Knowledge and Innovation in Central and Eastern Europe Trends and Issues Jean-Eric Aubert World Bank Institute May 2004

Structure of the presentation Knowledge Economy: What is it? How to benchmark countries? Where do stand the new EU countries? Innovation policy trends and issues in Central/Eastern Europe Data sources: World Bank, OECD, EC

Knowledge Economy and Development Strategies Knowledge and innovation at the core of development strategies Are not just about ICT or high technology,but about broader economic strategies Have to be tailored to specific realities of each country Require coordination across functional areas and among government, business and civil society

Investments in knowledge are growing across OECD...

... as are knowledge-intensive industrial outputs Share of high- and medium-high technology manufacturing in total gross value added (2002) Share of knowledge-intensive “market” services in total gross value added (2000)

Framework for KE: Four Key Functional Areas (WBI) Economic incentive and institutional regime that provides incentives for the efficient use of existing and new knowledge and the flourishing of entrepreneurship Educated, creative and skilled people Dynamic information infrastructure Effective national innovation system ©Knowledge for Development, WBI

WBI/KAM Methodology KAM: 76 structural/qualitative variables to benchmark performance on 4 pillars Variables normalized from 0 (worst) to 10 (best) for 121 countries www1.worldbank.org/gdln/kam.htm Basic scorecard for 14 variables at two points in time, 1995 and 2002 Aggregate knowledge economy index (KEI) ©Knowledge for Development, WBI

KEI variables – Country comparison

Strong Correlation between GDP/Capita & KEI ©Knowledge for Development, WBI

KE and GDP Strong correlation between KE and GDP per capita; how to interpret it? Some countries, notably Eastern Europe (transition economies) ones, have a “ lower ” KE productivity (according to indexes used)

Benchmarking Selected Countries : KEI ©Knowledge for Development, WBI

Benchmarking Selected Countries: EIR ©Knowledge for Development, WBI

EU accession countries Main Issues in KE perspective Business climate, altered by problematic rule of law (enforcement), but push for improvement through search for accession and adoption of acquis communautaire Overestimation of ST potential, falling ST resources but improved productivity, resistances to reforms Highly educated workforce but excessively technical and narrow qualifications Improvement in ICT infrastructure but use still lagging behind OECD countries

Important differences in adaptive capabilities of EU accession countries Size effects (e.g Poland) Cultural aspects (Estonia/Hungary vs others, historical experience with rule of law) Moves to EU (Bulgaria, Romania trailing behind)

Competitiveness trends (WEF) CountryGCI 2003GCI 2004 Finland11 Germany1314 Estonia2227 Hungary3329 Poland4550 Bulgaria6458

European Innovation Scoreboard Candidate Countries ©Knowledge for Development, WBI

Innovation Systems in Transition (From Planning to Market Economies) Yesterday: Top down (Science Academies, branch institutes, design bureaus, enterprises), compartmentalized, regionally specialized, “ closed ”, and oversized Today: more market-economy like, yet insufficiently (poorly) regulated, more regionally diversified, internationalized, and R&D seriously downsized (by one half to two thirds).

The Soviet Innovation System Enterprises Branch Institutes Sc Ac. Institutes Design Bureaus

R&D investments OECD countries – GERD as per cent of GDP GERD as % of GDP Source: OECD MSTI Database, November 2003

Business R&D Business R&D as a % of GDP Note: Data for 2002 or nearest year available. Source: OECD, MSTI database, November 2003.

Funding for public research lags in Eastern European countries R&D in the higher education and government sectors as a % of GDP, 2000 Source: OECD, MSTI Database, November 2003.

Small firms play in important role & attract much government support

R&D becoming more globalised: opportunity for emerging economies? Foreign affiliates as share of industrial activityR&D intensity of domestic versus foreign firms Source: OECD Activities of Foreign Affiliates database, January 2004

Strengthening human resources for S&T Researchers per thousand labour force, 2002 Attract and retain foreign students and workers Cultivate domestic supply of scientists and engineers

Challenges of EU Accession and key role of innovation Benefits of Accession will only be reaped where there is effective absorption capacity of funds at both administration and enterprise level, and where Accession is accompanied by growth-promoting policies (e.g. Ireland) key role of innovation. Impressive economic transformation of CEE Countries evidence of capacity to embrace change … However, analysis suggests large disparities between innovation performances of Accession Countries and EU-15.

How to improve the innovation policy framework? Make regulatory framework more “ innovation/entrepreneurship-friendly ” ; towards audits to identify obstacles to innovation Recognize the full scope of innovation policy (innovation not just science and technology) and make innovation a policy priority and an integral part of other policy areas (competition, education) Foster co-ordination between ministry lines with a remit for innovation matters; More government support for R&D and ST human resources; Foster public/private partnerships Overcome gaps between policy declarations and concrete implementation.

Implementation Issues Beyond benchmarking and policy recommendations Positioning of KE and Innovation Policy within development strategies; cutting across policies with unclear status We need to know not much ‘ what to do ’ but ‘ how to do ’ ? Problem of political economy of change. Adaptation of “ best practices ” to local contexts? Need to understand much better the influence of local cultures Measuring impact on industries, countries ’ performances – going beyond the “ slogan ”

Thank you! wledgefordevelopment/

Annex -- Knowledge Economy work at the World Bank World Development Report 1998/99: “ Using Knowledge for Development ” WBI K4D program: Development Strategies with Knowledge and Innovation-related Policies at the core Country studies (Korea, China, and a few others in the pipeline), lighter country assessments Policy fora (China, India, Brazil, Baltics and Poland, ASEAN countries) and conferences with WB Regions Focused work on selected aspects (notably innovation)

Annex -- KE work within the World Bank Regional Conferences with WBI support (ECA, MENA, AFR forthcoming) Studies in selected countries (e. g. Turkey, Lithuania, Tunisia) Follow on to WBI work within WB Regions (KE unit in Europe and Central Asia), interested in (lending) projects – KE projects beginning in Turkey and Romania Use of GDLN (video conference network)