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Innovation on the Horizon -The Know How behind Digital Transformation

Innovation on the Horizon -The Know How behind Digital Transformation

The European Bank for Reconstruction and Development defines a knowledge economy as an economy that grows through innovation. New trends, such as the Internet of Things or digitalisation, are examples of the transition towards the knowledge economy, which is central to achieving and sustaining long-term competitiveness

To measure knowledge economy development, the Bank has constructed the EBRD Knowledge Economy Index, spanning 46 economies – 38 where the EBRD invests and 8 comparators (members of the Organisation for Economic Co-operation and Development, OECD).

The Index contains 38 indicators divided into four pillars: institutions for innovation, skills for innovation, the innovation system and the ICT infrastructure. In the 2019 report, Romania is assessed as an intermediate knowledge economy, characterized by relatively adequate institutions for innovation and ICT infrastructure, but still relatively weak skills for innovation and innovation system, constraining knowledge economy development.

Overall, the state of Romania’s knowledge economy remains much behind those of  the OECD comparator countries (Czech Republic, France, Germany, Sweden, UK, Japan, Canada, USA), ranking 15 among EBRD economies with a total score of 5.01 out of 10 (the score represents distance to frontier, namely the distance of an economy to the best performance observed).

The innovation system pillar shows the largest gap between the EBRD regions and their OECD comparators (a 3.26 index points difference). Many of the EBRD countries of operations (CoOs) invest very little in their innovation system; often, certain types of innovation financing (e.g. venture capital) which are present in the more advanced countries, are just not available in many of our countries. In addition, innovation systems in many of the EBRD CoOs are not efficient and therefore produce relatively low outputs.

The study results also indicate that there are no one-size-fits-all policies to promote the development of the knowledge economy. Rather, countries should adopt policies that take into account their stage of knowledge economy development and set priorities accordingly. In the intermediate knowledge economy stage, countries should make efforts to catch up with those countries at the technological frontier.

One way to do this is by making digitalization a priority. Digital transformation can be an economic game changer, especially for small businesses that have the benefit of being agile and easily adaptable to change. They can boost their competitiveness by introducing key technologies in their operations, ranging from e-commerce to data warehousing, which help them optimize their business models, improve market intelligence, access new markets and deliver higher value to customers.

The EBRD has a strong focus and track record in increasing SME competitiveness. Through its Small Business Initiative, the Bank invests over €1.1 billion every year in direct and indirect finance for SMEs and supports about 2,300 business advisory projects. In Romania alone, since 1993, the EBRD has helped over 900 SMEs access advice and transform their business. Within a year of implementing a business advisory project, 74 per cent of companies boosted their turnover, and 56 per cent improved their productivity, as they expanded their business. The EBRD provides the knowledge, the network and the skills that SMEs need to succeed, by connecting them to local consultants and international advisers.

Around 40 per cent of the EBRD advisory project portfolio in Romania last year was focused on information communication technology. As a result, the Bank has helped 19 clients introduce the digital solutions they needed to improve their market performance and management effectiveness, whether by implementing a new business software solution, developing a revolutionary training platform, automating production or building a state-of-the-art data warehouse. Taking into account that another 10 per cent of projects focused on e-commerce solutions, it means that around half of the Bank’s advisory support for Romanian SMEs in 2018 was dedicated to digital transformation. In 2019, we are already at 30 per cent.

Small and medium-sized enterprises are often innovation pioneers. Dasha Online, for example, an online fashion retailer from Romania, developed its business information system and built a data warehouse that would feed into a complex business intelligence solution. As the business grew, the company’s key performance indicators (KPIs) also grew significantly, and the data mining process became more laborious, making sound, data-driven business decisions far more difficult. Dasha’s management realised that, in order to sustain the company’s growth rate, a reporting infrastructure was necessary. In 2018, the company approached the EBRD for support with developing a data warehouse and reporting software that would allow internal stakeholders to instantly obtain and process any information about business KPIs, leading to better and faster decision-making.

The EBRD connected the company with Relevance Management, a consultant specializing in business intelligence software and data warehouse solutions (incidentally, the consultant had also previously received advisory support from the EBRD, as well as skill-enhancing training through the Bank’s Grow Your Consulting Business training series). After finalizing the project in 2019, Dasha management and staff now have, in the same application, all the relevant data from essential business information sources (ERP system, Google Analytics, Facebook Ads, etc.), so they can see correlations between marketing activities and sales. They can also better understand sales processes, as well as their customers, they can analyse product performance and manage stock properly. Dasha’s management considers some of the reports to be game changers for the company, and they expect significant business development in the following year based on the information provided by the data warehouse and the business intelligence solution.

All this was possible thanks to donor funding from the European Union (EU). Since 2017, the EBRD’s work with SMEs in Romania has been supported by the European Investment Advisory Hub with funding from the EU and co-financing from the EBRD. Thanks to the donors, the EBRD can share part of the costs of advisory projects with their clients – Dasha, for example, benefited from a grant representing 67 per cent of the net cost of advisory services.

Starting in 2019, the EBRD’s partnership with the EU has expanded under Horizon 2020, by focussing specifically on innovative SMEs. With Horizon 2020 support, the EBRD is expected to contribute significantly to fostering innovation among Romanian SMEs, making them more competitive and, thus, releasing the full potential of further economic development.

But what makes a business innovative? The EBRD uses EU InnovFin criteria to identify companies which have the potential to revolutionise their industry and become local and regional leaders. It should be a company focused on research and innovation, which has invested in or intends to develop new or substantially improved products, processes or services. Or a fast-growing company, having grown on average 20 per cent a year over three years in terms of turnover or staff number. The EBRD is also looking at companies that have been acknowledged by European or national research and innovation support schemes, either through an innovation prize or through grants, loans or guarantees. The full set of criteria is available at https://knowhowromania.ro/. For the first time, the EBRD is also considering working with both smaller companies, including start-ups, and larger businesses, with up to 3,000 full time employees, provided that they are still SMEs in terms of their turnover (maximum €50 million) or assets (maximum €43 million).

The Bank has a track record in identifying the best innovators, whether through advisory projects or financing. The Romanian technology company UiPath has been extraordinarily successful and the EBRD has also contributed to this success. One of our funds – Earlybird Digital East Fund – invested in UiPath at a seed stage. In 2015, it had less than $1 million in revenue. In April 2019 the company announced that it has exceeded $200 million in revenue, and was valued at $7 billion. With a clear mandate to do #EBRDmore, perhaps the next Romanian unicorn is already on the Horizon.