Business Environment and Knowledge for Private Sector Growth: Forum Closing Remarks Fernando Montes-Negret, World Bank Sector Director Private and Financial Sector Development Europe and Central Asia Knowledge Economy Forum IV, Istanbul, March 2005

Outline: Closing Remarks Key challenges ahead for the ECA Region Business environment Innovation Skills for the Knowledge Economy Looking ahead: policies for private sector growth Did we meet the Forum’s objectives?

The world is moving fast… …with or without you! Increasing globalization: reduction of transportation & communication costs, increasing global information, increasingly mobile FDI. Rapid pace of technological change and innovation. Increasing competition, driven by trade liberalization and increasingly larger players (e.g., China, Korea, India) Demographic pressures: ECA faces declining and aging populations. Tighter regional integration: Joining a regional club (EU and NAFTA, ASEAN +3) is useful, but not a panacea. EU Membership opportunity, but not a guarantee for success. Carl, Wim Kok

The world is moving fast… …with or without you! Carl

Creating conditions for sustainable growth is key Productivity and growth: firms’ perspective Simplify interactions with the Government Access to credit for start up and operation Environment Business Infrastructure and Logistics costs Labor costs Reduce Costs & Improve Quality of Supply Information costs Technology absorption, adaptation and innovation Knowledge Skills of the labor force

Key constraints to growth Business Environment Costs as % of Sales Key constraints in the business environment in developing and transition economies Key constraints to growth Business Environment Costs as % of Sales 27% 20% 15% 13% 8% World-wide surveys Poland China Brazil Indonesia Tanzania Policy uncertainty is the dominant concern. Improving predictability can increase likelihood of investment by over 30%. Business environment constraints are costly: (>8% of sales) Warrick

Policy-Related Barriers to Competition Stifle Innovation and productivity Warrick

A better Investment Climate for all Policies to reduce regulatory barriers: simplification leading to a better investment climate for all, reducing business risks, costs, and barriers to competition (benefiting consumers through lower prices and more innovative products); Improving predictability of laws, regulations and interpretation of norms, drastically reducing legal/regulatory uncertainty; Provision of a policy basic framework ensuring: stability & security, sensible regulation & tax regime, good infrastructure & logistics, access to finance, and a flexible and fair labor market. Persistence, not perfection in fostering reforms. Fernando

ECA has a Strong Scientific Tradition that does not Translate into Innovation Large S&T base, well-educated workforce, culture of science… …but limited R&D, innovation and entrepreneurship EU Target = 3% Average new EU member states (EU10) = 0.8% How can we move from science to innovation? Technology absorption: get it from abroad Commercialization of local S&T: develop it in-house Increase access to finance for innovation Fernando

Technology Absorption: Attracting FDI, Rooting MNCs Locally and Promoting Linkages Most R&D and technology in non-OECD countries comes from MNCs, but their investment goes mainly to South & East Asia. ECA should become more integrated in the global production network by attracting and retaining FDI, creating linkages between foreign and local firms. Cheap unskilled labor and protected markets not an option Good investment climate; skills; training; quality standards and technology; suppliers networks; logistics and ICT; FDI promotion, including targeting of foreign firms; selected incentives. (Ireland, Malaysia and Singapore cases). Improve capacity of local suppliers with MNCs assistance looking for long term viability Governments have a role to play: matchmaking and information dissemination and financing. Lall/Varney

Wessner/Lindholm/Brett. Commercialization of Local S&T: Get the Scientists Out of Their Ivory Towers! Key to local innovation: strengthen university-firm collaboration and commercialize university research. Requirements: Changes in the IP policy framework: giving IP rights to universities. Change in policies and in the culture of the academic and business worlds: policy makers need to agree on quantity and type of spending in R&D; researchers need to select R&D themes that serve economic growth; the business community has to engage scientists in problem solving. Technoparks and incubators are not enough – without skilled management with links to global markets, they may turn into real estate development projects. In the US, the Bayh-Dole Act, giving universities the right to patent and earn royalties from licensing. Nearly 300 US universities have Technology Transfer Programs today and thousands of new firms are based on university research (e.g., the birth of the biotech industry). Wessner/Lindholm/Brett.

Finance for Innovation: Governments Have a Careful Role to Play Risk Capital Markets / Venture Capital Grants, Credit, Technical Assistance Getting the sequence right: Innovative Skills On Finance for innovation: Matching grants Government risk sharing in private risk capital funds (US, UK, Israel) Make R&D expenditures tax deductible But: Avoid rent-seeking, capture and moral hazard. Protection of Intellectual Property Rights Financial Markets and Financial Information Infrastructure. VC as a new financial industry. Business Environment (Broad) Why VC is not common in emerging markets? It is expensive (% equity);; It requires highly skilled management teams It requires well developed capital markets. Fernando

Venture Capital is not the only way to finance innovation in ECA. Realities of VC: need a significant number of bankable projects. VC is highly selective: 1/200 firms in non-OECD countries get funds. Financing innovation w/o VC: the “Go Forward Plan” Build on your comparative advantages. Remember that technology can be embedded in very traditional products and processes. All sectors can be high-tech! Characterize the deal flow – quality and performance. Go after corporate investors (not financial investors) that do business in your country and have a long-term perspective. Create industry consortia: multinationals and private-public local funds. Why VC is not common in emerging markets? It is expensive (% equity);; It requires highly skilled management teams It requires well developed capital markets. B uild on your comparative advantages and mix and match local and western technologies to provide innovative solutions. Nastas

Human Capital – “Crude Oil” of the 21st Century Requirements of Knowledge-intensive economies 21st century jobs demand new skills and competencies Employment security, not job security: LLL and flexibility Without education innovation will not occur Status Quo Education and training systems are not meeting demands High unemployment despite generally high enrollment and high growth Mismatch of skills and knowledge for future jobs Lack of dynamic private sector (particularly SMEs) to generate employment Education Panels --all

ECA Youth has difficulty applying skills and knowledge acquired at school Policy Challenge: Teaching practical skills Improving performance indicators Aligning general education and vocational training Providing equitable access to life-long learning

Acute Youth Unemployment in Candidate Countries and South Eastern Europe McBride

Complementary roles of Government and Private Sector in skills development Provision of relevant quality secondary education Curricula for flexible and transferable core skills Certification to facilitate the transferability and portability of skills and competencies and recognition of prior learning Quality Assurance and Accreditation for all forms of Lifelong Learning Result: Broader participation and increase labor market relevance Provide Learner-Friendly High-performance Work Environments: Team-based learning Access to Formal and Informal learning opportunities (e-learning) Incentives for employees In-company and external knowledge networks Recognition of prior learning Lifelong Learning

Complementary roles of Government and Private Sector in skills development Public Sector: Develop and implement education policy, curricula, and qualifications frameworks Implement lifelong learning strategies through Public-Private partnerships Private Sector: Education and training provision Provide just-in-time in-company training

Looking ahead: Key policies for private sector growth Stabilize policy environment Implement microeconomic reforms for a better business environment Absorb technology by attracting and retaining FDI and creating linkages between foreign and local firms Improve local innovation by strengthening university-firm collaboration and commercializing university research Governments have a role to play in facilitating access to finance and promoting technology start-ups. Public-private industry consortia are a viable alternative to VC in very early stages. Enable application of knowledge by teaching practical skills Align general and vocational education to improve the skills of the labor force

Did we meet the Forum’s Objectives? Yes IF: Generated new ideas Shared relevant experiences Identified specific lessons in the three critical areas discussed (business environment, innovation and skills) Identified follow-up actions (country cases) Established networks for continuous sharing and learning

Knowledge Economy Forum: Documents www.worldbank.org/eca/ke