Innovation Policy and Economic Recovery Paulo Correa, World Bank VIII Knowledge Economy Forum Insead, Fontainebleau, France April 28 –May 1, 2009 How innovation policy can help Croatia to reach and sustain higher rates of economic growth

2 Croatia’s economic convergence Raising living standards and among the best social indicators in the region Yet, growth trajectory was not necessarily sustainable From a growth pattern based on investments (particularly housing) and domestic consumption towards a pattern based on productivity/innovation and exports Output per capita relative to the US and EU

3 The impact of the global crisis Holding the process of Croatia’s convergence: recession/ growth decelearation Companies postpone investments in modernization (productivty) and innovation Finance unavailable or too expensive; unclear returns (higher uncertainty) Less public support: fiscal adjustment  reduction of public support to R&D in Croatia Stimulus packages elsewhere not always take innovation and R&D into consideration Reduction R&D expenditures elsewhere  lower spill-over effects Adoption of short-term measures that affect long-term growth potential Small differences in growth rates over a long period translate into big difference in the level of living standards: Following recent growth trends, Croatia’s per capita income in 50 years would correspond to 60 percent the U.S. level Alternatively, Croatia could reach the same outcome in less than one-third of the time by raising its growth rates by percentage points and sustaining such rates for a bit more than a decade.

4 Why innovation policy now? Unleashing Croatia’s untapped knowledge resources is an opportunity The use of untapped knowledge resources would raise innovation and productivity in the economy Smoothing the impact of the crisis and better positioning Croatia for the upturn R&D investments allow the introduction of new/better products and processes in the market Start up companies (knowledge based), higher efficiency Higher competition, exit of less efficient firms and concentration of production in more efficient firms (Schumpeterian competition), ultimately the engine of growth in market economies

5 The Impact of R&D Expenditures is High EmploymentHuman capital ServicesAdministrativ e burden R&DTotal GDP (1)(2)(3)(4)(5)(6) Croatia Poland Czech Republic Romania EU Source: WorldScan simulations. Note: The numbers in columns (2)-(5) are relative changes from the policy simulations in the previous column in the year In column (1) and (6) the numbers are relative changes from the baseline. A static general equilibrium approach – World Scan simulation: Effects of the five Lisbon targets in 2025 Increasing R&D from 1.2 to 3.0 percent would raise Croatian GDP by 6.0 percent in 2025 and by 8.2 percent in 2040

6 Technology diffusion is relatively advanced and their impact on firm productivity is also high An increase of 10 percent in the share of workforce using computer in Croatia would be associated to an increase in productivity in the rage of 5 -6 percent

7 The untapped innovation resources Little innovation and slow catch up

8 Which policies? Raising total and business investment in R&D Total R&D expenditure is growing but its productivity (patents/R&D) is comparatively low Still low R&D as share of GDP Low share of business R&D in total R&D Euro 1.6 Million additional funding for RAZUM program, a soft loan for financing private R&D Simplification of SPREAD program, a matching-grant for the collaboration between local research institutes and SMEs

9 Which policies? Enabling the commercialization of publicly funded research Inadequate incentives for applied R&D and commercialization of results from publicly-funded research (universities and RDIs) Three technology transfer offices established (Rudjer Boskovic Institute; University of Zagreb and University of Rijeka) Technology-parks: University of Rijeka and (possibly) Zagreb

10 Which policies? Start-up of knowledge- based companies: Rudjer Medicol Cyclotron; and Rudjer Medicol Diagnostics a spill-overs of RBI’s Initium Futuri – a company founded by four undergraduates from the Faculty of Organization and Informatics (University of Zagreb) to provide innovative ICT solutions in tele-medicine. Funding of EUR provided by RI has enabled establishing a spin-off company, secure intellectual property rights and finance part of the initial operational costs.

11 Which policies? Mitigating the scarcity of human resources for R&D Croatia’s share of graduates in science and technology programs (5.6%) is lower than most countries in the region The Unity through Knowledge Fund is linking Croatia’s researches living abroad with local scientists and the business sector (from Brain Drain to Brain Circulation)

12 Enabling Croatia’s firm to adopt modern technologies: The Nova Gradiska Techno-Center Training in CNC technology, metal processing and measurement techniques Business & Marketing services : Business counseling, planning and development Engineering & Technology services for R&D-based companies Potentially serving 1,200 SMEs Which policies?

13 Innovation policy and economic recovery Unleashing Croatia Innovative Potential The current agenda Raising R&D expenditures by encouraging private R&D Enabling the absorption of human resources demanded for the research and development sector Facilitating the commercialization of research Enabling the enterprise sector to further absorb technology, particularly ICT Some remaining challenges Eliminating regulatory bottlenecks for the development of a venture capital industry Fostering the restructuring of public R&D institutes by declining earmarking funding Researcher-level incentives for diversification of revenues Consolidating a pro-entrepreneurship mindset among scientific community and among graduate students

14 In sum … Policy-makers should be concerned about policies and reforms that will define the long-term growth prospects of the economy, despite the global economic crisis By unleashing Croatia’s innovative potential, an innovation policy focused on raising business R&D and encouraging the commercialization of publicly funded research could contribute for the acceleration of economic growth And thus better positioning Croatia for the upturn of the global economy Thank You !