Business Environment and Knowledge for Private Sector Growth: Setting the Stage

Advancing Innovation ECA 2007, Yerevan, Armenia

Fernando Montes-NegretSector Director

Private and Financial Sector DevelopmentDepartment, Europe and Central Asia (ECA)

The World Bank

2

Outline: Opening Remarks

Innovation & Entrepreneurship: Key challenges for Armenia and ECA in a Globalized WorldBusiness environment: Overcoming ConstraintsInnovation & CompetitionSkills for the Knowledge EconomyLooking ahead: Policies for private sector growth

3

Increasing globalization: reduction of transportation & communication costs, increasing global information, increasingly mobile FDI. Rapid pace of technological change and innovation.

Increasing competition: driven by trade liberalization and increasingly larger players (e.g., China, Korea, India)

Demographic pressures: ECA faces declining and aging populations.

Tighter regional integration: Joining a regional club (EU, NAFTA, ASEAN +3) is useful, but not a panacea.

EU Membership opportunity, but not a guarantee for success.

The world is moving fast……………..with or without you!

4

Real GDP (PPP): Projections 2004-2015 (Using 1991-2003 Average Growth Rates)

0

2

4

6

8

10

12

14

16

2003 2005 2007 2009 2011 2013 2015

Trillions of 1995 international $

India China BrazilCanada

Real GDP (PPP): Projections 2004-2015 (Using 1991-2003 Average Growth Rates)

0

2

4

6

8

10

12

14

16

2003 2005 2007 2009 2011 2013 2015

Trillions of 1995 international $

India China BrazilCanada France GermanyItaly Japan MexicoRussian Federation United Kingdom United States

India

China

United States

JapanGermany

United Kingdom

France

Italy

Canada

Mexico

RussianFederation

Brazil

The world is moving fast……with or without you!

5

Creating conditions for sustainable growth is key

Productivity and growth: firms’ perspective

Labor costsReduce Costs & Improve Quality of

SupplyInformation costs

Access to credit for start up and operation

Simplify interactions with the Government

Infrastructure and Logistics costs

Technology absorption, adaptation and innovation

Skills of the labor force

Business Environm

entKnow

ledge

6

Key constraints in the business environment in developing and transition economies

Policy uncertainty is the dominant concern. Improving predictability can increase likelihood of investment by over 30%.

Business environment constraints are costly: (>8% of sales)

0

5

1 0

1 5

2 0

2 5

3 0

P o la n d C h in a B r a z i l In d o n e s ia T a n z a n ia

Perc

ent o

f sal

es

C o n t r a c t e n fo r c e m e n t d i f f i c u l t i e sR e g u l a t i o nB r i b e sC r i m eU n r e l i a b l e i n fr a s t r u c t u r e

Business Environment Costs as % of Sales

Poland China Brazil Indonesia TanzaniaWorld-wide surveys

Key constraints to growth

8%

13%

15%

20%

27%

7

Policy-Related Barriers to Competition Stifle Innovation and productivity

8

Armenia-Doing Business Indicators: 2006

Ease of doing business: ranked 46 out of 155 countries. BUT …… still costly (65% of income per capita) and slow (176 days) to obtain licenses.Labor markets still not flexible enough.Relatively high taxation (54% of gross profits), too many taxes (50), and too time consuming (1120 hours per year).Takes time to enforce contracts (185 days).

9

A better Investment Climate for all

Policies to reduce regulatory barriers: simplification leading to a better investment climate for all, reducing business risks, costs, and barriers to competition (benefiting consumers through lower prices and more innovative products);Improving predictability of laws, regulations and interpretation of norms, drastically reducing legal/regulatory uncertainty;Provision of a policy basic framework ensuring: stability & security, sensible regulation & tax regime, good infrastructure & logistics, access to finance, and a flexible and fair labor market.Persistence, not perfection in fostering reforms.

10

ECA has a Strong Scientific Tradition that does not Translate into Innovation

EU Target = 3%

Average new EU member states (EU10) = 0.8%

o

How can we move from science to innovation?Technology absorption: get it from abroadCommercialization of local S&T: develop it in-houseIncrease access to finance for innovation

Large S&T base, well-educated workforce, culture of science… …but limited R&D, innovation

and entrepreneurship

11

Technology Absorption: Attracting FDI, Rooting MNCs Locally and Promoting Linkages

Most R&D and technology in non-OECD countries comes from MNCs, but their investment goes mainly to South & East Asia.

ECA should become more integrated in the global production network by attracting and retaining FDI, creating linkages between foreign and local firms.

Cheap unskilled labor and protected markets not an option Good investment climate; skills; training; quality standards andtechnology; suppliers networks; logistics and ICT; FDI promotion, including targeting of foreign firms; selectedincentives. (Ireland, Malaysia and Singapore cases).Improve capacity of local suppliers with MNCs assistance looking for long term viability Governments have a role to play: matchmaking and information dissemination and financing.

12

Commercialization of Local S&T: Get the Scientists Out of Their Ivory Towers!

Key to local innovation: strengthen university-firm collaboration and commercialize university research.Requirements:

Changes in the IP policy framework: giving IP rights to universities.Change in policies and in the culture of the academic and business worlds: policy makers need to agree on quantity and type of spending in R&D; researchers need to select R&D themes that serve economic growth; the business community has to engage scientists in problem solving.

Technoparks and incubators are not enough – without skilled management with links to global markets, they may turn into realestate development projects.

13

Finance for Innovation: Governments Have a Careful Role to Play

On Finance for innovation:Matching grants Government risk sharing in private risk capital funds (US, UK, Israel)Make R&D expenditures tax deductible

But:Avoid rent-seeking, capture and moral hazard.

Financial Markets and Financial Information Infrastructure.

VC as a new financial industry.

Protection of Intellectual Property Rights

Innovative Skills

Grants, Credit, Technical Assistance

Risk Capital Markets / Venture Capital

Business Environment (Broad)

Getting the sequence right:

14

Venture Capital is not the only way to finance innovation in ECA.

Realities of VC: need a significant number of bankable projects. VC is highly selective: 1/200 firms in non-OECDcountries get funds.

Financing innovation w/o VC: the “Go Forward Plan”Build on your comparative advantages.Remember that technology can be embedded in very traditional products and processes. All sectors can be high-tech!Characterize the deal flow – quality and performance.Go after corporate investors (not financial investors) that do business in your country and have a long-term perspective. Create industry consortia: multinationals and private-public local funds.

15

Human Capital –“Crude Oil” of the 21st Century

Requirements of Knowledge-intensive economies 21st century jobs demand new skills and competencies Employment security, not job security: LLL and flexibilityWithout education innovation will not occur

Status QuoEducation and training systems are not meeting demandsHigh unemployment despite generally high enrollment and high growthMismatch of skills and knowledge for future jobsLack of dynamic private sector (particularly SMEs) to generate employment

16

Complementary roles of Government and Private Sector in skills development

Provision of relevant quality secondary educationCurricula for flexible and transferable core skills Certification to facilitate the transferability and portability of skills and competencies and recognition of prior learningQuality Assurance and Accreditationfor all forms of Lifelong Learning

Result: Broader participation and increase labor market relevance

Provide Learner-Friendly High-performance Work Environments:

Team-based learningAccess to Formal and Informal learning opportunities (e-learning)Incentives for employees In-company and external knowledge networksRecognition of prior learning

Lifelong Learning

17

Looking ahead: Key policies for private sector growth

Stabilize policy environment

Implement microeconomic reforms for a better business environment

Absorb technology by attracting and retaining FDI and creating linkages between foreign and local firms

Improve local innovation by strengthening university-firm collaboration and commercializing university research

Governments have a role to play in facilitating access to finance and promoting technology start-ups. Public-private industry consortia are a viable alternative to VC in very early stages.

Enable application of knowledge by teaching practical skills

Align general and vocational education to improve the skills of the labor force

18

Factors contributing to the success of high-technology based incubators (I)

International experience shows that success requires appropriate governance and skills:

proactive supervisory board

define objectives from the outset, adopting a market-oriented governance mechanism

careful screening and monitoring of tenants, emphasizing market potential

select management team with business experience to ensure quality of services

leverage resources with networks of external professional service providers

19

Factors contributing to the success of high-technology based incubators (II)

With the aim of developing economically-independent incubators, government funding agencies should:

monitor performance of the incubator and its tenants and take remedial actions when necessary

establish a process to transfer funding and supervision responsibilities progressively to private sector agents and/or other stakeholders

20

Factors contributing to the success of high-technology based incubators (III)

Success of entrepreneurial ventures in BIs depends critically on the environment, possibly requiring simultaneous development in:

scientific research and technology capacityframework for university-industry cooperation engineering and management servicestechnical education and continuous learningtransport and communications infrastructuresources of credit and risk capital for tenants

21

Resources on Innovation and Technology Adoption

www.worldbank.org/eca/ke