TRANSITION REPORT 2014 Innovation in Transition

Potential for knowledge-based growth

Stages of innovation development

Transition countries differ significantly in terms of their rates of innovation and the ways in which firms acquire or create the know-how that they need. The analysis in Chapter 3 demonstrates that both firm-specific factors (such as a firm’s age, size and ownership) and country-specific factors (such as the business environment) influence innovation. The importance of these factors varies depending on a country’s position relative to the global technological frontier – in other words, whether a country is in a pre-catching-up phase, a catching-up phase or a post-catching-up phase.2

The way in which firms acquire the knowledge that underpins innovation tends to differ across these stages of development. As Chapter 1 shows, countries can be grouped together in four broad categories in terms of the main ways in which knowledge is obtained: (i) “low innovation” countries (where few companies spend money on buying or producing knowledge); (ii) “buy” countries (where firms predominantly buy technology, and relatively few firms engage in in-house R&D); (iii) “make and buy” countries (where firms are more active in terms of in-house R&D, relative to the purchasing or licensing of patents and know-how); and (iv) “make” countries (where firms are even more active in terms of in-house R&D).

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Conditions for knowledge-based growth

These prerequisites for knowledge-based growth can be grouped together under broader business environment conditions (or framework conditions). Such conditions affect the operations and decisions of all firms in the economy, particularly firms that innovate. Some conditions affect specific aspects of firms’ capacity to innovate. Business environment conditions include the quality of institutions (in other words, the legal and administrative framework that underpins interaction between individuals, firms and governments), macroeconomic stability and the functioning of product, labour and financial markets. (The importance of these factors as drivers of innovation is discussed in Chapter 3.)

Taking into account differences in levels of development, the conditions influencing innovative capacity can be divided into those affecting access to foreign technology, those affecting firms’ capacity to adopt and fully understand existing technologies, and those affecting the ability to create knowledge.7

For instance, access to technology depends on a country’s economic openness, the availability and use of ICT infrastructure and the extent to which FDI facilitates the transfer of technology. Absorptive capacity is underpinned by the quality of secondary and undergraduate education, the effectiveness of on-the-job training and the extent of any “brain drain”. Creative capacity depends crucially on: (i) the quality of postgraduate education; (ii) the availability of highly qualified scientists and engineers; (iii) flexible product and labour markets; (iv) the quality of scientific research institutions; (v) effective cooperation between science and industry in the field of research; (vi) the protection of intellectual property; and (vii) the availability of venture capital.


Conditions for innovation

Thus, as countries develop, the relevant conditions need to evolve in order to support knowledge-based growth. Having better access to technology without an educated workforce that is capable of effectively absorbing such technology will make it difficult for countries to progress to the “buy” stage of knowledge acquisition. Countries that become successful at absorbing technology and seek to create knowledge will need to improve the availability of specific skills. They will also need to strengthen links between public scientific institutions and the private sector.8

Policies that help to improve these conditions must evolve accordingly, depending on the extent to which conditions supporting knowledge-based growth are already in place. Where countries are still in the early stages of technological development, policies should focus on fulfilling the conditions for access to and absorption of technology.

In these circumstances, a policy mix that focuses solely on strengthening creative capacity (for instance, through increases in venture capital or grants fostering cooperation between industry and science) may yield only limited results. At the same time, these factors cannot be completely ignored, as elements such as cooperation between industry and science and the quality of scientific research institutions take a long time to improve.


Assessment of prerequisites

A simple framework comprising six sets of conditions for knowledge-based growth (the quality of institutions, the macroeconomic environment, the functioning of markets, access to technology, absorptive capacity and creative capacity) is used below to provide a brief assessment of the conditions for innovation in individual countries in the transition region.

Assessment in these areas is based on the relevant global competitiveness indicators. Data on these indicators are provided not only for the transition countries, but also for a number of advanced economies (in other words, countries operating at the technological frontier) and emerging market comparators.9 The scores reflect the establishment of various regulations (such as laws protecting intellectual property or requirements that need to be fulfilled in order to start a new company) and their implementation, as well as expert assessments of the quality of economic institutions and firms’ capacity to access and absorb technology.

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CHART 5.1 CHART 5.2