Innovation on the Eastern Front

Innovation on the Eastern Front

After the 1989 revolution, economies in the East are entering an unsystematist transition to a market economy. Effects?! Inflation, privatization, restructuring, social tensions, government instability.

Finally, the will to join the community space. The ages of the 90s are finally overcome and the Central and Eastern European economies live the growth experience. Proximity to the EU still has eccentric eastern economies arouses the interest of multinational companies.

Their accession to the EU leads to the decision of global conglomerates to invest in the countries of this region due to the "earned" predictability, the low cost and the high technical training level of the workforce.

Increased foreign investment has led to capital accumulation, along with skill shaping, technology transfer and other benefits. It has also allowed productivity to grow and the gaps in recovery from advanced economies.

The average revenue trap limits growth

The 2008-2010 crisis has tempered their growth momentum. Foreign investment declined, and productivity moderated growth. The increase in wages, the absence of value-added products and services have affected exports and led to a competitiveness deficit.

The average revenue trap, as the described phenomenon is known, shows the limits of this increase. The structural transformation model and the capital increase invested per employee are no longer working. Attracting foreign investment and encouraging innovation in this way have supported low wage policy. But at this moment the challenges in the labor market place pressure on the average salary level by forcing these countries to innovate.

New digital technologies bring opportunities for innovation

Artificial Intelligence is the new oil of economies and intelligence of things (IoT), quantum computers and new technologies, derived from this fuel of the future. For the Central and Eastern European countries in the 1990s the transition meant moving to an open and free economic system.

Today transition is the transition to an economic growth model based on innovation. Countries in this region, without a coherent and functional innovation system, risk falling behind. Romania is extremely exposed, taking into account that in 2017 it is the last one, according to the EU innovation index.

The common factor of the countries of this region is the focus on technical disciplines (STEMS). The medium to high level of education and research in these disciplines has sometimes evolved differently in some countries.

This is also the case for Romania. However, especially joining the EU, it opened these countries to foreign investments that led to the consolidation of the manufacturing sector, the acquisition of technology, the management development and their entry on the global value-increasing highway.

The countries of Eastern Europe point to some successes

The economic and social transformations of the past three decades have altered social attitudes about innovation and free initiative. New technologies enjoy promotion, start-ups in technology and organizational forms in hubs are encouraged.

Speed, strategies and tactics adopted are reflected in the place of the countries in the region in the ranking of EU innovation. Countries from this region come from Skype, TransferWise, AVAST, AVG, ESET, Prezi, Bitdefender or UiPath.

Although important, the results are less significant in numeric terms and are rather due to solitary initiatives.
Therefore, the creation of an innovation ecosystem in the countries of this region requires the following four minimum measures at macro level:

1. Increasing the budgets allocated to research and development (Romania allocates a quarter of the EU average), but also to the private companies with attracting venture capital financing (only 2% at regional level)

2. Increasing the quality of research (the references in international articles to research in the region are few) and the results of research to find application in commercially successful products by collaborating with the business environment (the number of patents in the region is low)

3. Addressing the problem of brain drain by increasing tertiary education able to produce skilled people for internal labor market requirements and increasing student numbers

4. Adapting the regulatory framework to technological advances, but also its stability and predictability (most successful startups are based in Western or US).