Slavo Radosevic

1. RESTRUCTURING OF INNOVATION SYSTEMS IN CENTRAL AND SOUTH EAST EASTERN EUROPEASESSING THEBASIS FOR TRANSFORMATION TOWARDS KNOWLEDGE BASED ECONOMY Slavo Radosevic School of Slavonic and East European Studies

2. Background • 1990s: CEECs - R&D has not been directly linked to recovery and growth • 1990s: Growth = initial conditions * reform policies • Sources of long-term growth in the post-transition period: NSI?

3. Key arguments • Growth during the 1990s: Static modernization effects driven by reallocations/FDI/subcontracting vs. Dynamic modernisation effects (technology accumulation/FDI spillovers) • Growth is not automatically accompanied by recovery in R&D and domestic innovation (demand vs. demand for technology) • Disjunction between accumulation of production capability vs. technology capability of the CEECs > weak systems of innovation unable to meet challenges of KBE • Innovation policy between ‘surrogate modernisation’ and search for own solutions

4. Growth and recovery have not been accompanied by recovery in demand for technology …….

5. Different rates of GDP ….. similar falls of GERD/GDP

6. … while demand side constraints have improved …. Change in proportion of demand side difficulties of enterprises today (2001) and at start up (established in 1998)

7. … but, this improvement in demand side conditions has not been followed by equally strong improvement in supply side conditions Change in proportion of supply side difficulties of today (2001) and at start up (established in 1998)

8. Decline…. stabilisation …….and partial recovery in early 2000 ….…

9. The shares of R&D funded by business enterprise sector have remained relatively stable > business enterprise sector has shared the destiny of the overall decline, absolute and relative, of R&D sector

10. … while the overall share of industry in R&D funding (except Slovenia)remains stable …. i.e, no structural change

11. Why growth does not automatically generate demand for R&D? Innovation in CEE, RU and TK is mainly about equipment (cf. low R&D intensity of innovation)

12. Employment in high-medium tech manufacturing vs BERD/GDP 3.5 3 S 2.5 FIN 2 CH D BERD/GDP B F 1.5 DK UK NO A 1 NO IRL SL CZ I E SK 0.5 HU LV CY EL LT P EE RO BG PL 0 0 2 4 6 8 10 12 High-medium tech empl/mnfg A large share of high/medium tech…. but without R&D

13. … the key source of competitiveness is in production capability

15. Quality: proxy for production capability (ISO9000 per capita) However, mastery of production capability in the overall economy is still low....

16. ….though, taking place at a high rate.

17. Technology developing vs. technology using capabilities … In nutshell, evidence points to disjunction between production and technology capability

18. Catch-up in production capability (use of technology) • Significant rise in labour productivity (partial proxy for technology use) • Growth of ISO9000 • High gap in productivity of FDI subsidiaries vs local firms (Rojec, Hunya)

19. Catch-up in technology capability (technology development)? • Micro evidence • from technology use to technology development: limited functional upgrading • Electronics: limited network alignment • firm case studies: successful business models are confined on production capability (cf. Videoton)

20. Catch-up in technology capability (technology development)? • Macro evidence • Labour force skill structure (high share of vocational skills) • FDI spillovers: negative or absent • Low and stable GERD/GDP • EIS trends: falling behind • Summary: • Micro – mixed evidence • Macro- not ‘catch up’ but ‘hanging on’ • Local firms: the weakest link

21. EIS trend Innovation Scoreboard Trend (average based on 10 indicators) 60 50 40 30 20 10 0 EU TR BG SK CZ LV CY EE LT SI HU PL RO • 8 out of 12 ACCs are falling behind in knowledge based activities

22. Common structural weaknesses of innovation systems of the CEECs • Inovation activity is restricted to few large domestic enterprises which invest comparatively high share of sales into innovation • SMEs : the weakest part of innovation system > very small share of innovative SMEs (except EE) • Foreign firms are investing comparatively more into R&D and innovation than domestic firms > big productivity gap between domestic and foreign firms • Very weak linkages between domestic LE and SMEs, and between FDI and domestic firms > fragmented innovation systems

23. Innovation policy: from ‘surrogate modernisation’ to search for own solutions • Early/mid 1990s: focus on bridging institutions • Academy – industry relations; S&T parks; commercialisation • Implicit assumption that public R&D and demand (final and intermediate/firms) are not the problem but the LINK between them • Neglect of production capability (except. SI) and of firms as a source of supply of technology • Late 1990s/2000s: differentiation among countries in the scope of innovation policy • Focus on production capability (cf. Slovenia) • Degree to which innovation policy is oriented towards FDI (Hungary) • Focus on R&D in industry vs R&D for industry (Estonia)

25. Number of innovation policy mechanisms of the CEE acceding and candidate countries (end of 2003)

26. Key challenge of innovation policies in CEECs • ‘R&D/High tech’: the dominant paradigm in innovation policy in CEECs despite data which suggest that innovation in these countries is very much linked to equipment and with limited R&D component • This leads to very narrow ‘client base’ of innovation policy and neglect of huge untapped demand related to quality, diffusion and knowledge absorption • Value chain vs. NSI: how to reconcile and integrate two policies • Location of investments • Extent and depth of technology intensive activities • Spillovers to local firms • FDI: marketing country for FDI • Innovation policy: exclusively R&D/high tech focus • Models to follow? Models to be developed?