Knowledge Absorption and Growth in ECA - The

Role of Government

January 22, 2008 Itzhak Goldberg, Lee Branstetter, John Gabriel Goddard and Smita

Kuriakose Mr. Itzhak GoldbergAdvisor, Policy and

StrategyWorld Bank

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Absorption >>> Innovation

Innovation = New to the World Absorption = New to the FirmAbsorptive capacity: Firm’s

capacity to assess → modify → use

Absorption e.g. new product, process

Upgrade old product, process

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Channels of Absorption (&Innovation)

Trade &

FDI

Trade &

FDI

R&DR&D

Learning &

Brain Circulation

Learning &

Brain Circulation

Knowledge Flows: Patents,

Citations

Knowledge Flows: Patents,

CitationsAbsorptionAbsorption

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Channel I: Trade and FDI

Surveys of circa 7000 ECA firms show:

Export increasing their absorption by about 33%

– JV with a multinational increasing their absorption by 41%

•Policy : international openness

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• Education and training by firms• Brain-drain → Brain

circulation. Models: India, Israel, Armenia

•Policy: Investment in education and openness to attract returnees

Channel II: Learning and Brain Circulation

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• R&D for absorption, not JUST for innovation -- the “second face” of R&D

• R&D output does not flow costlessly from developed to developing countries. China invests massively in R&D

III: R&D for Absorption & Innovation

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Channel IV: Patents and patents citations India and China

overtake ECA7

0

200

400

600

800

1000

1200

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

ECA 7

India

China

Source: Authors’ calculations based on the U.S. Patent and Trademark Office CASSIS CD-ROM, December 2006 version. The graph compares counts of patents in which at least one inventor is based in one of seven ECA countries, India, or the People’s Republic of China. The ECA 7 are Russia, Hungary, Poland, Slovenia, the Czech Republic, Bulgaria, and the Ukraine.

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Market failures may justify government intervention to stimulate absorptive capacity in private sector

BUTPolicy design needs to account for government failures: capture, corruption, misaligned incentives

AND…

Role of Government – the Why?

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•Skills and Human Capital – India: Early publicly financed

education - critical importance

•Investment Climate and Governance– Russia: Poor investment climate

(weak competition, red tape); governance: corruption, regional government capture by business

Pre-Requisites

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National Innovation System

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Not in Western textbook: Set R&D Entry/Exit Free

•Do state R&D Institutes crowd out new institutions?

•IPRs of R&D Institutes•Drain of R&D Institutes on budget

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R&D Finance: what not to do?

•Loans >> Risk taking↓↓

•Tax holidays: start ups - no profit,

•Matching Grants for Consortia – target the Missing Link of “University-Business”

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Entry: Own, Manage and/or just Pay ?

1. Privately owned/managed & subsidized

2. Publicly owned & managed

3. Publicly owned & privately managed & subsidized

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Summary: Absorption<</ >> Innovation 1.Openness – free trade, FDI

and cross-border K-flows 2. Brain circulation and

investment climate 3. R&D: Business-Research

Consortia4. Set Entry/Exit Free5. IPRs of local R&D