In general, analysis suggests that in countries with very low levels of development (in other words, countries in the pre-catching-up phase) the take-up of new technology is often still slow (or absent entirely). This is partly because insufficient human capital severely constrains technological progress. As economies develop and move into the catching-up phase, the pace of such take-up starts to vary greatly, even across countries that are at similar levels of development.3 One explanation for this heterogeneity in take-up rates is differences in countries’ access to (typically foreign) technology, particularly information and communication technology (ICT).

The openness of a country’s economy to foreign direct investment (FDI) and other forms of international cooperation are the key channels that determine the extent to which a country that is catching up with the technological frontier is able to tap the global pool of existing technologies.4 In particular, attracting FDI helps countries to effectively absorb such technologies. For instance, the Spanish-based firm Grupo Industrial Roquet is investing, in cooperation with the EBRD, in the production of standard hydraulic cylinders for agricultural and construction machinery in Romania. The use of modern technology – particularly as regards welding techniques and other modern production facilities – was essential to obtaining the approval of major international clients such as Kubota, Caterpillar and John Deere.

This absorptive capacity also depends on many other factors. Among these are: (i) the availability of technologically literate workers (reflecting both the quality of education and the effectiveness of on-the-job training programmes); (ii) good management skills; (iii) incentives for firms to use higher-technology processes; (iv) access to capital; and (v) the existence of adequate public-sector institutions which will support the take-up of critical technologies where market forces prove to be insufficient.5

As countries develop further and move closer to the technological frontier, another factor explaining the heterogeneity of the take-up of technology comes into play. This factor is the capacity of countries to create their own knowledge as they move from the “buy” group to the “make and buy” group.6 The adoption of technology and its modification to suit local circumstances tend to be more effective when domestic firms have R&D programmes.

At higher levels of development (as countries move to the “make” group), a country’s own R&D can increasingly start to generate new processes and products, particularly in areas where the country has developed advanced capabilities. In this post-catching-up phase, countries require cutting edge know-how, supported by both public and private R&D and good links between the two. Incentives for investment in R&D and innovation, which should already have been put in place, now become crucial. This requires access to markets where there is strong demand for new products, as well as effective intellectual property rights, tailored finance and access to specific skills.

The largest gap between the transition countries and the advanced economies relates to the capacity to create knowledge (see Chart 5.1a). While transition countries score relatively well on the availability of scientists and engineers (thanks to the emphasis placed on science and technology in the days of centrally planned economies), they lag behind when it comes to the quality of scientific research institutions and the availability of venture capital.

The gap between transition and advanced economies in terms of their absorptive capacity and access to technology is smaller, but still substantial, driven primarily by the lower availability and use of ICT in transition countries. This is also the area where differences within the transition region are the largest. This suggests that countries in the region tend not to fully exploit the potential of ICT when fostering innovation-based growth. A lower use of ICT often reflects insufficiently dynamic product and labour markets, as well as inadequate university systems.10

Transition countries perform somewhat better when it comes to broad business environment conditions such as the functioning of markets, although the gap in terms of the quality of institutions is sizeable.

Differences relative to other emerging markets (such as Brazil, Chile, China, India and South Africa) are smaller (see Chart 5.1b). However, the transition region is not in the lead on any aspect. Indeed, it trails all of those comparators when it comes to the capacity to create knowledge (where Chile scores highest).

Within the transition region, countries differ substantially in terms of the conditions for innovation. As expected, countries in the “make and buy” group tend to score higher than the “buy” and “low innovation” countries on all aspects (see Chart 5.2). In turn, the “buy” countries score higher than the “low innovation” countries on all aspects (with the exception of the quality of institutions, where differences are generally smaller).

These broad trends mask substantial heterogeneity within each group. For instance, Hungary, Poland and Turkey score highest among the countries in the “buy” group, signalling greater potential for knowledge-based growth. However, all of these countries have areas where they underperform. Hungary scores relatively poorly on the quality of institutions. Poland does badly on education and Turkey underperforms when it comes to labour market efficiency and the use of ICT.

Countries in the “low innovation” category have made substantial improvements since 2007, particularly in terms of the quality of institutions, access to technology and absorptive capacity. In these areas they have closed all or most of the gap relative to countries in the “buy” category. However, they continue to be held back by insufficient competition in their product markets, as well as their relatively inefficient labour and financial markets.

Regardless of these differences, the fact that countries that are more highly developed score better on all conditions for innovation suggests that they need to be looked at as a whole. Estonia, the transition country with the highest score in terms of the conditions for innovation, illustrates the importance of such a systemic approach to innovation (see Box 5.1).