EBRD Transition Report 2014 – Innovation policies: one size fits all?

Innovation policies: one size fits all?

Innovation policies can play a crucial role in improving the conditions for innovation, identifying and addressing bottlenecks that impair the ability of countries to innovate and improve productivity.

In fact, as of 2014 all countries in the EBRD region have drafted a nationwide policy or strategy with a view to providing public support for innovation activities. Most countries established the bulk of their policy frameworks during the 2000s. Some countries (such as Tajikistan and Turkmenistan) did not start outlining their priorities until more recently. This section examines these policies, looking at the extent to which they reflect countries’ potential for knowledge-based growth as assessed in the previous section.

In order to obtain detailed information about innovation policies in transition countries, the government bodies in charge of innovation policy in all countries where the EBRD works were asked to complete a questionnaire in summer 2014.

A total of 19 countries responded in time to be included in this analysis. The response rate was relatively high among countries at the “make and buy” stage (with Bulgaria, Croatia, Kosovo, Latvia, Lithuania, Romania, Slovak Republic and Slovenia all replying). A similarly high response rate was seen among those at the “buy” stage (with Bosnia and Herzegovina, Cyprus, Hungary, the Kyrgyz Republic, Moldova, Poland, Serbia, Tunisia and Ukraine responding as well). Meanwhile, in the “low innovation” category only two countries responded (Albania and Armenia).11 The survey evidence was supplemented with information from publicly available sources.

Policy objectives

The survey results suggest that there is remarkably little variation across transition countries in terms of the objectives of innovation policy (see Chart 5.3). Virtually all countries regarded the objectives of enhancing the contribution that public research organisations make to the country’s innovation performance and improving the business environment for innovative firms as either “important” or “highly important”. All of them also placed considerable emphasis on better links between science and industry. Such links included improved commercialisation of academic research.

In contrast, while the objective of producing educated and trained personnel – a critical factor underpinning a country’s capacity to efficiently adapt and use new technologies – was considered important, it tended to score less than the top priorities referred to above. Furthermore, some countries at the “buy” stage ranked it lower than countries in the “make and buy” category. This was surprising, given that “buy” countries would be expected to place greater emphasis on factors facilitating the absorption of technology.12

CHART 5.3

Source: EBRD innovation policy questionnaire and authors’ calculations.
Note: This chart ranks the strategic objectives of innovation policy in descending order according to the percentage of countries that regard them as “highly important” or “important”.

Economic and financial instruments

The consensus among the transition countries extends to the preferred policy instruments for supporting innovation. The three instruments most frequently regarded as “important” or “highly important” are (i) competitive funding of R&D, (ii) support for the transfer of technology and (iii) incentives for cooperation between industry and science (see Chart 5.4).

At first glance, this support for the transfer of technology appears to be well suited to the needs of emerging market economies, where the adoption of existing technology plays a prominent role. On closer inspection, however, we can see that policies primarily target the transfer of technology from science to industry. Virtually all countries (with the exception of Bulgaria) report that they have government initiatives in place aimed at helping to translate research in universities and public research organisations into innovation, together with initiatives strengthening research in these institutes.

At the same time, initiatives supporting firms’ absorption of technology (the spread of technology and technology matching services13) are, on average, deemed only “somewhat important”. What is more, the actual initiatives often focus on the transfer of technology from science to industry (see Box 5.2). While public research institutes are encouraged to develop applied technologies, incentives for firms to take on and commercialise these technologies often remain weak. This potentially undermines the effectiveness of technology transfer policies. (See Box 5.3 for a more detailed assessment of the links between industry and science in transition countries.)

Almost all countries also report support for small and medium-sized enterprises (SMEs) and start-ups – mostly in the form of project-based financial support, incubators, and science and technology parks. Such location-based innovation policies – specific measures directed at well-defined geographical areas – are in place in virtually all transition countries. These policies provide for the direct financing of economic activities or establish special regulations governing targeted areas. They also aim to promote a culture of competitiveness and innovation among the firms located there and seek to stimulate technological spillovers. (See Box 5.4 for further discussion of location-based policies.)

Support for venture and seed capital is more prominent in the more advanced transition economies (although even there it remains relatively modest, as discussed in Box 4.1).

CHART 5.4

Source: EBRD innovation policy questionnaire and authors’ calculations.
Note: This chart ranks economic and financial instruments of innovation policy in descending order according to the percentage of countries that regard them as “highly important” or “important”.

One size fits all?

Overall, policy priorities and instruments look remarkably similar across the entire transition region, despite fairly large differences in terms of the level of development and the potential for knowledge-based growth. This suggests that the stated policy targets and instrument mixes are, in most cases, insufficiently tailored to the specific circumstances of countries, with policy choices seemingly following the fashion of the day.

Analysis suggests that, with some exceptions, transition economies tend to follow the type of innovation policy that is typically used by advanced economies. They do not necessarily identify priority areas on the basis of careful analysis of their current strengths and comparative advantages.14

The overarching focus on the development of high-tech industries and the omnipresent objective of improving the contribution that public research organisations make to the country’s innovation performance are perhaps the clearest illustration of this.

This kind of “one size fits all” approach may not suit many of the transition countries. Given the current prerequisites for knowledge-based growth in these countries, governments need to focus more on supporting the absorption and adaptation of existing cutting-edge technology, which features far less prominently as a priority. Similarly, greater attention needs to be paid to improving the formation of human capital in universities, which may often focus excessively on academic patenting. In extreme cases, simply taking innovation policies that are designed for advanced economies and transposing them to transition countries may be more of a deterrent, rather than acting as a catalyst for knowledge-based growth.

Design and governance

One area where innovation systems could usefully imitate advanced economies is policy design and governance.

Effective innovation policies rely on the careful identification of key bottlenecks preventing innovation. This is important, because policies need to evolve as a country’s innovation develops. Continued monitoring of a country’s performance in terms of framework conditions can guide the design, evaluation and adaptation of its innovation policy mix.

Identifying bottlenecks requires close communication with the intended recipients of innovation support. It also calls for regular evaluation of the outcomes of policies and an ability to learn from past mistakes.15 The use and effectiveness of programmes targeting innovation should not only be monitored, but also benchmarked and evaluated. Future policy design phases should use the results of such evaluation exercises.16 Most countries that responded to the EBRD’s innovation policy questionnaire indicated that they assess the effectiveness of spending on innovation support. However, closer inspection of published evaluation exercises suggests that such appraisals are rarely rigorous – even in advanced economies.

Furthermore, three-quarters of respondents reported that they always or usually use the continuation of existing schemes as a selection criterion when choosing instruments. There may be good reasons for this. Continuity of innovation policies increases the private sector’s willingness to undertake risky investments with a long payback period. In addition, the results of innovation policies that depend on such investments may take a long time to materialise. At the same time, continuity needs to be weighed against the need to evaluate policies, learn from past mistakes and redesign policies as the economy evolves.

Finland’s centres of excellence (CoEs) in the field of research are a good example of best practice in terms of governance. This government programme was launched in 1994 for a fixed term of six years and has since been repeated a number of times. CoEs consist of a number of cutting-edge research teams working closely together. The Academy of Finland, which allocates funding to CoEs, establishes priorities in terms of the subject areas to be covered and sets quantifiable targets to be reached by the end of the six-year term, as well as specific short-term objectives. CoEs receive funding in two instalments – one at the beginning of the six-year term and one at the mid-point. The programme is managed by sub-regional councils, which act as an interface with the private sector and various levels of government. A CoE can apply to participate in a new programme at the end of its term, but whether or not its application is successful is determined by the quality of its scientific research plan.17

The effectiveness of innovation policies also depends on the overall quality of governance in the countries that implement them. In this regard, only five survey respondents reported that they never use ad hoc selection criteria or take account of the lobbying activities of particular groups. Weak governance may be particularly damaging when it comes to identifying priority sectors and the allocation of related subsidies and concessions. In general, governments tend not to be particularly good at picking winners, and identifying losers has proven politically difficult. Authorities in countries with weak governance are likely to have particularly poor track records in these areas.