Industrial upgrading in Western Balkans and policy implications

1. Industrial upgrading in Western Balkans and policy implications Prof. Slavo Radosevic Keynote remarks The Impact of Economic Crisis in Western Balkans: Implications for Politics, Innovation and Change EBRD, Roundtable discussion, Friday 12th February 2010

2. Outline • Western Balkans: a brief recap of recent and not so recent history • Industrial upgrading: production and innovation capability and foreign levers to growth • Policy lessons

3. Western Balkans: a brief recap of recent and past history • After 1989: the SEE/WB has become a new European periphery • Lesson from history: the growth of periphery is inextricably linked to its international economic integration (Berend and Ranki, 1982). • Catch up with the EU core = f (the relative roles of exogenous and endogenous forces * the nature of their interaction) • The direct economic ‘pull’ of the old EU through finance,FDI and intra-industry trade > < the domestic forces (national system of political economy) which enable the external influences to have spin off effects • My lenses today: industrial upgrading

4. Industrial upgrading: how to move up along value chain? • Cost vs. quality vs. technology based competition • Requirements for technology based competition • competition based on product/process innovation • sophisticated demand • user requirements • certificates and standards • marketing barriers (brand) • after sale services and warranty • IPRs • affordable access of NTBFs to technical infrastructure • available finance to upscale production • For the time being, upgrading in WeBa is about production not innovation capability

5. Direct and indirect R&D content: policy implications • A majority of the NMS and all WeBa are technology users and have a high indirect technology intensity • Non-EIS pattern of technology upgrading: • -> low overall technology intensity -> high indirect technology intensity -> average direct and indirect technology intensity -> high direct technology intensity • Policy implication: integrate FDI / technology transfer into innovation policy (increase R&D but in interaction with imported and indirect domestic R&D (embodied in capital goods and inputs)

6. Production capability as driver of productivity; the inefficiency of NIS in EE • Production capability and R&D as drivers of productivity (see next two slides) • Given their levels of R&D, innovation and quality related activities (ISO9000), EBRD economies have lower levels of GNI per capita compared to the ROW. • The models that include sub-regional dummies (11 and 12) show improved explanatory power confirming that inefficiency of the NSI characterizes all EBRD sub-regions • EBRD countries sample: ISO certification as a proxy for production capability significantly contributes to explaining the differences in productivity. In a catching up context, R&D denotes absorptive rather than innovative capability

7. A shift from production to innovation capability is not automatic and linear process • Not significant correlation between firm level technology absorption and company spending on RD across countries* + not significant link between firm level technology absorption and capacity for innovation > significant difference between innovation capacity and production capability/absorptive capacity. • Innovation variables (capacity for innovation and company spending on RTD ) are strongly and significantly correlated toexternal RTD factors (local specialised research and training, quality of scientific research institutes and to demand) and to demand factors (customer orientation, buyer sophistication). • *For very similar result see EBRD TR 2009, p. 102: there is not link between management practises and either % of innovative sales or R&D spending (cf. not, this is not measurement error) Source: Radosevic, S (2009) ‘Research And Development and Competitiveness, and European Integration of South Eastern Europe’, Euro-Asia Studies, June 2009, Vol. 61, No. 4, June

8. Assessment of demand and supply for local R&D in SEE - Supply of RTD is still above demand for RTD Source: Radosevic, S (2009) ‘Research And Development and Competitiveness, and European Integration of South Eastern Europe’, Euro-Asia Studies, June 2009, Vol. 61, No. 4, June

9. Supply Quality of education Quality of math and science teaching Local availability of spec. research and training Quality of public (free) schools Quality of scientific research institutes Availability of scientists and engineers Demand Extent of staff training Firm level technology absorption Production process sophistication Buyer sophistication Customer orientation Company spending on R&D Government procurement adv. techn products Capacity for innovation Proxies for quality of supply and demand for RTD in SEE Note: These are responses of local business communities which are assessing demand and supply for RTD from the perspective of their economy, Not some objective external benchmark.Source: WEF data 2006

10. The sources of productivity improvements in CEE: Global value chains and production capability improvements Productivity of FDI subsidiaries is significantly explained by ‘quality control’ (production capability) (Majcen et al, 2009)(se next slide) Production capability: upgrading quality in existing products seem to be a more automatic process. Countries converge in quality (measured by unit prices) with the international leaders at an annual rate of 5-6% unconditionally (Hausman, Hwang and Rodrik, 2007) This ‘automatism ‘ in the case of CEECs it is actually FDI assisted or subcontracting driven mastery of production capability Some CEECs (Hungary, Croatia, Lithuania, Romania, Slovenia) have lesser scope for further quality improvements and must instead move to new products (EBRD, 2008)

11. The challenge for ‘periphery’: Missing levers to growth? Weak vertical integration & horizontal fragmentation Vertical and horizontal links do not work in WeBa ? Policy focus: - Support to the weakest agent: local business R&D - Transfer function on supply side (R&D) - Transfer function on demand side (FDI/local firms)

12. Invest in ‘knowledge infrastructure’ but only closely linked to careful assessment of BES demand • S&T Parks and dangers of ‘surrogate modernization’ • Priorities: First: projects and services (functions), and only than buildings (organisations) • Give preference to technology specific (critical mass) vs. generic parks (preferably linked to large enterprises)

13. Support current drivers of technology upgrading • Quality (ISO9000 etc is precondition to export) and vocational training (key to developed production capability) • Support for domestic firms to become quality suppliers for MNEs (cf. Hungarian INTEGRATOR) • Support programs for engineering and software

14. Support integrated and complementary support to NTBFs • Policy support is focused on opposite edges of new technology venturing • Funding gap • mini-grants: to explore commercial feasibility of technical idea • matching grants: to encourage risk sharing with firm + potential to create linkages

15. WeBa 2010: how ‘to extend transition agenda’? • Policy package of the last 15-20 years: focus on business environment (market automatism) + add well functioning state (2009) • Meagre results: slower X than of CE; large trade and CA deficits; appreciating ExRat; quality of life worse in 2009 than in 1989 (except Rom and Alb) • Add dimension of industrial upgrading into analysis and policy coupled with FDI/industrial networks • How to address demand shock? Further opening of regional (EU/SEE) market (cf. ‘jugosfera’ as the remaining lifeblood of local businesses). EBRD and regional projects?