KEF VII: Technology Absorption by Innovative SMEs Concluding Remarks F. Montes-Negret Director, Private and Financial Sector Europe and Central Asia, The World Bank June 19, 2008, Ancona, Italy

Agenda Globalization & Technology Absorption Globalization & Technology Absorption Technology Absorption Channels Technology Absorption Channels Clusters & Global Supply Chains Clusters & Global Supply Chains Competitiveness & Human Capital Competitiveness & Human Capital Responsive HEIs & Industry Responsive HEIs & Industry Regional Innovation Regional Innovation Partnerships Partnerships Quality Standards Quality Standards Start-Ups & Spin-Offs Start-Ups & Spin-Offs

Technology diffusion in the developing world Globalization has been a main driver of technological progress; Globalization has been a main driver of technological progress; The technology gap between rich and poor countries has narrowed -- but remains large; The technology gap between rich and poor countries has narrowed -- but remains large; Progress in developing countries reflects the absorption of pre-existing technologies – not at-the- frontier inventions; Progress in developing countries reflects the absorption of pre-existing technologies – not at-the- frontier inventions; Technology diffusion across countries has picked up, but diffusion within countries remains slow and penetration rates uneven; Technology diffusion across countries has picked up, but diffusion within countries remains slow and penetration rates uneven; Persistent weakness in technological absorptive capacity may constrain further technological progress. Persistent weakness in technological absorptive capacity may constrain further technological progress.

Key features of a pro-technology policy stance No detailed roadmap for promoting technological progress, but certain policy directions are indicated: No detailed roadmap for promoting technological progress, but certain policy directions are indicated: –Maintain openness to trade, foreign direct investment and participation of diaspora –Further improve the investment climate so as to allow innovative firms to grow and flourish –Improve basic infrastructure (roads, electricity, telephony) –Raise the quality and quantity of education throughout economy not just major centers –Emphasize technology diffusion by reinforcing dissemination systems and the market-orientation of R&D programs

Technology progress is mainly about absorbing and adopting technologies developed elsewhere Source: World Bank, Global Economic Prospects (2008) Technology in the developing country Exposure to foreign technology Capacity to absorb = + Technological progress In-country diffusion

Technological Flows Unbundling of Productive Activities Unbundling of Productive Activities Technology transfer strongly affected by North/ South firm interaction; Technology transfer strongly affected by North/ South firm interaction; Unbundling of production has created extraordinary new opportunities for technology diffusion; Unbundling of production has created extraordinary new opportunities for technology diffusion; Technological flows no longer unilateral; Technological flows no longer unilateral; Many countries or part of countries still excluded. Many countries or part of countries still excluded.

Policies for K Absorption Absorption depends on Local R&D Absorption depends on Local R&D Chinas Sea Turtles Expatriates Role Chinas Sea Turtles Expatriates Role ECA: proximity to EU: ECA: proximity to EU: return migration return migration outsourcing outsourcing absorption absorption R&D reform R&D collaboration R&D reform R&D collaboration R&D-driven FDI effects R&D-driven FDI effects Sequencing: R&D deal flow seed VC Sequencing: R&D deal flow seed VC

Patents & Co-Invention Patents provide rich information on technological development, even in follower countries, and (some) patents can even provide direct measures of technology absorption; Patents can be quite useful in filling in the gaps in our knowledge surrounding technological development and technology absorption in ECA and other developing regions A large fraction of ECA patents are made up of multinational inventor teams: international co-invention; Much of it takes place under the auspices of Western multinationals Are ECA inventors increasingly participating in an international division of R&D labor?

Patenting Trends The growth of ECA patenting is decelerating, even as Chinese and Indian patenting accelerates The growth of ECA patenting is decelerating, even as Chinese and Indian patenting accelerates Indigenous ECA patenting continues to lag in quality, quantity, and connectedness to the global state of the art Indigenous ECA patenting continues to lag in quality, quantity, and connectedness to the global state of the art Multinational R&D in ECA raises the quality and quantity of ECA patenting Multinational R&D in ECA raises the quality and quantity of ECA patenting ECA inventors are participating in international coinvention networks, a phenomenon worthy of further study ECA inventors are participating in international coinvention networks, a phenomenon worthy of further study Increasing (but few) international patents Increasing (but few) international patents Relative importance of Eastern & Central Asia for EU core: decreasing; while role of Asia for EU core countries is increasing. Relative importance of Eastern & Central Asia for EU core: decreasing; while role of Asia for EU core countries is increasing.

Clusters & Collective Efficiency External economies Joint actions Collective Efficiency

Italian Smallness Trap Lessons for emerging countries? … in particular, for countries emerging from transition private SMEs are the necessary antidote to the old model of large and inefficient state-owned firms … in particular, for countries emerging from transition private SMEs are the necessary antidote to the old model of large and inefficient state-owned firms As soon as the private sector has consolidated, and the economy has reached a middle-income level of development, how to stimulate the endogenous dimensional growth of firms should become a policy priority As soon as the private sector has consolidated, and the economy has reached a middle-income level of development, how to stimulate the endogenous dimensional growth of firms should become a policy priority Otherwise, as the recent Italian experience shows, an economy about to approach an advanced development stage may enter a smallness trap Otherwise, as the recent Italian experience shows, an economy about to approach an advanced development stage may enter a smallness trap

Short & Medium term challenges for SME policy in Russia Differences in enabling environment across Russian regions and clusters is key challenge for national SME policy National SME policy should be more focused on stimulating and supporting regional SME policy Regional and local governments will play more important role in SME development Regional SME policy (short and medium term) can be focused on some important issues: infrastructure (i.e. industrial/suppliers park), availability of financial resources, regional innovation infrastructure and administrative barriers

KraussMaffei Message HR Development should not be delegated: It has to be made a priority by top management Improve top-down communication within organization Listen to your own people and have a look at things from their perspective Appraisal interviews are a chance to give orientation to both of employees and organization Improve customer orientation of staff Benchmark on all hierarchy levels (plant visits, common projects like quality, service, cost awareness, etc.) with other companies of the same size and with a similar structure; it is not mandatory to be in the same business

Integrated Talent Management Talent Management through a competency framework Recruiting Learning Performance Management Succession Planning Retention Compensation

Innovation-led Growth: Four Pathways (MIT) Indigenous creation of new industry Exogeneous creation of new industry Diversification of existing industry into new - Create entirely new industry - Import new industry to the region - Use the core technologies of an existing and declining industry Upgrading existing mature industry - Enhance products, services or production technologies

From Core Values to Business Competitiveness 16 What we need to know & to do How we develop our human capital Business Competitiveness People Development Knowledge Enhancement Core Values What we want to be

Le Marche Specific and Perhaps Exclusive Features! The cluster is mainly based on a cultural approach: The cluster is mainly based on a cultural approach: - creativity and entrepreneurship are the ground skills for the spin-off - imitation and emulation effects push newcomers - competition & cooperation allow for the distribution of production phases among many firms - traditional and non hi-tech industries involve low entrance barriers - high specialization in each production step needs a low plant cost

Le Marche: Public-Private Partnership! The cluster is an endogenous and self-governing phenomenon: the public role is rarely a decisive start-up factor The cluster is an endogenous and self-governing phenomenon: the public role is rarely a decisive start-up factor Nevertheless, the policy maker may offer strong support to strengthen the external economies (the core of a cluster!) Nevertheless, the policy maker may offer strong support to strengthen the external economies (the core of a cluster!) External economies change continuously: establishment areas, basic services, worker availability and suitable education, material and immaterial infrastructures, quality and environmental certification… External economies change continuously: establishment areas, basic services, worker availability and suitable education, material and immaterial infrastructures, quality and environmental certification… As the cluster grows, the governance becomes more and more relevant: in the Marche Region the Technological Center System as well as the District Council are composed of local stakeholders (such as representatives of Public Boards and social and economic actors) As the cluster grows, the governance becomes more and more relevant: in the Marche Region the Technological Center System as well as the District Council are composed of local stakeholders (such as representatives of Public Boards and social and economic actors)

Institutions & Infrastructure for Global Quality Standards Metrology, standards, testing and certificationMetrology, standards, testing and certification –help diffuse technology to SMEs –provide the technical infrastructure for innovation –increase trust between SMEs and their buyers Quality, testing and certification service platforms can act as important facilitators of SME innovation in clustersQuality, testing and certification service platforms can act as important facilitators of SME innovation in clusters Public-private partnerships can play an important role in helping clusters define the types of services that can help foster regional innovationPublic-private partnerships can play an important role in helping clusters define the types of services that can help foster regional innovation BUT metrology, standards, testing and certification CAN ALSO HAMPER technology absorption and innovation when imposed on a top-down basis by the governmentBUT metrology, standards, testing and certification CAN ALSO HAMPER technology absorption and innovation when imposed on a top-down basis by the government –by placing barriers to trade in technology –by limiting freedom to innovate

Business Incubators Business incubators are a leading instrument used by European governments to facilitate technology transfer from public research organizations Commercial risks pose a greater problem than technical risks when taking R&D results to market, not least because spin-offs are often founded by scientists with technical capacities but without business skills

Connecting the dots Complexity => No single path or model; Complexity => No single path or model; Key to facilitate enterprise entry and, critically, their growth; Key to facilitate enterprise entry and, critically, their growth; Multiple tools: Incubators, spin-offs, … Multiple tools: Incubators, spin-offs, … Innovation and Absorption Innovation and Absorption –COMPLIMENTARY NOT EXCLUSIVE PATHS All industries must innovate in products and processes All industries must innovate in products and processes –BRANDING & DESIGN increasingly differentiating element Core of Innovation and Sustained Enterprise Growth Core of Innovation and Sustained Enterprise Growth –CONTINUOUS & ADAPTIVE INVESTMENT IN TALENT MODERN HEIs embody entrepreneurial and technological leadership to serve Local SMEs (INCENTIVES) rooted in 3Ts: MODERN HEIs embody entrepreneurial and technological leadership to serve Local SMEs (INCENTIVES) rooted in 3Ts: –TALENT, TECHNOLOGY, TERRITORY