Western Balkan - 5: key development and innovation features

WB-5 countries belong to lower middle-income economies as their gross national income per capita (in PPP) varied in 2015 from $10K (Bosnia and Herzegovina) to $15K (Montenegro)¹² (see Figure 1).

GDP per capital in WB-5 countries ranges from 22-34% of German income which makes it a fairly homogenous group.

This ranking is reflected in the World Economic Forum Global Competitiveness Index which divides countries/economies by stages of development into factor driven, efficiency driven and innovation driven. The WB-5 group falls into the category of efficiency-driven economies. In this stage of development, growth is also driven by innovation, but the weight of basic requirements and

12 Source: Word Bank development indicators database 2016

efficiency factors which cannot be attributed directly to innovation and the overall sophistication of business practices is much more prevalent.

Figure 1: GDP per capita 2015, PPP (constant 2011 international $)

Source: World Bank Development Indicators 2016

Although quite homogenous regarding current incomes per capita, WB-5 countries are quite different regarding overall competitiveness and also regarding ranking on three different drivers of growth (Table 1).

Table 1:Ranking of Western Balkan – 5 economies on Global Competitiveness Index: overall and individual drivers (based on 140 economies)

Driver of growth Macedonia

FYROM

Montenegro Albania Serbia Bosnia &

Herzegovina

Although they all rank higher in basic factors than on efficiency enhancers or innovation, there are big differences regarding business sophistication and innovation. This suggests that potential for growth based on innovation is quite different but also that the existing innovation potential is poorly

44,053 43,893

employed in their current growth. For example, the gap in ranking on innovation between Serbia and FYROM is quite high in favour of FYROM despite much more developed R&D system of Serbia.

The low-income level is quite an important feature of these economies as their drivers of growth are not identical to drivers of growth in high-income economies. Their drivers of growth are widely related to physical investments, production capability, human capital and skills, openness and acquisition of foreign knowledge and to a smaller extent to own R&D and technological capability, and business or institutional environment (Hulten and Issakson, 2007; Lee, 2013).

This specificity of WB-5 countries is quite important for S3 approaches in this region which should promote those drivers of growth that are the most relevant in the medium term. So, in addition to R&D and capability to generate new technologies policy should consider much more the role of production capability and capability to import effectively and adopt foreign technologies.

Production capability is the capability to produce at world standards of efficiency and quality at a given technology. This is the capability to use and operate given forms of technology in specific configurations and should be distinguished from the capability to create and implement innovations in production to change the forms and configurations of current technologies in use (Bell, 2007).

ISO9001 certificates per capita are a satisfactory proxy for production capability. ISO9001 is a general management standard and indicates that there are activities at the firm level which aim at operating at the world levels of efficiency with the given technology. Table 2 shows that there is a huge lag of WB-5 countries when compared to other reference economies.

Table 2: Number of ISO 9001 certificates per 1 million inhabitants, 2010-2014

Country No of ISO9001

certificates per 1 million inhabitants

Italy 12297

Slovenia 4176

Germany 3236

Croatia 2899

Austria 2637

Serbia 1799

Bosnia and Herzegovina 1297

Montenegro 934

FYROM 897

Albania 243

Source: For ISO certificates ISO Database, for population World Bank Development Indicators 2016

This lag is particularly high in economies that are not yet part of European or regional value chains (FYROM, Montenegro and Albania¹³). However, by and large, there are significant differences in production capability among WB-5 countries. This calls for the broader understanding of innovation which should include non-R&D, design engineering and software, training and technical operating skills.

13 Differences among countries also reflect differences in industry structure or biases of different sectors towards use of ISO9001 certificates.

R&D capabilities have property to generate new knowledge to technology frontier as well as to facilitate absorption of knowledge from abroad. However, just R&D is not sufficient for generating innovation. Non-R&D activities which are closely related to either R&D or production are design and engineering capabilities, and they are very often the key to industrial growth of many middle-income economies, including WB-5 economies. R&D is increasingly important as countries move closer to the technology frontier. However, in middle-income economies like in WB-5 countries R&D is also is important to enable absorption of foreign knowledge rather than generate new knowledge at technology frontier. In that respect, the nature of R&D is also different when compared to technologically more advanced economies.

WB-5 countries are investing to a quite limited extent in R&D. Their investments are comparable to economies of their level of income and are either close or well below 1% (Table 3). Also, their R&D systems are largely publicly driven with very limited investments by the business sector.

Table 3: Research and development expenditure (% of GDP), 2013

Country GERD as % of

GDP

Germany 2.9

Austria 2.8

Slovenia 2.6

Italy 1.3

Croatia 0.8

Serbia 0.7

Macedonia, FYRM 0.4

Montenegro 0.4

Bosnia and Herzegovina 0.3

Albania ..

Source: World Bank Development Indicators 2016

In summary, important features of WB-5 economies is that they are lower middle-income economies which growth is based largely on: the production capability or efficiency enhancing drivers related to training and skills of the labour force; the capacity to absorb foreign technology and to establish an economic system that promotes entrepreneurship, competition but also social cohesion.

Enterprises in WB-5 countries, as in high-income economies are the major agents of the innovation process that respond to signals in the market and broader institutional environment. When the external environment is stable, predictable, and transparent and when it encourages competition but also a long-term planning horizon the enterprises are induced towards productive forms of entrepreneurship based on costs, quality and innovation. When the business environment is unstable, unpredictable, abundant in red tape and under the substantial influence of the discretionary state, this encourages corruption, buying favours and anti-innovative search for short-terms profits and their use for unproductive purposes.

Our core point here is that S3 for the WB-5 region needs to take on board these key developmental features. The WB-5 countries are in relative terms quite poor European economies and drivers of their growth differ from their richer northern and western neighbours. This calls for broader understanding of innovation as well as for identification of region and country-specific constraints. In

the next section, we use RIS3 Assessment Wheel as a framework to evaluate major gaps and obstacles that may hinder the development of appropriate S3 strategies.

In overall, WB-5 economies growth is based on production as opposed to technological capabilities.

By this we mean that enterprises compete on basis of the efficient use of standard technologies but through enhancing production capability and adoption of foreign technologies. In this respect, they are similar to other countries of Central and Eastern Europe (see Majcen et al., 2009; Kravtsova and Radosevic, 2011).