Serbia Doesn't Have Oil, but Does It Have Ideas?

October 27, 2011

Loup Brefort, Country Manager for Serbia, The World Bank

This article was published in NIN weekly magazine on October 27, 2011

Innovate or – Perish! You think this is an overstatement? Well, while writing on your laptops or PCs think of typewriters.  While listening to the music on your iPods/USBs/CDs think of gramophones and vinyl records. Do you still think I am exaggerating?

In today’s world innovation and technology absorption are widely recognized as main sources of economic growth for emerging and advanced economies alike.  The recent global financial crisis made it even more vital mechanism for accelerating industrial development, worker productivity, and economic growth. Namely, the crisis showed to countries – like Serbia – which anchored their economic prospects on the financial sector, real estate, construction, and local demand that such a model was not working any more. When I was still a student in France, Europe was hit by what became known as “the first oil shock”. Suddenly, prospects of entire economies that had little natural resources of their own but had assumed continued access to cheap energy to make their industries competitive appeared to collapse. I remember the response, captured in the following slogan: “we do not have oil, but we have ideas” and, indeed, Europe continued to grow and improve the living standards of its citizens.

As you know, Serbia has been keen for some time now to shift to another growth model in which exports and manufacturing play a larger role. Serbia cannot and should not base its future growth on being competitive because of its low wages. Technology adoption and innovation need to be the catalyst for transformation and revitalization of its productive sectors. But the question is: how to get there?

It is widely acknowledged that the private sector is leading the way in technology absorption and in innovation. I am sure you can immediately associate the names of many private firms with new innovative products and services. But I suspect you would be hard pressed to do the same with state enterprises. Nevertheless, governments can play an important role in bringing innovation and technology to markets. On the contrary, badly designed or badly implemented government interventions can further hamper the development of an innovative and entrepreneurial culture among businesses and research communities.

As such, it is vital for governments to choose the right policies and country examples to follow rather than implementing innovation support measures which do not suit the country context. The World Bank’s recently published a report (Igniting Innovation: Rethinking the Role of Government in Emerging Europe and Central Asia) examines lessons learned from public institutions and programs for innovation, both successful and failed. In the report you can find interesting experiences from emerging Europe and Central Asia as well as China, Finland, Israel, and the United States. Let me highlight here several issues I consider important for policy makers in Serbia.

The role of the government is to build a system which develops incentives at the firm level, making managers genuinely responsible to owners (good governance), removing barriers to startups and spinoffs (investment climate), and stimulating companies to invest in skills and research and development. A key principle in the design of the support from the government has to be “neutrality” with respect to sectors in project selection. The selection criteria must be based on the project’s value and commercial-success potential, not on the sector of the firm.

Governments can also play a role in promoting private risk-taking and stimulate markets for private risk capital since the inherent uncertainty of success is a major obstacle for entrepreneurs to invest their own money and leave a secure job. This, for instance, can be done by adopting good intellectual property rights legislation, and if government provides seed funds to entrepreneurs, avoiding corruption in project selection by using international peer review and requiring the matching of public funds with private cash contribution.

Once the business starts to grow, governments can provide instruments to share the risk with private venture capital. For example, the government can mitigate private investors’ risk by investing as a founding and passive limited partner, with minority ownership.

At the mature stage governments can help by facilitating access to international and local equity funds and strategic investors.

I am sure there are a lot of bright people in Serbia who can come up with new – and commercial – ideas just like four Estonian programmers helped found Skype.  One such example is the new solar charger for mobile phones. Serbia does not have oil, but some of its people definitely have bright ideas!!