BEEPS V provides a valuable snapshot of firm-level innovation in the transition region today. To get a deeper sense of how innovation in economies of the region has evolved over time, this chapter now turns to country-level measures of innovation outputs, which are similar to the country-level measures of innovation inputs that were discussed above.

Patent quality

A common country-level measure of innovation at the technological frontier is the number of patents that are held by firms or individuals from a given country. While this has the advantage of comparability (as data are available for a large number of countries), it is a narrow measure which captures a limited range of innovations. Not all innovations are patented, and the likelihood of firms or individuals applying for a patent in a given economy will depend on the legal system, local practices and the sectors in which that economy specialises.12 The extent to which patents are converted into commercialised innovations will also vary considerably from country to country.

With these caveats in mind, Chart 1.13 shows that there is a positive relationship between R&D expenditure and the number of patents held. However, while this relationship is strong in advanced markets, it is weaker in emerging markets, where levels of R&D spending and patenting are generally lower.13 A number of countries (including Belarus and Kazakhstan) have more patents than their R&D expenditure would predict, while other countries (including SEMED countries and Turkey) have relatively few patents.

Importantly, not all patents are of equal value: some may represent small modifications to existing products (incremental innovation), whereas others may cover breakthrough technologies such as lasers (radical innovation). One way to distinguish between patents of differing quality is to look at patent citations, as important patents tend to be cited in subsequent patent applications. Citation data suggest that patents in the transition region tend to be of lower quality than those found in more developed economies: only 6 per cent of patents in transition countries are cited at least once, compared with 44 per cent of patents in the United States (see Chart 1.14).

Furthermore, the percentage of patents that are held by firms is much lower in the transition region than it is in the United States. In the United States only 6 per cent of patents are held by universities or public organisations, compared with 11 per cent in the transition region (see Chart 1.15).14 In fact, in Russia, Poland and Ukraine over a third of all patents are held by universities or research institutes. This reflects the persistent legacy of centralised state-led research. If academic and public institutions have only weak links with industry, and universities and research institutes have limited incentives to commercialise their inventions, the patents they hold may raise the profile of their institutions but contribute little to innovation or productivity growth in the economy.

Adoption of existing technology

Measures of innovation output such as patents do not take full account of the adoption of existing technology. Ideally, one would like to have a broader measure of how innovative countries are. This measure would not only include information on innovation at the technological frontier (in other words, information derived from patents), but also cover the sophistication of each country’s output (for instance, by accounting for countries’ export mixes).15

In order to develop such a measure of country-level innovation, the first step is to ascertain the innovation content of various industries. We can then assess the export mixes of individual countries on the basis of the innovation content of these exporting industries.

Changes in the innovation intensity of countries’ exports

How has the innovation intensity of exports evolved over time? Globally, innovation activity has increasingly shifted from advanced economies to emerging markets. The last few decades have seen a major shift in the production of innovative goods, with a growing role for foreign direct investment and the rapid globalisation of production chains. In addition, emerging markets now account for an increasing share of both global R&D spending and R&D output.20

These broader trends are reflected in the innovation intensity of the various regions’ exports (see Chart 1.18). In line with these developments, the innovation intensity of the transition region’s exports has risen over time. Of the various emerging markets, Asia has seen the fastest growth in innovation intensity, while overall growth in the transition region has been similar to that observed in Latin America. Innovation intensity has generally remained low in the Middle East and North Africa.

These overall trends mask substantial heterogeneity at the level of individual countries, in terms of both the level of innovation intensity (see Chart 1.19) and its evolution over time (see Chart 1.20). In central Europe and the Baltic States (CEB) innovation intensity increased rapidly in the 2000s, reaching levels comparable to those seen in OECD countries. This structural change was, to a large extent, facilitated by foreign direct investment on the part of core EU countries and the integration of CEB producers into European value chains. The innovation intensity of exports has also increased moderately in the SEE and SEMED regions. Overall, though, changes outside the CEB region have been modest and levels have remained below 60 per cent of the average innovation intensity of world exports. Israel, the main comparator country in BEEPS V and MENA ES, has highly innovation-intensive exports.

Since the start of the transition process, a number of countries have succeeded in increasing the innovation intensity of their exports and raising income per capita, moving upwards and to the right in Chart 1.21. These include Estonia, Hungary, Latvia, Romania, Slovak Republic and Egypt – although in the case of Egypt, both the innovation intensity of exports and income per capita remain relatively low, highlighting the fact that significant challenges still lie ahead. Notably, there have been no instances where the innovation intensity of exports has improved without commensurate growth in income per capita.

However, a number of other economies have remained “stuck”, with production concentrated in less innovation-intensive industries and modest levels of income per capita. This group of countries includes Moldova, Ukraine and – at a somewhat higher level of innovation intensity – Jordan and Morocco. A number of countries have seen rapid growth in per capita income in the absence of improvements in the innovation intensity of their exports. These include exporters of commodities (such as Azerbaijan and Russia) and a number of other countries (such as Belarus). These countries face the challenge of sustaining growth once commodity prices stop rising and/or higher incomes erode their competitive advantages in their traditional export markets.

Innovation intensity of exports and patents

This measure of innovation intensity emphasises the adoption of existing technology, rather than innovation at the technological frontier. This is an important distinction, as in the most innovation-intensive industries the countries that account for the largest shares in the world’s patents may be different from those that account for the largest shares in international trade (see Chart 1.22). In other industries (such as vehicle manufacturing) shares in patents and exports are broadly aligned. Thus, certain countries may be good at adopting technologies without making a major contribution to their development. The innovation intensity of a country’s exports captures this important aspect.

Despite these differences, there is a positive relationship between the innovation intensity of exports and patents (see Chart 1.23). Indeed, many mature economies (including the United States, Israel, Japan and South Korea) tend to be among the strongest performers in terms of both patents and the innovation intensity of exports.

Meanwhile, a number of emerging markets appear to be better at adopting existing technologies, which is reflected in a high innovation intensity for exports but lower patent output. One notable example here is China. A similar pattern can be observed in the Czech Republic and a number of CEB economies (including Hungary and the Slovak Republic).

Conversely, Belarus, Russia, Kazakhstan and Ukraine have a relatively high incidence of patents, but appear to be less successful at commercialising the underlying inventions and adopting existing technologies. This may also be due to the fact that in some of these countries a large percentage of patents are held by universities and research institutes (see Chart 1.15), which have fewer incentives to commercialise their inventions.