1. Sofia Arsenal Museum of Contemporary Art February 7, 2012 J. Gabriel Goddard Senior Economist World Bank

2. Main questions What are the opportunities to strengthen Bulgaria’s growth by investing in research and innovation? Which public policies could help Bulgaria to move up the value chain and expand high-tech exports? What are the options to improve policy design and implementation? 2

3. Economic context Robust economic growth up to 2008, driven by strong FDI and credit growth Innovation was not the major driver of growth… yet some knowledge-intensive industries have done well Post-2008: Economic downturn → lower private investment… and fiscal consolidation → cuts in public R&D At the same time, increased competition from emerging economies 3

4. Increasingly export-oriented economy… Room to increase high-tech contribution Exports are about 58% of GDP (2010), mostly directed to the EU market Only 3% are high-technology exports, while EU average is 16% Past performance may not be a good predictor of the future Source: Staff estimates, based on UN COMTRADE 2010. 4

5. R&D-intensity is too low… Potential to step up private innovation Bulgaria invests 0.48% of GDP on R&D vs. 1.85% in EU Ratio of private to public R&D is 30:70; the inverse of OECD Why invest more in R&D? Innovative firms in Bulgaria grew 1.5 times faster and create more jobs than non- innovative firms Extensive product upgrading but limited long-term R&D Source: BEEPS (2008). 5

6. Building on Bulgaria’s competitive industries… Potential for faster growth in IT IT industry - 15,000 specialists and 2% of GDP Attracts large amounts of FDI Increasing sophistication Bottlenecks for future growth: Shortage of skilled specialists Regulatory burden Low internet penetration Low demand for EU-funded instruments 6

7. Recovery in patenting linked to IT sector Source: USPTO. 7

8. An expanding pharmaceutical industry… Potential for more homegrown R&D Bulgaria’s Pharma industry exports tripled in recent years, generating ca. 25,000 jobs Produces mainly generics, forcing it to compete on price Spends about 5% of turnover on R&D, less than peers Bottlenecks for future growth: Producers face admin. hurdles after patent expiry Low-quality imports of medical products Demand for public innovation programs is weak Exports tripled in recent years Source: UN Comtrade. 8

9. Priorities for Research and Innovation Policies in Bulgaria 9

10. Finding new models to finance research and innovation Short –term actions Frontload planned increases in public R&D spending Channel future increases in public R&D via competitive mechanisms Target international and public- private collaboration Medium-term actions Introduce counter-cyclical R&D spending policies Introduce an R&D Satellite Account for more active monitoring of R&D Key Issues: Low R&D spending; low absorption of EU funds and inefficiency of national funding instruments 10

11. Introducing reforms that promote research excellence Short-term action Develop synchronized strategies on research and innovation up to 2020 Medium-term actions Introduce a system-wide evaluation of research organizations Provide additional support to high performers Establish a grant program for high-impact researchers Key Issue: Fragmentation of funding mechanisms for research and innovation in different ministries 11

12. Strengthening public entities to achieve better results Short-term actions Prepare an evaluation of the effectiveness of innovation funding instruments Work with beneficiaries to sustain the quality of proposals and enlarge the project pipeline Medium-term action Consider merging NSF and NIF into a single specialized agency Key Issue: The National Science Fund (NSF) and National Innovation Fund (NIF) are too small and do not operate as efficiently as they could 12

13. Faster absorption of EU funds within high-impact projects Short-term actions Improve admin. capacity of the teams supervising the calls Develop a rating system for consultants that work with beneficiaries of OP Competitiveness Channel part of existing EU funds to large-scale projects such as Technology Parks Medium-term action Consider creating a dedicated OP for Research and Innovation for 2014–2020 Key Issue: EU funding is a major source of innovation financing but absorption has proved challenging 13

14. Developing sector-specific innovation policies for priority industries: IT, pharmaceuticals,… Short-term actions Train more highly-qualified specialists Establish grants to retain young Bulgarian scientists and attract international experts Support the development of R&D centers in partnership with international companies Medium-term actions Scale-up national funding instruments with new funding windows for priority sectors Improve the business environment for IT and pharmaceuticals industries Key issues: Public research does not respond fast enough to private sector dynamics; brain drain and increasing shortage of skills 14