56701 Croatia's Science and Technology Project Unleashes Innovation Paulo Correa, Ljiljana Tarade and Iwona M. productivity and reaping the benefits of innovation for Borowik the country's development have become even more urgent. Key Messages The economic crisis has hit the Europe and Why Science and Technology? Central Asia (ECA) region hard and made it important for countries to accelerate Fostering R&D and innovation is a good policy option: productivity by reaping the benefits of simulations prepared for a World Bank study in 2009, increased innovation and R&D. the Croatia EU Convergence Report, show that increasing aggregate R&D to 3% can raise GDP by 5.8% The large demand for financing under the above its baseline and exports by 13% by 2025. Yet, Science and Technology Project (STP) in currently, public support to R&D corresponds to about Croatia indicates that the expansion of R&D 0.7% of total Government expenditure, a value that is in transition economies might be limited insufficient to make a dent in Croatia's growth path more by lack of public support than (Spain's R&D programs, for example, correspond to businesses ideas. about 2.4% of total Government expenditure). The Firms that cooperated with public research challenge Croatia faces, therefore, is to find ways of organization in the STP programs showed scaling up its current R&D programs in the context of satisfaction and willingness to continue with fiscal tightening and last stages of EU accession. this cooperation. Legacies of Soviet-era central planning still persist in The process of commercializing public many ECA countries in the form of outdated policies research managed to overcome cultural, and institutions for science, technology and innovation. ideological, institutional, and operational Croatia is no exception. Despite the country's notable constraints is set to generate tangible results history of scientific discoveries (Nikola Tesla, probably within the project's lifetime. the most famous inventor from Croatia, literally lit the A simple, transparent and merit-based world a century ago), its recent performance in the arena mechanism for allocation of research grants of science and technology has been relatively modest. is helping to attract Croatian scientists The public sector is responsible for most R&D working abroad. expenditures but usually does not commercialize its research to the business sector. In parallel, a forceful Introduction process of brain drain has threatened the country's science base. Croatia's economic and social development achievements in the last decade have been impressive; The Science and Technology Project the country closed its income gap with the European Union and now has some of the best social development It is in this context that the Science and Technology indicators in the region. However, growing current Project (STP) has become the new backbone of the account deficits--in the context of increasing domestic country's science and technology policy, helping to wages, small productivity gains and scarce innovation-- create an innovation environment that will likely serve suggest that this pattern may not be sustainable. With the country well in its development agenda. The Project the economic crisis hitting the region hard, accelerating was conceived with the goal of unleashing the ECA Knowledge Brief innovative potential inherent in the country and it was the "innovation value chain" through which knowledge implemented in the 2006-09 period. The original loan affects economic development: knowledge creation, from the World Bank was for EURO 31 million but this knowledge transfer and knowledge use (see Figure 1). was subsequently reduced to EURO 30 million as a This Knowledge Brief describes the STP programs, the result of project restructuring by mid-2008. The STP main implementation challenges and some initial programs were designed to cover the different stages of promising results. Figure 1: The Croatia Science and Technology Project ­ An Illustration Knowledge Creation Knowledge Transfer Knowledge Use Economic Impact Research and Commercialization of Innovation Development R&D Local Researchers Restructuring Brodarski Companies Economy (University of Zagreb (UoZ) Institute New processes (cost Cost reductions University of Rijeka (UoR) reduction); New/Better products; Productivity gains Brodarski Institute Contract research; Patents; Rudjer Boskovic Institute spin-off companies Growth of sales Technology Transfer Others) Offices Higher export probability Croatian Researchers in Rudjer Innovations; University Foreign Research of Zagreb; University of Rijeka RAZUM Program Institutions SPREAD Program UKF Program VENCRO Program Encouraging Private Sector R&D: The RAZUM Program RAZUM is a soft loan mechanism, designed to Eligible expenditures encompass a large number of encourage the private sector to spend more on R&D, activities, including patent applications. The selection particularly in the later stages of product development, process aims to identify projects that have a higher and reduce the risk that firms often face in the likelihood of commercial success and assesses both innovation process. By March 2010, the RAZUM technical feasibility and market potential. program was supporting sixteen projects with a total of about EURO 11.5 million (about EURO 7.5 million of As of March 2010, there was a pipeline of more than 35 the financing came from STP and the rest from the projects waiting for additional complementary financing Government). The private sector provided additional under the RAZUM program. This strong interest EURO 9.3 million in R&D funding to the program. The demonstrates high demand in the Croatian economy for RAZUM program provides loans covering up to 70% of programs that facilitate private sector investment in product development costs, with repayments conditional R&D. It also indicates that, at least in the initial years of on success; companies begin to repay loans when the economic transition, innovation activity in Croatia was projects start generating revenues from sales resulting constrained by limited access to financing and not by a from the innovations (repayment can be 3-5% of these lack of ideas or projects; the lack of financing also sales). Support is limited to a maximum of EURO 1.5 possibly contributed to the decline of important million for a period of up to three years per project. industries and the brain drain that followed. ECA Knowledge Brief Fostering Collaboration between Businesses and and those that do often take about a decade to do so. Public Research Organizations: the SPREAD Start-up costs for TTOs are not negligible. Program Yet, returns in the initial years tend to be comparatively small even though some gains may be had from The SPREAD Program consists of a matching-grants eliminating the informal commercialization (the grey scheme to foster joint research between the private sector market) of the products in the short run. This happens and public research organizations--the limit is 50% of the because the licensing to patenting ratio is very low; total project cost and a maximum of EURO 120,000 per returns from spin-offs need time to mature and contract project. The program is managed by the Business research expands only as businessmen and researchers Innovation Center of Croatia (BICRO), a Government- gradually realize the mutual benefits of closer owned limited liability company. Research projects by collaboration. small- and medium-size companies, performed jointly with public research organizations, are eligible. The The STP project is financing three TTOs: the Rudjer application process is relatively simple and decisions are Boskovic Institute's (RBI's) Rudjer Innovation, and the made within six weeks. TTOs of two large Croatian public universities--the University of Zagreb and the University of Rijeka. SPREAD had already committed EURO 2 million to 14 Activities financed by the project include developing the projects in less than 18 months since its inception. The legal framework for intellectual property management, majority of projects are with micro and small companies, as well as staff salaries and training costs. The project predominantly in the information communication also finances the initial expenditures involved in the technology (ICT) and electronics sectors, for an average process of commercialization itself, such as, screening of one year. Faculty members from the departments of and patenting costs and providing seed capital to spin-off electrical engineering, mechanical engineering and companies. shipbuilding of the University of Split, and faculty from the electrical engineering department at the University of The project aims to achieve the following results by Zagreb have been frequently involved in these projects. May 2011: (i) at least 20 patents filed, six patents Currently, eleven public research organizations are granted, and eight licensing agreements signed; (ii) participating in the SPREAD program. The program will EURO 8 million in contract research mobilized by the end in May 2011, unfortunately leaving 15 projects in the TTOs in benefit of their parent organizations; and (iii) pipeline that could not be supported due to lack of funding eight spin-off companies created through discoveries Interviews with the beneficiary companies indicate that from ongoing research. By mid-2010, the project seemed they are satisfied and willing to cooperate with the on track to achieve these results (one of RBI's patents public research organizations again in the future. has been licensed to the prestigious Massachusetts Beneficiaries also indicated that, in the absence of the Institute of Technology). The engagement of top grants, they would not have collaborated with these scientists from RBI is also a major achievement since, organizations or developed their projects (at least not overall, researchers are now beginning to perceive that with the same speed and quality). The preliminary academic excellence and research commercialization can evaluation suggests that the SPREAD program has had a be compatible and mutually beneficial. positive impact on the commercialization of public research. Strengthening Croatia's Science Base: the Unity through Knowledge Fund (UKF) Accelerating Commercialization of Public The UKF provides grants for joint scientific projects Research through Technology Transfer Offices between Croatian scientists living in the country and those living abroad. By March 2010, 57 research Technology Transfer Offices (TTOs) are responsible for projects worth EURO 4.1 million were under managing the intellectual property (IP) that emerges implementation under the UKF, with STP providing from public research--evaluating its commercial EURO 3.3 million of the financing. Thirteen of these potential, identifying potential users in the business projects have been completed and received positive community and defining the best way of evaluations. Cooperation with leading research institutes commercializing the research. has been strengthened, as illustrated by joint projects sponsored by the program between RBI in Zagreb and Financing the operational costs of TTOs is critically the Max Planck Institute for Molecular Cell Biology and important because, as international experience shows, Genetics in Germany in the field of bio-photonics not all TTOs manage to become financially independent methods. ECA Knowledge Brief The success of UKF in attracting Croatian researchers Croatia STP can be valuable in this respect: living abroad can mostly be attributed to the way the Program is administered and governed. Since the first The large demand for innovation financing under call for proposals, the selection process has been driven RAZUM confirms the existence of untapped sources by academic excellence, fairness and transparency. This, of innovation (ideas) in the business sector in in turn, was achieved through a combination of simple Croatia; this experience clearly demonstrates that the rules, streamlined processes, expert evaluation, and a supply of ideas and entrepreneurial skills is not sounding board comprising local and international limited in developing countries and their R&D researchers as well as leading representatives from the sectors would benefit from expansion. business community. When the SPREAD Program was created, it was The novel idea of bringing in leading figures from assumed that SMEs were reluctant to cooperate with multinational and local companies to supervise the R&D organizations, either due to lack of information program was aimed at strengthening the credibility of or because there was a perception that the services of the program, ensuring that it was merit-based and the public research organizations would be impartial, and encouraging the best researchers, incompatible with the companies' needs. However, particularly those living abroad, to apply for the grants. as the results showed, participating companies were The International Labour Organization and the European satisfied with the collaboration and expressed a Regional Economic Forum recognized the UKF as good desire to cooperate again in the future, indicating practice for improving the mobility of highly qualified that setting up matching grants to reduce the risk of experts, and critical to promoting linkages between joint projects might pay off. migration and development. Cultural and ideological barriers that constrain commercialization of public research, as well as Two sub-programs under the UKF are worth noting. The legal, institutional and operational difficulties, were first is the support provided to joint projects between gradually overcome as initial results demonstrated Croatian researchers living abroad and local Croatian that academic excellence and commercialization of companies and research institutes. While the key research are not contradictory activities and may be outcomes of these projects are of more academic even mutually beneficial. Croatia's experience relevance, they may possibly generate discoveries that shows that efforts to commercialize public research can be commercialized. The second project provides can achieve tangible results in a relatively short grants to young researchers and supports the period of time. employment of recent engineering graduates and researchers in natural sciences in Croatian enterprises; Croatia's past brain drain threatened the quality of the objective of this sub-program is to prevent brain the country's science base. An effective governance drain and help research-related professionals remain structure, transparency in the application process, permanently in the country. and the UKF program's strong reputation helped gain recognition and interest from the scientific Sustaining the UKF Program beyond STP's existence is community, including the Croatian research the major challenge ahead. diaspora. This experience shows that simple, transparent and merit-based allocation of research Lessons from the Croatia STP grants can help attract scientists from abroad. In several other ECA countries--including Romania, About the Authors Bulgaria and Poland - the situation is similar to Croatia Paulo Correa is a Lead Economist, and Iwona M. in that the returns expected from innovation and R&D Borowik is a consultant in the Private/Financial Sectors are high but investments by the public sector are low. Development Unit, and Ljiljana Tarade is an Operations The challenge is to implement innovation policies that Analyst in the Croatia Country Unit of the Europe and can have an immediate impact on economic Central Asia Region of the World Bank. development. Some of the lessons learned from the "ECA Knowledge Brief" is a regular series of notes highlighting recent analyses, good practices and lessons learned from the development work program of the World Bank's Europe and Central Asia Region http://www.worldbank.org/eca