Strengthening Bulgaria's Growth through Research and Innovation

1. J. Gabriel Goddard Senior Economist World Bank Sofia Arsenal Museum of Contemporary Art February 7, 2012

2. Main questions • What are the opportunities to strengthen Bulgaria’s growth by investing in research and innovation? • Which public policies could help Bulgaria to move up the value chain and expand high-tech exports? • What are the options to improve policy design and implementation?

3. Economic context • Robust economic growth up to 2008, driven by strong FDI and credit growth • Innovation was not the major driver of growth… yet some knowledge-intensive industries have done well • Post-2008: Economic downturn → lower private investment… and fiscal consolidation → cuts in public R&D • At the same time, increased competition from emerging economies

4. Increasingly export-oriented economy…Room to increase high-tech contribution • Exports are about 58% of GDP (2010), mostly directed to the EU market • Only 3% are high-technology exports, while EU average is 16% • Past performance may not be a good predictor of the future Source: Staff estimates, based on UN COMTRADE 2010 .

5. R&D-intensity is too low…Potential to step up private innovation Extensive product upgrading but limited long-term R&D • Bulgaria invests 0.48% of GDP on R&D vs. 1.85% in EU • Ratio of private to public R&D is 30:70; the inverse of OECD • Why invest more in R&D? Innovative firms in Bulgaria grew 1.5 times faster and create more jobs than non-innovative firms Source: BEEPS (2008).

6. Building on Bulgaria’s competitive industries…Potential for faster growth in IT • IT industry - 15,000 specialists and 2% of GDP • Attracts large amounts of FDI • Increasing sophistication Bottlenecks for future growth: • Shortage of skilled specialists • Regulatory burden • Low internet penetration • Low demand for EU-funded instruments

7. Recovery in patenting linked to IT sector Source: USPTO.

8. An expanding pharmaceutical industry… Potential for more homegrown R&D • Bulgaria’s Pharma industry exports tripled in recent years, generating ca. 25,000 jobs • Produces mainly generics, forcing it to compete on price • Spends about 5% of turnover on R&D, less than peers Bottlenecks for future growth: • Producers face admin. hurdles after patent expiry • Low-quality imports of medical products • Demand for public innovation programs is weak Exports tripled in recent years Source: UN Comtrade.

9. Priorities for Research and Innovation Policies in Bulgaria

10. Finding new models to finance research and innovation Key Issues: Low R&D spending; low absorption of EU funds and inefficiency of national funding instruments Short –term actions Medium-term actions Introduce counter-cyclical R&D spending policies Introduce an R&D Satellite Account for more active monitoring of R&D • Frontload planned increases in public R&D spending • Channel future increases in public R&D via competitive mechanisms • Target international and public-private collaboration

11. Introducing reforms that promote research excellence Key Issue: Fragmentation of funding mechanisms for research and innovation in different ministries Short-term action Medium-term actions Introduce a system-wide evaluation of research organizations Provide additional support to high performers Establish a grant program for high-impact researchers • Develop synchronized strategies on research and innovation up to 2020

12. Strengthening public entities to achieve better results Key Issue: TheNational Science Fund (NSF) and National Innovation Fund (NIF) are too small and do not operate as efficiently as they could Short-term actions Medium-term action Consider merging NSF and NIF into a single specialized agency • Prepare an evaluation of the effectiveness of innovation funding instruments • Work with beneficiaries to sustain the quality of proposals and enlarge the project pipeline

13. Faster absorption of EU funds within high-impact projects Key Issue: EU funding is a major source of innovation financing but absorption has proved challenging Short-term actions Medium-term action Consider creating a dedicated OP for Research and Innovation for 2014–2020 • Improve admin. capacity of the teams supervising the calls • Develop a rating system for consultants that work with beneficiaries of OP Competitiveness • Channel part of existing EU funds to large-scale projects such as Technology Parks

14. Developing sector-specific innovation policies for priority industries: IT, pharmaceuticals,… Key issues: Public research does not respond fast enough to private sector dynamics; brain drain and increasing shortage of skills Short-term actions Medium-term actions Scale-up national funding instruments with new funding windows for priority sectors Improve the business environment for IT and pharmaceuticals industries • Train more highly-qualified specialists • Establish grants to retain young Bulgarian scientists and attract international experts • Support the development of R&D centers in partnership with international companies