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Assessing the innovation
potential in Ukraine
Recent track record and implications for low-carbon
development
Low Carbon Ukraine – Technical Paper No. 1 (April 2012)
Project
“Capacity Building for Low Carbon Growth in Ukraine”
Assessing the innovation potential in Ukraine
Technical Paper No. 1
ii
Contact:
DIW econ GmbH
Dr. Lars Handrich
Mohrenstraße 58
10117 Berlin
Germany
Phone +49.30.20 60 972 - 0
Fax +49.30.20 60 972 - 99
www.diw-econ.de
Assessing the innovation potential in Ukraine
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Table of contents
1. Introduction ..................................................................................................................... 1
2. Ukraine’s innovation record over time and across sectors .............................................. 2
2.1 Inputs: R&D expenditures ........................................................................................ 2
2.2 Outputs: Patents and innovative products ................................................................ 3
3. Ukraine’s innovation record in international comparison ................................................. 7
3.1 Inputs: R&D expenditures ........................................................................................ 7
3.2 Outputs: patents per capita ...................................................................................... 8
4. Domestic potential for innovative growth ........................................................................ 9
4.1 Research intensity of patents ................................................................................... 9
4.2 Patents and economic growth .................................................................................11
5. Conclusions ...................................................................................................................12
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Executive Summary
Innovations are crucial for shifting from a conventional to a sustainable low-carbon economic
growth trajectory. This technical paper assesses the current innovation potential in Ukraine
and infers to what extent innovations contribute to economic growth.
We analyse input and output factors of innovation in Ukraine over the recent past and across
different economic sectors:
� We find that expenditures in R&D have fallen at a rate of 7% between 2005 and
2011. Thus spending in R&D measured as a share of GDP decreases from 0.14% in
2005 to 0.08% in 2011.
� Sectoral R&D funding fluctuates heavily over time and has declined across all
industrial sectors except for food processing between 2009 and 2011.
� Despite decreasing expenditure in R&D, patent applications and registrations have
increased from 2009 onwards. This is due to the fact that the share of foreign patent
holders increased over the last years.
� Innovative outputs show high volatility and sensitivity to business cycle downturns.
The share of innovative industrial production has contracted sharply by 40%
between 2007 and 2009 and has still not reached the pre-crisis levels by 2011.
� The innovation intensity of output varies widely between industrial sectors, with some
small sectors showing substantial innovative capacity.
When comparing Ukraine with other benchmark countries we find that Ukraine is placed in
the middle field regarding the expenditure in R&D, spending a larger share of GDP on R&D
than Poland, Belarus or Kazakhstan. Compared to Russia, however, Ukraine would need to
increase R&D expenditure by a factor of 1.5. Measuring innovation by the number of
patents per capita Ukraine currently takes a place in the lower half among the
benchmark group, having 3 times less patented inventions per year, than Belarus or
Russia. The difference to the advanced economies such as the EU and the United States is
even larger.
Ukraine spends little R&D per patent. Most advanced economies spend more resources
per patent. In this regard, a low level of spending per patent may not be so much a signal of
efficiency, but rather an indication that the registered patent is not the result of prolonged
domestic innovative research.
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We evaluate the capacity of patented technology to induce economic growth and conclude
that growth of Ukrainian GDP was driven much less by R&D than in other nations,
implying that Ukraine’s domestic capacity for a growth path driven by technological
innovation is still limited at the moment.
We conclude that the switch of the Ukrainian economy towards a low carbon economic
growth trajectory will require initially large transfers of technology from abroad. This should
be accompanied by efforts to increase domestic research capacity.
Assessing the innovation potential in Ukraine
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1. Introduction
Innovations are crucial for shifting from a conventional to a sustainable low-carbon economic
growth trajectory1. This technical paper assesses the current innovation potential in Ukraine
as well as to what extent innovations contribute to economic growth. Firstly, innovations lead
to products and services with high value added. This in itself can raise GDP and improve the
economy’s future capability for growth. Secondly, a focus on intensive growth through
innovation, rather than extensive growth through the accumulation of production factors,
stresses less the environment. The extent of intensive growth is also not limited by the
availability of finite natural resources. Thirdly, the realisation of sustainable low carbon
growth relies on the development and implementation of advanced green technologies, like
for example efficient methods of steel making. Such technologies can either be developed
domestically, or be imported from abroad. If these innovative products are produced
domestically, this will present additional sources of value creation and economic growth in
Ukraine.
Ukraine has undertaken some steps towards stimulating its innovation potential as outlined in
the “Strategy for Innovative Development of Ukraine”, adopted in 2009. This is supplemented
by the “Concept for reforming the government policy in the area of innovation until 2014”, as
well numerous policy initiatives that have identified strategic sectoral and regional priorities of
innovative development.
These steps indicate the awareness among policy makers of the importance of innovations
for economic growth in Ukraine. But it is yet too early to assess the impact of the recent
policy changes2. In the remaining part of the technical paper we evaluate Ukraine’s current
track record and potential of innovation, rather than gauging the outcome of specific policies.
In order to accomplish that, we adopt three different perspectives. We first evaluate Ukraine’s
track record of innovation over time, placing special emphasis on the evolution of innovation
in sectors of strategic importance to low carbon and innovative growth. Secondly, we
compare Ukraine’s performance against a suitable international benchmark group of
countries. Finally, we appraise Ukraine’s current domestic capacity for innovative growth.
1 See for example Aghion, Hemous and Veugelers (2009): No Green Growth Without Innovation. Bruegel Policy Brief 2009/07
2 For a qualitative assessment of the policies and institutions of the national innovation system, see United Nations Economic Commission for Europe (2013): Innovation Performance Review of Ukraine
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2. Ukraine’s innovation record over time and
across sectors
For assessing innovation we study inputs used in the research and development (R&D)
chain, and the outputs from that process. Input criteria primarily include spending on R&D.
Output criteria are registered patents, or the money value of innovative production.
2.1 Inputs: R&D expenditures
As shown in Figure 1, real spending in R&D in Ukraine has generally exhibited a downward
trend over the past years. Having reached a peak in 2006 by spending 910 million hryvnia
over all industrial sectors, expenditures have decreased to a value of 395 million hryvnia net
of consumer price inflation in 2011. This implies an annual decline of 7%3 for the years 2005
to 2011.
Figure 1: Real domestic spending on R&D in Ukraine 2005-2011, by industrial sector
Spending deflated by consumer price index, prices of 2005.
Source: State Statistic Committee of Ukraine. Calculations: DIW econ
3 Given the relatively high rates of inflation in Ukraine, the calculation of real money values is sensitive to the choice of the price index used in deflating the nominal spending figures. If instead of the consumer price index, the official GDP deflator is used, compound annual growth rate will decrease to -11%.
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Processing of
other Minerals
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Machinery amd
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R+D spending, %
of GDP
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The largest share of expenditure in R & D is held by the machinery and equipment industry.
Hence the development of expenditure is mainly driven by this sector. Between 2006 and
2011, expenditure in R&D in this sector reduced by 56%. Another large part is accounted for
the chemical and petrochemicals industry which reduced its expenditure by 28%. Only the
food processing industry increased their R&D expenditure - albeit from extremely low levels -
from 1.7 million hryvnia in 2005 to 10.9 million hryvnia in 2011, which implies a growth factor
of 6.4.
However, over the same time period, Ukraine also registered a rise in GDP, which has
moved contrary to the R&D spending. As shown by the line in Figure 1, this implies that R&D
spending relative to GDP has decreased over the period. Whereas in 2005 the amount
equivalent to 0.14% of GDP was spent for R&D, this share had fallen to only 0.08% of GDP
by 2011. Furthermore, R&D often requires long-term efforts, which are disrupted by strong
annual budget fluctuations. The latter is apparently the case in Ukraine.
In most innovative economies, a significant portion of R&D is spend at the firm level. The
proximity to market demands allows firms to develop products with a potential of being
commercially successful. Developing innovation at the firm level should therefore be a crucial
part of a national innovation strategy (UNECE, 2013).
2.2 Outputs: Patents and innovative products
Patents are often used as a proxy measure for research output. Patents represent an
inventor’s recognised claim to the result of the research process, and therefore constitute
one step towards bringing innovative products to the commercial market. Figure 2 gives an
impression of the evolution of patent applications and officially granted patents in Ukraine
from 2006 onwards. The patents illustrated are on inventions only.
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Figure 2: Patent applications and approvals in Ukraine, 2006-2011
Data: State Statistic Committee of Ukraine. Calculations: DIW econ
Despite decreasing R&D spending, the number of patent applications and patents
granted increased from 2009 onwards. Applications and grants move very closely over the
years implying an exceptionally high success rate of patent applications in Ukraine. Over the
six years observed, a cumulative total of almost 96% of applications were approved4. This
suggests that a large share of patents registered in Ukraine do not correspond to completely
new inventions, but rather represent a transfer of technologies that have already been
successfully patented in other countries.
Over the last years the share of invention patents held by foreign residents increased. While
in 2005, 37% were held by foreign patent holders, this share increased to 53% in 2011
(Figure 3). This might be the reason for a growing number of patent applications and
decreasing R&D spending at the same time.
4 In comparison, the USA exhibited a cumulative approval rate of only 41% over the same time period, whereas the corresponding figure for Germany is even lower at 34%.
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Figure 3: Share of invention patents held by domestic and foreign residents in Ukraine, 2008-2011
Data: WIPO. Calculations: DIW econ
Although patents are a useful measure of scientific output, they do not offer any information
on the economic value of the underlying inventions. A suitable metric of the economic value
of innovative output is the money value of innovative production. In absolute figures,
innovative production in industrial sectors (including extraction of natural resources) in
Ukraine amounted to 42 billion hryvnia in 2011. Figure 4 tracks this metric expressed as a
percentage of total output (GDP) over the past seven years, as well as displaying the
innovative contribution of key industry sectors to total GDP.
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2008 2009 2010 2011
Foreign residents
Domestic residents
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Figure 4: Value of innovative industrial production in Ukraine as percentage of GDP 2007-2011, by industrial sectors
Data: State Statistic Committee of Ukraine. Calculations: DIW econ
As shown figure 4, the share of innovative industrial production has contracted sharply
during the downturn of the business cycle decreasing to 60% of its original share of GDP in
2009. Due to the fact that innovative production in the coke and oil refining sector has
experienced a remarkable upswing, total innovative industrial output remains at more or less
constant levels.
The coke and oil refining sector was the only sector able to expand its innovative production
during and after the crisis. Starting in 2005 when the share of GDP was at 0.16% it increased
to 1.25% in 2011, representing an innovative output that is 24 times higher in 2011. In
addition to that, the machinery and equipment sector as well as the metallurgy sector
decreased strongly from 2008 to 2011. Both sectors together have accounted for the bulk of
innovative production in the industrial sector during the past years.
Expressing the volume of innovative production in a sector as a share of total production in
that sector, we arrive at a measure of innovation intensity of output in a sector. This measure
is graphed in Figure 5. Clearly, the innovation intensity of output varies widely by sector.
As expected, the coal and oil refining industries in particular as well as the machinery and
equipment industries produce a comparatively high percentage of innovative output. These
industries can accordingly be classified as highly innovative.
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2005 2006 2007 2008 2009 2010 2011
% o
f G
DP
Food Processing
Wood
Coke and Oil
Refining
Chemicals and
Petrochemicals
Metallurgy
Machinery and
Equipment
Others
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Figure 5: Share of innovative production in total sectoral production in key industrial sectors, 2011
* The value for the sector cut at 10% for better representation, complete value: 21.6%. Data: State Statistic Committee of Ukraine. Calculations: DIW econ
3. Ukraine’s innovation record in international
comparison
This section puts Ukraine’s innovation record into a comparative perspective by contrasting it
against an international benchmark group of countries. This group includes relevant peers
among the transition economies of Eastern Europe and the Commonwealth of Independent
States (CIS), Turkey and China, as well as the United Kingdom, Germany and the USA..
3.1 Inputs: R&D expenditures
In order to make R&D expenditures across countries comparable, we use data assembled by
UNESCO on harmonised Gross Domestic Expenditure on R&D (GERD), which includes
research outlays by private and public institutions and enterprises. Figure 6 shows the
relevant data for the total group of 12 countries.
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Figure 6: Expenditure on R&D (GERD) as % of national GDP in 12 countries, 2009
Data: UNESCO, Calculations: DIW econ
Clearly, Ukraine needs to drastically increase its spending in R&D if it is to catch up with the
advanced economies. But in comparison to the other transition economies in this sample
Ukraine takes a middle place. If Ukraine were to catch up to the level of its neighbour Russia,
it would need to increase spending only by a factor of 1.5, whereas trying to achieve the
value of Germany would imply an increase by a factor of 3.3.
3.2 Outputs: patents per capita
Figure 7 displays the number of patents for invention as registered by the World Intellectual
Property Organisation (WIPO) per million inhabitants. Using this measure, Ukraine takes
only a lower place among the benchmark group. Thus in comparison to Russia or Belarus
Ukraine registers 70% less patents per million inhabitants and so the gap to the advanced
economies in Europe and North-America remains very large.
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Figure 7: Patents for inventions per million inhabitants in 12 countries, 2009
* The value for USA cut at 800 for better representation, complete value: 1228 Data: World Intellectual Property Organisation (WIPO), Calculations: DIW econ
4. Domestic potential for innovative growth
This section assesses the potential of domestic Ukrainian R&D to create innovative growth.
Two links therefore need to be evaluated: firstly the capacity of R&D spending to generate
domestic innovation (measured by patents), and secondly the capacity of the innovation to
generate economic growth.
4.1 Research intensity of patents
Putting input and output indicators of innovation together, the R&D intensity of a patent,
which is the amount of spending necessary to trigger a single patent, can be derived for each
country. This is a measure of the capacity of research spending to create innovation,
sometimes referred to as the “efficiency” of R&D5. This metric is displayed in Figure 7.
5 See for example World Bank (2011): Igniting innovation: Rethinking the Role of Government in Emerging Europe and Central Asia. The authors calculate a similar measure, based on US Patent Office (USPTO), rather than WIPO patent data.
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Figure 8: R&D spending per patented invention in 12 countries, 2009
GDP in thousands of US dollar at purchasing power parity. Data: WIPO / UNESCO, Calculations: DIW econ
Using this measure, Ukraine is placed in the lower half of this sample of countries. Most
advanced economies spend more resources per patent. In this regard, a low level of
spending per patent may not be so much a sign of efficiency, but rather indicates that the
registered patent is not the result of prolonged domestic innovative research. This
interpretation would be in concordance with the assessment of the high success rate of
patent applications in Section 2.2: many patents registered in Ukraine may constitute partial
transfers of already established foreign technologies, which is a process that takes up
comparatively little domestic R&D spending. These the figures of patents do not primarily
present wholly original domestic research. However, the are no other data available, which
would allow a more precise assessment of domestic innovative capacity. Figure 9 presents
data on the place of residence of patent holders in Ukraine, which is the closest measure
available. As the graph shows, more than half of the patents filed in Ukraine come from
foreign residents. Only Hungary has a larger proportionally share of foreign patent holders
than Ukraine.
In Ukraine patents applications are not as dependent on expenditure in R&D because of its
large share of foreign patent holders. It is obvious that a large part of the expenditure in R&D
and the development of technology are made abroad.
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Figure 9: Share of invention patents held by domestic and foreign residents in 12
countries, 2011
Data: WIPO, Calculations: DIW econ
4.2 Patents and economic growth
We now proceed to evaluate the effect of Ukraine’s patents. In the context of a low carbon
economic growth strategy, the main purpose of patented technologies is to lead to resource
saving innovations that promotes growth. To this end, the capacity of patented technology to
induce economic growth is evaluated by comparing the correlation over time between
granted patents and GDP in six countries from the international benchmark group (Table 1).
0%
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40%
50%
60%
70%
80%
90%
100%
Domestic residents Foreign residents
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Table 1: Strength of correlation between GDP and granted invention patents in selected countries, 2003-2011
Country Correlation coefficient USA 0.985
Germany 0.916 Russia 0.903
UK 0.895 Poland 0.878 Ukraine 0.330
GDP at purchasing power parity, constant 2005 prices.
Data: WIPO. Calculations: DIW econ
The correlation coefficient can take on values between -1, which indicates a perfectly strong
negative relationship and +1, indicating a perfectly strong positive relationship between
developments in GDP and granted patents. The results show strong positive relationships in
all countries except Ukraine. This indicates that growth in Ukrainian GDP was driven
much less by patents than in other nations, implying that Ukraine’s domestic capacity for
a growth path driven by technological innovation is still limited at the moment6.
5. Conclusions
This paper has investigated Ukraine’s innovation record over time and provided an
assessment of Ukraine’s potential to domestically generate innovation-driven economic
growth.
Generally, both input and output measures of innovation show no clear upward trend over
the last decade, even during Ukraine’s remarkable phase of economic growth. Conversely,
industrial innovation output does seem to contract sharply in the face of business cycle
downturns. This may suggest that many enterprises still perceive R&D investments as being
a risky “extra” rather than an essential part of core business activity. Presenting businesses
with better risk smoothing mechanisms and more stable and more long-term financing for
promising innovative research, may help to improve both the level as well as the resilience of
innovative output in Ukraine.
6 The correlation coefficient does not specify the direction of causation (if any exists) between the two variables, so that it is technically possible that a higher GDP leads to more innovation and hence to more patents instead of the reverse direction. However, as patents are the outcome of a lengthy research process as well as a lengthy administrative registration procedure, it is unlikely that higher GDP leads of more patents within the same year. This means the chain of causation implied in this paper is the most probable one.
Assessing the innovation potential in Ukraine
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In the recent past we observe from the official statistics a rather worrying development in
Ukraine, as the share in innovative production of the usually as R&D intensive classified
sectors, primarily machinery and equipment and chemicals, has declined considerably. At
the same time the share of less R&D intensive sectors like coke and refineries started to
dominate the innovative output in Ukraine.
To counter this unfavourable development policy efforts need to be intensified in order to
diversify into sectors that display high innovation intensity and thus have a more a long
term outlook for development of greener technologies and low carbon economic growth.
From an international perspective, it is clear that Ukraine has not yet devoted as large a
share of its national income to innovation as relevant benchmark countries. This clearly
implies the need for Ukraine to significantly raise the volume of R&D spending if it is to
generate the capacity for domestic innovative growth in the future.
At present, the capacity for domestic innovative growth is constrained, as indicated by the
low research intensity of the patents registered in Ukraine, as well as the low capacity of
these patents to generate GDP growth.
Shifting the economy on a low carbon economic growth trajectory will require that Ukraine
initially relies on technology transfers from abroad. Once a large stock of modern
technologies is imported, this may help to stimulate domestic innovation and economic
activity. In parallel, domestic efforts to increase Ukraine’s innovative capacity must continue
to be supported.