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EBRD Transition Report 2014 – R&D and the acquisition of external knowledge

TRANSITION REPORT 2014 Innovation in Transition

R&D and the acquisition of external knowledge

The introduction of new products and processes often requires specific inputs, such as spending on research and development (R&D) – in other words, creative work undertaken on a systematic basis in order to increase a firm’s stock of knowledge. While the concepts of R&D and innovation are sometimes used interchangeably, R&D primarily reflects inputs into the innovation process, while new products and services are innovation outputs. For example, R&D activities do not always lead to successful innovation, as a company may spend money on laboratory research investigating a new chemical compound for its paint, but not have any new paints on offer (at least, not for the time being). And conversely, the introduction of new products or processes may not always require R&D spending.


Low spending on R&D

Firms in the transition region lag behind Israel in terms of the amounts spent on in-house R&D, despite the fact that some individual transition countries have a higher percentage of firms engaged in in-house R&D than Israel (see Chart 1.6). Slovenia comes closest, with an average of 0.7 per cent of annual turnover being spent on R&D, compared with Israel’s 1.3 per cent. While cross-country differences are small in low-tech sectors, where firms in all countries (including Israel) tend not to invest much in R&D, these differences are more pronounced in high-tech and medium-high-tech manufacturing sectors and knowledge-intensive service sectors (see Chart 1.7).

CHART 1.6

While some transition countries have a higher incidence of in-house R&D than Israel, the amounts of money involved are much smaller

 

1.6_new2

Source: BEEPS V, MENA ES and authors’ calculations.
Note: Darker colours correspond to higher expenditure on in-house R&D as a percentage of annual turnover across all firms. The pie charts for each country compare the number of firms that undertake in-house R&D (purple) with the number of firms that do not conduct such R&D (ochre).

CHART 1.7

Source: BEEPS V, MENA ES and authors’ calculations.
Note: Based on ISIC Rev 3.1. High-tech and medium-high-tech manufacturing sectors include pharmaceuticals (24), machinery and equipment (29), electrical and optical equipment (30-33) and transport equipment (34-35, excluding 35.1). Low-tech manufacturing sectors include food products, beverages and tobacco (15-16), textiles (17-18), leather (19), wood (20), paper, publishing and printing (21-22) and other manufacturing (36-37). Knowledge-intensive services include water and air transport (61-62), telecommunications (64) and real estate, renting and business activities (70-74). Data represent unweighted cross-country averages.

To make or to buy?

Some R&D can be contracted out to other companies and institutions, rather than being conducted in-house. In fact, BEEPS firms outsource more R&D projects than they conduct in-house. At the same time, in-house R&D projects have a higher average cost. The majority of firms conducting R&D employ a combination of in-house and outsourced work.

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The introduction of new products can also be facilitated by acquiring external knowledge. This can be done through the purchase or licensing of patented technologies, non-patented inventions and know-how derived from other businesses or organisations. In short, firms can use a range of different approaches to obtain knowledge.

Chart 1.8 shows how countries compare in terms of whether they “make” knowledge (in-house R&D) or “buy” it (outsourced R&D, or the purchase or licensing of external knowledge). The horizontal axis shows the percentage of firms that only ever buy knowledge, while the vertical axis shows the percentage of firms that only follow a “make” strategy or employ a combination of “make” and “buy” strategies.

On the basis of firms’ responses to BEEPS V, four broad groups of countries emerge:
1. Low innovation: In this group of countries, located in the bottom left-hand corner of Chart 1.8, few companies spend money on buying or producing knowledge. This group includes countries such as Albania, Armenia, Azerbaijan, Georgia and Uzbekistan.
2. Buy: Firms in this group of countries predominantly buy technology, with the percentage of firms that engage in in-house R&D remaining relatively modest. Countries in this category include Bosnia and Herzegovina, FYR Macedonia, Hungary, Kazakhstan, Kyrgyz Republic, Moldova, Mongolia, Montenegro, Poland, Serbia, Tajikistan, Turkey and Ukraine.
3. Make and buy: Firms in this group of countries, which is located above the sloping line, are more active in terms of in-house R&D relative to the acquisition of external knowledge. This group could be broken down further on the basis of the extent to which firms tend to engage exclusively in in-house R&D or both make and buy knowledge.
4. Make: Finally, Israel (located in the top left-hand corner) is the only country where few firms only follow a “buy” strategy and a relatively large proportion of firms spend money on in-house R&D.

These distinctions are important when designing policies to support innovation in individual countries (as discussed in Chapter 5 of this report).

What explains these cross-country differences in firms’ innovation strategies? As one might expect, their level of economic development appears to play an important role. Firms in lower-income countries are generally less likely to engage in either in-house R&D (see Chart 1.9) or the acquisition of external knowledge. However, if they do, they are more likely to simply spend on the acquisition of external knowledge (see Chart 1.10). This is not surprising, since firms in countries that are further removed from the technological frontier naturally focus more on the adoption of existing technologies. This may also be a reflection of insufficient human capital and other limitations in terms of their capacity to conduct their own R&D.

Such limitations are also reflected in the source of any external knowledge: in higher-income countries it comes predominantly from domestic firms, research institutes and universities, while in lower-income countries it is predominantly imported from foreign firms, research institutes and universities. Although firms in lower-income countries may find it harder to pursue R&D-based strategies, they can achieve productivity gains in a number of other ways, for instance by upgrading their management practices (see Chapter 2).

CHART 1.8

Source: BEEPS V, MENA ES and authors’ calculations.
Note: A “make” strategy refers to in-house R&D, whereas a “buy” strategy refers to outsourced R&D and the purchase or licensing of patents and know-how. The lighter colour denotes countries where the percentage of firms that only ever follow a “make” strategy is greater than the percentage of firms that only ever follow a “buy” strategy. The size of the bubble corresponds to the percentage of firms that have engaged in product innovation (on the basis of cleaned data).

CHART 1.9

Source: BEEPS V, MENA ES and authors’ calculations.
Note: Based on the World Bank’s income classification as at July 2014. Data represent unweighted
cross-country averages.

CHART 1.10

Source: BEEPS V, MENA ES and authors’ calculations.
Note: Based on the World Bank’s income classification as at July 2014. Data represent unweighted
cross-country averages.

Government and university spending on R&D

Evidence from BEEPS V is in line with country-level data showing that R&D activity tends to be significantly weaker in transition economies than in innovative advanced economies, whether it is measured in terms of R&D spending or the number of people working on R&D (see Chart 1.11). However, these transition countries are not performing any worse than other emerging markets. For instance, Russia and China spend a similar proportion of their GDP on R&D – around 1 per cent. Interestingly, however, the number of R&D personnel in Russia is several times the figure seen in China as a percentage of total employment, partly reflecting a legacy of the Soviet innovation system (see the discussion of science cities in Box 5.4).

Country-level data also reveal that firms are responsible for the majority of R&D spending in advanced economies, accounting for an average of 61 per cent of such spending in OECD economies (see Chart 1.12). Firms in emerging Asia account for a similar percentage.

In the transition region, however, firms account for a much lower percentage of countries’ overall R&D spending: around 37 per cent on average. In contrast, governments in the transition region account for a larger percentage of R&D spending (more than a third, compared with 12 per cent in advanced economies).10 This reflects a legacy of the central planning system, where innovation was often centralised in specialist research institutes, which remain active to this day in some countries.11

As the development of new technologies relies on both fundamental and applied research, both governments and universities have an important role to play. For innovation to be successful, the efforts of governments, academia and industry must complement each other effectively (as discussed in Chapter 5 of this report).

CHART 1.11
  • Transition countries
  • Other countries

Source: UNESCO.
Note: The fitted line is produced using a linear regression.

CHART 1.12

Source: UNESCO.
Note: Based on 2011 data for 73 countries worldwide. Figures represent unweighted cross-country averages. In the transition region data are not available for Albania, Bosnia and Herzegovina, Egypt, Jordan, Kosovo, Morocco, FYR Macedonia, Tunisia, Turkmenistan or Uzbekistan.