Innovation by companies key as emerging countries strive to catch up with more developed economies

By Anthony Williams

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Innovation by companies is a powerful lever that can galvanise growth in emerging countries and help bring their economies in line with their more prosperous neighbours, according to a new report from the EBRD.

The EBRD’s Transition Report 2014: Innovation in Transition draws on unique data to examine why some companies are more innovative than others and shows what drives innovation and what stands in its way.

It also outlines how governments can support companies as they develop new products themselves or become more competitive by adopting products or production processes and adapting them to suit their own needs.

The report makes clear that individual efforts at the micro or company level have a significant impact on a country’s overall macro-economic performance.

“As firms move along their transition path, so will the countries in which they are based,” says EBRD Chief Economist Erik Berglof in the foreword to the new study. “The overall message of this year’s Transition Report is a hopeful one,” he added.

The 2014 publication tackles issues from last year’s report, “Stuck in Transition?”, which showed that the convergence process had slowed in the EBRD region, primarily because reforms that had previously been the engine for growth had all but dried up.

The new report helps provide answers to questions asked in the earlier study, pointing specifically to the role innovation can play in boosting economic productivity.

The Transition Report stresses that innovation should not only be seen in terms of ground-breaking new inventions but also, especially in less advanced economies, in terms of companies introducing products or processes that are new to that firm but were already available elsewhere.

The research that underlies the report shows that innovative firms are particularly sensitive to the business climate and, in order to promote innovation, authorities have to make sure that they address bottlenecks affecting innovation, such as corruption, inadequate skills among the workforce, limited access to finance and lengthy customs and trade regulations.

Policies also have to be adapted to suit the prevailing conditions in any given country, the report says. “In countries still far removed from the technological frontier, policy-makers should focus more on improving the country’s capacity to absorb and benefit from technologies developed elsewhere.”

This calls for better primary and secondary education, better access to bank credit and an environment that encourages entrepreneurs to improve the management of their firms in these countries.

In more advanced economies, policies have to focus on nurturing creativity, providing highly specialised human capital and creating space for the market entry of young, innovative firms while also allowing the exit of firms that do not succeed.

“This requires that we pay more attention to flexible labour markets, better competition policies, good universities and sufficient access to venture capital and private equity for young start-up firms in these more advanced economies”, the report says.

The study also analyses data showing the relationship between company innovation and access to credit and draws lessons on how policy-makers can improve the provision of credit to small businesses.

It says that while financing constraints can be alleviated in the short term by the introduction of special funding schemes for small firms, banks may also have to review their lending models in order to ensure they have sufficient in-house capacity to lend to small and medium-sized enterprises.

Policy-makers can also encourage lending to small firms by establishing credit bureaus and registries, which facilitate the sharing of borrower information among lenders.

The report draws on data from two surveys. The Business Environment and Enterprise Performance Survey, produced by the EBRD and the World Bank, polled almost 16,000 firms in 30 countries for views on the business environment for private enterprise and business development. It was the fifth such survey but the first to include a module on innovation.

The Bank also conducted a second round of its Banking Environment and Performance Survey, holding face-to-face interviews with CEOs from over 600 banks in the region that provided valuable data on their operations and business models.

Data was produced on the locations of over 137,000 branches operated by these banks, providing unique insight into how firms and banks work together and how their cooperation can drive innovation forward.

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