1. Business Environment and Knowledge for Private Sector Growth: Forum Closing Remarks
Fernando Montes-Negret, World Bank Sector Director Private and Financial Sector Development Europe and Central Asia
Knowledge Economy Forum IV, Istanbul, March 2005

2. Outline: Closing Remarks
Key challenges ahead for the ECA Region
Business environment
Innovation
Skills for the Knowledge Economy
Looking ahead: policies for private sector growth
Did we meet the Forum’s objectives?

3. The world is moving fast… …with or without you!
Increasing globalization: reduction of transportation & communication costs, increasing global information, increasingly mobile FDI. Rapid pace of technological change and innovation.
Increasing competition, driven by trade liberalization and increasingly larger players (e.g., China, Korea, India)
Demographic pressures: ECA faces declining and aging populations.
Tighter regional integration: Joining a regional club (EU and NAFTA, ASEAN +3) is useful, but not a panacea.
EU Membership opportunity, but not a guarantee for success.
Carl, Wim Kok

4. The world is moving fast… …with or without you!
Carl

5. Creating conditions for sustainable growth is key
Productivity and growth: firms’ perspective
Simplify interactions with the Government
Access to credit for start up and operation
Environment
Business
Infrastructure and Logistics costs
Labor costs
Reduce Costs & Improve Quality of Supply
Information costs
Technology absorption, adaptation and innovation
Knowledge
Skills of the labor force

6. Key constraints to growth Business Environment Costs as % of Sales
Key constraints in the business environment in developing and transition economies
Key constraints to growth
Business Environment Costs as % of Sales
27%
20%
15%
13% 8%
World-wide surveys
Poland
China
Brazil
Indonesia
Tanzania
Policy uncertainty is the dominant concern. Improving predictability can increase likelihood of investment by over 30%.
Business environment constraints are costly: (>8% of sales)
Warrick

7. Policy-Related Barriers to Competition Stifle Innovation and productivity
Warrick

8. A better Investment Climate for all
Policies to reduce regulatory barriers: simplification leading to a better investment climate for all, reducing business risks, costs, and barriers to competition (benefiting consumers through lower prices and more innovative products);
Improving predictability of laws, regulations and interpretation of norms, drastically reducing legal/regulatory uncertainty;
Provision of a policy basic framework ensuring: stability & security, sensible regulation & tax regime, good infrastructure & logistics, access to finance, and a flexible and fair labor market.
Persistence, not perfection in fostering reforms.
Fernando

9. ECA has a Strong Scientific Tradition that does not Translate into Innovation
Large S&T base, well-educated
workforce, culture of science…
…but limited R&D, innovation and entrepreneurship
EU Target = 3%
Average new EU member states (EU10) = 0.8%
How can we move from science to innovation?
Technology absorption: get it from abroad
Commercialization of local S&T: develop it in-house
Increase access to finance for innovation
Fernando

10. Technology Absorption: Attracting FDI, Rooting MNCs Locally and Promoting Linkages
Most R&D and technology in non-OECD countries comes from MNCs, but their investment goes mainly to South & East Asia.
ECA should become more integrated in the global production network by attracting and retaining FDI, creating linkages between foreign and local firms.
Cheap unskilled labor and protected markets not an option
Good investment climate; skills; training; quality standards and technology; suppliers networks; logistics and ICT; FDI promotion, including targeting of foreign firms; selected incentives. (Ireland, Malaysia and Singapore cases).
Improve capacity of local suppliers with MNCs assistance looking for long term viability
Governments have a role to play: matchmaking and information dissemination and financing.
Lall/Varney

11. Wessner/Lindholm/Brett.
Commercialization of Local S&T: Get the Scientists Out of Their Ivory Towers!
Key to local innovation: strengthen university-firm collaboration and commercialize university research.
Requirements:
Changes in the IP policy framework: giving IP rights to universities.
Change in policies and in the culture of the academic and business worlds: policy makers need to agree on quantity and type of spending in R&D; researchers need to select R&D themes that serve economic growth; the business community has to engage scientists in problem solving.
Technoparks and incubators are not enough – without skilled management with links to global markets, they may turn into real estate development projects.
In the US, the Bayh-Dole Act, giving universities the right to patent and earn royalties from licensing. Nearly 300 US universities have Technology Transfer Programs today and thousands of new firms are based on university research (e.g., the birth of the biotech industry).
Wessner/Lindholm/Brett.

12. Finance for Innovation: Governments Have a Careful Role to Play
Risk Capital Markets / Venture Capital
Grants, Credit, Technical Assistance
Getting the sequence right:
Innovative Skills
On Finance for innovation:
Matching grants
Government risk sharing in private risk capital funds (US, UK, Israel)
Make R&D expenditures tax deductible
But:
Avoid rent-seeking, capture and moral hazard.
Protection of Intellectual Property Rights
Financial Markets and Financial
Information Infrastructure.
VC as a new financial industry.
Business Environment (Broad)
Why VC is not common in emerging markets?
It is expensive (% equity);;
It requires highly skilled management teams
It requires well developed capital markets.
Fernando

13. Venture Capital is not the only way to finance innovation in ECA.
Realities of VC: need a significant number of bankable projects. VC is highly selective: 1/200 firms in non-OECD countries get funds.
Financing innovation w/o VC: the “Go Forward Plan”
Build on your comparative advantages.
Remember that technology can be embedded in very traditional products and processes. All sectors can be high-tech!
Characterize the deal flow – quality and performance.
Go after corporate investors (not financial investors) that do business in your country and have a long-term perspective.
Create industry consortia: multinationals and private-public local funds.
Why VC is not common in emerging markets?
It is expensive (% equity);;
It requires highly skilled management teams
It requires well developed capital markets.
B uild on your comparative advantages and mix and match local and western technologies to provide innovative solutions.
Nastas

14. Human Capital – “Crude Oil” of the 21st Century
Requirements of Knowledge-intensive economies
21st century jobs demand new skills and competencies
Employment security, not job security: LLL and flexibility
Without education innovation will not occur
Status Quo
Education and training systems are not meeting demands
High unemployment despite generally high enrollment and high growth
Mismatch of skills and knowledge for future jobs
Lack of dynamic private sector (particularly SMEs) to generate employment
Education Panels --all

15. ECA Youth has difficulty applying skills and knowledge acquired at school
Policy Challenge:
Teaching practical skills
Improving performance indicators
Aligning general education and vocational training
Providing equitable access to life-long learning

16. Acute Youth Unemployment in Candidate Countries and South Eastern Europe
McBride

17. Complementary roles of Government and Private Sector in skills development
Provision of relevant quality secondary education
Curricula for flexible and transferable core skills
Certification to facilitate the transferability and portability of skills and competencies and recognition of prior learning
Quality Assurance and Accreditation for all forms of Lifelong Learning
Result: Broader participation and increase labor market relevance
Provide Learner-Friendly High-performance Work Environments:
Team-based learning
Access to Formal and Informal learning opportunities (e-learning)
Incentives for employees
In-company and external knowledge networks
Recognition of prior learning
Lifelong Learning

18. Complementary roles of Government and Private Sector in skills development
Public Sector:
Develop and implement education policy, curricula, and qualifications frameworks
Implement lifelong learning strategies through Public-Private partnerships
Private Sector:
Education and training provision
Provide just-in-time in-company training

19. Looking ahead: Key policies for private sector growth
Stabilize policy environment
Implement microeconomic reforms for a better business environment
Absorb technology by attracting and retaining FDI and creating linkages between foreign and local firms
Improve local innovation by strengthening university-firm collaboration and commercializing university research
Governments have a role to play in facilitating access to finance and promoting technology start-ups. Public-private industry consortia are a viable alternative to VC in very early stages.
Enable application of knowledge by teaching practical skills
Align general and vocational education to improve the skills of the labor force

20. Did we meet the Forum’s Objectives?
Yes IF:
Generated new ideas
Shared relevant experiences
Identified specific lessons in the three critical areas discussed (business environment, innovation and skills)
Identified follow-up actions (country cases)
Established networks for continuous sharing and learning

21. Knowledge Economy Forum: Documents