IGNITING

INNOVATION

Itzhak Goldberg

John Gabriel Goddard

Smita Kuriakose

Jean-Louis Racine

Rethinking the Role of

Government in Emerging Europe

and Central Asia

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This report is part of a series undertaken by the Europe and Central Asia Region of the World Bank. Earlier reports have investigated poverty, jobs, trade, migration, demography, and productivity growth. The series covers the following countries:

AlbaniaArmeniaAzerbaijanBelarusBosnia and HerzegovinaBulgariaCroatiaCzech RepublicEstoniaGeorgiaHungaryKazakhstanKosovoKyrgyz RepublicLatvia

LithuaniaMacedonia, FYRMoldovaMontenegroPolandRomaniaRussian FederationSerbiaSlovak RepublicSloveniaTajikistanTurkeyTurkmenistanUkraineUzbekistan

IGNITING

INNOVATION

IGNITING

INNOVATION

Rethinking the Role of Government in

Emerging Europe and Central Asia

Itzhak GoldbergJohn Gabriel Goddard

Smita KuriakoseJean-Louis Racine

Europe and Central Asia Region

2011 The International Bank for Reconstruction and Development / The World Bank1818 H Street NWWashington DC 20433Telephone: 202-473-1000Internet: www.worldbank.org

All rights reserved

1 2 3 4 14 13 12 11

This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not neces-sarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judge-ment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org.

ISBN: 978-0-8213-8740-5e-ISBN: 978-0-8213-8741-2DOI: 10.1596/978-0-8213-8740-5

Cover illustration & design: Romain FallouxCover image of Sputnik-1: NASA/Asif A. Siddiqi

Library of Congress Cataloging-in-Publication Data Igniting innovation : rethinking the role of government in emerging Europe and Central Asia / Itzhak Goldberg ... [et al.]. p. cm. Includes bibliographical references. ISBN 978-0-8213-8740-5 (alk. paper) ISBN 978-0-8213-8741-2 (e-ISBN) 1. Research, IndustrialEconomic aspects. 2. Endowment of researchEurope. 3. Endowment of researchAsia. 4. Government spending policy. I. Goldberg, Itzhak. HC79.R4I38 2011338.064094dc23 2011024386

Foreword ix

Acknowledgments xiii

Contributors xv

Abbreviations xvii

Overview 1Why innovation matters 4

Acquiring technology from abroad 9

Connecting research to firms 12

Restructuring options for RDIs 14

Bringing innovations to market 14

1. Why innovation mattersand what the governmentshould do about it 19The rationale for innovation 26

Coping with spillovers 28

Coping with unequal information and the funding gap 30

Why the government should play a role 33

2. Acquiring technology from abroadleveraging theresources of foreign investors and inventors 39Cross-border knowledge flows 42

Acquiring foreign technology 54

How well do ECA firms absorb knowledge? 62

Case study: The role of FDI in helping Serbia acquire

technology 69

v

Contents

3. Connecting research to firmsoptions for reforming thepublic RDIs 81Incomplete restructuring of RDIs 83

RDIs outside ECA 85

A snapshot of RDIs in ECA 91

Government funding and governance 100

A roster of obstacles 106

A proposed RDI reform strategy 110

Options for restructuring RDIs 112

Options for public funding to support RDI reforms 115

Case Study: Finlands shift to a knowledge-based economy:

The Role of TEKES 118

4. Bringing innovations to marketboosting privateincentives through public instruments 123Basic principles of instrument design 125

Basic types of instruments 131

Financial instruments for ECA 135

Institutional support instruments 144

Monitoring and evaluation 148

Conclusion 151

Case study: How Israel has promoted innovation

in recent decades 152

References 157

Boxes1 Demystifying innovation and absorption 5

2 Poland at a crossroads: Expanding from technologyabsorption to broader meanings of innovation 6

1.1 Defining innovation and absorption 21

2.1 A snapshot of coinvention in Poland 53

3.1 Restructuring of RDIs faces important legacy challenges 109

4.1 Catalyzing private sector innovation in Turkey throughan improved institutional environment and financial instruments 127

4.2 Using grants and loans for innovation support in Croatia 132

4.3 Do matching grants for industrial R&D help the Israeli economy? 138

4.4 Armenias efforts at enterprise incubation 144

Contentsvi

Figures1 ECAs R&D efficiency is still low 8

2 ECA needs to boost its R&D spending 8

3 The expanding role of international coinvention inthe ECA 7 10

4 A call for policy reforms and capacity building 13

1.1 ECA needs to boost its R&D spending 23

1.2 ECAs researcher population is unevenly distributed 24

1.3 ECAs R&D efficiency is still low 25

1.4 Corporate ventures and the government play a key rolein the early stages 32

2.1 Innovation and absorption spur growth and productivity 41

2.2 ECA inventive activity on the rise 44

2.3 Hungary and the Czech Republic lead the ECA patentsrace 45

2.4 Russian Federations patent share could be even biggergiven its size and scientific strength 46

2.5 EU12 losing its edge on China and India 47

2.6 The expanding role of international coinvention in theECA 7 48

2.7 Germany dominates ECA coinventions 49

2.8 Expanding role of international coinventions in theRussian Federation 50

2.9 Revenue and employment trends pre- and post-acquisition 72

3.1 Number of annual publications per RDI staff 97

3.2 R&D and technical services to industry mostly marginal compared with public funds 98

3.3 Some ECA RDIs generate as much industry revenue as international benchmarks, but this is not the norm 99

3.4 SMEs could make greater use of RDIs 100

3.5 A bias toward a few types of funding sources 101

3.6 Too few private sector board directors 103

3.7 RDIs salaries not attractive enough 106

3.8 Chain of events leading to ineffective RDIs 108

3.9 Factors affecting RDI performance 108

3.10 RDI restructuring strategies 111

3.11 RDI reform decision tree 112

3.12 The less the government funding, the more marketpull dominates 116

3.13 Finlands business sector is sharply stepping up its R&D 119

3.14 Finlands successful innovation environment 120

Contents vii

Contents

Tables2.1 Top generators of Russia-based U.S. patents 51

2.2 Openness is better: Link between international interconnectedness and technology absorption 65

3.1 A massive overhaul of RDIs in the 1990s 84

3.2 A successful strategy typically reflects market needs 88

3.3 Foreign comparator RDIs vary in size and ownership 93

3.4 Specializations of the RDIs in the ECA sample 94

3.5 Restructuring options for ECA RDIs 113

viii

Innovation and technology absorption are now firmly recognized as one

of the main sources of economic growth for emerging and advanced

economies alike. That is why igniting the latent potential of the innova-

tion systems in Europe and Central Asia (ECA) is seen as a possible cata-

lyst for revitalizing the economies after the recent shocks of the global

financial and economic crisis. More active government intervention to

support innovation is being weighed as a tool to transform failing indus-

tries, develop new industries, and speed up a recovery process of export-

oriented industries. Even for countries lucky enough to have substantial

natural resources, there is a pressing need to move up the value chain

and diversify their economies to mitigate future price shocks.

Is there a role for government intervention to ignite innovation in

ECA? This is the central question to which this book responds. The

answer is yes, but a qualified yes. Innovation activities are rife with mar-