Faces of innovation
Products
This innovation could be a new product – a category that includes significant improvements to technical specifications, components and materials, incorporated software, user-friendliness and other functional characteristics of goods and services.8
Around a quarter of all firms interviewed as part of BEEPS reported that they had introduced a new product in the last three years. However, when those responses were then cross-checked against the description of product innovation, that percentage fell to 12 per cent (see Box 1.1 for details of the cleaning process).
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As one might expect, the percentage of surveyed firms in the transition region that introduced a product which was new to international markets was relatively low at only 0.4 per cent – compared with around 5 per cent in Israel (see Chart 1.1). While around half of all product innovation reported in Israel can be classified as innovation at the technological frontier, in the transition region that ratio is only 5 per cent. However, while innovation on a global scale is encountered less frequently in the transition region, notable examples of such innovation can be found across emerging Europe, Central Asia and the southern and eastern Mediterranean (SEMED) region. For instance, the software behind products such as Skype and the file-sharing application Kazaa was developed by Estonians. Another example is the Akrapovič exhaust system, which was developed in Slovenia.
When it comes to the introduction of products that are new to the relevant firm, rather than being new to the international market, the picture changes. Indeed, such innovation is actually more common in the transition region than it is in Israel. This reflects the fact that firms in that region have greater scope for adopting – and sometimes improving – existing technologies and products.
CHART 1.1
Source: BEEPS V, MENA ES and authors’ calculations.
Note: Based on cleaned data. Cleaned data on new products are not available for the Slovak Republic, Tajikistan or Turkey at the time of writing. Data represent unweighted cross-country averages and indicate the percentage of surveyed firms that have introduced new products in the last three years. Figures for the transition region include data for the CEB, SEE, and EEC regions, as well as Russia and Central Asia.
Processes
Productivity-enhancing innovations are not limited to new products. They can also be new or significantly improved production methods – or, for service-sector companies, delivery methods. Examples of such process innovations include the automation of work that used to be done manually, the introduction of new software to manage inventories and the introduction of new quality-control measures.
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A process innovation may, for instance, help to introduce a new product. For example, buying new machinery in order to start producing a new product involves both product and process innovation. Of the BEEPS respondents that have introduced new products, around a third have also introduced a new process in the last three years (see Chart 1.2). Indeed, product and process innovation may sometimes be hard to tell apart (see Table 1.1 for some real-life examples).
Alternatively, process innovations may help firms to deliver existing products in a more efficient, cost-effective manner – for instance, with the help of new equipment or new software. Around 9 per cent of all BEEPS respondents introduced a new process without engaging in product innovation. Around a quarter of all process innovations entailed changes to production techniques, machinery, equipment or software. Process innovation is most commonly encountered in manufacturing, where it is typically related to the upgrading of machinery and equipment.
CHART 1.2
TABLE 1.1
Source: BEEPS V, MENA ES and authors’ calculations.
Note: Based on cleaned data. Data represent unweighted cross-country averages and indicate the percentage of surveyed firms that have introduced new products and/or processes in the last three years.
Examples of innovation from BEEPS V and MENA ES
| Innovation | Not innovation |
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Source: BEEPS V and MENA ES.
Product and process innovation in different sectors
Firms in high-tech and medium-high-tech manufacturing sectors (such as pharmaceuticals or electronics) – and particularly firms in knowledge-intensive service sectors (such as telecommunications or information technology) – are more likely to introduce new products than firms in low-tech sectors (such as wood processing or textiles; see Chart 1.3).9 Regional differences in the frequency of product innovation are also larger in these sectors. For instance, in knowledge-intensive service sectors the percentage of firms that have introduced new products in the last three years ranges from 0 per cent in Jordan to over 25 per cent in south-eastern Europe (SEE) and almost 60 per cent in Israel (see Case study 1.1 for an example of an innovative IT firm with its origins in Belarus). In contrast, differences between innovation rates are less pronounced for low-tech sectors, as firms in these industries generally innovate less (even in Israel).
In contrast to product innovation, process innovation is common in low-tech manufacturing sectors, as firms look for new, more efficient production methods (see Chart 1.4). For instance, in Central Asia around 28 per cent of firms operating in low-tech manufacturing sectors have recently introduced a new process. Differences between the process innovation rates of individual countries and regions are substantial across all manufacturing sectors and knowledge-intensive services (albeit process innovation is much less common across the board in less knowledge-intensive service sectors).
CASE STUDY 1.1EPAM
EPAM, a global provider of software development services, has managed to successfully leverage and commercialise the availability of programming talent in a number of countries in central Europe. In just 20 years or so, it has gone from being a small start-up to a global IT services company that is listed on the New York Stock Exchange.
EPAM was founded in 1993 by two native Belarusians, Arkadiy Dobkin and Leo Lozner. The company was based in Princeton, New Jersey, with a development centre in Minsk. As the firm secured more clients on the global market, it gradually expanded, attracting investment from major private equity investors, including EBRD-supported private equity funds such as Russia Partners II and III. In 2012 it then launched an IPO on the New York Stock Exchange, the first time that a software company originating in the region had been floated on a major stock exchange.
EPAM now has development centres in Belarus, Hungary, Kazakhstan, Poland, Russia and Ukraine. The company has more than 10,000 engineers serving firms in a wide variety of industries in both developed and developing markets (with clients such as Google, Barclays, MTV, Expedia and Thomson Reuters). Its current areas of focus include cloud and mobile services and big data.
The company was also one of the first residents of the HTP Belarus high-tech park in Minsk, thereby contributing to the development of the local IT cluster.
CHART 1.3
CHART 1.4
Source: BEEPS V, MENA ES and authors’ calculations.
Note: Based on the International Standard Industrial Classification (ISIC), Rev. 3.1. High-tech and medium-high-tech manufacturing sectors include chemicals (24), machinery and equipment (29), electrical and optical equipment (30-33) and transport equipment (34-35, excluding 35.1). Low-tech manufacturing sectors include food products, beverages and tobacco (15-16), textiles (17-18), leather (19), wood (20), paper, publishing and printing (21-22) and other manufacturing (36-37). Knowledge-intensive services include water and air transport (61-62), telecommunications (64) and real estate, renting and business activities (70-74). Data represent unweighted cross-country averages and indicate the percentage of surveyed firms that have introduced new products in the last three years, on the basis of cleaned measures of innovation.
Source: BEEPS V, MENA ES and authors’ calculations.
Note: Based on ISIC Rev. 3.1. High-tech and medium-high-tech manufacturing sectors include chemicals (24), machinery and equipment (29), electrical and optical equipment (30-33) and transport equipment (34-35, excluding 35.1). Low-tech manufacturing sectors include food products, beverages and tobacco (15-16), textiles (17-18), leather (19), wood (20), paper, publishing and printing (21-22) and other manufacturing (36-37). Knowledge-intensive services include water and air transport (61-62), telecommunications (64) and real estate, renting and business activities (70-74). Data represent unweighted cross-country averages and indicate the percentage of surveyed firms that have introduced new processes in the last three years, on the basis of cleaned measures of innovation.
Organisational innovation
Innovation does not always involve new technologies. For instance, it may take the form of organisational innovation – such as new approaches to business practices, workplace organisation or external relations. As with process innovations, organisational innovations may seek to improve a firm’s performance by reducing administrative or transaction costs, gaining access to non-tradeable assets or reducing the cost of supplies. Unlike process innovations, organisational innovations primarily concern people and the organisation of work flows. Examples of organisational innovations include the introduction of a supply chain management system, the implementation of a database of best practices or the decentralisation of decision-making (which gives employees greater autonomy).
Marketing innovation
Marketing is another important area of innovation. Marketing innovations could, for instance, be aimed at better addressing customers’ needs, opening up new markets or repositioning a firm’s product on the market. Examples include the introduction of a new flavour for a food product in order to target a new group of customers, product placement in films or television programmes, the establishment of client loyalty cards or the introduction of variable pricing based on demand.
While product, process, organisational and marketing innovations cover a broad range of changes within a firm, not every change can be considered an innovation. For instance, customisation, routine upgrades (minor changes to a good or service that are expected and planned in advance), regular seasonal changes and new pricing methods aimed solely at offering different prices to different groups of customers are not deemed to be innovations. Ceasing to use a particular process to market a product is also not considered to be an innovation. And although a new product represents an innovation for the firm that manufactures it, it does not generally constitute an innovation for firms trading, transporting or storing that new product.
High incidence of organisational and marketing innovation
Making changes to organisational and marketing arrangements is likely to be cheaper – although not necessarily less risky – than introducing new products and processes. Given the legacy of central planning, where marketing was severely underdeveloped – and, indeed, largely unnecessary – it is not surprising that firms in transition countries are more likely to introduce new organisational or marketing arrangements than firms in Israel (see Chart 1.5). Indeed, around 28 per cent of all surveyed firms in the transition region have adopted new organisational practices or marketing techniques over the last three years, with marketing innovations being the more common of the two.
CHART 1.5
Source: BEEPS V, MENA ES and authors’ calculations.
Note: This chart is based on self-reported data, as firms were not asked to provide descriptions of their organisational and marketing innovations. Data represent unweighed cross-country averages and indicate the percentage of surveyed firms that have introduced organisational and marketing innovations in the last three years.