Exploitable results
The crucial weakness of the S&T systems, or narrow national systems of innovation (NSI), in the CEECs was their failure to develop R&D at the enterprise level. In the current stage of post-socialist transformation, industrial restructuring has not directly involved domestic R&D/S&T systems. In the medium or long term, however, domestic S&T systems or narrow NSIs will have to be much more closely involved in the process of industrial restructuring if the CEECs are to vigorously pursue industrial upgrading. Very weak demand for R&D, as well as the problems of restructuring the S&T systems themselves, help to explain the current situation.
The project shows a broad compatibility in transformation between broad and narrow national systems of innovation, or between general system transformation and the restructuring of S&T systems. Changes in narrow NSIs reflect changes in the broader system of innovation, but they also have a degree of autonomy as these are mixed or hybrid (public/private) systems. The results show considerable differences in the content of institutional restructuring of S&T systems in different CEECs. In S&T policy, for instance, the spectrum of interim results achieved until now ranges from the Polish case of a more centralist administration and a predominant retention of public funding, even in the field of applied research, to the more clearly decentralised course in the Czech Republic, where there is no specific ministry for science and research, funding of research is left to the individual ministries and the (mainly privatised) industrial enterprises, and all former R&D branch institutes have been either privatised or closed. Furthermore, when considering the differences between the individual CEECs in terms of the state of their legislation (and their observance of laws), the evaluation of facilities and scientists, the introduction of competitive forms of financing for R&D projects, and their share in total R&D funding, etc, one gains the impression of a very wide spectrum of variation in the institutional transformation of the S&T systems in the individual countries. A systematic comparison of countries across several dimensions was attempted, including general progress in economic transformation, changes in S&T policy, and changes in individual institutional S&T sectors.
The result is the three groups of countries with high consistency of assessment on all three criteria. This is particularly present between the most advanced group and the group, which is the most behind in terms of institutional transformation of S&T system.
The classification of countries into Group I (Poland, Czech Republic, Hungary, Estonia, Slovenia) and Group III (Moldova, Bulgaria, Russia, Belarus, Ukraine) shows a clear congruence between progress in economic recovery and institutional transformation, and transformation of the S&T system. In other words, there is a broad compatibility in transformation between the broad and narrow NSIs, or between general system transformation and S&T system restructuring.
The relative autonomy of narrow NSIs can be observed in the Group II countries (Latvia, Slovakia, Lithuania, Romania), which demonstrate differences in restructuring between economic transformation, S&T policy, and changes in S&T institutional sectors. For example, substantial advances have been made in S&T policy in some Group II countries, often comparable to those made in the Group I countries. However, without a corresponding stable economic basis, these political and policy changes in S&T clearly could not be translated into radical changes in the performing S&T institutions. This inconsistency in areas of change is also present within specific institutional sectors, especially when the establishment of a new superstructure may often lead to little in terms of content, when the newly acquired autonomy of science is not always followed by competition and relevance, and when advances in academic science are accompanied by much lesser advances in the restructuring of industrial R&D.
Despite large national differences, the transformation process is characterised by a few common phases, each characterised by different types of changes.
The first step in the process of transformation was the dissolution and fragmentation of the old S&T systems. The second phase was characterised by a consolidation of the surviving portions of the old S&T systems, and their transformation into players whose position and behaviour became adjusted to the new environment. The third phase is witness to the emergence/building of new S&T systems, relating in particular to an appropriate quantitative balance of activities in S&T organisations and a balance of different types of organisations in S&T systems.
All CEECs have passed through the first phase of transformation (dissolution and fragmentation of the old socialist S&T system). In the group of leading countries (Group I) the changes in state and governing institutions and other players, and in the regulations in S&T policy, have generally been successful. These countries have also, to a large extent, passed through phase 2 and are in transition to phase 3. The middle group (Group II) of countries are in phase 2 (with varying success in managing individual sub-processes). In these countries, progress has in particular been made in the political environment. In most cases, the necessary science policy bodies and regulations have been created, although there are still difficulties in implementing new regulations. In this case, therefore, the issue is not so much a fundamental question of reorganisation, but rather of its practical realisation.
The least advanced group of countries (Group III) is essentially still at the beginning of phase 2 of the transformation process. The impact of continuing economic decline is strongest in this group and directly affects all areas of life, with a destabilising effect on the S&T system.
R&D systems in CEE have introduced competition and ensured scientific autonomy outside of political control. In most of the countries, we have seen competition through peer review- based selection, although the implementation of these systems shows weaknesses and only a low share of funds is distributed in this way. However, the introduction of these systems has not resolved the problem of their relevance for industry and the economy.
While autonomy has been achieved in these economies, the relevance of science for the new demand structure has not. In fact, by giving funding priority to the most competent groups and individuals and by avoiding any strong structural policy in science funding, science policy has temporarily petrified the old disciplinary profile. We must wait for science policies in the CEECs to develop structural components that could then assist in transforming the inherited disciplinary structure. This is important if we take into account that the critical issues for these countries, like education, environmental protection, competitiveness, health care, information infrastructures, etc, cannot be satisfactorily tackled with inherited disciplinary S&T structures.
Industrial R&D:
With the introduction of the market economy in CEE countries, industrial R&D has been undergoing by far the biggest changes in terms of organisational arrangements, functions, and funding. Reactions to these changes have been markedly different in the individual transformation countries, with the spectrum running from a substantial dissolution of industrial R&D in the course of its exposure to the forces of the market, all the way to its politically supported reconfiguration. But since economic changes and a difficult acclimatisation of newcomers to the EU and to international marketplace are inevitable, any artificial preservation of redundant and often centralised R&D capacities is condemned to fail. Instead, new tasks and opportunities must be sought out for them and policies developed for their restructuring.
The differences in country responses in the field of industrial R&D depend on the pace of change (shock or gradualism) and the type of restructuring (active or passive). These dimensions produce a variety of nationally specific patterns of adjustment. Most of the CEECs have followed a policy of passive and gradual adjustment in industrial R&D. The assessment of different responses is dependent on policy implementation capability. The lower that capability, the higher the costs of gradualism in terms of the erosion of the industrial R&D and weakening of any impetus towards restructuring, and the more attractive the option of rapid privatisation of industrial R&D activities. Either way, an effective policy is one that aims at supporting activities (projects) and not institutions per se, and that supports a limited number of consistent and administratively feasible goals. The costs of gradual policy are hidden but can be very high, as is evident in the imbalances between nominal and real activities of organisations, squeezing out of the most competent groups through per capita funding, and the survival of those who do not have prospects in a market-oriented R&D system. For most of the CEECs, the policy problem is how to shift from survival and passive adjustment to a policy of active restructuring of industrial R&D.
The period of post-socialist transformation of the CEE continues to be characterised by a large gap between a high level of R&D potential and labour force skills on the one hand, and results, in terms of growth and restructuring, on the other. During this period, all CEECs have seen a significant reduction of their R&D systems in terms of expenditure and personnel, which does not seem to be directly linked to growth. The lack of direct links between S&T inputs and outputs and growth and recovery in the CEECs suggests that sources of growth in the CEECs during the 1990s have not been directly linked to R&D activities, a trend confirmed by both sectoral evidence and country analyses of S&T systems. This seems to suggest that growth seems linked more to knowledge acquisition in the production process and through different forms of firm-based learning (learning by doing, learning by exporting, and interacting). The contribution of R&D/S&T systems in this case has been indirect - through skilled graduates, technological problem solving, and the creation of new firms.
Contrary to the commonly held view of ever-present inefficiencies in R&D, the relative size of R&D in the CEECs is reflected in such outputs as patents and publications: Significantly downsized R&D systems still produce a volume of patents and papers that broadly reflects the CEECs investment in R&D. This suggests that the major inefficiencies in the growth mechanism of the CEECs lie in the transformation of R&D results into commercial values. Thus the problem in the CEECs seems to be not one of supply of R&D, but, rather, one of demand for R&D and of quality of supply. Data suggest that the role of these countries industrial structures and historical heritage in maintaining R&D investments and outputs is greater than current income levels would suggest.
Trade data, combined with R&D and patent data, indicate the possibility of a CEEC-specific dual pattern of adjustment, whereby progress occurs in parallel both in labour-intensive traditional industries and in specialised supplier industries. The latter are not based on science but on a skilled workforce, usually with strong competencies in the mechanical technologies. It seems that the CEECs will not follow the East Asian pattern - from labour to capital and then technology intensive industries. This seeming CEEC specificity, which remains to be proven, can be explained as the result of inherited capabilities in design and mechanical technologies.
Trade data at detailed product levels confirm the parallel adjustment along several technological levels of product structure in exports. These are:
- Strengthened export patterns in labour-intensive industries, like clothing and footwear, in all CEECs;
- The emergence of technology-intensive exports in transport machinery and of electronic and electrical products, especially in Hungary and the Czech Republic;
- The adherence to the previous strong export orientation in commodities; this remains an important part of the export product spectrum, but accounts for the most substantial share of exports only in Bulgaria.
The basis for the catching-up process of the CEECs on world-frontier patentable innovation is rather tenuous. The remaining strengths are in specific areas rather than across broad sectors or even an entire industry. This means that the possibilities for patterns recombining world frontier R&D, design, and manufacturing capabilities are not likely on a large scale but seem probable in those specific sectors in which these economies still have world-frontier patentable inventions. On the other hand, the level of human capital, the size of the R&D systems, and the design and engineering capacities indicate that the CEECs may develop imitative capabilities not only in manufacturing but also in R&D and design.
The physical capital stock of the central and eastern European (CEE) economies, its technological structure and technology (R&D) capital was removed from market economy structures. This generated a rather unbalanced structure of assets, in which some, for example, physical assets, design capabilities, or engineering, are in abundance while others, like finance, quality management or industrial software, are in short supply. The unbalanced nature of assets of the CEECs is also evident in the structure of their technology capital.
The CEECs technological advantages are firmly rooted in their past successes and are predominantly based on metallurgical and mechanical technologies, as well as on chemicals and pharmaceuticals, while absolute and relative patent levels in electronics are marginal. In science, the CEECs advantages are highly concentrated in physics and chemistry and related disciplines. This in itself would not be a major problem, as minor investments in complementary assets, if available, could produce high payoffs. However, abundant assets often cannot be exploited with increasing returns due to a lack of complementary assets.
Numerous examples exist in the CEE countries to illustrate this situation, such as innovation activity constrained by a lack of physical investment; a high general education level of human capital but lacking on-the-job training investments; a poor IT infrastructure but a large, highly skilled pool of engineers; an abundance of skilled labour but an absence of foreign investors.
As a result of inherited unbalanced assets, which generated huge inefficiencies in the past, growth in the ex-socialist economies could no longer be sustained. The post-socialist era has seen a huge reallocation of assets. Indeed, the transition process has been clearly dominated by reallocations. However, growth derived from improved resource allocation will gradually diminish unless there is a catching up process, an accumulation of technological knowledge, or an improvement in the skills of workers and engineers. A shift towards labour-intensive export industries, a fairly common feature of CEECs, may be efficient in the short term but will be inferior in the long term due to differences in accumulated knowledge.
The experience of CEE suggests a very weak synergy between transition policies in the narrow, macro-economic sense and the required shift towards an economy based on innovation and knowledge. There is a clear need to better integrate structural and transition policies to induce economic growth and initiate structural change. To achieve this, rather than lingering over systemic details, policy priorities in CEE should focus on the big picture - on enhancing demand for technology within enterprises, and on restructuring R&D supply across the board. It must be recognised that a stabilisation of the R&D sector is impossible with radically reduced levels of expenditure unless the organisation, function, and structure of R&D is transformed. Policy needs to tackle supply, demand, and bridging functions in an integrative way.
After 10 years of pursuing the transition policy agenda, the CEECs are now searching for alternative policy solutions to also address the problem of their technological competitiveness. Given the current role of the state in these countries, the implementation of highly selective structural (industrial and technological) policies aimed at strengthening inter-firm and intersectoral technological linkages is unlikely. The CEECs are in the process of developing market-friendly public policies that correspond to the capacity of the individual states to implement them in co-operation with enterprises and with public and private organisations. This process is not a rational search but a highly politicised process in which ad hoc interventions dominate in most of the countries.
Policy options range from sector-specific or vertical policies (industrial policies) to horizontal policies (technology policy). However, the sectoral studies within the project show that the main problem is not in the type of policies per se but in the ability of governments to implement them in co-operation with industry. In other words, the empirical evidence produced within the scope of this project shows a variety of possible policy approaches, none of which should be dismissed as a priori more appropriate than others. Their (in) appropriateness is possible only within the specific industry and country context and includes an assessment of the role of the state and of business-government interactions.
The CEECs experience of the last seven years in R&D shows strong limitations of only supply type measures. On the other hand, structural difficulties on the demand side are such that key bottlenecks cannot be resolved through S&T policy only. A new transformation phase in the CEECs, in which basic economic reforms, economic stability, and privatisation are relatively stable, calls for much more innovative solutions in industrial and innovation policy, particularly in terms of low-cost policy measures.
The main areas of policy action should be:
I) Resolving the Problem of Industrial R&D Institutes Through Active Restructuring:
With the introduction of the market economy in CEE, it is primarily industry (and, more specifically, the structures and behaviour of enterprises) that is undergoing a major transformation. This has changed the role and position of industrial R&D institutes, but policy in most of the CEECs has been unable to come to grips with this problem. The response was most often a passive and gradual adjustment, whereby institutes had to restructure on their own without a clear policy framework within which they could identify their options. Also, it became clear that any artificial preservation of redundant and often centralised R&D capacities was condemned to fail, and that new tasks and opportunities would have to be sought out for them. In the Policy Report of this project, we propose elements of a pilot scheme for the active restructuring of R&D institutes in CEE.
II) Improving Domestic S&T Infrastructures:
The special importance of building up a technology infrastructure in CEE hardly needs emphasising. Thus, for example, the market value of the current excess supply of engineers and R&D specialists could be greatly enhanced by a technology infrastructure providing general technical support for entrepreneurs, in tandem, perhaps, with a venture capital facility to provide the financial support. But while the infrastructure is crucial for private enterprise and investment, it does not follow from this that the building-up of that infrastructure should be entirely the responsibility of government.
Technology infrastructure policy for a country in transition needs to be oriented much more closely to the customer, designed and financed in co-operation with the customer. In addition to direct government-led public initiatives, infrastructural functions can be created with the support of private provisions of public services (through information services, consultancy organisations, university-industry consortia, semi-public networks of innovation centres, etc). A bottom-up approach should ensure demand for the services provided. Voluntary industry associations, too, can function as builders of the technology infrastructure, targeting specific branch needs and financing their operations through members fees and customer contributions.
III) Supporting Vocational Training:
Human capital leads to growth only to the extent that it can generate technical change and learning. The sectoral studies within this project pointed to this aspect of restructuring as an essential component for industrial upgrading. In CEE, the labour force has undergone a difficult process of adjustment and the wage structure reflects this through increasing wage differentials.
The education system does not seem to be a major factor constraining industrial upgrading - but it is certainly not a catalyst in that direction, either. Thus one looks in vain for strong pressures to upgrade the human capital stock from either the demand or the supply side. In addition, there are serious deficiencies in the process of the renewal of the skilled labour force (ie, training of unemployed workers), and there is a lack of support for vocational training. The fact that this aspect has been significantly undermined during the 1990s is a strong rationale for public policy actions in this area. Also, technical education is subject to radical change and in need of modernisation. Due to the need to ensure the relevance of vocational training, these schemes are not only a problem of funding: More important is their relevance and whether they ensure the skill profiles that foreign and domestic enterprises seek. This requires vocational training policies to be conducted in close co-operation with business through different stimulative co-funding schemes.
IV) Developing a Regional Innovation Policy:
As a result of systematic neglect under the old regime, the development of the CEECs regions - both in an administrative sense and as an innovative centre - is generally very weak. Nevertheless, economic differences between regions are already evident, and likely to increase even further, which only reinforces the case for a pro-active regional policy, including a regional innovation policy. Although this project did not explicitly focus on regional aspects, this aspect clearly stemmed from problems related to the inclusion of small and medium-sized enterprises (SMEs) into national and international supply networks.
The main elements of regional innovation policy should be:
- Strengthening input-output linkages through physical investments, and opening new markets and trade links, by establishing regional business centres and development agencies that would promote the region. This activity is already spreading throughout CEE.
- There is a need to address those skills and training needs that are very industry-specific and relevant for the region. In designing such programmes, users must be actively involved in their development.
- Assistance for institution building and institutional transfers. From the perspective of regional innovation, an important form of this kind of transfer are innovation centres, incubators, and technology parks. Evidence suggests that their effects and results in a central and eastern European context have not been very encouraging. Most often they are initiated by foreign-assisted programmes and operate successfully - as long as foreign assistance is in place. Misunderstanding with these forms of institutional transfer is that they do not represent response of local community on their own problems but are seen as mere transfer of institutions which do not resolve the main constraint - lack of collective action which is implied in institutions like innovation centres. This points to the need to correct an excessive supply side orientation of such initiatives that do not take into account local demand.
V) Strengthening and Differentiating International Co-Operation in S&T Between the EU and CEE:
The comparative analysis of the progress in the institutional transformation of S&T systems in CEE led to a differentiation between three large groups of countries. In the coming years these countries are therefore also faced with differing problems and tasks in the formation of their S&T systems, although they do also share many similar problems. Given the current state of development, however, a differentiation in the main emphasis placed on the individual transformation countries would be prudent:
In the (Group III) countries, which are still beginning to reorganise their S&T systems, the main focus should be on consultation and an exchange of experiences in the area of S&T policy and organisation. This aim can be broadly supported by involving these countries in international bodies (such as EUROSTAT, for example), and by establishing contacts (by sending experts at all levels of science, politics, administration, and organisation to bilateral conferences or to appropriate fora to exchange experiences.
The Group II countries, in which fundamental changes in the S&T systems have either already been introduced or prepared, should be included in international bodies like Eurostat, and an expert exchange at all levels of S&T policy should be supported on a continuous basis. In particular, it would be sensible within the EU framework to gain an overview and to take stock of all the activities that individual EU members states and EU bodies have undertaken in S&T policy and co-operation.
The leading transformation countries in Group I have already consolidated their S&T systems, and co-operation with them should be intensified. Indeed, this is now taking place, with these countries being involved in the work of the EU at various levels. Of primary importance here is adaptation of corresponding regulations, modes of operation, etc, to conform to EU standards and requirements. In some cases, however, interim arrangements are likely to be necessary to take into account the specific conditions in these countries even after their accession to the EU, especially as regards the support of industrial R&D in the former branch institutes.
Finally, the policy of international co-operation, in particular with CIS countries, should be more diversified, and efforts should be made to actively develop civilian as opposed to military/defence sciences. International S&T co-operation should diversify into areas of civilian science, especially those concerned with solving the more immediate environmental, health, and industrial problems.
Based on the results of this project, the following measures, aimed to enhance the production, utilisation, and diffusion of knowledge in CEEC is also recommended. These are further explained in the projects Policy Report.
- Continuing to strengthen the autonomy of public R&D systems through improving peer review and other evaluation procedures, but increasing its relevance to economic needs through different co-funding mechanisms.
- Diversifying the portfolio of funding instruments in R&D and innovation activities by introducing programme, project, co-funding, and individual grant funding.
- Developing technology foresight activities.
- Stimulating foreign investors to invest in R&D and avoid ad hoc interventionism in relation to FDI.
- Fostering collaboration in public technology procurement.
- Supporting the transfer of those R&D units most directly linked to industrial activity to industrial enterprises.
- Improving the articulation of demand for technology services by supporting demonstration projects in innovation and technology management.
- Supporting the process of formation of spin-off enterprises from, or attached to, R&D institutes and enhancing bottom-up restructuring processes.
- Encouraging governments to invest in vocational training through different co-funding schemes.
- Supporting technology transfer functions not only through the formation of stand-alone organisations (ie, S&T parks, innovation centres) but also by enhancing the technology transfer functions of enterprises and R&D organisations.
- Supporting networking at the regional level by supporting regional technology plans and organisations that may act as network organisers in the region.
- Advocating a broad strategy to encourage linkages and subcontracting arrangements with foreign firms.
Given the collapse of S&T systems in CEE countries, the internationalisation of production and sales networks in CEE became an important, if not the most important, factor in the emergence of new enterprise and innovation networks. National S&T systems did not play an important direct role in sector and enterprise restructuring in CEE. The sources of innovation and the patterns of technical change have dramatically altered in all the sectors studied, but the new role for industrial R&D organisations has not become clear.
Industrial transformation in the CEECs has changed not only the organisation of the innovation process but also the entire production network, which formed the basis of the sector. The main feature of the socialist production networks was a deep vertical integration, which was unsuitable under new conditions. The disintegration of vertical production networks and their reorganisation, very often led by foreign enterprises, has also changed the nature of the innovation process.
The radical change in the industrial structure of individual sectors led to changes in supply and demand for S&T and to a complete change of the position of enterprises in the innovation process. For example, CEE telecom equipment producers have gone from being producers of outdated switching equipment to becoming dependent subsidiaries localising state-of-the-art technologies. Computer producers had to completely abandon the idea of producing their own mini-computers, becoming transformed instead into PC assemblers.
New software firms have become customisers of generic solutions in close co-operation with foreign software providers. Car complexes of the former socialist period have been transformed into networks led by foreign assemblers and reorganised with the help of first-tier foreign suppliers. Domestic car part producers have become subcontractors serving foreign-controlled assemblers.
As a result of de-verticalisation, which went hand in hand with the opening of domestic markets and foreign investments, the local value- added has been drastically reduced. However, competitiveness and productivity have improved dramatically, especially in enterprises benefiting from foreign investment. The focus of the technology effort has moved from R&D towards technological intra-firm improvements, where R&D, especially the imitative type, has become much less prevalent - if, indeed, it still exists. This has led to a drastic fall in demand for domestic technology and to a devaluation of domestic S&T assets. However, in some cases, due to the availability of skilled engineers, these assets were successfully re-employed in the same or in other sectors. In that context, the key issue is to understand which factors prevent the re-deployment of the inherited socialist S&T potential into new areas.
Sectoral studies undertaken within this project suggest that market demand is essential for the restructuring process. In those sectors, or subsectors, where domestic demand is growing, progress in industrial modernisation is more likely. However, demand alone is not sufficient for restructuring as, in that case, rising demand could also be satisfied through imports. Sectoral studies suggest that the pace of this process is also likely to be determined by gaps in technology and finance. If both financing and technology gaps are small, as in the case of PC assembly, customised software, and, to a certain extent, in the food processing industry, restructuring can be expected to take place. If, on the other hand, technology and/or financing gaps are a problem, difficulties in modernisation, or more significant country differences like in telecommunications services or car assembly are likely.
The market, technology, and financing are not the only determinants of restructuring, however. Whether similar structural situations will result in similar outcomes also depends on other factors, including management capabilities and political control of the process. However, in all of the six industry sectors studied, the issue of access to markets, technology, and finance plays an important role. In that respect, these three elements seem an important structural feature of industrial modernisation in CEE.
Industry studies also show that the growing demand for products or services does not automatically also generate demand for domestic S&T and for S&T links. For central and eastern European S&T systems, the growth of demand for S&T is essential. The break-up of large firms in CEE has reduced demand for innovation to levels lower than product demand would suggest. Also, the proliferation of new small firms probably generates a different type of demand for R&D and innovation, to which domestic R&D cannot respond immediately. This may partly explain why, despite the recovery in the CEECs, the emergence of dynamic sectoral innovation systems is not discernible. In addition, innovation systems almost everywhere are hybrid systems, embodying complex public/private interdependencies. This suggests that, even where there is a critical mass of demand for domestic innovation and technology, a plethora of other missing factors may be related to a hybrid character of systems of innovation that may prevent its emergence.
In the most restructured sectors in CEE, emerging structural barriers to further industrial upgrading are becoming evident. In these sectors, CEECs may reach the limits of industrial upgrading based only on foreign direct investment or foreign-led modernisation, which are characterised by intra-firm productivity improvements in foreign investment enterprises but not yet by increasing foreign-domestic innovation linkages. The majority of CEECs are still struggling to integrate into international production networks, and integration at any technological level is, albeit temporarily, a solution. However, the evidence of some sectors suggests that industrial upgrading is a continuos process and that todays specialisations may not be sustainable or economically profitable in the medium or long term unless improvements in local production and innovation networks are made. And such improvements cannot be driven entirely - and in all CEECs - by foreign investments. The examples of structural problems in the sectors studied suggest the importance of a diversified knowledge base and the importance of constructing sectoral and national systems of innovation. Indeed, the CEECs may not be able to overcome future structural barriers unless they develop strong public R&D systems and enhance their links to industry.
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