Enhancing Competitiveness in South East Europe through Innovation and Human Capital Development

1. Enhancing South East Europe Competitiveness through innovation and human capital development Bank of Greece-University of Oxford (SEESOX) Conference Athens, February 11 2011

2. Agenda • Overall business climate issues in South East Europe • Supporting SMEs in South East Europe • Boosting Innovation and skills in South East Europe

3. Business Climate as measured by the Investment Reform Index 2010 IRI – SEE average score • Main improvement points – Investment Policy and Promotion • Land title registration and cadastre is slow • Permits for foreign workers are cumbersome in BiH and FYROM • FDI Incentives on sub-national level need more clarity • FDI-related capital transfer remain in AL, SRB and BiH • One-stopshop for investors(IPAs to approvepermits) • Weakaftercare in BiH, BG, MNE and RO • Legalframeworks for PPPs to bedeveloped • Need to improve IP rightsenforcement Note: (1) Dimensions on SME policy, which was derived from the SME policy index and on infrastructure were not scored

4. Business Climate as measured by the Investment Reform Index 2010 IRI – SEE average score • Main improvementpoints – Human Capital Development • Basic skills in education system are muchlowerthan OECD average (BG, MNE, RO, SRB) or comparable to it (HR) • Misalignmentbetween profile of skillssupplied by the education system and the needs of the privatesector • Little or no governmentstrategy on ContinuousEducation and Training • High taxwedges on labour, except in AL, BG • Temporary labour contractsrestricted to specificpurposes (seasonalwork, replacements) Note: (1) Dimensions on SME policy, which was derived from the SME policy index and on infrastructure were not scored

5. Business Climate as measured by the Investment Reform Index 2010 IRI – SEE average score • Main improvement points – Trade Policy and Facilitation • Implement agreement on agricultural tariffs (manufacturedproducttariffsalready minimal) • Monitor and decrease non-tariffbarriers to trade: sanitary and phytosanitary, technical • Continue integration in multilateraltrade system (WTO members: AL, HR, FYROM, MD: negotiating: BiH, SRB, MNE) • Main improvement points – Access to Finance • Developcompetition in bankingsector • Improvecredit information and creditguaranteeschemes • Develop stock markets and venture capital/business angel networks • Develop export guaranteeschemes Note: (1) Dimensions on SME policy, which was derived from the SME policy index and on infrastructure were not scored

6. Business Climate as measured by the Investment Reform Index 2010 IRI – SEE average score • Main improvement points – RegulatoryReform • Regulatory Impact Assessment to bedeveloped • Improveco-ordination of parliaments and governments • Formalize dialogue with civil society • Main improvement points – Tax Policy Analysis • Improve simulation instruments such as corporateincometaxmicrosimulation, taxwedge model, marginal effective tax rate model • Assesscost of compliance for SMEs Note: (1) Dimensions on SME policy, which was derived from the SME policy index and on infrastructure were not scored

7. After the crisis, support to SMEs and innovation isseen as key to sustainablegrowth

8. Agenda • Overall business climate issues in South East Europe • Supporting SMEs in South East Europe • Boosting Innovation and skills in South East Europe

9. Overall Conclusions of the 2009 SME Policy Index • Good overall progress on the implementation of the European Charter for SMEs • However: uneven progress across the 10 dimensions of the Charter: • Good progress for policy areas that directly affect operational environment of SMEs (e.g. company registration, regulatory reform, access to finance). • More modest progress in introducing targeted policies for specific types of SMEs (e.g. start-ups, innovative SMEs). Even in the cases where such policies have been formulated, the amount of available resources is very low, compared to EU Member States. • The contribution of human capital to the region’s competitiveness remains a particular constraint to the Western Balkan economies. • Implementation is still in an early phase in some economies.

10. Detailed recommendations of the 2009 SME Policy index (1/2) • Entrepreneurship and training • Entrepreneurship to be considered as key competence by education community • Co-operation needed among education policy makers to achieve life-long entrepreneurship training • Cheaper and faster start-up • Compliance phase: strive to balance the need for inspection and compliance with burden on SMEs • Need to establish an electronic registry for all companies to create a centre of collection and dissemination of company data • Better legislation and regulation • Apply the “silence is consent” principle widely • Regulatory impact assessment should be further implemented, and redundant legislation eliminated • BiH and Kosovo under UNSCR 1244/99 still lack a coherent legislation with an effective institutional framework and strategy • Availability of skills • Develop training needs analysis to identify skills gaps • Promote the training market • Improving online access for SMEs • Continue developing e-government, notably by developing an e-signature

11. Detailed recommendations of the 2009 SME Policy index (2/2) • Getting more out of the single market • Export promotion: provide export insurance and export credit • Competitiveness support: targeted measures, monitor impact • Taxation and access to finance • Increase domestic bank lending by allowing banks to shift to cash-flow lending (without collateral) • Lower barriers and costs for transferring remittances • Strengthen property rights and contract law • Improve credit information and bankruptcy laws • Improve credit guarantee schemes • Promote leasing, venture capital funds and private equity • Strengthening the technological capacities of SMEs • Extend support to initiatives establishing inter-firm clusters and networks (+voucher schemes, incubators,… • Improve international cooperation through Enterprise Europe network • Coordinate policymaking across Ministries in areas such as IP rights, incubators, clusters and skills development

12. Agenda • Overall business climate issues in South East Europe • Supporting SMEs in South East Europe • Boosting Innovation and skills in South East Europe

13. South East Europe performance on innovation isverylow Western Europe average CEE average Upper middle income countries Lower middle income countries Source: Data from Knowledge Economy indicators, World Bank, OECD analysis

14. Whatis an innovation system? • Absorptive Capacity • ‘Follower’ firms; Intermediate and End Consumers and Professional Users • Market for Goods and Services • Social and Human Capital • Universities • S&T Training and Education Knowledge Users • Research Capacity • Universities; Govt Laboratories • Basic Scientific Research • Technology and Innovation Performance • ‘Creative’ Firms • Applied RTD and Product /Process Development Knowledge Creators Public Sector Private Sector Source: Nauwelaers, 2003

15. Public research input and output ranges frominsignificant to catch-up withdeveloped countries Output Input Source: Data from Science and Technology in the Western Balkans (inco-net), Knowledge Economy indicators, World Bank, OECD analysis

16. Private R&D input and output are mostlybelow the average for upper middle income countries Output Input Source: Data from Global Competitiveness Review, Knowledge Economy indicators, World Bank, OECD analysis

17. Whatcanpolicy do to enhance the Innovation system? The Impact of RTDon Competitivenessand Employment (IRCE), EC, 2003

18. Regional Competitiveness Initiative Overview • Objectives: • Support medium and long-term competitiveness of the Western Balkans. • Provide capacity building support to Western Balkan public administrations via pilot projects. • Focus Areas: • Human capital development –To address major skills gaps. • Innovation –To strengthen innovative capacities and support absorption of technology by the private sector. • Duration : 2010-2013 • Financial support : European Union (DG Enlargement) • Implementing agency: OECD with the financial support of the European Union

19. Pilot projects Mechanisms to finance business services in support of innovation (voucher schemes) The establishment of a Competence Research Centre (CRC) Assist the government in conceiving the overall policy framework for innovation Co-operation within the ‘triple helix’ of research-business-government communities Greater time and staff commitment with the financial support of the European Union

20. Thank you for your attention Alan Paic Principal Administrator OECD Investment Compact for South East EuropePrivate Sector Development DivisionOrganisation for Economic Co-operation and Development (OECD) Alan.Paic@oecd.org www.investmentcompact.org with the financial support of the European Union