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EBRD Transition Report 2014 – Conclusion and guidelines

TRANSITION REPORT 2014 Innovation in Transition

Conclusion and guidelines

The analysis in this chapter shows that countries at different stages of development vary in terms of their ability to use and create knowledge. This ability is shaped by the quality of institutions, macroeconomic stability, and the functioning of product, labour and financial markets. It is also determined by specific conditions underpinning a country’s ability to effectively access and absorb existing technology and create new technology.

Transition countries perform reasonably well in terms of access to technology, but they lag behind advanced economies and many other emerging markets when it comes to absorptive and creative capacity. Analysis reveals that transition countries have surprisingly similar innovation policies, despite the underlying differences in these countries’ potential for knowledge-based growth and the ways in which their firms tend to acquire knowledge. This indicates that the stated policy targets and instrument mixes are, in most cases, insufficiently tailored to the specific circumstances of these countries.

In particular, innovation policies in the region tend to follow trends set by advanced economies, focusing on the creation of new technology. There is an overarching focus on developing high-tech industries and improving the contribution that public research organisations make to innovation performance, seemingly with the aim of creating the next Silicon Valley.

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However, this kind of “one size fits all” approach may not suit many transition countries. Given that these countries are not yet operating at the technological frontier, policies need to prioritise improvements in absorptive capacity. Such improvements can be achieved through greater economic openness, better secondary education and professional training, better management practices, and policies that alleviate credit constraints.

As countries develop and approach the technological frontier, innovation policies need to evolve. They should place greater emphasis on helping firms to improve their capacity to create knowledge by facilitating the supply of specialist skills and specialist finance, strengthening competition and facilitating the entry and exit of firms.

While policy instruments and priority areas need to be tailored to the specific circumstances of countries, innovation systems could usefully imitate the governance and general policy design seen in advanced economies. They should also ensure maximum transparency when allocating innovation support and striking an appropriate balance between horizontal and vertical policy elements.

To be effective, vertical innovation policies focusing on support for particular sectors require high standards of governance and high-quality economic institutions. Given the weak economic institutions in many transition countries, such policies may not suit many of them. The high risk of manipulation by interest groups may outweigh the potential benefits of more targeted support. Instead, policies should initially prioritise improvements in institutional quality and address common bottlenecks affecting innovation in all sectors (such as poor skills among the workforce or burdensome customs and trade regulations).

If direct government support is provided to particular sectors or firms, such vertical policies should make effective use of private-sector participation. This would provide an independent assessment of the commercial viability of projects receiving preferential treatment and encourage smart specialisation. Policy instruments need to include clear conditionalities linked to addressing the bottlenecks identified. They should also specify exit strategies to mitigate the risk of firms becoming addicted to support.

Policies should be subject to regular evaluations, with reviews linked to these evaluations. Thus, the design and implementation of effective innovation policies requires a sophisticated public administration with the capacity to regularly evaluate a country’s strengths and weaknesses and collect the data necessary to conduct such assessments. This calls for the quality of public administration to be improved in the area of innovation policy, for instance by providing universities with the resources and incentives needed to properly train future civil servants. That may, in itself, be an important aspect of a country’s innovation policy mix.