1. Policy Implications for Knowledge Absorption June 17, 2008 Itzhak Goldberg Advisor, Policy and Strategy Europe and Central Asia Region World Bank

2. 2 Globalization Challenge: BRIC countries Growth Productivity Labor Capital Human Capital Innovation Absorption Investment Climate Trade & FDI Patents and Patent Citations R&D Source: Authors’ Calculations from World Bank Enterprise Surveys

3. 3 I discuss both Innovation and Technology – continuum Absorption “New to the firm” Examples Adopt new product, process, Upgrade old product, process; Quality certification; Technology license Innovation “New to the World” Invent new technology or product

4. 4 Market failures may justify government intervention BUT Government failures: capture, corruption, must be accounted in design AND How… Role of Government – the 2 schools

5. 5 What Can Governments Do? A.Investment Climate: openness to trade, FDI, R&D collaboration, corporate governance - my focus today B.Restructuring of old structures (ECAKE3 – next Forum) C.New institutions & instruments: matching grants, VC, parks and incubators. (ECAKE1 and ECAKE3)

6. 6 Openness to Trade & FDI Surveys of circa 7000 ECA firms show: –Transition to export status increases absorption by about 33% –Joint-Venture with a multinational increases absorption by 41%

7. 7 Openness to FDI Serbian case study: Production↑ 3.5 times, productivity↑ 7.2 times, wages↑ 20%

8. 8 Openness to International Collaboration Multinational collaboration patents: (i) connected to global R&D (ii) higher quality. Policy recommendation: Promote international R&D collaboration E.g. Matching Grants for Consortia – target Missing University-Business Link

9. 9 China Finding: Effect of MNEs’ R&D in Z-Park on: Entry of new domestic firms into same industry in Z-Park R&D volume of the entering domestic firms Entry of existing domestic firms from elsewhere in China to Z-Park Cai, Todo and Zhou (2007) “Do MNEs’ R&D stimulate indigenous entrepreneurship – evidence from China’s Silicon Valley”

10. 10 China Finding: Effect of MNEs’ R&D in Z-Park on: Entry of new domestic firms into same industry in Z-Park R&D volume of the entering domestic firms Entry of existing domestic firms from elsewhere in China to Z-Park Cai, Todo and Zhou (2007) “Do MNEs’ R&D stimulate indigenous entrepreneurship – evidence from China’s Silicon Valley”

11. 11 Corporate Governance → Innovation Risk–taking depends on corporate governance. Bankruptcy – attitude to failure Serbian case-studies: strategic owner, foreign or local >> improves corporate governance >> increases technology absorption.

12. 12 E.g. investment Climate in Russia Venture Capital lacks “Deal-Flow”

13. 13 Lessons for Policy Absorption depends on Local R&D Expats’s critical role China’s “Sea Turtles” ECA: proximity to EU: return migration, outsourcing → absorption R&D reform → R&D collaboration R&D-driven FDI effects Sequencing: R&D → deal flow → seed→ VC