural change

Innovation expenditures in manufacturing by type of costs

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

EU Slovenia CzechR Russia Slovakia Poland Latvia Romania Turkey

Other

Mach&Eqpm.

R&D

Innovation in CEE, RU and TK is mainly about equipment (cf. low R&D intensity of innovation)

Why growth does not automatically generate demand for R&D?

A large share of high/medium tech…. but without R&D

Employment in high-medium tech manufacturing vs BERD/GDP

0

0.5

1

1.5

2

2.5

3

3.5

0 2 4 6 8 10 12

High-medium tech empl/mnfg

BE

RD

/GD

P

S

FIN

DCH

CZSL

HUPL

I

UKFB

DK AIRL

SKBG

E

RO

NONO

EEPLTELCYLV

Areas of competitiveness - Very important and extremely important

0

10

20

30

40

50

60

70

80

90

100

Quality controlassistance

Management People andtraining

Patents,licences, R&D

% o

f fi

rms

EE

SI

PL

SK

HU

… the key source of competitiveness is in production capability

Areas and sources of competitiveness

CEE-5

Quality control

assistanceManagement

People and training

Patents, licences,

R&DOwn company 0.82 0.79 0.72 0.50

Foreign parent 0.61 0.66 0.5 0.57Other foreign buyers 0.55 0.35 0.29 0.31Other foreign suppliers 0.51 0.3 0.26 0.3Other local subsidaries 0.23 0.21 0.19 0.16Other local buyers 0.52 0.36 0.3 0.28Other local suppliers 0.52 0.32 0.29 0.28Other organisations 0.35 0.32 0.35 0.31

0

200

400

600

800

1000

1200

UK IRL NL S A FIN DK D I B HU F SI E CZ P SK EL HR EE PL LT BG RO LV

Quality: proxy for production capability (ISO9000 per capita)

However, mastery of production capability in the overall economy is still low....

Change in number of ISO9000 certificates, 2001/1999 (%)

0%

50%

100%

150%

200%

250%

300%

350%

400%FI

N LU

KD

K AIR

LN

L SFR BL TK D HSK LV C

Y SI E PEL LT

IBG PL EE R

O MT CZ

….though, taking place at a high rate.

Technology developing vs. technology using capabilities

TechnologyDevelopmentand Creation

Technology Use, Operation and Maintenance

Source: Arnold et al (2000)

R&D

Design and Engineering

Technician and craft skills and capabilities

Basic operators skills and capabilities

… In nutshell, evidence points to disjunction between production and technology capability

Catch-up in production capability

(use of technology)– Significant rise in labour productivity

(partial proxy for technology use)– Growth of ISO9000– High gap in productivity of FDI

subsidiaries vs local firms (Rojec, Hunya)

Catch-up in technology capability (technology

development)?• Micro evidence

– from technology use to technology development: limited functional upgrading

– Electronics: limited network alignment– firm case studies: successful business

models are confined on production capability (cf. Videoton)

Catch-up in technology capability (technology

development)?• Macro evidence

– Labour force skill structure (high share of vocational skills)

– FDI spillovers: negative or absent – Low and stable GERD/GDP– EIS trends: falling behind

• Summary: – Micro – mixed evidence– Macro- not ‘catch up’ but ‘hanging on’ – Local firms: the weakest link

EIS trend

Innovation Scoreboard Trend (average based on 10 indicators)

0

10

20

30

40

50

60

EU TR BG SK CZ LV CY EE LT SI HU PL RO

8 out of 12 ACCs are falling behind in knowledge based activities

Common structural weaknesses of innovation systems of the CEECs

• Inovation activity is restricted to few large domestic enterprises which invest comparatively high share of sales into innovation

• SMEs : the weakest part of innovation system > very small share of innovative SMEs (except EE)

• Foreign firms are investing comparatively more into R&D and innovation than domestic firms > big productivity gap between domestic and foreign firms

• Very weak linkages between domestic LE and SMEs, and between FDI and domestic firms > fragmented innovation systems

Innovation policy: from ‘surrogate modernisation’ to search for own

solutions• Early/mid 1990s: focus on bridging institutions

– Academy – industry relations; S&T parks; commercialisation– Implicit assumption that public R&D and demand (final and

intermediate/firms) are not the problem but the LINK between them

– Neglect of production capability (except. SI) and of firms as a source of supply of technology

• Late 1990s/2000s: differentiation among countries in the scope of innovation policy– Focus on production capability (cf. Slovenia)– Degree to which innovation policy is oriented towards FDI

(Hungary)– Focus on R&D in industry vs R&D for industry (Estonia)

National innovation capacity framework

Absorptive capacity

R&D supply Diffusion and linkages

Demand (market pull)

Number of innovation policy mechanisms of the CEE acceding and candidate countries (end of 2003)

Absorptive capacity and human capital

Generation of new knowledge (R&D)

Diffusion of knowledge and networking

Demand for innovation

Total

Bulgaria 1 1 1 3 Czech R 4 4 3 11 Hungary 3 3 4 10 Estonia 1 3 5 1 10 Latvia 1 2 1 4 Lithuania 1 2 1 1 5 Poland 1 3 1 3 8 Romania 2 2 4 8 Slovakia 2 2 1 5 Slovenia 3 4 5 2 14 Total 6 25 26 21 78

Key challenge of innovation policies in CEECs

• ‘R&D/High tech’: the dominant paradigm in innovation policy in CEECs despite data which suggest that innovation in these countries is very much linked to equipment and with limited R&D component

• This leads to very narrow ‘client base’ of innovation policy and neglect of huge untapped demand related to quality, diffusion and knowledge absorption

• Value chain vs. NSI: how to reconcile and integrate two policies– Location of investments– Extent and depth of technology intensive activities– Spillovers to local firms

• FDI: marketing country for FDI• Innovation policy: exclusively R&D/high tech focus• Models to follow? Models to be developed?