Smart specialization strategies: lessons

from Slovenia for Croatia

Prof. Slavo Radosevic

Seminar on smart specialization

12 February 2013 Zagreb

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Issues

1. SSS: discovering latent comparative advantages

vs. Research + Innovation strategies

2. A country’s position on the ladder of industrial

and technology upgrading

3. Methodologies for identifying priorities

4. International linkages and leverages in SSS

5. Ownership of SSS: stakeholders involvement

6. Governance reforms: the major challenge of SS

SSS: latent comparative advantages vs.

Research + Innovation strategies

• SSS: ‘1what a country or region does best in terms of

R&D and innovation’ (?)

• vs.

• EU: ‘a poor correlation between R&D specialisations and

the dominant structures of the economy’

• SSS conditionality goes beyond sectoral strategies

• Innovation is a market process: R&D/Innovation +

complementary assets (micro perspective)

• SS>Complementarity of RDI with the country’s other

productive assets to create future domestic capability

(macro perspective)

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What is ‘latent’ comparative advantage

• Latent: Short term vs. Long term drivers

• Current drivers of industry upgrading in NMS (production

capability vs. technology capability)

– 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. CzechInvest old programs vs technology and strategic service

centres)

• Future drivers of technology upgrading

– ...but still a great danger of irrelevant RDI infrastructure (S&T Parks

as ‘surrogates of modernization’)

• Slovenia vs. Croatia: differences in degree

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SEE 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)

SI and HR: differences in capacity to grow based on world frontier

innovation

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The sources of productivity improvements in

CEE: Global value chains and production

capability improvements

• Productivity of FDI subsidiaries in central Europe is

significantly explained by ‘quality control’ (production

capability) (Majcen et al, 2009)

• Some CEECs (Hungary, Croatia, Lithuania, Romania,

Slovenia) have lesser scope for further quality

improvements and must instead move to new products

(EBRD, 2008)

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Production capability as driver of

productivity growth in CEECs

• 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

• A shift from production to innovation capability is

not automatic and linear process

Slovenia: a transformation from the position of

moderate innovator to innovation follower requires

structural change in the R&D and IS

� Intensive innovation activities are largely focused on factors of cost

competition and are not complemented by competition in terms of

value added, knowledge and other intangibles (organisational

capital, brand, trademarks, etc).

�A lacking technology dynamism especially one based on new

technology based firms

�Based on EIS alone it seems that Slovenia would need to improve its

financial system, especially access to finance of SMES and new

technology based firms, further increase R&D in the business

sector, and make a stronger shift towards knowledge intensive

services.

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Missing levers to growth?

EU Centers of excellence MNCs: parents and other subsidaries

weak horizontal linkages

National centres of excellence Local FDI subsidaries

Vertical integration & horizontal fragmentation

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)

Czech R and Slovakia vs. Slovenia and Croatia (missing right side)

Upgrading paths are industry specific 0..

• Apparel: from only CTM (42%) services to gradual

introduction of VA services (OEM/OBM) + beyond imitation

(design schools)

• Automotive suppliers: to move out of subcontracting

‘cost trap’ towards improved quality standards, design and

supply chain management skills

• BPIT Outsourcing: from fragmented, diversified and local

market oriented firms towards focus on core competencies

(specialization) and creation of BPITO champions

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0 and so should policies

• A gap between traditional S&T policy and requirements for industry/technology upgrading

• EU FP7 without other supportive activities may de facto increase the existing structural gap (cf. Greek case)

• But identifying technology/industry specific constrains and patterns of upgrading is not trivial task 1. But is doable (see OECD study on sectoral competitiveness in Western Balkans)

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Methodologies for identifying priorities

• Looking for “smart specialization” through research paper

databases (WoS)

• Looking for “smart specialization” through patent database

(EPO)

• Looking for “smart specialization” through business

demand (Priority branches of industry/Knowledge intensive

services)

• Only a few areas in NMS are amenable to these indicators

(cf.pharmaceuticals and a few high tech niches)

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A marginal world frontier technology effort in

European latecomers

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.

Broader criteria to be used for identification of areas of

local current and potential strengths

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Generic indicators Industry specific indicators and

expert assessments*

Skills of labor force Education and skill levels of

labour force, continuous

vocational training data,

productivity per hour

Production and service

quality

ISO9001 and ISO1400

certificates, trademarks and

design, export and export unit

prices

Software capabilities and

skills

CMM Certificates

Engineering capabilities

and skills

Value of engineering services

including export

R&D capabilities Publications, patents, utility

patents, R&D contracts

Industry specific indicators could be developed once industries or sub-areas are identified in steps 1, 2 and 3.

These criteria should be developed in consultation with industry experts

Matrix for assessing business sector

potential

Unexploited potential / threats to

competitiveness

Specialization strategies:

restructuring, modernization

Emerging / niche economy sectors

Specialization strategies:

breakthrough, diversification

Current strengths

Specialization strategies:

strengthening the strengths

Declining economy sectors / losing

competitiveness

Level of R&D and innovation, engineering and software capabilities, quality,

Cri

tica

l m

ass

Source: Based on ‘A contribution to priority setting for future research, studies and innovation in Lithuania’, 18 October 2012,

Report of an expert group to the Ministry of Education and Science and Ministry of Economy of the Republic of Lithuania

In search of relevant methodologies for

‘catching up’ countries

• Well established methodologies for establishing

priorities may not be the most relevant for

countries whose productivity growth is not yet

driven by RDI

• Why not entertain alternatives 1.. provided that

there are analytical capacities and stakeholder

involvement

• See Lifu Yin New Structural Economics approach

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Growth Identification and Facilitation according to NSE

Step 1:Find fast-growing

countries with a similar

endowment structure and

with about 100% higher per

capita income. Identify

dynamically growing

tradable industries that

have grown well in those

countries for the last 20

years

. Step 2:

See if some private

domestic firms are already

in those industries (of

which may be existing or

nascent). Identify

constraints to quality

upgrading or further firm

entry. Take action to

remove constraints

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Growth Identification and Facilitation according to NSE

Step 3:

In industries where no

domestic firms are currently

present, seek FDI from

countries examined in step

1, or organize new firm

incubation programs.

Step 4:

In addition to the industries

identified in step 1, the

government should also

pay attention to

spontaneous self discovery

by private enterprises and

give support to scale up

the successful private

innovations in new industries.

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Growth Identification and Facilitation according to NSE

Step 5

In countries with poor

infrastructure and bad

business environment,

special economic zones or

industrial parks may be

used to overcome these

barriers to firm entry and

FDI and encourage

industrial clusters

Step 6:

The government may

compensate pioneer firms

in the list identified above

with tax incentives for a

limited period,

Direct credits for

investments, Access to

foreign exchanges (?????)

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Austria 35

Germany 33

Potential ‘SEE flying

geese’

Italy 27

Slovenia 25

Greece 24

Hungary 17

Croatia 16

Turkey 13

Bulgaria 11GDP pc PPP const

2005$ Romania 11

Serbia 10

Albania 8

Bosnia and

Herzegovina 7

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HR and SI are largely outside of German MNCs

value chains but are part of Austrian VC

Source: Marin 2011 22

Germany’s MNCs relocations to CEE: boost to

productivity improvements and decreased unit

labour costs in Germany

• Productivity gains from offshoring to CEE > Germany and Austria experienced only minor job losses

• German offshoring to CEE boosted not only the productivity of its subsidiaries in CEE by almost threefold compared to local firms, but it also increased the productivity of the parent companies in Germany by more than 20% (estimates by Hansen 2010 and Marin 2010).

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Linkages and leverages in SSS

• Complementarities are at the core of SSS

• SS as an opportunity to integrate EU2020, FDI

and subcontracting/value chains with the national

innovation policy

• A big income gap should enable mixing up of

different ‘production functions’ or integration

through increasingly fragmented industrial

networks and value chains.

• 1 but 11..

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Governance reforms: the key challenge of SS !!

From “public policy” to “petty politics”

• All stakeholders will agree that public resources should focus on actions with strong social added value...... until final beneficiaries are chosen, (cf. saving existing jobs and activities/a clearly defined constituency).

• ‘Oversubscribed’ vs. ‘missing’ stakeholders: Croatia vs Slovenia

Governance reforms: the major challenge of

SS

• Slovenia:

– Reform of universities

– Internationalization of R&D system

– Restructure roles and overlaps among five agencies

– Reform criteria of R&D evaluations

– Introduce active FDI policy: (cf. unlikely despite obvious need/.

OECD, 2012)

– Introduce incentives for life long learning and vocational training

• Is there enough political capital to use SSS to overcome

governance challenges ?

• Croatia: governance challenges?

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