How to use prioritization methods in the course of implementation of RIS3

How to use prioritization methods in the course of implementation of RIS3 S3 Platform – Peer review workshop 25 February 2014, Rīga

Introduction • Methodology for selecting and reviewing RIS3 priorities via identification of industry sectors with highest growth potential. • Method developed by a group of experts: Gundars Kuļikovskis, Aiva Švēde, Gatis Ābele, Krišs Riekstiņš during June, July – 2013 as part industry analysis for RIS3 Latvia Presentation@RIS3 Platform Peer Review Workshop. (C) 2014. FIDEA SIA.

Challenges • Identification of industries with highest growth potential for selecting RIS3 priorities should be evidence based process, based on hard and objective data • Were to create human capital to benefit from it, rather than feed to brain drain • Implementing RIS3 is aiming at moving target. Re-evaluation of priorities should be done on regular basis: • Important changes in external context should be expected during strategic planning 7 year cycle • Non-linearity. Even successful policies result in unforeseen changes in internal context • Process of re-evaluating priorities should be compatible with process of initial strategy setup • Rent seeking is a problem at every step. Lobby groups are powerful and government needs strong arguments • Cost of re-evaluation should be reasonable Presentation@RIS3 Platform Peer Review Workshop. (C) 2014. FIDEA SIA.

RIS3 – strategy of economical transformation • Economic transformation should lead to higher productivity at individual as well as cumulative level • Innovation is the key to move to higher value products and activities • Successful smart specialization: • Increase trade - higher volume of exports & imports • Decrease number of technologically unrelated products produced locally • Increase value of products produced locally per volume • “What You export matters” by Ricardo Hausmann, Jason Hwang & DaniRodrik • Export is the key for growth • Moving to higher value products can be done only step by step using existing and related production factors Presentation@RIS3 Platform Peer Review Workshop. (C) 2014. FIDEA SIA.

Sectorial gap analysis • Value gap between Latvia and more developed countries is good indicator of unrealized growth potential • Used 9 reference EU countries: Austria, Belgium, Denmark, Ireland, UK, Netherlands, Finland, Germany and Sweden. We can expect that these countries: • Done maximum in order to increase value • Similar environment and climate • There are no product requiring low skilled and low labour • Database of international trade (COMEXT). Data of international trade of 2010, 2011 and 2012 • 4 digit product level which is highest degree of detail available • Export value (EUR) & volume (KG) • Only countries with significant volume or value of export. Country is excluded in given 4 digit product group if it is not at the top 3 at any of- physical volume, value or total value Presentation@RIS3 Platform Peer Review Workshop. (C) 2014. FIDEA SIA.

Notes • Approach is very conservative. Movement to higher product value is in very related product set . If we allow migration between the products the gap is higher • The methodology is useful: • For identifying sectors with potential for building up human capital • For measuring success of convergence of economy • For regions which by size is country due to type of data – Eurostat • Potential of industries does not reflect potential of direct investment into industries. • It might be that investment should be done in other: R&D, human capital, internationalization etc. For example wood industry can move to higher value product by employing nanotechnology • If the realization of growth potential is lack of investment then such investment should be done by private capital • Most important lesson is shortlist of industries which have significant value creation potential Presentation@RIS3 Platform Peer Review Workshop. (C) 2014. FIDEA SIA.

How to use prioritization methods in the course of implementation of RIS3