Educational levels are low in developing countries, and, this is a significant barrier to the development and diffusion of innovation in these countries<sup>6</sup> . In fact, one can establish a clear relation between educational needs and the different phases of industrialization. In the pre-industrial phase, educational needs demand only basic literacy. In the industrial phase, more professional and medium-level skills are required. In the post-industrial phase, there is a need for a significant share of a population with tertiary education, with the rest of the population having at least functional literacy<sup>7</sup> .

The influence of the quality of the business environment, linked to governance conditions, on innovation performances is also clearly demonstrated. However, there is a need to approach with some caution the appreciation of business environment. The quality should be seen from the perspective of countries themselves with their own values and cultural specificities. A lack of financial transparency is not necessarily a problem in a number of cultures, as discussed later. On the other hand, a bureaucratic climate which forces an entrepreneur to obtain a hundred authorizations to establish his/her enterprise is a problem, whatever the culture in question. More generally, when judging the quality of a business environment it is of crucial importance to go beyond the formal appearance of laws and to examine how laws are applied in practice in taking due account of the more or less informal relations regulating transactions among economic agents.

Finally, there is the issue of a lack of infrastructure. Of primary importance is, of course, the telephone infrastructure. The telephone is the most important tool for (potential) entrepreneurs. Mobile phone technology has transformed the conditions of telecommunications in developing countries. Yet, the tele-density remains weak in a number of developing countries, inferior to what may be considered the minimal threshold for take-off (around 30 percent). Progress made with mobile phone technology can lead to rapid improvements in connectivity, however it does not solve the necessity for greater internet penetration – something which remains quite low in most developing countries. Infrastructural needs for innovation in developing countries are, however, not limited to telecommunications. Road and other transport infrastructure are of primary importance, as well as sanitation, water, and other systems.

# **_Innovation systems_**

As a consequence of this overall problematic environment, innovation systems<sup>8</sup> in developing countries are poorly constructed and are very fragmented. On the enterprise side, generally a large number of micro-enterprises operate in the informal economy, and a more or less important number of foreign-based firms, which tend, however, to be disconnected from the rest of the economy.

> 6 For a convincing demonstration of the correlation between educational levels and innovation performances, see W. Maloney, presentation at the ECA KE forum Budapest, March 2004.  Innovation performances are measured by patent deposited in international systems.

> 7 On this notion of functional literacy – which means a capability to orient oneself in various walks of life – see OECD, and notably the Adult Education Surveys.

> 8 The innovation system is defined as the set of organizations (firms, universities, public laboratories, etc.) and their linkages through which innovation processes develop.  For an in-depth analysis of innovation systems in developed countries, see Managing Innovation Systems, OECD, Paris 2000.

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