Implications for S3 in the EU Enlargement and Neighbourhood policies

Given these key features of E&N countries from the S3 perspective, what are the policy implications for the EU E&N policy?

First, the EU S3 approach towards E&N countries needs to recognise the differences in their levels of innovation activities and the fact that innovation in E&N economies is driven by non-R&D activities.

So, it is important to acknowledge that each country strikes a balance between R&D-oriented and non-R&D-oriented supporting activities and programmes. There are strong limits on innovation policies that are only R&D oriented. Instead, policies to promote quality improvement, productivity-enhancing measures, for engineering, software, user-oriented innovations and training of the labour force should also be present. Innovation policies should focus on the whole innovation chain, including production capabilities. Currently, policies focus on the commercialisation of the results of public R&D, new technology-based firms and science–industry links, while technological activities and technological upgrading in the business sector as well as non-technological innovation are neglected. The latter should receive more attention in R&I policies in E&N economies. S3-based R&I policy embraces a broad view of innovation, supporting technological as well as practice-based and social innovation. The focus not only on R&D-based innovation is convenient for E&N countries, though the specificity of the E&N economies requires that some of the existing S3 model tools are adjusted to this context. The overall S3 approach would need to be much more differentiated to capture the specific technological and upgrading challenges of these economies.

Second, S3 for E&N economies should recognise that the importation of technology in different forms is of great significance to technological upgrading in these economies. As argued elsewhere (Radosevic and Stancova, 2016) the transnational dimension of S3 has so far been its most undeveloped component. The key challenge for smart specialisation is how the local production stage of global value chains may become a building block of the regional innovation strategy. For E&N economies, integration into regional and global value and supply chains as a source of technological upgrading and structural change is just as important as R&D and innovation activities.

This is even more important given that the majority of the E&N economies are either outside these networks or present only in segments of them. This requires a broadening of the scope of the innovation policies in E&N countries such that R&D and innovation policy is integrated into FDI promotion and support for supply chains. The European Commission (EC) should develop a long-term approach to facilitate the integration of these economies into EU supply chains as a way to promote their technological upgrading, but also as a mutually beneficial way to strengthen these supply chains. The present activities on the integration of the science systems of E&N countries into EU programmes should be expanded to linkages and twinning activities, which would be focused on downstream activities, training, quality improvement, productivity enhancement, meeting of EU health and safety standards, etc. S3 could serve as a bridging factor facilitating access to value chains when combining similar or complementary competences and finding specific roles in global value chains.

Third, the institutional capacity for S3 is seriously lacking in E&N countries. S3 requires developed public–private and mezzo (sector)-level coordination mechanisms. It assumes that there is sector- and technology-specific policy expertise and that there are institutional and financial conditions for experimentation. As these preconditions are absent, EU E&N policy should strongly support capacity- building measures in R&I policy, including monitoring and evaluation (M&E) capacity. However, these capacity-building measures should be tailored to the specific conditions of middle-income economies where drivers of productivity are not the same as in high-income EU economies. Copying capacity-building programmes or adopting off-the-shelf tools will not be effective.

Fourth, establishing country-specific S3 governance mechanisms is an essential precondition for the implementation of S3-type policies. But establishing policy capabilities alone, without the capacity to engage in dialogue with the private sector, will not be sufficient. Similarly, having good

communication with the private sector but weak policy capabilities is also not enough. E&N countries have organised constituencies in the public R&D sector, but constituencies for innovation activities in the business community are, as a rule, more dispersed and thus harder to self-organise.

Furthermore, the corporate community could be very poorly organised so that the public sector may need to improve private–private coordination.

In some E&N countries, horizontal policies will be more appropriate than vertical ones when public–

private coordination is weak. In addition, the appointment of a single agency to coordinate S3 processes could be recommended when intra-public sector coordination is undeveloped. Thus, policy design should be tailored to the coordination capacities of innovation policy. However, the key task of S3, for it to be effective and relevant, will be the development of coordination capacities in innovation policy. E&N policy should establish a minimum standard of coordination capacities in innovation policy, which should be considered a precondition for the S3 process. These requirements could be framed in generic terms and should allow for the significant institutional and political variety that exists in the E&N countries. A lean and targeted approach should be taken, which will reflect the size of each country, as well as of its R&I community. Overly bureaucratic solutions and competing bodies need to be avoided.

Fifth, S3 calls for a shared vision and identification of priorities to be generated through an entrepreneurial discovery process (EDP). The S3 is, by definition, a kind of experimentalist policy, as would be expected given the importance of EDP in its design. However, this inevitably clashes with the rigid nature of administrative procedures in E&N countries. The challenge is how to square this feature of S3 with requirements for selectivity, learning, and trial and error. This issue is not unique to E&N countries but is very common across many EU regions, especially in cohesion countries⁴⁹. The viable solution would be to nurture autonomous public agencies that have freedom to issue tailor-made rules. These organisations should have a mandate to operate under a different regime, which would enable them to promote a portfolio of projects and manage them depending on their successes or failures. A culture of accepting a certain level of risk and failure in innovation support will be needed here. This could be possible when there is a political commitment to the S3 process.

In summary, the application of S3 would require an entrepreneurial type of agency, which could be developed through twinning arrangements with different EU countries. These agencies would be required to manage portfolios of projects with a common theme and strategy behind the portfolio, even though the strategy may be implicit. The aim is to develop the capability and motivation to experiment, make mistakes and correct them (Kuznetsov and Sabel, 2017). These agencies whose nuclei are often already present as well-functioning organisations of different types in various countries. They should be supported as potential drivers of the EDP.

Sixth, the S3 policy mix calls for a different balance between horizontally and vertically focused instruments. Horizontal policies lack the focus of vertical policies. Although vertical policies might be more prone to failure, they are potentially more effective than horizontal policies as they are more focused. Horizontal policies are less prone to failure but at the price of potentially reduced effectiveness. E&N countries have quite diverse cultures and preferences in terms of policy style preference, which should be recognised. Their policy mixes should be gradually developed and can be effective only when the previous five preconditions have been met. The policy support should

49 For the 2014-2020 period, the Cohesion Fund concerns Bulgaria, Croatia, Cyprus, the Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Malta, Poland, Portugal, Romania, Slovakia and Slovenia.

explore what are the low-cost and administratively less demanding, but effective, policy measures that are feasible in individual E&N countries. It is important to bear in mind that these actions should result from local EDP and extensive discussion with local stakeholders.