World Bank urges increased investment in commercial innovation

01/05/2006

Warning countries from Central Europe to Central Asia that they are trailing behind most of the developed world in R&D spending, a new World Bank report urges them to take steps to improve the conditions for increased investment in commercial innovation as a tool for promoting growth and reducing poverty. According to the Bank's experts, it is important to boost the private sector's role, as well as to institute economic incentives, upgrade information infrastructure, and bring about educational reforms.

By Svetla Dimitrova for Southeast European Times in Sofia - 01/05/06

Average spending on R&D in the region now stands at less than 1 per cent of GDP, well below the EU target of 3 per cent. [Getty Images]

Countries from Central Europe to Central Asia are lagging behind most of the developed world in R&D spending, according to a recent report from the World Bank.

Average spending on R&D in the region now stands at less than 1 per cent of GDP, well below the EU target of 3 per cent, according to the study, "Public Financial Support for Commercial Innovation". Furthermore, some two-thirds of research spending in these mostly post-communist countries is covered by public funding, while in Western Europe 65 per cent to 70 per cent of the total comes from the private sector. In Japan, the private sector's share stands at 80 per cent.

The aim of the report's authors was to offer policymakers in Europe and Central Asia (ECA) options to foster productivity and growth by creating a favourable environment for the application of knowledge in the economy via innovation and learning. They analysed the various financial instruments for encouraging innovation in the region and recommended reform measures that should be carried out before applying these instruments.

Seven Southeast European (SEE) countries -- Albania, Bosnia and Herzegovina (BiH), Bulgaria, Croatia, Romania, Serbia-Montenegro and Turkey -- are among the 25 ECA nations assessed in the report. The others include 13 former Soviet republics, among them current EU members Estonia, Latvia and Lithuania, as well as five other former communist countries -- the Czech Republic, Hungary, Poland, Slovakia and Slovenia -- which also joined the Union in 2004.

Using a set of Knowledge Economy Indicators (KEI) -- economic incentives, education, innovation system and information infrastructure -- the study ranks countries according to their ability to invest effectively in innovation. Each country is given a score of 1 to 10 for each indicator and a general KEI score, which determines its ranking.

Of the 25 ECA countries, the top three in terms of the KEI are Estonia with 8.26 points, Slovenia with 7.88 points and Lithuania with 7.17 points. They are followed by the other five new EU member nations. Right after them come Croatia with 6.22 points and Bulgaria with 6.19, in 9th and 10th place, respectively. Of the other SEE countries, Romania is ranked 12th with 5.27 points, Turkey takes the 16th position with 4.73 points and Serbia-Montenegro the 17th with 4.55 points. A score of 3.02 points put BiH in the 23rd position, ahead of Albania, which is second to last among the 25 ECA nations, with 2.99 points.

By comparison, Finland -- one of the top innovation economies in the world -- has a general KEI score of 9.02 points and 9.73 points on innovation and 9.21 points on education.

"Government funds are scarce and should only be used to fund research when the conditions are in place for them to bear fruit," the study's lead author, Itzhak Goldberg, stressed. [World Bank]

SEE countries received mixed scores for specific indicators. Croatia's highest score of 7.12 points is on innovation, placing it 4th among the 25 ECA countries, ahead of six EU members. But the country is given only 4.31 points for its economic incentives regime, suggesting a need for improvement in this area.

Bulgaria's best score of 6.73 points is on education, entitling it to a better ranking on this indicator than the other SEE countries, but two places below its position in the general KEI ranking.

Romania, for example, is 12th in the general KEI ranking of the 25 ECA countries, but only 20th in education because of low public spending in this sector. Turkey's per capita GDP is at the same level as Lithuania and Slovakia, but it is ranked behind these countries on the general KEI index, due to low scores on average years of schooling and mathematical achievement. It is in 24th position on education.

A score of less than 2.50 points on a specific indicator is a sign of bottlenecks in that area. BiH and Albania, for example, are given only 1.02 points and 1.65 points, respectively, on innovation, while Serbia-Montenegro's worst score of 2.15 points is on the economic incentives indicator.

If governments provide additional funding to encourage innovation without also improving economic incentives, upgrading information infrastructure and reforming education, the money will be wasted, the report noted. Furthermore, increases in expenditure are unlikely to bring about an improvement unless the private sector begins to plays a bigger role in the process.

Despite large numbers of researchers and a legacy of educational achievement from the communist period, countries in the former Eastern Bloc will not find it easy to translate these potential strengths into commercially successful innovations unless universities and research institutions work seamlessly with the private sector, the World Bank said.

The World Bank hosted a Knowledge Economy Forum in Prague on 28-30 March. The three-day event brought together representatives of 27 nations from the region. [World Bank]

"Government funds are scarce and should only be used to fund research when the conditions are in place for them to bear fruit," the study's lead author, Itzhak Goldberg, stressed.

The availability of incentives to promote collaboration between researchers and the private sector and broad public access to computers and the internet are some of the needed conditions. The rule of law is also essential, according to Goldberg, as are the protection of intellectual property rights and efforts to fight corruption.

To discuss how the ECA countries can improve their innovation systems and foster better use of knowledge by firms, the World Bank hosted a Knowledge Economy Forum in Prague on 28-30 March. The three-day event brought together representatives of 27 nations from the region.

"Translating research and development into commercial success is key to achieving sustained, long-term economic growth," Shigeo Katsu, World Bank Vice President for the ECA region, said in his opening remarks at the conference. "This will require governments in Eastern Europe and Central Asia to stop spending their limited resources on archaic innovation systems and start encouraging private enterprises to step into the breach, as their counterparts do further west."

This does not mean that governments should stop financing research altogether, but that when they allocate public resources for such activities, the focus should be on research by or for private enterprises. "The more important role for government is to carry out the necessary structural reforms so that investments in research bear fruit," Katsu said. "Channelling the resources governments save on direct research into education, health and social safety nets would also help by raising labour productivity. In addition, government needs to facilitate public access to the internet, to encourage accurate financial reporting by firms, and to uphold the rule of law. The same goes for fighting corruption and enforcing rules to protect intellectual property rights."