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EBRD Transition Report 2014 – Introduction

TRANSITION REPORT 2014 Innovation in Transition

Introduction

Governments everywhere acknowledge the importance of innovation for long-term growth. This is most noticeable in countries where the easy options have been exhausted and future growth depends on more efficient ways of combining inputs or producing new or improved outputs.

Furthermore, the creation and spread of new knowledge are associated with significant market failures. For example, an individual firm deciding whether to invest in research and development (R&D) may fail to take account of the potential for positive spillovers to occur as the knowledge created becomes available to the wider economy. Such externalities call for government action.

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Governments can support innovation directly, either by funding public research or by encouraging private investment in research and innovation (for example through support for the transfer and spread of technology, support for venture capital, seed capital and R&D, and innovation-related tax incentives or incentives fostering cooperation between industry and science). They can also foster innovation indirectly, by providing a suitable environment for firms that are willing to invest and innovate.

The policy mix should take account of potential externalities stemming from innovation by individual firms, as well as the degree of competition within the relevant sector. Most policy options will favour one sector over another, and some sectors may require specific interventions. This may force governments to make difficult choices, striking a balance between direct support for innovation and improvements in the general environment.

The combination of policy objectives and instruments should be tailored to a country’s level of development and the strengths and weaknesses of its innovation system, so it should vary both across countries and over time. Although some countries in the EBRD region have made important technological breakthroughs in the past – such as Sputnik 1, the first artificial satellite to orbit the Earth, and Vostok 1, the world’s first manned spacecraft – they are not currently operating at the technological frontier in most areas.

Instead, they are at various stages of the catching-up process. Furthermore, the legacy of centrally planned innovation systems still looms large over much of the EBRD region – particularly in the countries of the former Soviet Union, where most research work was conducted by special research institutes, rather than universities or private companies.1 Although the pure science and innovation that resulted from these top-down systems was sometimes very advanced, it often failed to translate into commercially viable applications, as links with industry were weak. While there are examples of innovative companies subsequently emerging from these environments, the interface between research and the rest of the economy remains rudimentary at best.

With this in mind, this chapter provides an overview of science, technology and innovation policies (henceforth simply referred to as “innovation policies”) in transition countries and assesses their appropriateness given the level of development in these countries. It first analyses the potential for transition countries to follow a knowledge-based growth path, given their current position in terms of innovation. It then discusses the main characteristics of the innovation policies currently being pursued, before looking at whether such policies are in line with these countries’ levels of development and their potential for knowledge-based growth. It concludes by providing guidelines for more differentiated and more appropriate innovation policies in individual countries in the region.