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Strengthening Innovation and Competitiveness Through Targeted Interventions by Both the Private Sector and the Public Sector: Remarks in Sofia, Bulgaria

Janamitra Devan, World Bank Vice President and Head of Network, Financial and Private Sector Development

Sofia, Bulgaria

February 7, 2012

Your Excellencies, and ladies and gentlemen:

It’s a great pleasure to join you, to help launch the World Bank’s new report – on Bulgaria’s effort to achieve stronger innovation and competitiveness.

As we begin our discussion: I’d like to explore three thoughts – two facts and one fallacy.

Point Number One is a Fact. Innovation is paramount to economic growth for any country. Empirical evidence shows that – on average – half of a country’s long-term growth is due to innovation and technology enhancements. To increase productivity, an economy does not have to apply more resources – it just has to make use of the same amount of resources more efficiently. Another way to translate this is to compete for the lowest per-unit cost of production. Bulgaria has certainly seen the benefits that occur when companies promote innovation.

Related Links: Research, Innovation Can Help Unlock Bulgaria's Smart Growth Potential

The data are striking. Highly innovative firms in Bulgaria increased their sales by 26 percent per year in recent years – about one-and-a half-times the rate of low-innovation firms. The impact in employment growth was even more dramatic. Innovative firms in Bulgaria increased their job creation by 8 percent per year. Job creation in non-innovative firms was all of zero!

Now let’s consider Point Number Two – another Fact: There is no “one size fits all” approach to innovation. Simply imitating models that have succeeded in other, highly innovative economies is a recipe for disappointment. For example, many countries have been amazed at – and have dreamed of replicating – Israel. But Israel's case cannot be easily “taken off the shelf” and duplicated. Analyzing its success, many countries have quickly recognized that Israel's unique conditions – primarily, its vast resource of talented human capital – allowed the country’s venture capital industry to thrive, which in turn spilled over to finance the takeoff of its high-tech sector.

Realistically, what each country needs is a holistic approach that includes four main components:
First, each country must focus on a candid assessment of its capacities that lead to the development of policies for innovation and entrepreneurship. Second, improvements must be driven in several areas of technology transfer and diffusion that include modernizing legal frameworks; installing the “plumbing” of innovation, such as strong institutions and essential skills; and offering technology-transfer training for innovators. Third, financing innovation must identify opportunities to fuel the growth of micro, small, and medium-sized enterprises – as these are the companies that create jobs. And, fourth, each country must actively seek ways to promote innovation that drives widely shared prosperity, emphasizing greater social inclusion.

Finally, let's explore Point Number Three – which is not a Fact, but a Fallacy. That fallacy is that government cannot play an active role in fueling innovation. Let me get straight to the point: Active government intervention to support innovation is one important tool that can help transform faltering industries, and that can help develop new sectors of the economy. But, the intervention cannot and should not supplant the private sector.

Indeed, government action – if it is wisely targeted and effectively managed – can help ignite broader innovation.

If aspiring countries seek instructive role models, several nations come to mind: Singapore, South Korea, Germany, Sweden, Finland, Malaysia – and, yes, even the United States – are a few examples. Let me pick on just two such examples of how patient investment in innovation ecosystems can produce remarkably strong results, when active public-policy interventions – of one kind or another – have been an indispensable part of their success.

First, consider Finland. The country has long committed exceptionally strong resources to investment in human capital, through its education system. In addition, through TEKES – the National Technology Agency, founded in the 1980s – Finland has deliberately guided “applied R&D” investment toward commercial applications. That R&D funding is driven through several channels: private companies, universities and state-supported research institutes like VTT – with an emphasis on R&D collaboration between academic researchers and the private sector. With Finland investing Europe’s highest percentage of GDP in R&D, the result is a highly integrated and dynamic innovation ecosystem.

Second, consider the Republic of Korea. Since emerging from a civil war that left its economy in ruins, the South Korean government has devoted enormous resources to building a “knowledge economy.” Government-inspired, knowledge-based growth – through education, advanced job-skills training, and innovation-focused R&D – and lately supported by heavy investments in broadband – has helped the country steadily climb from post-war poverty to post-war wealth. In addition, South Korea astutely linked its innovation programs to targeted industries that it had comparative advantages in.

Finland and South Korea are examples that illustrate, in various ways, a theme that runs through the World Bank’s findings on Emerging Europe – and, in today’s report, on Bulgaria.
And that is: that enlightened, targeted public-sector interventions may be difficult to design, yet they are critical in driving innovation.

The combination is almost a chemical reaction: The necessary elements, brought to the table by the private sector, might remain inert. But an appropriate spark – such as being smarter about emphasizing and inculcating team effort in schools, which changes simple mindsets (such as how “five brains are better than one”), or employing more direct interventions such as facilitating industry-university linkages – could light the fire of innovation.

In the case of Bulgaria, you have an important positive factor to draw upon. Bulgaria has a tradition of excellence in education and basic research. Those strengths can provide the foundation of future commercial innovation.

But we must also be aware of the potential down-side: Poorly designed or badly implemented policy interventions can undermine progress, if they hinder the development of an entrepreneurial culture.
To be candid: The recent balance between private and public spending for R&D in Bulgaria – which has recently been about 30 percent private and 70 percent public – does not position Bulgaria very well, by comparison to other economies in Europe, where the ratio is more like 65 percent private and 35 percent public.

Yet there are some early indications that this trend is turning. The latest data on Bulgaria’s R&D spending – published just a few days ago by Eurostat – show that the private sector’s share has gone up to 50 percent of total R&D – a significant and welcome increase. A key challenge for Bulgaria will be to continuing to increase private expenditures on R&D while effectively absorbing EU funds. In addition, improving the quality and effectiveness of public expenditure is critical to achieving stronger results.

As I prepare to yield the floor to my colleagues, let me just say that it was an honor for me to meet with His Excellency, President Plevneliev, as well as with several of your esteemed ministers. I was pleased to discuss with them, some of the same issues that we’ll explore today, about Bulgaria’s opportunities to invest strategically to help make your economy more competitive. The national target you have set for R&D investment – 1.5 percent of your GDP – is a bold ambition: That’s three times the current level of R&D. It takes great vision to set the country on a course toward such a goal.
But, I emphasize again: This increase needs to have the private sector leading the way. Only the private sector can truly appreciate what risk is, and therefore, employ appropriate risk capital.

Government alone won’t do the trick.

The report that we’re presenting today – “Going for Smart Growth” – has built on a wide range of economic research. I’m confident that the report will make a strong contribution to Bulgaria’s effort to improve your competitive position in the global economy.

The World Bank Group is ready to assist in any way we can. In that context, a World Bank team has been working with two of Bulgaria’s ministries – the Ministry of Education, Youth, and Science . . . and the Ministry of Economy, Energy and Tourism.

We’re ready to be your partner amid your efforts for economic renewal.

And so, as I end my remarks, let me remind you of a quote from Roger von Oech: “It's easy to come up with new ideas. The hard part is letting go of what worked for you two years ago, but will soon be out of date."

Thank you very much.

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