Lisbon and Croatia Zagreb, Does Lisbon work for Croatia? with an emphasis on innovation Arjan Lejour prepared for the international conference 2008 on innovation, competitiveness and growth Partly based on background paper prepared for the World Bank Report Croatia --EU Convergence

Lisbon and Croatia Zagreb, Introduction Focus on Croatia and Lisbon reforms Capture question 1: In what ways do human capital accumulation and innovation development contribute to economic growth? Macro perspective Broad picture: not specific on micro issues barrieres to innovation etc. Applied work: CGE model WorldScan

Lisbon and Croatia Zagreb, Conclusion Lisbon matters for Croatia: If R&D targets are reached: 6% increase in GDP. ► Only employment target delivers (much) more ► Be careful: “What if analysis” ► But message is clear: big benefits ahead! Policy message: wait not for EU accession, own reform policies pay off ► But joint forces may help for innovation and R&D: ► Croatia could benefit substantially from spillovers Policy message: improve transmission channels for spillovers ► More trade and FDI. ► Quarantee absorptive capacity

Lisbon and Croatia Zagreb, Economic growth Y = F( A, L, K) GDP (Y) is a function (F) of TFP (A) Labour (L) and Capital (K) Labour is split in low (L) and high-skilled (H) Capital is split in R&D stock and a capital stock A is a function of ► R&D spillovers from abroad, ► level of regulation and competition ► Technology ► …..and other factors

Lisbon and Croatia Zagreb, What Lisbon does is Raising A through ► Improving internal market, ► Reducing adminstrative burden, ► less regulation, ► and through foreign spillovers. Raising L through employment target Raising H through ► scholing and on the job training ► increasing employment Raising R through increasing R&D expenditure K also affected by measures like venture capital

Lisbon and Croatia Zagreb, What it could deliver!

Lisbon and Croatia Zagreb, Seeds for innovation in Croatia Doctorate students in science and technology fields – 0.06% in Croatia, 0.26% in EU27 ► Total (% of the population aged 20-29) In graduate ST 13 per 1000 in EU and 6 per 1000 in Croatia Employment in KIBS EU 33% Croatia 23% Employment in high tech sectors EU 6.6% Croatia 4.7% Miss numbers on broader innovation indicators ► except on R&D Source: Eurostat

Lisbon and Croatia Zagreb, R&D expenditures in 2006, selected countries (% GDP)

Lisbon and Croatia Zagreb, Framework: WorldScan General equilibrium and micro foundations Interaction: markets, countries and sectors ► 26 countries, 10 sectors Imperfect competition in products markets ► Free entry and exit Dynamic (recursive) model Econometrically underpinned ► consumer demand, savings, capital mobility, R&D spillovers

Lisbon and Croatia Zagreb, R&D in WorldScan R&D expenditures cumulate in R&D stock Firms decide on optimal R&D stock R&D produced in separate R&D sector Estimated R&D spillovers in productivity ► own sector ► other sectors ► foreign sectors Social return to R&D set at 25% ► Lower end of econometric estimates R&D intensity falls in baseline ► services economy ► larger share of new member states

Lisbon and Croatia Zagreb, R&D simulations Target: EU expenditure at 2.7% GDP in 2015 ► Country: target in national action plans are used. ► Proportional increase in R&D stock: 2025 ► After 2025: falling R&D (services economy) Instrument: subsidy ► 3% expenditure target met over ► proportionally to R&D spending by sector ► A subsidy rate of 54% for Croatia in 2025 (1.8 bn US$) R&D stock more than doubles

Lisbon and Croatia Zagreb, Outcomes GDP increase by 6% (in line with new MS) High tech sector benefit most, but also other manufacturing sectors Most tradable sectors, exports increase by 13%, improvement in competitiveness About 50% of this is due to productivity spillovers from importing. ► for open economies even larger.

Lisbon and Croatia Zagreb, Spillovers for R&D policy

Lisbon and Croatia Zagreb, Qualifications No diminishing returns ► Some countries: increase R&D stock % Subsidy 100% effective ► no additionality problem No disincentives effects of taxation Ignore crowding out, scarcity of scientists ► Interaction skills and R&D target No other policy instruments

Lisbon and Croatia Zagreb, Increasing spillovers Channels are trade, FDI, people Much FDI potential and trade ► TI perception index is low (FDI) ► Transnationality index low (UNCTAD) Increase absorptive capacity ► human capital ► knowledge workers ► own R&D, at least public, emphasis on diffusion and development.

Lisbon and Croatia Zagreb, Central and Eastern Europe: openness (transnationality index)

Lisbon and Croatia Zagreb, Transparency (TI corruption index, 2006)

Lisbon and Croatia Zagreb, Prospects According to OECD FDI in SE Europe is below its potential. Stocks could be 50%-80% higher ► regulatory reform ► anti corruption ► tax administration Trade could increase substantially: ► accession to EU’s Internal Market ► including new IM policy initiatives ► better institutions

Lisbon and Croatia Zagreb, Conclusion Lisbon matters for Croatia: If R&D targets are reached: 6% increase in GDP. ► Only employment target delivers (much) more ► Be careful: “What if analysis” ► But message is clear: big benefits ahead! Policy message: wait not for EU accession, own reform policies pay off ► But joint forces may help for innovation and R&D: ► Croatia could benefit substantially from spillovers Policy message: improve transmission channels for spillovers ► More trade and FDI. ► Quarantee absorptive capacity

Lisbon and Croatia Zagreb, Literature The new Lisbon Strategy; An estimation of the economic impact of reaching five Lisbon Targets (CPB Document 104) The new Lisbon Strategy; An estimation of the economic impact of reaching five Lisbon Targets International spillovers of domestic reforms: the joint application of the Lisbon Strategy in the EU, (CPB DP 105) International spillovers of domestic reforms: the joint application of the Lisbon Strategy in the EU forthcoming background paper prepared for the World Bank Report Croatia --EU Convergence. The economic effects of Croatia's accession to the EU, (CPB document 154) The economic effects of Croatia's accession to the EU FDI in Services: Recent Developments and Prospects in Europe FDI in Services: Recent Developments and Prospects in Europe