Advancing Innovation in ECA September 17-20, Yerevan, Armenia Innovation and Absorption in ECA - The Role of Government September 17, 2007 Mr. Itzhak Goldberg Advisor, Policy and Strategy World Bank
The Role of Innovation and Absorption for Growth Labor Labor Growth Productivity Capital Capital Human Human Capital Capital Brain Circulation Innovation Innovation Absorption Absorption R&D Trade & FDI Investment Investment Climate Climate K-Flows 2
Innovation vs. Absorption From Absorption to Innovation: New to the Firm versus New to the World Examples of absorption: Adopt new product, process, Upgrade old product, process; Quality certification, Technology license Examples of Innovation: invent new technology or product 3
Channels of Absorption Learning & Brain Circulation Trade & FDI Absorption Knowledge Flows: Patents, Citations R&D 4
Channel I: Trade and FDI Exporter 50% more likely to introduce new products, processes, but chicken & egg Foreign ownership 18% increase in technology upgrading. JV with MNE 100% increase in technology upgrading. Policy : international openness 5
Channel II: Learning and Brain Circulation Education and training by firms. Models: Finland, Korea Brain-drain Brain circulation. Models: India, Israel, Armenia? Policy: Investment in education and openness to attract returnees 6
Channel III: Research and Development R&D for absorption, not JUST for innovation -- the second face of R&D à la Cohen and Levinthal (1990) R&D output does not flow costlessly from developed to developing countries. China invests massively in R&D Policy: Matching Grants below 7
Channel IV Knowledge Flows: Econometric Analysis of ECA Patents Sample: 3000 ECA-generated patents in US and EU. Findings: Indigenous (not joint) patents make fewer citations to the global literature, cite older technologies, Indigenous patents are less frequently cited by the world. Conclusion: weak connection to global technological mainstream 8
Finding: Growing R&D collaboration Many ECA patents are co-invented with inventors in Western economies, mainly Germany Many ECA patents assigned to MNEs; some to ECA-based subsidiaries of MNEs. Data hint that collaboration might be overcoming isolation 9
Role of Government the Why? Market failures may justify government intervention to stimulate absorptive capacity in private sector BUT Policy design needs to account for government failures: capture, corruption, misaligned incentives AND 10
Pre-requisites for Intervention Skills and Human Capital India: Early publicly financed education - critical importance Investment Climate and Governance Russia: Poor investment climate (weak competition, red tape); governance: corruption, regional government capture by business 11
KEI measure of Pre-requisites Source: ECA Study Public Financial Support for Commercial Innovation, 2006 12
The How of Government Intervention? Governments can support absorption via: 1. Role I: Regulatory interventions to open to FDI and K-Flows by Entry, Financial Discipline, Exit, Mobility, Barriers to FDI, Trade: Non-Tariff-Barriers, Customs, Standards, Quality Certification and IPR Enforcement 2. Role II: Commitment of public funds financial and institutional instruments - next. 13
Option I: Financial Instruments Matching grants: preserve private risk, can they be protected from corruption and capture by vested interests? Soft loans: maturity deters risk taking Tax holidays: no profit to offset in SMEs (Source: WB ECA Study Public Financial Support for Commercial Innovation, 2006) 14
Option II: Institutional Instruments Why & How should governments intervene in the management of: Technology Incubators Technology parks Own, Manage or Pay: 1. Privately owned/managed & subsidized 2. Publicly owned & managed 3. Publicly owned & privately managed & subsidized 15
ECA KE Discussion Issues Are Pre-Requisites met? - Human Capital, Investment Climate, Are Channels Open? - FDI/trade, skills & brain circulation, K-Flows, R&D Governance of Incubators/Parks? - who owns, manages, pays? Protected from capture by industry? From Government interventions? 16