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# 52013SC0075

**COMMISSION STAFF WORKING DOCUMENT Research and Innovation performance in EU Member States and Associated countries – Innovation Union progress at country level Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS State of the Innovation Union 2012 - Accelerating change /\* SWD/2013/075 final \*/**

  

Introduction

The Europe 2020
strategy relies to a large extent on efforts made at country level, to which
European instruments can contribute. Progress towards a European Innovation
Union[1]
is therefore closely linked to the performance of Member States in mobilising
reforms of R&I systems, investing in knowledge and making structural changes
towards more knowledge-intensive economies.

As highlighted
in the Commission’s Communication on the State of the Innovation Union 2012, an
effective innovation policy requires a combination of three crucial dimensions:
Europe needs to reform, invest and transform. In the current
period of economic crisis, reforms to achieve greater efficiency are urgent and
feasible; alongside these reforms, there need to be continuous investment and
smart fiscal consolidation to lay the groundwork for the recovery. However, the
crisis has also highlighted more structural weaknesses in the European economy.
Our future beyond the crisis depends on having the capacity to transform the structure
of the economy towards more knowledge-intensive and innovative industries and
services.

Figure: Innovating out of the crisis

The Research and
Innovation country profiles provided in this publication constitute a key
policy tool for stakeholders and policy makers and cover these three
dimensions. These country profiles facilitate the framing of policies and the
elaboration of national strategies based on factual evidence. They were first
published in June 2011 as part of the Innovation Union Competitiveness report,[2] providing policy makers and
stakeholders with concise, holistic and comparative overviews of research and
innovation (R&I) in individual countries. This 2013 publication is an
updated and extended version of the country profiles published in 2011 with
particular emphasis on thematic and sector-based analysis.

The country
profiles cover the whole innovation cycle: the main policies concerning
investment in R&I, performance and reforms of the R&I system, hot spots
and specialisation in science and technology, new R&I policy strategies,
dynamics of fast-growing innovative firms, upgrading of manufacturing
industries, the contribution of high-tech and medium-tech industries to the
trade balance, and the overall link between innovation and progress towards Europe
2020.

As in 2011, the
performance of individual countries is benchmarked against the EU average and
against a group of other European countries with similar knowledge and
industrial structures. The benchmarking employs the same methodology that was
used in 2011,[3]
thus ensuring comparability over time. The policy analysis draws on the policy
assessments already published as part of the Europe 2020 process4 in
the Commission staff working document assessing the National Reform Programmes,
and also on the supporting Country-Specific Recommendations.

The statistical
data and evidence of policy reforms have been verified with each Member State and associated country. Each country profile, however, does not constitute a
policy statement but rather is an objective analysis by the Commission
services. In order to ensure cross-country learning and comparability, Eurostat
and OECD data have been used, complemented by data from some other sources3.

Key findings

1.
The need for reforms for a more
efficient research and innovation system

One of the Europe
2020 targets is to reach an R&D investment intensity of 3 % in the EU.
Governments and firms are investing strongly in research and development.
However, the use of these resources will not be effective if they are not
invested in a first class research and innovation system that is capable of
transforming ideas into innovation and spurring the development and deployment
of technologies for industry and society. A more efficient R&I system means
generating the best possible output from invested input; a more effective
system means attaining more relevant outcomes for the economy and society. The
objectives of efficiency and effectiveness should therefore be actively pursued
and must cover the whole research and innovation cycle.

There is no
ideal or absolute model for an R&I system. Its specific configuration will
not be optimal if it is not tailored to the industrial, social and cultural
setting at national and regional level. However, many features of a system can
be transposed from one setting to another with slight adaptations, notably from
other countries with similar patterns.

The country
profiles show that some countries excel more than others at science and
technology (S&T) for the same level of public investment. In some
countries, the challenge for efficiency starts at the reforms needed to achieve
scientific and technological excellence. Growing investment has raised levels
of excellence in S&T in many countries, but the degree of improvement may
still be lower than the EU average. For other countries the main challenge is
to trigger fast-growing innovative enterprises and international
competitiveness by disseminating knowledge.

The synthesis
table below illustrates these findings. The first column shows the latest
levels of R&D intensity of each country and its growth over the last
decade. This input can be seen alongside two new composite indicators on research
excellence and on structural change towards a more knowledge-intensive economy.[4] Finally, an effective
innovation system should have an effect on international competitiveness and on
the trade balance of more sophisticated products and services. The last column,
based on a recognised methodology used by the OECD, provides important insights
into the competitiveness of a country. In order to interpret it, parallel
information on the trends in absolute values of exports is made available in
each country profile.

Table: Overview of R&I performance in Member States and Associated countries

|| Country || R&D intensity1 2011 || Excellence in S&T 2010 || Index of economic impact of innovation 2010-2011 || Knowledge-intensity of economy 2010 || HT&MT contribution to trade balance 2011

value || growth rate1 (2000-2011) || value || growth rate (2005-2010) || value || growth rate (2000-2010) || value || growth rate2 (2000-2011)

EU || European Union || 2.03 || +0.8 || 47.86 || +3.09 || 0.612 || 48.75 || +0.93 || 4.2 || +4.99%

AT || Austria || 2.75 || +3.25 || 50.46 || +4.51 || 0.556 || 42.4 || +2.78 || 3.18 || +20.24%

BE || Belgium || 2.04 || +0.35 || 59.92 || +3.5 || 0.599 || 58.88 || +1.06 || 2.37 || +10.39%

BG || Bulgaria || 0.57 || +1.06 || 24.65 || +3.4 || 0.234 || 29.45 || +3.65 || -4.78 || n.a.

HR || Croatia || 0.75 || -2.72 || 12.25 || +2.31 || 0.353 || n.a || n.a. || 2.98 || +133.23%

CY || Cyprus || 0.48 || +6.24 || 27.77 || +0.17 || 0.558 || 44.11 || +3.27 || 1.72 || -0.83%

CZ || Czech Republic || 1.84 || +4.23 || 29.9 || +4.58 || 0.497 || 39.58 || +2.91 || 3.82 || +42.62%

DK || Denmark || 3.09 || +4.64 || 77.65 || +3.41 || 0.713 || 54.95 || +1.64 || -2.77 || n.a.

EE || Estonia || 2.38 || +13.31 || 25.85 || +11.7 || 0.450 || 46.48 || +2.94 || -2.7 || n.a.

FI || Finland || 3.78 || +1.12 || 62.91 || +2.71 || 0.698 || 52.17 || +0.49 || 1.69 || +33.50%

FR || France || 2.25 || +1.02 || 48.24 || +3.54 || 0.628 || 57.01 || +0.63 || 4.65 || +1.66%

DE || Germany || 2.84 || +1.28 || 62.78 || +3.88 || 0.813 || 44.94 || +1.04 || 8.54 || -0.70%

EL || Greece || 0.60 || +0.56 || 35.27 || +2.53 || 0.345 || 32.53 || +2.52 || -5.69 || n.a.

HU || Hungary || 1.21 || +4.64 || 31.88 || +2.03 || 0.527 || 50.23 || +1.87 || 5.84 || +9.04%

IE || Ireland || 1.72 || +4.07 || 38.11 || +5.39 || 0.690 || 65.43 || +1.94 || 2.57 || +26.26%

IT || Italy || 1.25 || +1.69 || 43.12 || +3.56 || 0.556 || 35.43 || +1 || 4.96 || +8.13%

LV || Latvia || 0.70 || +4.15 || 11.49 || -0.15 || 0.248 || 34.38 || +3.96 || -5.42 || n.a.

LT || Lithuania || 0.92 || +4.13 || 13.92 || +2.62 || 0.223 || 35.28 || +5.04 || -1.27 || n.a.

LU || Luxembourg || 1.43 || -1.34 || 19.84 || +1.29 || 0.589 || 64.75 || +1.4 || -3.35 || n.a.

MT || Malta || 0.73 || +4.68 || 17.53 || +4.07 || 0.350 || 54.45 || +2.67 || 0.92 || -14.37%

NL || Netherlands || 2.04 || -0.45 || 78.86 || +2.72 || 0.565 || 56.22 || +0.48 || 1.68 || +53.81%

PL || Poland || 0.77 || +1.6 || 20.47 || +4.45 || 0.313 || 31.78 || +1.65 || 0.88 || +37.56%

PT || Portugal || 1.50 || -0.16 || 26.45 || +4.23 || 0.387 || 41.04 || +3.18 || -1.2 || n.a.

RO || Romania || 0.48 || +2.53 || 17.84 || +7.81 || 0.384 || 28.35 || +5.86 || 0.38 || n.a.

SK || Slovakia || 0.68 || +0.41 || 17.73 || +3.85 || 0.479 || 31.64 || +0.07 || 4.35 || +32.26%

SI || Slovenia || 2.47 || +12.46 || 27.47 || +3.99 || 0.521 || 45.9 || +4.25 || 6.05 || +14.72%

ES || Spain || 1.33 || +3.56 || 36.63 || +3.66 || 0.530 || 36.76 || +2.65 || 3.05 || +23.73%

SE || Sweden || 3.37 || -0.96 || 77.2 || +3.58 || 0.652 || 64.6 || +1.41 || 2.02 || -1.97%

UK || United Kingdom || 1.77 || -0.23 || 56.08 || +2.27 || 0.621 || 59.24 || +1.2 || 3.13 || +4.83%

|| || || || || || || || || ||

IS || Iceland || 3.11 || +1.7 || 38.8 || +9.22 || 0.485 || n.a || n.a. || -13.57 || n.a.

IL || Israel || 4.40 || +0.31 || 77.13 || +2.68 || n.a. || n.a || n.a. || 5.42 || +8.62%

NO || Norway || 1.70 || +0.66 || 51.77 || +11.61 || 0.433 || 39.99 || +2.22 || -17.38 || n.a.

CH || Switzerland || 2.87 || +1.9 || 97.59 || +3.42 || 0.837 || 70.05 || +2.11 || 8.44 || +2.69%

TR || Turkey || 0.84 || +5.82 || 13.79 || +2.52 || 0.315 || 18.6 || +0.92 || -2.22 || n.a.

Source: European Commission, DG Research and
Innovation, Economic Analysis Unit (2012)

Notes: 1R&D intensity: EL: 2007; CH:
2008; IS: 2009; IL: 2010. Average annual growth rate is calculated for the
period 2000-2011, or between the latest available data (considering the breaks
in the series for certain countries): CH:2000-2008; DK:2007-2011; EL:2001-2007;
FR:2004-2009; HR:2002-2011; HU, MT:2004-2011; IS:2000-2009; IL, NL,
TR:2000-2010;
PT:2008-2011; SI:2008-2010; SE:2005-2010; NO:2001-2011.

2CZ:
2001-2011; CY,AT: 2004-2011; FI: 2003-2011; NL: 2007-2011; HR, IE, PL, IL:
2008-2010. These countries have
positive values only for the periods mentioned above, the rest of the values
are negatives. For countries with negative values of the HT&MT products'
contribution to the trade balance, in the period 2000-2011, the average annual
growth rate cannot be provided. The EU value is the weighted average of the
values for the Member States.

At EU level,
growing investment in R&D has had a positive impact on S&T, structural
change and competitiveness. The most successful Member States have managed to
increase the scientific quality and economic impact of their science through
innovation, while others still face efficiency problems or problems related to
the inadequate impact of public investment.

EU Member States
and associated countries have launched ambitious policy reforms with the aim of
making their R&I systems more efficient and more effective in line
with the objectives of the European Research Area.[5] Many of these reforms were
initiated before the economic crisis, but have since been extended and
deepened.

The economic
crisis has shown that there is a need for stronger integration of research and
innovation in broader industrial and macro-economic policies. New innovation
bills have been launched in several countries and many countries are linking
innovation to broader reform packages on entrepreneurship, the business
environment and the labour market. Most Member States have designed or
implemented legislative changes increasing the autonomy
of universities. Others have introduced new employment conditions for public
sector researchers that allow them to work with the private sector and
commercialise their scientific and technological findings. Efficiency is being
promoted through a better balance between institutional and project-based
funding and a general move towards competitive funding. Performance-based
institutional funding is being linked to scientific excellence,
internationalisation, and collaboration with business on science and technology.

However, there
is still room for improvement. Only a handful of countries have put in place
effective mechanisms for allocating funding that give strong incentives to
excellence, while such reforms are clearly having an impact on the efficiency
of the public R&I systems of these countries. Institutional block funding
for universities and public research organisations is often allocated without reference
to any performance criteria, and when criteria are used they do not always
cover key features such as cooperation with industry or dissemination of
results. Individual research actors may still have limited incentives to engage
in Europe-wide networking or competition if financial returns are absorbed by
the funding institutions. Institutions have limited incentives to strive for
excellence or to cooperate with private sector actors when neither their
institutional funding nor the evaluation of their work is linked to the results
achieved. Equally worrying is the fact that, despite progress in student
mobility, too few universities and public research organisations recruit
foreign professors or recognise the international professional experience
gained by their staff.

In these times
of crisis and reduced funding, strategic priority setting and the
establishment of technology profiles are gaining increased attention. Most
Member States, including the larger ones, are engaged in the strategic priority
setting of specific science and technology profiles. They use a combination of
criteria for their choices: dialogue with industry on their needs for new
knowledge and technologies, dialogue with stakeholders on major societal
challenges in the country and beyond, and efforts to streamline the national
priorities with thematic priorities at the EU level, in particular the FP7 and
the upcoming Horizon 2020. In most Member States, it is the national government
that leads the dialogue on strategic priority setting. In some countries the
private sector takes the lead while in others regions or public research
organisations are responsible for their own priority setting in dialogue with
industry.

The approach to
priority setting can often be substantially improved. In several Member States
there are glaring inconsistencies between scientific specialisation and
technological specialisation, indicating both a mismatch and an insufficiency
of collaboration between the public and the private sectors. Other Member
States are facing the need to diversify and to develop specialised human
resources and technology for new industries. Such changes have come about
following major changes in global value chains that have affected domestic
employment in multinational firms. And while the number of graduates in science
and engineering has gone up considerably over the last decade, gaps remain in
some knowledge-intensive economies that are faced with the gradual retirement
of large numbers of researchers and engineers. Many higher education
institutions are revising their courses and curricula to ensure that the qualifications
and skills of future professionals are better suited to labour market needs, in
particular to the needs of growing industries in areas addressing societal
challenges such as health, clean energy and environment.

2. The
need for continuous investment in knowledge

The EU still
lags behind the United States and Japan in overall R&D intensity; China is rapidly catching up. The EU has set an R&D intensity target of 3 % for
2020, which is below the Japanese target of 4 % but in line with those of
the United States and China. The funding allocated to research and innovation
in the EU Framework Programme for Research and EU Structural Funds has
increased substantially since 2000, and further increases are expected for the
period 2014-2020. However, efforts are also needed at Member State level to achieve national R&D intensity objectives, despite the economic crisis.

Figure: R&D Intensity trends and
targets

Since the onset of
the current crisis, many Member States and associated countries have been
engaged in smart fiscal consolidation that prioritises investment in
R&I. Public and private investment in R&D increased up to the start of economic
crisis. When, in 2008 or 2009, depending on the country, the impact of the crisis
started to be felt in public funding, some governments chose to implement a
countercyclical strategy, keeping up investment in R&D and incentivising
the private sector to follow suit. In fact, most Member States have maintained
or increased their investment in R&D despite fiscal constraints. In many
Member States this strategy has worked well, in particular in countries where
the private sector is knowledge-intensive and internationally competitive.
These countries were affected by the crisis for a shorter period of time and
have staged a stronger economic rebound.

However, in a
few countries the countercyclical strategy did not sufficiently stimulate
private investments to generate a rebound. This occurred mainly in those
countries where the economy suffered persistent liquidity constraints combined
with lower demand for knowledge by business. Unfortunately, the latest
information collected from the Member States shows that the number of countries
maintaining or increasing their efforts in R&D investment is falling. The
importance of staying at the forefront and engaging in smart fiscal
consolidation must therefore be emphasised now that some countries might be
tempted to lower the priority they give to public investment in knowledge
creation.

With increasing
fiscal constraints and cuts in national research budgets, in particular in the
most crisis-affected Member States, the relative importance of EU funding for
research and innovation is increasing. Before the crisis, EU funding
represented more than 20 % of project-based funding in Europe, and this
has increased since then thanks to higher annual budgets in the Seventh
Framework Programme for Research and Technological Development (FP7). The
increased budgets for research, innovation and entrepreneurship in the
Structural Funds for 2014-2020 and in the upcoming Horizon 2020 are likely to
boost this innovation-triggering effect further. This impact is enhanced by the
fact that in the 2011-2012 period a larger number of Member States revised how
they implement their Structural Funds in order to better incentivise R&I
investment by the private sector.

Overall, European
enterprises have slightly increased their investments in R&D as a share
of GDP since 2008. They also expect to increase their investment in R&D
globally by an annual average of 4 % over the period 2012 – 2014. However,
there are large differences between Member States and between industrial
sectors and actors. Some countries are suffering cuts in R&D investment by
the private sector, in particular by SMEs. Larger international corporations
tend to increase their level of investment but not necessarily in their country
of origin, confronting innovation leaders with the challenge of knowledge
specialisation and cluster building on a global scale. As regards sectors, many
countries have seen an increase in R&D intensity in more traditional
medium-tech industries (metals, rubber and plastics, food products) and in
growing markets that are influenced by societal challenges such as waste treatment
and the need for clean energy and water.

3. The
need for structural change towards a more knowledge-intensive economy

Europe needs to restructure its economy to be more flexible and better
adapted to the multi-polar economy that is emerging from the crisis. This
requires Europe to adapt to broad societal challenges and to position itself vis-à-vis
new technological models and new growth markets. In other words, we need to
increase our capacity to channel knowledge, creativity and technology into
innovative, internationally competitive products and services that respond to
societal needs.

Overall, the
European economy has a lower level of knowledge intensity than the economy of
the United States, although it is catching up slightly. As in the United States, the proportion of manufacturing sectors in the overall economy has decreased
(leftward move in the graph), with the exception of the construction sector
before the bursting of the property bubble in 2008. In the period 1995-2008,
the EU did achieve a slight R&D-driven upgrade in many manufacturing
sectors, including the more strategic high-tech and medium-high-tech sectors
(in red). However, momentum was lost in important sectors such as electricity
and water, electrical machinery, and office, accounting and computing
machinery.

Figure:
Structural change in the EU manufacturing

The United States is encountering similar structural
challenges to the EU with relatively modest knowledge-driven structural changes,
a reduction in the economic weight of the manufacturing industry and a dominant
construction sector. In fact, the way in which the manufacturing sectors in the
two blocs evolved over the 13-year period before the economic crisis is
surprisingly similar. The trend was different in only a few sectors. In the EU,
the motor vehicle, pulp and paper, and rubber and plastics sectors have
upgraded more than in the United States, while the United States economy has seen
more of an upgrade in ICT and health-related sectors such as office, accounting
and computing machinery, medical precision and optical instruments and the
larger radio, TV and communication equipment sector.

Figure: Structural change in the US manufacturing

Each individual
country profile tells a different story as regards industrial upgrading and
structural change. However, one striking finding in this country-based report
is that Europe’s economic landscape is developing much more than commonly
perceived. The challenge is to develop strategies and policies to guide this
change in a direction that will create good quality and sustainable jobs over
time and across Europe.

Some countries
have achieved a knowledge upgrade in traditional sectors such as wood, basic
metals and textiles. R&D intensity in the high-tech and medium-high-tech
sectors has not increased in all countries, although it has done in the most
dynamic countries of the last decade. There are also interesting trends of new
(or renewed) industries growing in value added and in knowledge intensity. This
has been the case primarily in the recycling, electrical machinery and
publishing and printing industries. The construction sector has been dominant
in most European countries and the level of R&D intensity in that sector went
up in many of these countries (albeit from relatively low levels) in the period
up to the economic crisis.

Member States
with the highest performing research and innovation systems, backed up by
considerable and growing investment, have not only high but increasing levels
of knowledge intensity in their economies (see also the previous overview table
on R&I performance). However, some of these countries are being tested by
the speed of economic globalisation and their competitiveness is falling in
relation to high-tech and medium-tech goods. This illustrates that there is no
guarantee that currently held competitive advantages will last. For this
reason, even the best performing Member States may need to pursue an ambitious
policy to increase their R&D intensity further and to improve even more the
effectiveness of their R&I systems.

The country
profiles also illustrate the catching-up process that has taken place
over the last decade. Countries in eastern and southern Europe have in general
a lower knowledge-intensity in their economies, but they have almost all
managed to work towards structural change, as is evidenced by rising levels of international
competitiveness in high-tech and medium-tech goods. The few exceptions are
correlated with very low R&D intensities and mediocre performance in
science and technology.

Innovation-driven
structural change must be analysed at sector and
industry level and linked to strategic technological capacity and to areas
where there is growing global demand. Adapting the dynamics of business and
innovation to growing markets in the post-crisis period will have an impact on
technological development, given the crucial role of technologies in both
product and process innovation. Incremental innovation is likely to happen
inside each area of technology. However, more radical innovation can be
expected when different technologies converge, for example in the area of clean
energy technologies, renewables as strategic raw materials, technologies
addressing water scarcity, mobility technologies and ICT for sustainable and
smart cities. There is thus a strong need to review policies and framework
conditions to ensure that they are oriented to these types of technologies and the
ways in which they converge.

Historically,
Europe has been strong in systemic transition technologies while conceding ground
in pervasive technologies to the United States and the rising East Asian
economies. However, the economic crisis has had a strong mobilisation effect on
the United States and China with regard to several systemic transition
technologies, in particular renewable energy, environmental and new material
technologies. The EU’s share of world PCT patents in green energy and
environmental technologies is decreasing while the shares of both the United States and the Asian economies are increasing and are now higher than that of the
EU. China is accelerating the wide deployment of several of these technologies.
The EU has not adapted its technological specialisation to these growing global
markets and remains focused on traditional European industries such as food and
agriculture, construction and automobiles. Only a few
EU Member States, mainly in western and northern Europe, have large-scale and
visible scientific and technological capacity in areas such as health, new
materials, energy, environment, ICT and biotechnologies.

European
countries and countries outside of Europe have strong international and
regional dimensions to their R&I systems and their industries are part of
global value chains. EU policies and instruments (for both supply and demand)
increasingly influence the national R&I systems of Member States. At the
same time, Structural Funds for research, innovation and entrepreneurship
reinforce the regional dimension by building regional capacity and boosting
diversification. Smart specialisation in science and technology opens up
new possibilities for intra-European knowledge flows and trade in related areas
and industries and would support economic convergence between EU Member States
and regions.

Several Member States
have set up cluster policies and in many cases promoted the development of
science and technology parks or clusters. Clusters are found in the automobile,
food, biotechnology, energy, and ICT sectors, among others. However, there have
been only very few cases of the emergence of real innovation-driven clusters
in Europe. And so far, no European cluster has had a transformation impact as
effective as that of Silicon Valley. At the European level, more can be done
both to agglomerate clusters and to enhance knowledge flows between related
clusters located in different European countries, thus enhancing dispersion of knowledge
in the single market. As in the United States, the most dynamic clusters in
Europe are geographically concentrated, with the main concentrations located in
central and northern Europe. However, related clusters do exist in other
locations, providing opportunities for structural change through technology
flows, absorption and adaptation in new European industry.

The following
country profiles provide verified information in a structured way that will
help guide countries in pursuing ambitious strategies in R&I, integrating
reforms, and making changes to investment policies and structures.

Austria

The
challenge of further enhancing the innovation base of a knowledge-intensive
economy

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Austria. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 2.75%              (EU: 2.03%; US: 2.75%) 2000-2011: +3.25%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 50.46                 (EU:47.86;    US: 56.68) 2005-2010: +4.51%    (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.556              (EU: 0.612) || Knowledge-intensity of the economy 2010: 42.4                   (EU:48.75;     US: 56.25) 2000-2010: +2.78%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Energy, Environment, Transport technology                || HT + MT contribution to the trade balance 2011: 3.18%                (EU: 4.2%;     US: 1.93%) 2000-2011: +20.24%   (EU: +4.99%; US:-10.75%)

Austria has expanded its research and innovation
system over the last decade with investments in research and innovation growing
more quickly than the EU average. These efforts have been translated into a
high and growing level of excellence in science and technology and clear
strengths in key technologies for energy, environment and transport. The Austrian economy is characterised by
specialised niche players, which are in constant need of innovation, in
particular technological innovation, in order to remain leaders in their market
segment. The level of innovation in Austrian firms is
hence relatively high. Overall, according to several indicators on trade, firm
innovations and patent revenues from abroad, the Austrian economy is, partly
for structural reasons, less knowledge-intensive than many other EU Member
States. However, the indexes on structural change and on the trade balance both
point towards an upgrading of knowledge-intensity and linked to that an
increase of competitiveness.

Nevertheless, the efforts to boost
research need to be maintained, given the specialisation of the Austrian
economy in a limited number of knowledge-intensive sectors where international
competition is strong. This includes for example transport technology,
biotechnology and the energy sector. The economic crisis has hit Austria less than other Member States and the unemployment rate is currently the lowest in
the EU. To maintain its competitiveness and hence its favourable economic
position, Austria is depending on an on-going high rate of innovation.

Austria's research and innovation policies are
addressing these challenges by means of educational reform, improved governance
of the R&D sector, by establishing new research centres of excellence, by setting
up a more effective system of public research funding and more generally by
promoting a further increase in the already high level of public and private
investment in R&D.

Investing in knowledge

Austria has set a national R&D intensity
target of 3.76%, one percentage point above the performance in 2011 and the
third highest national target among EU Member States. In the past decade,
R&D intensity in Austria has progressed faster than the EU average -
reaching 2.75% in 2011. Overall, Austria is almost on track to achieve its
national R&D intensity target, if the recent slowdown in R&D investment
growth can be overcome.

Public spending on R&D as a % of GDP has
shown a clear upward trend in Austria since 2002 and increased also during and
after the recession of 2009, despite budgetary constraints.  Also business
R&D as a % of GDP has expanded strongly in the last decade and is now among
the highest in Europe. However, in recent years, progress in private spending
has decelerated, with a stagnation in the share of GDP and no increase in
absolute spending in real terms during the recession of 2009 and only a
moderate increase in 2011.

Austrian research and innovation are also
benefitting from support from the EU budget, via co-funding for private and
public R&D investment as well as other innovation, training and
entrepreneurial activities. Main instruments are the Structural Funds and the 7th
Framework Programme for Research. For the ERDF programme period 2007-2013,
nearly € 500 million has been allocated from the EU budget to activities
related to research, innovation and entrepreneurship in Austrian regions
(corresponding to over 70% of the ERDF resources allocated to Austria). Austria still has scope to increase its funding of R&D from the 7th
Framework Programme. The success rate of Austrian applicants is 21.7%, slightly
lower than the EU average success rate of 22%. Up to mid-2012, over 2000
Austrian participants had been partners in a FP 7 project, with a total EU
financial contribution of € 710 million.

An effective
research and innovation system building on the European Research Area

The graph below illustrates the strengths and
weaknesses of the Austrian R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The graph shows that the Austrian R&I system is
balanced, with a good performance in all areas: human resources, scientific
production, technology development and innovation. Progress has in general also
been good. However, some warning signals come from falling innovation in SMEs
and declining shares of R&D investments by foreign firms.

In the field of human resources for research and
innovation, Austria performs at or above EU average and progress has been good
since 2000. Tertiary attainment has been traditionally low in Austria, with many graduates classified as post-secondary, non-tertiary (ISCED 4), but a
relatively high share of Austrian students study science and technology
subjects and an above average proportion of them graduate at the doctoral
level. Despite a strong inflow of foreign students, notably from Germany, Austria still has a lower share of foreign doctoral students than comparable countries.
Highly-skilled graduates are relatively well absorbed into the Austrian
economy, as evidenced by the relatively high number of business enterprise
researchers and, linked to that, the good performance of Austria in the field of patent applications. Austria does not significantly outperform the
EU average in high-quality scientific publications, nor in success in
international competitions for EU Framework programme funds to R&D. There
is a high share of Austrian universities
among the good performers in major international rankings, but Austrian
universities are not well represented at the very top of such rankings. Austria has improved public-private cooperation considerably in the past, both
in scientific production and in contract research by business enterprises
cooperating with public research organisations and now performs above the EU
average in this field. Austria also performs well as regards innovation in SMEs.

Austria's scientific and technological strengths

The maps below illustrate several key science and
technology areas where Austrian regions have real strengths in a European
perspective. The maps are based on the number of scientific publications and
patents produced by authors and inventors based in the regions.

Strengths in science and technology at European level

Scientific
production                                               Energy                       
Technological production

Scientific production          Construction and
construction technologies         Technological production

Scientific production                                     Environment                              
 Technological production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific production                                  Automobiles                              
Technological production

Scientific production          Other transport
technologies                  Technological production

Scientific production          New production
technology Technological production

As shown by the maps above, in terms of
scientific production, only a few Austrian regions perform at high output levels
and the number of high performance sectors, specifically environment, food and
agriculture and information and communication technologies (the latter two not
illustrated on the maps), is limited. This is partly due to the relatively
small size of Austrian regions - the average population of an Austrian NUTS 2
region is less than half the EU NUTS 2 average. Leading regions (Länder) in Austria in terms of scientific production in these fields are Steiermark (Styria) and Vienna.

In terms of technology patenting, which is more
closely linked to business innovation, the relative position of Austria is much better than in scientific production, with many Austrian regions among the top
quarter in Europe, notably in the fields of energy, construction and construction
technologies, environment, automobiles and other transport technologies and in
new production technology. This reflects economic structures and the areas
where Austrian enterprises are innovative and have a strong market position. The comparison between scientific output in terms of
publications and patenting thus shows a certain imbalance, since the strong
fields for the Austrian science base are not necessarily the same as the
sectors where Austrian firms have the strongest technology development.
Moreover, Austria's performance in terms of scientific output is relatively low
compared to the EU average and is concentrated in specific fields and regions,
whereas in relation to patenting there is good performance over many fields and
regions. It will be a challenge for the future to bring scientific output in Austria to the same level as patenting, and also to ensure the long term sustainability of
innovation.

Policies and reforms for research and innovation

Austria formulates R&D policies from a relatively
favourable position in terms of overall R&D intensity. While research is
among the priority areas in public spending, the share of private sector expenditure
on R&D in total R&D expenditure has fallen from 71 % in 2007
to 68 % in 2011, thus putting at risk the achievement of the ambitious Europe
2020 R&D intensity target of 3.76 %. Among the factors explaining the
recent low growth in private spending are the economic crisis and a shortage of
venture capital. However, the government has taken steps to stimulate
additional private sector spending on R&D. Between August and November 2011
on the initiative of the Austrian Ministry for Transport, Innovation and
Technology (bmvit) 22 of the larger Austrian companies, representing more than
one fifth of business enterprise research spending in Austria, have committed
themselves to increase R&D spending by 20% by 2015.

The Austrian RTDI Strategy ‘Becoming an
innovation leader’, which was published in 2011, contains many initiatives to
improve the performance of the research and innovation system. These include
initiatives to strengthen the links to the education system, to increase the
share of tertiary graduates, to promote high quality research infrastructure
and fundamental research and to use public procurement to promote innovation.

The Austrian government has set up a Task
Force for the implementation of the RTDI strategy. The initiatives of the RTDI
Strategy are echoed and enhanced in the 2012 National Reform Programme and the
Euro Plus Pact commitments. The most prominent measure is the simplification of
the tax regime for R&D activities to a single tax credit raised from 8 % to
10 %. In addition, the cap on the amount which could be subcontracted while remaining
eligible for tax credit rises from € 0.1 million  to € 1 million. These
measures are budget neutral and are expected to encourage subcontracting to
research centres and universities. On the other hand, this approach favours
established activities more than the breakthrough research needed for an
economy like Austria's. Moreover, whereas the National Reform Programme of 2012
lists numerous initiatives in the field of research and innovation, it still lacks
clear prioritisation and details of players and budgets and implementation
timetables and it does not address the need for a closer integration of the Austrian R&I
system within the European Research Area.

As regards sustainability of economic activities,
which plays an important role in the acceptance of innovation by the public and
which in itself can be a source of innovation, the National Energy Strategy
from 2010 aims at increasing efficiency, energy security and the share of
renewables. Funding is available for the greening of industries and an action
plan was set up in October 2010 for Green Public Procurement. In 2011 a
strategy paper to promote electrical mobility was prepared and in 2012 a
resource efficiency action plan (REAP) was adopted.

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[6].

Overall, Austria's employment is slightly more oriented
towards knowledge-intensive sectors than the EU average. Austria's scores on
the indicators "PCT patents application per billion GDP" and
"Contribution of medium and high-tech products exports to trade balance"
is also above EU average, reflecting the very good innovation performance of its
manufacturing sector. Austria's low score on the summary index is strongly
influenced by a very low score on the indicator "Knowledge-intensive
services export as % of total services exports", which is explained by
the dominance in its services export of the tourist sector, which is classified
as non-knowledge-intensive.

The recent economic crisis has been less severe on Austria than on other EU Member States with the result that the conditions for innovation have faced
fewer challenges in Austria than in most other EU countries, although the
availability of business financing has decreased in 2009. In 2010, according to
enterprise surveys[7]
Austria was among the middle performers in the EU as regards the ease of
access to loans and the availability of venture capital. Austria currently also ranks in the middle group of EU member states in the World Bank's
index Ease of doing business. However, Austria ranks low regarding the
time needed to start a business, since the number of administrative procedures
required for setting up a business is still relatively high. There are on-going
efforts to reduce the administrative burden on enterprises.

Expenditure on R&D is high by European
standards, but Austria may not be sufficiently exploiting and maintaining its
innovative potential. One reason for this is an underdeveloped venture capital
market (venture capital represented 0.04% of GDP in Austria in 2011 compared to
an EU average of 0.35%), which suffers from an unfavourable legal framework and
from structural and other problems of the Austrian VC market (e.g. small size
and limited differentiation, general reluctance to invest in early stages,
uncertainty concerning the treatment of non-incorporated companies as VC funds
etc). In addition, the education system faces the challenge of providing the
skills required as a basis for innovation and competitiveness, but the low
tertiary attainment rate and the general demographic development might lead to
a scarcity of skilled people in the long term.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of manufacturing
in the overall economy. The sectors above the x-axis are sectors whose research
intensity has increased over time. The size of the bubble represents the share
of the sector (in value added) in manufacturing (for all sectors presented in
the graph). The red-coloured sectors are high-tech or medium-high-tech sectors.

Austria is one of the EU countries having a high
contribution of manufacturing industry to total value added (around 19%
compared to an EU average of 16%). In parallel, Austrian manufacturing industry
has clearly increased its knowledge-intensity in high- and medium-high-tech
sectors as well as in the medium-low and low-tech sectors (with the notable
exception of chemicals, other transport equipment and the electricity, gas and
water sector).

As in many other European countries, one
of the largest sectors in the economy is the construction sector, but unlike
other EU countries, the construction sector did not increase its share of the
economy in the years leading up to the economic crisis, while its research
intensity improved slightly. Research intensity has mostly increased in
high-tech and medium-high-tech sectors, with in most cases positive results
when it comes to value added. However, despite an increase in research intensity,
the manufacturing of radio, TV and communication equipment has declined in
importance, partly as a result of a reclassification of the activities of a
large Austrian manufacturing firm, which was until 2006 attributed to this
sector and probably also due to a shift of production to low wage countries.
The chemicals and chemical products sector, on the other hand, has increased in
economic importance despite a decline in research intensity. As regards
electrical machinery and medical, precision and optical instruments an increase
in research intensity has been accompanied in Austria by a growth in value
added.

Competitiveness
in reaping income of global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these products.

The Austrian economy is characterised by a
relatively small contribution of agriculture to GDP and a comparatively high
share of manufacturing industry in total value added. The service sector,
including a relatively large tourism sector, also has an above EU average share
of the economy. The strongest growth in value added over time tends to occur in
the service sector.

As shown by the graph above, Austria succeeded in improving its trade balance for most of its high-tech and medium-tech
products over the period 2000-2011. A limited number of medium-tech products
showed a stagnation or slight decline in their contribution to the trade
balance. On the other hand, the trade balance improved significantly in the
electrical machinery, apparatus and appliances sector – the high-tech sector,
where R&D intensity has increased most over the last decade .

Overall Austria has improved its total factor
productivity faster than the EU average over the last decade, a sign of
innovation in line with the balanced and expanding R&I system and the
upgrading of its manufacturing sector. Progress has also been made in
technologies addressing societal challenges such as health and the environment
and on all of the Europe 2020 targets. However, compared to other EU Member
States, Austria shows a relatively low tertiary education attainment rate.
Furthermore, this rate is progressing only slowly. The picture improves if
post-secondary, non-tertiary education (ISCED 4), which Austria considers equivalent to tertiary education, is included. Furthermore, the high
employment rate and the low rate of early leavers from education and training
show that Austria makes good use of its human capital.

Table on key indicators

Belgium

The challenge of fostering innovation-based
competitiveness through the business economy

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Belgium. They relate knowledge investment
and input to performance or economic output throughout the innovation cycle.
They show thematic strengths in key technologies and also the high-tech and
medium-tech contribution to the trade balance. The table includes a new index
on excellence in science and technology which takes into consideration the
quality of scientific production as well as technological development. The
indicator on knowledge-intensity of the economy is an index on structural
change that focuses on the sectoral composition and specialisation of the
economy and shows the evolution of the weight of knowledge-intensive sectors
and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 2.04%               (EU: 2.03%; US: 2.75%) 2000-2011: +0.35%  (EU: +0.8%;  US: +0.2%) || Excellence in S&T 2010:59.92                 (EU:47.86;   US: 56.68) 2005-2010: +3.5%    (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.599              (EU: 0.612) || Knowledge-intensity of the economy 2010:58.88                  (EU:48.75;     US: 56.25) 2000-2010: +1.06%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Food and agriculture, ICT, nanotechnologies, new materials, biotechnology, environment               || HT + MT contribution to the trade balance 2011: 2.37%                (EU: 4.2%;     US: 1.93%) 2000-2011: +10.39%  (EU: +4.99%; US:-10.75%)

Belgium has a very high quality research system, as reflected by its third
highest score among all EU Member States on the S&T Excellence index. Belgium has been able to exploit this strength to its economic advantage in several
sectors. A particularly good performance is visible in the bio-pharmaceutical
sector, where high scientific quality, business investment, product innovation
and trade performance reinforce each other. Moreover, several service sectors,
such as computer-related and other business services, strongly contribute in Belgium to a structural change towards a more knowledge-intensive economy, notably through
the growth of innovative firms.

However, despite these very positive sectoral
dynamics, Belgian R&D intensity stagnated in the period 2000-2011 and there
was even a decline in business expenditure on R&D, especially between 2001
and 2005.  This is due to a de-industrialisation trend, which has notably
affected several high-tech and medium- high-tech manufacturing sectors. The
de-industrialisation trend has been accompanied by a rapid deterioration of the
Belgian trade balance since 2002, showing that the strengths of the services
and of the bio-pharmaceutical sectors cannot alone support the competitiveness
of Belgium.

There is a consensus in Belgium about the critical
importance of fostering the innovation-based competiveness of Belgian
businesses. This has been reflected in the development of sophisticated and
comprehensive policy mixes at national and regional levels and in significant
budgetary efforts in favour of R&D from all political entities, especially
between 2005 and 2009. At federal level, fiscal incentives for R&D are an
important tool. In the Walloon Region the focus has been on supporting a
limited number of competitiveness poles (a cluster approach). In the Flemish
Region, the willingness to address through innovation some specific societal
challenges is a main driver of research and innovation policy. In the Brussels
Capital Region, an updated innovation strategy including a ‘smart
specialisation’ approach has been launched in 2012.

Investing in knowledge

Belgium is not on track to reach its R&D intensity target for 2020 of 3%.
After a peak in 2001 at 2.07%, Belgian R&D intensity decreased to 1.83% in
2005. This decrease was due to a fall in business R&D intensity (from 1.51%
in 2001 to 1.24% in 2005). Business R&D intensity partially recovered in
2006-2008, up to 1.34%, and in 2011 slightly increased further, up to 1.37%,
but this remains still well below its 2001 peak. However, thanks to an increase
in public R&D intensity since 2000 (public R&D intensity was 0.52% in
2000, 0.55% in 2007 and 0.65% in 2011), overall R&D intensity in 2008-2011
was again close to its 2001 peak. Since 2010, public investment in R&D has
been stable and a 5% increase is expected for 2013. However, the growing role
of fiscal incentives must be stressed. If coupled with a reorientation of
business investment in Belgium, this may foster R&D business intensity and
hence help Belgium to improve its trend to meet the headline target.

The decrease in business R&D intensity during the
last decade is linked to a strong reduction of R&D activities in Belgium in two industry sectors: radio, TV and communication equipment, and chemicals and
chemical products (excluding pharmaceuticals). In 2000, radio, TV and communication
equipment (18%), chemicals and chemical products (excluding pharmaceuticals)
(17%) and pharmaceuticals (16%) accounted for slightly more than half of
Belgian business R&D expenditure (BERD). Since then, these three sectors
have experienced diverging trends. While pharmaceuticals-related R&D
expenditure has more than doubled, representing 28% of total Belgian business
R&D expenditure in 2009, the R&D expenditure of the two other sectors
has declined. R&D expenditure decreased by 8% in the case of chemicals and
chemical products (excluding pharmaceuticals) and by 62% in the case of radio,
TV and communication equipment, reducing their shares in BERD in 2009 to
respectively 11% and 5%. The service sector "Computer and related
activities" has on the contrary become increasingly important, accounting
for 8% of BERD in 2009, compared to 4% in 2000.

Belgium has been very successful in the EU Framework Programme. Up to early
2012, slightly over 3350 Belgian participants had been partners in an FP7
project (a success rate of 24%), with a total EC financial contribution of €
1.0 billion. Regarding the other main source of EU funding, the FEDER Regional
Funds, in the programming period 2007-2013, a total of € 643 million (31.2% of
the total FEDER fund to Belgium) was allocated to research, innovation and
entrepreneurship in the Belgian regions.

An effective research and innovation system building
on the European Research Area

The graph below illustrates the strengths and
weaknesses of Belgium's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The
overall shape of the graph highlights the strong performance of the Belgian
research and innovation system. Belgium scores higher than the EU average for
the vast majority of the indicators. In particular, Belgium has a high quality
public research and higher education system, characterised by a strong
international openness. The quality of the Belgian research system is evidenced
by the high share of its scientific publications within the top 10% most cited
scientific publications worldwide[8],
the strong position of Belgium in the context of the EU R&D Framework
Programmes, as well as its attractiveness for foreign doctoral students[9]. Its international openness is
further evidenced by the highest "Collaboration Index"[10] of all the EU Member States
(1.33). Belgium also performs well above the EU average for the two indicators
on cooperation between public research institutions and firms (co-publications
and business funding of public R&D), confirming the quality of the public
scientific and technological base and highlighting its relevance for
businesses.

As shown on the graph, a weak point of the Belgian
research system is a share of science and engineering graduates in the
population aged 25-34 that is lower than the EU average. Combined with the
overall ageing demographic in Belgium, this raises the question of how Belgium will be able to assure for the future the pool of highly skilled human resources
necessary to keep an innovation-based economy running. However, the share of
S&E graduates has rapidly increased in recent years.

Belgium’s scientific and technological strengths

The maps below illustrate six key science and
technology areas where Belgium has real strengths in a European context. The
maps are based on the number of scientific publications and patents produced by
authors and inventors based in the regions.

Strengths in science and technology at European level

Scientific
production                      Food, agriculture and fisheries        Technological
production

Scientific production       
Information and Communication Technologies         Technological production

Scientific production                  
Nanosciences and Nanotechnologies        Technological production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific
production                                           Materials                      Technological
production

Scientific
production                                
Biotechnology                                    Technological production

Scientific
production                               
Environment                                     Technological production

The maps in the left column above show a
high volume of scientific production in some Belgian provinces in food,
agriculture and fisheries, ICT, nanoscience and nanotechnologies,
biotechnology, and environmental science and technologies. It is mainly in the
provinces of Flemish Brabant and Eastern Flanders that these high volumes of
scientific production are visible on the maps, reflecting the presence in these
provinces of the two largest Belgian universities: Leuven and Ghent. In all the
fields mentioned above, Belgium also displays high scientific excellence (based
on citations, with Average Relative Citations above 1.35 and a share of
scientific publications within the 10% most-cited above 13%), with the notable
exception of nanoscience and nanotechologies. Other fields where Belgian
scientific production is excellent include science related to materials, new
production technologies, construction, other transport technologies, and
security. The number of scientific publications has been increasing very
rapidly in the case of construction technologies.

Maps on the right side show high volumes of patenting
in all six fields in the vast majority of Belgian provinces, revealing clear
synergies between scientific strengths and technological innovativeness. In
most of those fields, both Flemish and Walloon provinces exhibit high volumes
of patenting. The maps show that in these key technological fields nearly the
whole of Belgium is part of a transnational knowledge-intensive macro-region
which includes also parts of the Netherlands and parts of Germany. Based on patenting activities, Belgium is the most specialized EU Member State in
materials and the second most specialised (after Denmark) in biotechnology.
Construction is also a strong technological specialisation area for Belgium. Biotechnology is the area with the strongest growth of patenting activities
since 2000.

Policies and reforms for research and innovation

In Belgium, policies and funding for research and
innovation are mainly in the hands of the Regions and the Communities, but the
federal authorities still play an important role in some specific areas (e.g.
space) as well as through fiscal instruments. The existing consensus in Belgian
political circles about the importance of research and innovation as a key
source of economic growth, has led to significant budgetary efforts from all
political entities. Between 2000 and 2010, government budget appropriations for
research and development (GBAORD) increased by 37% in real terms. This growth
was notably driven by strong increases since 2000 in the Flemish budget for
R&D (which represents about half of GBAORD). The Walloon budget for R&D
has also strongly increased since the launch of the Walloon "Marshall
Plan" in 2005. The growth of public funding of R&D since 2000
reinforced proportionally all R&D performing sectors: between 2000 and
2009, public funding of R&D performed by higher education increased by 60%,
public funding of R&D performed by other public research organisations
increased by 42% and public funding of R&D performed by businesses
increased by 45%. Moreover, in recent years the federal government has
developed powerful R&D tax incentives (in particular a 75%[11] payroll tax exemption for
researchers), leading to a situation where foregone revenues due to R&D tax
incentives are almost equivalent to the amount of direct public funding of
business R&D. Taking into account both forms of support, public support for
business R&D represents in Belgium a higher share of GDP (0.17%) than in
most other EU Member States.

After slight decreases in 2009/2010, GBAORD
has been stable in 2011/2012 and may grow again in 2013, taking into account
the decision by the Flemish government to increase its R&I budget by at
least € 200 million between 2011 and 2014 and the willingness of the other
entities to preserve the allocations for R&D despite difficult budgetary
situations.

The way public funding of research is
organised contributes both the quality and the openness of the Belgian research
system. Firstly, about half of public funding is allocated through
project-based competition (this is one of the highest rates in the EU),
secondly, 12% of public funding is transnationally coordinated (this is the
highest share among the MS for which information is available), in particular
through participation in Europe-wide actions such as ESA, Article 185
initiatives, Joint Technology Initiatives with national funding, and ERA-NET's
joint calls[12].

All Belgian regions have developed strategic
innovation approaches covering all major aspects of a successful innovation
strategy. In the Walloon Region the focus has been on supporting a limited
number of competitiveness poles (a cluster approach); in 2011,
€ 125 million was allocated to the R&D projects of
competitiveness poles under the "Marshall 2.Green" plan. New
approaches have been developed under the so-called 'Creative Wallonia' Plan as
in the field of support to market take-up for new products and services
(technologically based or not) and the promotion of cultural and creative
industries. In the Flemish Region, the willingness to address through
innovation major economic and societal challenges is a main driver of research
and innovation policy. Flanders also has a policy of developing strategic
research centres able to provide high quality service to businesses[13]. In 2011, the competence poles
for industrial design, logistics, materials research and mobility have been
extended and a new competence pole for sustainable chemistry has been created.
A particular investment fund (TINA fund) with € 200 million at its
disposal has been set up in order to help reform the Flemish economy through
innovation. In the Brussels Capital Region, an updated innovation strategy,
including a ‘smart specialisation’ approach, has been launched in 2012. To
improve innovation financing, the Region created a fund to support young
innovative companies (Brustart).

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[14].

Belgium's score on this index is comparable to the average scores of the EU
and of the reference group of countries. However, Belgium's score results from
different situation in each indicator composing the index.

On the positive side, knowledge-intensive
sectors provide more jobs in Belgium than (on average and proportionally) in
other Member States. Moreover, thanks to excellent trade performance in a range
of research-intensive products, the contribution of medium and high-tech
product exports to the Belgian trade balance has strongly increased in the last
decade.

On the negative side, Belgium's score is lower than EU average on the indicators “Share of knowledge-intensive
exports in services exports” and “Sales of new to market and new to firm
innovations as % of turnover”. However, the low score of Belgium on the indicator “Share of knowledge-intensive exports in services exports” is
largely explained by high volumes of export in some logistics, transport and
trade related services which are linked to the geographical intermediation role
of Belgium and which are classified as non-knowledge-intensive. Moreover, the
low score of Belgium on the indicator “Sales of new to market and new to
firm innovations as % of turnover” is explained by the fact that Belgium is strongly specialised in sectors with long innovation cycle as pharmaceuticals or
chemicals and strongly under-specialised in sectors with short innovation cycle
as IT[15].
As the low scores of Belgium on these two indicators reflect some specificities
of the industrial structure of Belgium not related to any underperformance, the
situation of Belgium in terms of economic impact of innovation is more positive
than the image given by the index.

While the Belgian research and innovation
system seems to be effective in generating economic impacts in the sectors in
which R&D investments are concentrated, the key issue for Belgium is to broaden its innovation base beyond those sectors. All Belgian regions have
developed some efforts in this direction (see last paragraph on previous page).
However, Belgium needs more growing innovative firms to fasten the renewal of
its economic fabric and speed-up the transition towards a more
knowledge-intensive and innovation-driven economy.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

The graph also points at some of the factors behind
the evolution of business R&D intensity described in the section "Investing
in knowledge". The shares in total Belgian value-added of nearly all
manufacturing sectors declined between 1998 and 2009. This evolution reflects
the trends toward a more service-oriented economy, and is similar to the one
observed at the level of the EU as a whole. It has however been more pronounced
in Belgium, where manufacturing now accounts for 14% of gross value added
compared to 19% in 2000. High-tech and medium-high-tech sectors have not been
spared from this trend: in particular, the radio, TV and communication
equipment sector, which in 2000 was the sector contributing the most to BERD,
has been strongly affected. Thus, although the sectoral R&D intensities of
most of the manufacturing sectors have been stable or increasing, the negative
impact of the de-industrialisation trend on the evolution of overall Belgian
business R&D intensity has been overwhelming. Foreign multinationals, which
represent nearly 60% of BERD, played a key role in these dynamics: for
instance, decisions to disinvest in Belgium from foreign firms active in the
radio, TV and communication equipment sectors explain the above mentioned
trends in this sector.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

Since 2002, the Belgian trade balance has deteriorated
rapidly, mainly due to loss of market shares on global markets, to the extent
that it now constitutes an important emerging risk for the Belgian economy. The
improving services balance has not been sufficient to offset the decline in the
goods balance, from a surplus of 4.3% of GDP in 1995 to a deficit of 2% of GDP
in 2011. This negative evolution was especially strong in labour-intensive and
mainstream industries, where it is linked to a cost-competiveness issue for Belgium.

At the same time, the contribution of high-tech and
medium-tech (HT & MT) products to the trade balance has increased. This
increase has been driven by excellent performance in pharmaceuticals exports as
well as by positive evolutions across a wide range of HT&MT products,
notably plastics and other chemical materials and products. The increase of the
overall contribution of HT & MT products to trade balance would have been
even more impressive without the strong deteriorations of the trade balances in
road vehicles and, to a lesser extent, in telecommunication apparatus. The
trade balance deterioration in these sectors is due to the sharp reduction of
the volume of activities of these industries in Belgium (visible on the bubble
graph in the previous section), including through the closure of some
factories.

It is thus clear that the strengths of the Belgian
research and innovation system have to some extent played a counter-balancing
and mitigating role vis-à-vis the Belgian cost-competiveness issue in the
manufacturing sector. Since 2000, total factor productivity has remained rather
constant in Belgium. Between 1996 and 2007 it was close to 0 but for goods it
increased 10% and for services it decreased by 6.5%. The employment rate has
increased slightly. Belgium is making progress on the other Europe 2020
targets, in particular in the field of the environment, although there is room
for further progress.

Key
indicators for Belgium

Bulgaria

Seizing the economic growth potential of innovation –
policy coordination and strategic planning

Summary: Performance in research, innovation and
competitiveness

The
indicators in the table below present a synthesis of research, innovation and
competitiveness in Bulgaria. They relate knowledge investment and input to
performance or economic output throughout the innovation cycle. They show
thematic strengths in key technologies and also the high-tech and medium-tech
contribution to the trade balance. The table includes a new index on excellence
in science and technology which takes into consideration the quality of
scientific production as well as technological development. The indicator on
knowledge-intensity of the economy is an index on structural change that
focuses on the sectoral composition and specialisation of the economy and shows
the evolution of the weight of knowledge-intensive sectors and products and
services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 0.57%              (EU: 2.03%;  US: 2.75%) 2000-2011: +1.06%   (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:24.65                 (EU:47.86;   US: 56.68) 2005-2010: +3.4%     (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.234              (EU: 0.612) || Knowledge-intensity of the economy 2010:29.45                  (EU:48.75;     US: 56.25) 2000-2010: +3.65%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Agriculture, Nano- and Biotechnology, ICT and Energy               || HT + MT contribution to the trade balance 2011: -4.78%             (EU: 4.2%;     US: 1.93%) 2000-2011: n.a.          (EU: +4.99%; US:-10.75%)

Bulgaria has in the past decade increased its R&D expenditure in nominal
terms in line with the strong growth of its GDP, with only slight setbacks
during the current crisis. After slowly increasing from 0.09% of GDP in 2002 to
0.16% of the GDP in 2009, business expenditure on R&D has surged to 0.3% of
GDP in 2011, matched by sustained catching up in levels of excellence in
science and technology, but also innovation. The economy is also steadily
catching up to EU-level averages in terms of high-technology and
medium-technology sectors, albeit from low levels. There have also been some
recent positive policy developments with the adoption of national strategies
for research and innovation, as well as the recent establishment of a ranking
of universities, which will better inform resource allocation.

However, multiple challenges remain if Bulgaria is to be able to fully benefit from the knowledge economy. Bulgaria has low levels of knowledge-intensive economic activity, and its overall structure
has not changed substantially over the last decade. Bulgaria's participation
rate in FP7 is much below potential and working conditions are not attractive
for highly productive researchers. Consequently, both public and private
R&D investment are hampered by a lack of skilled human resources. A
substantial increase in R&D spending, both in absolute and relative terms, is
a prerequisite if Bulgaria is to raise its economic competitiveness and secure
high-quality jobs.

Tackling these challenges is crucial to
achieving sustainable economic growth in the future. A new mechanism for
effective collaboration and coordination between the structures and
institutions that support the executive in conducting scientific and innovation
policy in Bulgaria is under development. Recent progress made in securing
private investment in ICT and pharmaceuticals should be capitalized upon. Bulgaria has a strategic focus to move up the value chain and away from a sectoral
specialisation in low technologies. This will require increased public
investment in researchers and infrastructures as well as fostering an
environment that is conducive to collaborations between universities and
business (implementing what is already in the National Development Programme
"Bulgaria 2020"). Moreover, more focus should be placed on incentives
for excellence and internationalisation, in particular through an increase in
the part of public funding which is allocated competitively, transparently and
based on merit. Further support should also be given to research and innovation
collaboration platforms such as technology parks and clusters; the drive to
create Sofia Tech is a valuable reference point in this regard. At regional
level, more support from the Structural Funds should be channelled towards
research and innovation infrastructures.

Investing in knowledge

In June 2010, the Bulgarian government adopted a
national R&D investment target of 1.5 % of GDP by 2020. R&D intensity
has not changed significantly over time: it was 0.51% in 2000 and was 0.57% in
2011. Moreover, the 2011 public budget for science remained at 0.3% of GDP,
despite a planned increase in absolute terms. Therefore, although R&D
expenditure in Bulgaria has been increasing, a further dramatic increase would
be required if Bulgaria is to reach its 2020 R&D intensity target. The
public sector has historically been the main research funder and performer: in
2011 it provided 38.8% of total R&D funding, a substantial crisis-related
drop from pre-2010 levels. For example, the Academy of Sciences saw a ~40% cut in
its initially approved budget.

After slowly increasing from 0.09% of GDP
in 2002 to 0.16% of  GDP in 2009, business R&D intensity surged to reach
0.3% of GDP in 2011. Business expenditure on R&D more than doubled from €
55  million in 2009 to € 117 million in 2011 surpassing total public
expenditure on R&D. In 2011 business enterprise expenditure on R&D
accounted for 53 % of total R&D expenditure in Bulgaria compared to an EU
average of 62%. This encouraging sudden increase is attributable to investments
by ICT and pharmaceutical companies, but. there are doubts as to whether this
extremely positive trend can be sustained. The low level of R&D intensity
is due to the economic crisis and the lack of demand for development of
innovation on the domestic market

Some general trans-national funding initiatives
partially complement national R&I funding. The allocated Regional
Development and Cohesion Funds support for the 2007-2013 period amount to € 310.6
million for Research and Innovation and related activities and € 292 million
for support of innovation in SMEs. The level of Bulgarian participation in the
Framework Programmes is low. As of February 2012 Bulgaria ranks 20th
among EU Member States both in terms of number of applicants (0.91 % of the EU
total) and requested EC contribution (0.55 % of the EU total). The applicant
success rate of 17,2 % is lower than the EU average (21.2 %) as is the EC
financial contribution success rate of 10,8 % (EU average 20,4 %). Bulgaria received € 64.5 million  of FP7 funding, of which € 16.3 million went to SMEs.
Adjusted for population, this comes to eight euro per capita, a value
comparable to those of Poland and Slovakia.

An effective research and innovation system building
on the European Research Area

The graph below illustrates the strengths and
weaknesses of Bulgaria's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

Even if its overall position in the Innovation Union
Scoreboard is rather low, Bulgaria being among the modest innovators, there are
some encouraging signs in the disaggregated dimensions. Most important is the
fact that Bulgaria is the "EU catching-up leader", with a 9% growth
in innovation performance in 2011 (and ~6% in 2010), albeit from a low level. Bulgaria also scores relatively high on the quality of its Human Resources and in Firm
Investments. As the graph above shows, Bulgaria is significantly lower than the
EU average for all dimensions except, as would be expected for a catching up
innovator, in terms of EU funding and in terms of foreign business expenditure
on R&D. Of particular concern is the low level of public-private scientific
co-publications and the very small number of business enterprise researchers,
which are in a sense related, as well as the very limited number of PCT
applications compared to the EU average.

Moreover, Bulgaria still faces major
challenges in key policy dimensions related to European Research. Bulgaria has been experiencing massive outflows of researchers and highly skilled people: for
example, in 2010 the number of Bulgarian students at graduate level who went to
the United States was higher than the corresponding numers for Poland andr Romania. There is therefore an urgent need to enhance the quality of the higher
education system and to address the failure to channel skilled people into
domestic employment. In 2010 a new Academic Staff Development Act aimed at
supporting the career development of researchers was adopted.
Bulgaria is slowly catching up in terms of
increasing the excellence and internationalisation of its universities and
public research organisations. The overall number of scientific co-publications
based on collaborations between Bulgarian and other ERA country researchers is
one of the lowest in Europe, suggesting that the country is not sufficiently
benefitting from international knowledge flows, despite having several
bilateral cooperation agreements with over 12 EU and Third countries which
promote joint scientific projects, exchange of research staff and support co-publications.
Bulgaria's most significant co-patenting partners are Germany, Switzerland and Belgium.

Bulgaria's scientific and technological strengths

The Bulgarian R&I system is faced with the typical
dilemma of a catching up innovator with limited resources. Some efforts have
been aimed at defining some key areas of focus on which to build a truly
excellent research base upon which to further base a framework of support for
innovation. In order to concentrate resources, the National Science Fund has
decided, under the 2012 call for proposals, to support predominantly
fundamental and applied research projects as well as experimental developments
in the priority areas defined in the National Research Strategy.  However, not
enough is currently being done in Bulgaria to properly direct scarce resources,
the result being that they are spread too thinly.

The maps below illustrate five key science
and technology areas where Bulgaria has real strengths in a European context.
The maps are based on the number of scientific publications and patents
produced by authors and inventors based in the regions.

Strengths in science and technology at
European level

 Scientific
production                      Food, agriculture and fisheries        Technological
production

Scientific
production             Nanosciences and nanotechnologies            Technological
production

Scientific
production    Information and Communication Technologies   Technological
production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific
production                                 Biotechnology                              
Technological
production

Scientific
production                                   Energy                                    
Technological production

The maps above are selected based on
existing or emerging regional clusters in scientific or technological
production. These are in the areas of agriculture, nano- and biotechnology, ICT
and energy. Furthermore, based on citations and the impact of scientific
publications, Bulgaria also shows strength in the area of transport.
Nevertheless, current trends indicate a lack of clarity in the country's areas
of specialisation that should be addressed with smart specialisation
strategies. In order to define
the country's areas of Smart Specialization, the Government has signed a
service agreement with the Word Bank and set up an inter-institutional working
group including representatives of all interested ministries, regional
authorities and social partners.

Overall, patenting in Bulgaria is behind most European countries, most probably still affected by the
post-communism decline, when activity in its traditional industries
(metallurgy, chemicals, heating and medicine) was scaled back. Although these
industries are nowadays limited to technological upgrades with foreign capital
(rather than in-house development), there are signs of intensification, fuelled
by R&D intensive FDI, in other areas, primarily in ICT as seen in the maps
above.

Scientific production is increasing but not
strongly enough for Bulgaria to improve its global standing. The impact of this
research has also increased, and is currently comparable to regional peers such
as Romania and Croatia, but is behind Poland. In general, scientific publications
are mainly concentrated in the field of pure sciences. Co-authorship with
foreign researchers has increased to over half of all publications, the main
partners being in Germany, France and Italy, but also in the United States and, more recently, in Poland and Spain.

Policies and reforms for research and innovation

There have not been any notable changes in
the innovation policy mix, programmes and measures in Bulgaria between 2009 and 2011. Institutional fragmentation continues to present a
challenge to policy implementation: R&I policies remain within the
authorities of two different ministries that have different policy-making
mechanisms and policy implementation structures. Nevertheless, there has been
some collaboration: for example the joint consultation for the elaboration of
the National Strategy of Scientific Research to 2020 (NSSR2020). The Strategy,
incorporating for the first time important science, technology and innovation policy
guidelines into one document, was adopted in 2011. The adoption of a new Law on
Innovation, as well as a new Higher Education and Science Law, should be
treated as a priority. In order for both the national and Europe 2020
objectives to be achieved, all strategy documents, as well as their
implementation measures, should be harmonised and jointly developed by all
stakeholders. The measures should include standardisation, public procurement
rules, regulations, etc.

The lack of up to date statistical and
qualitative data on the implementation of research and innovation policy and
measures is another general weakness that affects policies and reforms.
Evaluation is performed ad-hoc and irregularly, and statistical data are
produced with a time lag of several years. A positive step is the newly
introduced university rating system (launched in 2010), which is intended to
serve as a tool for discretionary state funding based on the universities’
achievements. Progress has been made in establishing evaluation systems and
rules for initiating policy and structural changes in all innovation and
research-related institutions based on the recommendations from the
evaluations. The NSSR2020 foresees as one of its measures the introduction of
scientific activity evaluation of  research organisations, which will help the State
to design better policy measures. A draft of the "Regulation for the
monitoring and evaluation of the research carried out by universities and
research organizations" is expected to be adopted soon.

In 2008, for the first time, the ratio
between national institutional (direct subsidies for public research
organisations) and competitive funding was almost equal. National competitive
funding usually does not have strict thematic or sectoral focus, or it tends to
focus on the support of 6-7 areas per one open call. It should be noted,
however, that several of the sectors listed as priorities in the NSSR2020
currently receive less than 1% of  government budget appropriations or outlays
on R&D. Notwithstanding the existence of a national roadmap for research, specific
R&I cross-border or regional programmes and support schemes have been limited
so far, as have been plans for involvement in any ESFRI projects. HEIs provided
a minute 0.20% of the total R&D funding in 2011, while total higher
education expenditure on R&D (HERD) which amounted to € 22.5 million in
2011 accounted for only 10.2% of total R&D expenditure in Bulgaria. The main change in R&D expenditure trends, in 2011, was the increase in R&D
investment from abroad. The share of R&D financed by abroad, which was in
the range of 5-8% for the 2000-2009 period, increased to 43.9% in 2011. The
main competitive public R&D funding instruments are the National Innovation
Fund (NIF) and the National Science Fund (NSF). Due to considerations related
to overlapping with EU funding programmes, the NIF has not distributed any
funds since 2008, when it reached a budget of € 10.3 million. The NSF’s budget
peaked in 2009 (€ 51.1 million), but government cuts in 2010 have substantially
reduced it to € 13 million.

The level of cooperation between companies and
R&D institutions and universities is still low. A number of measures aimed
at building a favourable environment and encouraging the interaction between
universities and business are foreseen in the National Youth Strategy
2010-2020, the “Bulgaria 2020” Programme, the NSSR 2020, and are supported by a
scheme launched under the Operational Programme “Development of Human
Resources”, which has also been used to fund training for some researchers. There
are no specific policy measures aimed at promoting public-private knowledge transfer
or spin-offs. Mobility of research staff between the public and private sectors
is rare and is in general not supported by specialised programmes for fostering
inter-sectoral mobility. The majority of Bulgarian enterprises do not have
research units and are not attracting research staff from the public sector. In
order to promote private investment in R&I, the state should further
develop and implement instruments such as start-up funding schemes, support for
clusters, technology centres  for the commercialisation of patents, while
financial engineering instruments, guarantees and venture capital funds should
be further enhanced.

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[16].

The graph above shows that raising the economic impact
of innovation constitutes a challenge for Bulgaria and currently leaves a lot
of room for improvement. There is a need to support future growth in the
economy as well as employment by harnessing the power of innovation to create
new and sustained high value-added exports. This is of paramount importance
because Bulgaria's exports have stagnated in terms of quality and product
sophistication. There is agreement among policy makers that exports would play
a pivotal role in achieving a robust recovery, but for this to happen, exports
must become more diversified and more innovation-based and the share of
high-technology goods must increase. The economic crisis seems to have
accelerated Bulgaria’s structural change towards more advanced and
knowledge-intensive industries and sectors, as demonstrated by the sizeable
gains in exports by technology-driven and mainstream manufacturing industries.
However, Bulgaria is still catching up with respect to competitiveness. Much of
the innovation that businesses are currently engaged in is related to catching-up
and the upgrading of technology through acquisitions and FDI in the most
research-dynamic sectors. For example, in 2007 one fifth of all inward business
investment in R&D in Bulgaria originated from the chemical industry, with
the majority of the investment coming from outside the EU.

The World Bank (WB) has assessed private
innovation based on the World Bank's enterprise survey, and concluded that
Bulgarian firms which innovate grow 1.5 times faster and create more jobs than
their non-innovating counterparts. But this powerful engine is hampered by
insufficient access to the external finance needed for long-term R&I
investments. Over the past years, SMEs have encountered difficulties in
financing innovative projects due to high interest rates and credit rationing,
while start-ups have not been able to find appropriate funding. Bulgaria has also experienced the largest increase in the EU in unsuccessful loan
applications - from 3 % in 2007 to 36 % in 2010 (Eurostat). Moreover,
the regulatory environment is not stable and predictable for companies as
legislative acts change very often. National harmonisation with EU legislation is
sometimes complex and contradictory. In the WB Doing Business 2012 survey, Bulgaria's
ranking worsened for the second consecutive year (from 57 in 2010 to 59 in
2011), pointing to excessive red tape and inefficiencies, including difficulties
with permits, access to electricity, contract enforcement, and the insolvency
framework.

Upgrading the manufacturing sector through research
and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

The manufacturing sector plays a slightly
bigger role in Bulgaria than in the EU as a whole. This is mainly due to
specialisation in labour-intensive industries (e.g. textiles and clothing,
leather and footwear), and in capital-intensive industries (e.g. cement,
refined petroleum and non-metallic mineral products). The primary sector is
larger than the EU average due to the higher share of agriculture and, in
general, the economy is dominated by sectors with low and medium-low technology
intensity (DG Enterprise, 2012). The graph shows the large relative weight of
textiles, metals and agricultural products in the economy, as well as the large
share of value-added growth that they still represent. Two of the high-tech sectors
have seen their shares of value added decrease over time (i.e. machinery and
equipment, and chemicals, although BERD intensity increased in the case of
machinery and equipment), whereas the electrical and optical equipment sector has
increased its weight.

Overall there is a positive trend in the
evolution of Bulgaria's economic structure. The Composite Indicator on
structural change (DG Research and Innovation, 2012) also reflects this by
showing steady improvement over time, the largest increase being from 2005 to
2009. There appears to be a general consensus that while improvements are
evident and the manufacturing and export sectors are gradually shifting towards
higher value-added and a more high-tech mix, this change is not happening fast
enough to sustain competitiveness levels in the globalized economy.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation in these products.

So far, the Bulgarian economy has been
associated with marketing and organisational innovation but not with
technological innovation. Its economic specialisation has been based on low
costs and a cheap labour force. The latest strategy documents call for measures
to strengthen high value added and technology intensive sectors. There are
already some encouraging data to show that this is happening, in particular a
reduction of employment in low-tech sectors such as processing and apparel
manufacturing coupled with employment growth in ICT. Another positive sign is
that several medium-tech products (in particular products in machinery and
transport-related sectors) are increasing their weight in Bulgaria's trade balance, as illustrated in the graph above. Although Bulgaria has a negative trade balance, both overall and in high-tech and medium-tech
products, the export of medium-tech products has grown in absolute numbers
since 2008.

Nevertheless, Bulgaria is still in the
process of catching up with the EU average for a series of indicators related
to competitiveness (see Key indicators for Bulgaria, below). The trends shown
by these indicators are reminiscent of the larger shifts in the economy that
have been outlined above, and point to the moderate pace of positive change.
For example, while total factor productivity has increased by 13% since 2000
compared to 3% for the EU, employment in knowledge intensive activities is
still rather low. Bulgaria has also made some strides in patenting in crucial
sectors such as health and environment-related technologies. Overall, Bulgaria is making good progress on several of the Europe 2020 targets, although from a
lower level than other EU Member States. A worrying sign is the falling
employment rate and the growing share of population at risk of poverty following
the economic crisis.

Key indicators for Bulgaria

Country-specific recommendation in R&I adopted by
the Council in July 2012:

"Improve the access to finance for start-ups and
SMEs, in particular those involved in innovative activities."

[1] State of the Innovation Union 2012, Accelerating change

[2] Link: ec.europa.eu/iuc2011.

[3] See methodological notes at the end of
this document.

[4] For an overview of these composite indicators, see the methodological
notes at the end of this document.

[5] A reinforced European Research Area Partnership for Excellence and
Growth, COM(2012) 392final, 17.7.2012.

[6] See Methodological note for the composition
of this index.

[7] World Economic Forum, The Global Competitiveness
Report 2012-2013, pages 97-98 and 482

[8] 13. 6%, well above EU average of 10. 9% - this is the
third best EU performance.

[9] Belgium has proportionally the third largest inflow of
doctoral students from other Member States: 12% of doctoral students come from
another Member State.

[10] Index calculated by Science-Metrix, based on the
number of co-publications while taking into account the size of national
scientific output.

[11]  Increased to 80% since 1 January 2013

[12] Belgium also participates in several
research infrastructure projects as part of the ESFRI roadmap. Its main
contribution to the implementation of the ESFRI roadmap is as lead partner on
the MYrrHA European Fast Spectrum Irradiation Facility: Belgium will contribute 40% of the construction costs as part of a broad international
consortium.

[13] IMEC for instance is selling its service to
industrial players from all over the globe.

[14] See Methodological note for the composition
of this index.

[15] Due to differences in innovation cycle, the
share of innovative products introduced the last three years in the turnover is
about 10% for  global innovation leaders in
pharmaceuticals or chemicals vs. more than 60% in IT hardware: see
http://iri.jrc.ec.europa.eu/docs/survey/2012/Survey2012.pdf

[16] See Methodological note for the composition
of this index.

Croatia

The
challenge of structural change for a more knowledge-intensive economy

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Croatia. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 0.75%            (EU: 2.03%; US: 2.75%) 2000-2011: -2.72%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:12.25                 (EU:47.86; US: 56.68) 2005-2010: +2.31%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.353              (EU: 0.612) || Knowledge-intensity of the economy 2010:n.a               (EU:48.75; US: 56.25) 2000-2010: n.a.    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Healthcare sector; Food processing and agro-business; Energy technology; Electronics and Advanced materials and Digital techniques               || HT + MT contribution to the trade balance 2011: 2.98%                  (EU: 4.2%; US: 1.93%) 2000-2011: +133.23%  (EU: +4.99%; US:-10.75%)

Croatia is building up its research and
innovation system. Although starting from a low level, its science and
technology excellence has clearly improved after 2005. Efforts are still needed
to enhance R&D investment and to build up capacities in key technology
areas and to improve international competitiveness and trade by producing more
technology-intensive goods.

Since 2000, Croatia has restructured its science (and education) system with the objectives of turning
the country into a knowledge based society and of strengthening the country's
research capacity as a lever for economic development. Driven its determination
to join the EU, Croatia has taken steps to strengthen its national research
capacity by taking measures and adopting polices that are compatible with EU
policy on the European Research Area. Croatia, however, has been slow to
implement the envisaged actions and lacks reliable statistics and the
administrative capacity to monitor and follow-up the envisaged reforms. Croatia has also suffered from the economic recession.

The new Government elected in
December 2011 continued the efforts to reform the science system by proposing
amendments to the Act on Scientific Activity and Higher Education aimed at
creating an adequate legislative framework for a more programme-based and
competitive funding of research institutes (adoption by Parliament foreseen
before end of 2012).

A new R&D strategy and a
"National Innovation Strategy is under preparation for the period
2013-2020.

Investing in knowledge

In 2011 Croatia had an R&D intensity of 0.75% and a business R&D intensity of 0.33%. Croatia's R&D intensity decreased from 0.90% in 2008 to 0.75 % in 2011. This was mainly
due to an overall slowdown of the national economy during the last four years,
which was additionally affected by the global financial and economic crisis. Croatia did not meet its own national target of 1% by 2010. Accordingly, Croatia has opted to first reform the science system before setting new targets. Total R&D
expenditure (GERD) which amounted to € 330 million in 2011 decreased by 3.2%
between 2004 and 2011. Croatia's R&D intensity of 0.75% in 2011 was well
below the EU average of 2.03%. and has decreased at an average annual rate of
2.7% over the period 2002-2011.

Regarding EU funding, Croatia participates in FP7 as an associated country. It has a good level of participation
(an average success rate close to 18%) which has amounted to about € 50 million
of EU funding for Croatian research entities since the beginning of FP7. Croatia is particularly successful under the scientific themes in which it is also strong
at national level i.e.: healthcare, ICT, biotechnology and transport.
Participation of SMEs is also good: out of 225 applicants 57 (or more than 25%)
were selected for funding. Croatia is a full member of the Eurostar initiative.
Croatia is also a member of COST and EUREKA.

As a Candidate Country, and since December
2011, an Accession Country, Croatia is eligible for EU support under the
Pre-Accession Instrument (IPA) and has used that instrument in support of
research and innovation capacity building such as the creation of the Business
Innovation Centre of Croatia (BRICO) which is a dedicated institution for the
promotion of research and innovation in SMEs. The latter is a good
demonstration that Croatia is concentrating its efforts on innovation and creating
links between the public and private sectors. Croatia wll become a member State on 1 July 2013 and will then have access to the Structural Funds and notably the
European Regional Development Fund (ERDF) and the European Social Fund (ESF)
for R&I capacity building purposes. BRICO will be the ggency in charge of
the competitiveness axis under the Structural Funds.

An effective research and innovation system
building on the European Research Area

The graph below illustrates the strengths and
weaknesses of Croatia's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

This graph shows that Croatia is lagging behind the EU average on most key research and innovation indicators but it is
doing well or better than several other Member States and Associated Countries
with a similar knowledge and economic structure. Croatia is performing above the
EU average in  attracting business R&D from abroad, although this is also
linked to the low total business R&D in the country. Croatia faces a particular challenge in improving private-public cooperation and in
valorising and commercialising research generated by publicly funded
institutes.

Human capital building in S&T is below the
EU average. Croatia still has a large scientific diaspora. The lack of
attractive research infrastructures and good research management is leading to
a further increase in brain drain. The MSES and the Agency for Mobility have,
however, stepped up efforts on human capital building by actively supporting
the principles of the European Charter for Researchers and the Code of Conduct
for Recruitment of Researchers. In total, nine Croatian institutes have been
accredited for HR excellence in research. Croatia is participating in the work
of the Steering Group on Human Resources and Mobility (SGHRM). The Croatian
Researchers Mobility Portal was launched in 2009.

Competitiveness in global demand and
markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

Croatia is a net importer with a trade deficit in the order of € 8 billion in
2010 compared to about € 3.5 billion in 2001.  Following the economic crisis,
trade volume decreased significantly in 2009, 2010 and 2011 but exports in
high-tech and medium-tech products continued to grow. Croatia is, for example, a net exporter of goods and products in which its research
capacity is also strong such as fertilizers, plastic products in primary forms,
electrical machinery and transport equipment. The graph above shows that
important sectors such as road vehicles, electrical and specialised machinery
have increased their contribution to the Croatian trade balance.

Croatia's employment rate has fallen since 2008 as a result of the economic
crisis. The share of renewable energy in total energy consumption has slightly
increased over the last years. However, Croatia's performance on energy
efficiency and reducing the level of CO2 by stimulating the use of renewable
energy is still at a low level, which is also reflected in the Croatian
research capacity under the FP7 environment theme.

Key
indicators for Croatia

Cyprus

A new integrated innovation strategy to valorise opportunities
of a small service-oriented economy

Summary: Performance
in research, innovation and competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Cyprus. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 0.48%               (EU: 2.03%; US: 2.75%) 2000-2011: +6.24%   (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 27.77                (EU:47.86;  US: 56.68) 2005-2010: +0.17%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.558              (EU: 0.612) || Knowledge-intensity of the economy 2010: 44.11                 (EU:48.75;     US: 56.25) 2000-2010: +3.27%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies New production technologies, Construction, ICT               || HT + MT contribution to the trade balance 2011: 1.72%              (EU: 4.2%;    US: 1.93%) 2000-2011: -0.83%   (EU: +4.99%; US:-10.75%)

In the last decade, Cyprus has achieved a significant increase in its R&D intensity, which has led to
improved excellence in science and technology. Cyprus has also managed to
increase the knowledge-intensity of its economy to a level approaching the EU
average.

Research and innovation presents some challenges to policy makers. A main
bottleneck of the R&I system is the low number of human resources for
research activities. This is due to the weak demand from business and industry.
There is a sharp contrast between
the high number of tertiary education graduates which has grown by 80% between
2000 and 2010 and the very low number of human resources for research. This is
partially explained by a still unfavourable environment for research activities
which leads to a substantial brain-drain of S&T graduates to other
countries, mainly the United Kingdom and the United States. In addition, business involvement in
research and innovation is very limited mainly due to the lack of big companies
and the absence of high-tech industrial activity. The business sector is focused on services and is
dominated by very small enterprises that have not developed an innovation
culture.

The government has introduced financial incentives for
business R&D and new support schemes for innovation such as innovation
vouchers. There is also a strong emphasis on the importance of a stronger
cooperation between the higher education system and industry. Currently, there is a too broad research orientation
that lacks prioritisation and an
integrated R&I policy. The
National Research and Innovation Strategy (2011-2015) is under preparation. The
Cyprus authorities consider that the absorption capacity of Cyprus in the field of R&D is limited and that it is better to encourage the development
of existing products in an innovative way. Non-technological innovation as well
as innovation in services could be real options for Cyprus.

Investing in knowledge

The research and innovation system in Cyprus is relatively new. It has evolved mainly over the last two decades and it
relies predominantly on public expenditure. In 2009, 69% of total R&D
expenditure (GERD) was financed by government, the highest percentage in the EU
and considerably above the EU average of 34.9%. There is indeed a persistent
problem of underinvestment in research and innovation by the business sector.
Business R&D expenditure (BERD) as a % of GDP was equal to 0.09% in 2010,
the lowest level in the EU. In its National Reform Programme Cyprus set a very modest R&D intensity target of 0.5% for 2020, the lowest R&D
intensity target in the EU, and in fact this target had been reached in 2010.
However, the R&D intensity decreased to 0.48% of GDP in 2011. The economy
is not oriented towards high value-added products and services.  Cyprus has been affected by the financial crisis with the result that the R&D budget
and several measures related to innovation have been put on hold during the
process of fiscal consolidation.

In the last decade, a significant increase
of public RTDI funding has taken place across various disciplines without
focusing on the limited number of scientific fields where the national
innovation system could be expected to excel. There is a low involvement of
firms in research and innovation activities in terms of participation and
expenditure on R&D and innovation. In 2010 only 17.5% of total R&D
expenditure (GERD) was performed by business enterprise compared to an EU
average of 61.5%. This share has decreased from 22.8% in 2008.

Conversely, research performed by the higher
education sector has increased over the same period from 43.7% to 49.6% of
GERD, a value which is more than twice the EU average. In 2010 the government
budget for R&D amounted to 0.46% of GDP to be compared with the EU average
of 0.76%. In 2009, 12.1% of R&D was financed from abroad compared to an EU
average of 8.4%. The main source of foreign funding has been the EU Framework
Programme for Research and Technological Development (FP7). Cyprus is successful in raising funds from the FP7. Around one third of the EU funds raised
by Cypriot participants through the FP7 up to February 2012 were directed to
SMEs i.e. € 18.7 million out of € 52.55 million. Cyprus has most FP7 collaborative
links with the United Kingdom, Germany and Greece.

An effective research and innovation system
building on the European Research Area

The graph below illustrates the strengths and
weaknesses of Cyprus's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The graph above shows that in the case of
Cyprus FP7 funding per GERD is much higher than the EU average. The graph also
shows that two other indicators, BERD financed from abroad (as percentage of
total BERD) and employment in knowledge-intensive activities (as percentage of
total employment aged between 15 and 64 years), have higher values than the EU
average. The biggest gaps between Cyprus and the EU average occur for BERD as %
of GDP, public expenditure on R&D financed by business enterprise as % of
GDP, and PCT patent applications per GDP. These findings underline the
conclusion that there is a significant underinvestment in research and innovation
activities, affecting mainly the business sector.

Research policy has a strong international
dimension and is well aligned with the ERA pillars. ERA policy is seen as an
opportunity to integrate the small national R&I system into the broader
European market and in this context internationalisation of the research system
is a high priority. The national scientific landscape does not provide space
for large research infrastructures. However, due to the strong performance of its
ICT and computing base, Cyprus puts particular emphasis on e-infrastructure. Cyprus participates actively in the FP7 and recent results confirm a successful
participation in the ICT programme, in particular.

Cyprus' scientific and technological strengths

The maps below illustrate six key science and
technology areas where Cyprus has real strengths in a European context. The maps
are based on the number of scientific publications and patents produced by
authors and inventors based in the regions.

Strengths in
science and technology at European level

Scientific
production        Information and Communication Technologies         Technological
production

Scientific production                                           Energy                                   
                Technological production

Scientific production                                           Materials                                     
Technological production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific
production                           New production technologies                   
        Technological production

Scientific
production                                           Construction                       
             Technological production

Scientific
production                                           Biotechnology                              
       Technological production

In terms of research output, Cyprus is underperforming. In 2010 Cyprus had the fourth lowest number of scientific
publications in the EU ahead of Luxembourg, Latvia, and Malta. However, Cyprus had the second highest average annual growth rate in the EU after Luxembourg in numbers of scientific publications between 2000 and 2010. The level of PCT patent
applications is very low with Cyprus well below the EU average. The situation concerning
PCT patent applications in societal challenges is even worse.

Bibliometric indicators between 2000 and
2009 on information and communication technologies (ICT), as a FP7 thematic
priority, show that Cyprus has one of the highest specialisation index values
at 2.59. In addition the collaboration index in information and communication
technologies (ICT) for Cyprus at 1.44 is at the highest level in the EU.

The growth index for Cyprus in the field of materials (excluding nanotechnologies) is also very high. Cyprus together with Israel and Denmark has the highest ARIF score (the average of relative impact
factors) in this field.

Cyprus produced the most collaborative publications in the EU, relative to
its size, in the FP7 research theme of new production technologies (with a Collaborative
Index value of 1.82). It has the second highest growth index value (3.84)
behind Lithuania for scientific publications in the field of construction and
construction technologies. Cyprus together with Lithuania and Turkey   is amongst the most specialised countries in this field.

Cyprus has a very high ARC score (the average of relative citations) of 2.29
for scientific publications on energy, meaning that these publications are
cited more than twice as often, on average, than the world level in this
research area. In addition, 21.2% of Cypriot scientific publications in the
field of energy are in the top 10% most cited publications in this field. This
is one of the highest levels in the EU.

A quantitative analysis of the numbers of
EPO patents (2000-2010) by applicant classified by FP7 thematic priorities shows
that Cyprus achieved good results in the fields of information and
communication technologies (ICT), new production technologies, construction
technologies, materials, and energy and environment. These are areas in which Cyprus also had its best outputs in terms of scientific publications over the last decade.

Policies and reforms for research and innovation

The new R&I strategy currently in
preparation should better address the main challenges of the R&I system.
These include a more focused employment of the limited financial resources to
ensure smart specialisation, better prioritisation, an increased involvement of
SMEs in R&I activities and more career opportunities for researchers. In
the new research and innovation strategy, research priorities will target a
broad spectrum of multi-thematic research projects in the following pre-selected
fields: manufacturing technologies, information and communication technologies,
sustainable development, health and bio-sciences and social sciences.

The low level of innovation in Cyprus is linked to its particular economic structure which has a limited capacity to
increase private research and innovation. The Government is making efforts to
support a more active involvement of businesses in innovation activities by
introducing new subsidy schemes for enterprises.

The European Commission
recommended in 2012 that the government should take further measures to
reinforce occupational mobility towards activities of high growth and high value added and to address youth unemployment, with an
emphasis on work placements in companies and promotion of self-employment, as
well as appropriate policy measures on the demand side to stimulate business
innovation. As the service sector is significantly more developed than
industry, measures in favour of non-technological innovation could be a useful
option to take into consideration.

The Research Promotion Foundation was
established in 1996 to promote the development of scientific research,
technology and innovation. The National Framework Programme (2008-2010) is a
medium-term development mechanism aiming at the development of research and
innovation sector of the Cypriot economy. It covers the main research and
innovative activities that have been supported and financed by the Research
Promotion Foundation and the Structural Funds of the European Union. The budget
for new calls for proposals was around € 14.5 million in February 2011.

To date, Cyprus has allocated only around
18% of available Structural Funds (2007-2013) under the Operational Programme
for 'Sustainable development
and Competitiveness' to knowledge society and innovation. As a
result of a limited institutional capacity to absorb these funds, the Cypriot
authorities have indicated their intention to redirect a part of this already
limited share to other priorities.

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[1].

The performance of Cyprus on four out of the five indicators composing this index is slightly above the EU
average: contribution of high- and medium-tech products to the trade balance,
knowledge-intensive services exports, employment in knowledge intensive
activities, sales of new-to-market and new-to-firm products. The resulting
index value is below the EU average due to the very low performance of Cyprus in patents inventions.

Business demand is still low and special
efforts would be needed to develop an innovation culture among firms. Policies
promoting innovation are recent and have a relatively limited impact. Support
for innovation is mainly based on traditional direct funding. Venture capital
schemes and other less traditional financial incentives are almost
non-existent. The government intends to use public procurement as a demand side
policy to drive innovation. The adoption of pre-commercial procurement is
expected to act as an important stimulus for innovation. However, commercial
exploitation of knowledge is difficult to increase further without a
significant increase in demand.

A scheme of innovation vouchers is a
relatively new measure which is being used to stimulate a more active
involvement of SMEs in innovation activities in collaboration with research
organisations. The Research Promotion Foundation (RPF) supports the
strengthening of links between the academic and business sectors in coordination
with the Business Support Centre of Cyprus which is a member of the Enterprise
Europe Network. Recent measures supported by the RPF aim to bridge the gap
between the supply and demand of innovation through a mechanism of
intermediation between research institutions and SMEs. In 2009-2010, an
''innovation clusters'' measure targeted the creation of cooperation networks
between enterprises, public research organisations and intermediaries.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

The Cypriot economy is dominated by very
small sized family-run enterprises with limited export orientation. This
economic structure does not favour R&D. The economy of Cyprus is dominated by the service sector, mainly tourism, transport and finance, with
manufacturing representing only around 7%. SMEs which provide mostly low value
added support services are unlikely to invest in research and innovation. Most
firms tend to concentrate on low value added products and services and do not
take risks on new products or export markets.

The graph above shows that manufacturing
industry in Cyprus is largely dominated by low and medium-low-tech sectors
(which are less research intensive) and mainly by the construction sector
followed by the electricity, gas and water sector and the food products,
beverages and tobacco sector.  Structural changes towards more
research-intensive economies are in general driven by high and medium-high-tech
manufacturing sectors. In Cyprus, there are three such sectors: machinery and
equipment, chemicals and chemical products, and electrical machinery and
apparatus. Three manufacturing sectors have an increased their weights in the
economy: construction, other non-metallic mineral products, and fabricated
metal products which also had the highest growth in research intensity.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive clusters,
innovation and the upgrading of the manufacturing sector are determinants of a
country's competitiveness in global export markets. A positive contribution of
high-tech and medium-tech products to the trade balance is an indication of
specialisation and competitiveness in these products.

The Cypriot economy is currently facing the challenge
of strengthening its external competitiveness and fostering growth. The
deteriorating outlook for growth and increasing unemployment are challenges for
Cyprus’s economy which grew by a modest 0.5 % in 2011. GDP is projected to
contract by 0.8% in 2012 due to a fall in domestic demand, traditionally the
main driver of growth, and to the weaker external environment, in particular
persistent financial market uncertainty. The large exposure of the financial
sector to Greece and the banks' need for recapitalisation have increased the
cost of financing and have limited the availability of finance to the private
sector. Conversely, the external sector has made a positive contribution to
growth.

The graph above shows that most high-tech and
medium-tech industries have increased their contribution to Cyprus's trade balance over the period 2000-2011. Those industries which significantly
improved their contribution are medical and pharmaceutical products, electrical
machinery, and telecommunications. In contrast, the contributions of the road
vehicles industry, fabrics woven of man-made textile materials and other
transport equipment have significantly diminished.

Cyprus
is making progress towards most of the Europe 2020 targets, with the exceptions
of the targets for greenhouse gas emissions and the share of the population at
risk of poverty. Technology development is oriented towards societal challenges
such as environment and health, but there is a falling number of
environment-related patents. Total factor productivity in the Cypriot economy
stagnated between 2000 and 2008, after which it decreased markedly during the
economic crisis.

Key indicators for Cyprus

Country-specific recommendation in R&I adopted by
the Council in July 2012:

"Take appropriate policy measures on the demand side to stimulate
business innovation."

The
Czech Republic

Improving
the output of the science base to foster business R&I investment

Summary: Performance in research,
innovation and competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in the Czech Republic. They relate
knowledge investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into consideration
the quality of scientific production as well as technological development. The
indicator on knowledge-intensity of the economy is an index on structural
change that focuses on the sectoral composition and specialisation of the
economy and shows the evolution of the weight of knowledge-intensive sectors
and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 1.84%              (EU: 2.03%; US: 2.75%) 2000-2011: +4.23%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:29.9                   (EU:47.86;  US: 56.68) 2005-2010: +4.58%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.497               (EU: 0.612) || Knowledge-intensity of the economy 2010:39.58                  (EU:48.75;     US: 56.25) 2000-2010: +2.91%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Automobiles, transport, construction, materials, energy and environment               || HT + MT contribution to the trade balance 2011: 3.82%                 (EU1: 4.2%;     US: 1.93%) 2000-2011: +42.62%   (EU1: +4.99%; US:-10.75%)

Public funding of R&D and the available
pool of S&E graduates are in line with the level of development of the
Czech economy although the level of excellence in S&T is markedly lower
than the EU average (with the exception of S&T in other transport and
energy) and is catching up only very slowly, which impacts negatively on the
ability of the Czech innovation base to expand to its full potential. As a
result, business investment in R&D is relatively low in relation to the
structure of the economy (size of the manufacturing sector in general and of HT
and MT sectors in particular) and the innovation performance of the country is
sub-optimal. The situation is, however, improving as evidenced by the
structural change towards a more knowledge-intensive economy and the fast-rising
contribution of HT and MT sectors to the trade balance. The latter has
increased much faster than the EU average in spite of a sharp improvement in
the total trade balance over the same period.

Despite progress, the main challenge for
the Czech research and innovation system remains therefore the insufficient
quality of the scientific and technological output of the science base, which
is notably linked to an inadequate system for evaluating research and
allocating public R&D funding. Despite a public R&D intensity of 0.72%,
similar to the EU average, the level of S&T excellence and the amount of
intellectual property assets produced remain, in relative terms, well below the
EU average.

Another persistent weakness of the Czech
research and innovation system is the low extent of cooperation between the
science base and the business sector originating from a combination of poor
absorptive capacity of domestic firms, a lack of incentives to support
collaboration between universities and firms and the shortage of scientific and
engineering skills. This is evidenced notably by the extremely low shares of
the R&D carried out by universities and by the government sector that are
funded by business - 1% and 3.4%, respectively. According to innovation
surveys, neither universities nor public research organisations are considered
by firms as key partners for their innovation activities. These challenges are
linked to the overdue reform of the higher education system and to the
persistent weaknesses of the current system for evaluating research performance
and allocating public R&D funding to higher education and research institutions.
The Czech Republic International Competitiveness strategy for 2012-2020 plans
to address several of these issues, as described in the following parts of the
present country profile.

Investing in knowledge

R&D intensity rose steadily from 1.17%
in 2000 to 1.49% in 2006 at an average annual growth rate of 4.1%, before
falling to 1.41% in 2008 and rising again to 1.84% in 2011. In 2011, the Czech Republic set a target for public funding of R&D of 1% of GDP by 2020. This
indicator currently stands at 0.70%, very close to the EU average and significantly
higher than in most other EU-12 Member States. The government budget for
R&D has so far been protected during the economic crisis (€ 1053 million in
2011) but there is currently no multiannual funding framework to ensure that it
will continue to increase.

The relatively good performance of the Czech research
and innovation system in terms of business expenditure on R&D (BERD reached
1.11% of GDP in 2011) is largely due to a strong manufacturing sector (24% of
total value added in 2009) with a marked industrial specialisation in
innovative sectors (such as 'motor vehicles' and 'electrical equipment'),
combined with an increasing level of R&D financed from abroad (0.28% of GDP
in 2010). However, BERD is highly concentrated in a few multinational
corporations that accounted for 55% of total BERD in 2009. Whereas BERD
performed by domestic companies almost doubled from € 284 million in 1998 to €
487 million in 2009, inward BERD increased six fold during the same period.
This reflects the country’s rising attractiveness for foreign R&D
activities and highlights the growing role played by foreign firms in the Czech
research and innovation system. Medium-high-tech (MHT) manufacturing and
knowledge-intensive services account for the larger share of total inward BERD.
The share of inward BERD in high-tech industries almost doubled from 2002 to
2009 (16%) and the share of inward BERD in knowledge-intensive services almost
tripled between 2002 and 2009 (22%). During the same period, the share of
inward BERD decreased in the MHT sectors, as exemplified by the motor vehicles
sector where it went down from 65% in 2002 to 37% in 2009.

About € 5.8 billion of Structural Funds are earmarked
for research, innovation and entrepreneurship in the Czech Republic in the
current programming period (2007-2013). This represents 22.1% of total ERDF
Structural Funds. Structural Funds are therefore one of the largest sources of
public funding of R&D in the Czech Republic. Up to 2010, 34.3% of these
funds had been absorbed. The success rate of Czech entities in FP7 (20%) is
only marginally lower than the EU average (22%) but, if overall progress in
quality was significant, their share of the total funding (0.72%) – which
corresponds to more than € 164 million - could still be improved when compared
to the share of the Czech Republic in total EU investment in R&D (0.95%).

An effective research and innovation system building
on the European Research Area

The graph below illustrates the strengths
and weaknesses of the Czech R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The Czech innovation system displays a
complex pattern of relative strengths and weaknesses affecting both its input
and output. While it currently scores lower than the EU average on most S&T
indicators, it has been catching up with the group of innovation followers[2] and outperforms its reference
group in terms of new graduates in science and engineering, business R&D
intensity, researchers employed by the business sector and innovation in SMEs.
The region of Prague is amongst the EU regions with the highest share of
researchers (full-time equivalent) in total employment (superior to 1.8%) and
is the EU leader in terms of the share of the labour force employed in a
S&T occupation (more than 50%). Other relative strengths include
international co-publications, non-R&D business expenditure and HT and MT
exports. The number of international scientific co-publications has surged over
the last decade, in particular in partnerships with Germany, the United Kingdom, France, Italy and Slovakia, which is evidence of increased scientific networking
within the ERA.

The S&T output of the Czech
innovation system is critically weak in terms of high impact scientific
publications, PCT patents and attractiveness to foreign doctoral students
(other than Slovaks). Other marked weaknesses highlighted in the IU scoreboard
include public R&D expenditure, access to venture capital and license and
patent revenues from abroad. There are also relatively few co-inventions of
patents, which may hint at potential weaknesses in the capacity to engage in
international technological networks.

The Czech Republic's scientific and technological
strengths

The maps below illustrate six key science and
technology areas where the Czech Republic has real strengths in a European
context. The maps are based on the number of scientific publications and
patents produced by authors and inventors based in the regions.

Strengths in science and technology at European level

Scientific production                                           Automobiles                                         Technological
production

Scientific production                                           Other
transport                   Technological production

Scientific production                                           Construction                                        Technological
production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific production                                           Materials                                              Technological
production

Scientific production                                           Energy                                                   Technological
production

Scientific production                                           Environment                                         Technological
production

There is a considerable
diversity in the Czech Republic amongst regional innovation performances,
ranging from low to medium-high[3].
Overall, other transport, construction, materials, energy, and environment are
the five areas where the Czech Republic combines a strong scientific output in
terms of the number of scientific publications and a strong technological
output in terms of the number of patent applications. In the case of other
transport and energy this combination is further reinforced by the quality of the
scientific output. While the automobiles sector also features a strong
technological output, the corresponding scientific field displays weak outputs.
Food, agriculture and fisheries stands out as an area of strong scientific
specialisation with many publications but has poor scientific impact and little
technological output.

In terms of EPO patent applications the Czech Republic and all regions lag significantly behind the European average - in
particular in ICT and biotech applications - and on average only 4.9% of Czech
scientific publications are amongst the 10% most cited worldwide. Energy,
aeronautics and space and transport stand out as scientific fields where the Czech Republic displays a high degree of scientific excellence and of international
collaboration. This is also true to a lesser degree for research on biotech,
materials and new production technologies. However, with the exception of
materials science, these are not areas of high specialisation in the Czech
science base.

Policies and reforms for research and
innovation

Recent reforms are intended to put the
Czech innovation system on path to converge with the EU innovation followers by
2020. The Czech Republic International Competitiveness Strategy for 2012-2020,
which includes the new National Innovation Strategy (NIS), aims to strengthen
the importance of innovation as a source of competitiveness for the Czech Republic. It builds on the ambitious reform programme presented in the 2011 and 2012
NRPs to increase the effectiveness of the national research and innovation
system, including the quality of its output and the links between the science
base and the business sector. This includes amending the Investment Incentives
Act to offer investors (as of July 2012) tax incentives for creating or
upgrading manufacturing facilities, R&D centres and business support
centres; amending the Income Tax Act so that private firms can (as of January
2014) deduct from their taxable income the cost of R&D activities
contracted out; launching new programmes to stimulate cooperation between
R&D institutions and industry in sectors such as transport, energy and
environment through the ALFA Programme of the Technology Agency (which also
supports the development of Competence Centres); developing a new evaluation
methodology to ensure that long-term R&D financing is based on
excellence/quality and that support is focused on the best research teams;
creating a fund to improve access to venture capital for financing innovation;
reforming the tertiary education system and improving researchers' career
prospects, especially for top scientists, in order to prevent brain drain.

The implementation of the International
Competitiveness Strategy is coordinated by an intergovernmental Steering
Committee which is also responsible for the National Innovation Strategy.
However, the governance of the national research and innovation system would
benefit from a clarification of the respective roles of this Steering Committee
and of the Council for R&D and Innovation which advises the Prime Minister
on related matters.

The national R&D target currently only
covers public funding of R&D. The lack of commitment to an overall R&D
target, encompassing both public and private R&D intensity, could
jeopardise the adoption (and/or endanger the rigorous implementation) of
important policies and measures to incentivise private R&D investment.
There are also important delays in implementing the planned reforms which may
lead to a loss of attractiveness for domestic and foreign R&I investors.
This is particularly the case for the overdue modernisation of the higher
education system which is a prerequisite to a change of attitude of academia
towards the business sector with whom it should start developing stronger
collaborations[4].

A broad set of priorities for applied
research, development and innovation had been defined for the period 2009-2011
by the Council for R&D and innovation, covering in particular biological
and ecological aspects of sustainable development; molecular biology and biotechnologies;
sources of energy; smart materials; competitive engineering; information
society; security and defence. As part of the revision of the National
R&D&I policy 2009-2015, the Government adopted in July 2012 a new set
of better targeted priorities focusing on six major societal challenges
(competitive knowledge economy, sustainable energy and material resources,
environment for quality life, social and cultural challenges, healthy people
and secure society). The priorities were identified on the basis of the work of
expert panels and cover the period up until 2030. A detailed plan of
implementation (starting in 2014) will be submitted to the Government by July
2013.

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[5].

According to this index, the Czech Republic underperforms its reference group and is clearly below the EU average. The
country ranks 17th due in particular to its poor performance in
"patent applications per GDP" and "share of knowledge intensive
services in total export of services". These marked weaknesses reflect the
still insufficient innovation orientation of the national economy and are only
partly compensated by a strong performance in terms of the "contribution
of medium and high-tech product exports to the trade balance" and the
"sales of new to market and new to firm innovations as % of turnover of
firms".

Recent policies and reforms –
including the extension of the R&D tax incentives, the setting up of a seed
fund and the Government's recent approval of a joint stock company to support
the creation of SMEs and the development of innovative and technologically
oriented enterprises – can contribute to establishing a more stable and
predictable legal framework for developing innovation activities. At present
the main instruments available for supporting the growth of innovative SMEs are
two loan guarantee schemes (one of them is funded through OP Enterprise and
innovation) and the more recent pre-seed fund. The capacity to transform the Czech Republic into a strong innovation-oriented economy by 2020 will ultimately depend on
the capacity to implement the recent and planed reforms quickly and
effectively.

Upgrading the manufacturing sector through research
and technologies

The graph below illustrates the upgrading
of knowledge in different manufacturing industries. The position on the
horizontal axis illustrates the changing weight of each industry sector in
value added over the period. The general trend to the left-hand side reflects
the decrease of manufacturing in the overall economy. The sectors above the
x-axis are sectors whose research intensity has increased over time. The size
of the bubble represents the share of the sector (in value added) in
manufacturing (for all sectors presented in the graph). The red-coloured
sectors are high-tech or medium-high-tech sectors.

The graph above shows that the weights in
the economy (horizontal axis) and/or the BERD intensities (vertical
axis) of almost all manufacturing sectors in the Czech Republic have increased
substantially since 1995. This trend concerns all the HT and MHT manufacturing
sectors (colored in red) - in particular motor vehicles, electrical machinery
and apparatus and machinery and equipment - which are all contributing to the
overall increase of total BERD in the Czech Republic.

This reflects to a large extent the
attractiveness of the country for foreign investors, with 55% of BERD performed
by foreign-owned affiliates. The share of inward BERD doubled over the period
1999-2009. Around 80% of this inward BERD comes from EU-owned firms out of
which half comes from German-owned firms. With shares of inward BERD in total
BERD of more than 85%, pharmaceuticals and motor vehicles are the manufacturing
sectors that show the highest degree of internationalisation. The dominance of
foreign affiliates in HT and MHT sectors is reflected by the absence of Czech
firms amongst the EU top 1000 R&D investing firms[6]. In the manufacturing sector,
the share of inward BERD in total BERD (about two thirds) is slightly higher
than the share of the value added created by foreign affiliates, indicating
that foreign-owned affiliates investing in the Czech Republic also invest in
R&D and that their R&D intensity is equal or above that of domestic
firms. In other words, inward BERD follows FDI.

Competitiveness in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

The trade balance in high-tech (HT) and
medium-tech (MT) products of the Czech economy improved considerably between
2000 and 2010. At the beginning of the period the country was running a mild
trade deficit to which HT/MT products were contributing. Starting in 2004,
HT/MT sectors literally pulled the trade balance out of the red, more than
offsetting trade losses in other sectors. Since 2007 the HT/MT trade surplus
has been maintained at a very high level and helped the country weather out the
economic crisis. HT and MT products have therefore played a critical role in
redressing the trade balance of the Czech economy and now constitute the
backbone of its trade surplus, indicating a relative HT/MT trade
specialisation.

The graph above shows the increase of this
positive contribution for the majority of HT and MT products. The largest
increases are for telecommunications and sound-recording and reproducing
apparatus; office machines and automatic data-processing machines; general
industrial machinery and equipment; and road vehicles. This shows that the
trade balance situation of these products has improved even faster than the
overall trade balance of the Czech Republic, indicating an increasing trade
specialisation of the country in these products. This is also true to a lesser
extent for professional, scientific and controlling instruments; other
transport equipment; machinery specialised for particular industries;, plastics
in non-primary form; and chemical materials and products.

The industries corresponding to these
products have largely upgraded their R&D intensities and, with the
exception of chemicals, they have been growing faster than the Czech economy on
average (see graph in previous section), highlighting a mutually supporting pattern
of trade and value added specialisation. In contrast, the trade balance in
electrical machinery, apparatus and appliances has stagnated despite an
increasing research intensity effort and share in the economy.

After an initial sharp increase by 20% from
2000 to 2006, total factor productivity has remained stable in the Czech Republic (table below) which is the 4th best performance in the EU.
Regarding the Europe 2020 targets, the country's best ranking is attained for
the risk of poverty (1st) and the worst for the level of tertiary
education among the 30-34 years old. The employment rate is high, greenhouse
gas emissions have been decreasing, backed up by clear growth in renewable
energy and environmental technologies.

Key indicators for the Czech Republic

Country-specific recommendation in R&I adopted by
the Council in July 2012:

"Adopt the necessary legislation to establish a
transparent and clearly defined system for quality evaluation of higher
education and research institutions. Ensure that the funding is sustainable and
linked to the outcome of the quality assessment."

Denmark

Innovation
for productivity addressing societal challenges

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Denmark. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 3.09%              (EU: 2.03%; US: 2.75%) 2000-2011: +4.64%   (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:77.65                 (EU:47.86;   US: 56.68) 2005-2010: +3.41%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.713             (EU: 0.612) || Knowledge-intensity of the economy 2010:54.95                  (EU:48.75;     US: 56.25) 2000-2010: +1.64%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Energy, Environment, Food, Biotechnology, Health               || HT + MT contribution to the trade balance 2011: -2.77%             (EU: 4.2%;      US: 1.93%) 2000-2011: n.a.          (EU: +4.99%; US:-10.75%)

Denmark has considerably expanded its research
and innovation system over the last decade and currently has the third highest
R&D intensity among EU Member States. Denmark is also one of the most
efficient European countries in terms of quality of scientific output per unit
of public R&D investment. In Denmark public R&D investment has been at the level of 1% of GDP since
2009 and the Danish scientific production system is of high quality and
efficient in terms of quality citations per invested public money. Nevertheless this good research performance has not yet fully
translated into increased competitiveness and productivity in the Danish economy.

In the last decade Denmark experienced a lower
productivity growth, especially in construction and in services, than other
knowledge-intensive countries, and even experienced falling levels of
productivity during the economic crisis over the period 2007-2010[7]. Furthermore, value added in
high-tech and medium-high-tech manufacturing sectors plus high-tech knowledge-intensive
services as a % of total value added has been lower than the EU average since
2000. Other remaining challenges are weak competition in some sectors and
relatively poor innovation performance, despite a favourable innovation
environment. There is thus a need for a better valorisation of knowledge by
enterprises and for boosting innovation to enhance productivity, growth of
firms and structural change.

The Danish government has identified the trend of slow
productivity growth as a serious economic challenge and in response has
developed a new national innovation strategy which focuses on the five Danish
regions and their innovation efforts. A Productivity Commission was furthermore
established in spring 2013 in order to examine the reasons for the slow growth
of productivity in Denmark and for answering specific questions on ways to make
the Danish economy more productive and competitive.

The current policy focus is on expanding 
public-private cooperation, reinforcing cluster dynamics and finding new
solutions to link the supply of innovation closer to public demand (through
public procurement of innovative products and services) and to private demand
(firm-to-firm technology markets). At the level of human resources, there is a
determined effort to enhance creativity and entrepreneurship throughout the
education system, including adult education.

Investing in knowledge

In the context of Europe 2020, Denmark set a national R&D intensity target of 3% for 2020. However, this target has already
been achieved in 2009. In 2009, Denmark also achieved its objective of reaching
a public R&D investment level of 1% of GDP. This target was achieved
following an increase in the government budget for R&D of 8.9% over the
period 2009-2011. [8]
A high share of the EU regional structural funds available to Denmark was allocated to research and innovation (over 34%). However, Denmark was less successful in obtaining funding from the EU research framework programme.[9]

Having reached a public R&D intensity level
considered optimal by the government, efforts are currently being focused on
how to foster innovation in the business sector. Over the last decade, business
R&D intensity has increased in Denmark to reach the level of the United States. In 2010,  business expenditure on R&D increased by 5% (in nominal
terms), in line with GDP growth thus leaving business R&D intensity
unchanged. R&D expenditure by the major research-intensive firms in Denmark increased by 11% over the same period. R&D investment in Denmark is mainly carried out by Danish firms; foreign inward business enterprise research
and development spending accounted for less than 7% of total BERD in 2007,
while outward business R&D was insignificant.

Denmark still has a lower intensity of business R&D investment than other
innovation leaders. Part of the reason is linked to Denmark's economic structure
which has a relatively high share of medium-tech and low-tech sectors. However,
over the last decade R&D intensity has increased in high-tech/medium
high-tech and medium—low-tech/low-tech sectors.[10] At the same time there was a
decreasing R&D intensity in some traditional sectors of the Danish economy,
such as food products, medical instruments, and machinery and equipment.
Moreover, the weights of many of the high-tech and medium-high-tech sectors in
the Danish economy have decreased.[11]

An effective research and innovation system building
on the European Research Area

The graph below illustrates the strengths and
weaknesses of the Danish R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

Denmark's research and innovation system benefits from a high level of funding,
strong scientific production, and good human resources and mostly performs
above the EU average. Denmark has a high tertiary education attainment rate and
performs near the EU average on new graduates in science and engineering per
thousand populations. A weaker point concerns the number of new doctoral
graduates and there is also a lower share of foreign doctoral students than in
the EU as a whole. Denmark has a high performance on business enterprise
researchers in the labour force and there is a focus on technologies well
adapted to the Danish industry profile (environmental technologies, health
technologies, biotechnologies). Denmark's scientific production is strong and
the country has one of the world's highest levels of scientific excellence (a share
of 14.9% of total national scientific publications in the 10% most highly-cited
scientific publications in the world) and the trend over the last ten years has
been towards a greater quality.

Denmark
is well integrated in scientific and cooperation networks across Europe, and also in  technological cooperation networks. However, Denmark's scientific cooperation with other European countries[12], benefiting from the emerging
European Research Area, is more intensive and broader in scope than its
technological cooperation. A potential for enhancing the internationalisation
of SMEs is suggested by the low share of Danish SMEs participating in the FP7
programme. The funding received under the EC framework programme in relation to
total research spending in Denmark is also below the EU average.

Denmark's scientific and technological strengths

The maps below illustrate six key science and
technology areas where Denmark has real strengths in a European context. The maps
are based on the number of scientific publications and patents produced by
authors and inventors based in the regions.

Strengths in science and technology at European level

  Scientific production                 Energy             
Green energy     Technological production

Scientific production                                Environment   
              Technological production

Scientific production                 Food,
agriculture and fisheries      Technological production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific production                           Biotechnology              
Technological production

Scientific production                                Health                          
Technological production

Scientific production           Materials       
Construction technologies Technological production

Denmark shows a stronger performance in patenting than in scientific
production. It has a high number of patent applications per inhabitant and it
also has a growing number of highly-cited patents (reflecting technology
breakthroughs). In scientific production Denmark only excels in food and
agriculture, while in technological production (patenting) it has clear strengths
at European level in energy (in particular green energy), environment, food and
agriculture, biotechnology, health (in particular medical technologies) and
construction technologies. Other fields of technology strengths include
electrical machinery, engines, pumps and turbines, plastic products, and
audio-visual products.

Denmark has scope for enhancing scientific strengths in areas related to these
technology fields (mainly industry-led), as shown by the maps above. The high
share of total Danish scientific publications in the 10 % most cited scientific
publications worldwide shows that the quality of Danish scientific output is world-class.
A weakness can be seen in the scale of scientific and technological production
as science, technology and industry clusters need both high quality and a
critical mass. There are opportunities to be found in an active use of
European-wide instruments, such as the ESFRI infrastructure, in networking or
smart specialisation scaling up dynamics and in enhancing potential clusters through
the use of EU Structural Funds.

Policies and reforms for research and innovation

Denmark has recently launched reforms to boost innovation, in particular through
the Danish Globalisation Strategy, the Business Innovation Fund
and the proposal "Strengthening innovation in business". Furthermore,
the 2010 "Enterprise package" has been extended to 2011 and a new
"Competition package" was launched in 2011 with 40 initiatives to
promote competition and productivity. Denmark has set a target for reducing the
administrative burden for business. Although this target was met in 2010, the
government has launched a new strategy for reducing the administrative burden
still further. Denmark, already a leading country when it comes to
e-government, has launched a new e-government strategy in 2011. From the end of
2012 all new enterprises will be equipped with basic tools for digital communication
with the authorities.

In 2009 and 2010, new innovation policy measures have
been introduced in Denmark targeting private R&D investment, including increased public procurement of
eco-innovations, support for large demonstration facilities, the launch of the
Renewal Fund and a risk capital fund. Finally, the "Energy Strategy 2050", a long-term and broad
national strategy for energy for the horizons 2020 and 2050, is also relevant in
this context as it contains measures for boosting innovation in an area, which
is a central challenge for Denmark and a global business opportunity for Danish
firms. Furthermore, Our Future Energy, an energy agreement for Danish
energy policy 2012-2020, was launched in March 2012. In December 2012 Denmark has adopted a new broad innovation strategy. This includes the identification of
areas where Denmark has competitive advantages, in line with the EU Horizon
2020 programme.

There is a good opportunity for active supply-side and
demand-side innovation in the areas where Denmark has competitive advantages,
such as wind energy, organic chemistry, pharmaceuticals and biotechnologies.
Such strategies should from the beginning be connected to European instruments,
in particular the European Innovation Partnerships, Horizon 2020
and ESFRI infrastructures. This would create stable and long-term framework
conditions for the Danish industry to invest strategically in research and
innovation.

Finally, an increase in R&D intensity would
probably make it easier for Denmark to maintain its position among the most
innovative and knowledge-intensive economies in the world. The mid-term review
of the Europe 2020 objectives (in 2014-2015) could constitute an opportunity in
this respect. Other Nordic countries (Sweden, Finland) have set R&D
intensity targets of 4% and competitors in Asia have R&D intensity targets
of up to 5% (South Korea). Given the low productivity growth in Denmark and the need for an evolution towards more broad innovation activities in firms, including
investment in intangibles, Denmark would benefit in particular from combining
the strategic focus of its innovation policy with increased public investment
in R&D.

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[13].

Danish SMEs are relatively dynamic, pursuing
technology development with a higher intenstiy of patent applications in young
firms than is found in the United States and with a high share of SMEs with
new-to the-market products.  The index of economic impact of innovation is at a
clearly higher level than in the EU as a whole and close to the reference group
of countries. A relative weakness in Denmark is a lower contribution to the
trade balance of medium and high-tech product exports.

The quality of the innovation environment for
firms in Denmark is well above the EU average. Denmark has good administrative
support for business, a determined policy to promote creative and
entrepreneurship skills in primary and secondary schools and a relatively high
public procurement culture for advanced technology products as perceived by
business leaders.

However, in some areas Denmark is lagging
behind other innovation leaders, in particular in private funding of innovation
(venture capital investment for the expansion and replacement phase, the
presence of business angel groups and the perceived ease of access to loans),
in some aspects of entrepreneurship (e.g. the fear of failure rate) and in the intensity
of local competition and perceived buyer sophistication. Market mechanisms and
indirect funding of R&D through tax incentives have played a larger role in
Denmark than direct funding of business R&D, features which distinguish Denmark from the other Nordic countries.

The Danish business environment is marked by
a wide range of competition-friendly regulations (it is ranked 5th
out of 183 economies on the ease of doing business indicator[14]). The
innovation environment for firms in Denmark is well above the EU average and Denmark's R&D investment target of 3% of GDP had already been achieved in 2009.
Compared to other innovation leaders, Denmark has a higher share of SMEs among
its companies coupled with a relatively high business R&D intensity within SMEs.
Denmark therefore has a clear potential to further increase its technology
development via a structural change towards a higher share of
knowledge-intensive sectors. In fact over the last ten years Denmark has caught up rapidly in terms of patent applications, license revenues and
employment in knowledge-intensive activities.

Upgrading the manufacturing sector through research
and technologies

The graph below illustrates with the upgrading of
knowledge in different manufacturing industries. The position on the horizontal
axis illustrates the changing weight of each industry sector in value added
over the period. The general trend to the left-hand side reflects the decrease
of manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

As shown by the graph above the share of value added
of high-tech and medium high-tech sectors (red circles) in the Danish economy
has decreased since 2001, despite a general increase in R&D intensity (R&D
intensity declined only in machinery and equipment, and medical, precision and
optical instruments). The only high-tech or medium-high-tech sector with an
increase in its share of value added was electrical machinery and apparatus. In
general productivity growth has been low. The Danish government recognises as a
major challenge the need to increase the number of innovative companies and to
accelerate productivity growth in the manufacturing and services sectors.

One possible reason for the low productivity growth is
a relatively lower level of innovation in Danish manufacturing enterprises, a
level which is far below the levels of other Nordic countries. Underlying
factors can be linked to the weaker dimensions of Denmark's innovation
environment (risk funding, entrepreneurship, competition and market
sophistication) and to the limited internationalisation of Danish technology
development and firms. However, it can also be linked to Denmark's industrial structure, which would have to change towards more knowledge-intensive
sectors and larger firms to make it more innovation oriented. In this respect
fast growing innovative firms represent a key asset and future potential for Denmark as has been illustrated in the previous part of this profile.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation in these products.

Within the framework of an increasing Danish export
surplus, the contribution of the majority of high-tech
(HT) and medium-tech (MT) products to Denmark's trade balance has not changed
significantly between 2000 and 2010. However, inside the important sector of
machinery and equipment there are several product categories, including power
generating machinery and machinery specialised for particular industries, which
showed a significant growth in their contributions to the trade balance.
Electrical machinery and apparatus, a sector that has improved its research
intensity, also expanded its contribution to the trade balance. Hence, there is
an increasing specialisation of the country in the above mentioned products.
The contribution of medicinal and pharmaceutical products to the trade balance
has decreased significantly between 2000 and 2010. Overall the share of
high-tech exports in total exports is below the EU average, but there is a
relatively high share of knowledge-intensive services in service exports.

The Danish economy is characterised by a relatively
low productivity growth, both in the services and the manufacturing sectors.
Possible explanations are an economic structure with a high share of services,
which tend to have lower productivity growth than manufacturing industries, a
low level of local competition due to the small size of the market and an
insufficient level of innovation in relation to the country's potential. Total
factor productivity has hardly grown since 2000 implying that there was little
contribution from innovation and human capital development to productivity
growth. The employment rate and the quality of human capital, as evidenced by
the tertiary education attainment rate of the population, are high in Denmark, but there was little progress on these indicators in recent years and even a
decline since 2005. However, Denmark has improved its performance as regards
the other Europe 2020 targets in recent years.

Key indicators for Denmark

[1] See Methodological note for the composition
of this index.

[2] IU scoreboard 2011: http://www.proinno-europe.eu/inno-metrics/page/country-profiles-czech-repucblic

[3] Corresponding resp. to Severozapad and Prague

[4] The proposed Higher Education Act was
rejected in June 2012

[5] See Methodological note for the composition
of this index.

[6] EU Industrial R&D Scoreboard

[7] Measured as change in GDP per person employed

[8] In the 2011 budget there was an increase
for R&D of 4.7%. According to a recent survey (ERAC) the 2012 budget
increased by 3.5%. However, a decrease of 3.6% is expected in the 2013 budget.

[9] Mainly due to a low application rate. The
financial contribution success rate was the 5th highest in the EU.

[10] For most of the relevant sectors of the
Danish economy, business R&D intensity increased over the last decade

[11] Particularly noticeable for the Radio, TV
and communication equipment sector.

[12] Denmark's main scientific cooperation
partners are the United Kingdom, Germany, Sweden and the Netherlands, but Danish scientists also cooperate extensively with researchers in Southern
European countries.

[13] See Methodological note for the composition
of this index.

[14] Source: World Bank Doing Business survey 2012.

Germany

The
challenge of maintaining a high innovation capacity for an export oriented
economy

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Germany. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 2.84%              (EU: 2.03%; US: 2.75%) 2000-2011: +1.28%   (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:62.78                 (EU: 47.86;  US: 56.68) 2005-2010: +3.88%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.813              (EU:0.612) || Knowledge-intensity of the economy 2010:44.94                  (EU: 48.75;    US: 56.25) 2000-2010: +1.04%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Automobiles, Environment, Energy, New production technologies               || HT + MT contribution to the trade balance 2011: 8.54%              (EU: 4.2%;     US: 1.93%) 2000-2011: -0.70%    (EU: +4.99%; US:-10.75%)

Germany has expanded its research and innovation system over the last decade.
Investment in R&D has grown substantially since 2000 to reach 2.84% of GDP
in 2011, which is already close to the 3% national target for 2020[1]. Public expenditure represents
one third of investment in R&D. The government increased the public budget
on research and innovation even during the 2009 economic crisis as part of a
policy of prioritising spending on education and research. Business enterprise expenditure
on R&D, which represents two thirds of investment in R&D, also grew as
a % of GDP over the period 2000-2010.

The increase in public and private expenditure
on research and development in Germany has helped to maintain a high innovation
capacity and a strong export performance. The German economy is based to a
considerable extent on medium-high technology sectors such as automobiles,
electro-technical products, machinery, and chemical products. However, over the
last decade Germany has lost its strong market position in pharmaceuticals and
in optical industries. Germany has only produced a few successful new players
in high-tech industries in the recent past. The development of biotechnology
and advanced computer science remains below potential. There is also still
underexploited growth potential as regards innovative and knowledge-intensive
service economy sectors. Germany has come through the current economic crisis relatively
well, partly as a result of a strong export sector. However, the German market
position as regards medium-high-tech products may be challenged in the future by
new players such as the BRIC countries. An ageing population and fewer young
people represent further challenges for the German economy.

The German ministry for research (BMBF) has
employed the so-called High-Tech Strategy to address several important
challenges. However, further structural reforms of the education, research and
innovation system are required.  In view of the demographic situation a
particular focus on the quality of human resources is necessary and further
incentives for excellence and internationalisation are needed. There is room
for more public-private cooperation and for implementing targeted supply-side
and demand-side measures to foster innovation and fast-growing innovative firms
in Germany. Such measures should in particular be targeted at high-tech sectors
such as ICT, biotechnology and medical technologies.

Investing in knowledge

With an R&D intensity of 2.84% in 2011 Germany is above the EU average and is already close to the 3% national target. The gap of
0.16 percentage points currently corresponds to € 4 billion (German GDP
amounted to about € 2.5 trillion in 2011). About one third of German R&D
investment comes from public sources and two thirds from private sources -
a distribution that has remained fairly stable over the last decade. Based on
this distribution an additional € 1.5 billion of public expenditure on R&D
will be needed (compared to 2011) to reach the R&D intensity target of
3.0%.

In the period 2000-2011 the federal public research
budgets, which represent more than half of public spending on research, were
expanded substantially. Federal spending on research and education increased by
a further 7% in 2011 and by 12% in 2012. However, at Länder level, growth in
R&D expenditure, including university expenditure on R&D was much lower.
R&D intensities vary strongly between German Länder, ranging from 1.26% in
Schleswig-Holstein and 1.27% in Saarland to 4.83% (2009) in Baden-Württemberg,
the European region (NUTS II level) with the highest research intensity. Berlin (3.67%), Bayern (3.1%) and Hessen (3.05%) also have R&D intensities that are
already above the German national target.

A recent survey of the Stifterverband für die Deutsche
Wissenschaft revealed that internal R&D spending of the business sector is
expected to amount to € 49.4 billion in 2011 (+5.1% in nominal terms compared
to the year before) and € 49.9 billion in 2012 (+1.2%), implying a probable
increase in real terms in 2011 of slightly below 3%, and if confirmed, a slight
decrease in real terms in 2012. Research intensity is especially high in the
automobile sector, which represents nearly one third of total German business
R&D investment. A weak point of German R&D is the relatively low level
of spending in high-tech areas such as pharmaceuticals and ICT.

Concerning EU funding Germany has allocated € 25.5
billion of ERDF Structural Funds to research, innovation and entrepreneurship
with a 47.1% absorption rate. Germany counts 11 000 participants in the EU FP7
programme and receives the highest amount of FP7 funding in absolute terms (€
4.3 billion). Its success rate of applications is above average (24% compared
to an EU average of 20.4%), but FP7 funding as a % of GDP is below the EU
average.

An effective
research and innovation system building on the European Research Area

The graph below illustrates the strengths and
weaknesses of the German R&I system. Reading clockwise, the graph provides
information on human resources, scientific production, technology valorisation,
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

In general Germany's research and
innovation system performs very well. However, the international dimension is
below the EU average, in particular in relation to foreign investment in
business R&D and EU Framework Programme funding. Possible explanations
relate to the country size effect, as well as to the high level of German
domestic public and private expenditure on R&D. Despite the easy access to
and relative abundance of national funding for research, Germany could better use the opportunities offered within the ERA and more specifically
within the Framework Programme.

Germany has a particular strength in business R&D especially in innovative
SMEs, many of which are world leaders in their particular small market
segments. The high level of patenting is an indication of industrial leadership
in several domains, most notably in medium-high-tech industries including
engineering industries, automobiles and chemicals and also in environmental and
energy technologies.  Public-private co-operation in publications and in
research is functioning well and is further supported by the federal government
in the current new programme activities for innovation outlined in the
"High Tech Strategy". While Germany performs well in terms of new
doctoral graduates, its performance as regards new science and engineering
graduates has only recently surpassed the EU average and there is the risk of
slower growth in the long term as a result of the ageingof the population. The
risk of a scarcity of qualified human resources could in the long term endanger
the strong German export position in engineering and science based industries.
In recent years there has been an increase in the number of students in science
and engineering subjects (MINT), but efforts should be maintained to further
reduce dropout rates and to increase the share of female professors, which in
turn would attract more female students.

Germany's scientific and technological strengths

The maps below illustrate six key science and
technology areas where German regions have real strengths in a European context.
The maps are based on the number of scientific publications and patents
produced by authors and inventors based in the regions.

Strengths in science and technology at European level

Scientific
production                        New production technologies                Technological
production

Materials

Automobiles

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Energy

Environment

Health

As illustrated by the maps above, there is a notable
difference in performance between scientific production (publications) and
technological production (patents) in Germany. Levels of scientific publication
vary across German regions with only a few regions on the same level as their
main competitors in Europe. This is even true for sectors such as production
technologies, materials, and automobiles, where German companies are among the
world leaders. An explanation of the relatively weak scientific publication
activity in Germany may be a language bias.

Patenting activities in Germany are very high in the
areas referred to above. Energy, environment and health are other areas where
patenting is particularly strong. The big public research institutes such as
the Max Planck Society, the Fraunhofer Society, the Helmholtz society, and also
the Leibniz institutes are specialised in these areas, work closely with
universities and are generally highly ranked in recognised international
comparisons. The regions of the south and the south-west of Germany are most active in patenting. Saxony and southern Brandenburg (Potsdam) in the New
Länder as well as Berlin also show relatively high levels of patenting.

Policies and reforms for research and innovation

The High-Tech Strategy 2020, launched in August
2006 and updated in July 2010, is seen as an instrument to improve cooperation
between science and industry, and to improve the conditions for innovation with
a view to enhancing the international competitiveness of technology-intensive
manufacturing products in key sectors of the German economy. The 2010 update of
the High-Tech Strategy prioritises the targeting by public-private
partnerships of prospective markets related to important societal challenges in 10 so called forward-looking projects
("Zukunftsprojekte"). Strategic priorities of the High-Tech
Strategy 2020 are health, nutrition, climate and energy security, and
communication and mobility.

As regards fiscal policies Germany is one of the few countries that has not introduced R&D tax credits. The
introduction of R&D tax credits is currently being considered at federal level
as such credits tend to be requested by large international companies.

Germany is already quite close to achieving its national R&D intensity
target of 3%. Only an extra 0.16 % of GDP or about € 4 billion are needed to
reach the target. However, available data show an increasing disparity between
R&D intensity in the northern Länder and the southern Länder. In fact
R&D intensity is almost four times higher in Baden-Württemberg (the leading
EU region) than in Mecklenburg-Vorpommern and Schleswig-Holstein. This
disparity also applies to private investment in R&D.

The university system, which is the responsibility of
the Länder, is considered to be underfinanced, given the recent strong increase
in student numbers. In order to enable additional federal funding for
universities, the Hochschulpakt (higher education pact), voluntary agreements
between the federal and the Länder levels, has been set up. This pact was
renewed in 2009 and additional resources were allocated in March 2011.

As regards human resources Germany has taken measures
to remove restrictions on in-bound researcher mobility in view of a skills
shortage in some science and technology domains. The federal government
recently decided on a reform of the Immigration Act to facilitate the processing
of residence permits, and on an action programme to ensure an adequate supply
of labour, and on programmes for enhancing international mobility. The legal
parameters for the employment of foreign graduates of German universities have
been improved and the recognition of qualifications acquired abroad is being
facilitated by new initiatives. This could help to increase the still
relatively low share of foreign professors. Researcher salaries in Germany are above the EU average, but lag behind those in the United States and Switzerland. Recently the Constitutional Court issued a ruling on minimum wages for full
professors in universities that could lead to increased salaries for those at
the lower end of the wage scale.

A national pact to attract more women to science and
engineering ('Komm mach MINT-mehr Frauen in MINT-Berufen') was set up on
the initiative of the Research Ministry (BMBF) in June 2008 and a second phase
of this pact was launched in December 2011.

As regards the knowledge triangle and the
fostering of innovation activities the Research Ministry (BMBF) and the
Ministry for Economic Affairs (BMWI) are making attempts to focus better their
activities. The BMBF fosters public/private partnerships by activities such as
the 'Leading-edge cluster competition', which aims at the formation of business
and science clusters to boost Germany's innovative strengths in specific areas
and more recently (August 2011) the 'Research Campus', a competitive funding
scheme to strengthen cooperation between companies and research organisations. The
BMWI uses the EXIST programme to stimulate an entrepreneurial
environment at universities and research institutions. This programme is aimed
at increasing the number of technology and knowledge-based business start-ups.
The programme is part of the federal government’s 'High-tech Strategy' and
comprises sub-programmes on improving start-up business culture, stipends and
knowledge transfers.

Economic
impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[2]..

Germany has one of the highest economic impact of innovation
in Europe. The German economy is more oriented towards knowledge-intensive
sectors than the EU as a whole. This is reflected also in the composition of
exports of goods and services and in the innovation activities of enterprises,
including those of SMEs, which are clearly above the EU average. Innovative
German enterprises have a good growth performance combined with a high level of
technology development.

The distribution of business expenditure on
R&D reflects the concentration of German industry in medium-high-tech sectors,
with more than 30% of R&D spending carried out by the automobile sector
alone.  Other important medium-high-tech sectors in terms of R&D
expenditure are machinery and equipment and chemicals excluding
pharmaceuticals. These three sectors represent around 50 % of business expenditure
on R&D in Germany. Spending levels are relatively lower in high-tech areas 
with pharmaceuticals, radio, TV and communication equipment, and medical
precision and optical instruments together accounting for only around 20% of
business expenditure on R&D. Research is furthermore concentrated in big
companies and research intensity is lower in the services sector than in
manufacturing. To assist SMEs in enhancing research and innovation a Central
Innovation Programme for SMEs (ZIM, 'Zentrales Innovationsprogramm
Mittelstand') has been set up in 2008 and will run till 2014.

Framework conditions for entrepreneurship
in Germany have improved as indicated by an improved ranking for Germany in the World Banks ease of doing business index. Germany has also made
progress in reducing the administrative burden related to reporting obligations
in the business sector.  In 2011, The Bureaucracy Reduction and Better
Regulation programme has been extended to cover other compliance costs.
However, Germany remains at around the EU average regarding the administrative
burden of the regulatory framework.

Labour productivity in Germany is high and access to bank lending for SMEs is above the EU average. The quality of
the infrastructure is good and the legal and regulatory framework is perceived
by business as being appropriate. Remaining weak points concern the
availability of broadband and the usage of e-government services. Furthermore
the availability of venture capital in Germany (0.17% of GDP in 2011) remains
below the EU average (0.35%).

In the Global Competitiveness Report
2012-13 Germany is ranked highest among EU countries in capacity for
innovation, second highest (after Finland) in company spending on R&D and 6th
in the EU on university-industry collaboration on R&D.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend of moving to the left-hand side reflects the decrease
of manufacturing in the overall economy. The sectors above the x-axis are
sectors whose research intensity has increased over time. The size of the
bubble represents the share of the sector (in value added) in manufacturing
(for all sectors presented in the graph). The red-coloured sectors are
high-tech or medium-high-tech sectors.

The German economy is characterised by a relatively
strong manufacturing industry. Nevertheless, as in many countries, the share of
value added of manufacturing industries in total value added is tending to
decrease (illustrated by a leftward shift in the graph above). This is linked
to rationalisation and a relative decline in the price levels of manufactured
goods, the expanding services sector and also to globalisation and competition
from lower wage, emerging economies.

Compared to other EU Member States the German
manufacturing industries present an above average dynamic of upgrading
knowledge through R&D. Growth in business research intensity since 1995 was
moderate, but still faster than the EU average. The motor vehicles industry, a
key sector of the German economy, has expanded its high research intensity
further and has also succeeded in increasing its share of value added. A second
important medium-high-tech sector, machinery and equipment, has expanded its
share of the economy even more strongly, despite a more moderate growth in
research intensity. The same is true for the high-tech sector medical,
precision and optical instruments. The medium-high-tech sector electrical
machinery and apparatus, has lost research intensity over the last 15 years,
but maintained its share of value added. Office, accounting and computing
machinery is the only high-tech sector with a decreasing share of value added.
In this sector there was also a decline in research intensity over the last 15
years. The insufficient pace of modernisation in these knowledge-intensive industries
endangers their medium-term competitive advantage.

Competitiveness
in global demand and markets

Investment in knowledge,
technology-intensive clusters, innovation and the upgrading of the
manufacturing sector are determinants of a country's competitiveness in global
export markets. A positive contribution of high-tech and medium-tech products
to the trade balance is an indication of specialisation and competitiveness in
these products.

The German economy is strong
and has high levels of exports of manufactured goods for an economy of its
size. In fact, Germany is the third largest exporter worldwide[3], after China and the United States. In 2010 Germany was the economy with the largest export surplus in
absolute terms. As regards trade in services, in 2010 Germany ranked second, after the United States. In real terms, the German trade balance in high-tech
and medium-tech products is positive and has more than doubled over the last
decade.

The evolution of the
contribution of high-tech and medium-tech products to the trade balance in the
decade 2000-2011 shows a mixed picture for Germany, with few sectors expanding
their contribution to the trade balance, most sectors not changing their
contribution significantly and about one quarter of high-tech and medium-tech
sectors decreasing their contribution. As regards  the three largest German
export industries, all classified as high-tech or medium-high-tech: machinery, in
particular office machinery and power generating machinery has expanded its
contribution to the trade balance, while road vehicles, today Germany's largest
export industry, has also expanded its contribution, but to a lesser extent.
The contribution of chemical products, Germany's third largest export industry,
to the trade balance has shrunk over the same period.

Total factor productivity of
the German economy increased since 2000 by 5% per annum. However, Germany has performed less well when it comes to up-skilling its labour force. The share of
the population aged 30-34 who have successfully completed tertiary education has
increased only moderately since 2000 and is now below the EU average[4]. Germany is also making progress towards the other Europe 2020 targets, backed up by a very
high but decreasing level of patenting in areas of societal challenges, such as
health-related and environment-related technologies.

Key indicators for Germany

Greece

Focusing resources for a more knowledge-intensive
economy

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Greece. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 0.60%             (EU: 2.03%;  US: 2.75%) 2000-2011: +0.56%  (EU: +0.8%;  US: +0.2%) || Excellence in S&T 2010:35.27                 (EU:47.86;   US: 56.68) 2005-2010: +2.53%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.345                  (EU: 0.612) || Knowledge-intensity of the economy 2010:32.53                 (EU:48.75;      US: 56.25) 2000-2010: +2.52%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Food, agriculture and fisheries, Textiles, Services for computers, Manufacture of electrical motors generators and transformers               || HT + MT contribution to the trade balance 2011: -5.69%             (EU: 4.2%;    US: 1.93%) 2000-2011: n.a.          (EU: +4.99%; US:-10.75%)

Until the recent
economic crisis, Greece grew at a faster rate than the economies of most of the
other EU Member States and the United States, notably in the period immediately
after joining the European single currency (between 2002 and 2005). Greece made clear progress in improving its scientific quality and it
benefitted from an expanding global value chains. However, between 2001 and
2007 (the latest available year), R&D intensity in Greece never exceeded 0.60%, with a very low business R&D intensity (0.15% in 2000 and
0.17% in 2007). Overall R&D investment grew significantly over the period
2001-2006, but this did not result in any significant increase in R&D
intensity because of almost equally strong growth in GDP over the same period.
In addition to the problem of the low level of business investment in R&D, the
efficiency and effectiveness of spending on R&D remains a challenge and the
pace of implementation of reforms is slow.

Among the most pressing challenges, it can
be noted: an integrated legal framework for research performers is lacking (the
overall system is dominated by the universities); the articulation of R&I
policy with other policies is weak, with feeble links between education,
research and the business sector. Exploitation of research results by the
business sector is very limited, with very low patenting activity. The
knowledge-intensity of the economy is low (35.53 in 2010 compared to an EU
average of 48.75).

The strategy defined in 2011 identifies six
main research priorities focusing on sectors and technology areas that are
either very important for the economy or addressing societal challenges:
materials and chemicals; agro-biotechnology and food; ICT and knowledge
intensive services; health and biomedicine; energy and environment; applied
economic and social research, and research on cultural heritage. A reform of
institutional research structures responds to the need to increase critical
mass, focus the research agenda and avoid fragmentation. In this respect, Greece has in particular room for a further realignment of its research centres for an
increased concentration of resources, as well as an improvement of the
efficiency of the research sector and the development of its links with the
business sector.

Investing in knowledge

The latest data available for Greece date back to 2007. R&D intensity in Greece was stagnating at around 0.60% and
was marked by a particularly low business R&D intensity which increased at
an average annual rate of 2.3% between 2000 and 2007. In 2011 Greece set an R&D intensity target of 2% to be achieved by 2020, but this target was
cancelled at the end of 2011 due to the budgetary constraints and to the economic
crisis. No new target has been announced.

The bailout agreement with IMF, ECB and the European
Commission, resulted in a consolidation programme and deep cuts to public
expenditure and investment. In 2008 (the latest year available for Greece), the share of government budget for R&D in general government expenditure was
0.59%, significantly lower than the EU average of 1.52%. The percentage of
business R&D financed by the government at 4.7% was also well below the EU
average of 6.8%. National funding of R&I is complemented by EU funding. In
terms of number of FP7 applicants and requested contribution, Greece is ranked in 7th place (2011 data). In terms of number of participations
and budget share, Greece is ranked 9th with 1205 contracts.

The main supporting driving force behind the Greek
research and innovation system is related to the Cohesion policy. The core
Operational programme "Competitiveness and Entrepreneurship" has a
total budget of € 1.52 billion of which the Cohesion policy provides € 1.29
billion (EC contribution). The Operational Programme has 3 strategic objectives
for the period 2007-2013, with Research and Innovation as one of the major
intervention areas[5].

An effective research and innovation system building
on the European Research Area

The spider graph below provides a synthetic
picture of strengths and weaknesses in the Greek R&I system. Reading
clockwise, the graph provides information on human resources, scientific
production, technology valorisation and innovation. The average annual growth
rates from 2000 to the latest available year are given in brackets under each
indicator.

The innovativeness of the Greek economy depends
heavily on imported technology and know-how. It builds on organisational and
marketing innovations and until now very little on the production and
exploitation of new knowledge, which may lead to difficulties in finding new
sources of growth in a context of even increasing global competition. The graph
above illustrates this.

Greece
is below the EU average for most of the dimensions of its R&I system,
namely in human resources, scientific production and technology development.
However, it scores above the EU average for innovative SMES introducing
marketing, organisational and product or process innovations. BERD financed
from abroad as % of total BERD is well above the EU average, and before the
economic crisis had an average annual growth rate of 26.5% for the period
2001-2007. Other indicators have shown positive catching-up dynamics before the
economic crisis over the period 2000-2007: the quality of the scientific base grew as shown by an
average annual growth of 6.2%, the
number of researchers per thousand labour force and new doctoral graduates
(ISCED 6) per thousand population aged 25-34 grew at a faster rate than the EU
average. However, Greece suffered a net outflow of students to the United States before the economic crisis.

Greece's scientific and technological strengths

The maps below illustrate key science and technology
areas where Greece has real strengths in a European context. The maps are based
on the number of scientific publications and patents produced by authors and
inventors based in the regions.

Security:  scientific publications

Scientific
publications              Food, agriculture and fisheries         Technological
patents

Services for computer patents                   
Manufacture and sales of textiles patents

Manufacture of
electrical motors generators and transformers
patents

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010; European
Patent Office, patent applications, 2001-2010

Greece
has a high level of scientific production in construction, ICT, security,
aeronautics and space, transport, production and energy. From the point of view
of scientific specialisation, only the first three themes together with
automobiles can be considered as highly specialised. Greece's technological
specialization is mainly in food and agriculture, space, construction,
aeronautics and environment.  This thematic analysis points at room for improvement
in matching the science base and the knowledge needs of the Greek economy.
Although there is an insufficient convergence of S&T specializations, there
is a strong science base to build upon. The exceptions are the construction
sector and the food, agriculture and fisheries sector, where convergence is
well marked. Current trends indicate a lack of clarity regarding the country's
areas of specialisation that could be addressed in the national/regional smart
specialisation strategies under development, in particular in matching science
and innovation bases.

Policies and reforms for research and innovation

The General Secretary of Research and
Technology, appointed in May 2011, defined a new strategy for R&D and
innovation. A number of main areas of strategic importance have been defined as
national priorities: 1) agro-food, 2) information and communication
technologies, 3) materials/chemicals, 4) energy-environment, and 5)
health/biomedical sectors.

The process for meeting those priorities (and serving
the country's research needs) is based on four dimensions: (1) strengthening and supporting the scientific/research
personnel and research infrastructure; (2) encouraging links between the
scientific/research community and businesses and entrepreneurs; (3) supporting
bilateral, European and international collaboration; and (4) outreach and
education for research in the community (particularly youngsters). Each of
these dimensions will be implemented through a series of calls for proposals.
In addition, a "Policy Mix Project" formed of six routes to stimulate
private R&D investment is on-going.

Existing and planned programs support
R&I in enterprises, in particular in SMEs. The Operational Programme
“Competitiveness and Entrepreneurship 2007-2013” aims at enhancing cooperation between SMEs and Research centres and universities. This
framework is expected to increase the low propensity of SMEs to invest in
R&I. A monitoring and evaluation of results would certainly be helpful to
meet this crucial challenge for Greece.  The success of these programmes is
linked both to increasing the user-friendliness of the schemes and to
significantly improving framework conditions that would increase the absorption
by the private sector.

Public policies indeed face the challenge
of shaping the conditions influencing business demand for R&D-based
knowledge by opening up the internal market to competition, eliminating factors
hampering entrepreneurship and shifting emphasis from supply to demand. An
ambitious programme of reforms was launched in 2010 aiming to improve the
enabling environment for R&D and innovation investment. The measures
include significant improvements to the regulatory framework, the development
of industrial areas and business parks, and a roadmap for removing the most
important obstacles to entrepreneurship and innovation. In addition, the
funding of clusters has become a promising dimension for improving the
innovation climate. Following in the footsteps of the Corallia microelectronics
cluster (funded with €35 million in 2008), the creation of new "knowledge
intensive" clusters is foreseen in 2012. However, the deterioration of the
Greek economic situation continues to discourage business investment.

Economic
impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[6].

According to this index, the economic
impact of innovation in Greece is slightly above its reference group, much
below the EU average. Greece's performance on three of the five indicators is
particularly low: patents inventions, contribution of high- and medium-tech
products to the trade balance and share of knowledge intensive exports in
services exports[7].
In contrast, the performance on sales of new-to-market and new-to-firm products
is very good. One key factor to increase the economic impact of innovation is
of course the structural change that allows innovation-driven growth.
High-growth innovative firms in particular play a catalytic role in this
respect.

Greece traditionally has a very low business R&D intensity which is
directly linked to two main structural features of the economy: the small size of
the firms and the sectoral composition of the economy (mostly low-tech and medium-low-tech
sectors). Nevertheless, Greece has maintained a regular presence in the EU
Industrial R&D Investment Scoreboard, since 2005, with four to six
companies a year in the top 1000 R&D EU investors, mainly in three sectorss:
ICT, pharmaceuticals, and services (leisure, travel). These firms have
increased their R&D investment in 2009 and 2010, by 5% and 3.2%,
respectively.

The challenge is now to foster the creation
and development of new innovative firms. Human resources and entrepreneurship
provide strong building blocks for Greek firms. However Greek firms are lagging
behind in relation to finance, business investment and intellectual assets. The
low level of output from research activity and the need to increase the links
between universities and industry are two of the key challenges facing the
Greek R&I system. The private sector has a reduced share in total
expenditure on R&D, reflecting the low demand for research-based knowledge
from the business sector. A combination of factors including the predominance
of low-tech sectors, significant institutional and bureaucratic obstacles and a
volatile policy environment are orienting business activities towards less
knowledge-intensive and lower value added segments of the economy.

Restricted access to capital, especially
for new firms, due to the reluctance of the financial system to finance
innovation and to undertake risky investments, is also among the factors
hindering mobilisation of resources for R&D. Greece has recently made good
progress in simplifying procedures for start-ups and reducing overall costs.
Launched in 2011, this new system has already supported the creation of 7000
new firms. It aims at improving framework conditions and facilitating growth at
a time of rising unemployment and frozen hiring procedures in the public
sector.

Upgrading knowledge and technologies in the
manufacturing sector

The graph below illustrates the upgrading
of knowledge in different manufacturing industries. The position on the
horizontal axis illustrates the changing weight of each industry sector in
value added over the period. The general trend of moving to the left-hand side
reflects the decrease of manufacturing in the overall economy. The sectors
above the x-axis are sectors whose research intensity has increased over time.
The size of the bubble represents the share of the sector (in value added) in
the economy (for all sectors presented on the graph). The red-coloured sectors
are high-tech or medium-high-tech sectors.

The Greek service sector accounted for
79% of value added in 2009 compared to a share of 10% for manufacturing. In
1995, the corresponding share for the service sector was 70% and for
manufacturing was 12%. The construction sector dominates the manufacturing
sector. It accounted for 6.01% of total value added in 1995, reaching a peak of
8.16% in 2001 before declining to 4.45% in 2009.

The graph above synthesises the structural
change of the Greek economy over the 1995-2007 period. It shows that the
economy has become slightly less industrialised and more services oriented. The
small increase registered in business expenditures on R&D after 1995 (with
a negative trend in the period post 2000) has been caused by the increase in
the research intensities of a few individual sectors, in particular the
chemicals and chemical products sector. With tourism in a dominant position, the service sector
(not shown in the figure above) has overtaken all other sectors in terms of
contribution to value added (following a similar trend to most of the other EU
countries).

Competitiveness in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A positive
contribution of high-tech and medium-tech products to the trade balance is an
indication of specialisation and competitiveness in these products.

Over the period 1995-2009, the Greek
economy gained slightly in world competitiveness. The world market share of
Greek products and services was around 0.53% in 2009 compared to 0.42% in 1995,
with a smaller share for more knowledge-intensive products. Nevertheless, the
situation of the Greek trade balance in general has been negative and
deteriorating rapidly with a peak registered in 2008. The trade balance in all
high-tech and medium-tech products together followed the same pattern,
remaining negative over the last decade and slightly decreasing the gap after
2008. To achieve this inversion of trend, and as shown in the graph above, most
high-tech and medium-tech industries improved their contribution to the trade
balance. This is the case for road vehicles, general industrial machinery and
equipment, plastics in primary forms, iron and steel and machinery specialised
for particular industries. In contrast, other transport equipment and
fertilizers have reduced contributions to the trade balance while several
sectors are stagnating. The strong specialisation of Greek industry in food
processing industries, and at a lower scale, in textiles and chemicals, is only
partially reflected in the trade balance thus highlighting the need to increase
the competitiveness of the main sectors. This situation is also confirmed in
the previous graph which shows that most of the manufacturing sectors have not
increased their value added over the last 15 years.

Other features of the Greek R&I system
are shown in the table below: employment in knowledge intensive activities
(manufacturing and business services) as % of total employment is rather low (11.4%
compared with EU average of 13.6%). Greek total factor productivity increased
from 2000 until 2007, only to decrease afterwards and reach in 2012 a value
inferior to the one registered in 2000. The employment rate decreased by three
percentage points between 2000 and 2011; this leaves Greece with the lowest
employment rate in the EU. A high percentage of the population is at risk of
poverty or social exclusion (31% compared to an EU average of 24.2%).

Key indicators for Greece

Hungary

Gearing reforms to removing obstacles to the growth of
innovative companies

Summary: Performance
in research, innovation and competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Hungary. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 1.21%              (EU: 2.03%; US: 2.75%) 2000-2011: +4.64%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:31.88                 (EU:47.86; US: 56.68) 2005-2010: +2.03%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.527              (EU: 0.612) || Knowledge-intensity of the economy 2010:50.23                  (EU:48.75;     US: 56.25) 2000-2010: +1.87%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Health, Environment, Automobiles, Biotechnology               || HT + MT contribution to the trade balance 2011: 5.84%              (EU: 4.2%;     US: 1.93%) 2000-2011: +9.04%   (EU: +4.99%; US:-10.75%)

Over the last decade, the Hungarian
research and innovation system has made clear progress in the level of private
sector investment and in overall R&D intensity, as well as in scientific
quality, patent revenues and structural change towards a more
knowledge-intensive economy. In spite of the fact that public sector R&D
intensity and the internationalisation of science is still less dynamic than
the EU average, Hungary shows good progress among the countries with a similar
industrial structure and knowledge capacity.

Hungary is still facing some key challenges in research and innovation. These
include: a low level of innovation activity, especially by SMEs, together with
a low degree of co-operation in innovation activities among the key actors;
unfavourable framework conditions for innovation, in particular an unpredictable
business environment, a high administrative burden and competition not
conducive to innovation; an insufficient number of human resources for research
(2015 forecast). Policy evaluation culture is weak in Hungary. According to basic principles stipulated in the Law of Research and Technological
Innovation (2004), four external evaluations of funded support schemes were
conducted between 2005 and 2011. The freeze of public funding in the second
half of 2010 as well as the frequent changes in the structure of STI policy
governance point however to some risks regarding the continuous policy
commitment needed to further address these important challenges.

The newly-prepared innovation strategy is
expected to provide specific well-targeted incentive schemes in support of
innovative SMEs and of enterprises of intermediate size, with priority funding
in the domains of the national thematic priorities. In addition, a specific
scheme should support infrastructures and coordination activities within
clusters of excellence in these domains. The principle of smart fiscal
consolidation should re-establish the priority of public funding for research
and innovation and lead to increasing levels of R&D intensity over the
coming years.

Investing in knowledge

In the 2011 National Reform Programme, the
Hungarian government set an R&D intensity target for 2020 of 1.8%. Hungary had an R&D intensity of 1.21% in 2011, up from 1.16% in 2010. An intermediary
target of 1.5% by 2015 is set by the Science and Innovation Programme (as a
part of the broader New Széchenyi Plan of January 2011). In 2010, 39.9% of
total R&D expenditure (close to the EU average) was financed by government
and 47.4% was financed by the business enterprise sector. This last figure reflects
the increase in business R&D intensity from 0.41% in 2005 to 0.69% in 2010.

In Hungary, inward business investment in
R&D as a % of total BERD decreased between 2003 and 2007 in contrast to the
majority of European countries where internationalisation of R&D increased over
the same period. However, the actual amount of inward business investment in
R&D increased in nominal terms. Hungary has by far the highest ratio of
inward FDI to GDP but only an average inward business investment in R&D
intensity. Hungary, Spain and to a lesser extent Italy all suffered declines in
intensity of inward investment in R&D over the period 1998-2007 (the latest
period for which data are available).

Hungary has had a participant success rate of 20.4% in FP7 close to the EU
average of 21.5%, and received more than € 114 million for 681 Hungarian
participations in FP7 up to mid-2011. Hungary plans to invest € 2.16 billion of
Structural Funds (2007-2013) in R&D and innovation, in particular in the
regional growth poles with emphasis on enhancing R&D capacities.

 An effective research and innovation system building
on the European Research Area

The graph below illustrates the strengths and
weaknesses of Hungary's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

Hungary is below the EU average in almost all areas. However, the rate of BERD
financed from abroad and EU FP7 funding per thousand GERD are higher than the
EU average. The share of employment in knowledge-intensive activities is very
close to the EU average.

Vulnerable areas include human resources,
scientific production, innovation and technology production. Innovation
activities in small firms are at a low level with only around 17% of Hungarian
SMEs innovating by introducing a new product or a new process. This (with that
of Latvia) is the lowest level in the EU. Only 5% of Hungarian scientific
publications are in the top 10%-most cited scientific publications, compared to
an EU average of 11.6%. Hungary has a low level of PCT patent applications with
a decreasing trend.  Hungary does better in terms of licence and patent revenue
from abroad (not shown on the graph). This is probably due to the increased
role of large foreign-owned enterprises in business R&D investment.

In the FP7, Hungary seems to be relatively
well integrated in pan-European research collaborations. The top collaborative
of Hungarian researchers are mainly with colleagues from Germany, the United Kingdom and France. The results of Hungarian participation to FP7 show a more
intensive European cooperation of the public sector than of the industry.

Hungary's scientific and technological strength

The maps below illustrate six key science and
technology areas where Hungary has real strengths in a European context. The maps
are based on the number of scientific publications and patents produced by
authors and inventors based in the regions.

Strengths in science and technology at
European level

Scientific
production                                               Health                                       
        Technological production

Scientific
production        Information and Communication Technologies         Technological
production

Scientific
production                               
Environment                                                     Technological
production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific
production                                
Biotechnology                               Technological production

Scientific
production                                   Automobiles                                                 Technological
production

Scientific
production                                  
Security                                        Technological production

As illustrated by the maps, in terms of
scientific production, Hungary´s strengths lie in automobiles and in information
and communication technologies. The relative specialisation in terms of
patenting is in biotechnologies and health. A quantitative analysis of the number of
EPO patents (2000-2010) by applicant classified by FP7 thematic priorities shows
that Hungary has a significantly higher share in the domain of health (33.4%)
than the EU average (12.8%).

The RTA (revealed technological advance)
index confirms that Hungary, with 2.21, is second in the EU after Slovenia in this domain. In the case of environment, Hungary had a growth index of 1.21
between 2000 and 2009 compared to an EU average of 1.25. In the case of
automobiles, Hungary has the second highest specialisation index in the EU
(2.42 compared to the much lower EU average of 1.07).

Policies and reforms for research and innovation

It is noticeable that R&D intensity increased
during the first years of the economic crisis, demonstrating the effectiveness
of the R&I strategy. The new strategy on research and innovation, referred to
in the 2012 National Reform Programme is currently under preparation. The issue
of the low share of innovative enterprises needs urgently to be addressed.
Support measures geared to removing obstacles to the growth of innovative companies
are indeed expected under the Science and Innovation Programme of the New
Széchenyi Plan. The scope and the financial effort implied are however not yet
known.

Whereas the new Science and Innovation
Programme stipulates that the current policy mix should be reconsidered, no
action has been taken to date. Moreover, the new National Research and
Innovation Strategy due to be adopted by the end of 2011 has been postponed until
the end of 2012. The mid-term STI strategy (2007-2013) stresses the need to
align national and EU policy goals. While the national STI policy mix is not explicitly
aligned with the specific ERA pillars and objectives, there is no major disparity
between the national policy goals and the ERA initiatives.

Research and innovation governance has been
reorganised twice since 2009. The high-level STI policy co-ordination body, the
Research and Science Policy Council which was created in September 2009 was
disbanded in December 2010 and replaced by the National Research, Innovation
and Science Policy Council. In June 2010, the government discontinued all
funding by the Research Technological Innovation Fund (RTIF). EUR 58.2 million,
representing 36.6% of the RTIF's budget has been blocked following budgetary
cuts. Several schemes, co-financed with the EU Structural Funds were, however,
reopened in 2011. Following the freezing of national public funding, no new
schemes have been introduced from mid-2010 with the result that EU funding has
become increasingly more important.

The stronger sectoral areas identified in
the OECD review (2008) have been confirmed as the national thematic priorities
of the new Science–Innovation Programme (January 2011). These are: transport
mobility, automotive industry and logistics, health industries (pharmaceutical,
medical instruments and balneology), information and communication
technologies, energy and environmental technologies, and creative industries. The
national innovation strategy (as currently drafted) should be aligned with the
concept of smart specialisation and regional innovation strategies in order to
ensure increased coordination and to avoid duplication or fragmentation of
research and innovation policies. In addition to the metropolitan area of Budapest which is the dominant centre of domestic RTDI activities, six regional
development poles have been defined with specific priority fields of science
and sectors of industry. This will promote smart specialisation in the regions
through spill-overs and technology transfer from the major poles by building on
the strengths identified for each region or territory.

Private investment in R&D is primarily
carried out by a small number of big foreign-owned enterprises making growth
relatively vulnerable. The government is planning to introduce measures to encourage
SMEs participation in innovation activities including non-technological
innovation, to reduce the relatively high administrative burden and to
strengthen the links and networks between public and private research.

A national roadmap for ESFRI is being
prepared, with funding reserved for new and updated research infrastructures. The
Hungarian authorities are ensuring all necessary support for the implementation
of the national Operational Programme (OP): Economic Development for priority
R&D and innovation aiming to encourage competitiveness (more than one third
of the total budget is devoted to this programme), including the development of
the Extreme Light Infrastructure project (ELI).

Economic
impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[8]..

The graph above shows that, in Hungary, the economic impact of innovation is lower than both EU average and reference
group. In particular, the country shows significantly lower values on the
patent applications and knowledge-intesive services export indicators compared
to EU average.. In Hungary, innovation policy is mainly a supply side policy
based on grants for innovation activities. So far, demand side innovation
policy has only been taken into consideration by the government as a future
option. For instance, in the New Széchenyi Plan, pre-commercial public procurement
is a high priority for the future.

The dominant form of support is through
grants for innovation activities. However, there are other tools in place as
part of the national policy mix: venture capital, favourable loans, guarantees
and tax incentives. Demand side innovation policy is also being taken into
consideration as a future option, by the policy makers. The Science and
Innovation Programme of the New Széchenyi Plan highlight pre-commercial
procurement as a high priority.  A strong decline is observed for venture
capital as % of GDP which decreased by more than 75% between 2009 and 2010 (the
highest decline in the EU).

Links between public sector and private
sector research and also levels of cooperation on innovation activities by key
actors are still weak. The share of innovative SMEs is rather low compared to
other countries. Access to finance and in particular early stage financing is
limited. This issue is closely linked to the financing needs of innovation
intensive companies which are facing difficulties in finding sources of finance
for their innovative projects. Also, there is a weak rate of commercialisation
of inventions.

During the last two decades, the
internationalisation of business R&D activities has accelerated
significantly, with some new players emerging recently that have given rise to
new patterns. Some industrial sectors in Hungary have increased their outward
R&D activities. The wood, paper, printing and publishing sectors, and the
non-metallic minerals sectors have become significantly more internationalised.

Upgrading the manufacturing sector through
research and technologies

The graph below illustrates the upgrading
of knowledge in different manufacturing industries. The position on the
horizontal axis illustrates the changing weight of each industry sector in
value added over the period. The general trend to the left-hand side reflects
the decrease of manufacturing in the overall economy. The sectors above the
x-axis are sectors whose research intensity has increased over time. The size
of the bubble represents the share of the sector (in value added) in
manufacturing (for all sectors presented on the graph). The red-coloured
sectors are high-tech or medium-high-tech sectors.

Although manufacturing in Hungary is mainly concentrated in low skills sectors, there is a growing and promising
trend of specialisation in high-tech sectors. From 1995, it can be noticed that
almost all medium-high-tech and high-tech sectors, especially motor vehicles,
electrical machinery and apparatus, and Radio, TV and communication equipment
have increased their weights in the economy, as well as their R&D
intensities. In Hungary business enterprise expenditure on R&D (BERD) in
the motor vehicles sector accounted for 13.1% of all manufacturing BERD in 2009.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

The graph above shows that several high-tech and
medium-tech industries significantly improved their contributions to the
Hungarian trade balance over the period 2000-2011, in particular telecommunications,
scientific and controlling instruments, general industrial machinery and
specialized machinery for particular industries, and road vehicles. This
indicates a possible gain in relative world competitiveness in line with the
increasing weight of these sectors in the economy (see previous graph). In
contrast, the office machines and automatic data-processing machines industry
suffered a severe reduction in its contribution to the trade balance.

In Hungary total factor productivity grew steadily
between 2000 and 2006 and then fell significantly during the years of economic
crisis. Regarding progress towards the Europe 2020 indicator targets, Hungary
shows a mixed picture with good results for most indicators, such as R&D
intensity and the share of population (aged 30-34) with tertiary education,
share of renewable energy, greenhouse gas emissions and a slight decrease in
the share of population at risk of poverty (although with a negative evolution
since the crisis started in 2008. Also the employment rate has been slightly
falling, particularly with the economic crisis. However, Hungary's best rankings within the EU are for the contribution of high-tech and medium-tech
commodities to the trade balance, sales of new to market and new to firm
innovations as % of turnover, and license and patent revenues from abroad as %
of GDP. These are indicators which show the contribution of innovation to
international competitiveness.

Key
indicators for Hungary

Country-specific recommendation in R&I adopted by
the Council in July 2012:

"Provide specific well-targeted incentive schemes
to support innovative SMEs in the new innovation strategy"

[1] In fact, Germany is planning to achieve its R&D intensity
target of 3% in 2015.

[2] See Methodological note for the composition of this
index.

[3] In the period 2003-2008
Germany was the largest exporter but has been overtaken in 2009 by China and in 2010 by the USA

[4] If post-secondary non-tertiary education is included
(ISCED 4), which Germany considers equivalent to higher education in its
national target, Germany performs near the EU average, but growth in attainment
still remains below average.

[5] The three intervention
areas are: (1) Accelerate the transition to the knowledge economy; (2)
Development of healthy, sustainable and extrovert entrepreneurship and
improvement of the appropriate framework conditions; and (3) Improve the
attractiveness of Greece as an investment location respecting the environment
and the concept of sustainability.

[6] See Methodological note for the composition of this
index.

[7] This is probably
due to the importance of tourism in Greece's economy.

[8] See Methodological note for the composition of this
index.

Ireland

Prioritising
increased public investment in research while better exploiting results

Summary: Performance in
research, innovation and competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Ireland. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 1.72%              (EU: 2.03%; US: 2.75%) 2000-2011: +4.07%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:38.11                 (EU:47.86; US: 56.68) 2005-2010: +5.39%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.69              (EU: 0.612) || Knowledge-intensity of the economy 2010:65.43                  (EU:48.75;     US: 56.25) 2000-2010: +1.94%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Food and agriculture, Medical technologies, Nanotechnologies, Biotechnology, ICT, New production technologies               || HT + MT contribution to the trade balance 2011: 2.57%                (EU: 4.2%;    US: 1.93%) 2000-2011: +26.26%  (EU: +4.99%; US:-10.75%)

Ireland has expanded and consolidated its
research and innovation system over the last decade. Investments in research
and innovation have grown substantially. Public investment in research and
innovation grew considerably until the financial crisis. Business enterprise
investment in R&D continued to grow over the period 2000-2010 albeit at a
lower growth rate than public investment.

The considerable increase
in public and private R&D expenditure over the decade 2000-2010 has
resulted in a clear shift to a knowledge-based economy including a shift
towards services. The Irish economy has a high proportion of knowledge-intensive
products and services, and this structure has not changed substantially over
the last decade. Although the recession hit Ireland particularly hard, the economy has
since partly recovered because of the strength of exports by firms in the
high-tech sectors. These firms are mainly affiliates of MNEs.

In contrast, domestic
firms in a number of sectors which do not have a propensity to export have struggled.
Accordingly the main challenges are to return to the previous policy of
increasing public R&D expenditure and to complement the policy of promotion
of procurement of innovation with budgetary allocations to procurement
authorities.[1]

Prior to the crisis,
policy was based on a Strategy for Science, Technology and Innovation which
articulates the ambition to be a leading knowledge economy. More recently the
focus has been on accelerating growth and job creation. The government has also
adopted the report of a research prioritisation group which recommended
targeted research investment in 14 priority areas as well as a new IP protocol
on putting public research to work for Ireland.

Investing in knowledge

Ireland has a national R&D intensity target
of 2.0% of GDP or 2.5 % of GNP, by 2020. In 2011, Irish R&D intensity was
1.72% of GDP, with a public sector R&D intensity of 0.56% and business
R&D intensity 1.17%. Over the decade 2000-2010, R&D intensity in Ireland grew at an average annual growth rate of 4.9%, one of the highest growth rates in
the EU. One of the main challenges for Ireland would be to return to a trend of
increasing public investment in R&D which, if more related to business
needs, would raise the R&D intensity of Irish firms. If this line were
followed, the shift of the Irish economy towards a knowledge-based economy,
already very visible, could be pursued over the years and a more ambitious
target could be envisaged at the occasion of the mid-term review of the Europe
2020 targets (2014/2015). This would be more in line with the country's clear
potential, illustrated by the trend in the growth above.

In absolute
terms, public R&D funding reached a peak in 2008. R&D investment by
firms appears not to have been seriously affected by the economic crisis. Where
BERD is supported by government, Ireland has a relatively low level of direct
support, according to the OECD. Indirect support was almost 3 times higher than
direct support. Business R&D investment in real terms has continued to rise
and reached a peak in 2010. Overall, firms have almost doubled their R&D
investment in real terms over the period 2000-2010. The amount of GERD financed
from abroad at 15.6% is almost twice the EU average and reflects the policy of
attracting FDI with a large R&D component. In order to reach its national
target by 2020, R&D intensity in Ireland would have to grow at an average
annual rate of 1.1% over the decade 2010-2020. This growth would depend on
sustained incentives to attract and boost business R&D investment.

Under the ERDF Programme, Ireland has been allocated €163.5 million for research, innovation and entrepreneurship.
This represents 21.8% of the total FEDER funds for Ireland. Under FP7,
beneficiaries from Ireland have received €412 million[2] of which €85 million
went to SMEs. Overall, Irish applicants had a close to average success rate.

An effective research and
innovation system building on the European Research Area

The graph below
illustrates the strengths and weaknesses in the Irish R&I system. Reading
clockwise, the graph provides information on human resources, scientific
production, technology valorisation and innovation. Average annual growth rates
from 2000 to the latest available year are given in brackets.

The graph shows in broad
terms that the increase in funding for R&D (2000-2010 average annual
growth) has triggered a stronger scientific production with increases in
business expenditure on R&D, the number of new doctoral graduates,
employment in knowledge-based activities and scientific publications in the
most highly cited journals.  The number of researchers employed in business has
also grown. The relative weaknesses of the Irish R&I system are the
relatively low (but growing) numbers of PCT patent applications and
public-private co-publications as well as falling levels of SMEs introducing different
forms of innovation.

Ireland had in 2010 a net inflow
of students and engineers from the United States. According to UNESCO data, in
2010, 1201 students at graduate, masters or doctoral level left Ireland for studies in the United States, while 2545 students from the United States chose to study
in Ireland. Ireland has engaged in the ESFRI process from the beginning and is
supportive of 20 of the 44 areas identified in the original roadmap as well as
being a participant in seven FP7 funded research infrastructure preparatory
phase projects.

On knowledge transfer, Ireland has a relatively high efficiency with regard to the amount invested to generate
each patent application, licence agreement and spinoff.

Ireland's scientific and
technological strengths

The maps below
illustrate several key science and technology areas where Irish regions have
real strengths in a European context. The maps are based on the number of
scientific publications and patents produced by authors and inventors based in
the regions.

Strengths
in science and technology at European level

Scientific
production                      Food, agriculture and fisheries        Technological
production

Scientific production                                Health                  
        Technological production

Scientific production       
Information and Communication Technologies         Technological production

Source: DG Research and
Innovation – Economic Analysis unit

Data: Science Metrix using
Scopus (Elsevier), 2010; European Patent Office, patent applications, 2001-2010

Scientific
production                                           Nanotechnology                                  
Technological production

Scientific production                                           Environment              
Technological production

   Scientific
production                                          Energy              
Technological production

As illustrated by the maps
above, in absolute numbers, in terms of scientific capacity, Ireland has strong regional clusters in the fields of food, agriculture and fisheries, ICT
and nanotechnology. In terms of technology specialisation, Ireland is particularly strong in ICT. In fact, Ireland has a technological advantage in
ICT comparable to that of the United States and well above the EU average and
surpassed in the EU only by Sweden and Finland. In nanotechnology Ireland is third behind Singapore and the Czech Republic.

The main technology
sectors in which the number of patent applications and patents granted by the
EPO are in the 75-100 percentile are telecommunications, digital
communications, computer technology, IT methods for management, medical
technology, thermal process and apparatus, manufacture of medical and surgical
equipment, and services for computer and related activities. These findings
illustrate the comparative strengths and suggest the focus for R&I and
industrial policies.

Policies
and reforms for research and innovation

The Irish
research system is centralised and regions and while research policies are set
nationally they address regional aspects and needs and take account of effects
of clustering which have led to regional specialisation. The significance of
structural funds for Ireland has reduced and EDRF funds amounting to € 163.5
million for research, innovation and entrepreneurship over the period 2007-2013
represent less than 20% of the annual government budget for R&D. Ireland
comprises two NUTS II regions. The Border, Midland and Western region's key
challenge is to develop its Institutes of Technology as well as enhance the
research, innovation and ICT infrastructure to promote enterprise development.
The Southern and Eastern region has a commitment to developing incubator spaces
in close proximity to the institutes of Technology

Prior to the
crisis policy is based on a Strategy for Science, Technology and Innovation
2006-2013 which articulates the ambition to be a leading knowledge economy.
Following the onset of the economic crisis this policy is being implemented in
the context of the Framework for Sustainable Economic Renewal which, through an
Action plan for Jobs, involves actions to deliver reform and create economic
growth and which includes measures related to science technology and
innovation. The Government's programme for national recovery stresses increased
emphasis on delivering value from the State's investment in research with the
approach being to fund the full spectrum of research in priority areas as
identified in the National Research Prioritisation exercise. In addition a
portion of funding will be retained for research for policy and research for
knowledge.

Fiscal
measures involving R&D tax credits were introduced in 2004 and provided a
25% tax credit for qualifying incremental expenditure covering the full
spectrum from basic to applied research and experimental development. According
to the OECD surveys on tax incentives, indirect support of business R&D in Ireland is almost three times higher than direct support. The fiscal incentives for
carrying out R&D were complemented by an expansion of tax credits in 2010
to enhance investment in intellectual property (including software) by
excluding royalty income from withholding tax.

More recently
the Government has accepted a proposal for the prioritisation of research
funding for activities related to areas of industrial strength. In addition
emphasis is placed on increasing the innovation potential of indigenous firms
and improving links between industry and higher education institutions.

The existing
national policies on IPR were reviewed by a task force and were found to be in
line with international practice including that emerging at EU level from the
Commission Recommendation C(2008)1329 and the Responsible Partnering initiative
of the key stakeholders. This has recently been updated with a new IP protocol
to clarify the rules on knowledge transfer in the context of collaboration
between industry and higher education institutions.

In 2012 an
Innovation task force was adopted Key areas for action include a better
matching between supply and demand for innovation, a financial framework
fostering innovation, high quality and broad human capital, and international
projection. It also includes promotion of public procurement for innovative
products and services. However, due to the need for strong fiscal
consolidation, the implementation of this has been limited to the issuance of
guidance.

Economic
impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[3].

The high score of Ireland on this summary index is linked to its economic structure, with high volumes of
activities both in several high-tech manufacturing sectors and in
knowledge-intensive services. The share of the Ireland's employment in
knowledge-intensive activities (19.8 %) and the share of knowledge-intensive
services in services export are both the second highest of all EU Member States,
after Luxembourg.

Foreign multinational
firms perform a large part of the activity in the knowledge-intensive sectors,
and in the last decade, foreign direct investments have continued in the more
technology-intensive sectors. According to the OECD, Ireland has at 17.9% by
far the highest technology balance of payments as a percentage of GDP and at
20% the fifth highest growth rate among the OECD countries for which data are
available. This can be largely attributed to the high level of foreign direct
investment in Ireland and the resultant intra-group transfers of technology.

Ireland generally has favourable framework
conditions for innovation, in particular in terms of time taken to start a
business, barriers to entrepreneurship, and corporate taxation. In contrast it
is below the OECD average in terms of percentage of self-employed persons,
women entrepreneurs and entrepreneurs under 45 years of age. According to the
OECD, barriers to entrepreneurship (including regulatory, administrative
burdens and barriers to competition) were lower than in many other EU Member
States. However, following the financial crisis, in 2010 the ease of access to
capital in Ireland was the lowest of all OECD countries whereas previously Ireland had been ranked in 11th place. In contrast, in 2009 Ireland was still in 5th place in the OECD and 2nd in the EU (behind Sweden) in terms of venture capital investment as a percentage of GDP. Regarding the number
of business angel networks and groups, Ireland is 3rd in a group of
smaller and medium sized countries.

Upgrading the
manufacturing sector through research and technologies

The graph below
illustrates the upgrading of knowledge in different manufacturing industries.
The position on the horizontal axe illustrates the changing weight of each
industry sector in value added over the period. The general trend to the
left-hand side reflects the decrease of manufacturing in the overall economy.
The sectors above the x-axis are sectors whose research intensity has increased
over time. The size of the bubble represents the share of the sector (in value
added) in manufacturing (for all sectors presented in the graph). The
red-coloured sectors are high-tech or medium-high-tech sectors.

As recognised
in Irish economic and industrial policy, the medium-term avenue for a more
sustainable economy is to upgrade and move up on the value chain and
internationalise its outreach. Compared to other countries, Ireland has scope to further increase both the R&D intensity in existing high-tech and
medium-high-tech sectors and to increase knowledge intensity in more
traditional sectors of the economy.

The graph above
illustrates the structural change of the Irish economy over the last decade. It
shows that the economic expansion over the period 2000-2006 was mainly related
to chemicals and chemical products, medical, precision and optical instruments,
and radio, TV and communication equipment. There have been increases in R&I
investment in electrical machinery and apparatus, machinery and equipment, and
office, accounting and computing machinery. This knowledge injection has
translated into an increasing share of value added in medical, precision and
optical instruments and chemicals and chemical products.

Competitiveness
in global demand and markets

Investment in knowledge,
technology-intensive clusters, innovation and the upgrading of the
manufacturing sector are determinants of a country's competitiveness in global
export markets. A positive contribution of high-tech and medium-tech products
to the trade balance is an indication of specialisation and competitiveness in
these products.

Ireland has a positive trade balance in high-tech and medium-tech products and
has achieved a considerable growth with a fourfold increase over the last
decade, which constitutes an impressive record. Total trade balance in the
economy has also grown continuously. The graph above shows that most high-tech
and medium-tech products and in particular medicinal and pharmaceutical
products, road vehicles, and electrical machinery and apparatus have increased
their contributions to the Irish trade balance over the period 2000-2010. A
relative concern is the falling weight of products in office machines and
telecommunications, and other transport equipment, which have also decreased
their exports in real terms over the period 2000-2009. Looking at the previous
graph, it is clear that since 1995, the radio, TV and communication equipment
sector has not substantially upgraded its knowledge intensity in terms of
average annual growth of business R&D. On the other hand, electrical machinery
and apparatus has a lower average growth in value added but a higher average
growth in R&D.

Total factor productivity growth in Ireland is in 2012 back to the pre-crisis level. The employment rate is below the EU
average, it has also increased and subsequently fallen clearly with the crisis
after 2009. The share of population at risk of poverty or social exclusion has
risen as result of the economic crisis and is above the EU average. Regarding
the other Europe 2020 targets in environment and education, greenhouse gas
emissions have fallen but are still much higher than the EU average, and the
share of renewable energy has increased but is still much lower than the EU
average. Innovation has contributed to a rising number of patents in
environmental and health-related technologies, with Ireland ranking
respectively 11th and 7th within the EU.

Key
indicators for Ireland

Italy

The
challenge of structural change for a more knowledge-intensive economy

Summary: Performance in research, innovation and competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Italy. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 1.25%               (EU: 2.03%; US: 2.75%) 2000-2011: +1.69%   (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:43.12                 (EU:47.86; US: 56.68) 2005-2010: +3.56%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.556                (EU: 0.612) || Knowledge-intensity of the economy 2010:35.43             (EU:48.75;     US: 56.25) 2000-2010: +1%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Automobiles, Food and agriculture, ICT, Biotechnology, New production technologies               || HT + MT contribution to the trade balance 2011: 4.96%             (EU: 4.2%;     US: 1.93%) 2000-2011: +8.13%  (EU: +4.99%; US:-10.75%)

Over the last decade, Italian R&D intensity increased
moderately, reaching 1.25% in 2011. Overall, the R&D intensity of both the
public and private sectors increased over the last decade, but only to reach
levels that remain very far from those of the countries at the technology
frontier, thus suggesting a trend towards a specialisation in low technology-intensive
products.

Without any doubt, the first priority for Italy in the field of R&I is to generate a strong momentum and commitment towards
increasing its R&D intensity based on improved business framework
conditions for innovation and economic structural change. The low degree of
adjustment of the education system to the economic structure of the country and
to the specific needs of industry is a structural weakness. There is also a
lack of effective and timely implementation of the overall policy mix for
R&I and education, in particular measures to support innovation and more
specifically SMEs. Major challenges include the underinvestment of the private
sector in R&D and innovation, largely due to the fact that the Italian
economy is characterised by a large number of SMEs and micro firms in low
knowledge intensity sectors (bearing in mind also the large differences between
the North and the South of the country) as well as the low level of skills and
insufficient performance of the higher education system in many regions.

To address these challenges, public support measures and framework conditions
for R&D have been put in place (e.g. grants for industrial research,
simplification of the IPR system) and a new governmental structure has been
created to coordinate national R&D activities and links with R&D
stakeholders. Since 2011, the new government has incorporated the objectives
and priorities of EU 2020 in their main policies, with specific roles for
R&D, innovation and human resources. A reduction of taxation for R&D
activities is foreseen, extending regulation to intramural R&D (until now
applied only to extramural R&D). A "Cohesion Action Plan" was
launched in November 2011, aiming to improve the use of structural funds to
create growth and jobs by concentrating resources on key domains (education,
broadband, employment and transport networks) following the restructuring of
the Operational Programmes.

Investing in knowledge

The Italian national R&D intensity
target will be achieved if the current trend continues, but the target is not
very ambitious. Italy set an R&D intensity target of 1.53% in the context
of the Europe 2020 strategy, well below the current EU average, thus running
the risk of the country falling far behind a moving technology frontier in some
sectors of its economy. Over the 2000-2011 period, R&D intensity in Italy increased by an average of 1.69% annually, passing from 1.04% in 2000 to 1.25% in 2010.
Both public sector and private sector expenditure on R&D have grown during
the period, but at modest rates. The difference between Italy's R&D intensity and the EU average is mainly due to lower industrial R&D. In
2011 business R&D intensity in Italy was 0.68% compared to an EU average of
1.26%. Public sector R&D intensity is also lower than the EU average (0.53%
for Italy compared to an EU average of 0.74% in 2011).

Public funding for R&D as a percentage
of GDP has been decreasing over the last eight years, after a period between
2000 and 2004 in which a substantial increase was registered. The need to
reduce the public deficit has imposed budgetary constraints. The trend shows
also a decreasing public R&D budget in 2011 and 2012. Likewise, Italy has one of the lowest levels of public expenditure on education as a % of GDP in the
EU (4.7% in 2009). In addition, Italy faces the problem of very low business investment
in R&D. The low level of business R&D intensity is partly linked to the
structural composition of the economy which has a low share of high-tech
industries in total manufacturing, and partly the result of low R&D
investment by Italian firms. The small size of Italian firms, 95% of which are
small or micro enterprises, aggravates this situation. There is also a low
presence of foreign-owned firms which has remained unchanged over the period
2001-2008.

Italian R&D performers have received
almost € 2.2 billion in EC contributions under the 7th Framework
Programme (8.27% of the total EC contributions). Italy counts three
universities (Bologna, Milan and Rome) among the top 50 participant HES
organisations in FP7 and two research institutes among the top 20 participant
REO organisations. For the ERDF programming period 2007-2013, Italy has been allocated a total of € 27 billion for research, innovation, support for
SMEs, information technologies and other measures to stimulate innovation and
entrepreneurship. These funds will be crucial for the development and catching
up of some of the regions. However, by January 2012 only 34% of the available
structural funds for research and innovation related themes had been allocated.

An effective research and innovation system building
on the European Research Area

The graph below illustrates the strengths and
weaknesses of the Italian R&I system. Reading clockwise, the graph provides
information on human resources, scientific production, technology valorisation,
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

Italy scores above the EU average for innovative SMEs introducing marketing,
organisational and product or process innovations. Other positive aspects are
the high growth rates observed for shares of new doctoral graduates (ISCED 6)
(16.9%) and non-EU doctoral students (17.1%). Between 2000 and 2010, the total number of researchers (FTE) per thousand labour
force has grown at an average annual rate of 4.2%.

However, Italy is suffering a net outflow
of students and engineers to the United States.[4]
The number of business researchers per thousand labour force in Italy has grown between 2000 and 2010, but is still well below the EU average highlighting
the need to enhance the quality of the higher education system and to improve
the correspondence between curricula and labour market needs. The Italian
research and innovation system is relatively public-based, with only 53.6% of
research performed by the business sector (compared to an EU average of 61.5%
in 2010) and has a low level of knowledge transfer from public research
institutions to firms.

Another structural weakness is the disparity
between Northern and Southern regions in terms of innovation performance (the most
innovative regions are Lombardia and Emilia Romagna). However, Italy is well integrated in the European research and innovation system. Together with Germany, France and the United Kingdom, Italy is among the highest producers of cross-border scientific
co-publications (in absolute numbers).

Italy's scientific and technological strengths

The maps below illustrate six key science and
technology areas where Italy has real strengths in a European context. The maps
are based on the number of scientific publications and patents produced by
authors and inventors based in the regions.

Strengths in science and technology at European level

   Scientific
production                                         Automobiles           
                          Technological production

Science     New
production technologies                        Special purpose machinery     Technologies

 Scientific production                   Construction
and construction technologies     Technological production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

    Scientific production                      Food
agriculture and fisheries         Technological production

Furniture, consumer good    Technologies

Biotechnology     Scientific production                         
Information technologies    Scientific production

Italy
is still below the EU average in terms of scientific production and technology
development.  Some regions have strong scientific
capacity in the fields of automobiles, food, agriculture and fisheries,
construction and construction technologies, furniture and consumer goods,
special purpose machinery and chemicals. Italy reveals science quality and technological specialization mainly in energy, automobiles
and transport. Relative strengths in patenting reflect the weight of the
traditional sectors together with construction.

A cluster policy has been in place in Italy since the 1990s. Italian industrial clusters have been concentrated in the low-tech
and medium-tech sectors, but new clusters are also emerging in aerospace,
biotechnologies (highly concentrated in Lombardia), renewable energies and
mechatronics (in close collaboration with automotive and transports in
general). The relative scientific and
technological dynamics of the clusters can be observed from the publication and
patenting activity at regional level, as illustrated by the maps above. Strengths
in science and technology provide the potential for structural change towards
more knowledge-intensity by injecting knowledge into existing and new
industrial and services sectors. But in general, Italy has large and
diversified innovation and science bases with only partial correspondence
between science output and technological specialization. There is room for
improvement in the matching of the science base with the needs of the
industrial structure of Italy.

Policies and
reforms for research and innovation

Italy has set an R&D target which is realistic, but lacking in ambition
in view of the country's potential and challenges. The situation may improve under
the new national programme for research and if successful at the occasion of
the mid-term review of the Europe 2020 National targets (2014/2015). Procedures
will be simplified while the approach will be more “market” oriented. The new
“network contracts” could represent a positive element for supporting
innovative clusters and stimulating cooperation. Positive steps have been taken
in relation to the careers of researchers and in relation to increasing the
numbers of graduates in science and engineering (as for example the case of
Politecnico di Torino offering free tuition for female students, to incentivise
female participation in scientific and technological education). The 2009-2013
National Research Programme acknowledges the obstacles that have made the
development of a research policy in Italy difficult, and proposes an array of
actions dedicated to removing those obstacles, while also making the best use
of the positive characteristics of the existing productive structure. It
provides a national framework for research activity carried out in Italy and
assigns strategic value to public-private partnership for the development of
the products and processes needed to maintain and improve the nation's
competitiveness and level of exports, and to reduce national, economic and
political dependence in sectors such as energy, environment and healthcare.

Some public support measures and framework conditions
for R&I are in place (e.g. grants for industrial research, simplification
of the IPR system). A new governmental structure has been created to coordinate
national R&D activities and links with R&D stakeholders. In the higher
education sector a recent reform of universities towards more performance based
funding is being implemented. The new National Agency for the Evaluation of the
University and Research (ANVUR)
will evaluate research and education institutions. A five
year evaluation exercise was launched to assess the research performance of
universities and public research institutions. The
reform of the public administration is on-going, aiming at better linking pay
with performance, increasing mobility and introducing further competitive
elements in the appointment of public managers. Furthermore, the e-Government
2012 Plan, launched in 2009, aims to modernise the public administration
and to promote innovation through ICT. The information concerning the resources
made available for R&D and innovation for 2011-12 is positive. Several
interesting initiatives have been launched: 185 new JTIs projects involving 400
companies; agreement between MIUR and Agencies on venture capital for SMEs;
contracts between networks of companies (to improve industrial collaboration);
green public procurement, among other measures.

Since 2011, the new government has
incorporated the objectives and priorities of EU 2020 in their main policies,
with specific roles for R&D, innovation and human resources. With the aim
of enhancing private R&D investment the government has introduced fiscal
incentives such as a 35% tax credit, with a maximum of € 200.000 per firm and
year, to encourage recruitment of highly-skilled young people. Support for
public-private partnerships is foreseen in key sectors. In the context of
economic change a larger company or a sector in crisis can receive support for
projects of industrial conversion, and instruments have been put in place for
the re-training of human resources. These policies have been implemented in the
petrochemical and the chemical sectors.

Following the launching of a "Cohesion
Action Plan", November 2011, aiming to improve the use of structural funds
to create growth and jobs, resources are being concentrated on key domains
(education, broadband, employment and transport networks) as part of the
restructuring of the Operational Programmes. The biggest Operational Programme
for R&D and innovation, PON, has been concentrated in three domains, with a
budget of € 1150 million (data of March 2012). In relation to the European
Digital Agenda, a task force from the ministry in charge of research and the
regions is studying the economic viability of the project. Examples of focus
include smart cities and communities aiming to strengthen synergies at regional
level. An important step has been taken in the field of governance with the
abolition of the need for a double evaluation (at national level) of the
projects approved at community level. Progress towards the ERA and improving the
impact of the structural funds for research and innovation, in the context of
the 2011 Cohesion Action Plan, is dependent on implementation capacity.

Economic
impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[5].

The slightly lower level of economic impact of
innovation in Italy is partly linked to an economic structure that has a
relatively low concentration of knowledge-intensive sectors. In particular
technology production and the share of knowledge-intensive services in total
service export are clearly lower than the EU average. This effect concerns
mainly the R&D-based innovation, as the Italian economy consists to a large
extent of low knowledge-intensity sectors: e.g. footwear, textiles and clothing
and mainstream manufacturing industries such as fabricated metal products,
domestic appliances, and bicycles. However, Italy also has some specializations
in technology-intensive sectors such as machinery, automotive and aerospace.

The Italian financial sector has done well
since the beginning of the economic crisis, but a main issue of concern is the
access to credit for SMEs. Italy has adopted important measures to liberalise
services, in particular professional services, and to improve competition in
the network industries. Nevertheless, the business environment in Italy remains complex due to inefficiencies in resource utilisation, procedures and
institutional organisation. These have repercussions in particular on the time required
to apply and concretise specific measures reducing drastically their potential
benefits to the economy.

Concerning the business environment, SMEs
also have to deal with heavy administrative burdens. The reduction of the
administrative burden is therefore a priority and the target is 25% in line
with the EU strategy. Several initiatives have been proposed to cut the burden
and should be implemented in 2012. These aim at improving the ease of doing
business. At the moment Italy is among the less attractive Member States in the
EU in terms of ease of doing business (in fact, Italy is ranked 80th in the
world) and is also one of the Member States that has improved its framework
environment the least in the period 2006-2011.[6]

The complexity of the administrative
procedures involved in supporting programmes for R&D and innovation causes significant
delays which can have a very negative impact in the specific case of innovation
when market advantages are considered.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

The graph above synthesises the structural change of
the Italian economy over the last fifteen years. It shows that the economic
expansion over the period 1995-2007 has not resulted in a general increase in
knowledge-intensity in the manufacturing sector. The Italian economy has in
parallel moved towards a higher share of services (illustrated by the left-ward
move of the bubbles). Considering both manufacturing and services, employment
in knowledge-intensive activities as percentage of total employment aged 15-64 has
not increased over the period 2000-2010. Likewise, the combined share of value
added in high-tech and medium-high-tech manufacturing and in knowledge-intensive
services (KIS) in total value added actually decreased from 11.7% in 2000 to 10.3%
in 2009.

Nevertheless, manufacturing still accounts for a
larger share of the economy in Italy than in the EU, even if employment in
manufacturing industries has decreased by 5% while employment in the services
sector has increased by 23% over the period 1995-2009. The relatively high
share of employment in manufacturing industries is mainly due to specialisation
in some traditional sectors such as footwear, textiles and clothing and
machinery, basic metal products and non-metallic mineral products. However, these
sectors have lower R&D intensities in Italy than in other countries.  According
to the EU Industrial R&D Investment Scoreboard, Italy has been successful
in maintaining its position in some strategic sectors. In the last 5 years, Italian
firms in sectors such as automotive and parts, and aerospace, have remained
among the top R&D investors, with only Germany and France showing more R&D investment in these sectors.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

Over the last 15 years, the Italian economy
has slightly regressed in competitiveness. The efforts made in research and
innovation to increase the knowledge base of the economy have been cancelled out
by a decrease in total factor productivity (-5% since 2000) and by the
stagnation of employment in knowledge-intensive activities. Nevertheless, Italy succeeded in keeping a positive trade balance until 2003. In 2004, the Italian trade
balance deteriorated due mainly to the loss in competitiveness of low-tech
products. The trade balance in all high-tech and medium-tech products together
remained positive in Italy over the last decade, thus helping to redress the
negative trend but not sufficiently to cancel it.

Indeed, most knowledge-intensive products
and services have increased their contributions to the trade balance since
2000, as indicated on the graph above. However, electrical machinery, apparatus
and appliances as well as medical and pharmaceutical products have decreased
their contribution to the trade balance thus indicating a relative loss in
world competitiveness. The previous graph has shown that although R&D
intensity increased for most manufacturing sectors over the last 15 years,
value added for these sectors has decreased. Considering the still important
weight of the traditional manufacturing sectors in the Italian economy and the
relative specialisation in these sectors, there is a clear need to upgrade the
knowledge intensity of manufacturing sectors.

Relevant factors positively influencing structural
change of the Italian economy are shown in the table below. The share of SMEs
introducing product or process innovations is above the EU average while the
share of employment in knowledge-intensive services slightly decreased and
reached the Eu average. Italy is making efforts to develop technologies
addressing societal challenges, in particular environment-related technologies
(7,2% growth since 2000). Italy has registered good progress on all the Europe
2020 targets with the exception of a slightly falling employment rate, evident
since the start of the economic crisis in 2007. The indicators on the Europe
2020 objectives illustrate the need to make the most of resources and to foster
growth by investing in R&D, education and renewable energies.

Key indicators for Italy

Country-specific recommendation in R&I adopted by
the Council in July 2012:

"Improve access to financial instruments, in
particular equity, to finance growing businesses and innovation".

[1] Concrete measures were presented in Commission Communication Europe
2020 Ireland, June 2012

[2] According to CORDA 6 Nov 2012 I-cf. national estimate of €438 M in
June 2012.

[3] See Methodological note for the composition of this
index.

[4] In 2010, 4.036 students at graduate, master or
doctoral level left Italy for studies in the United States, while only 423
students from the United States chose to study in Italy (UNESCO data, 2009),

[5] See Methodological note for the composition of this
index.

[6] Commission Staff Working Document "Industrial
Performance Scoreboard and Report on Member States Performances and
Policies", 2012

Latvia

A
better partnership R&I-Business as a step forward towards competitiveness

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Latvia. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 0.70%              (EU: 2.03%; US: 2.75%) 2000-2011: +4.15%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:11.49                 (EU:47.86;  US: 56.68) 2005-2010: -0.15%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.248               (EU: 0.612) || Knowledge-intensity of the economy 2010:34.38                  (EU:48.75;     US: 56.25) 2000-2010: +3.96%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Materials, Health, Nano-sciences, Environment, Energy               || HT + MT contribution to the trade balance 2011: -5.42%               (EU: 4.2%;    US: 1.93%) 2000-2011: n.a.           (EU: +4.99%; US:-10.75%)

Conscious of its current limitations in terms of
research and innovation (R&I) and of the necessity to raise the level of
its industry, Latvia adopted in 2005 a law on research activity aiming to boost
its performance. Since 2008, however, Latvia has undertaken a rigorous fiscal
consolidation, which has left behind some of the objectives and targets
embodied in the law. A number of measures have been taken however, with the
support of structural funds, in order to improve governance of the R&I
system, to modernise the scientific infrastructure and attract foreign
academics, and to improve the capacity of industry to innovate, in particular
by developing the links between research and industry.

These measures still need to produce their
full effect. Latvia’s poor innovation performance still impairs its
competitiveness. Latvia has one of the lowest business R&D intensities in
the EU (0.19% in 2011). The national innovation system is overshadowed by low
scientific performance, as measured by the share of scientific publications in
the top 10% most cited which is only 4%,  significantly below the EU average.
There is little R&D investment by domestic companies or large foreign
affiliates to support specialisation in knowledge-intensive and
innovation-driven sectors.

As indicated by one of the Country Specific
Recommendations Latvia should continue its reforms in higher education, by
implementing a new financing model that rewards quality, strengthens links with
market needs and research institutions, and avoids fragmentation of budget
resources. Taking into account the thematic priorities and budgetary
constraints, Latvia should improve the quality of its science base and
rationalise its research and higher education institutions. The result obtained
would be fewer but larger entities more able to build up critical mass in
specialised areas of education and research, and a more focused use of
resources. Moreover, in order to address the current challenges, Latvia would also get benefits from drawing up an R&I strategy for smart
specialisation, that would facilitate a more efficient use of EU structural
funds and improve the synergies between different EU and national policies, as
well as increasing public and private investment in R&D.

Investing in knowledge

By the mid-2000s Latvia was faced with the realisation
that it had to upgrade its Science and Technology infrastructure in order to
become internationally competitive, to accumulate new knowledge and technology
and to find high value added niches. In terms of research, Latvia had increased its government budget for R&D fivefold in absolute terms between
2000 and 2008. The financial crisis of 2008 had a major impact on the government
budget for R&D, resulting in a 49% decrease between 2008 and 2009. Due to the
country's rapid economic recovery, the public R&D budget has partially
recovered in 2010 (with 27.3% increase compared to 2009). Moreover, in 2011 the
public R&D funds have reached a level close to 2008, increasing by 48%
compared to 2010 (HERD increased by 57.8%). Regarding innovation policy, Latvia does not have plans in the field of innovation procurement, is mostly supply led rather
than demand-side led, and there are no tax incentives to support business
R&D and innovation activities.

In strategic terms, Latvia has set a national R&D intensity target of 1.5%. In 2011, Latvia had an R&D intensity of 0.70%, with public R&D intensity amounting to 0.50%
and business R&D intensity amounting to 0.19%. Latvia needs to increase the
R&D intensity in both the public and the business sectors as a prerequisite
to maintaining a performing R&I infrastructure and to boosting innovation
in firms. Over the period 2000-2011, Latvia's R&D intensity has grown at an
average annual growth rate of 4.2%. This growth rate is significantly higher
than the EU average but still needs to be further increased if the country's
2020 R&D intensity target is to be achieved (in fact an average annual
growth rate of 8.9% is required over the period 2011-2020 if the target of 1.5%
is to be reached). The average annual growth rates of public sector R&D
intensity and business sector R&D intensity over the period 2000-2011 are
5.97% and 0.69%, respectively. Latvia's participant success rate in the EC
Seventh Framework Programme was 21.9%. The successful participants received a
total EC financial contribution of € 26.4 million.

Structural Funds play a major role in the financing
of R&I in Latvia (10% of the total ERDF–Cohesion Funds allocations for the
2007-2013 period). In 2010, R&I financing from the Structural Funds far
exceeded national public funding for R&D and currently represents a third
of total R&D expenditure in Latvia. The low level of business expenditure
on R&D is seen as a critical challenge for Latvia. Business expenditure on
R&D increased by 27% between 2009 and 2011. This increase is due in large
part to the activities funded under Structural Funds programmes designed to
improve the innovative capacity of industry. The growing share of Structural Funds
in R&D funding is affecting the previous balance between institutional and
competitive funding which is now inclining more towards project-based,
competitive funding. A major issue for Latvia is the funding of R&D post
2013, in the period before the new round of Structural Funds becomes operational.

An effective
research and innovation system building on the European Research Area

The graph below provides a synthetic picture of
strengths and weaknesses of Latvia's R&I system. Reading clockwise, the
graph provides information on human resources, scientific production,
technology valorisation and innovation. The average annual growth rates from
2000 to the latest available year are given in brackets under each indicator.

One important aspect of the Latvian R&I system is
the lack of highly qualified scientists and engineers, a lack which is correlated
to the low numbers of new doctorates awarded and graduates in science and
engineering. Moreover, it can be seen from the above graph that the share of
researchers in business enterprise is extremely low and employment in knowledge-intensive
activities is still below the EU average. In fact, Latvia suffers an important
outflow of graduates and researchers to the United States and other countries,
many scientists preferring to pursue their careers abroad. In addition to this
the country is not attracting any significant numbers of non-nationals in the
field of R&I.

The national innovation system is therefore severely
affected by low scientific performance (the share of scientific publications in
the top 10% most cited is 4%) and low licence and patent revenues. Moreover,
the country needs to enhance the quality of the higher education system and to
address the need to better attune Latvian research to the needs of local
industry while reinforcing the capacity of the latter for developing research
and innovation activities. As shown on the graph above, public-private scientific
cooperation is very low and research and innovation investment by foreign
affiliates in support of specialisation in knowledge-intensive and
innovation-driven sectors has been diminishing. The modest results produced by
the technology transfer contact points operating in several universities, in
part due to the incomplete legal framework for protecting intellectual property
rights, is also a factor that contributes to the low level of commercialisation
of research results.

Latvia's scientific and technological strengths

The maps below illustrate five key science and
technology areas where Latvia has real strengths in a European context. The
maps are based on the number of scientific publications and patents produced by
authors and inventors based in the regions.

Scientific production || Materials || Technological production

|| ||

Scientific production || Health || Technological production

|| ||

Scientific production || Nano-sciences & Nano-technologies || Technological production

|| ||

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific production || Environment || Technological production

|| ||

Scientific production || Energy || Technological production

|| ||

Latvia
does not show any areas of particular excellence in terms of scientific or
academic production. In terms of scientific capacity, no field appears to have
reached any critical mass with the exception of materials. Latvia shows some activity in industry related technologies (surface technologies and
coating, materials, engines, pumps and turbines, nano-sciences) and shows some
strength in sectors such as IT methods for management, audio-visual, health,
pharmacy, fine chemistry, and food chemistry. Latvia's scientific
specialisation index, not shown on the maps above, shows that the country is
relatively specialised in biotechnology, information and communication
technologies, energy, other transport technologies (other than automobiles and
aeronautics) and materials, materials being the main scientific field for
Latvia.

Policies and
reforms for research and innovation

The national research and innovation system
faces a number of challenges:

·
There is limited
capacity to design, implement and coordinate research and innovation policy: Latvia has a complicated decision-making process for such a small country and the
effectiveness of policy measures has been undermined by a lack of systematic
evaluations.

·
There is a lack of
highly qualified scientists and engineers; the number of new doctorates awarded
remains low and many scientists pursue their careers abroad.

·
The scientific and
research infrastructure is underdeveloped and the limited research and
innovation resources available are spread too thinly to be efficient.

·
The level of
commercialisation of research is low: the technology transfer contact points
operating in several universities produce modest results, in part due to the
incomplete legal framework for protecting intellectual property rights.

·
Cooperation between
businesses and academics continues to be poor: companies are barely using the
research potential of universities or state research institutes and their
participation in the on-going competence centres programme is rather low.

In order to address these weaknesses, Latvia has taken the following steps:

·
Governance is being
improved by the setting up of a cross-departmental coordination centre under the
Prime Minister.

·
Measures have been
taken to attract foreign academics, to increase the number of researchers and
to attune the education system more to business needs by involving employers’
organisations in the governance of universities and the assessment of vocational
study programmes;

·
Efforts are being made
to modernise the scientific infrastructure — nine national research centres
were established in 2011;

·
Steps are being taken
to promote commercialisation of science, encourage industrial innovation and
support the development of innovative enterprises (business development
involving new products and technologies, competence and technology transfer
centres, innovation vouchers, etc.).

There have been quite a number of policy
developments to support innovation. The most significant include:

·
Development of
innovation financing tools such as risk capital and seed/starting venture
capital funds as well as the development of mezzanine loans for risky projects;

·
Development of 10
business incubators to support new entrepreneurs across the country;

·
Lowering 
administrative fees, simplifying administrative procedures and reducing the
time for registering a business for entrepreneurs;

·
Development of a
long-term cooperation platform for enterprises and scientists - a framework for
efficient cooperation between scientists and entrepreneurs in order to improve
the research infrastructure, to support joint research and to foster technology
transfer.

Further efforts could be made to improve the quality
of the science base and to rationalise research and higher education
institutions in line with the thematic priorities and budgetary constraints.
This would result in fewer but larger entities more able to build up critical
mass in specialised areas of education and research, coupled with the progressive
introduction of competitive funding based on independent evaluation. In order
to address the current challenges and to qualify for EU funding in the post
2013 period, Latvia would benefit from drawing up a research and innovation
strategy for smart specialisation, so that EU Structural Funds can be used more
efficiently and synergies between different EU and national policies, as well
as public and private investment, can be increased.

Currently, Latvia is developing a National
Industrial Policy (NIP) to be presented in 2013. The NIP will include inter
alia specific measures for cross-cutting innovation policy implementation.
Moreover, in order to increase the quality of Latvian research, the government
has signed, at the end of 2012, an agreement with the Nordic Council of
Ministers for an evaluation of its scientific institutions.

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[1].

According to this index, the economic impact of
innovation in Latvia is below its reference group, much below the EU average.
Among the five indicators of the index, Latvia's performance is particularly
low in patent inventions, contribution of high- and medium-tech products to the
trade balance (see section 'Competitiveness in global demand and markets' below)
and sales of new-to-market and new-to-firm innovations. In contrast, the share
of knowledge-intensive exports in total services exports is relatively good.
One key factor to increase the economic impact of innovation is of course the
structural change that allows innovation-driven growth. High-growth innovative
firms in particular play a catalytic role in this respect.

In this regard, the government is in the process of implementing
a series of specific measures to improve the business environment. These
include reducing the administrative burden on business, ensuring the
appropriate e-services for business, providing on-line business registration,
reducing the procedures and the time taken to obtain a construction permit,
improving legislation for investor protection and providing greater
transparency. In addition, a framework for more efficient cooperation between
scientists and entrepreneurs is being developed to encourage innovation.

Access to financing within Latvia also needs to be improved.
Most of the support programs available for SMEs and start-ups are financed mainly
from EU Structural Funds and are rather fragmented and lack coherence. Programmes
offering loans and guarantees to manufacturing industry as well as the
microcredit programme for SMEs have had moderate success. Moreover, only a
small part of the available venture capital funds has been invested so far.

In recent years, the use of Structural Funds to finance
innovation support measures such as business R&D, the development of
technology centres and technology transfer points has increased. In particular,
the Competence Centre programme (also funded by the Structural Funds) aims to
better develop links between Research and Industry in order to implement
common, knowledge-intensive industrial research and product development
projects. Core participants at Competence Centres are industry representatives
who are responsible for defining R&D agendas and implementing research
results. (At this time, there are at least 11 scientific institutions and 72
companies (mostly SMEs) involved in six Competence Centres.)

Overall, Latvia could benefit from a further strengthening
of the growth potential of its economy through a range of structural reforms
that would also help to improve its competitiveness and to move it towards a
knowledge-based economy. Particular attention could be paid to the following:
promoting a coherent industrial policy, improving public procurement and the
performance of public administration, continuing to reduce the public burden
and improve the absorption of EU funds.

The business environment could also be further improved
by encouraging companies to innovate and to better exploit the resources
offered by universities, by improving access to finance, by creating a more
competitive environment, by increasing the supply of highly-skilled labour and by
improving (re)training schemes.

Upgrading knowledge and technologies in the
manufacturing sector

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors represented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

Latvia
has been moving from more traditional industrial activities towards more knowledge-intensive
industry. The contribution of manufacturing to Latvia's total gross value added
(14.12% in 2011) is lower than the EU average (15.5% in 2011). Latvia is specialised in sectors with low and medium-low research intensities such as metal
processing and machinery, wood and wood products, and food processing. Latvia's economic structure is highly biased towards small enterprises in traditional
sectors such as sawmilling and wood planning as well as fish processing.

According to the results of the 2011 EU Industrial
R&D Investment Scoreboard, there are no Latvian companies in the top 1000
EU companies listed by the publication, pointing to the fact that there are no large
R&D intensive firms in a Latvian economy that is mainly characterized by
SMEs and microenterprises.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

Over the last 10 years, Latvian trade has
been dominated by imports. This has led to a negative trend in the country's trade
balance at global level and for high-tech (HT) and medium-tech (MT) products. Following
a descending evolution of the trade balance over the period 2000-2008, a slight
increase occurs in 2009 but the following years show another decline. The
improvement in the trade balance for 2009 was the result of a significant decrease
in imports while exports remained constant.

With regard to the contribution of HT &
MT products to Latvia's trade balance, the graph above shows that the majority
of products have positive evolutions. These evolutions are more evident in the
case of road vehicles, telecommunication, sound-recording and reproducing
equipment and office machines and automatic data-processing machines. Even if
the absolute values are still negative, these products show a decrease in the
level of imports while the level of exports was maintained or increased. On the
other hand, products with descending evolutions of their contributions to the
trade balance, such as other transport equipment, power-generating machinery and
equipment, iron and steel and fertilizers, show both an increase in imports and
a decrease in exports.

Overall, Latvia has made some progress
towards the Europe 2020 targets, but there is still room for improvement in a
significant number of areas. Total factor productivity which decreased
substantially in 2009 due to the economic crisis increased significantly
between 2010 and 2012. The effects of the economic crisis can also be seen in a
much lower employment rate and in an increase in the share of population at
risk of poverty or social exclusion after 2008. The share of population at risk
of poverty or social exclusion in Latvia increased from 33.8% in 2008 to 40.1%
in 2011, a value that is significantly higher than the EU average of 24.2%. In
2010 Latvia was the one of the Member States with the lowest levels of greenhouse
gas emissions. At the same time, Latvia had one of the highest shares of
renewable energy in total energy consumption in the EU.

Key indicators for Latvia

Country-specific recommendation in R&I adopted by
the Council in July 2012:

"Continue reforms in higher education,
inter alia, by implementing a new financing model that rewards quality,
strengthens links with market needs and research institutions, and avoids
fragmentation of budget resources. Design and implement an effective research
and innovation policy encouraging companies to innovate, including via tax
incentives, upgrading infrastructure and rationalising research institutions."

Lithuania

Developing
a stronger and thematically focused science base

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Lithuania. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 0.92%              (EU: 2.03%; US: 2.75%) 2000-2011: +4.13%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 13.92                (EU:47.86;    US: 56.68) 2005-2010: +2.62%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.223               (EU: 0.612) || Knowledge-intensity of the economy 2010: 35.28                 (EU:48.75;     US: 56.25) 2000-2010: +5.04%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Other transport technologies (other than automobiles and aeronautics), Construction technologies, Energy               || HT + MT contribution to the trade balance 2011: -1.27%             (EU: 4.2%;      US: 1.93%) 2000-2011: n.a.          (EU: +4.99%; US:-10.75%)

The main strengths of Lithuania's research and
innovation (R&I) system are the size of its public research sector and the
good supply of new graduates.

In contrast, R&D
activities are very limited in the business sector: almost 3/4 of all R&D
expenditure in Lithuania is performed by the public sector. Lithuania has one of the lowest business R&D intensity in the EU. Business investment
in R&D will only improve if the quality, relevance and openness to the
private sector of the science base and of higher education in Lithuania increase. The Lithuanian science base is insufficiently competitive and is not
well connected to European networks. Due to unattractive research careers, the
science base is also threatened by an insufficient supply of human resources.
Links between education, research and the private sector are very weak.

In order to improve the situation, Lithuania has been
conducting over the last years an ambitious reform of its science base:
autonomy and new governance of universities, reorganisation of the network of
public research institutions, increase in the share of project-based funding
and of performance-based institutional funding, increase in researchers'
salaries and dedicated schemes to attract local and international talents,
creation and development of five clusters (called "Valleys")
integrating higher education institutions, research institutions and businesses
in identified scientific and technology areas. However, this important reform
is not accompanied by the same degree of government commitment in budgetary
terms. Consequently, as part of the Europe 2020 process, it was recommended
that Lithuania should minimise cuts in growth-enhancing expenditure (the
category of expenditure to which R&D expenditure belongs).

The reinforced innovation policy is expected to
strengthen the links between higher education institutions, research
institutions and businesses. S&T parks are created to act as a link between
businesses and public laboratories by providing a number of innovation services
and infrastructures, in particular in relation to knowledge transfer and
intellectual property rights. Altogether, the reform of the science base is
expected to make the Lithuanian research and innovation system more efficient
and better performing in the years to come.

Investing in R&D

Lithuania's R&D intensity substantially increased in 2011
to reach 0.92% of GDP, after five years of relative stagnation at around 0.8%. However,
this is still less than half of Lithuania's R&D intensity target of 1.9%
for 2020. Most of this increase in 2011 took place in the public sector and is
due to progress in implementing R&D-related projects financed with EU
Structural Funds. The business sector finances only about 28% of total R&D
expenditure, one of the lowest shares of business funding in the EU. The economic
crisis severely hit the national R&D budget which has been cut by half nominally
between 2007 (€ 95.7 million) and 2010 (€ 47 million). It slightly increased in
2011 and was planned to increase in 2012-2013. Overall, the share of the R&D
budget in total government expenditure has dramatically declined from 1.09% in
2004 to 0.43% in 2010.

Continuity in public funding of R&D has been
ensured by Structural Funds, with € 1511 million (22.3%) of ERDF funds
earmarked for research, innovation, ICT and entrepreneurship for the period
2007-2013, and with a good absorption rate. In 2011-2012, Lithuania simplified the use of Structural Funds in favour of RTDI.  Lithuania also benefited by about € 33.8 million from the EU FP7 for 280 Lithuanian
participants from 2007 to early 2012.  There was a good success rate for Lithuanian
applicants (19.4% vs. 21.5% for the EU). Additional government support for investment in R&D and in new technologies is provided through R&D tax incentives
- in place since 2008.

After some progress in the early 2000s, business
R&D intensity has hardly changed between 2006 (0.22%) and 2011 (0.24%). Business
financing of R&D was seriously affected by the economic crisis, decreasing
by 11% in nominal terms between 2007 and 2009. It increased again by 3% in 2010
and by another 11% in 2011, i.e. just above the 2007 level. Business R&D
has been most affected in the services sector with a decrease of 30% in nominal
terms between 2008 and 2009. On the other hand it increased in the
manufacturing sector by 13% between the same two years[2]. Professional, scientific and
technical activities, human health and social work activities, and financial
and insurance activities are the most affected services sectors. Among
manufacturing sectors, R&D expenditure in wood, paper and printing
increased by a factor of 4.8 and also increased in food products, beverages and
tobacco,  pharmaceuticals, and in computer, electronic and optical products,
but decreased by more than 40% in fabricated metal products.

An effective
research and innovation system building on the European Research Area

The graph below illustrates the strengths and
weaknesses of Lithuania's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The graph shows that Lithuania's performance faces challenges in all four dimensions (human resources,
scientific production, technology development, and innovation), for most of the
main R&I indicators. Particular strengths are the number of new graduates
in science and engineering (S&E) per population aged 25-34, the FP7 funding
received compared to total R&D expenditure in Lithuania (at EU average),
and the financing of business R&D expenditure from abroad (mainly EU
Structural funds). The level of patenting activities and the level of
public-private collaboration provide room for improvement, although business
financing of university research has appeared recently to be relatively strong.

This leads to two observations: (i) Lithuania's
R&D relies to a larger extent than the EU average on EU funds, be it
Structural Funds or FP7 funds; (ii) a large share of the young population
receives tertiary education in S&E in Lithuania, which is also reflected in
the good share of total knowledge-intensive activities in total employment in
Lithuania (close to the EU average). However, when it comes to doctoral level, the
number of new doctoral graduates per thousand population aged 25-34 is
considerably below the EU average, an indication that doctoral studies and the
research system in Lithuania are less attractive for students.

Lithuania's scientific and technological strengths at European
level

The maps below illustrate three key science and
technology areas where Lithuania has real strengths in a European context. The maps
are based on the number of scientific publications and patents produced by
authors and inventors based in the regions.

Scientific
production                         Other Transport Technologies                Technological
production

Scientific
production               Construction and Construction Technologies  Technological
production

 Scientific
production                                                Energy                                    
Technological production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

In terms of volume of scientific
publications, Lithuania performs best in other transport (i.e. transport other than
automobiles and aeronautics) technologies. In this thematic area, Lithuania's volume of scientific publications is among the highest of all NUTS 2 regions in Europe
(the country of Lithuania is classified as a NUTS 2 region). In construction
technologies and in energy, Lithuania's volume of scientific publications is
approximately in the median of NUTS 2 regions. In all other thematic areas, Lithuania is among the regions of Europe with low levels of scientific publishing. Patenting
activity[3]
in Lithuania is extremely low and does not show any statistically significant
technological specialisation. In all thematic areas, the volume of patents
invented in Lithuania places Lithuania among the NUTS 2 regions with the lowest
volumes of patents in Europe.

Policies and reforms for a more efficient science and
technology system

Reforms of the science base in Lithuania started to be implemented only recently after several years of discussions. The
on-going reforms are far-reaching and on the whole drive the research system
towards what is accepted as international good practices. Autonomy and a new
mode of governance are given to universities. The network of public research
institutions has been re-organised and rationalised. The share of project-based
funding has considerably increased and institutional funding is increasingly
allocated in relation to the performance of the research institutions.
Researchers' salaries have increased and dedicated schemes to attract local and
international talents are now implemented. Most importantly, the creation and
development of five clusters (called "Valleys") integrating
higher-education institutions, research institutions and businesses in
identified scientific and technology areas is meant to increase linkages
between higher education, science and businesses and improve knowledge transfer
and the valorisation of research results in the country.

Lithuania's R&I strategy is described in the 2010-2020
National Innovation Strategy adopted in 2010. It contains an analysis of
strengths, weaknesses, opportunities and threats to the national R&I system
and proposes a vision and a series of objectives for the system. From the
thematic point of view, however, the Strategy cannot be considered a
specialisation strategy. Specialisation features more clearly in the 5 Joint
Research Programmes in 5 "R&D and economic sectors" which cover
all R&D activities[4],
the 5 thematic Valleys, the 12 National Integrated Programmes in 12
knowledge-intensive economic sectors, and the 6 National Science Programmes in
6 scientific fields. The Structural Funds are used extensively in particular
for the construction of the Valleys. Through these thematic efforts, Lithuania aims both to build on its RDI strengths and to develop its research and
innovation capacity in some key high-tech areas.

Government policy towards trans-national
collaboration, internationalisation of science and opening the national
research system to researchers from other countries is still under-developed.
The lack of policy attention to opening up the national research system stems
from the need to first address the national problems related to unattractive
career paths for researchers and limited research capacity. Also, some ERA-related
policies and objectives, such as increasing the mobility of researchers, are
seen as a threat to the weaker research and innovation systems of countries
like Lithuania.

Joint design and coordination of programmes
remains low on the political agenda but nevertheless exists. The Baltic Sea
Region Starts programme is aimed at fostering R&D and business-related
trans-national collaborations of clusters through networks of SMEs. In the
context of this programme, StarDust runs 5 trans-national pilot projects on
clean water, well-being and health, sustainable transport, digital business and
services, and design of living spaces. A financial mechanism agreed with Norway, supports Lithuania's Green Innovation Programme which is focused on SMEs.

The country’s involvement in existing
international infrastructures is modest. Regarding the promotion of the
research system's attractiveness for non-national researchers, some measures
have been taken. In 2010 the Lithuanian Research Council started implementing
the Global Grant Scheme, which is for the first time available to non-national
world class researchers. Within the Researchers' Careers Programme, several
schemes are implemented to encourage the return of Lithuanian researchers from
abroad and to attract foreign researchers.

Public procurement of innovative products and services
is being developed. A new programme to partly finance the recruitment of
scientists in firms has been launched. Measures have been taken to both
facilitate and lower the costs of starting up new businesses. These measures
include, in particular, business vouchers and a new legal entity called
"small partnership". Measures have also been taken to improve the
business environment and reduce the administrative burden of firms.

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[5].

 According to this index, the economic
impact of innovation in Lithuania is below its reference group, much below the
EU average. Among the five indicators of this index, Lithuania's performance is
particularly low in patent inventions, knowledge-intensive services exports and
sales of new-to-market and new-to-firm innovations. One key factor to increase
the economic impact of innovation is of course the structural change that
allows innovation-driven growth. High-growth innovative firms in particular
play a catalytic role in this respect.

Over the last years, Lithuania has put in place a number of measures to improve the situation. Support for research
and innovation activities in SMEs relies on the R&D tax credit, an
intensive use of Structural Funds through a large and diversified set of
schemes and instruments, support for the formation of clusters, public support of
enterprises for IP protection costs, innovation vouchers to buy R&D from
public research performers, and the development of the Valleys that are
expected to provide a stimulating environment and networks for new innovative
firms. Six agencies are active in the public support of innovation and
businesses[6].
The abundance of support schemes, instruments and agencies might need to be
rationalized and simplified.

Developing clusters that integrate higher education
institutions, research institutions and firms is at the centre of innovation
policy in Lithuania, involving in particular the 5 Valleys mentioned above in broadS&T
areas. The objectives of the Valleys are to strengthen the public
infrastructures for R&D and higher-education, to concentrate human
resources geographically and to strengthen public-private cooperation. S&T
parks are created in the Valleys to act as a link between businesses and public
laboratories by providing a number of innovation services and infrastructures,
in particular in relation to knowledge transfer and intellectual property
rights. In addition, a new pilot scheme to launch joint public-private projects
is being implemented by MITA.

Currently, a barrier to the creation of
innovative firms is the difficulty that individuals have in financing the
prototyping and business plan design phase in order to be able to solicit
finance from private investors for the creation of new innovative businesses.
Also, in order to improve the capacity of the country to exploit research
results commercially, there is an urgent need to develop an entrepreneurship
and innovation culture and skills in the higher education and public research
sectors, as well as to provide the right incentives and training for
researchers in the public sector to engage in knowledge transfer and
commercialisation activities.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

The graph above shows that Lithuania's manufacturing
industry is dominated by low-tech and medium-low-tech sectors, which are
intrinsically less research intensive than high-tech and medium-high-tech
sectors (coloured in red above). The only sizeable medium-high-tech sector is
chemicals (including pharmaceuticals). All other high-tech and medium-high-tech
sectors in Lithuania are small and for some of them large part of the activity
is import and re-export. This sector structure necessarily limits the overall level
of business R&D intensity in the country. It should be noted that data on
the effect of the crisis in 2009/10 are not yet available, notably the
construction sector has declined significantly since.

Structural change towards a more research-intensive
economy is mainly driven by high-tech and medium-high-tech manufacturing
sectors. In Lithuania, no clear trend emerges for these sectors: the weight in
the economy of two of these sectors has increased (motor vehicles and chemicals
(including pharmaceuticals), but for three others the weight has decreased.
Research intensity has increased in three of these sectors, while it has
decreased for the two others. In total, the effect of the evolution of
high-tech and medium-high-tech manufacturing sectors on overall business
R&D intensity in Lithuania has been limited. The chemical sector (including
pharmaceuticals) is clearly the most important medium-high-tech/high-tech
sector in Lithuania, in terms both of current size and of evolution (positive
evolution in research intensity and in economic weight).

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

HT and MT products have been making a negative
contribution to the trade balance in Lithuania. This indicates a relative de-specialisation
of the country in these products in international trade. However, the
negativity of this contribution has continuously diminished since 2004 (except
in 2011), a sign that the situation of Lithuania regarding trade in HT and MT
products has improved compared to other products.

The above graph shows the HT and MT products which
have most improved their contribution to the Lithuanian trade balance between
2000 and 2011: plastics in primary forms, road vehicles, and general industrial
machinery and equipment. In contrast, the contribution to the trade balance of
fertilizers, organic chemicals, and electrical machinery has strongly
deteriorated. The previous graph showed the increasing share of the rubber and
plastics and motor vehicles sectors in total value added in Lithuania and the decreasing share of the electrical machinery sector. Taken together,
these results indicate the growing importance of the rubber and plastics and
motor vehicles sectors in the Lithuanian economy, and conversely, a relative
decline of the electrical machinery sector.

Total factor productivity (TFP) grew very rapidly in Lithuania between 2000 and 2007, dropped with the crisis in 2009 but recovered in 2010-2012
(table below). Despite the considerable 2009 fall, Lithuania is still ranked
third in the EU in terms of TFP growth between 2000 and 2012. Regarding Europe
2020 targets, Lithuania's position is best in greenhouse gas emissions
(although Lithuania's performance has deteriorated compared to 2000) and
tertiary education rate of the population aged 30-34. Following a marked and
rapid improvement between 2005 and 2008, the share of population at risk of
poverty increased again during the economic crisis to 9 points above the EU
average.

Key
indicators for Lithuania

Luxembourg

The
challenge of fostering the emergence of a genuine R&I ecosystem

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Luxemburg. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 1.43%             (EU: 2.03%; US: 2.75%) 2000-2011: -1.34%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:19.84                 (EU:47.86;  US: 56.68) 2005-2010: +1.29%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.589                 (EU: 0.612) || Knowledge-intensity of the economy 2010:64.75                (EU:48.75;     US: 56.25) 2000-2010: +1.4%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Space, Automobiles               || HT + MT contribution to the trade balance 2011: -3.35%             (EU: 4.2%;    US: 1.93%) 2000-2011: n.a.         (EU: +4.99%; US:-10.75%)

Luxembourg is rapidly building up its public research capacities, from a
situation where, 25 years ago, the public research system was non-existent - the
oldest public research centres were set up in 1987 and the University of Luxembourg was established in 2003. Public sector R&D intensity has steadily
increased from 0.12% of GDP in 2000 to 0.45% of GDP in 2011 but remains well
below the EU average of 0.74%. Luxembourg's scientific performance as measured
by the share of its scientific publications which are among the top 10% most
cited publications worldwide (10.1%, not far from the EU average of 10.9%) is impressive
considering that its public research system has only been in existence since
the mid-1980s.

However, as reflected in the decrease of business R&D
intensity (from 1.53% in 2000 to 0.98% in 2011) and in the limited level of
cooperation between public research institutions and firms, the Luxembourgish research
and innovation ecosystem remains very weak. Its public components are not yet
able to play any decisive role in fostering innovation-led growth. While the
prosperity of the Luxembourgish economy in the last decades has been based on
the expansion of the financial sector, its large dependence on this sector is a
strong structural risk. In addition to its "sovereignty niches" on
which the financial sector expansion is based, the Grand-Duchy crucially needs
to develop "competence niches" as a springboard for innovation-led
growth.

The Government's resolve to make investment in RDI
part of a long-term policy for Luxembourg's economic development and diversification
has been translated into continued budgetary efforts as shown by an increase of
38% in real terms of the government budget allocation to R&D between 2008
and 2011. R&D project funding targets thematic priorities selected through
a foresight exercise. Many actions are developed to foster public-private
cooperation and more generally business R&D and innovation, including for
instance a cluster programme, the setting up of business incubators, and the
specification of IP/spin-off requirements in the performance contracts of
public research organisations.

Investing in knowledge

Luxembourg is not at all on track to reach its R&D intensity target for 2020 of
2.3% – 2.6%, as its R&D intensity is on a declining trend. This declining
trend is explained by the sharp decrease in business R&D intensity (from
1.53% of GDP in 2000 to 0.98% in 2011).  Public sector R&D intensity on the
contrary steadily increased from 0.12% in 2000 to 0.45% in 2011. This fourfold
increase reflects the willingness of the Grand-Duchy to build up its public
research capacities from a situation where, 25 years ago, the public research
system was in fact non-existent. In fact, the first public research centres
were created in 1987 and the University of Luxembourg was established in 2003. These
efforts have continued in recent years as shown by an increase of 38% in real
terms of the government budget for R&D between 2008 and 2011.

If Luxemburg is to reach its 2020 R&D intensity
target, the contribution from the private sector should increase. Only 45% of Luxembourgish
private investment in R&D is made in the manufacturing sector, compared to
23% in financial services and about 30% in other services[7]. The level of R&D
investment in financial services tripled between 2003 and 2007; however
thereafter it dropped by 27% between 2007 and 2009.

Private and public R&D investment can also receive
support by co-funding from the European budget, in particular through
successful applications to the seventh Framework Program for research and the
Structural Funds. Up to early 2012, 124 Luxembourgish participants had been
partners in an FP7 project, with a total EC financial contribution of € 31
million. This represents € 61 per head of population, which is 35% higher than
the EU average. The success rate of Luxembourgish applicants is 19.5%, in line
with the EU average success rate of 21.6%. Moreover, over the FEDER programming
period 2007-2013, € 19 million (37.7% of the total FEDER fund for Luxembourg) was allocated to research, innovation and entrepreneurship in Luxembourg.

An effective
research and innovation system building on the European Research Area

The graph below illustrates the strengths and
weaknesses of Luxemburg's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The situation of the Luxembourgish research
system is marked by the contrast between public sector R&D and private
sector R&D:

·
The Luxembourgish
public research system is very young, but is developing fast (see section Investing
in knowledge above). Its scientific performance as measured by the share of
its scientific publications which are among the top 10% most cited scientific publications
worldwide[8]
is positive and the share of business enterprise researchers is impressive.
This is mainly due to a policy of attracting outstanding foreign researchers to
work in Luxembourg.

·
Taking into account the
structure of the Luxembourgish economy (marked by the lowest share of
manufacturing in all EU Member States), Luxembourg business R&D intensity
(close to the EU average) has to be considered as being in fact relatively
high. This high level is explained by the combination of significant R&D
activities in the financial sector with the long-standing presence in the
Grand-Duchy of several large R&D centres of multinational manufacturing
companies (such as ArcelorMittal, Goodyear and DuPont de Nemours) and of
smaller "home-grown" technologically innovative companies (such as
IEE, Paul Wurth and Rotarex).

The performance of Luxembourg on the two indicators on cooperation between public research institutions and
firms is well below the EU average, reflecting the current disconnections
between the long–standing private sector R&D centres and a public research
system which is in the course of development.

Luxembourg's scientific and technological strengths

The maps below illustrate six key science and
technology areas where Luxembourg has real strengths in a European context. The
maps are based on the number of scientific publications and patents produced by
authors and inventors based in the regions.

Strengths in science and technology at European level

Scientific
production                                          Space                                    Technological
production

Scientific production                                          Automobile                           Technological
production

       Scientific
production                                          Energy              
Technological production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific production                              Materials       
                                    Technological production

Scientific production                                 Construction                             
Technological production

Scientific production                               
Environment                                   Technological production

Due to the limited size of its public
research system, Luxembourg does not have any visible strengths on the
"Scientific production" maps. However, specialisation indices
calculated on the basis of the number of scientific publications (classified by
FP themes) reveal three areas of specialisation for Luxembourg: ICT
(specialisation index of 2.67), socio-economic sciences (specialisation index
of 1.92) and environment (specialisation index of 1.65).

Based on EPO patents classified in the same
way, Luxembourg has very strong specialisation in two areas:

·
Space (RTA[9]: 5.7): The creation in
Luxembourg in 1985 of the Société Européenne des Satellites (SES), a landmark
for satellite telecommunications and now a major player in this sector, has led
to the development of a Space-related industrial cluster in Luxembourg.

·
Automobiles (RTA:
5.25): This reflects the presence of a very significant cluster of
technologically innovative companies supplying the automotive industry (such as
IEE and Delphi Automotive Systems).

Other areas of technological specialisation
are energy (RTA: 1.63), materials (RTA: 1.49), construction (RTA: 1.45) and environment
(RTA: 1).

Policies and reforms for research and innovation

The steady increase in the public R&D budget
reflects the government's resolve to make investment in RDI part of a long-term
policy for Luxembourg's economic development and diversification. Luxembourg’s national RDI strategy is founded on multi-annual planning and focuses on
targeted priorities. Following the establishment of the public research centres
(PRCs) and of the University between 1987 and 2003, key steps have been the
OECD review of Luxembourg’s national research system in 2006 and a Foresight
Study in 2006-2007 that identified the thematic domains which now make up the
CORE public research funding programme. A major result of the OECD review was
the recommendation to implement performance contracts between the Ministry and
the National Research Fund (FNR), the University, the PRCs and Luxinnovation. A
second set of contracts was executed for the period of 2011-2013, following the
initial set for 2008-2010. The CORE programme 2008-2013 of the FNR National
concentrates its funding on five priority fields: innovation in services, sustainable
resource management, new functional and intelligent materials and surfaces and
new sensing applications, biomedical sciences, and societal changes for Luxembourg. In 2011, the programme funded 28 projects at a cost of € 16.2 million.

Human resources are a key focus of Luxembourgish
research policy. At the end of 2011, the aid programme for research training of
the FNR (AFR 2008-2013) had supported 442 and 106 young researchers in their
PhD and post-PhD studies respectively. Programmes ATTRACT and PEARL 2008-2013
of FNR aim at attracting young and top researchers to work in the country; the
cost involved was € 3.8 million in the years 2008-2010 with € 13.7 million
foreseen for 2011-2013.

Many initiatives have been developed to
foster private R&D, public-private cooperation, innovation and
entrepreneurship:

·
The law of 5 June 2009
provides state aid for the private sector with a special focus on SMEs and
services sector innovation. The law of 18 February 2010 provides public aid to the
private sector in the field of eco-innovation. The law on IP tax incentives (21
December 2007) encourages companies to patent and license the results of their
R&D work, and also fosters spin offs and start-ups based on IP.

·
Recent reform measures
have encouraged the development of small innovative companies. These measures
include:  IP/spin-off requirements in PRCs performance contracts, the creation
of a Master's degree in Entrepreneurship and Innovation, the setting up of
business incubators, the creation of a partnership with a business accelerator
located in Silicon Valley (Plug and Play Tech Centre) in order to help
start-ups in Luxembourg to gain access to the United States market.

·
The massive (€565
million) infrastructure project Cités des Sciences aims at reinforcing
relations between research, education and innovation, by hosting on one site
all the major public R&D institutes of Luxembourg, as well as private and
start-up companies, a new technical school, the university campus, the National
Archives and some cultural centres. It will provide facilities for
public-private partnerships and a business incubator.

·
Luxembourg has set up a cluster programme around five
thematic clusters (in materials, ICT, space, bio-health, eco-innovation).

·
The Luxembourgish
government founded a Luxembourg Future Fund to support the diversification and
sustainable development of the economy. The Fund will invest directly or via
other funds in innovative SME's in a start-up or development phase in
technology sectors (ICT, clean technologies…). The Luxembourg state will invest
€ 120 million in the Fund via the Société Nationale de Crédit et
d’Investissement and the European Investment Fund will contribute a further € 30
million. In addition, the government will invest in health sciences and
technology via an existing private fund.

Economic impact of innovation

The index below is
a summary index of the economic impact of innovation composed of five of the
Innovation Union Scoreboard's indicators[10].

The share of the Grand-Duchy's employment
in knowledge-intensive activities (24. 8 %) is the highest of all EU Member
States and nearly the double of the EU average. The share of
knowledge-intensive services in services export is also the highest of all EU
Member States. These situations are due to a very strong specialisation in the
financial services sector, which has been Luxembourg's main growth engine since
the early 1980s. Its expansion has allowed the Luxembourgish economy to
flourish despite the decline of its key manufacturing sectors, especially the
steel industry. The limited role of high-tech and medium-tech
manufacturing in the Luxembourgish economy explains the low scores of the
Grand-Duchy on the other indicators parts of the index. Manufacturing
represents only 6.5% of total value added, the lowest share of all EU Member
States.

It is however uncertain to what extent the
financial sector will be able to continue to play such an important role in
driving Luxembourgish prosperity in the future. Even if financial activities
around the world would remain as buoyant after the crisis as they were before,
the question arises as to whether Luxembourg will be able to preserve and
continue to develop the competitive advantages in terms of fiscal, legislative
and regulatory environment, that have made it an attractive environment for
this type of activity. Thus, although the Luxembourgish financial sector is
relatively healthy, the large dependence of the economy on this industry is a
strong structural risk.

As indicated by the OECD in its 2007 review
of Luxembourg, it is therefore crucial for the Grand-Duchy that, in addition to
its "sovereignty niches" on which the financial sector expansion is
based, it also develops "competence niches" as a springboard for
innovation-led growth, both in areas of existing activities or in new areas
that can contribute to the much-needed diversification of its economy.

The development of a top-quality public
research base is a key building block for such a strategy. Good framework
conditions for innovation are also required. The situation of the Grand-Duchy
in this regard is relatively good. Credit tightening has been less pronounced
in Luxembourg than elsewhere in the Eurozone and SMEs continued to enjoy good
access to finance. In Luxembourg early stage venture capital investment as a %
of GDP is close to the EU average. Luxembourg has the third highest score of
the EU Member States in the "International property rights index" compiled
by the Property Rights Alliance.

Competitiveness in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation in these products.

Although its goods balance is structurally in deficit,
Luxembourg has a large trade surplus thanks to its very strong position in
financial services, especially in asset management. Thanks to the continuing
expansion of its exports of financial services, Luxembourg has gained market
shares overall since 2000. Luxembourg also gained market shares in non-financial
services, while it lost shares in goods markets[11]. This has led to a situation
where the fees earned by asset managers alone constitute around half the total of
Luxembourgish exports. Non-financial services represent about 30% of
Luxembourgish exports, while the share of goods in Luxembourgish exports has
been reduced to about 20%, down from 45% in 1995.

Luxembourg has a trade deficit in high-tech and medium-tech products which has
grown slightly over the last decade. However, the evolution between 2000 and
2010 of the contribution of HT and MT products to the trade balance is positive
for many product sectors, as shown in the graph above. However, taking into
account the limited role the manufacturing and export of HT and MT products
plays in the Luxembourgish economy, the graph above has to be interpreted with
caution. For instance, the fluctuations of the trade balance in the other
transport equipment category are in fact driven by the large yearly variations
of the level of imports in the subcategory aircraft and associated equipment,
spacecraft (including satellites) and spacecraft launch vehicle, parts
thereof.

Key indicators for Luxembourg

Malta

Building
up a knowledge-based economy in a specialisation strategy

Overall performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Malta. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 0.73%             (EU: 2.03%;  US: 2.75%) 2000-2011: +4.68%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 17.53                (EU:47.86;   US: 56.68) 2005-2010: +4.07%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.35                  (EU: 0.612) || Knowledge-intensity of the economy 2010: 54.45                 (EU:48.75;     US: 56.25) 2000-2010: +2.67%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies ICT, Bio-medical technologies || HT + MT contribution to the trade balance 2011: 0.92%               (EU: 4.2%;    US: 1.93%) 2000-2011: -14.37%  (EU: +4.99%; US:-10.75%)

The stated aim of the Maltese government
is to build a knowledge -based economy with research and innovation at its
core. This can only be achieved in the long term and its success will depend on
the implementation of the policies outlined in the draft National Strategic
Plan for Research and Innovation -2020. However, it is clear that progress is
being made. This is shown by the increase in R&D intensity from 0.63% in
2010 to 0.73% in 2011, an increase which is underpinned by significant
increases in public and private expenditure on R&D. The total number of
researchers (full-time equivalent) has also increased, by 19% between 2009 and
2010. Performance and economic output indicators all show positive development
over the last decade, in particular the indicator on structural change of the
economy which has increased at almost six times the rate of the EU average.

However, Malta remains amongst the lowest
ranked Member States in some key areas. In 2010, Malta had 3.3 researchers
(full-time equivalent) per thousand labour force compared to an EU average of
6.5. Only four Member States had lower values. Malta has the lowest public
expenditure on R&D as % of GDP in the EU (0.25% compared to an EU average
of 0.75% in 2010). Although 59% of R&D expenditure in Malta is performed by business enterprise (a share which was only slightly lower than the
EU average of 62% in 2010), more than 80% of all business enterprise
expenditure on R&D is spent by foreign-owned companies.

Malta's key challenges are to build up R&I
capacity, to move towards a self-sustaining R&I system (which implies
specialisation in order to achieve a critical mass) and to create an enabling
environment for research to market, innovation and entrepreneurship, particularly
for SMEs. A fundamental challenge for Malta is to stimulate indigenous private
sector R&I. The strategic principles adopted to address these challenges
are outlined in Malta's draft National Strategic Plan for Research and
Innovation 2020. These include increased focus on priority areas,
specialisation in a select number of areas of economic importance, coordinating
public and private resources, expanding the science, technology, engineering
and mathematics human capital base and building strong links between knowledge
institutions and business.

Investing in knowledge

Malta's R&D intensity increased from 0.67%
in 2010 to 0.73% in 2011. This means that Malta has already achieved its
R&D intensity target for 2020 and if the current trend continues should
reach an R&D intensity of more than 1% in 2020. The increase in R&D
intensity between 2009 and 2010 was mainly due to an increase of 41% in R&D
performed by the higher education sector. Funding of R&D by each of the
three main sources (government, business and abroad) has increased by 20% or
more between 2009 and 2010.

In spite of the economic crisis, public
expenditure on R&D increased by 35.1% between 2009 and 2010. This was due
to an increase of 4.2 million euro in higher education expenditure on R&D.
Government intramural expenditure on R&D decreased slightly between 2009
and 2010. Government funding of R&D has increased steadily between 2005 and
2010 at an average annual real growth rate of 7.7%. However, the government
budget for R&D which increased from € 9.4 million to € 14.3 million between
2009 and 2010 has decreased by 19% between 2010 and 2011. This development is a
cause for concern in view of the likely negative impact on future R&D
intensity.

Malta is ranked nineteenth in the EU in terms
of business enterprise expenditure on R&D as % of GDP with a value of 0.37%
in 2010 compared to an EU average of 1.23%. The share of R&D performed by
business enterprise in Malta has decreased from 66% in 2005 to 59% in 2010.
R&D financed by business enterprise increased in real terms between 2005
and 2010 at an average annual growth rate of 6.3%. Most of Malta's business R&D is carried out by a small cluster of foreign-owned companies. 43%
of R&D carried out by foreign-owned companies is performed by US owned
companies.

Malta relies heavily on support from the EC
Framework Programme and Structural Funds for the achievement of its R&I
objectives. FP7 projects in Malta have been awarded €11(1) million to date. The
success rate of Maltese applicants for FP7 funding is 19.1% compared to an EU
average of 22.0%. Malta will also receive around € 60 million for innovation
and RTD from the Structural Funds 2007-2013. One of the objectives of the draft
National Strategic Plan for R&I 2020 is to put in place an appropriate
national framework to exploit opportunities for participation in EU R&I
funding programmes.

An effective
research and innovation system building on the European Research Area

The graph below illustrates the strengths and
weaknesses of Malta's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

Despite a clear strategy, Malta is still below the EU average for most indicators. Although the supply of human
resources for science and technology is below both the EU and the reference
group averages, the average annual growth in the numbers of graduates per
thousand population aged 25 -34 is quite high. Malta's share of employment in
knowledge-intensive activities is higher than the EU average reflecting the
dominance of high-tech multinationals in the private sector.

Knowledge creation as reflected in the
production of highly-cited scientific publications and public-private
scientific co-publications and in the number of PCT patent applications is far
below the EU average indicating a low scientific base, although the
establishment of the University of Malta Knowledge Transfer Office in 2009 is
already contributing to the reversal of this trend.  Indeed, since its
inception, the office has taken over the maintenance of the 3 patents owned by
University and oversaw the filing of 8 additional patents with the Malta Patent
Office, the UK IP Office and WIPO.

Malta's reliance on the EC Framework Programme
as a source of funding is shown in its above average level of EC funding.
Innovative activity by SMEs is above the reference group average but below the
EU average.

Malta's scientific and technological strengths

Malta, which is the smallest Member State in the EU in terms of population, produces the smallest number of scientific
publications in the EU and is in the lowest size category for publications in
every field of science. Historically, Malta makes very few patent applications
to the EPO, however a positive trend can be noticed over the last decade. The
expansion of Malta's science, technology, engineering and mathematics human
capital base and the building of links between knowledge institutions and the
private sector as outlined in the draft National Strategic Plan for Research
and Innovation should stimulate more activity in these areas.

R&D in Malta is concentrated around a
cluster of large firms specialising in ICT, manufacture of machinery,
manufacture of chemicals and medical instruments and the generic
pharmaceuticals industry. E-gaming is an emerging area which has attracted a
number of international companies to Malta. The setting up of a new Life Sciences
Centre (to be named the BioMalta Campus) is designed to develop Malta into a regional centre of excellence in life sciences and the bio-medical industry.
The Life Sciences Centre will seek to attract foreign direct investment into
research and development and innovation in the biotechnology and life sciences
sectors and will provide support to the local industrial community. The Life
Sciences Centre will be operational in 2014.

Policies and reforms for research and innovation

Malta's draft National Strategic Plan for
R&I 2020 responds adequately to the country's challenges in the field of
R&I. It is strongly business oriented and aims to build up R&I capacity
by concentrating efforts on areas of economic importance. Resource
concentration and smart specialisation in specific sectors is a key a part of
the Maltese R&I strategy. The Plan proposes a set of tailored aid schemes
for enterprises to provide support for particular target groups such as SMEs
and start-ups. A new commercialisation programme to help technology owners move
their technologies closer to market was launched in 2012. Efforts are being
made to use government expenditure on R&D to leverage an increase in
business R&D expenditure, particularly through a varied set of incentives
to promote R&D and innovation in the enterprise sector.

A first draft of the National R&I Plan
was issued for public consultation in late 2011 and work on the updating and
finalisation of this plan is currently on-going.

The draft Plan proposes to address the
serious shortfall in human capital for R&I by investing in human resource
development at all levels of education. Scholarship schemes supporting
post-graduate studies in Malta and abroad are in place and are synchronised
with areas of national priority. The draft Plan proposes the setting up of
fiscal incentives to highly qualified and skilled foreign workers who are
required for industrial sectors of economic importance and to those persons
carrying out research or marketing an invention or technology in Malta. Malta is investing in the construction of a new National Interactive Science Centre
in order to enhance science-related education and training. It will help to
expand the science, engineering and technology human capital base. The Centre
will open in 2014.

The European Research Area (ERA) dimension
in Malta's national research and innovation system is limited in the extent of
policies and measures specifically addressing this aspect. Some success has
been achieved through the putting in place of a legal framework for inward
mobility of third country researchers and the very good participation rates in
the sixth and seventh EC Framework Programmes. International cooperation is one
of the pillars of the draft National Strategic Plan for R&I, and a number
of priority measures to be implemented in the short term are identified.

Malta aims to support both research based and
non-research based innovation through identifying key issues and opportunities
and providing an appropriate enabling and support framework to potential
innovators. The draft National Strategic Plan for R&I recommends several
measures for the support of innovation, including an innovation voucher scheme,
a risk fund to enable the pooling of private funding to support start-up companies,
as well as established companies aiming at expansion and an investment
readiness programme to enable SMEs to innovate by addressing the lack of
availability of risk capital for businesses at their seed, start-up and
early-growth stages.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend of moving to the left-hand side reflects the decrease
of manufacturing in the overall economy. The sectors above the x-axis are
sectors whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented in the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

In Malta, the services sector accounts for
around 80% of total value added. The share of manufacturing in total value
added has declined steadily over the last decade to 13.6% in 2010. Between 2005
and 2009 the shares of value added decreased for all of the sectors on the
graph with the exception of chemicals and chemical products. Although the share
of value added for chemicals and chemical products increased, BERD intensity
(business expenditure on R&D as % of value added) decreased because
business expenditure on R&D for this sector stagnated between 2005 and
2009. BERD intensity for machinery and equipment increased by almost 25% per
annum between 2005-2009. In fact, BERD intensity is showing positive progress
for all sectors with the exception of chemicals and chemical products.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

The overall contribution of high- tech and medium-tech
products to the trade balance was positive for each year over the period
2000-2010. Electrical machinery, apparatus and appliances is the sector with
the most significant increase in its contribution to the trade balance.
Medicinal and pharmaceutical products also show a notable increase. The sector
with the biggest decrease is other transport equipment followed by
power-generating machinery and equipment. The contributions of most other
sectors have either slightly positive or slightly negative evolutions.

Growth in total factor productivity for Malta has been negative throughout the last decade (see Table below). Malta's employment rate has increased from 57.2% in 2000 to 61.5% in 2011 although this is
still well below the EU average of 68.6%. Malta has ambitious targets for 2020
in terms of addressing greenhouse gas emissions and the share of renewable
energy in energy consumption. However, it is still too early to assess the
impact of the measures being taken to achieve these targets.

Key indicators for Malta

[1] See Methodological note for the composition of this
index.

[2] Data from Eurostat, Business R&D expenditure
(BERD) by economic activity based on the 'main activity' of the firm.

[3] At the European Patent Office.

[4] Material, physical and chemical technologies; engineering and
ICT; biomedicine and biotechnologies; natural resources and agriculture;
creative and cultural industries

[5] See Methodological note for the composition of this
index.

[6] The Agency for Science, Innovation and Technology  (MITA),
the Lithuanian Business Support Agency (administration of EU Structural Funds),
Lithuanian Innovation Centre, INVEGA (loans, guarantees), Invest Lithuania
(investments consultancy), Enterprise Lithuania.

[7] However
it must be borne in mind that these other services include R&D services
to the manufacturing sector.

[8] 10.1%, not far from
the EU average of 10. 9% and similar to the performances of France and Italy

[9] Revealed Technological Advantage

[10] See Methodological note for the composition of this
index.

[11] Luxembourgish exports of goods increased during
the first decade of the millennium by an annual average of 3.5% in value and
1.4% in volume, well below world levels.

The
Netherlands

A 'Top sector's' business policy fostering industrial
renewal and promoting innovation

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in the Netherlands. They relate
knowledge investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 2.04%              (EU: 2.03%; US: 2.75%) 2000-2011: -0.45%   (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 78.86                 (EU:47.86;  US: 56.68) 2005-2010: +2.72%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.565              (EU: 0.612) || Knowledge-intensity of the economy 2010: 56.22                 (EU:48.75;      US: 56.25) 2000-2010: +0.48%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Food and agriculture, Energy, ICT, Nanotechnology, Security, Health               || HT + MT contribution to the trade balance 2011: 1.68%                (EU: 4.2%;     US: 1.93%) 2000-2011: +53.81%  (EU: +4.99%; US:-10.75%)

The
Dutch research and innovation (R&I) system has succeeded in maintaining its
innovative capacity during the years of financial crisis, with a high
efficiency and effectiveness of public R&D investment,  an improved S&T
excellence from a high existing level and the development of hot-spots in key
technologies, in spite of a stagnating R&D intensity. These efforts are
reflected in the competitiveness of the Dutch economy, which benefits from a
positive contribution of high-tech and medium-tech products to the trade
balance. The Dutch economy is very knowledge-intensive, although a warning
signal may be the very slow rate of structural change over the last decade. Dutch
enterprises, and particularly SMEs, are less innovative than the EU average. The
business R&D investment rate is only 70% of the EU average in 2010 and the
rate of SMEs innovating in-house (0.73) is at a lower level than the EU
average.

Compared to other Member States with
similar economic development, the Dutch R&I system has a relatively low
level of business expenditure on R&D and innovation which is overly
concentrated in a reduced number of multinational firms performing R&D. An
additional challenge is a weaker connection between, on the one hand, the Dutch
science base (which ranks amongst the world's best performers in terms of
output and openness) and, on the other hand, the business sector (which has an
average or below average innovative performance according to the Innovation
Union Scoreboard). The share of science and engineering graduates (both total and
doctorates) in the population aged 25-34 is markedly lower than the EU average and
this raises the question of how the Netherlands will be able to assure the
future supply of highly skilled human resources necessary to keep an
innovation-based economy running.

The recent 'top sectors' business policy
addresses directly the issue of underinvestment from the Dutch private sector
by the creation of 'top consortia' in innovation involving actors from public
research, universities and innovative enterprises and by stimulating knowledge
transfer. The Dutch economy needs indeed to foster industrial renewal, faster
growing and more innovative sectors which would stimulate increased investment
in private R&D and innovation while safeguarding accessibility beyond the
strict definition of top sectors and preserving fundamental research. From
2011, the new business policy introduced a sectoral approach implemented by
public-private partnerships in the field of research, education and innovation
in order to have closer links between science and business.

Investing in knowledge

In 2000-2010, R&D
intensity has fluctuated between a minimum of 1.77% (2008) and a maximum of
1.94% (2000). In 2011, the Netherlands had an R&D intensity of 2.04%. The Netherlands set the target to increase R&D intensity to 2.5% by 2020. R&D intensity
will have to increase at an average annual growth rate of 3.2% over the current
decade if the 2020 target is to be reached. Meeting that target constitutes a
challenge, considering recent trends.

The research system in the Netherlands is characterized by a relatively low R&D intensity in the private sector
and a relatively high R&D intensity in the public sector. In this context,
it was worrying that in the 2011 and 2012 public budgets, R&D investment
decreased by 3.7% and 4.1% respectively. A further decrease of 3.3% is planned
for the 2013 budget. This decrease is concentrated within the category of
applied research, due to a negative trend since the last four years. This
however reflects at least partly a shift from direct to indirect funding of
R&D, with a stronger weight given to tax incentives for enterprises
performing R&D. If we add foregone tax revenues to the budget expenditures,
the variation in respect to the previous year is indeed much more positive
(2011: -0.2%, 2012: +0.7%; 2013foreseen at -2.3%) Other measures include
specific schemes for SMEs and support for public-private partnership in key
technologies.

These measures respond to
the most outstanding challenge for the R&I system in the Netherlands, namely falling business R&D investment, which in 2010 stood at 0.87% of
GDP, well below the EU average of 1.23%. This gap has been addressed by successive
governments during the last decade through R&I policies with the aim of
creating an attractive climate for R&I intensive firms, including firms
from abroad. The Netherlands has a very large services sector and a relatively
small manufacturing sector, oriented predominantly towards medium technology
intensive industries. Furthermore, business R&D investments are
concentrated in a limited number of large multinational firms. Over the last
decade research and innovation has become increasingly international and EU
Member States having a concentration of R&D in MNEs are particularly
affected by an outsourcing of R&D activities in global value chains.

The Netherlands has been successful in its participation in FP7 with an EC contribution of €
1.8 billion up to mid-2012, representing 6.8% of total EC funding. The success
rate was 25.65%, which is the second highest among the Member States.  The Netherlands is ranked the 5th Member State in numbers of participants and in the 6th
position in budget share. The top collaborative links in FP7 are with Germany, the United Kingdom and France. For the 2007-2013 period, the Netherlands has been allocated
nearly € 818 million of ERDF Structural Funds for R&I and entrepreneurship
(almost half of the ERDF funds) and plans to invest some € 214 million to
support business and in particular SMEs.

An effective
research and innovation system building on the European Research Area

The graph below illustrates the strengths and
weaknesses of the Netherland's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The Dutch R&I performance stands out in
terms of scientific quality, internationalisation, technology development and
public-private cooperation. It has high levels of international
co-publications, scientific publications, public-private co-publications, PCT
patenting, BERD financed from abroad and licence and patent revenues from
abroad (as % of GDP).

The Netherlands has a strong and much
internationalised research system. The Netherlands is ranked second in the
world in terms of highly-cited scientific publications (behind Switzerland and equal to Denmark) and the trend is positive. Many Dutch universities score high in
international university rankings and in FP7 success rates. The researchers and
research institutions of the Netherlands cooperate extensively with partners in
the EU and beyond.  The Netherlands is amongst the top EU Member States in
terms of international scientific co-publications, and this trend of internationalisation
is growing. In the EU, Dutch researchers cooperate mainly with colleagues from Germany and the United Kingdom. An increasing number of Dutch research programmes aimed at talented
scientists are open to non-resident applicants. A good example of portability
of grants is the Rubicon programme. The Netherlands has a long-standing
tradition of participating in joint programmes at the European and
international level, in particular through international agencies. It also
participates in a large number of ERA-NETs and pan-European research
infrastructures.

The main weakness of the Dutch R&I
system is in the area of business innovation and in particular innovation by
SMEs. There is room to further improve the diffusion of the results of this excellent
science and technology base into the national economy itself. Business R&D
and business innovation in SMEs would benefit from this. Also, a worrying trend
is the very low level (much below the EU average) of new tertiary graduates in
Science and Engineering relatively to the population aged 25-34 in the Netherlands. This is a potential threat to the Dutch R&I system.

The Netherland's scientific and
technological strengths

The maps below illustrate several key science and
technology areas where Dutch regions have real strengths in a European
perspective. The maps are based on the number of scientific publications and
patents produced by authors and inventors based in the regions.

Strengths in science and technology at European level

Scientific production                     
Food, agriculture and fisheries             Technological production

Scientific
production                                  
Energy                                           Technological production

Scientific production        Information
and Communication Technologies         Technological
production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific
production                                           Nanotechnology                                  
Technological production

Scientific
production                                           Security                                    
                Technological production

Scientific
production                                                 Health                                           
     Technological production

The maps above illustrate the strengths of
Dutch science and technology production in absolute numbers in food agriculture
and fisheries, energy, ICT, nanotechnology, security, and health. In general,
there is a good correspondence between science and technology strengths. These
sectors coincide to a large extent with the top sectors of the Dutch enterprise
policy 'To-the-Top'.

In terms of specialisation, the Netherlands has globally the highest research intensity in health, with a specialisation
index of 1.35. The specialisation patterns between 2000 and 2010 show that the
Netherlands is among the first three most specialised countries in the world in
audio-visual technology, basic communications processes, semiconductors,
optics, macromolecular and food chemistry, and food products and beverages. In
the thematic area of food, agriculture and fisheries, the Netherlands had the highest share in the world of scientific publications in the top 10%
most cited scientific publications with a score of 17.8% (2000-2009). In the field
of nanosciences, the Netherlands had the second highest score in the world
(behind Israel) in terms of scientific publications produced between 2000 and
2009.

A quantitative analysis of the number of
EPO patents (2000-2010) by applicant classified by FP7 thematic priorities show
that the Netherlands has higher shares of total patenting activity than the EU average
in some fields including food and agriculture (6.31% vs. 4.07%), information
and communication technologies (37.7% vs. 21.4%) and security (3.16% vs.
2.94%).

Policies and reforms for research and
innovation

Although the Netherlands traditionally has a good organisational capacity that translates into
productivity performance, its relative underinvestment in R&D is not
without consequences. For instance, the productivity gains in the Netherlands tend to stagnate albeit at a high level. This may weaken the capacity of the Netherlands to position itself internationally in sectors where it could build
comparative advantage over time. These challenges are addressed by a
specialisation strategy, but it remains to be seen whether sufficient public
resources can be concentrated in the selected domains.

The national innovation
strategy ("Naar de top") relies indeed on the new top sectors
approach which is characterised by increased focus on demand-driven policies,
fewer direct subsidies, more generic indirect support (e.g. tax incentives,
deregulation) and more emphasis on entrepreneurship, in particular for
innovative SMEs. A significant share of the public R&D budget is to be
mobilised in favour of the top sectors. The aim is to reduce the administrative
burden and to create additional tools for innovation funding via a revolving
Innovation Fund. The shift from grants to tax incentives is based on three main
instruments: WBSO scheme for wage subsidies, the RDA for complementary types of
cost other than wages, and the Innovation Box.

That strategy identifies
nine "top sectors" to stimulate more cooperation between government, business
and knowledge institutes through a series of public-private partnerships:
chemistry, creative industry, energy, high-tech systems and materials, life
sciences and health, agro and food, logistics, horticulture and propagating
stock, and water. Each of these sectors is characterised by a strong market and
export position with a very good knowledge base and high potential for public-private
collaborations. Top sectors are often geographically concentrated in innovation
hotspots, such as the Brainport region (Eindhoven area) or Food Valley (Wageningen area). Each top sector will consider how to attract foreign business
and top talents to the Netherlands. This approach aims to bring research closer
to business and to foster valorisation and product innovation activities. It
was presented in 'To the Top: Towards a new enterprise policy' (February 2011)
and 'Enterprise policy in action' (September 2011).

So-called 'top teams'
involving various stakeholders from these sectors have developed sector policy
agendas which will be evaluated regularly.  These agendas have been translated
in so called innovation contracts per top sector. Innovation contracts comprise
are a balanced mix of fundamental research, applied research and valorisation,
tailored to the needs of the market and consistent with the European agenda.
The societal knowledge needs and overarching topics are also addressed in the contracts.
The government puts the responsibility for this on the field by bringing
relevant parties to the table under the direction of the leading players. This
gives the parties a communal goal: each sector will want to present the best
plan possible that is supported by their grass roots and organisations.
Drafting contracts is an open process with room for all blood types, including
the SME sector.

As part of the top sector
approach, 19 Top consortia for Knowledge and Innovation (TKI) are put into action
as of September 2012. TKIs are designed as public private partnerships,
bundling excellence (in terms of research and business) in promising fields of
technology.  Driven and supervised by the top teams, they will play an
important role in the prioritisation and guiding of public spending and in
demand-side management.

An important aspect of the
new business policy is to target support for the promotion and creation of fast
growing new science-based companies spinning-off from business, universities
and research laboratories. In parallel, continued public efforts are envisaged
to support non-targeted academic research and to attract and train a larger
number of students in science and engineering.

The Strategic Agenda for
Higher Education, Research and Science (published on 1 July 2011) complements
the "top sectors" approach by encouraging universities and
universities of applied sciences to adapt and improve academic curricula, to
regroup into knowledge clusters and to strengthen their 'valorisation' mission.
Addressing the challenge of a relatively low number of graduates, in particular
in science and engineering, the strategic agenda emphasizes the need to focus
on research, to foster specialisation in higher education institutions and to
reward quality when funding applied science in universities. The government has
also reserved funding for new and updated research infrastructures and has put
in place a national roadmap for research infrastructures.

Economic impact of innovation

The index below is a summary index of the
economic impact of innovation composed of five of the Innovation Union
Scoreboard's indicators[1].

The share of employment in
knowledge-intensive activities is in the Netherlands clearly above the EU
average. The overall good patenting performance in the Netherlands reflects primarily the patenting behaviour of a small group of MNEs based in the Netherlands while Dutch young firms (less than five years old) have noticeably less PCT
patent applications than their equivalents in other R&I intensive Member
States. The low score of the Netherlands on the indicator “Share of
knowledge-intensive exports in services exports” is largely explained by
high volumes of activities in some logistics, transport and trade related
services which are linked to the geographical intermediation role of the Netherlands and which are classified as non-knowledge-intensive.

Building on its excellent science base, the
Netherlands has the capacity to build up internationally attractive
innovation environments for innovative SMEs and to retain and attract R&I
activities of MNEs. The existing technology supply of innovative firms in the Netherlands would benefit from closer links with the technology demand from larger MNEs, thus
enhancing fast-growing innovative firms. In the medium term, the Netherlands needs to respond to internationalisation by upgrading the economic structure of
its economy and injecting knowledge in key growth sectors. Since 1995, there
have been few changes in the economic structure in the Netherlands towards higher knowledge intensity in the manufacturing sector. The service
sector is growing and would, if oriented towards knowledge-intensive services,
have the potential for linking up to the internationalisation of research and
innovation.

Finally, the Netherlands is fairly advanced in
implementing demand-side policy measures, such as the SBIR (Small Business
Innovation Research) programme which stimulates the creation or expansion of
innovation markets by supporting SMEs in developing innovative products through
several stages of procurement contracts. This scheme can be considered as pilot
in Europe (a similar scheme exists in South Korea). As a first step, companies submit
their proposals for product development. Several companies are funded for half
a year to perform feasibility studies. In the light of these studies, three
companies are asked to develop their ideas into a marketable product and are
subsidised for 18 months with up to € 450 000 each. After that, the procuring
authority is free to buy ownership of one of these three products.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

Since the mid-nineties, there have been
only few changes in the economic structure. Most manufacturing sectors have had
stable or declining R&D intensities. However, positive trends are visible
in high-tech and medium-high-tech sectors such as machinery, and chemicals, and
also in some larger medium-tech sectors such as publishing and printing. In
general, the Dutch economic structure is oriented towards the services sector while
the manufacturing sector is largely focused on medium-tech and medium-high-tech
sectors such as food processing, chemicals, electrical machinery and petroleum
refining. In terms of weight in the economy (horizontal axis), the graph above
illustrates the decreasing contribution of manufacturing industry to value
added in the Netherlands, with many sectors losing relative weight (left-hand
side of graph).

The crisis package put forward by the Dutch
government with regard to R&D and innovation included measures for
leveraging private sector investments. From 2000, private R&D intensity
declined in the Netherlands, indicating a shift towards less research-oriented
activities. Some medium-high-tech and high-tech sectors have lost importance in
the overall Dutch economic structure despite the fact that research investment
in various industrial sectors has remained largely stable. The structural
development of the Dutch economy is certainly a major concern of the
government. One of the main rationales behind top sectors approach is to
stimulate knowledge intensive sectors in the economy with a strong competitive
position. In the long run this should strengthen the structural composition of
the economy.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

In the period 2000-2011 many
Dutch industry sectors increased their contribution to the trade balance
confirming the important role of the Netherlands in the global markets and its
strong export capacities. The most significant improvements took place in
various sectors of the machinery industries (i.e. specialised and general
industrial, power-generating, electrical, data processing) and in the telecommunication,
sound-recording and reproducing apparatus sector led by Phillips. In contrast, the
photographic apparatus sector suffered a sharp deterioration of its relative
contribution to the trade balance.

Also in real terms, the trade
balance of HT and MT products have been growing strongly, although affected by
the economic crisis after 2008. The continuing competitiveness of high-tech and
medium-tech industries can be explained by the stability of Dutch total factor
productivity growth since 2005. The key indicators (table next page) also confirm
the excellent S&T results of the Netherlands in international cooperation,
in particular in terms of scientific co-publications and license and patent
revenues from abroad.

The Dutch economy was deeply
affected by the financial and economic crises and underwent a severe contraction
in 2009 but the employment rate remains. In total, beside a shrinking R&D
intensity, the progress towards the other Europe 2020 objectives is positive
with falling greenhouse gas emissions, a larger share of electricity from
renewable energy, a decrease of the population at risk of poverty and a growing
share of population having completed tertiary education. As regards
technologies contributing directly to societal challenges, the Netherlands patented more environment-related technologies, which is consistent with its
progress on environmental objectives. The evolution of health-related
technologies fell slightly, but from a high-performance level.

Key
indicators for the Netherlands

Country-specific recommendation in R&I adopted by
the Council in July 2012:

"Promote innovation, private R&D investment
and closer science-business links, as well as foster industrial renewal by
providing suitable incentives in the context of the enterprise policy, while
safeguarding accessibility beyond the strict definition of top sectors and
preserving fundamental research".

Poland

Improving
quality of the science base and fostering innovation in enterprises

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Poland. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 0.77%            (EU: 2.03%; US: 2.75%) 2000-2011: +1.6%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 20.47                (EU:47.86; US: 56.68) 2005-2010: +4.45%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.313              (EU: 0.612) || Knowledge-intensity of the economy 2010: 31.78                 (EU:48.75;     US: 56.25) 2000-2010: +1.65%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Food, agriculture and fisheries; Energy; Environment; Security; ICT; Materials || HT + MT contribution to the trade balance 2011: 0.88%                (EU: 4.2%;    US: 1.93%) 2000-2011: +37.56%  (EU: +4.99%; US:-10.75%)

Since 2000, Poland has increased its investment in
R&D and improved its excellence in science and technology (although at a
lower rate than EU average), while focusing on key technologies relevant to
industry. The economy has been undergoing structural change towards higher
knowledge intensity (a 28% improvement since 2000) and Poland's global competitiveness is improving at a higher rate than the EU average. In addition,
Polish exports have been growing and Poland has increased its share of
high-tech exports by 2% annually over the period 2000-2010. This development
seems to reflect the positive effects of large foreign direct investment
inflows and the related imports of advanced investment goods that upgraded
domestic production structures. Poland scores relatively low on the indicator
of contribution of high-tech and medium-tech goods to the trade balance, but the
positive value indicates a small comparative advantage and structural surplus
in high-tech and medium-tech trade which is growing (0.19 in 2010 and 0.88 in 2011;
EU average of 3.54 in 2010 and 4.2 in 2011). However, Poland is still far behind the EU average in terms of investment, excellence and
knowledge-intensity in the economy, thus leaving room for further progress,
illustrated by the ambitious Polish R&D intensity target for the Europe
2020 strategy.

The Polish R&D system has undergone
major restructuring over the last few years. The recent reforms of the science
and higher education systems spurred significant changes, including the move
towards more competitive funding, the creation of two R&D agencies for
applied and basic research and efforts on tackling fragmentation through
concentration of funding on the best performing institutions. These changes
were dovetailed with the evolution of the governance structure by the
establishment of two advisory bodies: the Committee for Science Policy and the
Committee for Evaluation of Scientific Institutions. These reforms are bound to
bear fruit in the mid to long term. A key challenge for the Polish economy is to
maintain high growth and this requires higher innovation and the deployment of
new technologies. Measures adopted so far have not led to visible improvement
in the innovativeness of Polish companies. Persistently low R&D spending,
in particular severe underinvestment in research and innovation in the private
sector, and limited cooperation between research and industry call for giving
way to a new approach with well-designed incentives and effective support
through public funding, including more public-private cooperation.

 Investing in knowledge

Poland
has set an ambitious national R&D intensity target of 1.7% by 2020. Poland's R&D expenditure has
grown slowly in recent years and remains low at 0.77 % of GDP in 2011,
one of the lowest levels in the EU. Poland's R&D intensity experienced an
average annual growth of +1.6% between 2000 and 2011. The average annual
increase required to hit the 2020 target is considerably higher at +8.7%. The
main weakness remains underinvestment by the private sector. Business R&D
expenditure accounts for only 0.2 % of GDP. The breakdown of total R&D
expenditure by source of funds and sector of performance illustrate reverse
shares in comparison to the EU average. In 2010 the government financed more
than 60% of total R&D, while business enterprise financed 24.4% of total
R&D and performed 26.6% of total R&D.

Compared to countries with a similar catching-up
dynamics as Poland, performance is good. However, the shares of R&D
financed by and performed by business enterprise have slightly declined over
the 2000-2010 period. In the EU as a whole, business enterprise financed more
than 50% of total R&D and performed more than 60% of R&D in 2010. Even
if Poland's industrial structure was in line with the average industrial structure
for OECD countries, there would only be a slight increase in Polish business
R&D intensity. This indicates that Poland's business R&D investment is
well below average regardless of sectoral specialisation. These indicators do
not reflect yet the efforts undertaken recently to increase public R&D
spending and to trigger private sector investment in R&D. The 2012 national
research budget grew by around 10% and together with funding provided under the
EU structural funds (around 20 % of the overall budget) this makes it Poland's
highest R&D budget so far. A further increase of around 3.5% is foreseen in
2013.

Structural funds are an important source of
funding for research and innovation activities. Out of the 67 billion euro of
structural funds allocated to Poland over the 2007-2013 programming period,
around 15 billion euro (22.8% of the total) relate to R&D, ICT, business
environment and SMEs. Projects amounting to more than 9 billion euro have been
selected up to the end of 2011, representing a commitment rate of 61.2% (the EU
average is 46.6%). Polish applicants for funding under the EU's 7th
Framework Programme (FP7) have a success rate of 19%. Over 1500 partners from Poland have been participating in FP7 receiving a total EC financial contribution of 286
million euro.

An effective
research and innovation system building on the European Research Area

The graph below illustrates the strengths and
weaknesses of the Polish system. Reading clockwise, it provides information on
human resources, scientific production, technology valorisation and innovation.
Average annual growth rates from 2000 to the latest available year are given in
brackets.

The Polish
research and innovation system exhibits a similar performance as comparable
countries in the reference group, but in order to progress further towards the
EU average Poland should address weaknesses in the innovation cycle - from
knowledge production to commercialisation. Poland's relative weaknesses are
mostly on the output side and relate to the innovation performance of
companies. Its
relative strengths are in human resources, where the average annual growth of
new graduates in science and engineering exceeds the EU average. However, new
doctoral graduates and foreign doctoral students show a decline. Poland has a low intensity of business researchers (less than one per thousand labour force).
This reflects the small role that the business sector plays in the national
R&D system. On a more positive note, the number of business researchers
increased in 2011 and shows a positive average annual growth over the period
2000-2011. Poland is one of the top-20 countries of origin of foreign scholars
in the US (2006-08).

Poland relies on transfer of foreign
technology to upgrade its economy. Domestic knowledge production is limited. Poland scores low both in terms of high-impact scientific publications and patent
applications, where the gap with the EU average is particularly large. Around
3.7% of Polish scientific publications are in the top 10% most cited scientific
publications worldwide. This is the third lowest value among EU countries. The
level of public-private co-publications is equally very low highlighting weak
linkages and a lack of cooperation culture between science and industry in Poland. While the level of employment in knowledge-intensive activities is one of the
lowest in the EU, Poland shows a positive trend with an average annual growth
of 4.1 % for this indicator. High growth is observed for the share of knowledge-intensive
services exports in total services exports and for BERD and license and patent
revenues from abroad (but starting from a very low level). Relatively strong
declines are observed for the innovation activities of SMEs. Overall, the low level of R&D expenditure and the low
R&D and innovation activity of companies, coupled with insufficiently
favourable framework conditions, are reflected in a poor scientific and
technological performance.

Poland's scientific and technological strengths

The maps below illustrate several key science and
technology areas where Polish regions have real strengths in a European context.
The maps are based on the numbers of scientific publications and patents
produced by authors and inventors based in the regions.

Strengths in science and technology at European level

 Scientific
production                      Food, agriculture and fisheries        Technological
production

Scientific production                                  
Energy                                 Technological production

Scientific production                                  Environment
                     Technological production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific production                                              Security                           Technological production

Scientific production                                                 
ICT                            Technological production

Scientific production                      Materials
(excluding nano)                        Technological production

The Polish composite indicator for research excellence
is only 35% of the EU average. Performance, of course, varies across sectors.
The maps present the sectors in which Poland's scientific and technological
production is relatively strong. Interestingly, these sectors largely
correspond to the priority areas identified recently in the 2011 National
Research Programme (KPB). Poland is therefore focusing its efforts on its
strengths. Food, agriculture and fisheries, energy, ICT, and materials are four
fields in which Poland's scientific production reaches the highest levels. These
strengths are not yet matched on the output side. No Polish region reaches the
two highest proxies for technology specialisation in terms of patent
applications. This re-affirms the overall finding that Poland has untapped potential in knowledge commercialisation and needs to reinforce its
innovation capacity to better translate knowledge into innovative outputs. Poland exhibits low levels of specialisation. The process of consolidating publicly funded
research efforts has started only recently.

Policies and reforms for research and innovation

The challenges involved in increasing the quality and
effectiveness of the Polish research and innovation system have been addressed
by major reforms launched in recent years. The reforms of higher education
(“Partnership for knowledge”) and science (“Building on knowledge” - package of
six reforming acts) entered into force in October 2011 and October 2010
respectively. The reforms spurred significant changes, including a move towards
more competitive funding, the creation and reinforcement of two executive
agencies for applied research (the
National Research and Development Centre - NCBiR) and basic research (the National Science Centre - NCN) and included efforts to tackle fragmentation
through concentration of funding on the best performing institutions. These
changes were dovetailed with the evolution of the governance structure by the
establishment of two advisory bodies: the Committee for Science Policy and the
Committee for Evaluation of Scientific Institutions.

The higher education reform aims to
strengthen university-business links and to address the skills and jobs mismatch. The reform aims to
make the higher educational system more flexible and better able to respond to
the needs of a changing labour market. The
first six KNOW (National Leading Scientific Centres) were selected in July
2012. Each of the selected KNOWs will receive up to 50 million PLN additional
funding for strengthening research potential and investing in top talent. Good
progress has also been made in implementing the science reform six pack. The ministerial decision on the criteria
for the evaluation of scientific institutes, after consultations with
stakeholders, was adopted in July 2012. Projects run by the applied research agency, NCBiR,
focus on stimulating science-industry cooperation, with a cluster initiative in
the aviation sector being a good practice example. The Top 500 innovators
initiative aims at improving the technology transfer skills of researchers and
professionals. It will train up to 500 professionals in the commercialisation
of research results and science-industry collaboration.  The reforms also
included the more effective management and improvement in quality of the Polish Academy of Science (PAN). An example of using the possibilities offered under the
new law is the creation of inter-disciplinary centres by research institutes of
the PAN.

Poland is also addressing the issue of research fragmentation with
initiatives to encourage specialisation outlined in the National Research
Programme adopted in August 2011. It identifies seven strategic research and
development areas: energy, medicine and pharmaceuticals, IT and advanced
technologies, environment and agriculture, socio-economic development, and
security and defence. The KPB priorities will be implemented in a series of
strategic programmes by the applied research agency. In general, there is a fit
between priorities identified in strategic documents and support measures,
however further prioritisation and the linking of those priorities with
innovation and industrial policies would bring more efficiency, as indicated in
the 2012 European Commission assessment of national reform programmes.

The reforms were predominantly designed to
correct inherent weaknesses of the Polish R&D system. The new 2020
Innovation and Effectiveness strategy, which will be adopted by the government
at the beginning of 2013, aims at an integrated approach to research and
innovation embedded in a wider economic context. The strategy builds on previous science and innovation strategies, but is extended to
new areas and is rooted in the Europe 2020 strategy and Innovation Union. The
strategy is based on a thorough analysis of the strengths and weaknesses of the
Polish research and innovation system, including Poland's performance across
the Innovation Union Scoreboard's indicators. Given the significant weaknesses
in innovative output, the new innovation strategy foresees greater emphasis on
financial engineering and demand side measures. Despite various
programmes of support, there is still a mismatch between the skills provided by
the education system and the needs of  industry. A general view voiced by the
stakeholders is that the skill shortages relate mainly to innovation, although
improving the skills of researchers is also a requirement. This has been a
long-standing challenge and different policy responses have been adopted over
recent years. The way forward would be to promote new forms of support as a
means of fostering closer co-operation between the business sector and HEIs, to
improve the mobility and career development of researchers, and to nurture the development
of entrepreneurship skills.

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[2].

The main challenge for the
Polish economy continues to be to enhance investment and innovativeness of
Polish businesses, improving the economic impact of innovation. The bar chart above
indicates a room for progress for Poland in reaching the EU average, in
particular in raising the knowledge and technology intensity of the economy. Poland's main strengths is in the manufacturing trade, where export in high-tech and
medium-tech goods give a relatively good contribution to the trade balance. A
way foreward is to address the dynamics of innovation and growth of firms. In
the EU, more than half of the enterprises in the industry and services sectors reported
innovation activity between 2006 and 2008. The second lowest rate was observed
for Poland which at 27.9% was little over half of the EU average. There is
strong awareness of this challenge at national level and support mechanisms
have been launched to encourage science-industry cooperation. However, there
are persistent structural problems which have resulted in a failure to drive sufficiently
private-public collaboration and to stimulate the growth of innovative
companies. Structural funds support for R&D&I have been skewed towards
absorption of new technologies, and have been less successful in undertaking
indigenous research and innovation projects which are inherently more risky.
The new innovation strategy identifies these bottlenecks and sets as priorities
the stimulation of demand-side measures for innovative products and services
and the facilitation of access to finance.

In the CIS 2010 survey, the surveyed Polish companies
reported high costs and weak access to finance as the main factors hampering
innovation investment. The sectors in Poland with the highest shares of
innovative companies are pharmaceuticals (industry sector) and insurance (services
sector). Improving the business environment is one of the Polish government's
priorities, with two deregulation acts and the entrepreneurship act entering
into force in 2012, but the pace of reform is rather moderate. Poland is close to the EU average in terms of access to finance. With the economic crisis
spreading in Europe, a decline in the demand for and the number of loans made to
SMEs has followed. However, the latest ECB lending survey shows that in 2011 the
willingness of banks to provide loans improved in Poland in contrast to the majority
of the other Member States. As the venture capital market is still not very
developed, the availability of risk capital for innovative companies at early
stages of development is limited. The first Polish 'funds of funds', National
Capital Fund (KFK), did not become operational until 2010 and it is too early
to assess its impact on the development of start-ups and seed capital funds. It
is expected that by the end of 2012, the KFK will invest in 22 venture capital
funds which in turn will support up to 200 innovative SMEs by 2016. The Polish
growth stock market, New Connect, continues to be a best practice example at
the European level. It is focused on SMEs with high growth potential, including
those investing in new technologies.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

The slight decline of business R&D
intensity in Poland in the last decade is mainly due to stagnation of the
relative research intensity in high technology sectors and the shift of the
economic structure towards less research intensive activities. An exception is
the motor vehicles sector, which has gained relative importance in total Polish
production in the last decade. Four of the most research intensive sectors,
i.e. the machinery and equipment sector, the radio TV and communication
equipment sector, the chemicals sector, and the motor vehicles sector suffered
from a drop in their relative R&D investments over the value of their
production.

This finding suggests that Poland is not moving towards more research intensive, higher value added products in these
industries. The two other research intensive sectors: office, accounting and
computing machinery and medical, precision and optical instruments, show an
increase in their R&D intensities while the medical, precision and optical
instruments sector has improved its relative importance in total value added.
The above economic structure is reflected in the sectors of activity of the top
Polish corporate R&D investors. Poland has seven companies in the 2011 EU
Industrial R&D Scoreboard, with companies coming from the fields of
telecommunications, banking, computer services and pharmaceuticals. Overall,
the relatively stable sectoral composition of Polish industry around low
research-intensive sectors reflects Poland's comparative weaknesses in terms of
research and innovation performance.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

Poland's
total export of high-tech (HT) and medium-tech (MT) goods grew up to 2008,
although the trade balance for HT and MT goods has stayed negative. With a
slowdown of imports since 2008, the gap in the HT and MT trade balance
remained. However, as overall trade balance in the economy presents a bigger
gap which has slightly expanded, the contribution of HT and MT goods to the
trade balance has increased for many products.

Overall, Poland has achieved an increasing weight of
HT and MT goods in its trade balance, which is noticeable and a potential for
structural change. Road vehicles, telecommunications, office machines and
industry machinery registered the highest growth in the contribution to the
trade balance. The evolution of these goods in the trade balance, confirms the
specialisation pattern revealed by their corresponding industry sectors in the
bubble graph presented on the previous page. If Poland is to achieve a positive
trade balance in HT and MT goods, a more determined knowledge upgrading of a
larger span of sectors is needed.

Over the last decade, total factor productivity has grown
constantly in Poland. The employment rate has also increased and the share of
population at risk of poverty or social exclusion is shrinking. Poland has also made good progress towards the other Europe 2020 targets in environment and
education. There are an increasing number of patents in environmental- and
health-related technologies.

Key indicators for Poland

Country-specific recommendation in R&I adopted by
the Council in July 2012:

"Take additional measures to ensure an
innovation-friendly business environment, by ensuring better links between
research, innovation and industry, and by establishing common priority areas
and instruments supporting the whole innovation cycle; improve access to
finance for research and innovation activities through guarantees and bridge
financing"

Portugal

The
challenge of a recovery

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Portugal. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 1.50%             (EU: 2.03%; US: 2.75%) 2000-2011: -0.16%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 26.45                 (EU:47.86;  US: 56.68) 2005-2010: +4.23%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.387              (EU: 0.612) || Knowledge-intensity of the economy 2010: 41.04                 (EU:48.75;     US: 56.25) 2000-2010: +3.18%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Food, agriculture, fisheries, Biotechnology, Materials, Environment, ICT               || HT + MT contribution to the trade balance 2011: -1.2%               (EU: 4.2%;     US: 1.93%) 2000-2011: n.a.          (EU: +4.99%; US:-10.75%)

Portugal has expanded its research and innovation system over the last decade, increasing
its investment in research at a remarkable average annual real growth rate of 7%
between 2000 and 2007. However, R&D intensity in Portugal has decreased by
an average of 0.16 % from 2008 to 2011. Public expenditure on R&D was maintained
at a level of 0.69% of GDP in 2011, despite the economic crisis. Portugal has also shown notable progress in the number of new doctoral graduates per
thousand population aged 25-34 and in the share of researchers in the labour
force. Business enterprise investment in R&D grew dramatically, with Portugal nearly quadrupling the intensity of business R&D in its economy between 2000
and 2011. Business enterprise also increased its share as source of funding of
GERD from 27% in 2000 to 44% in 2009. These evolutions had a positive impact on
scientific production and excellence as well as on innovation, including in
SMEs. The knowledge-intensity of the economy has increased by well over the EU
average in the period 2000-2010.

However, despite the progress observed on
R&D expenditure in the business sector and the large increase in the total
number of researchers in recent years, Portugal remains below the EU average in
terms of S&T excellence, business enterprise research intensity and
business enterprise researchers. Other challenges are the level of education
attainment (both secondary and tertiary education), as well as the lower amount
of public-private scientific co-publications, PCT patent applications, licence
and patent revenues from abroad and knowledge-intensive activities. Some
'traditional' manufacturing sectors like 'leather and footwear' and 'textiles
and textile products' lost competitiveness over the last decade and reduced
their share in total national added value.

Portuguese policies for research and innovation support
adequately the structural change needed by the country to improve productivity
and competitiveness and resume growth. The new Strategic Programme for
Entrepreneurship and Innovation articulates policies like education, training
and employment with the aim of stimulating R&D and Innovation in the
scientific system and the business enterprises. New initiatives for research
excellence were launched to promote scientific employment of talents and
excellent research centres. The Competitiveness Clusters are being rationalised
and redirected towards strategic objectives of more competitiveness and an
increase in exports and employment. At the same time the programme for applied research
and technology transfer to enterprises is being reinforced.

Investing in knowledge

Portugal has set a national R&D intensity target for 2020 of 3%, where
public sector R&D intensity would reach 1% and business R&D intensity
2%. From 2005 and up to the crisis, Portugal made a very significant progress
towards the R&D intensity target. However, from 2009 onwards, the trend is
negative and in 2011, Portuguese R&D intensity had fallen back to 1.50%,
with a public sector R&D intensity of 0.69% and a business R&D
intensity of 0.69%.

The main challenge for Portuguese R&D, therefore,
is to increase the share of business R&D investment in total national
R&D investment and to attract foreign business R&D investment. R&D
investment has slightly decreased, affected by the economic crisis. Business
R&D investment reached its highest level in 2009 in absolute terms and in
relative terms after some years of notable growth. The difficult national
business environment and the contraction of domestic demand places enterprises
in the position of having to find external markets while facing challenges in
terms of efficiency (productivity and competitiveness) and financing. The
efforts of investing in innovation and research, increasing productivity and
competitiveness, point in the good direction. Public funding of R&D has
been sustained, despite the pressures created by public expenditure reduction.

Private and public R&D investment also receives
support by co-funding from the European budget, in particular through the
Structural Funds and from successful applications to the Seventh Framework
Program for research. For the FEDER programming period 2007-2013, Portugal benefits from funding of € 5729 million (26.8% of the total allocated to Portugal) for research, innovation and entrepreneurship in the Portuguese regions. In 2010,
Portugal had already absorbed 62.5% of these EU funds (the average in the EU
was a 46.6% commitment rate). Portugal also has scope to increase its funding
of R&D from the 7th Framework Programme. The success rate of Portuguese
applicants is 19.1%, lower than the EU average success rate of 21.6%. By early
2012, slightly over 1300 Portuguese participants had been partners in an FP7
project, with a total EC financial contribution nearing € 283 million. Two
Portuguese SMEs are among the top twenty SMEs having the highest numbers of FP7
signed grant agreements for the period 2007-2010.

An effective
research and innovation system building on the European Research Area

The graph below illustrates the strengths and
weaknesses of Portugal's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. The average annual growth rates from 2000 to the latest
available year are given in brackets under each indicator.

The graph shows in broad terms that the big
increase in R&D investment over the period 2000-2011 has triggered a
stronger human resources component, higher scientific quality and some innovation
but with less progress on technology valorisation. All in all, while good
progress is made on human resources, science and business innovation, Portugal remains below the EU average on technology development, business R&D and the
knowledge-intensity of the economy.

In the field of human resources for research and
innovation, Portugal is achieving notable progress on numbers of new doctoral
graduates and on researchers employed by business. This is the consequence of
strong public incentives. However, the share of employment in
knowledge-intensive activities has not followed the same trend, reflecting a
weakness as regards its capacity to move towards more knowledge-intensive
domains. The quality of scientific production improved significantly as reflected
by an average annual growth rate of 6.1% in the share of national scientific
publications in the 10% most cited scientific publications worldwide. As seen
in the graph above, overall technology development is well below the EU
average, although the level of PCT patent applications per billion GDP shows
remarkable progress for the period 2000-2009. Product or process innovations in
SMEs are at a good level, having increased substantially over the last decade.

Portugal's scientific and technological strengths

The maps below illustrate several key science and
technology areas where Portuguese regions have real strengths in a European
perspective. The maps are based on the number of scientific publications and
patents produced by authors and inventors based in the regions.

Strengths in science and technology at European level

Scientific
production                      Food, agriculture and fisheries        Technological
production

Scientific
production                                 Biotechnology                             
  Technological production

Scientific
production                              Environment                     Technological
production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific
production                                     Materials                                 
Technological production

Scientific
production                 Information and Communication Technologies       
Technological production

Portugal, in terms of scientific production, has stronger capacity in the
fields of health, food, agriculture and fisheries, ICT, materials, biotech,
production and transport. The scientific specialisation index, covering the
period 2000-2009, shows higher values in the fields of food, agriculture and
fisheries, ICT, materials, production, construction, transport, biotech and
security.

Regional diversity in scientific production and
excellence is a reality, particularly for health, biotech, ICT and materials
with the region of Lisboa taking the lead, followed by Norte and Centro.
However, in areas such as food, agriculture and fisheries and environment participation
from other regions is more evident. Scientific excellence, as shown by the
impact of scientific publications in terms of citations, is shown to be
particularly high for food, agriculture and fisheries, materials, energy,
environment and transport.

Notwithstanding the diversification of S&T, as
shown by the indicators above, the innovation base could be further
strengthened by focusing more on some scientific areas that would improve the
quality of technological output, such as biotech, food, agriculture and
fisheries, materials, environment and ICT.

Policies and reforms for research and innovation

R&I policy is characterised by a large
political consensus and continuity over time that allowed for significant
progress from a relatively low base. Long term consistency has proved to be a
positive determinant in ensuring the consolidation of the research system. However,
the need to pursue a very tight budgetary policy has caused some changes. In
2012, for the first time since the economic crisis, the government budget for
R&D has decreased. The budget for the Science and Technology Foundation (FCT)
decreased by € 42 million between 2011 and 2012, but from a rather high level.
In 2012, the FCT launched a call for proposals for 80 scientists, both Portuguese
and foreign nationals, to carry out research in Portugal. New calls will be
announced to the coming years. This initiative aims to consolidate the pool of
high level scientists working in Portugal. A call for research projects in all
scientific domains was also launched following a very similar line to those
launched by previous governments. Initiatives have also been launched on
doctoral and post-doctoral grants. Financing and evaluation of R&D
institutions have been made in different scientific areas on a competitive
basis and using new excellence-based demand criteria.

Over
recent decades, Portuguese research policy has been horizontal in nature and
has covered a broad spectrum. Despite the implementation of a number of recent
initiatives addressing more targeted objectives and industry-academia
interaction, the fact remains that part of the research carried out in the
higher education, government and private non-profit sectors is still
essentially organized according to academic criteria and responds to academic
incentives. There are, however, signs that ‘targeted and thematic funding’ has
been increasing in recent years. Examples are the ‘International partnerships’,
addressing well defined areas, such as energy, advanced computation, security
and health, the creation of the Iberian Nanotechnologies Laboratory, and the ‘Commitment
to Science’ initiative that had identified some specific areas that research
should address. Some initiatives are indicative of the future R&I policies
of Portugal, e.g. the greater emphasis on competition for funding beyond
Portuguese strategic funds, or the renewal of the Carnegie Mellon-Portugal
programme to a second phase with a change of the main focus from education and
training to entrepreneurship and innovation.

The new
Strategic Programme for Entrepreneurship and Innovation (E+I+) includes several
measures which are aiming to improve the connections between the two areas of
"innovation" and "research". These include: (1) promoting
experimentation in basic and secondary education; (2) education for entrepreneurship;
(3) promoting the transition of PhD holders to non-academic careers, (4)
improving the "articulation" of technology transfer units; (5)
encouraging the economic exploitation of scientific knowledge; (6) launching of
scientific thematic/priority programmes; (7) support for patent registration
and licensing; and (8) a host of initiatives to encourage entrepreneurship. The
programme of the new government specifies the "encouragement of the
integration of Portugal's scientific system in the European Research
Area". This will be achieved through an increased participation of
Portuguese companies and research organisations in EU Framework Programmes and by
supporting industrial research through public-private collaborations. The
Strategic Programme for Entrepreneurship and Innovation (E+ I+) also includes a
measure aimed at supporting the participation of Portuguese companies in
international R&D programmes.

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[3].

The index of economic impact of innovation
shows that Portugal is lagging slightly behind in terms of orienting its
economy towards innovative and knowledge-intensive sectors. This is of course
partly attributable to the severe economic crisis. However, the scale of the
gap also points at more structural problems.

Portugal's overall performance in innovation is moderate also according to the
IUS report. Although there is a high share of SMEs introducing innovations,
exports and employment in high-tech sectors and knowledge-intensive services
are particularly weak, showing the difficulty for innovative firms to
positioning themselves in markets with high potential for growth. This weakness
is recognised and a strategic programme to promote entrepreneurship and
innovation, 'E+I+', was introduced at the end of 2011, leading to the creation
of a National Council for Entrepreneurship and Innovation and the launch of
competitions for innovation and R&D projects to be implemented by micro and
SMEs in cooperation with universities and research institutes. Standards on
innovation management and guidelines for the valorisation and protection of IPR
are being developed. Various measures were adopted to reduce the constraints on
credit conditions and to promote the internationalisation and exports of SMEs.
The on-going "Digital Agenda 2015" is progressing well, leaving Portugal with one of the most advanced broadband networks in the EU.

If the analysis is not limited to
innovative enterprises but refers to all fast-growing firms, it reveals that Portugal's share of high growth[4]
enterprises (in terms of employment) in the total of active enterprises was 2.70%
for micro enterprises and 3.26% for somewhat larger enterprises (10 employees
or more) in 2009. These values are lower than the 2008 values, at a similar
level to Spain but lower than Estonia and the Czech Republic. If fast-growing
firms are measured in terms of turnover, the values for Portugal for 2009 are
higher (4.45% and 6.38%, respectively) which seems to indicate that a critical
size (in terms of employment and/or turnover), let alone other important
factors, is an important factor in the growth of enterprises. The share of
fast-growing enterprises by sector is much higher when measured in terms of
turnover than in terms of employment. In 2009 the shares of high growth
enterprises in the construction sector, in terms of turnover, were 8.27% (5 to
9 employees) and 11.95% (10 employees or more), whereas in terms of employment
the corresponding shares were much more modest at 2.90% and 3.35%,
respectively.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend of moving to the left-hand side reflects the decrease
of manufacturing in the overall economy. The sectors above the x-axis are
sectors whose research intensity has increased over time. The size of the
bubble represents the share of the sector (in value added) in manufacturing
(for all sectors presented in the graph). The red-coloured sectors are
high-tech or medium-high-tech sectors.

For a small country like Portugal, the road to growth leads to an extended market beyond the national boundaries,
where competition must be confronted with high quality actors in sectors
providing more value added. This requires reinforcing the capacity of
enterprises to move into more high-tech and medium-high-tech sectors. Portugal has scope to upgrade the knowledge intensity in new areas of industry and in
'traditional' sectors by integrating more R&D with creativity, design, etc.
The graph above shows a general picture of manufacturing sectors over the
pre-crisis period 1995-2006, showing reduced shares of value added but
increased BERD intensities for most of the sectors. In particular, textiles,
leather products and other non-metallic mineral products, lost important
positions. Wearing apparel and fur, despite a growth in R&D intensity over
the period, lost an important share of value added, which can be explained by
factors such as aggravated price competitiveness loss. Construction (a
non-exposed sector) continues to play an important role in manufacturing value
added with a very high growth rate of R&D intensity. The growth in the
shares of value added for motor vehicles, and medical, precision and optical
instruments is encouraging.

The 2011 EU industrial R&D scoreboard,
ranking the top 1000 companies investing in R&D, shows that the top
Portuguese companies are in the telecommunications, banking and electricity
sectors. Just a year earlier pharmaceuticals and construction were also among
the top sectors.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

Over the last decade, Portugal has had large current
account and trade balance deficits, reflecting the overall weak competitiveness
of the majority of enterprises. The graph above shows the changes, from 2000 to
2011, of the contributions of various industries to the national trade balance.
The highest positive variation occurred in machinery specialized for particular
industries. The second highest positive variation is in road vehicles
(including air-cushion vehicles), which passed from a negative contribution in
2000 to a positive contribution in 2011. The next positive variation is in
plastics in non-primary forms (this industry had a positive trade balance since
2007). On the negative variations, the highest occurred for electrical
machinery, apparatus and appliances, and electrical parts. Medicinal and
pharmaceutical products and other transport equipment also had negative
variations. Industries that contributed positively to the trade balance
throughout the decade are: sanitary, plumbing and heating fixtures and fittings
and fabrics, woven, of man-made textile materials.

Total factor productivity is lower than a decade ago
(see Table below) and the share of employment in knowledge-intensive activities
is also relatively low. Labour productivity increased over the same period, but
only slightly. Enterprises need to further integrate new technologies and
strive to develop new products, processes and services that may provide higher
added value for their activities.

Concerning the other EU 2020 objectives, Portugal is progressing well in particular in relation to increasing the share of renewable
energy in total energy consumption and the share of population having completed
tertiary education.

Key indicators for Portugal

[1] See Methodological note for the composition
of this index.

[2] See Methodological note for the composition
of this index.

[3] See Methodological note for the composition
of this index.

[4] Enterprises with average annualised growth greater
than 20% per annum over a three year period.

Romania

The challenge of improving policy coordination of
R&I and upgrading the economy

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Romania. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 0.48%              (EU: 2.03%; US: 2.75%) 2000-2011: +2.53%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 17.84                 (EU:47.86;  US: 56.68) 2005-2010: +7.81%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.384              (EU: 0.612) || Knowledge-intensity of the economy 2010:28.35                  (EU:48.75;     US: 56.25) 2000-2010: +5.86%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Automobiles, ICT, New production technologies, Nanotechnologies, and Security               || HT + MT contribution to the trade balance 2011: 0.38%             (EU: 4.2%;    US: 1.93%) 2000-2011: n.a.        (EU: +4.99%; US:-10.75%)

The reform of the Romanian R&I system
has been under way over the last decade. A National Strategy for Research and
Innovation 2007-2013 is in place. However the economic crisis has hampered its
full implementation due to massive cuts in the public budget for R&D. It is
noteworthy that Romanian authorities decided to support large projects such as
the European Light Infrastructure (ELI) in order to make the most of extremely
reduced investments in R&D. At the same time, some Romanian scientific
journals have acquired an increasing international visibility and Romanian
scientific publications have improved in overall quality. Institutional reforms
of universities and research institutes are on-going.

The key challenge for Romania is its low level of competitiveness, a challenge which has significant consequences
for the R&I system. Romania's economy is characterised by the prevalence of
low- and medium-technology sectors, with a weak demand for knowledge and an
underdeveloped innovation culture. Romania is ranked as a modest innovator and
has the lowest R&D intensity in the EU and a very low level of business
R&D activity. To complete the picture of poor innovation, the Global
Competitiveness Report 2011 classifies the country as efficiency-driven
(together with Bulgaria), all the rest of the EU economies being either in
transition to, or already in the innovation-driven stage.

Over the last decade policy makers have
made great efforts to reform the R&I system in Romania. However, the
adopted measures would benefit from being supported by a long-term vision and
are still hampered by the fact that the awareness of the added value of R&I
for increasing competitiveness and secure high-quality jobs is not yet central
to the political debate. In addition, a lack of continuity in policy decisions
from one government to another and a lack of coordination among ministries that
have in their portfolio R&I activities are generating "stops and go's"
which are particularly detrimental in a domain that requires development of
capacities overtime. In order to leverage the importance of R&I in the
overall policy-mix of the country, R&I policy measures would indeed justify
to be considered in the broader context of the country's economic development
and better integrated in the overarching policy objectives of the country. For
instance, improving the overall functioning of institutions would result in a
better coordination of R&I policies across various ministries, whereas an
increased focus on competitiveness at political levels would draw the attention
of policy makers to the added value of R&I  for growth and jobs.

Investing in knowledge

Over the last decade, R&D intensity in Romania increased from 0.37% in 2000 to 0.58% in 2008, unfortunately only to drop back to
0.48% in 2011. Romania currently has one of the lowest R&D intensity in the
European Union, at a value of less than a quarter of its 2% target for 2020.

In absolute terms, public R&D funding
reached a peak in 2008, following the adoption of the 2007-2013 Strategy for
R&D and Innovation. The Strategy has foreseen a gradual increase of the
R&D public budget, but the planned increase of the R&D public budget in
2009 did not take place. In absolute terms, government budget appropriations
for R&D decreased by 25.4% in 2009 and by a further 2.6% in 2010 and then
increased by 0.5% (provisional value) in 2011. Higher education expenditure on
R&D suffered a large decrease of 32.2% in 2009 but increased by 1.4% in
2010. The Government expressed its intention to increase the public budget by
18.6% in 2011 and by an additional 12.7% in 2012 (according to the ERAC Survey,
2012).

In addition, Romania with a value of 0.17%
had one of the lowest business R&D intensities in the EU in 2011 (rank 25
out of 27), with an average annual growth rate of -3.4% between 2000 and 2011.
No Romanian firm is among the top-1000 EU R&D investing firms. The recent
trends show that the 2% R&D intensity target for 2020 is very ambitious and
will be difficult to reach, given both the recent low budgetary commitment and
the very low level of business R&D activities. This target could be
achieved only if the country prioritises R&I in a context of smart fiscal
consolidation, whilst implementing without delay key reforms as outlined in the
Action Plan for Research and Innovation adopted by the Government in July 2011.

The total number of Romanian participants
in the 7th Framework Programme so far is 704 (out of 4888
applicants); thereby Romania has received € 96 million. The success rate of
participants is 14.4%, below the EU average success rate of 21.95%. Romania receives the 19th largest share in the EU of 7th Framework Programme
funding and has most collaborative links with Germany, Italy, the United Kingdom, France and Spain.

Private and public R&D investment also
receives support by co-funding from the Structural Funds. Currently 13.7% is allocated to research, innovation and
entrepreneurship from the total of Structural Funds available to Romania, compared to an overall 25% at the level of EU. A large part of the
Structural Funds for R&I has been focussed on programmes for developing
R&I infrastructure and human resources which  have been developed as
complementary to the national R&D programmes. The massive reduction of the
R&D budget in 2009 however hampered this complementarity. Whereas the
Structural Funds have had an absorption rate of 30% (rate of approved payments)
for the R&I sector, the national R&D budget has been indeed severely
cut.

An effective
research and innovation system building on the European Research Area

The graph below illustrates the strengths and
weaknesses of Romania's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The Romanian R&I system is primarily
public-based, with only 38.3% of research performed by the business sector (the
EU average is 61.5%). Another structural feature is the fragmentation of the
public R&D system which has a large number of research performers and a
lack of critical mass of research results.  Romania scores well regarding the
numbers of new S&T and PhD graduates. However, the
overall underfinancing of R&I since the 1990s created a brain drain, which
left the country with a pool of researchers with high average age and limited
career prospects. Romania is suffering a net outflow of researchers (it is
estimated that 15000 researchers are currently working abroad).

In terms of research excellence, Romanian
universities are underperforming in all major international rankings and their
scientific production and staff composition is less internationalized compared
to other Member States. An increase in international scientific co-publications
and in the share of national scientific publications in the top 10% most cited
publications worldwide are nevertheless noticeable over the last 10 years.

Overall the number of international
co-publications with other European countries is one of the lowest in Europe,
suggesting that the Romania does not sufficiently benefit from the
international knowledge flows favoured by the ERA architecture. However,
Romanian scientific and technological cooperation is well distributed across
Europe, with France, Germany, Italy, the United Kingdom, and Spain as main co-publication partners and Germany and Ireland as co-patenting partners.

The relative weaknesses of Romanian
business sector R&I are striking: very low numbers of PCT patent
applications and of business enterprise researchers, and a very low level of
business R&D intensity, on a decreasing trend. The business sector is not
fuelled by collaborative links between public and private sectors (as reflected
by the low number of public-private co-publications).

Romania's scientific and technological strengths

The maps below illustrate six key science and
technology areas where Romania has real strengths in a European context. The
maps are based on the number of scientific publications and patents produced by
authors and inventors based in the regions.

Strengths in science and technology at European level

Scientific
production                                
Automobiles                               Technological production

Scientific
production    Information and Communication Technologies   Technological
production

 Scientific
production                      New production technologies        Technological
production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010; European
Patent Office, patent applications, 2001-2010

Scientific
production             Nanosciences and nanotechnologies            Technological
production

Scientific
production                                  
Security                                      Technological production

As illustrated by the maps above, in terms of
scientific and technological capacity, Romania has potential for regional
clusters in the fields of ICT, nano-sciences and nanotechnologies, automobiles,
security and new production technologies.

Romania's scientific specialisation index, citations and impact of scientific
publications, not visible in the maps above, reveals that the main scientific
fields are mathematics and statistics, physics and astronomy, enabling and
strategic technologies, engineering, and information and computer technologies.
Chemistry has an interesting evolution, being a field with a rather strong
specialisation in Romania, but with an overall impact of scientific
publications that is low compared to the world average. In addition, it is
striking that the field of agriculture, fisheries and forestry which has a lot
of potential in Romania for economic growth given the existing raw materials,
is not supported by a comparable scientific specialisation. The potential that
exists in the field of agriculture is additionally confirmed by the fact that
the low number of scientific publications are of very good quality, as
reflected by their relative impact which is comparable to the world average.

Patenting activity in Romania is extremely low and does not demonstrate much statistically significant
technological specialisation other than what can be seen in the maps above.  In
addition, based on data of the mid-2000s, no particular specialised established
employment or technology cluster could be identified in Romania. The cluster policy put in place around the European Light Infrastructure project
funded from the Structural Funds is expected to lead to the emergence of a
specialised cluster in Romania around scientific capabilities in the field of
physics. Danube-Danube Delta-Black Sea is another large project with cluster
potential around it.

Policies and reforms for research and
innovation

The country has undertaken a wide range of
measures in the R&I field over the last 10 years: the current National
R&I Strategy for 2007-2013 was based on a broad consultation (Foresight)
exercise; Romanian scientific journals have been promoted on the international
circuit; the share of competition-based funding has surpassed the share of
institutional funding for research; measures have been taken to improve
science-industry links by grants for projects with industrial partners;
innovation vouchers and tax incentives have been introduced. In addition, in August
2011, the Romanian Government adopted a Reform Action Plan for R&I in the
context of the loan received from the EU. The Action Plan is built around three
pillars: governance of the system, management of public research institutes and
increase of private sector R&I. Romanian authorities reported on a number
of measures related to the Action Plan, either adopted or already implemented.
A process of certification of national R&D institutes is ongoing and the
legal framework regarding the funding of these institutes has been amended;
ambitious reform of universities has been conducted, paving the way towards
more autonomy and differentiation between research universities and those more
oriented towards teaching and local needs.

However, the measures would have a greater
impact if supported by a long-term vision. The adopted/planned measures would
indeed need to be better related to each other within an overarching reform, in
order to improve the overall efficiency of the R&I system. The setting up
of an inter-ministerial Council for R&I could be
of great help in terms of governance. The creation of this Council has been
announced in 2002 but it has not really started its activities. It has the
potential to steer action both for addressing the lack of coordination of
research activities undertaken under the authority of various ministries and
for promoting innovation across the economy. It can be expected to raise
awareness at the highest political levels on the added value of innovation in
various sectors (i.e. innovation in fields such as agriculture, transport,
services, etc.), notably if its competencies cover both R&D and innovation
activities and if its articulation with other similar councils is clarified.

The development, together with the main
stakeholders, of a common vision for the progress towards a more knowledge-and
innovation-based economy would indeed greatly help in increasing synergies and
consistency between the various policies having an impact on business
innovation. For instance, there are two different
strategies on SMEs and on business environment, with similar objectives but
without clear links between them. In this context, it is somewhat worrying that
while a strategy for Competitiveness has been developed it is not yet
adopted and it is not clear whether or when it will be.

As a matter of fact, private sector R&I
remains underdeveloped and has been in continuous decline since 2000 and the
existing measures to promote private R&I are not fully commensurable with
the challenges faced by local innovative enterprises, multinationals and
start-ups. It might be worth considering whether the system could not benefit
from replacing the current interventions of a “one size fits all” type by
targeted interventions for innovative enterprises with proven successful track
records. In addition, there is an obvious need to address the current mismatch
between the skills needed by the knowledge market and the qualifications
provided by Academia. Multinationals seem somewhat reluctant about setting up R&I
facilities in Romania due to the vulnerabilities of the intellectual property
rights (IPR) framework, which gives the ownership of an invention/research
result to the employees. In this respect, the finalisation of the national
patent law is expected to contribute to an increase in foreign direct
investment (FDI) for innovative activities that would ensure an increased level
of productivity. A regulation on the 'employee patent' is currently under
preparation which may address this issue, while additional fiscal incentives
for companies undertaking R&D activities are in place and an innovation
voucher has been introduced in 2012.

Finally, there is a slow take-off in
“high-tech” student's start-ups that would need to be boosted by measures such
as financing and mentoring services vouchers. There is a special open operation
for innovative start-ups and spin-offs to support the implementation of R&I
results. Seed capital is beginning to become available: the Ministry of Economy encourages a network of business angels
(venture connectors) in fields such as ICT. However, high risk business
angel investment/venture capital is still at a very low level and could benefit
from being more easily matched by funding, for instance from an
accelerator/investment fund for medium-high and high-tech ventures.

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[1].

Romania's index of economic impact of innovation is lower than the EU average
but higher than the level of the reference group of countries with similar
economic and research profiles. Even if this value needs to be considered over
time and not limited to a single year, it highlights a real economic stress for
transforming knowledge and technology into economic competitiveness. A key
strategy is  facilitate the creation of high-growth innovative enterprises, which
demands the following three structural challenges: 1) developing an excellent
research base focused on sectors where Romania is performing well in terms of
international benchmarks and where it has the potential to attract business
investment; 2) nurturing entrepreneurship with the aim of disseminating and
fostering research and innovation in the economy; and 3) developing appropriate
framework conditions for innovation based on an overarching strategy supported
by stakeholders.

The most problematic factors in relation to doing
business have been identified as tax rates, inefficient government bureaucracy,
policy instability, access to finance, and corruption. As a result, measures
aiming to improve competitiveness and foster structural change of the business
sector should encompass a broad set of measures, going beyond purely R&I
related policies and dealing with the business environment, improving the
infrastructure, enhancing administrative capacity, fighting corruption and
fraud, etc.

As in most of Eastern Europe, the public support for the development of an informal
venture capital market (both early stage capital and expansion and replacement
phases) is limited. In addition, access to loans for SMEs undertaking R&I
activities is practically non-existent, due both to the perception of banks
that R&I activities are risky and to the lack of incentives for banks to
grant small loans (the cost of processing a file is similar for a small loan
taken out by an SME and for a big loan). Patent costs at EPO and other
international patent offices are unaffordable for most potential Romanian
applicants.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend of moving to the left-hand side reflects the decrease
of manufacturing in the overall economy. The sectors above the x-axis are
sectors whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented in the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

Romania's limited innovation performance is reflected in its economic
structure which has a prevalence of low- and medium-technology sectors. Demand
for knowledge is weak and there is an underdeveloped innovation culture. In
terms of trade and industry specialisation, Romania is part of the group of
lower income countries in the EU (together with Bulgaria, Estonia, Latvia and Lithuania), with lower GDP per person than the EU average and specialisation in
less technologically advanced sectors. Romania is highly specialised in
labour-intensive industries (preparation and spinning of textile fibres,
sawmilling, wearing apparel and accessories), in capital-driven industries
(cement), and marketing-driven ones (footwear). In terms of innovation, Romania is specialised both in low-innovation sectors (wearing apparel, leather) and in
medium-high innovation sectors (textiles, basic metals).

In dynamic terms, a certain degree of
structural change is shown in the graph above by the increasing added value in
technology-driven and innovation sectors (office, accounting and computing
machinery and motor vehicles, as well as to a lesser extent electrical
machinery and apparatus). On the other hand, fields with high knowledge
intensity such as medical precision and optical instruments and, to a certain
extent, chemical and chemical products have decreasing shares of value added.
However, whereas the quality of labour-intensive industries has improved, this
is not yet the case for technology-driven ones.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

The trade balance in all high-tech (HT) and
medium-tech (MT) products combined was negative in Romania up to 2008 and
became positive in 2009 and 2010. This contrasts with the total trade balance,
where the positive trend up to 2008 was followed by relative stagnation in 2009
and 2010. The data therefore indicate both a progressive and encouraging shift
towards HT and MT in the trade balance of Romania over the last few years, and
the fact this shift was instrumental to counterbalance the weaknesses in the
rest of the economy.

More precisely, the graph above points to the
high-tech and medium-tech industries that have improved their contributions to
the Romanian trade balance, in particular road vehicles, electrical machinery,
and textiles , and to a certain extent for telecommunication, general
industrial machinery and machinery specialised for particular industries. In
contrast, industries such as power-generating machinery and equipment,
plastics, medicinal and pharmaceutical products, fertilizers and metal working
machineries are making decreasing contributions to the trade balance,
indicating a possible loss in relative world competitiveness.

Over the last 15 years, the Romanian economy has
gained in world competitiveness; however structural change is taking place at a
very slow pace. Over the last decade, Romania has had the highest growth of
total factor productivity in the EU. Taking 2000 as year of reference, total
factor productivity had increased by 50% in 2008 and by 35% in 2012. The
relative decrease between 2008 and 2012 can be reasonably attributed to the
economic and financial crisis. Romania has made good progress on greenhouse
emissions which have fallen and has also succeeded in increasing the share of
renewable energy in gross final energy consumption. The employment rate has
fallen from 69.1 in 2000 to 62.8 in 2011.

Key indicators for Romania

Slovakia

The challenge of structural change to upgrade
knowledge in the context of industrial globalisation

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Slovakia. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 0.68%              (EU: 2.03%; US: 2.75%) 2000-2011: +0.41%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:17.73                 (EU:47.86;   US: 56.68) 2005-2010: +3.85%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.479               (EU: 0.612) || Knowledge-intensity of the economy 2010:31.64                  (EU:48.75;     US: 56.25) 2000-2010: +0.07%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Food and agriculture, Energy, ICT, Materials               || HT + MT contribution to the trade balance 2011: 4.35%                (EU: 4.2%;     US: 1.93%) 2000-2011: +32.26%  (EU: +4.99%; US:-10.75%)

The Slovak Republic is a small country, dynamic and
logistically well positioned between Eastern and Western European countries.
Since 2000, the country has improved the quality performance of its science and
technology base, slightly changed the structure of its economy towards a higher
knowledge-intensity and the weight of high-tech and medium-high-tech products
in the trade balance. Slovak Republic faces the challenge of further developing
its research and innovation system. Currently, the country is catching-up with
respect to competitiveness.

In the Slovak Republic, over the last decade, R&D
intensity has steadily declined from a peak of 3.88% in 1989 to 0.68 in 2011,
one of the lowest within the EU. The rise of a dual economy limited the
indigenous R&D capacity: on the one hand a predominance of foreign
multinational companies with high productivity and on the other, 60,000
domestic SMEs and a few large companies typically with low productivity levels.
Thus, the main challenge for the Slovak Republic consists in raising the
knowledge intensity in Slovak firms through investments and spill overs.
Moreover, existing public financing suffers from inefficiency, significant
administrative burden and a lack of transparency of the procedures used –
including those supporting regional innovation. The Slovak Republic has margins to improve its thematic concentration, including a stronger coordination
between responsible public authorities, the links between business and science,
and the connexion with international S&T networks

In spite of the current economic and financial
difficulties, Slovak authorities drafted and partly implemented comprehensive
R&I strategies. Since April 2012, the new government has reaffirmed the
country's commitment to the EU2020 targets, even if the challenges remain
substantial, especially in the case of R&D intensity. Its policies include
in particular, the updated "Minerva 2.0" strategy, which identifies
problems, constraints and priorities, and focuses on the speedy implementation
of a critical mass of measures to stimulate innovation and private R&D
investment including structural reforms and the reform of funding.

Investing
in knowledge

The Slovak Republic has set a national
R&D intensity target of 1%.  In 2011, the Slovak R&D intensity was 0.68%
of GDP, where public sector R&D intensity amounted to 0.36% and business
R&D intensity 0.27%. The Slovak Republic belongs to the group of Member
States which are not on track to reach their Europe 2020 target (1% of GDP of
R&D intensity) and there is a need to raise its annual rate of increase in
total (public + private) R&D investment. Under these circumstances, in
order to reach its national target by 2020, the Slovak Republic would need an
annual growth rate of 4.7% over the decade 2010-2020, slightly higher of the EU
average of 4.1%. This is possible to achieve provided the right policies are
implemented.

Overall, the research & innovation
system in the Slovak Republic is characterized by a very low R&D intensity
in both the public & private sectors The Slovak R&D intensity is one of
the lowest in Europe and also very low compared to the reference group
countries CZ, IT, HU, SI (average of 1.27%).

However and in spite the overall decrease
of the R&D intensity in the Slovak Republic over the last decade, public
support to R&D has increased significantly (€86m in 2000 to €219m in 2010),
notably due to the financing from EU resources (mainly through Structural
Funds). Between the two programming periods of 2000-2006 and 2007-2013, the Slovak Republic increased the allocations to research and innovation (RTDI) by 19%. In
total, over the period 2007-2013, the country received €1.103 million of the EU
Structural Funds (a ratio of 81.2% of the total GBAORD), to research,
innovation and entrepreneurship. For the 2011 and 2012 public state budget
allocated to R&D, there was a further increase of 9% and 18% respectively,
but a decrease is foreseen for the 2013 budget due mainly to measures to reduce
public deficit.

In the private sector, domestic firms,
including a great number of SMEs and a few large companies, are characterised
by low R&D expenditure and productivity levels. As a result, the production
system is dominated by technology imports. Therefore, a major challenge for Slovakia remains to raise the R&D intensity in Slovak firms.

The FP7 success rate of the Slovak Republic in terms of EU contribution of 12.3% is lower than the average EU-27 of
20.4%. In terms of applicants, the Slovak success rate of 19.2% is close to the
EU-27 average of 21.2%. Among the FP7 research priority areas, Slovakia is most active in "Marie-Curie Actions", in "information and
communication technologies" and in "research for the benefit of
SMEs".

An effective research and innovation system building
on the European Research Area

The spider graph below provides a synthetic picture of
strengths and weaknesses in the Slovak R&I system. Reading clockwise, the
graph provides information on human resources, scientific production,
technology valorisation and innovation. The average annual growth rates from
2000 to the latest available year are given in brackets under each indicator.

The strengths in Slovakia's R&I system
are found in human resources for research and innovation and in attracting
business R&D investments from abroad. There is also a positive innovation
dynamics in Small and Medium-Sized firms and in attracting foreign doctoral
students. By contrast, the country's main weaknesses lay in business research
activities, including low patenting, business researchers and R&D
investments. In the public sector, the main challenges consist in pursuing the
improvement in scientific quality and in public-private cooperation in R&D
activities.

There is need to enhance quality of the
higher education system and increase excellence and internationalization of its
universities, as the latter one are not visible in major international
rankings. The overall efficiency of the public science sector can be improved,
given the low number of scientific outputs. Meanwhile, the Slovak Republic
relative strengths are in Human Resources and Outputs, with a strong increase
of the new graduates in science and engineering and at PhD level, although a
shrinking number are employed in the business sector.

As the country has been able to attract a
large volume of Foreign Direct Investment (FDI) in the recent years, this would
create the appropriate conditions for a progressive improvement of the
knowledge-intensity of the local production, which would benefit the whole
economy of the country, creating better paid and qualified jobs. For all the
aforementioned, the Slovak Republic is facing a challenging set of reforms in
the R&I fields.

Slovakia's scientific and technological strengths

The maps below illustrate several key science and
technology areas where Slovak regions have real strengths in a European
perspective. The maps are based on the number of scientific publications and
patents produced by authors and inventors based in the regions.

Strengths in science and technology at European level

Scientific
production                                                                                                                 Scientific
production
Food, Agriculture and
Fisheries, 2000-2009                                      Information and
Communication Technologies, 2000-2009

                           
Scientific
production                                                                              
Technological production
Materials
(2000-2009)                                                                                                                                             Materials, Metallurgy

                                                                      
Energy            Technological production     Biotechnology

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Transport
Technologies                                                               
Manufacture of Electrical Motors, Generators  and
transformers

Manufacture of
Aircraft and Spacecraft                                                  
Services for Computer and related
activities

Electrical
Machinery, apparatus, energy                                                 
IT Methods for
management

As illustrated in the maps above, in terms of
scientific capacity, the Slovak Republic has relative strong regional clusters
in the fields of food, agriculture and fisheries, information &
communication technologies and materials. Considering the scientific
specialisation index, over the period 2000-2009, Slovakia has not significantly
improved its rate in new production technologies, energy and transport, with an
average below the EU27 average.

In comparison the Slovak regions are less prominent in
technology patenting than the Bratislava region, where relative strengths in
patenting are quite visible. Overall, significant disparities exist between the
capital region and the rest of the country in terms of R&D expenditure and
intensity. The main technology sectors are materials, metallurgy,
biotechnology, energy, other transport technologies, manufacture of electrical
motors. In terms of technological specialisation, considering patenting in
industrial sectors within Europe, the Slovak Republic shows particular
strengths in the automotive sector.

In terms of importance for economic growth, the
plastic product sector is highly relevant for the Slovak Republic, as well as
for Poland, Slovenia and Bulgaria in the EU-27 area and worldwide. Additionally,
the second largest and the quickest growing industrial sector of the country is
electro-technics and electronics. Moreover, as part of global value chains, the
Slovak Republic is one of the world leaders in LCD production – a high-tech
manufacturing sector. The above referred sectors are for Slovakia the sectors with great potential for doing business in R&D.

Policies and
reforms for research and innovation

The last National Reform Programme 2012
(NRP) was drafted by the previous government whose mandate ended on 4 April
2012. The new government set out its policy statement which identifies the
objectives of the NRP 2012 but proposes fundamentally different tools. However,
the challenges that the Slovak Republic faces today remain the same. Thus, the
new Slovak government commits to supplement its policy statement, in the
shortest possible time, with measures that will be in line with its own policy
conception. At national level, coordinators of the Europe 2020 strategy are the
Prime Minister, and the Deputy Prime Minister and Minister of Finance.
Furthermore, coordination of the agenda and policies at the inter-ministerial
level, of paramount importance for the efficient spending of funds in the years
to come, will be the responsibility of the Slovak Government's Council for
Science, Technology and Innovation.

The overall government budget for the
2012-2014 period aims to protect expenditures which promote economic growth,
such as state budget allocation and Structural Funds. Thus, two priorities
stand out in the 2012 budget. The first one is the transport infrastructure and
the second priority area is education where the volume of funds at regional
level per student has increased by 4.7% in the tertiary school sector. The new
Slovak Government considers important to ensure that expenditures on productive
areas, such as education, remain among its long-term political priorities in
the subsequent years too, and will take steps to improve the quality of higher
education and its relevance to market needs. It will focus on measures that
will ensure smart, sustainable and inclusive growth as well.

The new strategic policies intend to
streamline national objectives to the new EU policies in Europe 2020 and
Horizon 2020. In this context, the new government announced further measures to
improve collaboration between the public and private sector in terms of
financial and organisational arrangements and human capital through
partnerships, joint ventures and long term contracts. It plans to set up a new instrument
to support young Slovak researchers and to attract the top Slovak scientists
working abroad to come back to the country. People should be encouraged to run
innovative businesses. This will be promoted by systematically including
entrepreneurship teaching (including lessons on tax compliance) in the
curricula of primary, secondary and tertiary education establishments. Further,
it will develop an adaption of the internationally successful Small Business
Innovation Research programme.

In 2011, the Slovak Republic adopted two
strategy documents: "Fenix" and the "Minerva 2.0", both
aiming at science, technology and knowledge-based economy. They proposed a
range of measures for increasing the quality of higher education and research
systems, and connecting them to a knowledge-based economy.  The
"Fenix" strategy also proposed replacing current research and
innovation priorities by a demand-driven bottom-up approach, which might indeed
reduce the current low share of industry-science cooperation. The strategies
identified the main problems in the knowledge triangle policies, and also
addressed interaction between the key actors. Further, they defined the reform
of research funding and aimed to improve the transparency of the system and to
speed up the consumption of resources from Structural Funds. Their coordinated
implementation could improve the innovation capacity of the country.

Furthermore, the Innovation Strategy for
2007-2013 sets the general framework for policy intervention, while the
Innovation Policy 2011-2013 specifies actions in three areas (infrastructures,
quality of human resources, and support for innovation) in order to boost the country's
competitive position in Europe. The priority "Infrastructures"
includes support to industrial clusters for which the first calls were planned
by the end of 2012. Funded mainly by the Operational Programme Competitiveness
and Growth, the innovation support for industry is the biggest priority in
financial terms. The innovation vouchers are yet to be launched. The Slovak
government will concentrate its efforts primarily on social cohesion in regions
and notably on science, research and innovation, with a focus on green growth (using
cleaner sources of growth and developing green industries, services, technologies
and jobs). There is also scope for improving the Slovak innovation capacity and
business environment, in particular through more efficient public
administration. Finally, a closer integration of the Slovak research and
innovation system in the European Research Area is an explicit objective of the
national policy.

Economic
impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[2].

According to this index, the Slovak Republic underperforms its reference group and is clearly below the EU average. The
country ranks 18th due in particular to its poor performance in
"patent applications per GDP", "share of the employment in
knowledge-intensive activities" and "share of knowledge intensive
services in total export of services". In all three areas, the Slovak Republic scores the lowest amongst its reference group. The only area where it
performs extremely well is in the "sales of new to market and new to firm
innovations as % of turnover of firms" where it tops the EU ranking.

In July 2011, the previous government
adopted the strategy "Singapore" aimed at improving the business
environment. This strategy contains 94 short and mid-term measures for the period
2011-2015. The international "Small Business Innovation Research
(SBIR)" programme will facilitate experimental development and
implementation of innovative solutions. For the Slovak Republic, improvement of
the environment for establishing new start-ups and spin-offs by providing
administrative support to the technology transfer from public R&D
institutions, and by establishing a link between universities, the Slovak
Academy of Sciences and technology incubators is strongly needed.

Access to finance has also been difficult since
the start of the economic crisis. The rate of rejected loan applications went
up, while the number of SMEs using debt financing increased from 61% to 74%.
With an underdeveloped stock exchange and venture capital market, equity
financing remained very limited. On the other hand, Foreign Direct Investments
(FDI) and technology transfer feature strongly, with the Slovak Republic ranking 9th out of a panel of 142 countries. FDI might offer a good
opportunity for developing business R&D projects. The country presents
sufficient comparative advantages to attract foreign as well as domestic
investors. Development of human resources and talents, competitive R&D
costs, presence of foreign investors and availability of highly-qualified human
resources are valuable competitive indicators for doing business in this
country.

In 2011, the innovation environment reform
plan was approved. Since April 2012, the new Slovak government intends to
revise its measures in order to include other actions aiming at boosting
innovation capacity.  For example, the Slovak government intends to enhance the
innovation potential of the national economy by increasing the share of
high–tech exports to 14% by 2020. The Slovak Republic is challenged to offer
favourable framework conditions to remain competitive with regard to other
Member States and ensure long term growth, productivity gains and improved
living standards.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates with four variables the
upgrading of knowledge in different manufacturing industries. First, position
on the horizontal axe illustrates the changing weight of each industry sector
in value added over the period. The general trend of moving to the left-hand
side reflects the decrease of manufacturing in the overall economy. The sectors
above the x-aces are sectors whose research intensity has increased over time.
The size of the bubble represents the share of the sector (in value added) in
manufacturing (all sectors presented in the graph), and the red-coloured
sectors are those which are already high-tech or medium-high-tech.

Across the EU, as the industrial structures vary
considerably, the Member States have been following different paths toward a
more knowledge-intensive economy. In the aftermath of the crisis, Slovakia ranks among the fastest growing economies of the entire European Union. The Slovak
economy continues successfully recovering, mainly due to external demand and
strong manufacturing activity, covering almost 23.4% of total value added
against the EU average of 13.8%. Productivity in manufacturing sector profited
from a sustained increase, indicating a good industry performance. The share of
exports of GDP, as indicator of the openness of the economy, is in the Slovak Republic quite well performing, notably in the sector of medium-high and high-tech
product exports, with an average clearly above the EU-27 level.

The graph above synthetises the structural change of
the Slovak manufacturing sectors over the last decade. It shows that several
medium and high-tech sectors (in red) have grown in economic (value added)
importance, while large medium- or low-tech sectors, such as fabricated metal
products and food and beverages have increased their knowledge-intensity (as
measured by R&D investments). Economic expansion has been mainly related to
radio, TV & communication equipment sector, Electric machinery and to the
traditional sector of motor vehicles, followed by fabricated metal products.
The Slovak economy has also been diversifying over the last decade, and its
specialization degree has been decreased from 6.06 to 4.42. Moreover, as a
traditional manufacturing country, The Slovak Republic has been more resilient
to the economic crisis. However, many of the Slovak manufacturing industries
have not upgraded its knowledge intensity over the period 1995-2009, which
could indicate a medium-term threat to the sector in the context of increasing
globalisation.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants for a country's competitiveness in global export markets. A higher
contribution of high-tech and medium-high-tech industries to the trade balance
is an indication of competitiveness in more sophisticated products and
services.

Over the last decade, the trade balance in high-tech
(HT) and medium-tech (MT) goods of the Slovak economy showed a high increase,
strongly above the EU average, with a high total productivity factor, notably
of its labour level, in particular when compared to its catching–up peers. As
shows the graph above, the "telecommunication and sound-recording
apparatus" was one of the main sources of this improvement of the trade
balance. It yielded a quite remarkable progress. The "general industrial
machinery and equipment" and the "office-machines and automatic
data-processing machines" sectors also contributed significantly to this
improvement, in contrast to the more traditional product sectors of plastics,
vehicles, machinery, arms and instruments.

However, this progress has not been well reflected to
the research and innovation system of the country. The industries corresponding
to these goods have not upgraded their R&D intensity. The Slovak Republic,
having a dual economy, where a large part  is hold by foreign multinational
companies, with high productivity, but transferring technology from abroad
where they run their R&D activities and limited liaising activities with
Slovak research facilities (i.e. to establish R&D centres in Slovakia).
Thus, the strong foreign presence has not yet been translated into
significantly higher inward BERD. National companies, including a great number
of SMEs and a few large companies, have lower R&D expenditure and
productivity levels. As a result, source of major productivity in the past
years was mainly the technology imports, but this potential is evaporating due
to declining of inflows of FDI. Furthermore, a strong decline is observed in
the non-R&D innovation expenditure and in license and patent revenues from
abroad. For catching-up Member states, such as the Slovak Republic, price
competitiveness and on-going industrial restructuring would help to boost
exports. As innovation capacity has improved only modestly, it has yet to move
significantly towards more knowledge-intensive economic activities.

Key
indicators for Slovakia

Slovenia

Towards
a knowledge-intensive economy

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Slovenia. They relate knowledge
investment and input to performance or economic output throughout the innovation
cycle. They show thematic strengths in key technologies and also the high-tech
and medium-tech contribution to the trade balance. The table includes a new
index on excellence in science and technology which takes into consideration
the quality of scientific production as well as technological development. The
indicator on knowledge-intensity of the economy is an index on structural
change that focuses on the sectoral composition and specialisation of the
economy and shows the evolution of the weight of knowledge-intensive sectors
and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 2.47%                (EU: 2.03%; US: 2.75%) 2000-2011: +12.46%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 27.47                 (EU:47.86;  US: 56.68) 2005-2010: +3.99%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011:0.521                 (EU: 0.612) || Knowledge-intensity of the economy 2010:45.9                    (EU:48.75;     US: 56.25) 2000-2010: +4.25%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Health, Food and agriculture, ICT, Materials, New production technologies, Environment               || HT + MT contribution to the trade balance 2011: 6.05%               (EU: 4.2%;      US: 1.93%) 2000-2011: +14.72%  (EU: +4.99%; US:-10.75%)

Slovenia has significantly increased its R&D intensity over the last
decade, with some fluctuations. It increased from 1.38% in 2000 to 2.11 % in 2010
and reached 2.47 % in 2011, a value which is higher than the EU average of 2.3%.
The fluctuations over that period are mirrored by fluctuations in the R&D
intensities of both the private and public sectors. In 2011, business
enterprise expenditure on R&D as a percentage of GDP was 1.83% compared to
an EU average of 1.26% and public sector expenditure on R&D as a percentage
of GDP was 0.64% compared to an EU average of 0.74%. In the last decade both business
expenditure on R&D and government funding of R&D increased.

This is a clear signal that Slovenia regards investment
in R&D as a priority for the development of medium-high and high-tech and
competitive enterprises and for increased and sustainable economic growth. Slovenia is meeting the challenge of reaching its 2020 R&D intensity target of 3% by
mobilising incentives and resources from public and private sources (human,
financial, infrastructural) and providing smooth paths for more technological
innovation. At the same time the effectiveness and efficiency of the R&I
system needs to be upgraded, notably through improved governance and higher
dynamics in the knowledge triangle.

In order to tackle these challenges a new
National Research and Innovation Strategy 2011-2020 was prepared and approved
in 2011. It aims to better integrate research and innovation, to enhance
cooperation between PROs and the business sector, to better contribute to
economic and social restructuring and to increase scientific excellence. The
National Programme 2011-2010 for Higher Education points to improved efficiency
of the system and better articulation with needed skills, notably in science
and engineering.

Investing in knowledge

R&D intensity in Slovenia increased from 1.66 % in
2008 to 2.47 % in 2011.  Slovenia's R&D intensity target of 3% for 2020 is ambitious
but achievable despite the economic crisis, provided that there is an effective
and efficient increase of resources devoted to research and innovation.

In spite of the economic crisis, the share of R&D
financed by business enterprise has been indeed  higher than the EU average
since 2007. In fact, in 2011 business enterprise expenditure on R&D as a
percentage of GDP reached 1.83%, making Slovenia one of the top performers in
the EU in terms of business R&D. Notwithstanding, budgetary constraints,
public sector expenditure on R&D n 2011 was equal to 0.64%, of GDP, slightly
below the EU average but above those of countries with similar research and
knowledge structures. Between 2008 and 2010 business expenditure on R&D has
increased in real terms at an average annual growth rate of 15,3% while
government funding of R&D has increased in real terms over the same period
at an average annual growth rate of 1.4%.

Slovenian research and innovation also receives
support from the EU budget through two main instruments: the Structural Funds
and the 7th Framework Programme.  Over the ERDF programme period
2007-2013, a total of €1 207 million has been allocated to activities related
to research, innovation and entrepreneurship (29.4% of the total of Structural
Funds available for the Slovenian regions).   A total of 509 participants from Slovenia benefited by around € 99.4 million from the EU 7th Framework Programme.
The participant success rate of participants is 16.12%, was below the EU
average success rate of 21.95%.

Slovenia is one of the countries where R&D expenditure has increased
steadily both before and after 2008. As a result Slovenia had the sixth highest
R&D intensity in the EU in 2011, a development which reflects the Slovenian
counter-cyclic commitment to ensure increased and sustainable economic growth.

An effective
research and innovation system building on the European Research Area

The graph below illustrates the strengths and
weaknesses of Slovenia's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The graph above shows that Slovenia's research and
innovation system is performing well, with several indicators close to or above
the EU average and with positive trends. These include human resources,
innovation in business, and R&D expenditure. Nevertheless, there are some
weaknesses in the domains of knowledge commercialization, private and public
sector internationalisation, and research quality.

Regarding human resources, Slovenia already has a high
level of new doctoral graduates, above the EU average, but is still catching up
in terms of new graduates in science and engineering. Employment of researchers
by business enterprises and in knowledge-intensive activities is also at a high
level. In this regard it seems that highly skilled graduates are readily
absorbed into the Slovenian economy. However, despite its good performance in
human resources, Slovenia is still not attractive enough for foreign doctoral
students.

Regarding scientific production, Slovenia has high levels of international scientific co-publications and public-private
scientific co-publications but needs to improve their quality in order to
perform better in terms of scientific publications within the 10% most cited
scientific publications worldwide.  In terms of knowledge commercialization Slovenia has an increasing number of PCT patent applications and has a high level of patent
applications to the EPO in the field of health-related technologies. However,
the levels of both total PCT and total EPO patent applications are below the EU
average.  Slovenian SMEs perform well in terms of (non-technological) marketing
and organisational innovations and fairly well in introducing product or
process innovations. However, Slovenia needs to improve its attractiveness for
R&D investment by foreign firms as is illustrated by the fact that the
share of business R&D expenditure financed from abroad is much lower than
the EU average.

Slovenia's scientific and technological strengths

The maps below illustrate six key science and
technology areas where Slovenia has real strengths in a European context. The maps
are based on the number of scientific publications and patents produced by
authors and inventors based in the regions.

Strengths in science and technology at European level

Scientific production                           Health                                                    Technological
production

Scientific production           Food, agriculture and
fisheries                          Technological production

Scientific production   Information and communication
technologies   Technological production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific production                              Materials
               Technological production

Scientific production    New production
technologies               Technological production

Scientific production                  Environment                
Technological production

The maps above illustrate the strengths of Slovenian
science and technology production in absolute numbers.  Slovenia, in terms of scientific production, using the FP7 thematic priorities, has strong
capacity in the fields of health, food, agriculture and fisheries, ICT,
materials, production, environment, and socio-economics. In terms of
specialisation the 'scientific specialisation index', covering the period
2000-2009, shows high values in the fields of food, agriculture and fisheries,
ICT, materials, production, construction, energy, transport, socio-economics,
and humanities.

Slovenian scientific excellence, as measured by the
impact of citations and the share of its total scientific publications in the top
10% cited publications in each respective field, is particularly high for
energy, transport, and security.  The 'revealed technological advantage' index,
also covering the same period, on the basis of the location of inventor of EPO
patents, shows particular strength in health, biotechnology, construction, and 
transport.

Policies and reforms for research and innovation

Research and innovation is a priority in Slovenia. Slovenia's R&D intensity target for 2020 of 3%, therefore, seems to be
achievable. One of the main challenges is the structuring of policies that
provide support for research and, in particular, that stimulate innovation. In
2011, the Slovenian authorities approved two important long term strategic
documents: The Research and Innovation Strategy of Slovenia 2011-2020 (RISS)
and the National Higher Education Programme 2011-2020 (NHEP).

The Research and Innovation Strategy of
Slovenia (RISS) defines the R&D priorities for the next decade (2011-2012)
and aims to create a high performance research and innovation system which will
improve the quality of life. It sets out the following main priorities: (1)
better integration of research and innovation; (2) increasing scientific
excellence, partly by increasing competitiveness within S&T stakeholders
and partly by providing necessary resources, both human as well finance; (3) promoting
closer cooperation between universities, research institutions and the business
sector; (4) strengthened capacity of research to contribute to economic and
social development. The National Higher Education Programme (NHEP) aims at
upgrading the Slovenian Higher Education system to a level which is more
consistent with education and skills needs in general and in science and
engineering in particular. The measures outlined in 2011 in both the RISS and
NHEP have yet to materialise. Several legal enactments, in particular, a
revamped Law on Research and Development are required for their implementation.

Within the RISS a special section is devoted to the
issue of research infrastructure, stipulating the need for a special Slovenian Research
Infrastructure Roadmap (2011-2020) to deal with two problems related to the
current state of Slovenian research infrastructure. These problems are: a lack
of cooperation between research institutes, and the fragmentation and
sub-optimisation of R&I utilisation. In this regard, the key objectives of
the Research Infrastructure Roadmap are: better exploitation of the existing national
research infrastructure; upgrade and construction of new research infrastructure
in priority areas, and international integration based on access to large
research infrastructures.

The new government, which was formed after the
elections of December 2011, reallocated the competences for Research and
Innovation between the Ministry of Education, Science, Culture and Sports, the
Ministry of Economic Development and Technology and the Ministry of
Infrastructure and Spatial Planning.

In 2010, different stakeholders in innovation policy
introduced several new policy measures. The Competence Centres are led by
businesses combining basic and applied research with a view to creating future
market opportunities, and to some extent complement the Centres of Excellence,
introduced in 2009. The latter are focused on basic research made by PROs, in
cooperation with those business R&D units active in the same area. And
finally the Development Centres (consortia of business firms) support
"close to the market" research projects with a view to developing new
products, processes and services. It is also noteworthy that tax allowances for
research and innovation were increased in April, 2012.

Slovenia has several programmes and instruments to support Research and
Innovation, such as the innovation voucher, the mentorship voucher, the
mentorship of young researchers, calls for basic and applied projects, financial
assistance to institutions that support innovation, the strengthening of
development units in the business sector and the transfer of technologies from
the public sector. In the aftermath of the economic crisis Slovenia will focus on cutting its annual budget deficit from 6% to 3% by 2013. This will
lead to difficult decisions about priorities for the public sector. It remains
to be seen if support for R&I will be affected. The new government
announced several policy changes in both strategic documents in order to
preserve research and innovation capabilities of Slovenia against reduction of
government budget on R&D.

Economic
impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[3].

According to this index, Slovenia underperforms its reference group and is clearly below the EU average. While the
country only ranks 16th in the EU, Slovenia displays a contrasted
pattern of marked strengths and weaknesses. Slovenia is the best performer
amongst its reference group for "patent applications per GDP",
"share of the employment in knowledge-intensive activities" and "contribution of medium and high-tech
product exports to the trade balance". In all three areas, Slovenia ranks rather well amongst EU Member States, in particular regarding its medium and
high-tech trade specialisation where it is second only to Germany. However, these strengths are counterbalanced by equally marked weaknesses in the "share
of knowledge intensive services in total export of services" and "sales
of new to market and new to firm innovations as % of turnover of firms".

Therefore, it seems that Slovenia may not
have fully developed its innovative potential. One of the reasons is that some
components of the business and competitive framework have changed very little: links
between public sector and private sector are still weak and some structural
aspects of the business environment hinder foreign direct investment. In order
to improve competitiveness, there would be benefits to consider developing a new
industrial policy including a strategy for attracting foreign capital, notably
linked to R&I.

The approach to attracting investment
outlined in the National Reform Programme seems to rely mainly on financial
incentives rather than on making also other improvements to the business
environment, while the latter could contribute to maximise the impact of these
incentives. Progress has been made through changes in tax legislation: the R&D
tax allowance was increased to 100% of the amount invested.

The background of economic crisis and
fiscal austerity implies a lower availability of resources, and companies,
especially SMEs, struggle to obtain funding not only for projects but also for
operational capital.  In this regard the government is planning to increase
funds for guarantees and credits for R&D and new technologies through the
Slovenian Enterprise Funds (SPD) and the Slovene Development and Export Bank
(SID) rather than providing direct subsidies to the business sector. The
question remains whether credit is a suitable instrument for SMEs with little
experience of research and innovation.  The Slovene Enterprise Fund also
supports start–up companies in the first three years of their life. The results
show that this instrument should be reinforced. Most of the stronger financial
measures currently being implemented are co-financed from the Structural Funds.
Overall the main challenge remains the efficient and effective use of available
resources. Slovenia has room to better address funding priorities. There is a
need for more focus on and critical mass in sectors related to the existing
R&D strengths and economic strengths of Slovenia.

Upgrading the manufacturing sector through research
and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

The Slovenian economy is characterised by a relatively
strong manufacturing industry. Manufacturing makes a higher contribution to total
value added than the EU average. Nevertheless, as in many other countries, the
share of manufacturing value added is tending to decrease (as shown by the
position of most of the sectors on the left side of the graph), due to a
corresponding increase in services value added.

Although some industry sectors have achieved slight increases
in their shares of the economy, specialization in labour intensive industries
has decreased considerably over the last decades. As the graph illustrates, Slovenia's manufacturing industries are moving towards higher research intensity in almost
all sectors. Highly innovation-intensive sectors are: electrical machinery and
apparatus, chemical products, machinery and equipment, motor vehicles, medical
precision and optical instruments, and radio, TV and communication equipment. Slovenia has two companies in the 2011 EU Industrial R&D Scoreboard in the fields of pharmaceuticals,
and construction and materials.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

The Slovenian trade balance for high-tech (HT) and
medium-tech (MT) products has grown progressively since 2000. The contribution
of the basket of the above products to the Slovenian trade balance grew at an
average rate of over 12% per annum during the last decade. Medicinal and
pharmaceutical products, road vehicles, and general industrial machinery and
equipment and machine parts increased their contributions whereas iron and steel,
professional, scientific and controlling instruments and apparatus, and electrical
machinery, apparatus and appliances, and electrical parts have lower
contributions.

It should be noted, however, that some commodities, such
as the last two referred to above, contribute positively to the national trade
balance, whereas others, such as office machines and automatic data-processing
machines have reduced their negative contribution over the period. It is also
worth noting that medicinal and pharmaceutical products, road vehicles, and general
industrial machinery and equipment and machine parts which make a strong
positive contribution to the trade balance are produced in sectors with high
positive variations in added value and R&D intensity (see previous graph).

Slovenia is investing and catching-up. Total Factor Productivity increased from
2000 to 2011 at a higher rate than the EU average. Gross Fixed Capital
Formation grew in real terms from 2000 to 2008 at an average rate of 5.9% per
annum but has declined since then. R&D intensity grew at an average annual rate
of 12.5% between 2008 and 2010. Labour productivity grew at an average annual
rate of more than 3% up to 2010. Slovenian employment in knowledge-intensive
activities (manufacturing and services) is at the level of the EU average and EPO
patent applications per billion GDP in the domain of health-related
technologies are the second highest in the EU.

Key indicators for Slovenia

[1] See Methodological note for the composition
of this index.

[2] See Methodological note for the composition of this
index.

[3] See Methodological note for the composition of this
index.

Spain

The challenge of structural change for a more
knowledge-intensive economy

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Spain. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 1.33%              (EU: 2.03%; US: 2.75%) 2000-2011: +3.56%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:36.63                 (EU:47.86;   US: 56.68) 2005-2010: +3.66%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.53              (EU: 0.612) || Knowledge-intensity of the economy 2010:36.76                  (EU:48.75;     US: 56.25) 2000-2010: +2.65%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Food and agriculture, Energy, ICT, Security, Biotechnology, Environment               || HT + MT contribution to the trade balance 2011: 3.05%                (EU: 4.2%;     US: 1.93%) 2000-2011: +23.73%  (EU: +4.99%; US:-10.75%)

Investment in research and innovation (R&I) has
grown substantially in Spain over the last decade. Public investment in R&D
grew even beyond the economic crisis, in a counter-cyclic effort. Business
investment in R&D also grew over the period 2000-2008. As a result,
excellence in science and technology has substantially improved and Spain demonstrated a fair degree of structural change towards a more knowledge-intensive
economy and a slight upgrading of the R&D intensity in most manufacturing
industries. Another positive sign is the rising contribution of high-tech and
medium high-tech goods to the trade balance.

However, despite this positive evolution, the Spanish
economy remains less knowledge-intensive than the EU economy as a whole. 
Investment levels are still low, excellence in science and technology lags behind
the EU average, and growth in innovative firms must be boosted. The economic crisis has hit Spain hard, partly because international
competition and the globalisation of production has had a particularly harsh
impact on several industries and services in which Spain is specialised. In
particular, the low scale of hot spots in key technologies and the lack of innovation
for societal challenges contrast with the expanding potential for these
products and services in global markets and value chains. The main challenges
for Spain remain, therefore, to invest in knowledge and to better ensure the
effectiveness of this investment in creating a more knowledge-intensive
economy.

A new law for Science, Technology and Innovation was
adopted in 2011. It strengthens the governance system, simplifies the
allocation of competitive funding creating a new national research agency, and
stimulates researcher mobility between the public and private sectors. However,
with the economic crisis, the government has recently reduced public funding in
R&D and in education. Consequently, as part of the Europe 2020 process, it
was recommended that Spain should review spending priorities and reallocate
funds to support small and medium-sized enterprises (SMEs), research,
innovation and employment opportunities for young people. In order to meet with
this recommendation, the government has included in its National Reform
Programme 2012 a package of structural reforms especially devoted to boosting
SMEs, research, innovation and employment opportunities for young people.

Investing in knowledge

Spain has set a national R&D intensity
target of 3%, within which public sector R&D investment would reach 1% and
business R&D investment 2% of GDP by 2020. In 2011, Spanish R&D
intensity was 1.33%. Public sector R&D intensity amounted to 0.64% and
business R&D intensity 0.70%. Both values have fallen slightly in 2011
compared to 2010.

Over the period
2000-2009, the Spanish R&D intensity increased with an annual average
growth of 4.3%, well above the EU average. In absolute terms, public R&D
funding reached a peak in 2009, which means that the Spanish government
continued to increase its R&D budget up to two years after the start of the
financial crisis in 2008. However, since then, the government R&D budget
has been reduced by 4.12% in 2010 and by 7.38% in 2011. The 2012 budget
foresees a more drastic decrease of 25.57%.

Private R&D expenditure
has also been seriously affected by the economic crisis. Business R&D expenditure
in real terms reached a peak in 2008. Spanish firms more than doubled their
R&D expenditure in real terms over the period 2000-2008. However, following
the economic crisis and liquidity constraints, business R&D investment fell
by 6.27% in 2009 and by another 0.81% in 2010. Firms in food, automobiles, and
construction, have undertaken the strongest cuts.

A total of € 7.8 billion
from the EU FEDER Structural Funds has been allocated to research, innovation
and entrepreneurship in the Spanish regions for the period 2007-2013. This
represents 22.6% of the total FEDER fund for Spain. By 2010, Spain had committed 38.4% of these EU funds (the average in the EU was a 46.6% commitment
rate). Spain also has the scope to increase its funding of R&D from the EU 7th
Framework Programme. It will adopt a national strategy to foster the
participation of national R&I teams in European projects and programmes. The
success rate of Spanish applicants is 19.99%. This is lower than the EU average
success rate of 21.95%. Up to mid 2012, over 6400 Spanish participants had been
partners in an FP7 project, with a total EC financial contribution of € 1.8 billion
(representing 6.88% of total EC funding contribution at that stage in FP7).

An effective
research and innovation system building on the European Research Area

The graph below illustrates the strengths and
weaknesses of the Spanish R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The graph above indicates that the increase
in public funding for R&D (2000-2011 average annual growth) has triggered a
stronger scientific excellence but without clear progress in business
innovation. Spain faces a negative trend in business R&D investments and is
still below the EU average on technology development and innovation. Its
performance is however similar to the reference group of countries. In the
field of human resources, 40.6% of the population aged 25-34 completed tertiary
education, although with lower share of new graduates (ISCED 6) in science and
engineering than the EU average. While Spain is below the EU average in
highly-cited scientific publications, Spanish researchers are successful in
international scientific co-publications.

The number of business researchers in Spain has grown between 1999 and 2010, but Spain has still a lower level than the EU average. These
numbers point at the need to enhance the quality of the higher education system
and to address the non absorption of highly-skilled graduates in firms. Spain has improved its scientific quality and production but still faces the
challenge of increasing the excellence and internationalization of its
universities and PROs. The universities are not visible in major international
rankings and their scientific production and staff composition is less
international than is the case in several other Member States. And despite an
improvement, Spain still performs well below the EU average
for public-private cooperation in science. Spain also faces challenges in relation
to business R&D. As shown on the graph above, overall technology
development is low – but increasing. Product and process innovations in SMEs
have decreased over the last decade.

Spain's scientific and technological strengths

The maps below illustrate six key science and
technology areas where Spain has real strengths in a European context. The maps
are based on the numbers of scientific publications and patents produced by
authors and inventors based in the regions.

Strengths in science and technology at European level

 Scientific
production                      Food, agriculture and fisheries        Technological
production

Scientific
production                                  
Energy                                     Technological production

Scientific production       
Information and Communication Technologies         Technological production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific
production                                  
Security                                      Technological production

Scientific production      
                          Biotechnology                               Technological
production

Scientific production       
                        Environment                                     Technological
production

As illustrated by the maps above, in terms of
scientific production, Spain has strong regional capacity in the fields of
food, agriculture and fisheries, energy, ICT, security, biotechnology and
environmental science and technologies (including the important water sector). In
terms of scientific quality, the most prominent scientific work in Spain is in energy, security, transport and materials. Spain's scientific specialisation
index (not shown on the maps above) shows that the main scientific fields are
food, agriculture and fisheries, ICT, security, but also construction
technologies and humanities.

The relative strengths in patenting are visible in Catalonia, Madrid and the Basque country, although Aragon and Cantabria are also present in
energy patenting. The main technology sectors are food and agriculture,
biotechnology, ICT and energy although the core technology development in
Europe in these sectors takes place in regions outside Spain. The data on patenting in industrial sectors (not included on the maps above), show
that Catalonia has particular strengths (within the highest 25th percentile)
in organic fine chemistry, pharmaceuticals, food chemistry, while the Basque
country has similar technology strengths in engines, pumps and turbines,
thermal process and apparatus, furniture, games, other consumer goods, machine
tools, electrical motors and green energy.

Policies and reforms for research and innovation

The Spanish authorities are addressing these
challenges in a new Law for Science, Technology and Innovation adopted with
broad political support in 2011, as well as in new Spanish Strategy for
Science, Technology and Innovation and in the State Plan for Scientific and
Technical Research and Innovation adopted in February 2013. The new innovation
strategy is very relevant and needed. Reform proposals cover the governance
system, the quality of human resources, the funding allocation system and
knowledge transfer between actors. The strategy for the Spanish research and
innovation system now need to be implemented effectively and swiftly. Stronger
coordination between national and regional R&I policies and instruments is
a crucial element for improved system efficiency. Objectives and priorities are
well aligned with the objectives of Europe 2020, the Innovation Union and
Horizon 2020. The law of 2011 also simplifies the allocation of competitive
funding for research and innovation by giving responsibility for the allocation
of funds to two main bodies, the new national research agency (AEI) and the
existing agency for innovation (CDTI). Public-private cooperation will be
reinforced by the introduction of legal changes to researchers' contracts,
thereby stimulating mobility between the public and the private sector. Legal
reforms related to the recruitment and careers of researchers will encourage
international outward mobility as well as inward mobility of foreign
researchers of high levels of excellence. In addition to these legal reforms,
agreed among all parties, a strong policy focus is placed on technology transfer to the market and on
instruments to stimulate private R&D.

Key areas for action are a better matching between
supply and demand for innovation, a favorable financial framework for innovation, high quality human
capital and its engagement in R&I activities of Spanish industry, boosting
risk capital activities and instruments alongside a reorientation of part of
the public procurement towards innovative products and services, and increasing
the participation of Spanish teams in EU research and innovation programmes.
The Government has created a trading platform, a user guide and special
programs aimed at making easier for firms to bid in innovative and
pre-commercial public procurement calls.

The reforms in the Law for Science, Technology
and the Spanish Strategy for Science, Technology and Innovation as well as the
2015 University strategy for excellence would need to be implemented fully in
2013. The falling public funding in R&D and education is a worrying trend.
An enhanced focus on innovation and competitiveness in the EU Structural Funds
for the 2014-2020 period would also contribute to this objective. At present, Spanish regions are designing their new
innovation strategies aligned with smart specialization, under close monitoring by
the central administration. Building on the positive experiences of other Member States in boosting
the efficiency of the public R&I system, Spain could also improve 
institutional funding, introduce a performance-based financing system for
universities and public research institutions, link a proportion of
institutional funding to progress in scientific excellence, and increase the
levels of internationalization and public-private cooperation.

Since early 2012, a package of reforms has
been implemented, while ensuring the execution of some of the initiatives
launched previously. Among the new reforms there are comprehensive laws to
foster entrepreneurship, reform the labour market, and enhance a more unified
domestic market. On-going reforms cover the execution of the Small Business Act
for SMEs, simplification of the regulations, modernisation of public
administration, boosting the internationalization of firms, and addressing the
crucial challenge of access to funding. As part of the future Spanish Entrepreneurship Act, the government has announced the creation of
the Spain Co-investment Startup Fund, allocating a budget of 20
million euros to enhance
venture capital on early-stage investments. The "AVANZA ICT plan will finish in 2015. The
ministry of industry will also revise the existing industrial policy (PIN 2020)
which was approved in 2010. Instead of focusing on an identified number of
strategic sectors and building on Spain's strengths, the new government wishes
to adopt a more horizontal approach where no specific sector is highlighted. There
is however scope for further synergies between the industrial policy and the
more strategic focus of innovation policies at national and regional level.

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[1].

Economic impact of innovation in Spain is clearly above that of the reference group of countries with similar industrial and
knowledge structure. However, there is room for further progress in reaching
the EU average performance. One of the relevant policy areas is cluster
support. Industrial clusters in Spain have been dominated by low-tech and
medium-tech sectors such as food, textiles, tourism, leather, and the furniture
industry. In order to foster innovation in these clusters as well as the
emergence of new sectors, over 80 science and technology parks were established
in the last decade where SMEs and larger firms work with research institutions.
In terms of employment, these knowledge clusters are focused on transport, ICT
and media, tourism, water and energy, health, optics, as well as agro-business,
machinery, and wood. Science and technology parks can be found in all of the
Spanish regions. Technology platforms are also very active in setting
priorities in key sectors and boosting public-private cooperation.

The challenge ahead is to focus on real
innovation-based clusters in sectors where Spain or a Spanish region has
comparative advantage to address regional or global societal challenges. Strategies
must be coordinated in a consistent national policy, including building
networks between regions. Incentive-structures are needed to stimulate larger
firms to develop smaller technology-based firms in a more sustainable
eco-system; in parallel research institutions and researchers must be more
incentivized to engage in innovation activity with surrounding firms. Economic
impact of innovation is further enhanced by a better matching between science
and technology and the regional or national industrial structure.

Spain has had to face the challenge of less favourable
framework conditions for innovation, in particular following the economic
crisis. In 2011, the ease of access to loans in Spain was among the lowest in
the EU and this indicator had fallen sharply compared to 2007-2008 when the
economic crisis broke out. Venture capital as % of GDP is also well below most
EU Member States, in particular seed and start-up capital. However, in absolute
terms, Spain is above the EU average in venture capital investment. Over the last
decade, barriers to entrepreneurship have been lowered, but Spain's internal market has been more fragmented with a rapid increase in regional
regulations.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

As recognised by Spanish economic and
industrial policy, the medium-term avenue for a more sustainable economy is to
upgrade and to move up on the value chain and to internationalise its outreach.
Compared to other countries, Spain has the scope to both increase the share of
value added of high-tech and medium-high-tech sectors and to increase knowledge
intensity in more traditional sectors of the economy.

The graph above synthesises the structural change of
the Spanish manufacturing sector over the last decade. It shows that the Spanish
manufacturing has been dominated by low-tech sectors or large consumer goods
and services. However, there has been an increase in R&I investment and in
skilled human resources in most industrial sectors of the Spanish economy, and
in particular in the low-tech and traditional sectors. But this knowledge
injection has not been directly translated into an increasing share of the
value added in the overall economy, except for the construction sector, which
dominates the Spanish economy, and for the electricity, gas and water sector.

Firm-level data in the EU Industrial Scoreboard
reveals that since the crisis started in 2008, firms active in computer
services, telecommunications and banking have in general increased their annual
R&D investments until 2010, while firms in pharmaceuticals, biotechnology
and food production have decreased their investments in R&D, in some cases
considerably. Firms in the electricity sector show a mixed performance.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

The contribution of high-tech (HT) and medium-tech
(MT) products to the trade balance has grown over the period 2000-2011. The
graph above shows that most high-tech and medium-tech industries have improved
their contribution to the Spanish trade balance. This is particularly true for
machinery sectors, transport equipment, plastics, medical and pharmaceutical
products, photographic equipment and fertilizers, indicating an increasing
specialisation of the country in these products in international trade. In
absolute numbers, trade balance is particularly positive for metalworking
machinery.

However, in absolute numbers the Spanish trade balance
in almost all high-tech and medium-tech products is negative and has
continuously decreased up to 2008 (after which the gap diminished due to a drop
in imports). The overall Spanish trade balance has also become increasingly
negative over the decade, falling at an even higher degree. Because the erosion
of the trade balance in HT and MT products has been slower than the
deterioration of the overall trade balance, the positive contribution of these
products has increased over the decade.

Over the last decade, Spanish total factor
productivity has remained stagnant. The employment rate has fallen dramatically
with the economic crisis. However, Spain has made good progress on the other
Europe 2020 target indicators, addressing both societal needs and future
economic growth sectors. Green house emissions have fallen, supported by
progress in the deployment of renewable energy sources and progress in
environmental technologies. Progress has also been made in health-related
technologies, relevant for economic growth and an ageing population.

Key indicators for Spain

Country-specific recommendation in R&I adopted by
the Council in July 2012:

"Review spending priorities and reallocate funds
to support access to finance for SMEs, research, innovation and young
people."

Sweden

World
positioning in challenge-driven innovation

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Sweden. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 3.37%             (EU: 2.03%; US: 2.75%) 2000-2011: -0.96%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 77.2                   (EU:47.86;  US: 56.68) 2005-2010: +3.58%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.652              (EU: 0.612) || Knowledge-intensity of the economy 2010:64.6                    (EU:48.75;     US: 56.25) 2000-2010: +1.41%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Health, Environment, Energy, ICT, Materials, Security               || HT + MT contribution to the trade balance 2011: 2.02%                (EU: 4.2%;     US: 1.93%) 2000-2011: -1.97%      (EU: +4.99%; US:-10.75%)

Sweden
has one of the world's highest R&D intensities. The country also performs
very well in terms of scientific and technological excellence, with a very
positive evolution. The Swedish economy is very knowledge-intensive, and has
achieved a continuous development towards a stronger high-tech and medium-high-tech
composition and specialisation. The country has several hot-spot clusters in
key technologies at European and world scale, in particular in energy and
environmental technologies, health and medical technologies, biotechnologies,
ICT, materials and new production technologies, machine tools as well as
transport technologies and motor vehicles.

However, Sweden's competitive position is facing
challenges. While world competitors in the knowledge-intensive global markets
are stepping up their R&D investments, Sweden is losing ground due to an
increasing delocalisation of private R&D investment to firms outside the
country. Since 2002 the outflow of R&D business investment has exceeded the
inflow. Sweden's good R&D position is vulnerable due to its strong
dependence on a few large multinational companies, which increasingly orient
themselves towards the global innovation system.  At the same time, SMEs, which
were responsible for the growth in employment in recent years, are not growing
fast.

To address these challenges a new bill on research and
research-based innovation as well as a new innovation strategy were launched in
Autumn 2012 increasing public funding for R&D and fostering the growth of
firms in innovative sectors. By orienting innovation more closely towards
global societal challenges it aims at enhancing service and product innovation.
Supply-side policies will be matched more closely with policies enhancing the demand
for innovation, both from private actors and from public procurement and regulation.
As part of the Europe 2020 process, it was recommended that Sweden  fosters cooperation between the technology and innovation demands of larger
multinational companies with the innovative products and services produced by
local firms. The new EU Structural Funds for 2014-2020 also provides an
opportunity to enhance clusters and infrastructures for the testing and
demonstration of new technology-based innovation.

Investing in knowledge

Based on recent trends, Swedish progress
towards the national R&D target of 4% of GDP has indeed come to a halt in
recent years, with R&D intensity declining from a peak of 4.13% in 2001 to 3.56%
in 2005 and to 3.37% in 2011. This is the result of a significant drop in
business R&D intensity. Business R&D intensity fell from 3.20% in 2001
to 2.59% in 2005 and to 2.34% in 2011.[2]
This will make it a challenge to meet the Swedish target of reaching 4% R&D
intensity by 2020. Within the business sector, R&D investment is highly
concentrated in large, often foreign-owned, companies, which makes the Swedish
prima-facie good position vulnerable to change of firm strategies. At the same
time, R&D investment in SMEs has fallen almost 30% between 2005 and 2009.

Public funding of R&D has increased since the
research bill of 2008, and this trend is planned to continue up to 2012 with a
total increase of around € 500 million for 2008-2012. Sweden raised its public R&D budget by 3.2% in 2011 and another 4.5% in 2012. A new
research bill covering 2013-2016 budget, plans an additional SEK 4000 million
for R&D. Sweden has received € 741 million of EU ERDF Structural Funds
allocated to research, innovation and entrepreneurship over the period
2007-2013, with a high execution level (65.8%). In addition, up to early 2012,
2782 Swedish research teams have been successful in the EU FP7 programme,
receiving a total of € 1.0 billion (representing 3.83% of all EU funding from
FP7). The success rate of applicants was 23.78% (above the EU average of
21.95%).

This public funding effort seems having a
counter-cyclic effect on business R&D investment. All major R&D-intensive
firms in Sweden increased their R&D investments between 2009 and 2011. More
broadly, total R&D investment (GERD) in Sweden in current Euro increased by
13% in 2010, partly recovering from a 15% decrease between 2008 and 2009. The
long-term trend of decreasing business R&D investment is partly linked to a
reallocation of investment to countries outside of Sweden. The R&D
investment flows are depending on the general globalisation of research and innovation.
The outflow of R&D investment from Sweden increased between 2002 and 2007
to € 3000 million. Inward R&D investment grew as well, but for Sweden the outflow of R&D business investment exceeded the inflow.

An effective
research and innovation system building on the European Research Area

The graph below illustrates the strengths and
weaknesses of Sweden's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

Sweden performs above the EU average in all R&I dimensions except for new
graduates in science and engineering, EC framework programme funding, and public
expenditure on R&D financed by business. A similar picture emerges when Sweden is compared to the reference group, pointing up Sweden's relative weakness in public-private
R&D cooperation, in new graduates for science and engineering and in
scientific excellence.

Higher education institutions perform over 26% of
R&D in Sweden. More than half of the funding for higher education
institutions is competitive funding and part of their institutional funding is
now subject to performance-based criteria. Given the small size of Sweden, optimisation of research and innovation also depends on integration into the
expanding European research and innovation system. Currently, only the most
research-intensive universities in Sweden cooperate extensively with international
partners. In contrast, the business sector has developed strong co-patenting
activity with firms in Germany, France and the United Kingdom.

However, firm knowledge dynamics are less intensive
than could be expected from the high level of research performance and
favourable framework conditions. Overall business R&D investment and patent
applications are slightly declining. Many of the reference countries, as well
as the United States, have higher private R&I investment growth and more
dynamic patenting activity, both for PCT patents and for SME patenting. The
patenting activity of young firms (less than five years old) in Sweden is clearly lower than that of young firms in the United States and other Nordic countries.

Sweden's scientific and technological strengths

The maps below illustrate six key science and
technology areas where Sweden has real strengths in a European context. The maps
are based on the number of scientific publications and patents produced by
authors and inventors based in the regions.

Strengths in science and technology at European level

Scientific
production                                           Environment              
Technological production

       Scientific production                                          Energy  
            Technological production

 Scientific
production                                            Health                  
Technological production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific production              Information and
Communication Technologies      Technological production

 Scientific production Nanoscience, nanotechnologies    
      Materials         Technology production

Scientific
production                                                Security                     Technological
production

Sweden
performs well in most areas of technology production. Apart from the sectors
illustrated in the maps above, Sweden has intensive patenting in transport
technologies, motor vehicles, machine tools, new production technologies, and biotechnologies,
among other sectors. In terms of technological specialisation world-wide, Sweden stands out in digital and basic communication processes, and transport patents.

However, the maps do not always show corresponding
scientific strengths in these sectors. These findings are confirmed by the data
on shares of the 10 % most cited scientific publications, which show that
Sweden is lagging behind the world scientific leaders in future strategic areas
such as health, energy, and environment as well as security and automobiles.
There is thus room for enhancing scientific excellence in the fields where
Swedish industry has European level technology strengths. Being a small country
with a large dependency on private multinational research performers, Swedish
institutions and clusters need high quality, critical mass and a relevant focus.

Policies and reforms for research and innovation

The current Swedish policy follows the research and
innovation bill of 2008, which stresses the links between research and
innovation. In the broad sense of innovation policy, governance issues are
crucial to actively enhancing innovation in several policy areas and
reinforcing comprehensive framework conditions for business innovation. In a
more narrow sense, the bill reinforced the funding and strategic focus of
research and innovation. Public funding was boosted both for the new
performance-based grant funding of universities and for strategic programmes in
24 research areas important to the Swedish business sector and society, including
cancer, diabetes, epidemiology, e-science, molecular bioscience, nanoscience
and nanotechnologies, neuroscience, stem cell and regenerative medicine,
nursing research, eco-systems and natural resources, oceanic environment,
climate modelling, sustainable use of natural resources, material science,
production technologies, security and crisis, transport, IT mobile
communication, and energy. In view of the 2013-2016 budget, a new research and
research-based innovation bill gives a strong emphasis to R&D in strategic
innovation and in core areas for the Swedish industry, such as mining, steel,
wood products and the construction of a sustainable society. Public funding to
R&D will be progressively increased and funding allocation systems to
universities progressively reformed to enhance scientific excellence

Over the last five years, several initiatives have
been launched to enhance the effectiveness of the Swedish R&I system, with
a focus on innovation in SMEs through reinforced public-private cooperation
with universities and better access to seed funding and venture capital.  Industrial
Research Institutes have been created to be specific innovation intermediates and
to act as an interface between academic research and product development in the
business sector. The model is that the private business sector buys R&D
services from the Institutes, while the state funds their facilities and skills
development. In addition, the bill established innovation offices to foster the
commercialisation of research results. The commercialisation of research in
seven universities was encouraged by additional state funding (SEK 150m per
year). Access to funding, in particular early stage seed financing, for
innovative SMEs is enhanced through business incubators and venture funds i.e. Innovationsbron,
Industrifonden, Almi and more than 30 incubators, often located
in Technology parks. The Swedish innovation agency, Vinnova, also funds
programmes to enhance research in SMEs, Forska och Väx, as well as
cluster building. However, the overall budget for these programmes is
relatively small.

The new national innovation strategy, adopted at the
end of 2012, comprises a holistic approach to
innovation policy aiming at the year 2020. Interesting proposals have been made for both
demand-side measures (i.e. introducing a new procurement law fostering innovation-friendly
procurement) and supply-side measures (in particular to fund testing,
demonstration infrastructure and reinforce incubators of new research-based
products). The role of the public sector as driver of innovation is stressed.
The 2011 innovation procurement inquiry proposed the introduction of a new law
on pre-commercial procurement. An increasing importance is given to innovation
in services, mobilising knowledge in a broad sense and enhancing societal
challenge-driven innovation, new business models and design-based thinking.

Additional value is drawn from linking supply-side and
demand-side measures more closely to each other. Compared to other EU Member
States, Sweden has margins for increasing its state aid to R&I.  Direct
funding to larger firms could be linked to conditions to buy products and
services from Swedish SMEs with the aim of fostering innovative eco-systems in
strategic sectors for Sweden. A strategic harnessing of EU Structural Funds for
challenge-driven innovation would enable the expansion of infrastructures for
testing and demonstration of new technology-based innovation and boost the
world-class Swedish innovation clusters, thus better linking demand for
innovation by large multinational enterprises with supply of technologies and
services from SMEs and enterprises of intermediate size. The building in Lund
of a  world-class neutron source laboratory in the field of new materials,
namely the European ESFRI infrastructure European Spalling Source, and
the determined funding to Life science in the region of Uppsala and Stockholm, SciLifeLab,
constitute opportunities both for frontier research and for business
applications.

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[3].

In a Schumpeterian perspective, Sweden offers good framework conditions for innovation in business activities, in
particular for the creation of new firms. In general, barriers to entrepreneurship
are lower than in most OECD countries. The time involved and the cost of
starting up a business are below the EU average. The share of doctoral
graduates is high (although less focused on science and technology). Clusters
in some sectors (i.e. ICT, power generation, biotechnology) have grown around
some of the larger research-intensive firms. Early stage funding as a share of
GDP was the highest among the EU Member States. Also venture capital investment
as a share of GDP is among the highest in the OECD. However, the share of early
stage funding in total risk capital is lower than in other EU Member States,
and following the financial crisis, there has been a sharp decline in risk
finance.

The innovation challenges for Sweden lay elsewhere. Even if Sweden scores much higher than the EU average in the index
above on economic impact of innovation, it performs below its reference group.
Despite its very knowledge-intensive labour force and high patenting intensity,
the relative weakness of the Swedish economy is rooted in the commercialisation
and trade of innovative and knowledge-intensive products. Sales of new to
market and new to firm innovations and trade in knowledge-intensive services in
total services export are particularly lower than in its reference countries.
The challenge of Sweden is not in technology production or firm creation, but
in the sustainability of knowledge-intensive firms for medium-term growth and
market presence. The survival rate (after two years) of new firms is relatively
high, but many innovative start-ups are bought up by larger and often foreign
firms. This dynamics is aggravated by the Swedish firm structure, still
dominated by a small number of old, large and globalized companies. With an
outsourcing of employment, and more recently of research and innovation
(visible in the falling business R&D intensity), these larger firms no
longer support the sustainability of new Swedish knowledge-intensive firms.

There are positive signs of change. The
proportion of high-growth enterprises (measured by revenues or by employment)
is higher in Sweden than in other Nordic countries, and is only slightly behind
the United States. Among the existing firms, the innovation activity in SMEs as
measured by the Eurostat Community Innovation Survey (CIS) is comparable to
other knowledge-intensive Member States, although on average is clearly below
the innovation activity in German enterprises.

Upgrading
the manufacturing sector through research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

The Swedish economy has managed to maintain an
important manufacturing industry since the mid 90s. In most other EU Member
States, the share of value added of manufacturing industry in total value added
has decreased (illustrated by a leftward shift in the graph above), linked to
the expanding services sectors. In general, countries with a strong
manufacturing sector have been more resilient to the economic crisis.

However, compared to other EU Member States, Swedish
manufacturing industry presents a lower dynamic in terms of upgrading
knowledge, in particular R&D. This is particularly true of the larger
manufacturing sectors, such as the electricity, gas and water industries,
fabricated metal products, basic metals, and motor vehicles, all key sectors in
the Swedish economy both currently and historically. There are some promising
exceptions, such as recycling, publishing and printing, textiles and apparel,
but these sectors have a smaller size in the economy.

Considering R&D investment at firm level, as
illustrated in the EU Industrial Scoreboard, the large Swedish
R&D-intensive enterprises (Ericsson, Volvo, Sandvik, Electrolux,
Vattenfall, Atlas Copco, SKF, etc.) broadly maintained or even increased their
global R&D intensities in 2010 as compared to 2009.  Swedish firms have on
average increased their R&D investment over the last three years
(2007-2010) by 3.4%, although there are exceptions - firms in the motor vehicle
sector, software, biotechnology and pharmaceutical sectors. Many of the Swedish
firms operate on a global base with the result that increased R&D
investment may not necessarily be made in Sweden.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade balance
is an indication of specialisation and competitiveness in these products.

In real terms, the Swedish trade balance for high-tech
(HT) and medium-tech (MT) products grew substantially up to 2006, and
thereafter it fell and counted almost half the size in 2010. It was mainly
exports in HT and MT products which dropped in the economic crisis in 2009. The
graph above shows that most high-tech and medium-tech products and in
particular electrical machinery, office machinery, power-generating machinery and
general industrial machinery have slightly increased their contribution to the
Swedish trade balance over the period 2000-2011. This constitutes a good
performance in increasingly competitive markets. However, a serious concern is
the falling weight of telecommunications in the Swedish trade balance (and to a
less extent other high-tech product sectors such as medical products, vehicles
and organic chemistry), possibly a sign of a weaker world competitiveness of Sweden regarding these products. Looking at the data in relation to the previous graph, it
is clear that since 1995 these sectors have not substantially upgraded their
knowledge intensities in terms of average annual growth of business R&D. On
the other hand, the lower dynamics of R&D upgrading is found in most
manufacturing sectors, including the machinery and electricity sectors;
although these products have expanded their position in the overall trade
balance, their exports in real terms have dropped with the economic crisis
after 2008.

Total factor productivity grew continuously in Sweden between 2001 and 2007, but since then it has stagnated. The employment rate shows a
similar evolution, with an overall level of 80% (the highest in the EU). Apart
from falling R&D intensity, Sweden is making good progress on all other
Europe 2020 targets. Greenhouse gas emissions have decreased considerably while
the share of renewable energy in final energy consumption has grown. In line
with this progress, the number of patents in environment-related technologies
per billion GDP has increased to the third highest level in the EU. However,
the number of patents in health-related technologies (another major societal
challenge) has fallen when measured as ratio of GDP.  Despite this, Sweden is among the top three EU Member States in both these technology areas.

Key indicators for Sweden

Country-specific recommendation in R&I adopted by
the Council in July 2012:

"Take further measures in the upcoming research
and innovation bill to continue improving the excellence in research and to
focus on improving the commercialisation of innovative products and the
development of new technologies"

United Kingdom

Delivering
a better environment for commercialising research

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in the United Kingdom. They relate
knowledge investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 1.77%             (EU: 2.03%; US: 2.75%) 2000-2011: -0.23%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:56.08                 (EU:47.86; US: 56.68) 2005-2010: +2.27%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.621              (EU: 0.612) || Knowledge-intensity of the economy 2010:59.24                (EU:48.75; US: 56.25) 2000-2010: +1.2%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Organic chemistry, Biotechnology, Pharmaceuticals, Medical technology, High-value manufacturing, Nanotechnology, Digital technologies               || HT + MT contribution to the trade balance 2011: 3.13%              (EU: 4.2%; US: 1.93%) 2000-2011: +4.83%  (EU: +4.99%; US:-10.75%)

The UK shows overall innovation performance above the
EU average. There are particular strengths in human resources, venture capital,
international and public-private co-publications, and entrepreneurship. The
number of collaborations by innovative SMEs with other entities is increasing
rapidly, while rates of improvement in human resources and international
co-publications are well above average. The presence of several world-class
universities, a significant proportion of young doctoral graduates, and
competitive strengths in sectors such as pharmaceuticals and digital
technologies have helped achieve this strong performance. However, there are
relative weaknesses in RDI investments by firms, the creation of intellectual
assets, and SMEs introducing innovations.

The UK economy has several distinctive characteristics
that represent actual or potential sources of competitive advantage in the
innovation sphere: a world-leading science base and information infrastructure;
a prominent financial sector (although this could be better incentivised to
support the creation and growth of firms); a rich supply of high-level skills
plus a proven attractiveness to globally mobile talents; strong performance by
business in creating intangible assets; and a relatively large role of the
service sector for industry and export performance. These characteristics,
highlighted by the UK Government in its new strategy for innovation published
at the end of 2011, underpin the four priority areas identified for policy
development: strengthening the sharing and dissemination of knowledge within
the innovation system; fostering the development and use of a more coherent
innovation infrastructure; driving business innovation in all sectors of the
economy — high-tech, medium-tech and low-tech, and in the services sector; and
transforming the public sector into a major driver of innovation.

Apart from the recent abolition of regional
development agencies, which represents a significant change in the innovation
policy delivery infrastructure, the UK continues to benefit from a key strength
of its innovation policy governance system: a long-term, strategic view of
innovation policy informed by an extensive process of review and evaluation and
benefiting from a relative absence of dramatic shifts in priorities,
instruments or structures.

Investing in knowledge

The higher education sector was responsible in 2010
for €8.19 billion of R&D activities, representing 27.2% of total R&D
performed. This share increased from 20.6% in 2000 at an average annual growth
rate of 3.2%. Business enterprise finances 45% of R&D and performs around
61% of R&D. R&D expenditure by business enterprise amounted to €18.3
billion in 2010, close to the level of 2003. Government finances around 32% of
R&D. An important characteristic of the UK research system is the
significant R&D investment financed from abroad — some 17% (8% EU average) —
and from the non-profit sector — about 5%. In 2010, the UK's gross domestic expenditure on R&D was some €33 billion and had decreased by 0.8%
in real terms, from 2009. UK institutions also benefitted from € 3.9 billion
from FP7 (14.9% of the total, which is the second-highest share among Member
States). The success rate of UK applicants in FP7 is 23.62%, well above the
average EU rate of 21.5%. For 2007-2013, the UK has been allocated around €10.6
billion in Cohesion Policy funding. The UK plans to invest €4.5 billion of this
in RDI.

R&D intensity (2011) was 1.77% of GDP,
down from 1.86% and lower than the EU average of 2%. The trend since 2000 shows
an initial fall, a mild recovery from 2005 (peaking in 2009), and a recent
decline. Public spending accounted for about one-third of the total. Albeit
with ups and downs, growth has been negative overall for the past decade (averaging
out at -0.3% per year); Business R&D intensity has fell from 1.17% in 2001 to
1.08% in 2010. As part of the government's 2010 fiscal consolidation strategy,
the budget for science was frozen in cash terms at just over £4.6 billion (€5.4 billion) for the next
four years. This amounts to a cut of some 10% in real terms over the period.
The capital expenditure budget for science was not protected and is expected to
be cut by some 44% over the same period. In spite of this negative trend, the UK has not set a national R&D intensity target corresponding to the request of the
European Council regarding Europe 2020 headline targets. The current Government
has stated that it does not believe that Lisbon targets have proved effective
in the past. However, it indicated that the level of R&D investment will be
monitored on an annual basis, although data will be available with an 18-month
time-lag. In the last decade, R&D intensity has averaged around 1.8%.  Reinforced
fiscal incentives, the new "patent box" and an ambitious public
procurement policy may yet succeed in progressively reversing the negative
trend in business R&D.

An effective
research and innovation system building on the European Research Area

The graph below illustrates the strengths and
weaknesses of the UK R&I system. Clockwise, it gives information on human
resources, scientific production, technology valorisation and innovation.
Average annual growth rates from 2000 to the latest available year are given in
brackets.

As a whole, the UK R&I system performs
above the EU average, with strengths in the quality of research, but weaknesses
in the introduction of innovations to the market. The proportion of human
resources in science and technology as a share of the UK labour-force is above the EU average, and has risen since 2006. High numbers of highly
qualified UK-educated researchers are resident in other OECD countries, associated
with the circulation of high-level human resources. On research
infrastructures, the UK recognises that investment in world-class
infrastructure is a prerequisite for world-class research: it hosts a large
number of national and international facilities and is involved in many
facilities in Europe and the rest of the world. Regarding universities, greater
emphasis has been placed recently on stimulating their engagement with
businesses and local communities, with a Higher Education Investment Fund as
the main policy stimulus. Knowledge transfer from the research base to business
is a UK policy priority, with several initiatives providing funding to
stimulate collaborative research and inter-sectorial mobility or supporting the
creation of university and public-sector spin-outs.

Sectorial support is strongly focused on advanced
manufacturing, covering vocational skills education, apprenticeships,
high-value manufacturing technology innovation accelerators
("Catapults"), incentive prizes, fellowships and advisory services.
Life sciences also attract particular support via a Biomedical Catalyst Fund.
Overall, public-private partnerships are becoming more significant,
particularly in the mobilisation of risk and venture financing, growth capital
and other forms of support. Many support measures engage industry in co-funding
initiatives, especially in programmes addressing major socio-economic
challenges ("research & technology clubs") and cross-cutting
technology sectors. 58% of businesses were innovation-active between 2006 and
2008 (UK Innovation Survey, 2009).

UK's scientific and technological strengths

The maps below illustrate six key science and
technology areas where the UK has real strengths in a European context. These maps
are based on the numbers of scientific publications and patents produced by
authors and inventors based in the regions. Caution should be exercised,
however, as not all industries either find patents the most useful means of
protecting intellectual property or are accustomed to publicising research
results in the scientific press.

Strengths in science and technology at European level

Scientific production                                          Automobiles 
                             Technological production

Scientific
production                                         Biotechnology                               Technological
production

Scientific production                                                  Energy  
                                   Technological production

Source: DG Research and Innovation – Economic Analysis
unit

Data: Science Metrix using Scopus (Elsevier), 2010;
European Patent Office, patent applications, 2001-2010

Scientific
production                                      Environment                                     Technological
production

Scientific
production           Information and Communication Technologies         Technological
production

Scientific production                        
Nanoscience and Nanotechnologies               Technology production

The UK performs well in most areas of technology production.
Apart from the sectors highlighted in the maps above, current patent activity
suggests that the UK is also relatively strong in the areas of organic
chemistry, pharmaceuticals and medical technology. It has a world-class
reputation in aerospace and nanotechnology research, and particularly
significant R&D capabilities in renewables, especially offshore windpower
and marine energy. However, compared to its competitors, UK R&D is
concentrated in a relatively small number of sectors and is carried out by
relatively few businesses. Greater business investment in R&D would be
helpful across all sectors of the UK economy.

In terms of scientific production, the UK research-base is the most productive in the G8, generating more papers and citations per unit of
investment than any other large country (International Comparative
Performance of the UK Research Base, Elsevier, 2011).

Policies and reforms for research and innovation

The UK Government stated its commitment to
prioritising, to a certain extent, spending on science and innovation while
pursuing fiscal consolidation. It reiterated its continuing support for RDI in
the document "The Innovation and Research Strategy for Growth"
published in December 2011, which states that RDI policy, overall, is focused
on increasing the UK's ability to innovate and commercialise new technologies
as a means for driving economic growth and creating jobs. The aim is to
encourage greater levels of innovation in all sectors of the economy, supported
by a better-integrated and more cohesive innovation system. The Strategy made a
number of specific announcements of additional investments planned in RDI,
including additional capital investments in research infrastructure, the
creation of a Graphene Global Research & Technology Hub, a large-scale
demonstrator in the area of "future cities", and investment to
support technology-based SMEs.

RDI policies are managed at national level by the Department
for Business, Innovation and Skills, which sponsors the seven UK Research Councils, the Higher Education
Funding Council for England (HEFCE), and the Technology Strategy Board (TSB).
The TSB is responsible for funding innovation and technology development within
business and acts as the national innovation agency for the UK. The devolved administrations of Northern Ireland, Scotland and Wales are responsible for certain elements of funding, specifically for higher education
research and for enterprise agencies.

The Government has decided that all programmes for and
funding linked to R&I should be delivered by national organisations. Consequently, regional
development agencies, which had previously played a role in innovation funding,
were dissolved in mid-2012. New "Local Enterprise Partnerships" are being
introduced at sub-national level, though without dedicated budgets for research
and innovation, and with no a role in delivering innovation support programmes.

Funding for research in the UK is provided in two
ways: competitive, project-based funding delivered through the Research Councils,
for which researchers in UK universities or public sector research can apply,
with each Research Council allocating resources within its field between
institutes, facilities, research studentships and projects; and via HEFCE in
England and its counterparts in Northern Ireland, Scotland and Wales, covering research,
knowledge transfer and infrastructure.

The TSB is the UK’s prime channel for
supporting business-led technology innovation. It is responsible for a range of
innovation programmes, including knowledge transfer partnerships, which embed
new graduates in, mostly, SMEs; knowledge transfer networks, to help industry
access knowledge and information; collaborative R&D, which supports the
business and research communities working together on projects; funding for
proof of concept, market validation studies and the development of prototypes
(the "Smart" initiative); and the new network of "Catapult"
innovation accelerators.

Tax credits are the biggest single funding
mechanism provided by the UK Government for incentivising investment in
business R&D. The SME scheme gives companies a deduction from corporate tax
of 125% of qualifying expenditure and the possibility of a payable credit. The
large-company scheme offers a deduction of 30%.

The Government has also put considerable
emphasis on using public procurement to stimulate innovation capacity: the
Small Business Research Initiative encourages innovative firms to tackle RDI
challenges facing government departments, while the Forward Commitment Procurement
programme helps public-sector organisations to develop new products and
services to meet demand.

A "Patent Box" scheme, to be
launched in 2013, will apply a reduced rate of tax to profits from patents and
some other types of intellectual property. The hypothesis is that this will
encourage firms to retain existing patents, develop new, innovative
technologies and patent them, and to locate jobs and activities associated with
patentable activities in the UK.

Economic impact of innovation

The index below is a summary index of the
economic impact of innovation composed of five of the Innovation Union
Scoreboard's indicators[4].

The rather good performance of the UK on this index as well as its score on each of its components reflect the specificities
of its economic structure, which an overall orientation towards the service
economy and a specifically strong specialisation in financial intermediation, a
knowledge-intensive sector. The share of the UK's employment in
knowledge-intensive activities (17.6 %) is the third highest of all EU Member
States, while the share of knowledge-intensive services in services export is
the fourth highest.

High-growth firms play a central role in
the economic impact of innovation in the UK. Research shows that the 6% of UK businesses with the highest growth-rates generated half the new jobs created by existing
businesses between 2002 and 2008 (The vital 6 per cent, NESTA, 2009).
Although young firms are more likely to be high-growth, the majority are at
least five years old. Furthermore, high-growth firms are found across the UK and across sectors, and are almost equally present in the high-tech and low-tech
sectors. Innovation drives firm growth, with innovative companies growing twice
as fast (in both employment and sales) in the period studied compared to firms
that failed to innovate. In addition, high-growth firms generate spillovers in
other regions. Although the analysis covers the period before the current
recessionary environment developed, the limited evidence available suggests
that high-growth businesses are resilient to downturns, continuing to grow
despite worsening economic conditions.

Although the sectoral dynamics of the UK
economy will undoubtedly change as the financial and economic crisis continues
to unfold, the contribution that high-growth firms make to that economy in both
times of growth and times of contraction has been acknowledged by the
Government as a valid basis for policy-making. In that light, the Government is
committed to providing support via tax incentives, as described above, and to
enabling such businesses to access more diverse sources of finance, including
debt and equity. Regarding access to finance, the Government has increased the
amount committed to an existing enterprise capital funds programme, backed
business angels with a co-investment fund, reinforced an investor tax-relief
scheme, spurred banks to set up a business growth fund targeting firms with
high-growth trajectories, and encouraged investment into new, early-stage companies
through an income tax relief and capital gains tax-exemption scheme.
Furthermore, research has consistently shown a link in the UK between the use of design and improved business performance across a range of measures,
including turnover, profit and market share. The Government continues to
support a programme, Design on Demand, to build greater design capability and
understanding among SMEs.

Upgrading the manufacturing sector through research
and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
shows the changing weight of each industry sector in value-added over the
period 1995-2007. The general trend of moving to the left-hand side reflects
the decreasing share of manufacturing in the overall economy. The sectors above
the horizontal axis are those whose research intensity has increased over time.
The size of a bubble represents the share of a sector (in value-added) in manufacturing
(all sectors shown). Red sectors are those that are already high-tech or
medium-to-high-tech.

Manufacturing is the third largest sector of the UK economy in terms of share of GDP, after business services and the wholesale and retail
sectors. In common with other leading manufacturing countries, the UK has increasingly specialised in higher-technology manufacturing industries such as
medical or chemical products and precision machinery and equipment.

Furthermore, there has been a shift in employment in
manufacturing away from production and towards support services, logistics and
distribution, sales and marketing, and R&D activities. Current patent
activity suggests that the UK is presently relatively strong in the areas of organic chemistry, biotechnology,
pharmaceuticals and medical technology, while relatively weak in the areas of
electronics, optics, nanotechnology and information technology. In addition,
the proportion of firms that are exporting is increasing in many manufacturing
industries.

The graph demonstrates that a significant proportion
of medium-tech and high-tech sectors have increased their research intensity,
but not their share of value-added. However, the research intensity of some
sectors has stagnated, or in several cases fallen, which could endanger their
long-term competitiveness.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of manufacturing are determinants of a
country's competitiveness in global export markets. A higher contribution of
high-tech (HT) and medium-tech (MT) industries to the trade balance indicates
specialisation and competitiveness in more sophisticated products and services.

Overall, the UK's trade balance in HT and MT firms is
negative, with an increasing gap over the last decade. The total trade balance
demonstrates an even larger gap, in particular in the period 1997-2005 (the
negative trend has been halted since 2005 and is improving since 2008).
Nevertheless, the graph above shows that several HT and MT industries have
improved their contribution to the UK's trade balance, since the erosion of the
trade balance in HT and MT has been slower than the deterioration of the
overall UK trade balance. While the medical and pharmaceutical products, road
vehicles, plastics, and machinery sectors maintain their competitiveness, the
telecommunications (especially) and office machines/data-processing industries
have markedly diminished their contributions to the trade balance, suggesting a
possible loss in relative competitiveness worldwide.

Alongside established enabling technologies such as
ICT, new general-purpose technologies are emerging in areas such as materials,
tools, transportation and power. These technologies include low-carbon and
environmental technology, advanced materials (such as composites),
nanomaterials and nanotechnology, photonics, and biotechnology. Official trade
data show that the value of UK manufactured exports to emerging markets has
risen in recent years. This can be attributed to a rise in the number of
exporting firms and an increase in the average value of their exports. Some of
the highest rates of growth in the value of exports have been in higher
technology products to emerging markets such as Brazil, Mexico and the Middle
East (Manufacturing in the UK: an economic analysis of the sector, Department
for Business, Innovation & Skills, 2010).

Over the past 12 years, the UK's total factor
productivity (see table below) has grown on average by 5% a year, though the
financial and economic crisis has knocked back values from a peak in 2007 to
2003's level. Looking at the Europe 2020 targets, the employment rate has
fallen slightly, while R&D intensity has recently declined from its 2009
high, averaging around 1.8% over the past decade.

Key indicators for the United Kingdom

[1] See Methodological note for the composition
of this index.

[2] There is a break in series between 2005 and the previous years for
both R&D intensity and business R&D intensity in Sweden.

[3] See Methodological note for the composition
of this index.

[4] See Methodological note for the composition of this
index.

Iceland

More
innovation for a more competitive economy

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Iceland. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2009: 3.11%            (EU: 2.03%; US: 2.75%) 2000-2011: +1.7%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 38.8                  (EU:47.86;    US: 56.68) 2005-2010: +9.22%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0. 485               (EU: 0.612) || Knowledge-intensity of the economy 2010: n.a                    (EU:48.75;    US: 56.25) 2000-2010: n.a.          (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Fishing industries, Industrial machinery, Geothermal energy               || HT + MT contribution to the trade balance 2011: -13.57%             (EU: 4.2%;    US: 1.93%) 2000-2011: n.a.           (EU: +4.99%; US:-10.75%)

Iceland
has one of the highest R&D intensities in Europe and has an excellent
science base. However, a main challenge for Iceland is to transform this into
economic competitiveness. Evidence shows that Iceland's competitiveness in
high-tech and medium-tech products and services is low, with a negative trade
balance for high-tech and medium-tech products since 2000. Research and
innovation are part of Iceland's recovery package for economic growth. Although
there has been less emphasis on major societal challenges following the
economic crisis, lifelong learning and the development of adequate skills for
the future are two areas that are receiving political attention. A
new strategy for R&I for 2010-2012 was presented by the Science and
Technology Policy Council (STPC) and a tax reduction scheme was created in 2009
for business R&D projects. Iceland is numbered among the high income
countries and has one of the highest levels of early stage entrepreneurial
activity.

Current research and innovation policy
priorities in Iceland match the structural challenges that the country is
facing. The current strategy of the STPC, entitled Building on Solid
Foundations. Science and Technology Policy for Iceland 2010-2012 highlights
the following priorities:

·
increased focus on
innovation and close industry support, on creative industries, and on user-driven
innovation;

·
more cooperation and
synergy among the various universities, research institutions and other actors
in the system;

·
evaluation and quality
control;

·
international
cooperation and participation in international programmes; and funding on the basis
of excellence and thus competition.

This strategy will also address two major
weaknesses of the R&I system: the first is the need for increased
thematic-oriented funding taking into consideration issues related to the size
of the country and critical mass; the second is weaknesses related to
governance with an increased emphasis on evaluation as outlined in the STPC
strategy for the period 2010-2012.

Investing in knowledge

Iceland had an R&D intensity of 3.11% in 2009, a relatively high level compared
to the EU average of 2.03% (2011). Iceland had already achieved an R&D
intensity of 2.95% in 2001. In January 2011, Iceland set an R&D intensity
target of 4%, to be reached by 2020, with the private sector
contributing 70% of the total and the public sector contributing
30%.

A significant share of total R&D
investment in Iceland comes from the public sector. In 2009, the public sector
accounted for 44.9% of total R&D investment. The business sector accounted
for 52.9%, which shows a decline from 2007 when the share was 54.6%.
Insufficient business enterprise expenditure on R&D is one of the key
weaknesses of the Icelandic research and innovation system.

In spite of the economic crisis, the
government budget for R&D increased by 6.6% between 2011 and 2012. It will
be a challenge to maintain this level of increase in public funding for
research and development. Mobilising private R&D funding in times of
economic crisis is another challenge: the level of private sector funding of
R&D in Iceland is considered to be low and has declined since 2007. The
government is planning an extra investment of 6,000 billion euros for research
and innovation for the period 2013-2015 in the context of the recovery plan.[1]

An effective research and innovation system
building on the European Research Area

The graph below illustrates the strengths and
weaknesses of Iceland's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The main pillar on which political and
economic relations between Iceland and the European Union rests, is the
European Economic Area (EEA) agreement signed in 1994 which gives Iceland the
right to participate in a range of EU programmes in areas such as research and
education. The Icelandic Centre for Research (RANNIS) coordinates and promotes Icelandic
participation in collaborative international projects in science and technology
inside the European Research area. In particular, Iceland places great emphasis
on integration in Nordic R&D co-operation programmes, including the Nordic
Research and Innovation Area.

The graph above illustrates that Iceland's strong investment in R&D has triggered high scientific production and very
good results in terms of participation in the EC Framework programmes. The
economy is very knowledge-intensive as illustrated both by the level of
employment in knowledge-intensive activities and the high number of business
researchers per thousand labour force. A challenge for Iceland is to increase the numbers of students participating in science, engineering and
doctoral studies. There is limited expertise in technology transfer in Iceland. However, recently, there has been an increase in expertise within the field of
technology transfer through successful research and development active
companies.

The Innovation Centre Iceland (ICI), a government agency, is responsible for delivering support services
and providing subsidies for innovation and entrepreneurship related activities.
It has the central role of
disseminating technology to SMEs and of valorising public investments.

Upgrading the manufacturing sector through
research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

In the last decade, Iceland's economy has been diversifying into manufacturing and service industries, in
particular into the fields of software production, biotechnology, and tourism,
but the country is still very dependent on the fishing industry (representing
12% of GDP). As a moderate innovator, Iceland has increasing BERD intensities
in most of its sectors, as shown on the above graph, with the high-tech and
medium-high-tech sectors also gaining in shares of value added.

Iceland has a unique status in terms of energy production: 80% of its
electricity needs come from renewable sources, both geothermal and hydropower.
This feature has attracted a large amount of foreign investment to the aluminium
sector (aluminium production consumes 75% of all electricity generated), and has
also attracted the interest of high-tech firms looking to establish data
centres using cheap green energy. Pharmaceutical and health industries are
considered strategic by the government (even if they only represent 1% of GDP) which
wants Iceland to take advantage of its existing knowledge capacity and world
level expertise in these domains as reflected by the high number of scientific
citations (mostly in molecular biology, genetics, clinical medicine and biology
and biochemistry). The Centres of Excellence programme, launched in 2009, aims
to stimulate collaboration between industry and academia and is also a means of
valorising public R&D investment. Creative industries are an emerging
sector, mainly involving SMEs, and are considered to have a very high growth
potential.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

Between 2000 and 2007, the total trade balance in Iceland deteriorated rapidly mainly due to increasing levels of imports not being covered
by a corresponding growth in exports. This trend has since changed, with a
substantial reduction in imports leading to a positive trade balance in 2009.
The trade balance deficit was also reflected in a negative trade balance for
all high-tech (HT) and medium-tech (MT) products. However, some products
performed better than others. The graph above shows the increase of the
contribution to the trade balance of several HT and MT products, such as road
vehicles, machinery specialised for particular industries, telecommunications
and sound recording, other transport equipment, office machines and automatic
data-processing machines, medical and pharmaceutical products, and iron and
steel. A comparison with the previous graph shows that several industry sectors
related to these products have upgraded their R&D intensities over the
period 1996-2009. However, few of these sectors have increased their value
added.

Total factor productivity is higher in 2012 than in
2000. The employment rate of the population aged 20-64 decreased slightly after
2007, but is still well above the EU average (80.6% against 68.6% in 2011). Iceland is also well positioned, compared to the EU average, regarding societal challenges,
with a smaller share of population at risk of poverty and a higher share of
population aged 30-34 having completed tertiary education. However, there is a
rising level of greenhouse gas emissions and a low and falling level of
environmental technologies.

Key
indicators for Iceland

Israel

The
challenge of attracting foreign funding for innovation

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Israel. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2010: 4.40%              (EU: 2.03%; US: 2.75%) 2000-2011: +0.31%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 77.13                (EU:47.86;    US: 56.68) 2005-2010: +2.68%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: n.a.                  (EU: 0.612) || Knowledge-intensity of the economy 2010: n.a                (EU:48.75;      US: 56.25) 2000-2010: n.a.      (EU: +0.93%;  US: +0.5%)

Competitiveness || Hot-spots in key technologies ICT, Chemicals, Food products and beverages               || HT + MT contribution to the trade balance 2011: 5.42%                (EU1: 4.2%;     US: 1.93%) 2000-20112: +8.62%   (EU1: +4.99%; US:-10.75%)

1The EU value is the weighted average of the
trade balance of the Member States.

2The annual growth rate is calculated for the period 2008 - 2010.

Israel
is a very knowledge-intensive country. It has a strong and dynamic business
sector and has achieved
excellence in scientific and technical education and research. This has led to
high levels of technological entrepreneurship and start-ups. The economy is
very knowledge-intensive with high-tech and medium-tech products contributing
significantly to the trade balance. The main strengths of Israel are its high research intensity, mainly due to a very high business expenditure on
R&D, and its patenting activity. The number of business researchers (head
count) per thousand labour force is more than four times the EU average (14.8
compared to 3.4, in 2009) and the country has been successful in attracting
foreign investment for research and innovation. Israel is ranked second (to the
United States) worldwide in terms of venture capital availability, thus
ensuring the right conditions for highly innovative small companies across all
sectors.

Nevertheless, in spite of this high
performance in the field of
research and innovation, Israel faces some structural challenges that have
created a certain stagnation over the last decade. Budgets for Israeli
universities have not increased in line with the growth of student numbers
resulting in a decline in scientific production and outward mobility of
students. Venture Capital (VC) has fallen due to the low returns on VC
investments. As a consequence, the total funds available for investment are at
a lower level than in previous years. Israeli fund management firms need to
raise new funds if they are to continue their important role in supporting
Israeli start-ups.

Recently there has been a reform of the
governance of the public R&I system, and a six-year plan to revive higher
education and university-based research was launched in 2011. The plan calls
for a 30% increase in budgets, a doubling of funding for competitive grants,
and a 9% increase in the number of researchers. The plan provides for the
creation of twenty new CORE centres of research, four of which are already
operational.

Investing in knowledge

Israel's R&D intensity was already higher than 4% in 2000 and continued
to increase until 2007, when it reached 4.84%. It then decreased to 4.40% in
2010 a value which is more than double the EU average. The business sector
accounts for around 80% of total R&D expenditure. Although Israel was less affected by the global
economic and financial crisis than other countries, business R&D intensity
decreased from 3.9% in 2007 to 3.51% in 2010.

Foreign owned firms contribute to
increasing the R&D intensity of a country through inward investment in
R&D. The level of inward investment in R&D is an indicator both of the
degree of internationalisation of business R&D and also of the
attractiveness of the country for foreign investors. In 2007 (the latest
available year), R&D expenditure of foreign affiliates accounted for 62% of
the total R&D expenditure of enterprises. The corresponding shares for Belgium, Austria and Sweden were 59.4%, 53.5% and 33.1%, respectively. In the case of Israel 80% of inward investment in R&D is invested in non-manufacturing sectors.[2]

An effective research and innovation system building
on the European Research Area

The graph below illustrates the strengths and
weaknesses of Israel's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The graph shows that Israel is well above the EU
average for the majority of the R&I indicators. Indeed, Israel’s
overall level of innovation performance places it among the group of European
“innovation leaders”. Only Sweden, Switzerland and Finland show higher levels
of innovation performance. PCT patent applications per billion GDP are three
times higher than the EU average, a remarkable difference (even if there has
been an average annual decrease of 1.43% over the period 2000-2010).

Although the supply of human resources for science and technology is
below the EU average for new science and technology graduates and new doctoral
graduates per thousand population aged 25-34, knowledge production as evidenced
by highly-cited scientific publications is at the same level as the EU average
indicating a good scientific base. This is confirmed by Israel's remarkable level of participation as an associated
country in the 7th Framework Programme: Israel has four institutions[3] in the top 50 participant HES
organisations in signed grant agreements for the period 2007-2010.

Upgrading the manufacturing sector through research
and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

GDP growth is expected to be lower in 2012 than in the
previous two years. Industry plays an important role in the Israeli economy and
is focused on high technology
products.  There are a growing number of start-up companies, in particular in
the communications, IT and defense sectors. The graph above shows the evolution
of value added and business R&D expenditure by manufacturing sectors for
the period 2000-2008. While most of the sectors increased their BERD intensities
(with the exceptions of other non-metallic mineral products, and electrical
machinery and apparatus) a smaller number of sectors reinforced their weights
in the economy, by increasing their shares of value-added, most notably in the
cases of chemicals and chemical products, basic metals, and food products,
beverages and tobacco. On the contrary, high-tech sectors such as machinery and
equipment, medical, precision and optical instruments, and radio, TV and
communication equipment show declining shares of value added over the same
period.

According to the EU Industrial R&D Investment
Scoreboard, Israel has been successful in maintaining its position in strategic
sectors. In the last five years, the most R&D-intensive Israeli firms have
increased their investments in R&D, even during the economic crisis, and
have retained their positions among the top R&D investors in sectors such
as Pharmaceuticals, Aerospace, Electronics, Semiconductors and Software and
General Industrial.

Competitiveness in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these
products.

Between 2000 and 2008 Israel succeeded in reducing its
overall trade balance deficit and in 2009 achieved a positive trade balance.
This positive outcome is explained by the growing importance of all high-tech
(HT) and medium-tech (MT) products, which since 2008 have registered a positive
trade balance. In fact, in 2000 the exports of HT plus MT products only covered
70% of the corresponding imports. However, by 2010 this state of affairs had
been reversed with exports of HT plus MT commodities now 30% higher than the
corresponding imports. As shown on the graph above, the highest growths at
sector level, for HT and MT products were in medical and pharmaceutical
products, electrical machinery, chemical materials and products, professional
scientific and controlling instruments, fertilizers, and office machines and
automatic data processing machines.

Israel
is investing strongly in environmental-related technologies as shown by a value
of 0.47 (compared to an EU average of 0.39) for patent applications to the EPO
per billion GDP in 2008 and an average annual growth rate of 13.7% over the
period 2000-2008. On the contrary, patent applications for health-related
technologies per billion GDP have decreased at an average annual rate of 1% but
in 2008 were still at a very high level of 2.61 compared to an EU average of
0.52. Both indicators are evidence of the dynamism of the business sector. The
employment rate increased in 2011 to 60.9% but was lower than the EU average of
68.6%.

Key
indicators for Israel

Norway

The
challenge of structural change for a more knowledge-intensive and sustainable
economy

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Norway. They relate knowledge investment
and input to performance or economic output throughout the innovation cycle.
They show thematic strengths in key technologies and also the high-tech and
medium-tech contribution to the trade balance. The table includes a new index
on excellence in science and technology which takes into consideration the
quality of scientific production as well as technological development. The
indicator on knowledge-intensity of the economy is an index on structural
change that focuses on the sectoral composition and specialisation of the
economy and shows the evolution of the weight of knowledge-intensive sectors
and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 1.70%                (EU: 2.03%; US: 2.75%) 2000-2011\*: +0.66%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 51.77                 (EU:47.86; US: 56.68) 2005-2010: +11.61%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.433             (EU: 0.612) || Knowledge-intensity of the economy 2010: 39.99                 (EU:48.75;     US: 56.25) 2000-2010: +2.22%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Energy, Environment, Food, agriculture and fisheries, Other transport technology               || HT + MT contribution to the trade balance 2011: -17.38%            (EU\*\*: 4.2%; US: 1.93%) 2000-2011\*\*\*: n.a.       (EU\*\*: +4.99%; US:-10.75%)

\*The growth rate for Norway refers to the period 2001-2011.

\*\*The EU value is the weighted average of the
trade balance of the Member States.

\*\*\*For the period 2000-2011 there are no data available to
provide the annual growth rate. The negative values for this period indicates a
structural deficit for the industry for the country.

Norway has the second highest GDP per inhabitant in Europe, with the high GDP partly explaining the low R&D intensity level. The Norwegian
economy is mainly based on traditional industrial activities related to the
extraction of raw materials and natural resources (petroleum and natural gas,
fish) and to their industrial processing into bulk products and semi-finished
goods. These industries are less R&D intensive than industries such as
pharmaceuticals and ICT, which partly explains why Norway's R&D intensity
level was only 1.70% (in 2011), a  lower value than the EU average of 2.03% and
also lower than the R&D intensity of the United States (2.75% in 2011). Norway's R&D intensity has fluctuated over the period 2001-2011 reaching a high of 1.78%
in 2009 and a low of 1.48% in 2006 and with an average annual growth rate of 0.7%
(a little lower then EU growth rate). Norway has a higher level of S&T
excellence and a higher growth rate for S&T excellence than the EU average.

Norway is below the EU average in terms of the knowledge-intensity of its
economy. Norway performs moderately on all indicators related to structural
change (not visible in the table above). As part of the structural change,
internationalization has become an overall priority of the government's R&I
policy in the last years and the new internationalization strategy states that
all activities of the RCN[4]
must include clearly defined objectives and plans for international
co-operation. Moreover, in terms of funding, there is a shift from instruments
dedicated to internationalization towards including the internationalization
dimension in all activities.

The low-tech nature of the Norway's economy is reflected also in the negative contribution to the trade balance of
high-tech (HT) and medium-tech (MT) products, with imports much higher than
exports for the last 11 years. There are no signs that this characteristic of
the Norwegian economy will change in the coming years.

Investing in knowledge

Norway's R&D intensity of 1.70% in 2011 is below the EU average. This is
due to the particular nature of Norway's economy which is characterised by
traditional industrial activities related to the extraction and processing of
natural resources. In recent years, Norwegian policy makers have increasingly
recognized that the low level of industrial R&D should be seen against the
backdrop of the country's industrial structure. Although Norway's R&D intensity has fluctuated over the last decade, the average annual growth
rate of its R&D intensity is close to that of the EU as a whole. If Norway's R&D intensity continues to grow at the same average annual growth rate, the R&D
intensity value attained by Norway in 2020 will still be below the EU value
and, in fact will be lower than 2%.

Over the last decade, total expenditure on
R&D (GERD) in Norway has increased in real terms at an average annual
growth rate of 2.1% while the corresponding growth rate for business
expenditure on R&D (BERD) was 0.4%. The business enterprise sector accounts
for 51% of Norwegian R&D and a large share of it is performed by SMEs. Norway's business R&D intensity of 0.86% in 2011 is much lower than the EU value of 1.26%
and is far below the level of the other Nordic countries all of which have
values higher than 2%. It is important to mention that the value excludes
indirect support for R&D such as R&D tax credits which is the largest
R&D support scheme for business in Norway. The country is therefore an
outlier with regard to innovation, with a low-tech but very knowledge-intensive
industry sector based on raw materials. This is reflected in the increasing share
of SMEs introducing product or process innovations (1.1% growth over the period
2004-2010). On the other hand, the share of knowledge-intensive services
exports in total service exports has grown at an average annual rate of 1.6%
over the period 2004-2009.

The EU Framework Programmes are the most
important international research programmes in which Norway participates.
Norwegian researchers have participated in EU FPs since 1987. In FP7, Norway's participant success rate was 24.64%. The successful participants received a total
EC financial contribution of € 563 million.

An effective research and innovation system building
on the European Research Area

The graph below illustrates the strengths
and weaknesses of the Norwegian innovation system. Reading clockwise, it
provides information on human resources, scientific production, technology
valorisation and innovation. Average annual growth rates from 2000 to the
latest available year are given in brackets.

The excellent macroeconomic performance of
the Norwegian economy does not yet translate into a high performance level for
R&D and innovation. Overall, the Norwegian R&I system's relative
strengths are in human resources, public-private cooperation, an attractive
research system, financing and entrepreneurship (the latter two dimensions are
not shown on the above graph). In the last decade, venture capital, an
important financial tool for the business sector, has increased to 0.21% of GDP
in 2011, with an average annual growth rate of 2.4%. In particular, the
business sector is supported through a number of specific programs for seed venture
capital whereby state venture capital is provided as a loan with a risk relief
element. Areas of relative weakness are private sector investment, patenting
levels and business innovations. The main structural challenges faced by the
Norwegian innovation system are a relatively low level of science and
engineering graduates, the need to increase industrial R&D and the need to
increase innovation in firms. The main program for R&D grants to business
is an open research arena for quality projects without thematic restrictions. There
has been a shift from indirect to direct support for business R&D and
innovation.

The Norwegian innovation system is adapted
to knowledge-intensive industry supplemented by a strong service sector. Norway's innovation system is dominated by knowledge-intensive enterprises that rely on
collaborative learning. Two other types of enterprise complete the system:
enterprises operating with little knowledge accumulation, and small
R&D-intensive enterprises that rely on collaborative learning and operate
within global innovative networks. Norway's share of employment in knowledge-intensive
activities is higher than the EU average but lower than its reference group of
countries as shown on the above graph.

Norway's scientific strengths

The maps below illustrate four key science areas where
Norway has real strengths in a European context. The maps are based on the
number of scientific publications produced by authors and inventors based in
the regions.

Energy (Scientific production) || Environment (Scientific production)

||

Food, Agriculture and Fisheries (Scientific production) || Other Transport Technologies (Scientific production)

||

Norway's
scientific production shows good results in the fields of energy, environment,
food, agriculture and fisheries, and other transport technology[5]. Scientific activity
is closely related to Norway’s R&D strategies and takes into account the
need to meet global challenges. It focuses particularly on environment, climate
change, oceans, food safety and energy research.

Economic impact of innovation

The index below is a summary index of the economic
impact of innovation composed of five of the Innovation Union Scoreboard's
indicators[6].

The situation of Norway's on this index as
well as its score on each of its components reflects the specificities of its
economic and trade structure. Despites scores higher than EU average on the
employment in knowledge-intensive sectors and in the share of
knowledge-intensive services export in total services export, the overall
result is strongly influenced by the negative contribution of high-tech and
medium-tech exports to the trade balance.

Although innovation performance refers to
more than technology-driven innovation, it is to be noted that Norway has a number of policy measures the objective of which is to support R&D in
companies. Overall public support for industrial R&D is relatively high in Norway, and the mix of instruments has remained largely stable for at least a decade.

The most significant innovation policy
developments in Norway since mid- 2009 concern the follow up and implementation
of the priorities outlined in the innovation White Paper. The objectives of
innovation policy were to foster sustainable value creation, secure future job opportunities
and protect welfare in order to respond to increasingly globalised challenges. The
competitiveness of trade and industry is dependent on increased research
activity in selected service, technology and industrial areas - industrial sectors
that could replace the loss in value-creation that will occur when oil and gas
production declines. Human resources are an important asset for innovation,
value creation and growth and are essential for future growth in new
knowledge-intensive sectors.

In order to further improve the quality and
capacity of Norway's R&I system, research activity must promote the
development of a more knowledge-intensive trade and industrial sector that
invests in its own research and development, boosts expertise within the
companies and enhances the ability of companies to make use of research
conducted by others.

Environmental technologies or
eco-innovations are an emerging and important field in Norwegian innovation
policy. In
June 2011, the government published a strategy for environmental technologies
that describes the measures that the government intends to implement in order
to create favourable conditions for the development of internationally
competitive industries and markets for environmental technologies.

Upgrading the manufacturing sector through research
and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

Norway has a particular industrial structure and as can be seen on the above
graph there has been no   significant change in R&D investments in the
manufacturing sector over the period 1995-2008. Very few sectors have increased
their R&D intensities and manufacturing in general has less weight in the
overall economy. Most of the sectors are grouped near the axes intersection
point, meaning that small variations in levels of R&D intensity are usually
accompanied by small or no variations in shares of value added. There are some
exceptions. In sectors such as basic metals, motor vehicles and pulp, paper and
paper products, business R&D intensity has increased significantly although
the share of value added is decreasing. Recycling is the only sector where a
small increase in R&D intensity has been accompanied a significant increase
in its share of value added, however, this sector is one of the smallest in the
economy.

Over recent years, R&D policies and
innovation strategies have been developed to focus on specific and
representative areas of Norway's economy. These include the strategies for oil
and gas, energy, climate, green growth, biotechnologies, nano-technologies and
the maritime sector. At national level, there has been a broad political
consensus on the need to foster more R&D intensive, knowledge-intensive
manufacturing industries and services, exploiting both renewable and
non-renewable energy technologies[7].
Therefore, green growth and environmental issues continue to develop as key
areas for Science, Technology and Industry (STI), alongside prioritised
technology fields such as bio- and nano-technology and ICT.

Competitiveness
in global demand and markets

Investment in knowledge,
technology-intensive clusters, innovation and the upgrading of the
manufacturing sector are determinants of a country's competitiveness in global
export markets. A positive contribution of high-tech and medium-tech products
to the trade balance is an indication of specialisation and competitiveness in
these products.

Over the period 2000-2011, Norway's trade balance had
an upward trend, with an average annual growth of around 10.4%. For each year
over the same period imports of high-tech (HT) and medium-tech (MT) products
exceeded exports. The share of HT and MT imports in total HT and MT trade was
lower in 2011 (70%) than in 2000 (72%). Over the period 2000-2011 some HT and
MT products have increased their contributions to the trade balance (left side
of the graph). The most significant increases were in other transport equipment[8]
and office machines. The product with the biggest decrease in its contribution
to the trade balance over 2000-2011 is road vehicles.

Norway's total factor productivity grew between 2000 and 2005 but then
declined to reach a level in 2012 that is lower than the level in 2000. This
type of evolution is not unusual due to the fact that the petroleum sector, a
large part of Norway's economy, depends on physical oil production which is
directly related to the characteristics of the actual reservoirs. As a result,
production at a new well will rise for several years and then fall for even
longer periods affecting the total factor productivity of the country. Norway's employment rate decreased slightly from 80.3% in 2000 to 79.6% in 2011 but remains
much higher than the EU average of 68.6%. The share of population at risk of
poverty or social exclusion has decreased by 1.1 percentage points between 2004
and 2011 to reach 14.6%.

Norway is the European country with the highest share of renewable energy in
gross final energy consumption. Its share of 61.1% in 2010 is five times higher
than the EU average. Greenhouse gas emissions in Norway have decreased over the
last decade but are still significantly higher than the EU average. It is also
noteworthy that in 2008 patents in environment-related technologies were at a
considerably lower level than the EU average with only a slight increase since
2000. The level of patent applications in health-related technologies has
decreased significantly between 2000 and 2008.

Key
indicators for Norway

Switzerland

The
challenge of structural change maintaining a leading competitive economy

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Switzerland. They relate
knowledge investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2008: 2.87%            (EU: 2.03%;  US: 2.75%) 2000-20111: +1.9%  (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010: 97.59                (EU:47.86; US: 56.68) 2005-2010: +3.42%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.837                 (EU: 0.612) || Knowledge-intensity of the economy 2010: 70.05                 (EU:48.75; US: 56.25) 2000-2010: +2.11%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Energy, Environment, ICT, Nanosciences and Nanotechnologies               || HT + MT contribution to the trade balance 2011: 8.44%              (EU2: 4.2%; US: 1.93%) 2000-2011: +2.69%   (EU2: +4.99%; US:-10.75%)

1For Switzerland the growth rate is calculated for the period 2000-2008.

2The EU value is the weighted average of the
trade balance of the Member States.

Switzerland has a level of economic development that is amongst the highest in Europe. Swiss research policy is characterised by continuity and stability and Switzerland performs better in R&D than the EU (average) and the United States. Switzerland had
an R&D intensity of 2.87% in 2008 (the latest available year) with an
R&D intensity average annual growth rate of 1.9% over the period 2000-2008
both of which are higher than the corresponding values for EU (2.03% and 0.8%)
and United States (2.75% and 0.2%).

The high level of R&D performance is accompanied
by a high level of S&T excellence with Switzerland performing at a level
that is almost double that of the EU. Switzerland is one of the most advanced
countries in terms of the knowledge-intensity of its economy, and has made even
further progress over the decade 2000-2010. The country performs well in all indicators
that indicate the size of the knowledge economy. There is also a high
performance on the cumulative inward and outward FDI stock as a share of GDP,
the relative specialization in the exports of medium-high-tech and high-tech
products (Revealed Competitive Advantage – RCA) and the share of value added in
knowledge-intensive activities within the total value added of the country.

The contribution of high-tech (HT) and medium-tech (MT)
products to the country's trade balance is much higher than the corresponding
contributions in the EU as a whole and the United States, and is based on a
very good performance of the knowledge-intensive sectors of the economy..

 
Investing in knowledge

The Swiss research system is of very good
quality and is based on a clear-cut separation between the public sector, which
is centred on very research-intensive universities, and the private sector,
which is centred on the large research units of multinational companies. The
main priority of Swiss national research and innovation (R&I) policies is
to provide excellent framework conditions by fostering basic as well as applied
research and technology transfer.

Switzerland has one of the highest R&D intensities both in Europe and in the world with a value of 2.87% in 2008. Over the last decade, R&D
intensity grew at an average annual rate of 1.9%, well above the EU rate of
0.8% and if the same trend is continued, will reach 3.60% in 2020. Almost 74%
of R&D is performed by the private sector. This is due to the specific
structure of the Swiss economy which is dominated by large multinational
companies with their own global strategies. Swiss research policy focuses
mainly on the quality of the public research sector and on the training of
skilled researchers. An important trend in public R&D expenditures is the
increasing R&D expenditure for universities. As a result, over the period
2000-2010, total higher education expenditure on R&D  increased in real
terms at an average annual rate of 5%. In 2008, higher education expenditure on
R&D as a percentage of total expenditure on R&D in Switzerland was approximately on the same level as the EU average (CH: 24.2%; EU: 23.0%).

The share of new doctoral graduates per
thousand population aged 25-34 has increased from 2.7% in 2002 to 3.6% in 2009,
a value which is more than double the EU average. Switzerland's competitive
R&I system is maintained by intensive and successful scientific activity as
shown by a high share of scientific publications within the 10% most cited
scientific publication worldwide (15.8% in 2008), a high number of
international scientific co-publications per million population (2505 in 2011),
a high level of PCT patent applications per billion GDP (7.8 in 2009) and a high
level of licensing and patent revenues from abroad as % of GDP (2.95% in 2011).

Switzerland has a good tradition of participating in
international programs at European level. Switzerland's participant success
rate in the EC Seventh Framework Programme was 25%. The successful participants
received a total EC financial contribution of € 1.3 billion.

An effective research and innovation system building
on the European Research Area

The graph below illustrates the strengths and
weaknesses of Switzerland's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The Swiss research and innovation system is
characterized by a very strong scientific and technological production that
outperforms the EU on almost all the indicators analysed in the graph above,
making Switzerland an innovation leader.

An important weakness in the Swiss R&I
system is the relatively low level and the significant decrease in the number
of researchers employed by business enterprises. A lack of researchers could
become a problem in the future for Switzerland. Although the number of graduates
in the fields of science and engineering per thousand population aged 25-34 has
increased at an average annual growth rate of 2.9% over the period 2002-2010,
there is still an insufficient supply of graduates in these fields. Another
challenge facing the Swiss R&I system (not visible in the graph above) is
the need to improve education and training curricula in relation to
entrepreneurial education and the teaching of intercultural and communications
skills.

Although business expenditure on R&D
(BERD) as a percentage of total expenditure on R&D is very high in
Switzerland (73.5%), the share of business expenditure financed from abroad is
lower than both the EU average and Switzerland's reference group of countries. Switzerland outperforms both the EU and its reference group of countries in terms of
production of scientific publications, public-private scientific
co-publications, share of foreign doctoral students in all doctoral students
and share of employment in knowledge-intensive activities in total employment
aged 15-64.

Switzerland's scientific strengths

The maps below illustrate four key science areas
where Switzerland has real strengths in a European context. The maps are based
on the number of scientific publications produced by authors and inventors
based in the regions.

Energy (Scientific production) || Environment (Scientific production)

||

Information and Communication Technologies (Scientific production) || Nanosciences and Nanotechnologies (Scientific production)

||

Switzerland's scientific production shows good results in the
fields of energy, environment, information and communication technology (ICT),
and nano-sciences and nanotechnologies. In Switzerland, almost all public
sector research is carried out in higher education institutions and research
policy is focused mainly on basic and applied research in universities. Switzerland has taken an important step to improve and strengthen its universities and to
allow them to position themselves in the European and international context by
adopting a new higher education act that will provide a common regulatory framework
for the whole system.

Upgrading the manufacturing sector through
research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

R&I excellence plays an important part
in Swiss manufacturing. Switzerland displays a strong specialization in a
number of technologically-intensive sectors, including the chemicals,
pharmaceuticals, medical, precision and optical instruments industries.
High-tech sectors make an important and increasing contribution to the Swiss
economy in terms of value added.

Business R&D intensities and shares of
value added show average annual increases over the period 2000-2008 for
medical, precision and optical instruments, chemicals and chemical products, and
Radio, TV and communication equipment. The challenge for Switzerland is to achieve the same competitive advantages in the new emerging sectors in
which the country has scientific and technological strengths, in particular
energy, environment and nanotechnologies. In this regard, partnerships between
higher education institutes, research centres and business are actively
promoted. Policies and instruments such as knowledge transfer platforms and
voucher systems are in place to encourage cooperation and knowledge sharing and
to create a more favourable business environment for SMEs.

Competitiveness in global demand and markets

Investment in knowledge,
technology-intensive clusters, innovation and the upgrading of the
manufacturing sector are determinants of a country's competitiveness in global
export markets. A positive contribution of high-tech and medium-tech products
to the trade balance is an indication of specialisation and competitiveness in
these products.

Over the period 2000-2011 the characteristics
of the Swiss trade balance have not changed significantly. The evolution of the
shares of imports and exports of HT and MT products in total imports and
exports shows little variation - the HT and MT share of total imports decreased
by 2.28% while the HT and MT share of total exports increased by 2.06%. Overall
the contribution of HT and MT goods to the trade balance has increased over the
period 2000-2011. HT and MT goods represent 56% of total trade. In terms of
contribution to the trade balance, the graph above shows that over the period
2000-2011, medical and pharmaceutical products had the highest increase whereas
metalworking machinery, and machinery specialized for particular industries had
the biggest decreases.

In Switzerland total factor productivity
has increased by 7% between 2000 and 2012. Switzerland has one of the highest
employment rates in the world at 81.8% in 2011, much higher than the EU average
of 68.6%. The high rate of employment is associated with an increasing share of
population aged 30-34 with tertiary education (44% in 2011) and a decreasing
share of the population at risk of poverty or social exclusion (17.3% in 2011).

Switzerland has one of the highest business R&D intensities
in Europe, 2.11% in 2008 (the latest available year). This value has been
increasing at an average annual rate 1.8% over the period 2000-2008. However,
the high level of private sector R&D and the relatively low level of public
sector expenditure on R&D could be considered as a challenge for the Swiss
R&I system. The bottom-up approach to knowledge demand is characterized by
a strong and an extensive involvement of social and economic stakeholders in
the design of research policy where decision on research direction is left to
researchers and private companies.

Key
indicators for Switzerland

Turkey

The
challenge of structural change for a more competitive economy

Summary: Performance in research, innovation and
competitiveness

The indicators in the table below present a synthesis
of research, innovation and competitiveness in Turkey. They relate knowledge
investment and input to performance or economic output throughout the
innovation cycle. They show thematic strengths in key technologies and also the
high-tech and medium-tech contribution to the trade balance. The table includes
a new index on excellence in science and technology which takes into
consideration the quality of scientific production as well as technological
development. The indicator on knowledge-intensity of the economy is an index on
structural change that focuses on the sectoral composition and specialisation
of the economy and shows the evolution of the weight of knowledge-intensive
sectors and products and services.

|| Investment and Input || Performance/economic output

Research || R&D intensity 2011: 0.84%              (EU: 2.03%; US: 2.75%) 2000-2011: +5.82%   (EU: +0.8%; US: +0.2%) || Excellence in S&T 2010:13.79                 (EU:47.86;  US: 56.68) 2005-2010: +2.52%   (EU: +3.09%;US: +0.53)

Innovation and Structural change || Index of economic impact of innovation 2010-2011: 0.315                   (EU: 0.612) || Knowledge-intensity of the economy 2010:18.6                    (EU:48.75;     US: 56.25) 2000-2010: +0.92%    (EU: +0.93%; US: +0.5%)

Competitiveness || Hot-spots in key technologies Energy, Water, Food, Space               || HT + MT contribution to the trade balance 2011: -2.22%              (EU1: 4.2%;     US: 1.93%) 2000-20112: n.a.         (EU1: +4.99%; US:-10.75%)

1The EU value is the weighted average of the trade balance of the Member
States.

2For the period 2000-2010 there are no data available to provide the
annual growth rate. The negative values for this period indicates a structural
deficit for the industry for the country.

Since the early 2000s, Turkey has devoted increasing
importance to investment in science, technology and innovation as shown by the
continuous increase in Government funding for R&D and innovation
activities. The growing political commitment to science, technology and
innovation has also been reflected in the Ninth Development Plan (2007–2013),
which was issued in 2006. The Plan identifies improving science and technology
performance as one of the building blocks for greater competitiveness.

The new science, technology and innovation strategy
document, National Science, Technology and Innovation Strategy, covering the period
2011-2016 was approved by the Supreme Council of Science and Technology (BTYK)
in December 2010. It aims to create more output from existing research capacity
and to enhance needs-oriented research capacity and defines strategic focus areas
for increased science, technology and innovation performance. Target-oriented
approaches are identified in the areas where Turkey has R&D and innovation
capacities, demand-oriented approaches where further R&D and innovation
efforts are needed and bottom-up approaches (including basic, applied and
frontier research) are also an option.

Investing in knowledge

R&D intensity in Turkey has increased
progressively from 0.48% in 2000 to 0.84% in 2010.  Over this period R&D
intensity has experienced an average annual growth rate of 5,8%. If this trend
continues Turkey will have an R&D intensity of 1.48% in 2020, a very good
achievement although still below the projected European Union average for 2020.

Turkey's R&D intensity decreased from 0.85% in 2009 to 0.84% in 2010 due
to a corresponding decrease in public R&D intensity from 0.51% to 0.48%. Despite
the decrease in Public R&D intensity and the economic crisis, R&D
expenditure in all sectors has increased and business R&D intensity has
grown from 0.34% in 2009 to 0.36% in 2010.   Although Turkey's business R&D intensity is still well below the EU average of 1.26%, it is involved
in a positive catching up process with an average annual growth rate of 8.4%.

Turkish research and innovation are also benefitting
from support from the EU budget. The main instrument is the 7th
Framework Program for Research and Development. The total number of participants
in the 7th Framework Program in Turkey is 879 (out of 5982
applicants), receiving more than € 145,1 million. The success rate of
participants of 14,7 % is below the EU average success rate of 21.95 %.

An effective research and innovation system
building on the European Research Area

The graph below illustrates the strengths and
weaknesses of Turkey's R&I system. Reading clockwise, it provides
information on human resources, scientific production, technology valorisation
and innovation. Average annual growth rates from 2000 to the latest available
year are given in brackets.

The graph above shows that the Turkish research and
innovation system is still weaker than the EU average in all areas except
innovation in SMEs and public expenditure on R&D financed by business
enterprise as a % of GDP. On the other hand, the average annual growth rates
for most of the indicators indicate a progressive increase.

Most vulnerable areas include human
resources, patents and public-private scientific co- publications.  In particular Turkey is behind countries with similar knowledge
capacity and economic structure in human resources with new graduates in
science and engineering and new doctoral graduates showing especially low
averages. Nevertheless, the research and innovation system in Turkey has relative strength in the quality of its scientific production, with an average
annual growth of 8,2 % in the share of its scientific publications among the
top 10 % most cited worldwide.

Policies and reforms for research and
innovation

Eight sectors are identified as priority areas in
UBTYS 2011-2016 in Turkey. These include automotive, machinery and
manufacturing technologies, ICT, energy, water, food, space and defense. The
sector-oriented standpoint adopted within UBTYS 2011-2016 has been promoted by
two result driven and targeted call based funding programs which were recently
set up by TUBITAK. Accordingly, temporary governance mechanisms have been
established by TUBITAK in automotive, machinery and manufacturing technologies,
and also in the ICT, energy, water and food areas which are designed to enable a
bottom-up approach and an entrepreneurial discovery of the technology needs of
each sector. These governance mechanisms are comprised of high level
representatives from academia, the private sector, and the public sector. In
the high level prioritization meetings of these actors, a consultative and a
consensus building process takes place to designate R&D priorities in each
sector. Calls through the aforementioned funding programs are opened in each
sector in the technology needs/topics that have been previously identified and
prioritized at the high-level prioritization meetings

The most recent STI priorities in Turkey include the decrees adopted in the 23rd and 24th meetings of BTYK which have set new targets
for the national innovation and entrepreneurship system of Turkey. The main themes of these meetings were “Ecosystem of innovation and
entrepreneurship in Turkey” and “Human resources for STI”. Regarding these themes,
17 new decrees were adopted which are being implemented in coordination with
all relevant ministries and stakeholders.

The national innovation and entrepreneurship system targets
have been renewed and targets have been set for the year 2023 with the
objective of being one of the top 10 economies in the world by 2023. The 2023
targets for the National Innovation and Entrepreneurship System of Turkey are
as follows:

•    To increase R&D
intensity to 3%

•    To increase business
R&D intensity to 2%

•    To raise the number of
full-time equivalent (FTE) researchers to 300,000

•    To raise the number of
FTE researchers in business to 180,000

The private sector is considered to be the driving
force for many improvements and therefore supportive decrees were adopted both
for increasing the private sector’s activities and fostering  collaboration
between the private sector and universities.  For example, it has been decided
to develop policies to provide R&D intensive start-ups with ready access to
finance and complementary mentorship support at all stages of the life cycle of
start-ups and to adoptembracing a tailor-made approach. It has also been
decided to establish an adequate innovation and entrepreneurship ecosystem to
increase the number of R&D intensive start-ups in Turkey. Furthermore, governmental organizations will be allowed to participate in venture
capital funds in order to increase their effectiveness, especially in the seed
funding and start-up capital phases. In this way it is hoped to reinvigorate
venture capital funding  in Turkey. These measures are expected to activate and
enhance the commercialization process of research results.

Another example can be given by the decree aims at
developing policy tools to trigger innovation and entrepreneurship in the
universities by

·
developing proper
mechanisms to support technology transfer offices with an aim to trigger the
commercialization of research conducted at universities

·
developing proper
mechanisms to support technology incubators with an aim to provide a gateway
between universities and technoparks

·
developing an index to
measure the entrepreneurship and innovativeness performances of universities
with an aim to increase the
entrepreneurship and innovation oriented competition between universities

·
redesigning academic
promotion criteria to foster entrepreneurship and innovative activities by
academicians

In line with this decree, in 2012, a university index
has been developed to evaluate the entrepreneurship and innovativeness
performance of universities based on such criteria as R&D projects,
university-industry collaborations, international collaborations, articles,
licences and spin-offs. The 50 most entrepreneurial universities in Turkey were listed for the first time, and this list will be renewed and published each
year.

A similar approach will probably also be used in
relation to university research institutions based on a protocol between the Ministry
of Development and TUBITAK. Under this new protocol, a more efficient
utilization and sustainability of existing and future Higher Education Research
Centers will be ensured by a classification based on the measurement,
monitoring and evaluation of their performances.

Furthermore, a temporary inter-ministerial
coordination board including the participation of related governmental bodies
has been set up to review all R&D, innovation and entrepreneurship support
mechanisms in Turkey with a view to ensuring a target oriented approach.

Fostering and diffusing S&T awareness in society
are among the areas which are under the auspices of the Prime Minister. It has
been decided to work in close cooperation with local authorities to establish
science centers, featuring interactive exhibits that encourage children and
young people to experiment and explore, in each metropolis by the year 2016 and
in each city by the year 2023.

The decrees adopted at the 24th meeting of BTYK which
are focused on furthering the development of human resources for STI can be
considered as complementary initiatives to the National Science and Technology
Human Resources and Action Plan (2011-2016). These decrees strengthen the
linkage between the Action Plan and education policies, as their main purpose
is to improve the quality of the education system in Turkey by conducting
educational assessment studies, developing digital course contents for
primary-secondary education and also higher education, revising teaching
programmes to enable students to acquire core competencies more efficiently,
restructuring scholarship programs for graduate students to study abroad, and
organizing science fairs for primary and secondary school students.

Upgrading the manufacturing sector through
research and technologies

The graph below illustrates the upgrading of knowledge
in different manufacturing industries. The position on the horizontal axis
illustrates the changing weight of each industry sector in value added over the
period. The general trend to the left-hand side reflects the decrease of
manufacturing in the overall economy. The sectors above the x-axis are sectors
whose research intensity has increased over time. The size of the bubble
represents the share of the sector (in value added) in manufacturing (for all
sectors presented on the graph). The red-coloured sectors are high-tech or
medium-high-tech sectors.

The graph above illustrates that in Turkey,as in many
other countries, the share of value added of manufacturing industries is
tending to decrease due to the increase of services in the overall economy (as illustrated
by a leftward shift in the graph above).

The three major industry sectors have seen their shares
in the Turkish economy decrease over the period 1995-2007. However
manufacturing and construction are moving towards more research intensive
activities as shown by increases in business R&D intensity (business
expenditure on R&D as % of value added) for these sectors. Turkey has four companies in the 2011 EU Industrial R&D Scoreboard - companies with a
considerable level of R&D expenditure in the fields of general industrials,
automobiles and parts, and leisure goods.

Turkey
has strengths in medium–high technology manufacturing industries and knowledge
services and is fast becoming Eurasia´s production base for medium–high and
high-technology products. The aim of UBTYS 2011-2016 is to strengthen national
R&D and innovation capacities in order to upgrade the industrial structure
towards high–technology industries.

Competitiveness
in global demand and markets

Investment in knowledge, technology-intensive
clusters, innovation and the upgrading of the manufacturing sector are
determinants of a country's competitiveness in global export markets. A
positive contribution of high-tech and medium-tech products to the trade
balance is an indication of specialisation and competitiveness in these products.

The overall contribution of high-tech and medium-tech
products to Turkey's trade balance was negative for each year over the last
decade. Nevertheless, as the graph above illustrates several high-tech and
medium-tech industries have improved their contributions to the Turkish trade
balance, in particular road vehicles, electrical machinery, apparatus and
appliances and machinery specialized for particular industries.

On other hand, industries with the biggest decreases
in their contributions to the trade balance are power-generating machinery and
equipment, plastics in primary forms and medical and pharmaceutical products,
indicating a possible relative decline in world competitiveness.

Total factor productivity is growing strongly in Turkey, and so is the employment rate. Clear progress is also visible in R&D intensity
and in the share of population aged 30-34 having successfully completed
tertiary education. However, the overall values are still at a low level.
Greenhouse gas emissions have increased over the last decade, despite some
improvements in patenting in environment-related technologies. Patenting in
health-related technologies has also grown, but from a very modest level.

Key indicators for Turkey[9]

Methodological Notes

Symbols and abbreviations

Country codes

BE || Belgium || || SE || Sweden

BG || Bulgaria || || UK || United Kingdom

CZ || Czech Republic || || EU || European Union

DK || Denmark || || IS || Iceland

DE || Germany || || LI || Liechtenstein

IE || Ireland || || NO || Norway

EL || Greece || || CH || Switzerland

ES || Spain || || HR || Croatia

FR || France || || MK || The former Yugoslav Republic of Macedonia

IT || Italy || || TR || Turkey

CY || Cyprus || || IL || Israel

LV || Latvia || || ERA || European Research Area

LT || Lithuania || || US || United States

LU || Luxembourg || || JP || Japan

HU || Hungary || || CN || China

MT || Malta || || KR || South Korea

NL || Netherlands || || IN || India

AT || Austria || || TW || Chinese Taipei

PL || Poland || || SG || Singapore

PT || Portugal || || RU || Russian Federation

RO || Romania || || AU || Australia

SI || Slovenia || || CA || Canada

SK || Slovakia || || ZA || South Africa

FI || Finland || || BR || Brazil

|| || || RoW || Rest of the World

Other
abbreviations

:           ‘not
available’

-           ‘not
applicable’ or ‘real zero’ or ‘zero by default’

Overall performance in research,
innovation and competitiveness

R&D
Intensity

Definition: Gross Domestic Expenditure on R&D (GERD) as % of
Gross Domestic Product (GDP)

Sources: Eurostat, OECD

Gross Domestic Product (GDP)

Definition: Gross domestic product (GDP) data have been compiled
in accordance with the European System of Accounts (ESA 1995).  Since 2005, GDP
has been revised upwards for the majority of EU Member States following the
allocation of FISIM (Financial Intermediation Services Indirectly Measured) to
user sectors. This has resulted in a downward revision of R&D intensity for
individual Member States and for the EU.

Source: Eurostat

Gross Domestic Expenditure on R&D

Definition: Gross domestic expenditure on R&D (GERD) is
defined according to the OECD Frascati Manual definition. GERD can be broken
down by four sectors of performance:

(i) Business Enterprise Expenditure on
R&D (BERD);

(ii) Government Intramural Expenditure on
R&D (GOVERD);

(iii) Higher Education Expenditure on
R&D (HERD);

(iv) Private non-Profit expenditure on
R&D (PNPRD).

GERD can also be broken down by four
sources of funding:

(i) Business Enterprise;

(ii) Government;

(iii) Other national sources;

(iv) Abroad.

Sources: Eurostat, OECD

Index of
economic impact of innovation

The index is
composed of five indicators of the Innovation Union Scoreboard 2013:

-
PCT patents
applications per billion GDP (in PPS€) - the number of PCT patent applications filed
under the PCT, at international phase, designating the European Patent Office
(EPO). Patent counts are based on the priority date, the inventor’s country of
residence and fractional counts. (Eurostat/OECD)

-
Employment in
knowledge-intensive activities (manufacturing and services) as % of total
employment - number of
employed persons in knowledge-intensive activities in business industries.
Knowledge-intensive activities are defined, based on EU Labour Force Survey
data, as all NACE Rev.2 industries at 2-digit level where at least 33% of
employment has a higher education degree (ISCED5 or ISCED6) (Eurostat)

-
Contribution of
medium and high-tech product exports to trade balance – see below

-
Sales of new to
market and new to firm innovations as % of turnover - sum of total turnover of new or significantly
improved products, either new to the firm or new to the market, for all
enterprises (Eurostat - Community Innovation Survey)

-
Knowledge-intensive
services exports as % total service exports - exports of knowledge-intensive services are
measured by the sum of credits in EBOPS (Extended Balance of Payments Services
Classification) 207, 208, 211, 212, 218, 228, 229, 245, 253, 260, 263, 272,
274, 278, 279, 280 and 284 (UN/Eurostat)

Source: Innovation
Union Scoreboard 2013

Hot-spots
clusters in key technologies

Based on the total number of patent applications and
patents granted by the EPO by NUTS2 regions by inventor’s region of residence
and by applicant’s region, by priority year, period (2001-2010) there were
developed clusters for key technologies: 0-25% - low innovative cluster; 26-50%
- medium-low innovative cluster; 51-75% - medium-high innovative cluster and
76-100% - high innovative cluster.

Excellence in
research (S&T)

Definition: It
is a composite indicator developed in order to measure the research excellence
in Europe, meaning the effects of European and National policies on the
modernization of research institutions, the vitality of the research environment
and the quality of research outputs in both basic and applied research. This
core indicator is a composite of four variables:

·
The share of highly cited publications in all
publications where at least one of the authors has an affiliation in a given
country (10% most highly cited publications considered, full counting method;
source: Science Metrix calculations using Scopus data)

·
Number of top scientific universities and public
research organizations in a country divided by million population (world top
250 scientific universities and top 50 public research organizations
considered; source: Leiden Ranking and Scimago Institutional Ranking)

·
Patent applications per million population (PCT
patent applications by country of inventor, 3-year moving average; source:
OECD, Eurostat)

·
Total value of ERC grants received divided by
public R&D performed by the higher education and government sectors
(transformed by using the natural logarithm, multi-year projects divided
equally over time; source: DG-RTD, ERC)

The value of the
composite indicator (a country score) is a geometric average of the four
variables normalized between 10 and 100 using the min-max method and taking
into consideration the two time points simultaneously.

Source: Group of
Research and Innovation Union Impact, RTD-JRC (Ispra): Composite Indicator of
Research Excellence, 2012.

Knowledge-intensity
of the economy (Structural change of economy)

Definition:
Compositional structural change indicators measure changes in the actual
sectoral composition of the economy in terms of production and employment,
business research and development (R&D), high-tech exports and
technological specialization and foreign direct investments. Changes may affect
the linkages among sectors and technologies, and influence the changes of the
international advantages of countries.

Eight
compositional structural change indicators have been identified and organized
into five dimensions:

·
The R&D dimension measures the size of
business R&D (as a % of GDP) and the size of the R&D services sector in
the economy (in terms of total value added; source: WIIW calculations using
OECD, Eurostat, WIOD and national sources)

·
The skills dimension measures changing skills
and occupation in terms of the share of persons employed in knowledge intensive
activities (both in manufacturing and service sectors considered where on
average at least a third of the employees have tertiary graduates; source:
Eurostat)

·
The sectoral specialization dimension captures
the relative share of knowledge intensive activities (in terms of value added;
source WIIW calculations using OECD, Eurostat, WIOD and national sources)

·
The international specialization dimension
captures the share of knowledge economy through technological (patents) and
export specialization (revealed technological and competitive advantage) and

·
The internationalization dimension refers to the
changing international competitiveness of a country in terms of attracting and
diffusing foreign direct investment (inward and outward foreign direct investments).

The eight
indicators in the five pillars have been normalized between 10 and 100 using
the min-max method and taking into consideration three time points
simultaneously. The five pillars have also been aggregated to a single
composite indicator of structural change using the geometric average to provide
an overall measure of country progress in this area.

Source: Group of Research on the impact of
the Innovation Union (GRIU), RTD-JRC/IPSC Ispra): Composite Indicators
measuring structural change, monitoring the progress towards a more
knowledge-intensive economy in Europe, 2011.

Contribution of
High-Tech and Medium-Tech manufacturing to trade balance

Definition: The "contribution to the trade
balance" is the difference between observed industry trade balance and the
theoretical trade balance.

By trade balance
we understand the difference between the level of exports and the level of
imports at a particular industry/sector.

The contribution
to the trade balance is given by the formula:

where

|| = || observed industry trade balance

|| = || theoretical trade balance

If there is no
comparative advantage or disadvantage for any industry i, a country's total trade balance
(surplus or deficit) should be distributed across industries according to their
share in the total trade. A positive value for an industry indicates structural
surplus and a negative value a structural deficit.

The HT & M-HT trade balance include of the following SITC Rev.3
products: 266, 267, 512, 513, 525, 533, 54, 553, 554, 562, 57, 58, 591, 593,
597, 598, 629, 653, 671, 672, 679, 71, 72, 731, 733, 737, 74, 751, 752, 759,
76, 77, 78, 79, 812, 87, 88, 891.

Source: OECD (Moving
Up the Value Chain: Staying Competitive in the Global Economy,
2007), UN (Comtrade), RTD - Economic Analysis Unit

Investing in knowledge

Public
expenditure on R&D

Definition: For the purposes of this publication, Public
expenditure on R&D is defined as Government Intramural Expenditure on
R&D (GOVERD) plus Higher Education Expenditure on R&D (HERD).

Sources: Eurostat,
OECD

Private
expenditure on R&D

Definition: For the purposes of this publication, Private expenditure
on R&D is defined as Business Enterprise Expenditure on R&D (BERD) plus
Private non-Profit expenditure on R&D (PNPRD).

Sources: Eurostat,
OECD

BERD Intensity

Definition: Business Enterprise Expenditure on R&D (BERD) as
% of Gross Domestic Product (GDP)

Sources: Eurostat,
OECD

Public sector
R&D Intensity

Definition: Public expenditure on R&D (GOVERD plus
HERD) as % of GDP.

Sources: Eurostat,
OECD

Government
budget for R&D

Definition: The government budget for R&D is
defined as government budget appropriations or outlays for R&D (GBAORD),
according to the OECD Frascati Manual definition. The data are based on
information obtained from central government statistics and are broken down by
socio-economic objectives in accordance with the nomenclature for the analysis
and comparison of scientific programmes and budgets (NABS).

Source: Eurostat

Structural Funds

Definition: Structural Funds are funds intended to facilitate
structural adjustment of specific sectors, regions, or combinations of both, in
the European Union.  Structural Funds for RTDI include data from sectors
involving research and development, technological innovation, entrepreneurship,
innovative ICT and human capital.

Source: DG REGIO.

Purchasing
Power Standards (PPS)

Definition: Financial aggregates are sometimes expressed in
Purchasing Power Standards (PPS), rather than in euro based on exchange rates.
PPS are based on comparisons of the prices of representative and comparable
goods or services in different countries in different currencies on a specific
date. The calculations on R&D investments in real terms are based on
constant 2000 PPS.

Source: Eurostat

Value Added

Definition: Value added is current gross value added measured at
producer prices or at basic prices, depending on the valuation used in the
national accounts. It represents the contribution of each industry to GDP.

Sources:
Eurostat, OECD

Venture Capital

Definition: Venture Capital investment is defined as private
equity being raised for investment in companies. For data between 2000 and 2006,
management buyouts, management buy-ins, and venture purchase of quoted shares
are excluded. Venture Capital includes early stage (seed + start-up) and
expansion and replacement capital. As of 2007 data are broken into the
following stages: Seed; Start-up; Later stage venture; Growth;
Rescue/Turnaround; Replacement capital; Buyouts.

Source: Eurostat,
EVCA

An effective research and innovation
system building on the European Research Area

Framework Programme

Definition: The Framework Programmes for Research and
Technological Development are the EU's main instruments for supporting
collaborative research, development and innovation in science, engineering and
technology. Participation is on an internationally collaborative basis and must
involve European partners. The first Framework Programme was launched in 1984. 
The seventh Framework Programme (FP7) covers the period 2007-2013.

Source: DG Research and Innovation

Higher
Education

ISCED
(International Standard Classification of Education)

ISCED 5: Tertiary
education (first stage) not leading directly to an advanced research
qualification.

ISCED 5A: Tertiary
education programmes with academic orientation.

ISCED 5B: Tertiary
education programmes with occupation orientation.

ISCED 6: Tertiary
education (second stage) leading to an advanced research qualification (PhD or
doctorate).

Human Resources for Science and Technology (HRST),
R&D personnel and researchers

The Canberra Manual proposes a definition of HRST as
persons who either have higher education or persons who are employed in
positions that normally require such education. HRST are people who fulfil one
or other of the following conditions:

a)
Successfully completed
education at the third level in an S&T field of study (HRSTE - Education);

b)
Not formally qualified
as above, but employed in a S&T occupation where the above qualifications
are normally required (HRSTO - Occupation).

HRST Core (HRSTC) are people with both tertiary-level
education and an S&T occupation. Scientists and engineers are defined as
ISCO categories 21 (Physical, mathematical and engineering science
professionals) and 22 (Life science and health professionals).

The Frascati Manual proposes the following
definitions of R&D personnel and researchers:

-
R&D personnel: “All
persons employed directly on R&D should be counted, as well as those
providing direct services such as R&D managers, administrators, and
clerical staff.” (p.92);

-
Researchers:
“Researchers are professionals engaged in the conception or creation of new
knowledge, products, processes, methods and systems and also in the management
of the projects concerned.” (p.93). R&D may be the primary function of some
persons or it may be a secondary function. It may also be a significant
part-time activity.

Therefore, the measurement of personnel employed in
R&D involves two exercises:

-
measuring their number
in headcounts (HC): the total number of persons who are mainly or partially
employed in R&D is counted;

-
measuring their R&D
activities in full-time equivalence (FTE): the number of persons engaged in
R&D is expressed in full-time equivalents on R&D activities (=
person-years).

Public and Private sector researchers

Definition: For the purposes of this publication, Public sector
researchers refer to researchers in the government and higher education
sectors. Private sector researchers refer to researchers in the business
enterprise and private non-profit sectors.

Source: Eurostat, OECD

Small and
medium-size enterprises (SMEs)

Definition: Small and medium-size enterprises (SMEs) are defined
as enterprises having fewer than 250 employees.

Sources: Eurostat,
OECD

Licence and
patent revenues from abroad

Definition: The export part of international
transactions in royalties and license fees.

Source: Eurostat,
TRADE

Patent Cooperation Treaty (PCT) Patents

Definitions: The Patent Cooperation Treaty (PCT) is an
international treaty, administered by the World Intellectual Property
Organization (WIPO), signed by 133 Paris Convention countries. The PCT makes it
possible to seek patent protection for an invention simultaneously in each of a
large number of countries by filing a single “international” patent application
instead of filing several separate national or regional applications.
Indicators based on PCT applications are relatively free from the "home
advantage" bias (proportionate to their inventive activity, domestic
applicants tend to file more patents in their home country than non-resident
applicants). The granting of patents remains under the control of the national
or regional patent offices. The PCT patents considered are ‘PCT patents, at
international phase, designating the European Patent Office’. The country of
origin is defined as the country of the inventor. If
one application has more than one inventor, the application is divided equally
among all of them and subsequently among their countries of residence, thus
avoiding double counting.

"PCT is an option for possible future patenting,
that provides the applicant with a further delay before deciding to apply or
not. The delay can be 6 to 12 months. The relation between the PCT option and
patent value is not predictable (Grupp and Schmoch, 1999). The PCT process
provides the advantage of a longer investigation of the technological potential
of the invention, and in case of a negative assessment, the application can be
withdrawn before entering into expensive regional (EPO) phase. Having passed
this test, the PCT applications that are continued towards entering the
regional phase are likely the ones of higher value. However, the argument can
be reversed in the way that inventions with unclear market potential are passed
through the PCT route, whereas those with an unquestionable potential are
directly applied at the regional phase, since the direct path is cheaper."
(Guellec & van Pottelsberghe, 2000).

Societal challenges patents comprise climate change
mitigation patents and health technology patents.

Climate change mitigation patents comprise patents for
renewable energy, electric and hybrid vehicles and energy efficiency in
buildings and lighting.

Health technology patents comprise patents for medical
technologies and pharmaceuticals.

Environment-related
technologies

Definition: patent applications to EPO per billion GDP in
current PPS€

The
environment-related technologies refer to the following thematic areas:

A.
General environmental
management

B.
Energy generation from
renewable and non-fossil sources

C.
Combustion technologies
with mitigation potential

D.
Technologies specific
to climate change mitigation

E.
Technologies with
potential or indirect contribution to emissions mitigation

F.
Emissions abatement and
fuel efficiency in transportation

G.
Energy efficiency in
buildings and lighting

Health-related technologies

Definition: patent applications to the EPO per billion
GDP in current PPS€

The health-related
technologies refer to medical technologies and pharmaceuticals: surgery,
dentistry, prostheses, transport / accommodation for patients, physical therapy
devices, containers, medical preparations, sterilization, media devices, electrotherapy,
chemical compounds.

Source: OECD

Community
Trademark System (CTM)

Definition: The Community trade mark system allows the
uniform identification of products and services by enterprises throughout the
EU. A unique procedure applied by the Office for Harmonization in the Internal
Market (OHIM) allows them to register trademarks which will benefit from
unitary protection and be fully applicable in every part of the Community. The
CTM system is unitary in character. A CTM registration is enforceable in all
member states.

Source: OHIM

Country groupings – methodology

In order to create homogeneous groups of similar
research and innovation systems in the European Research Area, a principal
components analysis (PCA) on nineteen variables characterising research and
innovation systems was carried out. The values of the variables as were
obtained for 2008 or the latest available year from Eurostat and the OECD and
included data for all 27 EU Member States as well as for Norway, Switzerland,
Croatia, Turkey and Israel.  Table 1 presents the main values of the different
factors accruing from the PCA. The first principal component explains 49.7% of
the variance-. The second principal component explains 12.4% of the variance
and together, the two principal components manage to explain above 62% of the
total variance.

Table 1: Results of the Principal Component Analysis

Table 2 presents the correlation matrix between the
main components and the individual variables that can help interpreting the
nature of these factors. To a great extent, Component 1 corresponds to the
economic and technological development of the country.  As shown by the
correlation matrix, this factor is closely related with per capita GDP,
investments in R&D, HRST, research excellence, patents and levels of skills
and employment. The second component represents the sectoral specialisation, as
it is shown by the coordinates of industrial employment and employment in
medium-high and high tech manufactures.

Table 2: Correlation matrix between the principal
components and the individual variables

Based on the findings of the PCA, a hierarchical
cluster analysis is carried out in order to gather the regions in homogeneous
groups. Figure 1 presents the dendogramme presenting the different groups as
well as the bar separating the different country groups.

Figure 1: Cluster Analysis- Dendogramme

Source: RTD –
Economic Analysis Unit (2011)

Scientific and technological strengths

The NUTS classification

Definition: The Nomenclature of Statistical Territorial Units (NUTS)
is a single coherent for dividing up the European Union’s territory in order to
produce regional statistics for the Community. NUTS subdivides each Member State into a whole number of regions at NUTS 1 level. Each of these is then
subdivided into regions at NUTS level 2 and these in turn into regions at NUTS
level 3.

Source:
Eurostat

Scientific Publications

Definition: Publications are research articles, reviews, notes
and letters published in referenced journals which are included in the Scopus
database of Elsevier. A full counting method was used at the country level.
However, for the EU aggregate, double counts of multiple occurrences of EU
Member States in the same record were excluded.

Source:  Scopus
(Elsevier); treatments and calculations: Science Metrix

Average of Relative
Citations (ARC)

The ARC is an indicator of the
scientific impact of papers produced by a given entity (e.g., the world, a
country, a NUTS2 region, an institution) relative to the world average (i.e.,
the expected number of citations). The number of citations received by each
publication is counted for the year in which it was published and for the three
subsequent years. For papers published in 2000, for example, citations received
in 2000, 2001, 2002 and 2003 are counted.

To account for different
citation patterns across fields and subfields of science (e.g., there are more
citations in biomedical research than in mathematics), each publication's
citation count is divided by the average citation count of all publications of
the corresponding document type (i.e., a review would be compared to other
reviews, whereas an article would be compared to other articles) that were
published the same year in the same subfield to obtain a Relative Citation count
(RC). The ARC of a given entity is the average of the RCs of the papers
belonging to it. An ARC value above 1 means that a given entity is cited more
frequently than the world average, while a value below 1 means the reverse. The
ARC is computed for the 2000-2006 period only since publications in 2007, 2008
and 2009 have incomplete citation windows.

Methodology of co-publication analysis

The methodology used for the co-publication
analysis involved three types of analysis:

a) Single country publications cover
co-publications that involve domestic partners only; this is the sum of all
papers written by one or more authors from a given country (and non-nationals
resident in that country). Although the literature usually distinguishes
between domestic single publications (including one or more authors belonging
to the same institution) and domestic co-publications (i.e. authors within the
same country but from different main organisations), for the aim of the current
analysis the sum of the two categories have been used under the heading of
“single country publications”.

b) EU transnational co-publications refer
to international co-publications which involve at least one author from an EU
country. This category includes both co-publications by authors from at least
two different EU Member States (as defined by research papers containing at
least two authors' addresses in different countries) and co-publications
between one or several authors from the EU together with at least one author
from a country outside the EU.

c) Extra-EU co-publications is a
sub-category of the broader EU transnational co-publications. It refers
exclusively to international co-publications involving at least one EU author
and at least one non-EU author, as defined by the authors' addresses in
different countries.

An important methodological issue is the
way in which a co-publication is quantified. The full counting method has been
used in this report, meaning that a single international co-published paper is
assigned to more than one country of scientific origin. If, for example, the
authors' addresses signal three different countries in the EU, the publication
is counted three times – once for each country mentioned. Therefore, in a
matrix of co-publications between countries, the number of publications
mentioned is not a completely accurate indicator of the number of publications
being co-authored, but rather how often a country or region is involved in
co-publications.

Public-Private co-publications

Definition: Number of public-private co-authored research
publications. The private sector excludes the private medical and health
sector.

Source: CWTS / Thomson Reuters

Scientific Specialisation

Definition: The relative scientific specialisation index (RCA) is
calculated for 28 disciplines on the basis of publications from 2000-2002 and
2004-2006. The fields ‘multidisciplinary’ and ‘social Sciences’' have been
excluded. The formula used is the hyperbolic tangent function for the ratio of
the share of a domain or discipline in a country compared to the share of the
domain in the total for the world: RCAki = 100 x tanh ln {(Aki/∑iAki)/(∑kAki/∑kiAki)},
with Aki indicating the number of publications of country k in the
field i, whereby the field is defined by 28 scientific disciplines used in the
classifications.

LN centres the data on zero and the hyperbolic tangent
multiplied by 100 limits the RCA values to a range of +100 to -100. Scores
below -20 are considered a significant under-specialisation in a given
scientific field, scores between -20 and +20 are around field average and mean
no significant (under-)

specialisation, and scores above +20 mean a
significant specialisation in a given field. The RCA indicator allows the assessment
of the relative position of a field i in a country beyond any size effects.
Neither the size of the field nor the size of the country has an impact on the
outcome of this indicator. Therefore, it is possible to directly compare
countries and fields.

Source: ISI,
Science Citation Index; treatments and calculations: Fraunhofer ISI

Technology Categories

Definition: The four manufacturing industry technology categories
are defined as follows (NACE Rev 1.1 codes are given in brackets):

(1) High-tech: office machinery and computers (30),
radio, television and communication equipment and apparatus (32), medical,
precision and optical instruments, watches and clocks (33), aircraft and
spacecraft (35.3), pharmaceuticals, medicinal chemicals and botanical products
(24.4).

(2) Medium-high-tech: machinery and equipment (29),
electrical machinery and apparatus (31), motor vehicles, trailers and
semi-trailers (34), other transport equipment (35) excluding building and
repairing of ships and boats (35.1) and excluding aircraft and spacecraft
(35.3), chemicals and chemical products (24) excluding pharmaceuticals,
medicinal chemicals and botanical products (24.4).

(3) Medium-low-tech: coke, refined petroleum products
and nuclear fuel (23), rubber and plastic products (25), non-metallic mineral
products (26), basic metals (27), fabricated metal products (28), building and
repairing of ships and boats (35.1).

(4) Low-tech: food products and beverages (15),
tobacco products (16), textiles (17), wearing apparel; dressing and dyeing of
fur (18), tanning and dressing of leather, manufacture of luggage, handbags,
saddlery and harness (19), wood and  products of wood and cork, except
furniture (20), pulp, paper and paper products (21), publishing, printing and
reproduction of recorded media (22), furniture and other manufacturing (36),
recycling (37).

Technological Specialisation

Definition: The relative technological specialisation index (or
RCA) is calculated for 19 technology domains on the basis of PCT patent
applications (at the international phase, designating the EPO). The data were
classified by earliest priority date and country of residence of the inventor.

The formula used is the hyperbolic tangent function
for the ratio of the share of a domain in a country compared to the share of
the domain in the total for the world:  RCAki = 100 x tanh ln {(Aki/∑iAki)/(∑kAki/∑kiAki)},
with Aki indicating the number of PCT patent applications (at
international phase, designating the EPO) of country k in the field i.LN
centres the data on zero and the hyperbolic tangent multiplied by 100 limits
the RCA values to a range of +100 to -100. Scores below -20 are considered a
significant under-specialisation in a given scientific domain, scores between
-20 and +20 are around domain average and mean no significant
(under-)specialisation, and scores above +20 mean a significant specialisation
in a given domain. The RCA indicator allows the assessment of the relative
position of a field i in a country beyond any size effects. Neither the size of
the domain nor the size of the country has an impact on the outcome of this
indicator. Therefore, it is possible to directly compare countries and domain.

Source: JRC-IPTS,
based on EPO and WIPO data

Economic impact of innovation

Index of
economic impact of innovation

See definition in
section Overall performance.

EU Industrial
R&D Investment Scoreboard

Definition: The EU Industrial R&D Investment Scoreboard
presents information on the top 1000 EU companies and the 1000 non-EU
companies. The Scoreboard includes data on R&D investment along with other
economic and financial data. It is the source for the ICT Scoreboard, which
provides data on the ICT companies with the largest R&D budgets globally.

Upgrading the manufacturing sector
through research and technologies

Knowledge-Intensive
Activities (KIAs)

Definition: Knowledge-Intensive Activities (KIAs) are defined as
economic sectors in which more than 33% of the employed labour force has
completed academic-oriented tertiary education (i.e. at ISCED 5 and 6 levels).
They cover all sectors in the economy, including manufacturing and services
sectors, and can be defined at two and three-digit levels of the statistical
classification of economic activities.

Source: Eurostat

Knowledge-Intensive Services (KIS)

Definition: Knowledge-intensive services (KIS) includes the
following sectors (NACE Rev.1.1 codes are given in brackets): water transport
(61), air transport (62), post and telecommunications (64), financial
intermediation, except insurance and pension funding (65), insurance and
pension funding, except compulsory social security (66), activities auxiliary
to financial intermediation (67), real estate activities (70), renting of
machinery and equipment without operator and of personal and household goods
(71), computer and related activities (72), research and development (73),
other business activities (74), education (80), health and social work (85),
recreational, cultural and sporting activities (92).

Source: OECD

Knowledge-Intensive
Services exports

Definition: Exports of knowledge-intensive services are
measured by the sum of credits in EBOPS (Extended Balance of Payments Services
Classification) 207, 208, 211, 212, 218, 228, 229, 245, 253, 260, 263, 272,
274, 278, 279, 280, 284.

Source: UN

Competitiveness in global demand and
markets

Contribution to
trade balance

See definition in
section Overall performance.

High-Tech and
Medium-Tech manufacture

See definition in
section Overall performance.

[1] Investment Plan for Iceland 2013-2015

[2] Internationalisation of business
investments in R&D and analysis of their economic impact, Final Report, Study
financed by the European Commission, DG RTD, April 2012

[3] HEBREW
UNIVERSITY OF JERUSALEM, WEIZMANN INSTITUTE OF SCIENCE, TECHNION - ISRAEL
INSTITUTE OF TECHNOLOGY and TEL AVIV UNIVERSITY.

[4] Research Council of Norway

[5] Railway vehicles (including hover trains)
and associated equipment; aircraft and associated equipment; spacecraft
(including satellites) and spacecraft launch vehicles; parts thereof; ships,
boats (including hovercraft) and floating structures (SITC Rev.4).

[6] See Methodological note for the composition
of this index.

[7] Report on Science & Technology Indicators for Norway by the Research Council of Norway 2011

[8] idem 3

[9] According to data provide by Turkish Government, 
values  for some indicators are as follows:

-
BERD as % of GDP 
increased  from  0.16 in 2000 to 0.36  in 2010   with an average annual growth 
rate of 10.7

-
GERD as % of GDP
increased from 0.48 in 2000 to 0.84 in 2010 with an average annual growth  rate
of  6.2

-
In  2010 the average 
of  SMEs introducing products or process innovations  was  32.6%

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