Enhancing South East Europe Competitiveness through innovation and human capital development Bank of Greece-University of Oxford (SEESOX) Conference Athens, February 11 2011

Overall business climate issues in South East Europe Agenda Overall business climate issues in South East Europe Supporting SMEs in South East Europe Boosting Innovation and skills in South East Europe

Business Climate as measured by the Investment Reform Index 2010 IRI – SEE average score Main improvement points – Investment Policy and Promotion Land title registration and cadastre is slow Permits for foreign workers are cumbersome in BiH and FYROM FDI Incentives on sub-national level need more clarity FDI-related capital transfer remain in AL, SRB and BiH One-stop shop for investors (IPAs to approve permits) Weak aftercare in BiH, BG, MNE and RO Legal frameworks for PPPs to be developed Need to improve IP rights enforcement Note: (1) Dimensions on SME policy, which was derived from the SME policy index and on infrastructure were not scored

Business Climate as measured by the Investment Reform Index 2010 IRI – SEE average score Main improvement points – Human Capital Development Basic skills in education system are much lower than OECD average (BG, MNE, RO, SRB) or comparable to it (HR) Misalignment between profile of skills supplied by the education system and the needs of the private sector Little or no government strategy on Continuous Education and Training High tax wedges on labour, except in AL, BG Temporary labour contracts restricted to specific purposes (seasonal work, replacements) Note: (1) Dimensions on SME policy, which was derived from the SME policy index and on infrastructure were not scored

Business Climate as measured by the Investment Reform Index 2010 IRI – SEE average score Main improvement points – Trade Policy and Facilitation Implement agreement on agricultural tariffs (manufactured product tariffs already minimal) Monitor and decrease non-tariff barriers to trade: sanitary and phytosanitary, technical Continue integration in multilateral trade system (WTO members: AL, HR, FYROM, MD: negotiating: BiH, SRB, MNE) Main improvement points – Access to Finance Develop competition in banking sector Improve credit information and credit guarantee schemes Develop stock markets and venture capital/business angel networks Develop export guarantee schemes Note: (1) Dimensions on SME policy, which was derived from the SME policy index and on infrastructure were not scored

Business Climate as measured by the Investment Reform Index 2010 IRI – SEE average score Main improvement points – Regulatory Reform Regulatory Impact Assessment to be developed Improve co-ordination of parliaments and governments Formalize dialogue with civil society Main improvement points – Tax Policy Analysis Improve simulation instruments such as corporate income tax microsimulation, tax wedge model, marginal effective tax rate model Assess cost of compliance for SMEs Note: (1) Dimensions on SME policy, which was derived from the SME policy index and on infrastructure were not scored

After the crisis, support to SMEs and innovation is seen as key to sustainable growth

Overall business climate issues in South East Europe Agenda Overall business climate issues in South East Europe Supporting SMEs in South East Europe Boosting Innovation and skills in South East Europe

Overall Conclusions of the 2009 SME Policy Index Good overall progress on the implementation of the European Charter for SMEs However: uneven progress across the 10 dimensions of the Charter: Good progress for policy areas that directly affect operational environment of SMEs (e.g. company registration, regulatory reform, access to finance). More modest progress in introducing targeted policies for specific types of SMEs (e.g. start-ups, innovative SMEs). Even in the cases where such policies have been formulated, the amount of available resources is very low, compared to EU Member States. The contribution of human capital to the region’s competitiveness remains a particular constraint to the Western Balkan economies. Implementation is still in an early phase in some economies.

Detailed recommendations of the 2009 SME Policy index (1/2) Entrepreneurship and training Entrepreneurship to be considered as key competence by education community Co-operation needed among education policy makers to achieve life-long entrepreneurship training Cheaper and faster start-up Compliance phase: strive to balance the need for inspection and compliance with burden on SMEs Need to establish an electronic registry for all companies to create a centre of collection and dissemination of company data Better legislation and regulation Apply the “silence is consent” principle widely Regulatory impact assessment should be further implemented, and redundant legislation eliminated BiH and Kosovo under UNSCR 1244/99 still lack a coherent legislation with an effective institutional framework and strategy Availability of skills Develop training needs analysis to identify skills gaps Promote the training market Improving online access for SMEs Continue developing e-government, notably by developing an e-signature

Detailed recommendations of the 2009 SME Policy index (2/2) Getting more out of the single market Export promotion: provide export insurance and export credit Competitiveness support: targeted measures, monitor impact Taxation and access to finance Increase domestic bank lending by allowing banks to shift to cash-flow lending (without collateral) Lower barriers and costs for transferring remittances Strengthen property rights and contract law Improve credit information and bankruptcy laws Improve credit guarantee schemes Promote leasing, venture capital funds and private equity Strengthening the technological capacities of SMEs Extend support to initiatives establishing inter-firm clusters and networks (+voucher schemes, incubators,… Improve international cooperation through Enterprise Europe network Coordinate policymaking across Ministries in areas such as IP rights, incubators, clusters and skills development

Overall business climate issues in South East Europe Agenda Overall business climate issues in South East Europe Supporting SMEs in South East Europe Boosting Innovation and skills in South East Europe

South East Europe performance on innovation is very low Western Europe average CEE average Upper middle income countries Lower middle income countries Source: Data from Knowledge Economy indicators, World Bank, OECD analysis

What is an innovation system? Social and Human Capital Universities S&T Training and Education Absorptive Capacity ‘Follower’ firms; Intermediate and End Consumers and Professional Users Market for Goods and Services Research Capacity Universities; Govt Laboratories Basic Scientific Research Technology and Innovation Performance ‘Creative’ Firms Applied RTD and Product /Process Development Knowledge Users Knowledge Creators Public Sector Private Sector Source: Nauwelaers, 2003

Public research input and output ranges from insignificant to catch-up with developed countries Source: Data from Science and Technology in the Western Balkans (inco-net), Knowledge Economy indicators, World Bank, OECD analysis

Private R&D input and output are mostly below the average for upper middle income countries Source: Data from Global Competitiveness Review, Knowledge Economy indicators, World Bank, OECD analysis

What can policy do to enhance the Innovation system? The Impact of RTD on Competitiveness and Employment (IRCE), EC, 2003

with the financial support of the European Union Regional Competitiveness Initiative Overview with the financial support of the European Union Objectives: Support medium and long-term competitiveness of the Western Balkans. Provide capacity building support to Western Balkan public administrations via pilot projects. Focus Areas: Human capital development – To address major skills gaps. Innovation – To strengthen innovative capacities and support absorption of technology by the private sector. Duration : 2010-2013 Financial support : European Union (DG Enlargement) Implementing agency: OECD

with the financial support of the European Union Pilot projects with the financial support of the European Union Mechanisms to finance business services in support of innovation (voucher schemes) The establishment of a Competence Research Centre (CRC) Assist the government in conceiving the overall policy framework for innovation Co-operation within the ‘triple helix’ of research-business-government communities Greater time and staff commitment

with the financial support of the European Union Thank you for your attention Alan Paic Principal Administrator OECD Investment Compact for South East Europe Private Sector Development Division Organisation for Economic Co-operation and Development (OECD) Alan.Paic@oecd.org www.investmentcompact.org