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CREATING INNOVATION ECOSYSTEMS IN EASTERN EUROPE

1© The Economist Intelligence Unit Limited 2018

C R E AT I N G I N N O VAT I O N E C O S Y ST E M S I N E A ST E R N E U R O P E

2 About this report

3 Executive summary

5 Chapter 1: Why does eastern Europe need innovation?

13 Chapter 2: It’s the legacy, stupid: overcoming the main challenges of creating innovation ecosystems in eastern Europe

18 Chapter 3: What can eastern Europe learn from the Nordic experience

19 Swedish Innovation Agency VINNOVA

21 Innovation ecosystem at the Aalto University in Finland

23 Conclusions

CONTENTS

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© The Economist Intelligence Unit Limited 2018

ABOUT THIS REPORTCreating Innovation Ecosystems in eastern Europe is an Economist Intelligence Unit report, sponsored

by Saab.

This report explores the forces shaping the future of innovation in central and eastern Europe as it

undergoes a transformation of its economic model. It is slowly moving from being a foreign investment-

dependent, low-wage and technology-importing region to one that is capable of creating regional and

globally important innovations. We review the region’s inheritance and seek to understand how its

policy environment may change in the future. We also consider the examples of the Nordic countries

and how their models may be adapted and applied to the east European context. The report is based

on expert interviews and desk research.

The Economist Intelligence Unit wishes to thank the following individuals for their time and insight:

l Erik Berglöf, director of the Institute of Global Affairs, London School of Economics and Political

Science

l Beñat Bilbao-Osorio, senior economist, European Commission

l Nicholas Davis, head of innovation and civil society, World Economic Forum

l Daria Tataj, chairwoman of RISE high-level advisers to Carlos Moedas, the EU Commissioner for

Research, Science and Innovation

l Ania Zalewska, professor of finance, School of Management, University of Bath

The Economist Intelligence Unit bears sole responsibility for the content of this report. The findings

and views expressed in the report do not necessarily reflect the views of the sponsor. The report is

authored by Margareta Drzeniek and edited by Renée Friedman.



EXECUTIVE SUMMARYThe countries of Central and Eastern Europe (CEE) are at a pivotal point in their economic development.

They have still not fully recovered from the 2008-09 global financial crisis, which lowered foreign direct

investment (FDI), created uncertainty amid greater regional financial instability, and in some countries

limited access to traditional funding, particularly for innovative small and medium-sized enterprises.

These countries have experienced high emigration rates and are no longer able to rely on the low-wage,

FDI-driven model of economic growth they have followed since their move to economic liberalism in

the 1990s and early 2000s. That model is unable to deliver the strong productivity growth and GDP

growth rates that were previously higher than the EU average. As a result, the CEE countries now have

to embrace a new, forward-thinking, strategic economic model that focuses on domestic innovation

and technological diffusion if they want to sustain continued improvements in competitiveness and

living standards.

Most CEE countries inherited some positive structural features from their socialist past that have

positioned them well for developing innovation-driven economies. These include well-educated

populations with particularly strong training in science and mathematics, solid basic research and

development (R&D) capacities, and a substantial manufacturing base. However, there is still much

room for improvement in all CEE countries to reinforce their innovation systems, which are currently

underperforming those found in western Europe, particularly in the Nordic countries.

There are therefore a number of significant challenges these countries need to address to improve their

innovation rates, with the main challenges being:

l Reducing the dependence of academic and scientific research institutes as well as businesses on

public funding, particularly from the EU.

l Deepening and improving access to R&D funding for institutes and businesses through market-based

mechanisms.

l Reversing the brain drain, notably of scientists and engineers, encouraging home-grown talent to

remain, and attracting foreign talent to complement existing and future capabilities.

l The governments of the region will have to assume a key role in creating an innovation-conducive

ecosystem with the private sector. They will need to encourage public-private collaboration in R&D

and implement policies that will help to create vibrant entrepreneurial ecosystems that can fuel

technological innovation and result in marketable products and services.

l Incentivising stronger civil society development to challenge existing poor governance and regulatory

standards and policy implementation to improve transparency and promote accountability

in government.

The experience of the Nordic countries (Denmark, Finland, Iceland, Norway and Sweden) in creating

successful innovation systems and equitable economies provides ample opportunity for CEE countries

to learn from. This does not mean the wholesale emulation or transference of Nordic models or

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programmes—local conditions and structures must be considered. However, as Nordic economies

are the European frontrunners in terms of innovation performance, the inherited structures in CEE

countries and currently used models should not be allowed to act as barriers to change.

What is clear when comparing the Nordics and the CEE countries is that the latter will be better able to

improve their innovation systems, thus putting their economies on a more sustainable growth path by:

1. Creating a well-performing formalised system for science, technology and innovation that is built

around institutions which foster public-private collaboration on funding innovation, but also

technology diffusion from larger to smaller firms.

2. Supporting geographical clusters of innovation around universities, as seen in many Nordic

countries. The primary role of these clusters is to connect complementary networks, thereby

creating a cohesive community of entrepreneurs and researchers.

3. Improving educational training to include applicable skills desired by businesses, creating

programmes and funding mechanisms to retain qualified staff, and attracting more talent into

research institutions.

4. Strengthening overall policy coherence to ensure longer-term stability that allows investors,

businesses and research institutes to develop long-term strategies. This will help these countries

to develop innovation capacity in a more strategic way and will create positive spillover effects

into the wider economy.

It would be unrealistic to expect a replication of the Nordics in the CEE region, but there are valuable

lessons to be learnt from the Nordic experience that may be adapted and applied. By being open to

learning from the Nordic innovation experience, CEE governments may be better placed not only to

become world-class innovators themselves but also to ensure that economic progress is inclusive and

gains are shared equitably.



CHAPTER 1: WHY DOES EASTERN EUROPE NEED INNOVATION? Following its economic transition in the 1990s, Central and Eastern Europe (CEE) experienced higher

than average economic growth, which allowed living standards in the region to increase significantly.1

Multinational institutions were attracted to the region owing to its geographical proximity to the

European Union (EU), the institutional certainty and market access provided by the region’s accession

to the EU, and its low-cost, skilled populations. These factors encouraged significant inflows of foreign

direct investment (FDI), leading to an accumulation of capital stock and bringing upskilling and

technology transfer as well as other positive spillover effects. They gave an important productivity

boost to the region and allowed countries to narrow the gap with the EU in terms of GDP per capita.

From an average of 6% between 2003 and 2007 GDP climbed as high 10% in individual countries, for

example in Latvia.

However, the CEE’s growth trajectory has slowed since the 2008-09 global financial crisis. The average

GDP growth rate over the 2013-17 period was less than half of what it had been in the pre-crisis years.

Foreign investment inflows have also slowed down, and productivity growth has lost momentum. In

the post-financial-crisis world both labour productivity (which indicates value created per unit of work)

and total factor productivity (which measures how efficiently inputs such as labour, capital, technology,

land etc are utilised in production) are running at approximately half the rates recorded in the

2003-07 period.

Convergence of standards of living: GDP per capita(US$ at PPP)

Source: The Economist Intelligence Unit.

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1 Central and Eastern Europe comprises the 11 countries which joined the European Union in 2004 and 2007: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.

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GDP growth per year(%)


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Slowing productivity growth suggests that the CEE countries may have reached the “middle-income

trap”, a growth plateau which often signifies that a country losing its competitive export edge because

of rising wages, while simultaneously being unable to compete with advanced economies capable of

producing high-value-added products and services. What is clear is that the economic development

models that the majority of CEE countries have used since their embrace of market economics,

namely structural transformation (movement of labour from unprofitable sectors to new ones) and

capital deepening (more capital invested per person) no longer work.2 These approaches have left

2 https://www.economist.com/special-report/2017/10/07/the-middle-income-trap-has-little-evidence-going-for-it

FDI Inflows into Central and Eastern European Countries(total, US$ m)

Source: UNCTAD http://unctadstat.unctad.org/EN/

Figure 3:

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Labour productivity growth in Eastern Europe, 2000-17(%)


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the countries of the region largely dependent on low wages to encourage FDI and the innovation that

often comes with it. However, as wages are rising owing to growing labour shortages, the CEE countries

now need to focus on raising domestic savings and encouraging domestic technological diffusion and

innovation.3

Shifting to an innovation-driven growth model has become critical as new technologies—such as

artificial intelligence (AI) and machine learning, the Internet of Things (IoT) and quantum computing—

are evolving rapidly and disrupting economies and their place in global supply chains. Countries

3 See M Piatkowski, “The Warsaw Consensus: The new European growth model”, IGER Working Paper, Series 131, 2014. Available at: http://tiger.edu.pl/aktualnosci/2014/TWP-131.pdf

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without strong innovation systems that are unable to adapt quickly to new demands will fall even

further behind in future.

In the CEE region, domestic innovation capacity remains weak compared with the EU average. These

domestic systems will not be able to drive growth without being entirely reformed. However, CEE

policymakers do not need to look far for inspiration and best practice when identifying methods

for boosting domestic innovation. The Nordic countries—Denmark, Finland, Iceland, Norway and

Sweden—are widely recognised for the quality of their innovation and their science and technology

systems. The outstanding innovation performance and economic dynamism of these economies as

well as their equitable societal outcomes make them an important source of learning and support for

ongoing efforts to reform innovation ecosystems across the CEE region.

The CEE inheritance: creating a foundation for changeOne measurement of innovation performance is the European Commission’s Innovation Scoreboard.

This measures Europe’s innovation performance across a number of indicators, including human

capital, the innovation environment, digital readiness, and research and development (R&D) capacity.

According to the Innovation Scoreboard, the Nordics are the most innovative countries in the EU,

with Sweden, Denmark and Finland the top performers. This high ranking indicates that they have

welcoming and conducive business environments, invest heavily in R&D, and benefit from strong

human capital and world-class innovation ecosystems.

Innovation capacity in EU and Eastern European(Summary Innovation Index, 2017)

Source: European Innovation Scoreboard https://ec.europa.eu/docsroom/documents/30282

Figure 6

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It is a different scenario for the CEE countries. According to the Innovation Scoreboard, most CEE

countries are in the mid-range in terms of innovation, which means they are modest innovators. The

exceptions are Slovenia, which is classified as a high innovator, and Bulgaria and Romania, which

are the least innovative countries in the EU. The innovation systems of all of these countries share

some common characteristics: they have all benefited from their shared communist-influenced past.

Relative to other lower-middle-income countries, they all had comparatively good-quality education

systems, with a particular emphasis on STEM disciplines (science, technology, engineering and

mathematics), as well as physics and computer science. Education levels remained high throughout the

transition process, and today the region boasts fairly young and highly skilled populations. However,

tertiary education remains below EU and Nordic levels, except in the smaller economies of Estonia,

Latvia and Slovenia. This, together with wages that are significantly lower than in the rest of the EU,

offers a particular advantage to businesses investing in technology-intensive activities in CEE countries

and may help to explain the history of FDI inflows into the region.

Another positive inheritance is a relatively well-developed network of academic institutions and

associated structures that is stronger than in other countries at the same level of development. These

research institutes, universities and laboratories are capable of supplying basic and applied R&D

services to private businesses and can support further innovative activities. Indeed, according to World

Economic Forum survey data, business executives, using a rating scale from 1 (worst) to 7 (best), assess

the quality of scientific research institutions as strong in most countries of the region. Estonia even

reaches the level of Norway in this respect, followed closely by the Czech Republic and Slovenia.

Share of population with tertiary education in CEE and selected countries in 2017(%)

Source: Eurostat https://ec.europa.eu/eurostat/web/education-and-training/data/database

Figure 7

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The region’s research capacity and human capital levels are complemented by its strong manufacturing

bases. Following their EU accession, these countries’ manufacturing sectors were able to benefit from

FDI inflows that also brought the technological and management know-how that helped to integrate

them into Europe-wide and global value chains. This is particularly evident in the automotive sector,

where several CEE countries, such as Slovakia, for example, have become major exporters for west

European production chains.

Labour cost in the Nordics and Central and Eastern Europe (€ per hour)

Source: Eurostat http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=lc_lci_lev&lang=en

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Source: World Economic Forum http://reports.weforum.org/global-competitiveness-report-2018/downloads/

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Throughout the EU accession process CEE economies improved their institutions and business

environments significantly by reducing corruption and red tape, while also overhauling their regulatory

and judicial systems. Although there remain bottlenecks in some countries, particularly in rural areas,

the region has undergone heavy investment in transport and digital infrastructure. The CEE countries

can, on average, boast good broadband penetration rates, with growth averaging 5.2% year on year

in 2017, according to the Worldwide Telecom Services Database published by International Data

Corporation (IDC). This means they are able to provide industry and even small and medium-sized

enterprises (SMEs) with easy access to e-commerce and digital services. This serves as a definite

contributor to innovation, job creation and employment.

Moreover, the economic and social transformations that the countries experienced over the past

20 years have shifted societal attitudes towards innovation and risk-taking. The countries have not

only introduced significant innovations in terms of policies and institutions, such as in their education

systems, but they have also made major changes to their social structures and employment models.

For example, in 2016 the share of self-employed people was higher in some CEE countries such as

Poland (18%) than across the EU (14%).4

In most of the countries, promoting the adoption of new technologies, encouraging their domestic

development and creating hubs and other support to would-be entrepreneurs have been priorities

for national, regional and city governments. Many—albeit somewhat disjointed—initiatives have

recently been put in place in the region. For example, in 2017 the Visegrad countries5 signed the

Warsaw Declaration and agreed on working together towards establishing the region as an innovation

hub. In 2018 the Silesian metropolitan region in Poland established a testing area for drones in urban

environments to promote technology development and start-ups. In Slovakia, the Danube Valley

Innovation Cluster was set up to help the country move from FDI-driven innovation to technology

start-ups.

Despite these similarities, CEE countries have pursued different innovation strategies with resultant

differing levels of success that underscore the innovation potential of the region. Estonia, for example,

focused at an early stage in its transition process on digitalisation and created an open business

environment that enabled the development of digital services such as Skype and TransferWise. In

the Czech Republic, Slovakia and Hungary there are other innovative success stories in the software

and technology sector: Avast, AVG, ESET and Prezi have become established industry players. More

recent entrants include Slovakia’s AeroMobil, a start-up that commercialises a flying car. An earlier tech

entrant is Romania’s UiPath, an AI-based office software company.

4 Eurostat, Taking a look at self-employed in the EU, 2018. https://ec.europa.eu/eurostat/web/products-eurostat-news/-/DDN-20170906-1

5 Visegrad countries include the Czech Republic, Hungary, Poland and Slovenia.

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General R&D expenditure (GERD)(% of GDP)

Source: Eurostat https://ec.europa.eu/eurostat/web/science-technology-innovation/data/database

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CHAPTER 2: IT’S THE LEGACY, STUPID: OVERCOMING THE MAIN CHALLENGES OF CREATING INNOVATION ECOSYSTEMS IN EASTERN EUROPEWhether the region’s overall strong human capital and its proximity to the EU can transform Central

and Eastern Europe into an innovation hotspot depends on the efforts these countries will make to

address the key challenges facing their innovation ecosystems.

The level of investment in R&D is below the EU average, although this average masks significant

differences. Some countries in the region are investing heavily in R&D, in particular Slovenia and the

Czech Republic, which have already reached the EU average in terms of R&D spending as a share of

GDP. Yet on average investment in R&D remains below the EU level in most countries, with some

countries, such as Romania and Latvia, reaching only one-quarter of the EU average.

The Nordic countries, by contrast, invest heavily in R&D. Denmark, Finland and Sweden boast the

highest levels of investment in R&D in the EU and among the highest in the world, reaching more than

3% of GDP in Sweden. All countries rely heavily on public-private collaboration in research, although

the emphasis shifts from one country to another. Whereas governments invest significantly in basic

R&D in Sweden and Norway, the private sector plays a more important role in Finland and Denmark.

What these countries have in common is that investment is funded mainly from domestic sources

( ie, savings) and that a high degree of public-private collaboration ensures that research can lead to

commercial applications.

In most of the CEE countries, domestic businesses invest comparatively little in R&D. Although

multinational companies are starting to invest in R&D activities, these efforts are only incipient. As

shown in figure 11, the CEE economies invest significantly less than the Nordic countries, which lead

in the EU in terms of private-sector investment. The majority of CEE countries rely on government

funding or on funding from abroad, the latter of which consists mainly of EU funds for R&D.6 The

new EU budget currently being discussed will apply pressure on the CEE countries to reform their

innovation systems, as it is likely that funding for the region will be reduced.

Business investment in R&D is constrained by the limited availability of finance for established, growing

companies as well as newer entrepreneurial ventures. Companies mainly rely on bank finance (lending

and other forms), and credit constraints constitute an important obstacle to firm-level innovation.7

When it comes to early-stage finance, the CEE countries have not been able to attract the same

amounts of venture capital (VC) as their west European peers. In 2017 the CEE region accounted for

only 2% of total European venture capital. The average VC investments in Central and Eastern Europe

6 A Correia et al, “Innovation investment in Central, Eastern and South Eastern Europe: building future prosperity and setting the ground for sustainable upward convergence”, Working Paper, European Commission and European Investment Bank. Forthcoming.

7 EBRD, Transition Report 2014. London. Available at: https://www.ebrd.com/news/publications/transition-report/transition-report-2014.html; and EBRD, Transition Report 2017-2018, London. Available at: https://www.ebrd.com/transition-report-2017-18

https://www.ebrd.com/news/publications/transition-report/transition-report-2014.html



https://www.ebrd.com/transition-report-2017-18

https://www.ebrd.com/transition-report-2017-18

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8 Invest Europe. 2018. Central Europe. Private Equity Statistics. Available at: https://www.investeurope.eu/media /727455/Invest-Europe-CEE-Activity-Report-2017-05072018.pdf

are significantly smaller than in western Europe, at €600,000 compared with €1.7m. Most VC funding

comes from government-backed funds, particularly from the EU.8

Quality of science and technology systemsDespite a good basic infrastructure, the quality of the scientific and technological systems in the

CEE countries has not reached its full potential when it comes to innovation, for two reasons. First,

scientific output does not fully meet international standards. Only a small percentage of scientific

articles published are globally cited. Second, knowledge is not turning into technological applications

that can be commercialised at the same rate as in other countries. For example, in terms of PCT patent

applications, the CEE countries lag significantly behind their west European counterparts, and the

Nordics in particular.

There are reasons for this low level of knowledge transfer. “The main problem in eastern Europe is

that there is little network thinking and ecosystem approach,” according to Daria Tataj, Chairwoman

of RISE high-level advisers to Carlos Moedas, the EU Commissioner for Research, Science and

Innovation. Research institutions in CEE countries have underdeveloped governance structures.

Increasing flexibility, efficiency, accountability and transparency, introducing more competition

and linking performance to regular performance assessments would help to increase the quality of

research output and bring it up to a par with international standards. Despite some reform efforts—

notably in Poland and in Hungary—institutions have been slow to absorb change since the transition.

The academic sector has traditionally enjoyed a high degree of independence, which makes it more

difficult to direct researchers into more strategic areas. Much of the research has been published in the

R&D expenditure (GERD) by source of funds,2015(%)

Source: Eurostat https://ec.europa.eu/eurostat/web/science-technology-innovation/data/database

Figure 11

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national language of the respective country, and this applies to this day to much of the information

about research and universities and policies.

Ideas exchange and technology transfer for commercial use could also be fostered if academia

collaborated more with business, as is the case in the Nordic economies. The level of university-

industry collaboration is very low. Stronger linkages between industry and academia would help to

ensure that R&D is solution-oriented and leads to marketable products and services that can in turn

translate innovation into economic growth.

As a result of the governance challenges and lack of understanding of the benefits of public-private

collaboration, universities and research institutions have not yet managed to become vibrant

innovation hubs that provide overlapping networks of business angels, entrepreneurs, innovators etc

in one geographical location.

The brain drain While the Nordic countries can depend on their skilled populations owing to their heavy investments

in education, sufficiently skilled people are increasingly harder to find in the CEE countries. Although

the region’s education systems produce fairly high numbers of tertiary graduates, they often lack

relevant and applicable skills, thereby creating an important bottleneck to developing innovation. The

lack of appropriately skilled people is largely attributable to the freedom of movement enjoyed by

these countries’ populations under EU law, which has resulted in a significant brain drain. The best and

brightest are often lured abroad by greater opportunities and higher wages, either to western Europe

or to Silicon Valley.

In addition, the number of students enrolled in universities is falling.9 Between 2013 and 2016 the

number of university students in CEE countries fell by 10.9%, with the steepest declines witnessed

Central and Eastern Europe vs Nordics: Selected innovation indicators(on a scale 1 to 7)

Source: World Economic Forum http://reports.weforum.org/global-competitiveness-index-2017-2018/downloads/

Figure 12

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Capacity for innovation

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9 A Correia et al, “Innovation investment in Central, Eastern and South Eastern Europe”.

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in Hungary (17.7%), Lithuania (16.2%) and Poland (15.9%).10 Another negative factor is that education,

including business education, remains formal and does not provide the skills that are sought after by

businesses. The availability of applicable skills is a key impediment to investment for companies, as it

makes it more difficult for them to adapt innovation.11

Governance and regulationMost countries in the region have made great progress in terms of reforming their institutions in the

first phase of transition, but over the past years progress has stagnated. Figure 13 shows four important

assessment elements of public institutions in CEE and Nordic countries and underscores the fact that

the CEE countries lag by a significant margin across the four categories.12 Moreover, over the past

decade their performance has deteriorated slightly, which does not bode well for the future.

Regulatory uncertainty and weak governance, combined with rather weak judicial systems that do

not enforce regulations effectively, create a difficult environment for all businesses.13 This is especially

true for technology start-ups, which need regulatory certainty and forward-looking regulation. Many

CEE start-ups, such as AeroMobil (Slovakia), Azimo (Poland) and Billon (Poland), therefore set up

headquarters in western Europe (eg, the UK or Sweden) and retain their development functions there

because they are less prone to regulatory reversals and uncertainty.14

Equally, government policy in the region often lacks the long-term vision necessary to nurture talent

and provide the right environment for start-ups to grow and for companies to invest and innovate.

A European Investment Bank (EIB) business survey showed that after the availability of skills,

uncertainty about the future is the most important impediment for companies to invest.15 This is

Ease of starting a business in Eastern Europe and the Nordics(rank out of 190)

Source: World Bank, Doing Business 2018 http://www.doingbusiness.org/

Figure 13

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120

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12 1319 21 26 2710 Eurostat, 2018 Tertiary Education Statistics.

Available at: https://ec.europa.eu/eurostat/statistics-explained/index.php/Tertiary_education_statistics.

11 A Correia et al, “Innovation investment in Central, Eastern and South Eastern Europe”.

12 The average numbers obfuscate differences between countries. The deterioration in performance is to a significant extent driven by major drops in Hungary, while the Czech Republic and Poland have improved.

13 Access to finance is another reason.

14 Financial Times, “Special Report: Central and Eastern Europe: Technology and Innovation”, 2018. https://www.ft.com/reports/cee-tech-innovation.

15 European Investment Bank, Investment Survey 2017. Luxemburg. http://www.eib.org/en/about/economic-research/surveys-data/investment-survey.htm.

http://www.eib.org/en/about/economic-research/surveys-data/investment-survey.htm





particularly important for innovation, as it can take up to a decade for new knowledge to be created

and transmitted and to have a tangible economic impact.

Quality of public institions (on a scale of 1 to 7)

Source: World Economic Forum http://reports.weforum.org/global-competitiveness-index-2017-2018/downloads/

Figure 14

CEE (2007-2008)Nordics (2017-2018)CEE (2017-2018)

Government e�ciency

Undue influence

Ethics and corruption

Property rights

76

54

32

1

18



CHAPTER 3: WHAT CAN EASTERN EUROPE LEARN FROM THE NORDIC EXPERIENCE?Most innovation assessments confirm that the Nordic countries are among the best performers

globally. This has not always been the case. In the 1990 these countries faced an economic shock, with

a slowdown in productivity and growth. Their social-democratic model of high taxes, generous social

benefits and worker security was considered detrimental to innovation, productivity and growth.

As a result the countries embarked on a process of deep transformation of their economic models

and focused on building high-performing innovation ecosystems and boosting the skills of their

populations.

They did this by increasing government funding for R&D and innovation, putting competitive tax

codes with significant investment incentives into place, supporting the use of information and

communications technology (ICT) on a massive scale, and embracing labour market flexicurity models.

As a result the Nordic countries have been pioneers in developing and implementing innovation-based

strategies for their economies.

Despite some similarities between the Nordic economies and those of Central and Eastern Europe,

such as the fact that they are generally small countries with strong manufacturing bases and large

agricultural sectors, there can be no one-size fits-all approach. The challenges in the CEE region are

substantial, while the innovation structures in the Nordic countries are historically rooted in the

region’s strong culture and industrial systems. In addition to looking towards the Nordic economies,

the CEE countries should therefore also look towards countries or regions that had to build their

innovation policy more recently, such as the Basque region. Nevertheless, certain features of the

Nordic model can inspire change in the CEE countries and help them to address their key innovation

challenges.

The Nordic economic model is generally understood as one that comprises a strong welfare state.

It emphasises individual freedom and social mobility combined with open and free markets and

a unionised wage bargaining system. In terms of innovation, there is no recognised definition of

what constitutes the Nordic innovation model, and the experiences of individual countries differ. In

the context of reforming CEE innovation systems, four common elements of the systems that have

contributed to the Nordic countries’ success in innovation stand out: (1) the presence of state-run,

formalised innovation systems; (2) the existence of geographical innovation and entrepreneurship

clusters; (3) a strong focus on people and skills; (4) strong governance, policy stability and a focus on

the future. These four elements can serve to derive policy recommendations for CEE economies. As

noted by Beñat Bilbao-Osorio, senior economist at the European Commission: “Countries should take

a look at technology agencies such as VINNOVA or Tekes. They are the bridge to foster the innovation

and technology diffusion from large to small companies to leverage the incipient R&D efforts by large

multinationals in eastern Europe.”



16 This case study draws on C Chaminade, JM Zabala and A Treccani, “The Swedish national innovation system and its relevance for global innovation networks”, 2010. Working Paper, Lund University. Available at: http://wp.circle.lu.se/upload/CIRCLE/workingpapers/201009_Chaminade_Zabala_Treccani.pdf and the VINNOVA website

Recommendation 1: Create a well-performing formalised system for science, technology and

innovation

A key feature of the Nordic model is that these countries opted for a systemic approach to science,

technology and innovation. This consists of a plethora of well-governed institutions that boast the

necessary capabilities to support their countries’ competitiveness. The Nordic countries were

frontrunners in this space in the early 2000s. Innovation agencies, including Denmark’s Agency for

Science, Technology and Innovation, Finland’s Tekes and SITRA, and Sweden’s Agency for Growth

Policy and Analysis and VINNOVA, play an important role in connecting the different actors of the

science, technology and innovation ecosystem. Their exact mandates differ, but their general aims

are to foster innovation, to channel funding into strategic areas and, most importantly, to stimulate

collaboration and dialogue between the key players in science, technology and innovation: businesses,

research institutions, public services and institutions abroad. In practice, they connect research

institutes with companies by providing funds for public-private research and innovation projects,

they incentivise companies with higher innovation capacity to work with less innovative ones to foster

innovation diffusion, and they support the exchange of researchers.

The Swedish Innovation Agency (VINNOVA),

which is at the core of the system, was

established in 2001 with a mandate to “promote

sustainable growth and development for the

business community, society and individuals

by developing effective innovation systems”.

VINNOVA reports to the Ministry of Enterprise

and Innovation and works closely with all other

players of the Swedish innovation ecosystem,

including the specialised industrial research

institutes that focus on applied research and

are jointly funded by the government, industry,

the Swedish Research Council, and the

Swedish Agency for Economic and Regional

Growth.

VINNOVA aims to develop an effective

innovation system, which it defines as

“consisting of actors from science, business

and politics, which interact to develop,

exchange and apply new technologies

and new knowledge in order to promote

sustainable growth by means of new products,

services and processes”. VINNOVA’s role is

to promote interaction among these actors

to enable knowledge transfer from the R&D

institutions into products, services and

processes. VINNOVA has, for example, trained

“innovation systems specialists”, whose role it

is to strengthen stakeholder engagement and

mobilise resources needed to drive concrete

impact through multistakeholder groups and

processes.

VINNOVA also works towards establishing and

maintaining linkages with other innovation

systems abroad or within the country (regional

and sectoral). It has played a role in identifying

new fields of research through stakeholder

dialogue and established collaboration

programmes between companies and

universities in these fields.

SWEDISH INNOVATION AGENCY VINNOVA16

20



What makes Nordic innovation agencies effective is their systemic approach and strong governance.

They focus on promoting competition, research excellence and specific internal capabilities, such as

project assessment or facilitating collaboration among diverse stakeholders.

Given the disconnect in most CEE countries between science and technology systems and the private

sector, the success of Nordic innovation agencies in promoting public-private collaboration in applied

research is particularly noteworthy and something that the CEE countries should seek to emulate.

Although most of them have established innovation agencies as part of the EU accession process, they

have not been particularly successful. In some cases this is because they have “copied and pasted”

blueprints from abroad without due consideration of local culture. According to Nicholas Davis, head

of innovation and civil society at the World Economic Forum, it is clear that they need to adapt to local

circumstances. “Some countries have based their innovation agencies on the Finnish model and were

surprised that they don’t perform in the same way. But the copy-and-paste approach does not work,”

he says.

To be successful, these institutions need to be well-governed and have the necessary capabilities in-

house. The processes related to evaluating and funding projects and assessing their performance need

to be brought up to international standards. Internal capabilities need to be strengthened so that they

reflect a systemic approach, ie, staff should be trained in facilitating multistakeholder collaboration.

Research institutions need to ensure that their governance creates clear incentives for research

excellence and that these career paths are attractive to young talent.

Recommendation 2: Support geographical clusters of innovation around universities

Nordic countries were European pioneers of geographical innovation clusters that bring together

different overlapping networks to create start-up ecosystems. Similar to Silicon Valley in the US, the

clusters work best if they are interdisciplinary and connected to all networks that are necessary for

a start-up success—venture-capital funds, business angels, co-working spaces, business services,

entrepreneurs, scientists and so on—they all need to overlap in one geographical space so that they

can interact easily. In the Nordic countries such clusters were created around many universities, for

example in Stockholm, Uppsala and Göteborg in Sweden and the Aalto University in Finland (see box).

The clusters not only foster business creation by linking technology and innovation, but by creating

vibrant, diverse and stimulating environments they also attract skilled and creative people.

However, as noted by Erik Berglöf, director of the Institute of Global Affairs at the London School of

Economics, “eastern European countries have a long way to go to create the innovation clusters like

those that Sweden has put in place in Stockholm and Göteborg. Warsaw and Budapest may be the

most dynamic cities.” The few such clusters that can be found in the CEE countries are concentrated

around urban areas, where innovation, culture and creativity are strong and people are internationally

connected. Examples include Warsaw, Budapest, Ljubliana and the Danube Valley, which spans

Slovenia, Austria and the Czech Republic. Countries should step up their efforts to create such clusters

around universities by reforming the research and university sector so that it rewards multistakeholder

nd international collaboration.



17 R Graham, “Creating university-based entrepreneurial ecosystems evidence from emerging world leaders”, Cambridge: MIT Skoltech Initiative, 2014. Available at: http://www.rhgraham.org/RHG/Recent_publications_files/MIT%3ASkoltech%20e n t re p re n e u r i a l % 2 0 e co s y s t e m s % 2 0report%202014%20_1.pdf

18 EUROSTAT. Government expenditure on education. https://ec.europa.eu/eurostat/statistics-explained/index.php/Government_expenditure_on_education.

19 World Economic Forum, The Global Competitiveness Report 2018. Geneva. Available at: http://reports.weforum.org/global-competitiveness-report-2018/

Recommendation 3: Train, retain and attract more talent

Excellence in education, coupled with opportunities and meritocracy, is an important and well-

documented element of the Nordic model. Denmark is the EU leader in educational spending, with

6.9% of its GDP spent on education.18 But these countries do not only invest in education—they also

ensure that it is of a high quality and that access is equitable. Nordic countries have topped education

quality assessments for many years, and the Finnish educational model is widely emulated. Diversity,

openness to new ideas, tolerance as well as critical thinking and creativity are important values that

are transmitted through the education system and play an important role in innovation.19 Innovation

through networked thinking is key to new growth models. As noted by Dr. Tataj, chairwoman of RISE,

“Countries need to create a value proposition that can attract talent and then move forward. Barcelona

and Berlin are very interesting examples for “brain gain.” Cities attract talent for different reasons: some

appeal first to artists, other to startup entrepreneurs and then become attractive to venture capital

investors. I am sure that city-level policies can greatly enhance the speed with which they become

innovation hubs as demonstrated by 22@Barcelona Innovation District.”

The Aalto University in Finland is an example

of a university that has created a unique

innovation ecosystem. It was founded in 2010

by merging three very distinct universities:

Helsinki University of Technology, Helsinki

School of Economics and the University of

Art and Design Helsinki. The Aalto University

endowment was funded by the Finnish state

(€500m) and private donations (€200m).

The school has 11,000 students and 4,000

employees.

The idea behind the merger was to create

an interdisciplinary school that would drive

innovation. It is part of the mission of the

university to strengthen Finland’s innovative

capacity and to find “solutions to the most

pressing societal challenges by combining

cutting-edge science with design expertise and

business thinking”.

The Aalto University innovation ecosystem

consists of university and student-led

entrepreneurial activities. These are supported

by a community space (AGRD), accelerators

(Impact Iglu for societal challenges and Startup

Sauna for tech teams), an entrepreneurship

community (Aaltoes), a multi-disciplinary

solutions space (Aalto Design Factory), an

intra-preneurship programme (AEnt) as well

as student-organised start-up events (eg,

Slush, FallUp) and hackathons ( Junction).

The university campus is used as a centre for

research collaboration, funding and innovation.

Students are actively encouraged to pursue

entrepreneurial ideas and are involved in the

ecosystem activities with researchers and

companies. The university is internationally

connected, and 37% of the academic staff

come from an international background.

The first large-scale evaluation of the Aalto

University is currently under way. However,

according to the university, each year 70-100

companies are founded in the community,

and the ecosystem has been recognised as one

of the top five emerging ecosystems by the

Massachusetts Institute of Technology (MIT).17

INNOVATION ECOSYSTEM AT THE AALTO UNIVERSITY IN FINLAND

22



20 On the survey indicator measuring country capacity to retain talent, the CEE region scores on average 2.74 (on a scale of 1 to 7), while the Nordics achieve a value of 5.04, significantly higher than the European and North American average of 3.74. Source: World Economic Forum, Executive Opinion Survey 2017. Available at: http://reports.weforum.org/global-competitiveness-index-2017-2018/#topic=highlights.

Nordic countries also create an environment for retaining and attracting talent through meritocracy.

They nurture vibrant and diverse communities of entrepreneurship. Business executives think this

makes these countries far more attractive to talent than CEE countries and puts them significantly

above the EU and North American average.20

In the CEE region, many highly qualified people have left their country to pursue a career abroad.

In Bulgaria alone an estimated 30,000 people, mainly highly qualified professionals, are leaving

the country each year. Slowing down and reversing the brain drain is an important priority for CEE

governments to ensure that qualified scientists and engineers stay in the country. Incentivising these

emigrants to return has the added benefit that they will bring know-how and international standards

to their country and linkages to international communities. There are a number of policy approaches

that countries should consider. Strengthening geographical clusters of innovation is one way to attract

talent, and so are programmes to incentivise top researchers to return. Countries should also focus on

reforming and speeding up career paths for researchers and on rewarding mobility across different

institutions, sectors and countries.

Recommendation 4: Strengthen policy coherence, ensure stability and focus on the future

A key feature of the Nordic countries is their political stability. They have transparent and

accountable institutions that focus on longer-term development. Economic actors can rely on the

full implementation of policy initiatives. A defined policy, policy consistency and reliable governance

structures all matter a great deal as they provide the political and regulatory stability necessary for

longer-term investment. The Nordic countries have consistently been at the forefront of policy

innovation and developed a strategic viewpoint towards innovation systems in the early 2000s by

creating forward-looking institutions, such as the Office of Denmark’s Tech Ambassador, which fosters

technology-related international co-operation.

The quality of governance and regulation and the rule of law in the CEE region are below the EU

average, and in a more worrying development they have, on average, deteriorated in recent years.

As noted by Ania Zalewska, professor of finance at the University of Bath’s School of Management:

“Regulatory stability is important for long-term planning but should not mean regulatory stagnation.

It is key that regulations are forward-looking and proactive. For this to happen, awareness of trends is

more important now than 50 years ago. And we don’t see much of this in eastern Europe.” The inability

of businesses, investors and innovators to rely on regulations and their correct and even enforcement

is seen as an impediment to growth. The reform agenda for the region is complex: red tape and

corruption need to be reduced; local governments need to be more transparent and accountable; the

capacity of regulatory bodies to govern using new technologies must be improved; the judiciary still

requires strengthening; and corporate governance standards need upgrading.



CONCLUSIONSPutting their economies on a more sustainable growth path will require CEE policymakers to move to a

new, innovation-driven growth model. All countries in the region have room for improvement in terms

of their innovation systems, which are performing below international standards.

The reform agenda is daunting. However, as noted by Mr Bilbao-Osorio: “Countries in eastern Europe

need a stronger strategic vision to develop innovation activities. Innovation and research agencies

exist, but efforts need time and resources to build true capacity.”

This means that in order to create well-performing systems that encourage scientific and technological

innovation, countries will have to look at a number of policy options. These options will include

geographical clusters inspired by those found in Sweden or Finland but building on local competitive

strengths. Governments will need to make their countries more attractive to talent to reverse the brain

drain. Last but not least, continued reform of the regulatory framework, coupled with higher policy

stability and future orientation, will be crucial.

The experience of the Nordic countries provides ample opportunities to learn from best practice

how to create vibrant innovation ecosystems that contribute to an equitable society and a

competitive economy.

While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor.

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