Switching to innovation

Switching to innovation

A shift in the companies’ thinking from basics towards innovation can make a difference, states Codrut Pascu, Managing Partner of Roland Berger Strategy Consultants


There are several challenges that are currently hindering and will probably continue to negatively impact Romania's business climate, with implicit influence on the overall society. Without being exhaustive, I would like to point out and make reference to four of them, which are of paramount importance, in my opinion.

To begin with, insufficient funding and investment is a major area of concern. As Romania relies heavily on external funds, the fact that FDI inflows decreased on average by 40% annually during the 2008-2011 period (from roughly EUR 9.5 bn in 2008 to around EUR 1.9 bn in 2011) has had a severe impact on the recent development of numerous activity sectors, and its effects are also likely to linger over the years to come in the form of non-accomplished potential gains and loss of added value that could have been created through those investments.


When adding the diminished support of available funding from credit institutions, due to an abrupt cut of external funding by mother banks to their local subsidiaries, we are confronted with a blunt shortage of financing options, that is not only hindering growth but can also cause severe survival issues, as existing businesses have to struggle with liquidity. Secondly, closely related to the first challenge but too important not to handle it separately, is our chronic inability to attract EU funds. Insufficient and ineffective administrative capacity, caused by flawed and highly bureaucratic processes, shortages in qualified and competent personnel, as well as an overall lack of public administrative infrastructure and centralized governance, have resulted in very poor absorption rates that not only affect the present state of things but menace our future access to EU funds. Thirdly, lack of appropriate (physical) infrastructure remains a perpetual obstacle in the path of our development. The existence of appropriate transport, energy and communications infrastructure is a key prerequisite for the national development, beyond any incipient stage. If we are to make the transition from a "low-cost" country to a "value-added" economy, infrastructure is a key milestone along the way. Finally, the current lack of predictability and coherence in public policies, doubled by painful bureaucracy when it comes to business interaction with the public authorities, represent key threats in our present and future development. Instability in both economic policies and legislative framework affecting the business climate represent foremost obstacles in improving investors' perception, leading to a severe shortage of investments (first problem highlighted!). Legislative changes should only occur after careful assessment of their impact and after meticulous cost-benefit analysis, so that changes incurred do not outweigh the envisaged benefits. Moreover, leaner, simpler and more transparent bureaucratic procedures would represent a major improvement in the sustainable development of any business in the country.






On the medium term, infrastructure and energy are key priority areas for Romania. They pose a high development potential both "sui generis" – reflected in the explicit investments these sectors could attract, the jobs they could create, etc. – but also by the ability of these sectors to increase productivity and improve efficiency in virtually all sectors of the national economy: e.g. road infrastructure could boost both the transportation sector and attract major investors in other branches; access to efficient and cheap energy could foster the development of heavily energy-dependent industries, etc. On the other hand, education, health and social services will have a deep impact on the longer term, as the economy will be highly dependent on the available human capital and talent that can only be promoted in an efficient eco-system. Along with these areas however, I would also like to nominate agriculture and, on a more general note, food production, as important potential sources of income and future development. Romania has a genuine capacity to become a highly competitive agricultural player at European level, should its potential be exploited effectively.






The 5 most important measures that could practically be implemented by any government, regardless of its own agenda and political orientation would be the following:



- Refrainment from making frequent changes to the fiscal and legislative framework affecting the business climate, unless the impact is thoroughly assessed and properly quantified as to make sure that the produced benefits significantly surpass the negative effects of the change itself – frequent changes producing only marginal effects are guaranteed to produce more damage than good



- Assurance of liquidity across the national economy, by limiting indirect state financing by the business entities, e.g. reducing arrears and delayed state payments and reimbursements; also simplification of bureaucratic procedures, and limitation, as much as possible, of bureaucratic interaction needs of businesses to public authorities are, in my opinion, key priorities


- Efficient restructuring of state-owned companies and introduction of professional management based on real performance criteria – and more generally, introduction of a professional corporate governance system across the entire public sector and state companies

- Prioritization of investments, as to channel available funding towards top priority projects (assessed objectively according to their positive impact), thus ensuring finalization of most impactful infrastructure objectives and avoiding waste and dissipation of resources on marginal projects

- Acceleration of EU funds absorption by creating and setting up an effective administrative capacity, through lean, efficient and transparent processes and capable personnel, properly selected and incentivized according to real performance standards.






It is unambiguous that the high-spirited growth in lending up to 2008 was not sustainable on the long-term and, thus, it is highly unlikely that it will resume at the same levels any time in the near future. Moreover, there cannot be a "one-size-fits-all" solution, as lending policies of each bank highly depend on both regulations and the quality and shape of its existing credit portfolio. Doubtless, the financing model of the banks also needs to change gradually, and this might further limit mid-term expansion of asset base for a wide number of banks. Thus, wide-spread solutions will only be found as the other sectors in the economy steadily improve and confidence raises both among retail and corporate players in the country. This will take longer, but lending activity might turn overly positive again very soon afterwards. What is needed more than anything now is a sense of coherence in the overall economic decision-making of the governing authorities, which might bring back confidence in the external markets, but also internally. Specific programs like "Prima Casa" and other well-targeted programs on selected priority areas and sectors could help as well, if applied efficiently.



Regarding EU funds, I do not believe in a wonder recipe. The improvement in attracting the EU money will come with the enhancement of administrative capacity in general, more specifically with a clear governance of the different EU funds related authorities, implementation of lean and transparent processes, harmonization of legislation and effective implication of capable personnel, assessed and incentivized according to real and objective performance criteria.



Euro zone accession implies strict compliance to the convergence criteria. I personally believe Romania should thrive to sustainably achieve these convergence conditions and be able to assume them on a long term. In this case, Romania would be able to access the euro zone whenever truly ready and if the internal and external circumstances recommend it as the most viable and beneficial step in the sustainable development of our economy, on the medium but also on the long term. The strategic choice of joining a currency union should be an informed one, properly debated and timely taken. Given where we are today, and what is currently happening with the euro zone, I would say the topic needs a lot of consideration and active engagement over a longer period of time. But first and foremost, we have to be able to qualify, and then we can truly make the best choice!






I am not the first, nor the last to fervently support the idea that Romania, through its human and natural resources, as well as through its geopolitical and geostrategic positioning, has a huge growth and development potential. Nevertheless, in order to capitalize on this potential, Romania has to make the transition from a "low-cost" economy to one based on innovation. Therefore, before our low-cost advantage erodes, we need to foster the development of other competitive advantages, and this can only be achieved through infrastructure and innovation. Of course, this will not happen overnight, just as our cost advantage will not disappear overnight. However, in order to ensure turning to an innovation-based economy, steps have to be made as of today, since these changes will not occur immediately. More specifically, infrastructure must be created, the education and social systems must be adapted in order to be able to grow and foster talents, industrial clusters should be set up and effective regulations enforced.