TRANSITION REPORT 2014 Innovation in Transition


As the EBRD’s Transition Report 2013 showed, convergence between the income levels and living standards of the transition region and those of advanced countries has slowed markedly in recent years. In some cases, it has stopped altogether. Last year’s report concluded that much of the slow-down could be attributed to trends in total factor productivity – the efficiency with which capital, labour, land and human capital are combined.

At the start of the transition process, countries in the EBRD region generally had unusually low levels of total factor productivity, reflecting the inefficient allocation of resources under central planning. When production factors began to be redeployed more efficiently, total factor productivity initially grew rapidly.

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However, by the time of the global financial crisis, productivity in the region had reached the levels seen in other emerging markets with similar income levels. This suggests that most of the easy options have now been exhausted. Further improvements in productivity will need to come from structural changes in these economies – in other words, changes to their economic structure and economic institutions, as well as policies supporting reforms and the development of human capital.

The challenge of boosting productivity in an economy can also be examined at the level of individual firms. On the one hand, an economy’s aggregate productivity and growth are shaped by macro-level factors – the availability of capital, labour, skills and natural resources – and the efficiency with which these factors are combined and used. On the other hand, though, aggregate productivity and growth also represent the sum of the productivity and growth rates of all firms operating in the economy in question.

This report focuses on the various challenges faced by firms across the transition region when they seek to improve their productivity. It makes use of a recent survey, the fifth Business Environment and Enterprise Performance Survey (BEEPS V) conducted by the EBRD and the World Bank, as well as the Middle East and North Africa Enterprise Surveys (MENA ES) conducted by the EBRD, the World Bank and the European Investment Bank (EIB). These unique surveys contain detailed information on firms’ characteristics, performance and perception of the business environment, and they cover almost 17,000 companies.

This was the first BEEPS survey to include a detailed module looking at firms’ innovation activities and management/organisational practices over the last three years. The data cover 30 countries in eastern Europe and Central Asia, as well as Jordan and Israel. Israel is a particularly interesting comparator when studying firm-level innovation, as it is a world-class innovation hub – second only to Silicon Valley in the United States in terms of the concentration of start-up companies.1

Importantly, the design of BEEPS V allowed independent verification of firms’ responses regarding their innovation activities on the basis of descriptions of their main new products and services. This is important, given that innovation may mean different things to different people (see Box 1.1 for more details).

This chapter starts by examining the link between aggregate productivity in the economy and the productivity of individual firms, highlighting the role of innovation. Using BEEPS data, it then looks at the distinction between innovation at the technological frontier (at the global level) and the adoption of existing technology. It also distinguishes between firms’ introduction of new products, the introduction of new production processes and innovation in the areas of marketing and organisation.

With these distinctions in mind, the chapter then examines the different strategies that firms across the transition region use to obtain the knowledge and know-how that underpins innovation. Lastly, the chapter uses cross-country data to assess the overall level of innovation of individual economies. Particular attention is paid to countries’ output in terms of patents, as well as the composition of their exports.