Knowledge Absorption and Growth in ECA - The Role of Government January 22, 2008 Itzhak Goldberg, Lee Branstetter, John Gabriel Goddard and Smita Kuriakose Mr. Itzhak Goldberg Advisor, Policy and Strategy World Bank

2 Absorption >>> Innovation Innovation = New to the World Absorption = New to the Firm Absorptive capacity: Firms capacity to assess modify use Absorption e.g. new product, process Upgrade old product, process

3 Channels of Absorption (&Innovation) Trade & FDI Trade & FDI R&D Learning & Brain Circulation Learning & Brain Circulation Knowledge Flows: Patents, Citations Knowledge Flows: Patents, Citations Absorption

4 Channel I: Trade and FDI Surveys of circa 7000 ECA firms show: Export increasing their absorption by about 33% –JV with a multinational increasing their absorption by 41% Policy : international openness

5 Education and training by firms Brain-drain Brain circulation. Models: India, Israel, Armenia Policy: Investment in education and openness to attract returnees Channel II: Learning and Brain Circulation

6 R&D for absorption, not JUST for innovation -- the second face of R&D R&D output does not flow costlessly from developed to developing countries. China invests massively in R&D III: R&D for Absorption & Innovation

7 Channel IV: Patents and patents citations India and China overtake ECA7 Source: Authors calculations based on the U.S. Patent and Trademark Office CASSIS CD- ROM, December 2006 version. The graph compares counts of patents in which at least one inventor is based in one of seven ECA countries, India, or the Peoples Republic of China. The ECA 7 are Russia, Hungary, Poland, Slovenia, the Czech Republic, Bulgaria, and the Ukraine.

8 Market failures may justify government intervention to stimulate absorptive capacity in private sector BUT Policy design needs to account for government failures: capture, corruption, misaligned incentives AND… Role of Government – the Why?

9 Skills and Human Capital –India: Early publicly financed education - critical importance Investment Climate and Governance –Russia: Poor investment climate (weak competition, red tape); governance: corruption, regional government capture by business Pre-Requisites

10 National Innovation System

11 Not in Western textbook: Set R&D Entry/Exit Free Do state R&D Institutes crowd out new institutions? IPRs of R&D Institutes Drain of R&D Institutes on budget

12 R&D Finance: what not to do? Loans >> Risk taking Tax holidays: start ups - no profit, Matching Grants for Consortia – target the Missing Link of University-Business

13 Entry: Own, Manage and/or just Pay ? 1.Privately owned/managed & subsidized 2.Publicly owned & managed 3.Publicly owned & privately managed & subsidized

14 Summary: Absorption > Innovation 1.Openness – free trade, FDI and cross-border K-flows 2.Brain circulation and investment climate 3.R&D: Business-Research Consortia 4.Set Entry/Exit Free 5.IPRs of local R&D