Itzhak GoldbergJean-Louis RacineThe World Bank

Restructuring of Research and Development Institutes in Eastern Europe and Central Asia

Knowledge Economy Forum VIII – Fontainebleau, April 29, 2009

Innovation in ECA: Current Trends

3

R&D Inputs R&D Outputs Industrial Performance

How can we measure innovation system performance?

4

R&D Inputs R&D Outputs Industrial Performance

How can we measure innovation system performance?

5

ECA countries invest little in R&D

Sources: UNESCO and USPTO databases

Germany FinlandNetherlands

IrelandUnited Kingdom

BelgiumAustria

France

ItalySloveniaHungary Spain

Latvia CroatiaCzech RepublicRomania Slovakia Estonia

PortugalGreeceBulgaria

Poland

Turkey

Lithuania

Georgia

Azerbaijan Russia

Kazakhstan Ukraine

Belarus

0

50

100

150

200

250

300

350

400

0 0.5 1 1.5 2 2.5 3 3.5 4

R&D / GDP(%)

R&

D /

pate

nt (t

hous

ands

of P

PP

$)

EU-15ECA

6

0%10%20%30%40%50%60%70%80%90%

100%

Aze

rbai

jan

Bul

garia

Kyr

gyzs

tan

Mac

edon

ia

Kaz

akhs

tan

Bel

arus

Pol

and

Rom

ania

Ukr

aine

Slo

vaki

a

Hun

gary

Rus

sia

Lith

uani

a

Cro

atia

Slo

veni

a

Latv

ia

Cze

ch R

epub

lic

Spa

in

Ger

man

y

Sou

th K

orea

Est

onia

Mal

aysi

a

Finl

and

Turk

ey

Government Higher education Business enterprise Private non-profit

In ECA much of the R&D is performed by the government sector

Source: UNESCO database

Sector of performance of R&D

7

R&D Inputs R&D Outputs Industrial Performance

How can we measure innovation system performance?

8

ECA is not efficient at turning R&D investments into patents

Sources: UNESCO and USPTO databases

Germany FinlandNetherlands

IrelandUnited Kingdom

BelgiumAustria

France

ItalySloveniaHungary Spain

Latvia CroatiaCzech RepublicRomania Slovakia Estonia

PortugalGreeceBulgaria

Poland

Turkey

Lithuania

Georgia

Azerbaijan Russia

Kazakhstan Ukraine

Belarus

0

50

100

150

200

250

300

350

400

0 0.5 1 1.5 2 2.5 3 3.5 4

R&D / GDP(%)

R&

D /

pate

nt (t

hous

ands

of P

PP

$)

EU-15

ECA

9

R&D Inputs R&D Outputs Industrial Performance

How can we measure innovation system performance?

10

In ECA, the productive sector is not benefiting from R&D investments

Patents do not result in important productivity gains- Radosevic study

R&D does not translate to better product quality - World Bank/WIFO study

A Look at ECA RDIs Through Case Studies and Benchmarking

1212

Countries in the Sample

What do the case studies show?

A mixed bag•Some are responsive to the market,

others not.•Some operate close to international best

practice while others are far removed from it.

13

14

In some ECA countries, public resources are being spread thin across many RDIs

Total public and private sector funding per staff

0

50

100

150

200

250

300

350

SR

I***

Sin

tef

TNO

Frau

nhof

er

Ars

enal

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Bio

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sics

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p-2

Bio

-3

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lear

-1

Thou

sand

s of

US$

adjusted for PPP

nominal US$

0

2

4

6

8

10

12

14

16

PA

RC

***

SR

I***

Sin

tef

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*

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*

publ

icat

ions

per

hun

dred

sta

ffECA RDIs publish less in international journals…

Average annual number of publications per hundred staff

Source: Science Citation Index over a five year period

15

0

2

4

6

8

10

12

14

PA

RC

SR

I

TNO

Sin

tef

VTT

Occ

up

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ICT

Ele

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c-1*

*

…and their publications have less impact than in OECD countriesAverage number of citations of a publication

Source: Science Citation Index over a five year period

16

1717

Although some ECA RDIs are engaged in patenting…

Average annual number of patents per hundred staff

0

1

2

3

4

5

6

Chem

**

Frau

nhof

er

Bio-

1

SRI*

**

FEDI

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ar-1

Mec

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Bio-

3

Mec

h-2*

*

Bio-

2

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ef

Elec

-2*

Nucle

ar-2

Mix

ed

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gy-2

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hem

**

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-1** IC

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Phys

ics

Ship

-1

1818

… few are able to license their IP

0.0

0.5

1.0

1.5

2.0

2.5IC

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ergy

-2Bi

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ace

Average annual number of licenses per hundred staff

0%10%20%30%40%50%60%70%80%90%

100%

Nuc

lear

-1

Bio

-3

Occ

up

Phy

sics

Ene

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A number of RDI are following “technology-push” models …

Share of budget spent on “strategic” research with no immediate commercial application

19

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%M

ech-

2**

Ene

rgy-

2

ICT

Ele

c-2*

Shi

p-1

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c-1*

*

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up

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…many are ignoring demand

Share of budget spent on marketing and business development

20

Funding affects RDI strategy

21

RDI Reform Strategies

2323

Technology push

Market pull

Private goods

Public goods

↑Closure or

restructure to IV

GOGO, Corporatization or

restructure to II

GOGO, GOCO or Foundation

Quadrant I Quadrant II

Quadrant III Quadrant IV

Privatization or transition to II

Classification of RDIs

24

Publications measure “public goods” production

# publications per RDI employee, weighted by prestige of international journals and publishing houses;

impact of RDI publications on international scientific community, using the number of citations as a proxy

24

25

Technology Push & Market Pull

Assessing RDIs w/ Competitiveness Mission patents: domestic vs. international licenses share of industry funding collaborative projects and spin-offs

25

2626

Is it a public good?

Does it fulfill a strategic mission

and is it performing well?

Is there sufficient market-pull?

No action

Is there sufficient market-pull?

Privatize or

Assess restructuring potential to

increase public good

Closure / liquidation

Corporatize, GOGO or restructure

Closureor

Assess restructuring potential to

increase market-pull through

GOGO, GOCO or NGO

yes

no

yes

yes

yes

no

no

no1

2

4

5

3

6

7

8

9

RDI Restructuring Decision Process

2727

Restructuring Options for RDIs

Option

Relevance to public

goods RDIs

Effect on market- pull of RDIs

Effect on RDI

governanceincentives

Politicalfeasibility

1. Corporatization / autonomy Government- owned + - - ++

2. Insider restructuring, Government-owned + ± - +

3. Government-owned, contractor operated (GOCO) + + + -

4. Non-profit Foundation + - ± ++5. Insider privatization - ± - +6. Outsider privatization - + + -7. Liquidation/closure - + + --

28

Insider and outsider privatization

Lessons: Privatization of enterprises in the transition economies >>> critical selecting the right method.

Insider privatization - sale of the company’s shares to its managers and workers; and

Outsider privatization as a sale to an investor who is an outsider, i.e. neither as manager or a worker of the company

28

29

Government-owned, Contractor-operated (GOCO)

Government contracts out the management of the RDI to an outside contractor but maintains government ownership.

Contractor: university consortium, not-for-profit organization, or professional/ external management team or CEO.

29

30

GOCO cont’d

GOCO contracts to insulate from political pressures.

Attract talented personnel – no civil service rules.

Operational responsibility transferred to a contractor who is paid for these services.

Public funding for operating and investment expenses are agreed upon.

30

31

7 Options and Effects

For RDIs producing mainly public goods, option (3), GOCO is the most appropriate solution.

A second best solution is option (2), insider restructuring: it offers lesser governance incentives and thus less likely to take advantage of market pull.

31

32

7 Options and Effects cont’d

For RDIs producing private goods, outsider privatization is most appropriate when the RDIs has access to markets and can be transformed to a fully commercial company.

For RDIs producing both public and private goods a foundation or insider privatization may be a second best solution instead of closure.

32

33

7 Options and Effects cont’d

For RDIs which needs to be eventually closed, outsider privatization could be used as “market test.

33

34

Public Funding - Quadrants I & III

In principle, only RDIs in Quadrant I which produce public goods and there is little demand in the markets for their outputs - eligible for long-term public funding.

RDIs in Quadrant III – private goods and no market –candidates for closure or restructuring, should get no public funding, except possibly, short term support for severance pay for departing researchers..

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3535

Technology push

Market pull

Private goods

Public goods

↑Closure or

restructure to IV

GOGO, Corporatization or

restructure to II

GOGO, GOCO or Foundation

Quadrant I Quadrant II

Quadrant III Quadrant IV

Privatization or transition to II

Classification of RDIs

36

Public Funding - Quadrants III & IV

The same logic applies to Quadrant IV – private good with market demand – which may need help in the transition.

The funding approach to RDIs in Quadrant III is mixed: Government owned government operated (GOCO) RDIs may have both private and public projects

36