enterprises. Latvian policy makers should utilize this audit tool to assess the strengths and weaknesses of a large representative sample of Latvian enterprises. Based on the weaknesses revealed by the audit and international lessons of experience, they should develop specific targeted strategies that would help enterprises improve in areas where they are deficient and achieve higher levels of sophistication.

**RECOMMENDATION 11.  Develop matching grant programs to align government R&D spending more closely to the innovation and competitiveness needs of domestic industry.  At present, Government R&D spending priorities bear little relationship to the innovation or competitiveness needs of Latvian enterprises.  Nor are Government  R&D spending programs designed to catalyze private innovation spending.  To a certain extent, this is a classic chicken and egg dilemma. As the preceding discussion of the Latvian innovation survey indicated, Latvian enterprises are not particularly prone to innovate and, when they do, R&D is not the favored mode of innovation.  Not surprisingly, therefore, Government R&D spending priorities have not responded to the low or non-existent demand from industry for more targeted R&D spending.  At the same time, it is also important to recognize that more targeted Government R&D spending, by itself, will not be sufficient to stimulate greater enterprise spending on or interest in innovation.  Targeted programs, in other words, are not a panacea or magic bullet.  Nevertheless, if coupled with other complementary policies and programs, World Bank projects in India, Turkey, and Chile among others, suggest that carefully crafted matching grant programs can be one part of a comprehensive approach to stimulating greater private sector innovation.**

For example, a 1999 World Bank Industrial Technology project in Turkey<sup>55</sup> , provided matching grants to co-finance up to 50% of the cost of product and process R&D among private enterprises. The project places special emphasis on promoting linkages between the R&D institutions and Turkish industry. A project with a similar component is currently under development in Croatia. And finally, a forthcoming World Bank project in Chile<sup>56</sup> would provide grants to research consortia from universities, government laboratories, and private industry undertaking collaborative research and development, and research training, in areas of importance to industry and the regions of Chile. The private industry and public sector agencies involved in the consortia and teams will be required to make substantial in-kind and cash commitments to support the cooperative activities.

As part of a more comprehensive program to promote enterprise innovation in Latvia, the Government should consider developing similar programs.

> 55  For details, see the Project Appraisal Document for a project in Turkey entitled, “Industrial Technology Project,” Report No: 18351-TU, May 1999.

> 56  For details, see the Project Appraisal Document for a project in Chile entitled, “Science For The Knowledge Economy In Support Of The First Phase Of The Program To Improve The Innovation System,” Report No. 25324, April 2003.

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