Restructuring of Research and Development Institutes in Eastern Europe and Central Asia

1. Restructuring of Research and Development Institutes in Eastern Europe and Central Asia Itzhak Goldberg Jean-Louis Racine The World Bank Knowledge Economy Forum VIII – Fontainebleau, April 29, 2009

2. Innovation in ECA: Current Trends

3. How can we measure innovation system performance? R&D Outputs R&D Inputs Industrial Performance

4. How can we measure innovation system performance? R&D Outputs R&D Inputs Industrial Performance

5. ECA countries invest little in R&D ECA EU-15 Sources: UNESCO and USPTO databases

6. In ECA much of the R&D is performed by the government sector Sector of performance of R&D Source: UNESCO database

7. How can we measure innovation system performance? R&D Outputs R&D Inputs Industrial Performance

8. ECA is not efficient at turning R&D investments into patents ECA EU-15 Sources: UNESCO and USPTO databases

9. How can we measure innovation system performance? R&D Outputs R&D Inputs Industrial Performance

10. In ECA, the productive sector is not benefiting from R&D investments Patents do not result in important productivity gains - Radosevic study • R&D does not translate to better product quality - World Bank/WIFO study

11. A Look at ECA RDIs Through Case Studies and Benchmarking

12. Countries in the Sample 12 12

13. What do the case studies show? A mixed bag Some are responsive to the market, others not. Some operate close to international best practice while others are far removed from it. 13

14. In some ECA countries, public resources are being spread thin across many RDIs Total public and private sector funding per staff

15. ECA RDIs publish less in international journals… Average annual number of publications per hundred staff 15 Source: Science Citation Index over a five year period

16. …and their publications have less impact than in OECD countries Average number of citations of a publication 16 Source: Science Citation Index over a five year period

17. Although some ECA RDIs are engaged in patenting… Average annual number of patents per hundred staff 17

18. … few are able to license their IP Average annual number of licenses per hundred staff 18 18

19. A number of RDI are following “technology-push” models … Share of budget spent on “strategic” research with no immediate commercial application 19

20. …many are ignoring demand Share of budget spent on marketing and business development 20

21. Funding affects RDI strategy 21

22. RDI Reform Strategies

23. Quadrant I Quadrant II Public goods GOGO, Corporatization or restructure to II GOGO, GOCO or Foundation Quadrant III Quadrant IV Closure or restructure to IV Privatization or transition to II ↑ Private goods Technology push Market pull Classification of RDIs 23

24. Publications measure “public goods” production # publications per RDI employee, weighted by prestige of international journals and publishing houses; impact of RDI publications on international scientific community, using the number of citations as a proxy 24

25. Technology Push & Market Pull Assessing RDIs w/ Competitiveness Mission patents: domestic vs. international licenses share of industry funding collaborative projects and spin-offs 25

26. No action 5 yes Corporatize, GOGO or restructure 8 Does it fulfill a strategic mission and is it performing well? 2 yes Is there sufficient market-pull? 3 no yes Closure or Assess restructuring potential to increase market-pull through GOGO, GOCO or NGO 9 Is it a public good? 1 no Privatize or Assess restructuring potential to increase public good 6 yes no Is there sufficient market-pull? 4 no Closure / liquidation 7 RDI Restructuring Decision Process 26

27. Restructuring Options for RDIs 27

28. Insider and outsider privatization Lessons: Privatization of enterprises in the transition economies >>> critical selecting the right method. Insider privatization - sale of the company’s shares to its managers and workers; and Outsider privatization as a sale to an investor who is an outsider, i.e. neither as manager or a worker of the company 28

29. Government-owned, Contractor-operated (GOCO) Government contracts out the management of the RDI to an outside contractor but maintains government ownership. Contractor: university consortium, not-for-profit organization, or professional/ external management team or CEO. 29

30. GOCO cont’d GOCO contracts to insulate from political pressures. Attract talented personnel – no civil service rules. Operational responsibility transferred to a contractor who is paid for these services. Public funding for operating and investment expenses are agreed upon. 30

31. 7 Options and Effects For RDIs producing mainly public goods, option (3), GOCO is the most appropriate solution. A second best solution is option (2), insider restructuring: it offers lesser governance incentives and thus less likely to take advantage of market pull. 31

32. 7 Options and Effects cont’d For RDIs producing private goods, outsider privatization is most appropriate when the RDIs has access to markets and can be transformed to a fully commercial company. For RDIs producing both public and private goods a foundation or insider privatization may be a second best solution instead of closure. 32

33. 7 Options and Effects cont’d For RDIs which needs to be eventually closed, outsider privatization could be used as “market test. 33

34. Public Funding - Quadrants I & III In principle, only RDIs in Quadrant I which produce public goods and there is little demand in the markets for their outputs - eligible for long-term public funding. RDIs in Quadrant III – private goods and no market –candidates for closure or restructuring, should get no public funding, except possibly, short term support for severance pay for departing researchers.. 34

35. Quadrant I Quadrant II Public goods GOGO, Corporatization or restructure to II GOGO, GOCO or Foundation Quadrant III Quadrant IV Closure or restructure to IV Privatization or transition to II ↑ Private goods Technology push Market pull Classification of RDIs 35 35

36. Public Funding - Quadrants III & IV The same logic applies to Quadrant IV – private good with market demand – which may need help in the transition. The funding approach to RDIs in Quadrant III is mixed: Government owned government operated (GOCO) RDIs may have both private and public projects 36