Industrial upgrading in Western Balkans and policy implications

Industrial upgrading in Western Balkans Industrial upgrading in Western Balkans and policy implications and policy implications

Prof. Slavo RadosevicProf. Slavo Radosevic

Keynote remarksKeynote remarks

The Impact of Economic Crisis in Western Balkans: Implications for Politics, The Impact of Economic Crisis in Western Balkans: Implications for Politics, Innovation and ChangeInnovation and Change

EBRD, Roundtable discussion, Friday 12th February 2010EBRD, Roundtable discussion, Friday 12th February 2010

2

OutlineOutline

• Western Balkans: a brief recap of recent and Western Balkans: a brief recap of recent and not so recent historynot so recent history

• Industrial upgrading: production and Industrial upgrading: production and innovation capability and foreign levers to innovation capability and foreign levers to growthgrowth

• Policy lessons Policy lessons

3

Western Balkans: a brief recap of recent and past Western Balkans: a brief recap of recent and past historyhistory

• After 1989: the SEE/WB has become a new European peripheryAfter 1989: the SEE/WB has become a new European periphery• Lesson from history: the growth of periphery is inextricably linked to its Lesson from history: the growth of periphery is inextricably linked to its

international economic integration (Berend and Ranki, 1982). international economic integration (Berend and Ranki, 1982). • Catch up with the EU core = f (the relative roles of exogenous and Catch up with the EU core = f (the relative roles of exogenous and

endogenous forces * the nature of their interaction)endogenous forces * the nature of their interaction)• The direct economic ‘pull’ of the old EU through The direct economic ‘pull’ of the old EU through finance,finance, FDI and FDI and

intra-industry tradeintra-industry trade > < the domestic forces ( > < the domestic forces (national system of national system of political economypolitical economy) which enable the external influences to have spin ) which enable the external influences to have spin off effects off effects

• My lenses today: industrial upgradingMy lenses today: industrial upgrading

4

Motivation Motivation

• A big income gap should enable mixing up of different A big income gap should enable mixing up of different ‘production functions’ or integration to the EU through ‘production functions’ or integration to the EU through increasingly fragmented industrial networks and value increasingly fragmented industrial networks and value chains. Why we do not see it happening? chains. Why we do not see it happening?

• What hinders exploitation of productive potential which What hinders exploitation of productive potential which should emerge from the big income differences between should emerge from the big income differences between EU15/WeBa?EU15/WeBa?

• Why WeBa is not location to low cost export oriented FDI Why WeBa is not location to low cost export oriented FDI to EU15? to EU15?

5

WeBa countries: basic factors and their efficient use as drivers of growth

Factor driven (FD) stage

Transition from FD to ED stage

Efficiency driven (ED) stage

Transition from ED to ID stage

Innovation driven (ID) stage

Albania Bulgaria Croatia Greece

Bosnia and Herzegovina

Macedonia, FYR Slovenia

Montenegro

Romania

Serbia

Turkey

Source: WEF (2007)

6

Industrial upgrading: how to move up along Industrial upgrading: how to move up along value chain? value chain?

• Cost vs. quality vs. technology based competitionCost vs. quality vs. technology based competition• Requirements for technology based competitionRequirements for technology based competition

– competition based on product/process innovationcompetition based on product/process innovation– sophisticated demandsophisticated demand– user requirementsuser requirements– certificates and standardscertificates and standards– marketing barriers (brand)marketing barriers (brand)– after sale services and warrantyafter sale services and warranty– IPRs IPRs – affordable access of NTBFs to technical infrastructure affordable access of NTBFs to technical infrastructure – available finance to upscale productionavailable finance to upscale production

• For the time being, upgrading in WeBa is about production For the time being, upgrading in WeBa is about production not innovation capabilitynot innovation capability

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An example of B&H in a comparative perspectiveAn example of B&H in a comparative perspective

• A recap of the recent history: A recap of the recent history: From relatively From relatively developed industry R&D oriented RTD system developed industry R&D oriented RTD system towards decimated and dominantly HES oriented towards decimated and dominantly HES oriented research system research system (see next two slides)(see next two slides)

• There is not alternative magic route but back There is not alternative magic route but back towards enterprise based RTD systemtowards enterprise based RTD system

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Shares in GERD of CEE - 10 (NMS) performed by Shares in GERD of CEE - 10 (NMS) performed by different sectors (based on averages)different sectors (based on averages)….. a huge structural gap of B&H….. a huge structural gap of B&H

0.00

0.10

0.20

0.30

0.40

0.50

0.60

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

BES

GOV

HES

PNP

BES R&D B&H ?

9

Decimated research system of B&HDecimated research system of B&H

Radosevic, S. South Eastern Europe, UNESCO World Science Report 2010, Paris (forthcoming)

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Collaboration paradox of laggards: science systems Collaboration paradox of laggards: science systems which are highly dependent on foreignerswhich are highly dependent on foreigners

Source : data from Thomson Reuters (Scientific) Inc. Web of Science

Share of international collaborations in scientific publications, 2006

100%

85%

79% 78%

65%

38%35%

63%

52%

42%

37%

30%

40%

50%

60%

70%

80%

90%

100%

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There is not world frontier technology effort coming from WeBa

USPTO Patents by Inventor's Country, 2000 - 2007

Country / Territory 2000 2001 2002 2003 2004 2005 2006 2007

1 Albania

2 Bosnia Herzegovina

3 Croatia 6 10 13 14 11 13 22 17

4 Montenegro

5 Republic of Moldova 2 1

6 Serbia 5 6 8 5 2 4 2 8

7 The former Yugoslav Republic of Macedonia

Neighbouring countries

1 Bulgaria 3 5 11 15 7 6 7 10

2 Greece 25 36 33 34 26 23 39 37

3 Romania 7 11 5 10 13 15 22 21

4 Slovenia 19 26 17 19 24 13 25 25

Source : data from Thomson Reuters (Scientific) Inc. Web of Science, (Science Citation Index Expanded - SCI Expanded, Social Sciences Citation Index - SSCI and Arts & Humanities Citation Index - AHCI), compiled by Canadian Observatoire des sciences et des technologies for UIS.

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B&H: What is use of R&D at $4,625 pc (IMF 2008) B&H: What is use of R&D at $4,625 pc (IMF 2008) (B&H GDPpc)(B&H GDPpc) ? ?

• A limited direct role of R&D to contribute to A limited direct role of R&D to contribute to economic growth at this income leveleconomic growth at this income level

• Absorption and diffusion of new technology is the Absorption and diffusion of new technology is the key driver of growth; RTD as an important key driver of growth; RTD as an important precondition to absorb and diffuseprecondition to absorb and diffuse

• R&D as a proxy for absorptive capacity as ‘R&D R&D as a proxy for absorptive capacity as ‘R&D not only generates new information, but also not only generates new information, but also enhances the firm's ability to assimilate and enhances the firm's ability to assimilate and exploit existing information’ exploit existing information’ (Cohen and Levinthal, (Cohen and Levinthal, 1989). 1989).

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Different institutional profiles of R&D systems ….Different institutional profiles of R&D systems ….

Dominant performing sector < Dominant source sectorModel 1 Model 2 Model 3 Model 4 Model 5BES < BES BES < GOV HES < GOVGOV < GOV GOV < BESUSA Slovakia Portugal Bulgaria KazakhstanIreland Hungary Estonia AzerbaijanFrance Poland LithuaniaUK Belarus TurkeyAustria CroatiaBelgium RussiaFinland RomaniaGermanySpainKorea (Rep)SloveniaCzech RLatvia

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Institutional structure of funding and performing R&D in Institutional structure of funding and performing R&D in WeBa: Government and HES SEE dominated systemsWeBa: Government and HES SEE dominated systems

Funding Country Performing

Business Enterprises sector (59%); Government (35%);

Slovenia Business Enterprises sector (60%); Government (22%); Higher education sector (16%)

Government (48%); Business Enterprises sector (45%)

Romania Business Enterprises sector (55%); Government (34%); Higher education sector (10%)


Croatia Business Enterprises sector (43%); Higher education sector (35%); Government (22%)


Turkey Higher education sector (64%); Business enterprise sector (29%)


Greece Higher education sector (49%); Business enterprise sector (30%); Government (21%)

Government (67%), Business enterprise sector (27%)

Bulgaria Government (67%); Business Enterprises sector (24%)

??? Serbia and Montenegro

Higher education sector (52%); Government (44%)

??? Macedonia, FYR

Government (76%)

?? Bosnia and Herzegovina

??

?? Albania ??

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BES dominated R&D systems are feature of countries above BES dominated R&D systems are feature of countries above $15Kpc$15Kpc

GDP pc 2003Model type

Model Dummy

USA 29,037 1 1Ireland 24,739 1 1France 21,861 1 1UK 21,310 1 1Austria 21,232 1 1Belgium 21,205 1 1Finland 20,511 1 1Germany 19,144 1 1Spain 17,021 1 1Korea (Rep) 15,732 1 1Estonia 14,340 3 0Slovenia 13,995 1 1Portugal 13,807 3 0Czech R 9,905 1 1Latvia 9,722 1 1Slovakia 9,392 2 0Lithuania 7,986 3 0Hungary 7,947 2 0Poland 7,674 2 0Kazakhstan 7,655 5 0Belarus 7,387 2 0Croatia 7,233 2 0Turkey 6,731 3 0Russian Fed 6,323 2 0Bulgaria 6,278 4 0Romania 3,510 2 0Azerbaijan 3,394 4 0

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An indirect R&D content dominates in the EU 10 CEE:

Percentage share of total R&D content in the manufacturing of ICT equipment

Source: Knell M. (2008), Embodied technology diffusion and intersectoral linkages in Europe. Europe Innova Sectoral Innovation Watch deliverable WP4. European Commission, Brussels.

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Direct and indirect R&D content: policy Direct and indirect R&D content: policy

implicationsimplications

• A majority of the NMS and all WeBa are technology users and A majority of the NMS and all WeBa are technology users and have a high indirect technology intensityhave a high indirect technology intensity

Non-EIS pattern of technology upgradingNon-EIS pattern of technology upgrading::-> low overall technology intensity -> high indirect -> low overall technology intensity -> high indirect

technology intensity -> average direct and indirect technology technology intensity -> average direct and indirect technology intensity -> high direct technology intensityintensity -> high direct technology intensity

Policy implicationPolicy implication: integrate FDI / technology transfer into : integrate FDI / technology transfer into innovation policy innovation policy

(increase R&D but in interaction with imported and indirect domestic (increase R&D but in interaction with imported and indirect domestic R&D R&D (embodied in capital goods and inputs)(embodied in capital goods and inputs)

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Production capability as driver of Production capability as driver of productivity; the inefficiency of NIS in EEproductivity; the inefficiency of NIS in EE

• Production capability and R&D as drivers of productivity (see next two Production capability and R&D as drivers of productivity (see next two slides)slides)

• Given their levels of R&D, innovation and quality related activities Given their levels of R&D, innovation and quality related activities (ISO9000), EBRD economies have lower levels of GNI per capita (ISO9000), EBRD economies have lower levels of GNI per capita compared to the ROW. compared to the ROW.

• The models that include sub-regional dummies (11 and 12) show The models that include sub-regional dummies (11 and 12) show improved explanatory power confirming that inefficiency of the NSI improved explanatory power confirming that inefficiency of the NSI characterizes all EBRD sub-regionscharacterizes all EBRD sub-regions

• EBRD countries sample: ISO certification as a proxy for production EBRD countries sample: ISO certification as a proxy for production capability significantly contributes to explaining the differences in capability significantly contributes to explaining the differences in productivity. In a catching up context, R&D denotes absorptive rather productivity. In a catching up context, R&D denotes absorptive rather than innovative capabilitythan innovative capability

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The dependent variable in all the regressions is gross national income (GNI) per capita. Method of estimation: panel data model with fixed effects (Model 7-10) and step-wise OLS (Model 11 – a reestimation of Model 8 with dummies, and Model 12 - a reestimation of Model 10 with dummies) with fixed effects for years (year dummies are not reported in the final presentation or results) and groups of EE countriesSource: Kravtsova and Radosevic (2010)

Model_7 Model_8 Model_9 Model_10 Model_11 Model_12ln_researchers_in_rd 0.34*** 0.21*** 0.22*** 0.16*** 0.42*** 0.27***

-7.39 -6.41 -6.34 -6.28 -20.27 -13.02ln_patent_resid 0.02 0.01

-0.47 -0.22ln_ISO_FDI 0.03*** 0.03*** 0.10***

-6.7 -7.52 -7.89Log of ISO standards per capita 0.05*** 0.05*** 0.21***

-9.44 -11.08 -16.29cis_dummy -0.59***

(-4.83)see_dummy -0.55*** -0.50***

(-6.31) (-5.72)ceb_dummy -0.37*** -0.38***

(-6.20) (-6.36)_cons 7.21*** 8.22*** 8.28*** 8.74*** 6.33*** 9.61***

-21.94 -33.64 -32.1 -45.92 -17.29 -38.13Number of observations 364 449 374 471 449 471R2 0.313 0.243 0.349 0.329 0.755 0.762

Table 3. Determinants of productivity in EE and non-EE countries, 1993-2005

note: *** p<0.01, ** p<0.05, * p<0.1

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Model_7.1 Model_8.1 Model_9.1 Model_10.1Model_11.1Model_12.1

ln_researchers_in_rd 0.17 0.20* 0.22** 0.23** 0.08** 0.14***-1.45 -1.81 -2.16 -2.44 -2.11 -3.86

ln_patent_resid 0.1 0.1-1.3 -1.48

ln_ISO_FDI 0.09*** 0.08*** 0.11***-8.9 -9.69 -10.63

Log of ISO patents per capita 0.10*** 0.10*** 0.14***-12 -12.8 -19.82

see_dummy -0.15** -0.26***(-2.53) (-7.15)

ceb_dummy 0.16***-2.97

_cons 8.32*** 8.65*** 8.01*** 8.46*** 9.68*** 9.63***-9.01 -10.24 -10.18 -11.79 -25.67 -34.31

Number of observations 121 126 121 126 126 126R2 0.478 0.497 0.614 0.625 0.827 0.832note: *** p<0.01, ** p<0.05, * p<0.1

Table 4. Determinants of productivity in EE countries, 1996-2005(Reestimation of table 3 for EE countries)

Note: Dependent variable in all regressions: GNI per capita. Method of estimation: panel data model with fixed effects {Model 7-10} and step-wise OLS in Model 11 {reestimation of Model 8 with dummies} and Model 12 {reestimation of Model 10 with dummies} with fixed effects for years {dummies for years are not reported in the final presentation} and groups of EE countries Source: Kravtsova and Radosevic (2010)

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A shift from production to innovation capability is not automatic and linear process

• S and D factors for RTD are driven by different forces (cf. not significant correlation between aggregates)

• 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 to external 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

22

Loc. availab.of

spec. R&D/train. services

Quality of sc. RI

Extent of staff

training

Firm-level technology absorption

Prod.process

sophistication

Buyer sophisticati

on

Degree of customer orientation

Company spending on R&D

Capacity for innovation

Loc. availab.of spec. R&D/train. services 1 .874(**) 0.545 .693(*) 0.592 .648(*) 0.572 .865(**) .686(*)

Quality of sc. RI .874(**) 1 0.405 0.51 0.47 0.541 0.482 .783(**) .698(*)

Extent of staff training 0.545 0.405 1 .759(*) .924(**) .857(**) .914(**) .687(*) .801(**)

Firm-level technology absorption .693(*) 0.51 .759(*) 1 .838(**) .786(**) .811(**) 0.603 0.545

Prod.process sophistication 0.592 0.47 .924(**) .838(**) 1 .945(**) .949(**) .727(*) .733(*)

Buyer sophistication .648(*) 0.541 .857(**) .786(**) .945(**) 1 .965(**) .802(**) .789(**)

Degree of customer orientation 0.572 0.482 .914(**) .811(**) .949(**) .965(**) 1 .750(*) .815(**)

Company spending on R&D .865(**) .783(**) .687(*) 0.603 .727(*) .802(**) .750(*) 1 .906(**)

Capacity for innovation .686(*) .698(*) .801(**) 0.545 .733(*) .789(**) .815(**) .906(**) 1

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Assessment of demand and supply for local R&D in SEE - Supply of RTD is still above demand for RTD

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

SI TK GRE HR ROM MAC SM BG BH ALB

4.5

4.23.9 3.8

3.6

3.33.1 3.1 3.1

2.8

4.23.9

4.24.5 4.4

4.0

4.4

3.93.6

3.0

0.3 0.3

-0.3

-0.7-0.8 -0.8

-1.3

-0.8-0.6

-0.2

demand

supply

difference

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

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Proxies for quality of supply and demand for RTD in SEE

• 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

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

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Results

• The most of the SEE countries have RTD demand gap i.e. they are not able to employ their RTD capacities effectively

• Causes: factors like low sophistication of businesses processes which do not use new technologies or inappropriate structure or quality of RTD capacities.

• Serbia and Montenegro have the biggest demand – supply gap.• SI and TK show signs of RTD supply gap i.e. limited RTD capacities or

possibly types of capacities given state of their demand for RTD. • Greece suffers from weak demand for RTD which probably is caused by its

industry structure which is dominated by small firms in traditional industries. • A small RTD demand – supply gap for Albania is mainly sign of very low levels

and quality of demand and supply for RTD > a ‘low level equilibrium’ • A bigger but still small RTD gap in case of Bosnia and Herzegovina should be

interpreted from similar perspective but which have to take into account its specific post-war situation.

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Quality of local vs foreign demand for firms'

products and services

4.5

3.9 4.0

2.8

3.4

2.4

3.4

4.4

3.8 3.9 4.0 4.24.4

4.1

0.1 0.1 0.1

-1.2-0.7

-2.0

-0.7

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

SI CZ EE SER ROM BLG All

Local

Foreign

Diff Loc-For

SEE: a local demand is much stronger constraint to SEE: a local demand is much stronger constraint to growth in software sector than in CEBgrowth in software sector than in CEB

Source: Radosevic (2006Source: Radosevic (2006))

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The sources of productivity improvements in CEE: Global value chains and production capability improvements

1.1. Productivity of FDI subsidiaries is significantly explained by ‘quality control’ Productivity of FDI subsidiaries is significantly explained by ‘quality control’

(production capability) (Majcen et al, 2009)(se next slide) (production capability) (Majcen et al, 2009)(se next slide)

2.2. Production capability: upgrading quality in existing products seem to be a Production capability: upgrading quality in existing products seem to be a

more automatic process. Countries converge in quality (measured by unit more automatic process. Countries converge in quality (measured by unit

prices) with the international leaders at an annual rate of 5-6% prices) with the international leaders at an annual rate of 5-6%

unconditionally (Hausman, Hwang and Rodrik, 2007)unconditionally (Hausman, Hwang and Rodrik, 2007)

3.3. This ‘automatism ‘ in the case of CEECs it is actually FDI assisted or This ‘automatism ‘ in the case of CEECs it is actually FDI assisted or

subcontracting driven mastery of production capability subcontracting driven mastery of production capability

4.4. Some CEECs (Hungary, Croatia, Lithuania, Romania, Slovenia) have lesser Some CEECs (Hungary, Croatia, Lithuania, Romania, Slovenia) have lesser

scope for further quality improvements and must instead move to new scope for further quality improvements and must instead move to new

products (EBRD, 2008)products (EBRD, 2008)

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CEE subsidiaries are mainly production oriented, i.e. competitive CEE subsidiaries are mainly production oriented, i.e. competitive advantage is based on production, not technological or marketing advantage is based on production, not technological or marketing capability.capability.

Ordered probit estimatesMODEL 1:

BASIC

With foreign equity share With foreign

equity share

Without foreign equity

share

With foreign equity share


share



share



share

Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient

0.358 *.619

-1.09 -2

-0.203 0.086

(-0.56) -0.25

0.314 *.450

-1.37 -2.02

328 *.574

-1.14 -2.14

**.481 **.440 **.550 **.444 **.426

-3.02 -2.47 -3.26 -2.6 -2.42

0.206 0.28 0.281 0.236 0.245 0.224 0.22 0.231 0.237

-1.35 -1.73 -1.74 -1.52 -1.56 -1.4 -1.38 -1.48 -1.52

**.568 **.446 **.452 **.538 **.553 **.451 **.444 **.532 **.541

-3.66 -2.7 -2.75 -3.38 -3.49 -2.79 -2.75 -3.33 -3.39

**.274 **.264 **.263 **.262 **.262 **.277 **.280 **.245 **.243

-3.58 -3.2 -3.19 -3.36 -3.37 -3.44 -3.39 -3.08 -3.07

**.269 **.230 *.219 **.246 **.235 **.260 **.253 **.219 *.213

-3.05 -2.44 -2.33 -2.73 -2.61 -2.81 -2.75 -2.4 -2.34

0.001 0.002 0.001 0.001 0.001 0.001 0.001 0.002 0.001

-0.69 -0.7 -0.63 -0.53 -0.42 -0.6 -0.54 -0.77 -0.71

-0.003 -0.002 -0.002 -0.003 -0.002 -0.002 -0.001 -0.002 -0.001

(-1.03) (-0.61) (-0.41) (-0.99) (-0.76) (-0.74) (-0.59) (-0.60) (-0.46)

**.848 *.765 *.739 **1.11 **1.070 0.669 0.648 **.910 **.885

-2.66 -2.08 -2.01 -3.3 -3.19 -1.92 -1.87 -2.79 -2.72

0.312 0.433 0.384 0.326 0.258 0.37 0.315 0.386 0.333

-1.43 -1.83 -1.63 -1.45 -1.16 -1.61 -1.38 -1.71 -1.48

-0.004 -0.004 -0.011 -0.005 -0.001 0.003 0.006 0.04 0.0357

(-0.01) (-0.01) (-0.03) (-0.01) (-0.00) -0.01 -0.02 -0.11 -0.1

-0.225 -0.36 -0.399 -0.448 -0.492 -0.315 -0.374 -0.27 -0.297

(-0.66) (-0.97) (-1.07) (-1.25) (-1.39) (-0.88) (-1.05) (-0.76) (-0.840

**-.612 **-.670 **-.626 **-.672 **-.609 **-.691 **-.6430712 **-.657 **-.615

(-2.79) -2.83 (-2.66) (-2.95) (-2.69) (-2.93) (-2.742) (-2.88) (-2.71)

Pseudo R2 0.0831 0.0808 0.0726 0.0887 0.0755 0.082 0.0732 0.083 0.0757

Number of obs. 375 332 332 361 361 344 344 354 354

Patents and licences

People and training

Management

Sector dummy – high technology intensity

Exports to other foreign firms

Imports of intermediate products from foreign owner

Imports of interm. products from other foreign firms

Quality control

Dummy – medium size firm

Dummy – large size firm

Exports to foreign owner

Foreign equity share

Control of strategic functions4

Control of marketing functions3

Control of operational functions2

Overall control1

MODEL 5:

WITH OVERALL CONTROL WITH OPERATIONAL CONTROL

WITH MARKETING CONTROL

WITH STRATEGIC CONTROL

VARIABLE

MODEL 2: MODEL 3: MODEL 4:

Notes: (i) Dependent variable: productivity growth; (ii) Z-statistics in parentheses; (iii) **, * and + indicate significance at 1%, 5% and 10%, respectively.1/ Control of subsidiary - overall: Average value of foreign parent company's control of all 13 business functions; 2/ Operational control: Average value of foreign parent company's control of 4 operational business functions; 3/ Marketing control: Average value of foreign parent company's control of 5 marketing business functions; 4/ Strategic control: Average value of foreign parent company's control of 4 strategic business functions (see Table 2). The rest of dummies including country dummies are not reported. Based on data on 433 subsidiaries in five CEECs. Source: Majcen, Radosevic and Rojec (2009)

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Quantity vs. quality of FDI: a further research is needed

Quantitity vs. quality of FDI

3

3.5

4

4.5

5

5.5

6

6.5

0 10 20 30 40 50 60 70 80 90 100 110

Share of FDI in GFCF, average 2004-06 (quantity)

FD

I b

rin

sg

new

tech

no

log

y 2

006

(qu

ali

ty)

Serbia & Montengero

Bulgaria

Romania

Bosnia and Herzegovina

Macedonia, FYR

Croatia

Turkey

Slovenia

GreeceAlbania

Econometrics of FDI spillovers in CEE: contradictory results, not very helpful Econometrics of FDI spillovers in CEE: contradictory results, not very helpful Damijan et al (2008): direct effects from foreign ownership and spillovers from FDI Damijan et al (2008): direct effects from foreign ownership and spillovers from FDI do substantially depend on the absorptive capacity and productivity level of do substantially depend on the absorptive capacity and productivity level of individual firmsindividual firmsHo: Differences explained by differences in levels of local technological capability Ho: Differences explained by differences in levels of local technological capability and differences in market orientation of FDI. and differences in market orientation of FDI.

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The challenge for ‘periphery’: Missing levers The challenge for ‘periphery’: Missing levers to growth?to growth?

EU Centers of excellence MNCs: parents and other subsidaries

weak horizontal linkagesNational centres of excellence Local FDI subsidaries

Weak vertical integration & horizontal fragmentationWeak vertical integration & horizontal fragmentationVertical and horizontal links do not work in WeBa ?Vertical and horizontal links do not work in WeBa ?

Policy focus:Policy focus:- Support to the weakest agent: local business R&D- Support to the weakest agent: local business R&D- Transfer function on supply side (R&D)- Transfer function on supply side (R&D)- Transfer function on demand side (FDI/local firms)- Transfer function on demand side (FDI/local firms)

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Broaden approach to RTD: innovation policy focused on country’s innovation capacity and its elements

Demand (market pull)

Absorptive capacity

R&D supply Diffusion and linkagesInnovation governance

Education, training and skillsLabour market

Enterprise as a source of supply and demand for innovation R&D system and its links to economyIntra-mural vs. extra-mural R&D

RTO – industry linkages)Small firms’ linkages (clusters)Large – small firms linkages Linkages: foreign and local firms (vertical and horizontal

Demand for technology_ large and SMEsTax incentivesMacroeconomic stabilityFinancial systemCompetition policy

Narrow view: capacity of public services (ministry, agency, etc.) to manage cycle of policy development and implementation;Broader view: capacity to coordinate large number of explicit and implicit policy measures that affect innovation process

Source: Radosevic (2006)

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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)

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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

34

Support integrated and complementary support to NTBFs

Public R&D <> Minigrants <> Matching Grants <> Venture Capital < Business support services > • 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

35

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?

Documents

Industrial upgrading in Western Balkans and policy implications