Ukraine: National Export Strategy Consultation. Innovation - An International Perspective

Ukraine: National Export Strategy Consultation
Innovation: An International Perspective
5-6 June 2018
Subhrendu Chatterji

Subhrendu Chatterji innovation framework Ukraine OECD
What is innovation?
2
Source: Oslo Manual: Guidelines for collecting and interpreting innovation data. Third edition.
OECD. 2005
An innovation is the implementation of a new or significantly improved product (good or
service), or process, a new marketing method, or a new organisational method in business
practices, workplace organisation or external relations.
A product innovation is the introduction of a good or service that is new or significantly improved
with respect to its characteristics or intended uses. This includes significant improvements in
technical specifications, components and materials, incorporated software, user friendliness or
other functional characteristics.
A process innovation is the implementation of a new or significantly improved production or
delivery method. This includes significant changes in techniques, equipment and/or software.
A marketing innovation is the implementation of a new marketing method involving significant
changes in product design or packaging, product placement, product promotion or pricing.
An organisational innovation is the implementation of a new organisational method in the firm’s
business practices, workplace organisation or external relations.

Traditionally innovation has been seen as a linear process…
3
INVENTION INNOVATION DIFFUSION
Basic Research
App. ResearchBasic Research
App. Research Development
Development
Invention/Patent
Commercialization
Market Launch Production
Prototype New product/
process
Commercialization
Source: Search and Innovate: A Way Towards Technological Change in Small Countries. Uquillas, Jorge; Sáenz-Arce, Pedro. IDB. 2005

…it is increasingly seen as more complex, systemic and
multi-directional
4
FEEDBACK
RESEARCH
KNOWLEDGE
(both in-firm and available elsewhere)
Potential
Market
Invent and/or
produce
analytic
design
Detailed
design
and test
Redesign
and
Produce
Distribute
and
Market
KNOWLEDGE
(both in-firm and available elsewhere)
Source: Search and Innovate: A Way Towards Technological Change in Small Countries. Uquillas, Jorge; Sáenz-Arce, Pedro. IDB. 2005

Education and skills.
Technology research
and commercialization
infrastructure.
Digital technology
infrastructure and
ecosystem.
Innovation policy should address needs at different levels
5
Business
Environment
Finance, strategies
and institutions
Technology policy
environment
Supportive key building
blocks of innovation
Regulatory
environment
Innovation enabling
framework for
organizations
Vibrant capital
markets.
Churn and change
accepted, embraced.
High level of
entrepreneurship.
Cooperation and
collaboration part of
culture.
Strong ICT adoption,
especially among
business.
Strong managerial
skills.
Pro-innovation tax system.
Competitive and open trade regime.
Ease of starting business.
Transparency and rule of law.
Support for competitive product and labour markets.
Limited regulations on the digital economy.
Government procurements based on performance
standards.
The Good, The Bad and The Ugly (and The
Self-Destructive) of Innovation Policy: A
Policymaker’s Guide to Crafting Effective
Innovation Policy. Stephen J. Ezell and
Robert D. Atkinson. 2010

Policies to strengthen innovation are typically based on key
pillars
6
Skilled workforce
Supportive business environment
Strong and efficient system for knowledge creation and diffusion
Policies to encourage firms to engage in innovation and entrepreneurial activities

…and it translates into a range of policy options
7
Source: The New Imperative of Innovation Policy: Perspectives for Latin America and the
Caribbean. Juan Carlos Navarro, José Miguel Benavente, and Gustavo Crespi. IDB. 2016.
Horizontal Vertical
PublicGood
Higher education and training
Support of scientific research
Intellectual property rights
Research infrastructure
Human capital/immigration
Labour training
Regulation/Competition policy
Technology transfer organization
Entrepreneurship education
IP rights and bankruptcy legislation
Innovation climate
Improve deal flow through technology transfer
Tax policy
Technological institutes (e.g., agriculture,
industry, energy, and fishing)
Standardization
Thematic funding
Signalling strategies
Information diffusion policies (extension
systems)
Technological consortiums
Contests
Industry-specific training
programs
Market
Intervention
R&D subsidies
R&D tax credits
Financial measures (e.g., guarantees for
technology investments and intangibles values)
Adoption subsidies
Public financing of seed, angel, and venture
capital, directly or through private VC funds
Generic business incubators and accelerators
Tax incentives
Public procurement
General purpose technologies (e.g., ICTs,
biotech, and nanotech)
Strategic sectors (e.g., semiconductors,
nuclear energy, and electronics)
Defence sector
Business incubators and accelerators
focused on particular strategic sectors
(e.g., ICT or biotechnology)
TypeScope

Overall STI policy focus in larger countries is on business
innovation and skills
8
Sources: OECD Science, Technology and Innovation outlook 2016. OECD. 2016
0
5
10
15
20
25
30
Structuraladjustment
Societalchallenges
Sustainable/greengrowth
Globalisationandinternational
cooperation
Overall-GovernanceofSTIpolicy
Designandimplementation
Coordinationandparticipation
Evaluation
Frameworkconditions
Overall-Publicresearchsystem
Researchinfrastructures
Publicresearchreform
Impactofscience
Overall-Businessinnovation
Innovationinfirms
EntrepreneurshipandSMEs
Policymix
Targetingpriorityareas
Overall-Humanresourcesandskills
Innovationculture
Educationandtraining
ResearchandS&Tcareers
Challenges . Governance . Public research Innovation in firms and entrepreneurship Skills for innovation
High and increasing High and unchanged Medium and increasing Medium and unchanged Medium and decreasing Low and increasing Low and unchanged

0
20
40
60
80
100
Competitive
grants
Debt financing Equity financing Technology
consulting and
extension
programmes
Repayable
advances
Tax incentives
for R&D
Public
procurement for
innovation
Other tax
incentives
Innovation
vouchers
Tax incentives
on IP gains
%
Increasing relative relevance Unchanged relative relevance Decreasing relative relevance
Direct financing of innovation is emphasized and is
increasing in relevance
9
Sources: OECD Science, Technology and Innovation outlook 2016. OECD. 2016
0
20
40
60
80
100
Competitive
grants
Debt financing Equity financing Technology
consulting and
extension
programmes
Repayable
advances
Tax incentives
for R&D
Public
procurement for
innovation
Other tax
incentives
Innovation
vouchers
Tax incentives
on IP gains
%
In use Not in use

Countries’ innovation capabilities develop over time
10
Source: The Innovation Paradox: Developing-Country Capabilities and the
Unrealized Promise of Technological Catch-Up. Xavier Cirera and William F.
Maloney. World Bank Group. 2017
Production
capabilities
Technological
adaptation capabilities
Invention
capabilities
The capabilities escalator
Level of development

The focus of innovation policy should depend on the stage of
the country’s development
11
Source: The Innovation Paradox: Developing-Country Capabilities and the
Unrealized Promise of Technological Catch-Up. Xavier Cirera and William F.
Maloney. World Bank Group. 2017
Long-term R&D and
technological programs
Minimize innovation gap
between leaders and
laggards
Collaborative innovation
projects
Building technological capabilities
Incentivize R&D projects
Link industry and academia
Improving quality of research,
innovation and export
infrastructure
Building managerial and organizational capabilities
Start collaborative projects
Need to develop STEM skills and engineering
Need for basic infrastructure—NQI and Incubation
Elimination of barriers to physical, human and knowledge capital
STAGE 2
Maturing NIS
STAGE 3
Mature NIS
STAGE 1
Incipient NIS
Levelofdevelopment

Main policy choices for innovation tools
12
Horizontal vs vertical
Sector- and technology targeted vs generic
Financial vs non-financial
Competitive vs non-competitive
Supply-side vs demand-side
Short vs medium/long-term horizon
For LMICs such as Ukraine
Diversifying continuously into higher value-added activities
Innovating through the adoption of existing knowledge elsewhere in the world and
increasingly through the development of local technological capabilities
Regionalization
Reforming product, labour and financial markets as well as skills development schemes
Fostering competitive and innovative service sectors
Focusing on sectors with export potential

Effective policy implementation needs a National Innovation
System
13
“ .. the network of institutions in the public and private sectors whose activities and
interactions initiate, import, modify and diffuse new technologies.” (Freeman, 1987)
“ .. the elements and relationships which interact in the production, diffusion and use of
new, and economically useful, knowledge ... and are either located within or rooted inside
the borders of a nation state.” (Lundvall, 1992)
“... a set of institutions whose interactions determine the innovative performance ... of
national firms.” (Nelson, 1993)
Definitions
Key ingredients
Innovative firms with necessary scientific and technological capabilities, access to
funding and a willingness to take risk.
Effective supporting institutions.
Supportive science and technology policies.
Wider framework of enabling conditions.
Sources: Search and Innovate: A Way Towards Technological Change in Small Countries.
Uquillas, Jorge; Sáenz-Arce, Pedro. IDB. 2005
National Innovation Systems. OECD
Often combined with science and technology policy/systems (STI)

14
Provision of knowledge inputs to the innovation process
Provision of R&D
Competence building
Demand-side activities
Formation of new product markets
Articulation of quality requirements
Provision of constituents of SI
Creating and changing organizations needed for developing new fields of innovation.
Networking through markets and other mechanisms
Creating and changing institutions
Support services for innovating firms
Incubation activities
Financing of innovation processes and other activities
Provision of consultancy services relevant for innovation processes
Small Country Innovation Systems: Globalization, Change and Policy in Asia and Europe. Ed.
Charles Edquist and Leif Hommen. Edward Elgar. 2008
A NIS provides a range of services and support through the
policy tools

A NIS requires coordinated action from a range of entities
Framework conditions
Financial environment; taxation and
incentives; propensity to innovation
and entrepreneurship; mobility
Demand for innovation
Consumers, Government (final demand)
Producers (intermediate demand)
Education &
research
Industrial system
Large companies
Mature SMEs
New, tech-based
firms
Intermediaries
Research institutions
Technology transfer
support organisations
Technology services
providers
TVET
Higher ed. &
research
Public research
Political
system
Govern-
ment
Gover-
nance
STI
policies
Infrastructure
Finance
Intellectual Property
Regime (IPR)
Innovation &
business support
Standards & norms
Source: RCN in the Norwegian Research and Innovation
System. Stefan Kuhlmann and Eric Arnold, November 2001

16
E-BUSINESS
SKILLS
Business skills
+ technology skills:
being able to identify how digital
technologies can create new business
opportunities, new business models, or new
ways of doing existing business.
DIGITAL SPECIALIST SKILLS
The skills required for researching, developing,
designing, producing, installing, managing, and
maintaining ICT software and systems
DIGITAL USER SKILLS
The skills required for the effective use of ICT tools, systems, and devices to support
non-ICT tasks/functions. User skills include the use of the Internet, applications and software.
Digital technologies are a key driver of innovation, but require
a solid foundation
Source: Aid for Trade at a Glance 2017: Promoting Trade, Inclusiveness and Connectivity for
Sustainable Development - © OECD / WTO 2017 and OECD.org

17
Service-sector innovation derives less from investments in formal R&D.
More reliance on acquisition of knowledge/IP from outside sources through acquisition and
collaboration.
Human resource development is especially important to service firms.
Indications that a lack of highly skilled personnel is a major impediment to service innovation
in most OECD economies.
The role of newly established firms in innovative activity is greater
Entrepreneurship is a key driver of service innovation (but small firms tend to be less
innovative than larger firms).
IPR protection is more important, especially on software and business method
patents.
Changes in policy regimes governing software-related patents and business method patents
would impact service-sector firms, regardless of their main activities.
Source: Promoting Innovation in Services. Working Party on Innovation and Technology Policy. OECD. 2005
There are important differences between innovation in
services and manufacturing

Mauritius NES: Constraints in export innovation
Policy and regulatory issues
Lack of a coherent approach to promote innovation in the export sector
Limited investment in R&D relevant for priority export sectors
Limited number and scale of policy instruments used to promote innovation
Supply-side issues (service providers’ side)
Shortage and mismatch of skilled labour force
Deficient provision of relevant and sustained technological support
University’s contribution to an innovative productive sector is limited
Inadequate technological and innovation infrastructure
Demand-side issues (private sector)
Lack of critical mass in innovative segments
Smaller firms are not adopting existing technologies
Insufficient appetite for innovation
Lack of offer of innovative products
18

Selected data
Innovation in Europe and Ukraine
19

20
Source: WEF Global Competitiveness Index 2017-18
Ukraine’s competitiveness has been improving, although
some regional peers have been doing so faster
Global Competitiveness Index Scores
2007-2017 GCI Rankings
2007/
125
2017/
137
EE 25 29
CZ 29 31
RU 62 38
PO 48 39
RO 68 68
UK 78 81

21
Source: WEF Global Competitiveness Index 2017-18
Ukraine’s GCI competitiveness profile broadly mirrors the
region’s, and innovation ranks stronger than some other areas

The Global Innovation Index is an internationally recognized
benchmark for a country’s innovative capacity
22
Source: www.globalinnovationindex.org
Institutions
Political
environment
Regulatory
environment
Business
environment
Human
capital and
research
Education
Tertiary
education
Research &
development
Infrastructure
ICTs
General
infrastructure
Ecological
sustainability
Market
sophistication
Credit
Investment
Trade,
competition,
& market scale
Business
sophistication
Knowledge
workers
Innovation
linkages
Knowledge
absorption
Creative
outputs
Intangible
assets
Creative goods
and services
Online
creativity
Knowledge &
technology
outputs
Knowledge
creation
Knowledge
impact
Knowledge
diffusion
Global Innovation Index
(average)
Innovation Efficiency Ratio
(ratio)
Innovation Input
Sub-Index
Innovation Output
Sub-Index

23
Source: www.globalinnovationindex.org. 2017 GII Indicators
Ukraine ranks 50 out of 127 countries in 2017 GII, having
improved recently
0
20
40
60
Institutions
Human capital and
research
Infrastructure
Market
sophistication
Business
sophistication
Knowledge and
technology outputs
Creative outputs 71
63 64
56
50
0
20
40
60
80
2013 2014 2015 2016 2017
35
36
37
38
Ukraine: GII Rankings and Scores
Rank Score

24
Source: www.globalinnovationindex.org. 2017 GII Indicators
Ukraine compares reasonably with neighbours but GII leaders
are stronger across all criteria
0
20
40
60
80
100
Institutions
Human capital and
research
Infrastructure
Market
sophistication
Business
sophistication
Knowledge and
technology outputs
Creative outputs
Poland Ukraine Romania Switzerland Russia 2017 GII Rankings/Scores
Switzerland: 1/67.7
Czech Rep.: 24/51.0
Estonia: 25/50.9
Poland: 38/42.0
Romania: 42/39.2
Russian Fed.: 45/38.8
Ukraine: 50/37.6

25
Source: European Innovation Scoreboard 2017. Hugo Hollanders and Nordine Es-Sadki.
Maastricht University. Funded by the European Commission
The European Innovation Scoreboard adopts a similar
approach to GII, and provides in-depth comparable data
Framework
conditions
Investments
Innovation
activities
Impacts
Human resources
Attractive research systems
Innovation-friendly environment
Finance and support
Firm investments
Innovators
Linkages
Intellectual assets
Employment impacts
Sales impacts
Measurement framework

2017* EIS rankings suggest Ukraine has significant catch-up
opportunities
26
0
20
40
60
80
100
120
140
160
180
UA
RO
MK
BG
HR
PL
LV
TR
RS
HU
EL
SK
CY
IT
MT
ES
LT
EE
PT
CZ
SI
EU
FR
IL
IE
NO
BE
LU
AT
IS
DE
UK
NL
FI
DK
SE
CH
EIS: Overall Rankings
* 2016 data
Source: http://ec.europa.eu/growth/industry/innovation/facts-figures_en

Ukraine is relatively stronger in educated and trained
citizens….
27
* 2016 data
0
50
100
150
200
250
300
TR
MK
RO
MT
HU
UA
BG
IT
RS
HR
PL
EL
LV
SK
CZ
IL
CY
PT
EU
BE
EE
DE
LT
ES
AT
LU
IS
FR
IE
SI
NL
NO
UK
FI
SE
DK
CH
Human resources

…scientific and cited publications score relatively low
28
* 2016 data
0
50
100
150
200
250
300
UA
MK
TR
BG
RO
PL
LT
LV
HR
RS
SK
HU
CZ
MT
EE
ES
IT
EL
SI
DE
EU
PT
CY
IL
FR
IE
FI
AT
NO
IS
BE
UK
SE
NL
DK
LU
CH
Attractive research systems

Ukraine broadband penetration and opportunity-driven
entrepreneurship data was lacking in the EIS
29
* 2016 data
0
50
100
150
200
250
UA
EL
RS
HR
CY
MK
BG
SK
IT
PL
RO
HU
CZ
UK
IL
DE
MT
AT
TR
IE
EE
EU
SI
FR
ES
BE
LT
PT
CH
LV
NL
LU
FI
NO
SE
IS
DK
Innovation‐friendly environment

Public sector and venture capital support for innovation is
better
30
* 2016 data
0
20
40
60
80
100
120
140
MK
BG
RO
UA
MT
SI
RS
HU
CY
IL
EL
IT
HR
PL
IE
ES
LU
TR
SK
LV
CZ
PT
EU
BE
UK
AT
FR
LT
DE
CH
NO
DK
NL
SE
IS
EE
FI
Finance and support

..and R&D, innovation investment and ICT training by firms is
relatively stronger
31
* 2016 data
0
50
100
150
200
250
300
RO
LV
UA
CY
BG
IT
EL
MT
MK
SK
EE
ES
NL
LU
PL
PT
HU
LT
FR
HR
IE
EU
CZ
UK
DK
RS
NO
IS
SI
TR
FI
BE
AT
SE
DE
CH
IL
Firm investments

SME innovation performance is better than a number of
countries
32
* 2016 data
0
20
40
60
80
100
120
140
160
180
RO
PL
BG
LV
HU
UA
EE
SK
ES
HR
MK
MT
CZ
IL
SI
LT
RS
TR
EU
UK
CY
IT
DK
PT
EL
FR
SE
NL
NO
FI
AT
LU
IS
DE
BE
IE
CH
Innovators

..but collaboration requires further strengthening
33
* 2016 data
0
20
40
60
80
100
120
140
160
180
UA
BG
MT
PL
RO
PT
MK
LV
RS
CY
IT
LU
HR
ES
EE
HU
SK
TR
CZ
IE
EL
FR
IL
EU
SI
LT
DK
SE
NO
FI
UK
DE
AT
IS
CH
NL
BE
Linkages

Patent, trademark and design performance is better than
overall EIS ranking
34
* 2016 data
0
20
40
60
80
100
120
140
160
180
MK
TR
RS
UA
RO
SK
HR
EL
HU
LV
NO
LT
CZ
IE
IS
PT
PL
ES
FR
BE
UK
SI
EE
BG
EU
IT
CY
NL
DE
IL
FI
SE
AT
DK
CH
MT
LU
Intellectual assets

Employment in fast growing innovative sectors and knowledge-
intensive activities scores the highest ranking
35
* 2016 data
0
20
40
60
80
100
120
140
160
180
200
MK
TR
RO
CY
HR
LT
PT
EE
EL
IT
ES
SI
BE
UA
AT
FI
LV
PL
FR
RS
CZ
BG
EU
DE
DK
NO
SK
CH
HU
NL
SE
LU
UK
IS
MT
IE
IL
Employment impacts

Sales and exports of technology products and knowledge-
intensive services requires further improvement
36
* 2016 data
0
20
40
60
80
100
120
140
HR
UA
BG
LT
IS
PT
LV
TR
MT
NO
EL
PL
RO
CY
EE
RS
MK
FI
SI
IT
BE
DK
AT
ES
SE
NL
LU
CZ
IL
HU
EU
SK
FR
CH
DE
IE
UK
Sales impacts

The EIS measurement framework highlights wide disparities in
scores across Ukraine’s innovation indicators
37
* 2016 data
29
66
15
n/a
19
47
16
5
24
78
33
Summary Innovation Index
Human resources
Research systems
Innovation-friendly environment
Finance and support
Firm investments
Innovators
Linkages
Intellectual assets
Employment impacts
Sales impacts
Ukraine: 2017 EIS scores
FRAMEWORK
CONDITIONS
INVESTMENTS
INNOVATION
ACTIVITIES
IMPACTS
Innovation performance decline of 4.2% vs EU 2010.

Ukraine: National Export Strategy Consultation. Innovation - An International Perspective

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