1. Innovation Policy in Candidate Countries: the challenges* INNOREGIO International Conference On Dissemination of Innovation Thessaloniki, 16 & 17 May 2002 *Studies funded by the European Commission, DG Enterprise, Innovation Policy Division Presentation by Alasdair Reid ADE S.A., Belgium www.ade.bewww.ade.be / alasdair.reid@ade.bealasdair.reid@ade.be

2. 2 Why a study on innovation policy in candidate countries ?  EU ‘acquis’ on innovation Green Paper (1995), Action Plan (1996), Communication (2000) “Innovation in a knowledge driven economy”;  but low visibility in negotiation procedure - no specific chapter, etc.  Objective : “examine and analyse the current framework conditions for selected innovation issues”.

3. 3 Priority issues of the study Innovation policy framework  Major actors.  Policy developments.  Data on innovation performance.  Legal and administrative environment. Fostering human resources for innovation  Teaching and training for innovation.  Awareness and use of innovation management tools. Business innovation support measures  Research-industry co-operation.  Support for technology based start ups.  Business networks.

4. 4 Two separate studies  First study (May 2000 to July 2001) covered : Cyprus, Czech Republic, Estonia, Hungary, Poland and Slovenia (CC6) Carried out by ADE in co-operation with School of Slavonic and East European Studies (UK), MERIT (NL) and national experts;  Second study (October 2001 to December 2002) covering Bulgaria, Latvia, Lithuania, Malta, Romania, Slovakia and Turkey (CC7) Carried out by ADE in co-operation with SSEES (UK), Logotech (Gr) and national experts.

5. 5 Six key questions:  How did the transition process influenced the potential for business innovation ?  Where do the candidate countries stand in terms of innovation performance ?  Is there a legal and institutional environment conducive to stimulating innovative activity?  Who is responsible for innovation policy matters?  Is there an innovation policy in each country ?  What types of initiatives have been taken in specific areas of innovation policy

6. 6 How has the transition process influenced business innovation: key conclusions  Economic growth cannot be sustained by the same factors (reorientation of markets, low-cost base for FDI serving EU markets, etc.) as during the nineties : new mechanisms for supporting innovation and industrial upgrading will be needed if productivity growth is to be sustained.  New firm creation is brisk and more often due to highly educated people but has not created a group of smaller more innovative firms. Barriers to growth in part due to inadequacy of financial system but more attention need to be paid to underlying incentives for entrepreneurs by CC6 governments  Restructuring of the enterprise sector has been led in majority of CC6 by FDI. Led to situation of dual economy... Attraction of (high-tech) FDI remains a key priority - but EU State Aid rules will limit future support - need to switch attention to fostering spill-over and linkages (technology, know-how) to local economy.

7. 7 How has the transition process influenced business innovation: macro-economic trends  Most countries benefited from high growth rates from about 1995 onwards Yet by 2000, the CC6 remain at the lower end of EU rankings in terms of income per capita.  Commission forecasts suggest growth 1-2% above EU for 2000-02 maintaining high rates essential for EU cohesion will require “pro-growth” policies.

8. 8 How has the transition process influenced business innovation: productivity  Strong fluctuations in rates of productivity growth - driven by “defensive restructuring”;  Rate of growth has slowed suggesting that initial sources of growth and productivity are exhausted  Innovation and technological change must complement cost cutting and layoffs if growth is to be sustained.

9. 9 How has the transition process influenced business innovation: trade liberalisation  Trade/GDP figures indicate major differences amongst CC6: Estonia and Slovenia are most integrated in world economy;  Shift over time from export of labour intensive industrial products toward increased share of skill, capital and technology intensive products.  But largely driven by FDI.

10. 10 How has the transition process influenced business innovation: foreign direct investment  FDI/GDP rates comparable to to high income EU countries; FDI has brought capital but also access to technology, business processes, etc.;  Result is a large difference in productivity & profitability between foreign & domestic owned firms in CC5 Trends suggest gap is increasing and leading to dual economy.

11. 11 Where the do the CC6 stand in terms of innovation performance  Bias of education systems to vocational training led to low creativity and flexibility plus skills-mismatch for “new economy”;  Low levels of public expenditure on R&D and low levels of commercialisation (knowledge diffusion);  Potential for catching up based on new technologies is severely restricted by weak demand for R&D by business sector;  Lower number of innovative small firms in CC6 - and weakness in (venture) capital markets is key barrier to growth.

12. Six Applicant Countries: innovation scoreboard 2001

13. 13 A legal environment conducive to innovation ?  International appraisals underline progress but little attention to innovation impact of legal reform process;  State aid policy : incompatible aids (for FDI) and low “incentive effect” of R&D schemes (e.g. Hungary);  Administrative simplification : gaining political priority - number of initiatives - new private entrants key to profitability and innovation;  Corporate taxation: only Hungary has tax benefit for business R&D - debate in several countries over merits;  IPR: compared to EU, still low priority - few identified schemes to support business in patenting, etc.

14. 14 Institutional framework for innovation policy  Majority of governments attribute innovation to economics ministry Hungary, Romania and Malta - Ministry of Education/Research; Poland and Turkey - State Committees for Research however, no clear remit for co-ordination - implementation of policy left to ‘line’ ministries.  Innovation/technology agencies exist in only a minority (Estonia, Turkey) re-organisation of agencies and intermediary structures ongoing: concern about effectiveness of delivery (low level of take-up of industrial R&D support) and sustainability of BICs, etc.  Advisory bodies play weak role and dominated by “science”; But Growth of ‘innovation constituency’ during second half of nineties - largely through external funding (IRC, BICs,...).

15. 15 Institutional framework: Estonia Executive level Implementing agencies Types of support Academy of Sciences Ministry of Economic Affairs Estonian Patents Board Tiger’s Leap Foundation: new technologies to schools & raising awareness. Patents, IPR issues Ministry of Education Science & Research Council Technology Agency ESTAG Project funding of R&D in firms & research institutes Technology & Innovation Division Estonian Business Development Foundation “Enterprise Estonia” Programmes for raising awareness, spin-offs and innovation management Technology and Innovation Council Science Competence Council Planning & managing policy Grants for Science Projects Other agencies: Investment, Export, etc Financial support for innovation support structures: science & technology parks; centres of competence. Estonian Science Foundation Estonian Government

16. 16 Innovation policies in the candidate countries – fact or fiction?  Only 2-3 ‘innovation policy’ documents : Ambitious goals "national innovation system” (Turkey); Policy documents reflect EU goals (Baltic states).  Innovation as a policy issue best embedded in Hungary, Turkey and Baltic states (Estonia) But lengthy time lags to adopt policy framework ; Significant gap between policy aims and funding available – low to non-existent;  Bulgaria, Czech Rep., Cyprus, Malta, Slovakia: l ack structured and coherent debate on innovation as a distinct policy objective.

17. 17  Hungary leads the field in terms of longevity and range of instruments –policy focus on FDI;  Estonia - strong emphasis on innovation and ambitious programmes foreseen; other Baltic states playing catch-up;  Poland and Slovenia were precursors but policy declarations not followed by implementation;  Czech and Slovak Republics - traditional focus on science and research - some recent effort to create linkages;  Romania & particularly Turkey have policy framework but suffer from lack of macro-economic stability;  Bulgaria lags behind with limited debate on high-tech parks;  Cyprus & Malta - few ad hoc initiatives and little policy awareness – issue of lack of own knowledge base. Innovation policies in the candidate countries – fact or fiction? (II)

18. 18  Higher recognition of importance of innovation not matched by integrated policy framework;  Policy design driven by concepts and not analysis (lack of data and studies, weak policy fora, evaluation, etc.).  Gap between policy declarations and implementation (Euros, co-ordination across line ministries, etc.)  Low awareness of firm needs when designing schemes and innovation/technology infrastructure (reflected in limited use of R&D loan schemes). Innovation policies in the candidate countries – fact or fiction? (III)

19. 19 Issues: Innovation Management Tools  Use of IMT not yet widespread: Only reliable indicator is ISO certification - Czech Rep, Hungary, Slovenia ahead - average growth in CC6 higher than in EU;  Strong statistical link between trade- openness and rate of penetration of international quality standards (used as proxy for IMT awareness).  IMT have not been the focus of significant policy initiatives: first funding programmes planned for 2002 (Estonia).

20. 20 Key conclusions (I)  Growing recognition of importance of innovation; end of transition and “recipes for change”; need to switch from defensive to offensive restructuring; debate on role of R&D vs dissemination of innovation.  But, considerable problems remain with framework conditions which constrain innovation activities: limited access to finance & small capital markets; unfinished privatisation & restructuring; continued uncertainty of legal environment for business; changes to state aid policy in line with EU ‘acquis’.

21. 21 Key conclusions (II)  Paradox of highly educated human resources vs skills mismatches high share of population with specialised vocational skills; limited practical experience for managing change (low IMT awareness); low priority to training and policy incentives.  Uneven progress to an “information economy” different indicators place different countries in lead; infrastructure improvements not matched by “e-business developments” (cost factors).  CC5 economies have relatively high share of industry (in terms of employment, etc.) compared to EU15 : greater emphasis on transferring knowledge needed if industry is to remain competitive.

22. 22 Key conclusions (III)  Limited pool of small innovative firms...; Small and large domestic firms still struggling to sell and restructure rather than innovate; High rates of new firm creation but problems in sustaining growth (investment)  Markedly higher productivity and profitability of foreign owned firms Linkages to and attraction of FDI remain a key policy aim (but conflict with EU state aid rules;) FDI seen as a vector for technological and organisational change.

23. 23  Challenge 1 : Promote a culture open to innovation and creativity Options for the candidate countries  Undertake a review of teaching of creativity and innovation in education systems(2003); amend teaching practices and materials (2004-5);  Develop programmes to diffuse IMTs in enterprises;  Identify exemplars of innovation in enterprises - promote through innovation awards (annually)  Foster business led forums on innovation and skills. Options for the Commission  Promote a special innovation award for CC firms.

24. 24  Challenge 2 : Place innovation at the core of further legal and regulatory reforms Options for the candidate countries  Include impact on innovation as a criteria when drafting new legislation & draw on EU best practice;  Investigate importance of law governing IPR and cost/administrative aspects of IPR protection;  Appraise in line with EU state aid rules, the possibility of introducing tax incentives for R&D and hiring personnel. Options for the Commission  Ensure that CC have early access to initiatives aimed at diffusing good practice on regulatory aspects of innovation.

25. 25  Challenge 3: Increase the number of (small) innovative firms Options for the candidate countries  Strengthen seed capital/start-up funds, linked to viable intermediaries & research structures;  Consider possibility for guarantee funds, etc. as means of increasing incentive to undertake risky projects;  Develop funding measures for “knowledge carriers” or mentoring schemes in firms. Options for the Commission  Consider a specific initiative in favour of high-tech start-ups in CC.

26. 26  Challenge 4 : Strengthen diffusion of knowledge in the economy Options for the candidate countries  Revise award criteria for pre-competitive research funding to increase importance of industrial exploitation;  Adapt performance criteria for industrial research organisations to ensure pro-active approach to smaller firms;  Provide funding for collaborative projects involving groups of smaller firms with research infrastructures; Options for the Commission  Support preparatory actions to assist manufacturers in the CC6 to prepare for 6th RTD Framework programme.

27. 27  Challenge 5 : Establish a policy- making process conducive to innovation policy Options for the candidate countries  Organise “CC-CIS” (2002-2003);  Establish innovation policy units - design, co-ordinate and evaluate initiatives for innovation;  Support for business led forums on innovation issues;  Undertake technology foresight (by 2004). Options for the Commission  Part-funding/TA for a CC-CIS task-force;  Pre-accession funding for pilot actions arising from RIS/RITTS type initiatives.

28. 28 For further information & copies of study Innovation Help-desk DG Enterprise, European Commission Email: innovation@cec.eu.int innovation@cec.eu.int http://www.cordis.lu/innovation-smes/src/studies.htm