Chairman OECD Working Party on SME and Entrepreneurship KEY POLICY CHALLENGES IN FOSTERING INNOVATION International Conference “Industry and Innovation 2014” Sofia, 30-31 October 2014 SALVATORE ZECCHINI Chairman OECD Working Party on SME and Entrepreneurship

Can a boost to R&D and Innovation (RDI) prop up currently stagnating economies ? Multifactor Productivity (MFP) differences can explain part of differences in per-capita income RDI is a major component of Multifactor Productivity MFP has provided a sizeable contribution to economic growth

From innovation policies to growth: A model link

MFP drives per-capita GDP differences (Source: OECD, Johansson et al

MFP as a main contributor to economic growth (Source: OECD, Johansson et al. 2012)

Gvt expenditure in RDI rose even during the last major economic crisis (Source: EU Lessons…2013)

But in countries most affected by crisis RDI funding first had an anti-cyclical effect, then declined

Bulgaria’s funding to RDI followed the same pattern (Source: EU Innovation Scoreboard 2014)

Bulgaria’s performance in innovation is not so unfavourable (Source: EU Innovation Scoreboard 2014)

Focus: Main challenges for government support policies in RDI Is there a need to support RDI, particularly at a time of fiscal stringency? Who should be the target for support? How should support be structured? What are the most appropriate means to support? How to ensure efficient and effective implementation?

Innovation is a process involving many actors, forms and institutions in a non-linear sense. Product of continuous interaction of many actors It is affected by economic, social and regulatory environment Prone to systemic failures Need to intervene on the many components of national innovation system The two main weak links are SMEs and finance

Bulgaria’s innovation indicators (Source: EU Innovation Union Scoreboard 2014)

Barriers to innovation SMEs difficult access to outside finance, lack of competition in the market place, unfavorable investment climate, the social culture, some regulatory constraints, the weak linkages between large and small companies, the dearth of cooperation between universities and entrepreneurs, particularly the start-ups.

Where to intervene? On the main shortcomings of the national innovation system (Data source: EU Innobarometer 2014)

Factors hampering innovation (% innovating firms with 10 to 49 employees, 2010 – Source: OECD)

Factors hampering innovation (% innovating firms with 50 to 249 employees, 2010 – Source: OECD)

Factors hampering innovation (% innovating firms with more than 250 employees, 2010 – Source: OECD)

Still, 2/3 of surveyed firms innovated in the last 3 years (Data source: EU Innobarometer 2014)

SMEs invest in R&D and innovate less than large firms

SMEs introducing product and process innovation in 2008 and 2010

Surprising: few innovative firms received any funding support (Data source: EU Innobarometer 2014)

SMEs generally received much less government aid than large firms

Tax incentives benefit more multinational corporations than start-ups and SMEs

Equally surprising: the majority of supported firms did not consider public support important!

What policy approach, to overcome system failures, government failures, SMEs hardship, financial market failures, incomplete markets for funding RDI?

Conclusion: there is no policy model valid for all the countries. Policy approaches are rather homogeneous across countries, with limited differences in their focus in spite of wide disparities in innovation performance Conclusion: there is no policy model valid for all the countries. The choice has to be based on the country’s characteristics and its validity tested on the ground in terms of innovation performance Barriers to innovation: SME financing problem, low competition, poor investment climate, social culture, low technology transfer, weak linkages between firms and universities, few collaborative projects

Government needs to develop a long term vision and a strategy with clear goals Issues: Policy governance Top-down approach vs. bottom-up The latter is more successful Create an innovation constituency within private business sector Choice of policy instrument mix Poor implementation and bureaucracy

Essential support Develop high skills, training, mentoring of firms, incubators, accelerators Improve firms’ absorption capacity and business environment Promote Production and Diffusion of innovation New standard settings and regulations Debt and equity funding of start-ups, innovative firms Policy coherence and effective policy implementation Public procurement Fine tuning of tax incentives (incremental investment)

Invest in an innovation culture within the society at large, not just the entrepreneurs Main policy message resulting from more than a decade of experience: Create an enabling environment conducive to research, development & innovation and Generate a culture that promotes innovation. Firms themselves should have an important role in shaping government policy and monitoring its implementation.