Sources of Growth - World Bank

Sources of Growth - World Bank

Knowledge Absorption and Growth in ECA - The Role of Government January 22, 2008 Itzhak Goldberg, Lee Branstetter, John Gabriel Goddard and Smita Mr. Itzhak Goldberg Kuriakose Advisor, Policy and Strategy Absorption >>> Innovation Innovation = New to the World Absorption = New to the Firm Absorptive capacity: Firms capacity to assess modify

use Absorption e.g. new product, process Upgrade old product, process 2 Channels of Absorption (&Innovation) Learning Learning & & Brain Brain Circulation Circulation Trade

Trade & & FDI FDI Absorption Absorption R&D R&D Knowledge Knowledge Flows: Flows: Patents,

Patents, Citations Citations 3 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 4

annel II: Learning and Brain Circula Education and training by firms Brain-drain Brain circulation. Models: India, Israel, Armenia Policy: Investment in education and openness to attract returnees 5 I: R&D for Absorption & Innovati 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 6 Channel IV: Patents and patents citations India and China overtake ECA7 1200 1000 800 ECA 7 600

India China 400 200 0 1993 1994 1995 1996

1997 1998 1999 2000 2001 2002 2003 2004

2005 2006 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 Peoples Republic of China. The ECA 7 are Russia, Hungary, Poland, Slovenia, the Czech Republic, Bulgaria, and the Ukraine. 7 Role of Government the Why? Market failures may justify government intervention to stimulate

absorptive capacity in private sector BUT Policy design needs to account for government failures: capture, corruption, misaligned incentives AND 8 Pre-Requisites Skills and Human Capital India: Early publicly financed education - critical importance Investment Governance

Climate and Russia: Poor investment climate (weak competition, red tape); governance: corruption, regional government capture by business 9 National Innovation System 10 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 11 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 12 Entry: Own, Manage and/or just Pay ? 1. Privately owned/managed & subsidized 2. Publicly owned & managed 3. Publicly owned & privately managed & subsidized 13 Summary: Absorption<>

Innovation 1. Openness free trade, FDI and cross-border K-flows 2. Brain circulation and investment climate 3. R&D: Business-Research Consortia 4. Set Entry/Exit Free 5. IPRs of local R&D 14

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