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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
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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
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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!
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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!
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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
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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%
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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).
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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.
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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
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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.
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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.
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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:
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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.
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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
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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
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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
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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
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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
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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