- The common innovation infrastructure which is defined as the broad set of policies affecting innovation including tax incentives, the protection of intellectual property, anti-trust enforcement and openness to competition.  It also includes such purely scientific technological factors as excellence in basic research.  But in general, the innovation infrastructure is more closely related to general business climate issues than to technology measures.

- The cluster-specific environment for innovation.<sup>29</sup> This dimension of innovation capacity recognizes that “the commercialization of new technologies takes place disproportionately in clusters  -- geographic concentrations of interconnected companies and institutions in a particular field.”  This in turn leads to “the presence of high quality and specialized inputs, a context that encourages investment coupled with intense local rivalry, pressure and insight gleaned from sophisticated local demand, and the local presence of related and supporting industries.”  The key point here is that isolated firms are at a competitive disadvantage.  A precondition for success in today’s global economy is a dense web of relationships between suppliers, customers, competitors, researchers and universities. Establishing this dense web is a pre-requisite for innovation and a challenge for innovation policy.

- The quality of linkages is the glue that binds the other elements together.  This variable measures the communications links between these various institutions. But communications links in this context do not refer to such mechanical items as ICT and the internet.  Instead, they refer to the formal and informal social organizations and networks that bind organizations and institutions to each other within the cluster. “Without strong linkages,” the authors explain, a nation’s upstream scientific and technical advances can diffuse to other countries more quickly than they can be exploited at home.”

On the basis of this Innovation Capacity Index, Latvia ranks 41<sup>st</sup> out of 75 countries. Once again, Latvia is behind every CC except Bulgaria and Romania. More interesting than the composite ranking, however, is Latvia’s relative standing on the four components. Latvia, along with such other transition countries as Russia and Ukraine and many NMS’s, has a comparatively high ranking on the Scientists and Engineers subindex coupled with a much lower ranking on the innovation and linkages components. In other words, Latvia possesses an abundance of one critical pre-requisite – a technically educated labor force. But according to this and other benchmarking studies, a well trained labor force will not generate an innovative economy unless a country also

> 29  For a discussion of clusters see Porter, The Competitive Advantage of Nations, Macmillan, 1990.  Also see, Innovative Regions: The Importance of Place and Networks in the Innovative Economy, Report Sponsored by the Heinz Endowments (www.heinz.org ) and the Pittsburgh Regional Alliance, October 1999 and Shahid Yusuf, Innovative East Asia: The Future of Growth, World Bank, 2003, especially Chapter 4, Chapter 6, and Chapter 7.  For interesting examples of how developed economies embark on the process of establishing clusters, see Israel Bio-Plan 2000-2010, available from the Office of the Chief Scientist at <u>http://www.moit.gov.il/tamas_level2_English.asp?sid=1434</u> .  Also see, Orjan Solvell, Goran Lindqvist, and Christian Ketels, <u>The Cluster Initiative Greenbook, 2003 and the</u> presentations at The Competitiveness Institute 6<sup>th</sup> Global Conference: Innovative Clusters – A New Challenge, September 17-19, 2003, Gothenburg, Sweden available at <u>http://www.tciconference.org</u> .

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