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Sketching Ukrainian Innovation System: R&D Investment

This is the first part of a twofold material about innovation system in Ukraine

Many speculative opinions about innovation activity in Ukraine can be found online. They range from dooming the country on agricultural fate without significant innovations to proclaiming it a promising land of future high-tech parks. To show how shallow these views are, it is enough to mention that some agriculture is actually innovative, and that many countries with high-tech places are actually poor. But how does innovation performance of Ukraine really look like today? The analysis of UNESCO data suggests rough contours.

I should start with the difference between STI and DUI as a disclaimer. The first abbreviation means science, technology, and innovation. This approach measures innovative activities by formal indicators, such as investments in research and development. As an example, it can be said that Norway is more innovative than Russia, because the first one invests more in R&D (which is actually true). However, the second approach that denotes doing, using, and interacting, offers a different perspective. In accordance with DUI, it is not enough to measure macro indicators, since important innovation processes often depend, for instance, on how much producers and users interact. In this piece, I will limit myself to what the aggregated data allows to analyze, that is to STI, but let us keep in mind that the picture below is not entire without informal and interactive factors.

 

About relative and real

The most general indicator of innovation activity is R&D investments in relative terms. UNESCO advises 1% of GDP as a minimum level of spending on research and development for developing countries. It is a quite modest number, since some researchers argue that 2% is actually the lowest threshold for getting a stable innovative output. In 2011, the last year with available data, Ukraine was close to the first margin – 0,73%. This number is not very optimistic, since the investment was diminishing from 2005, when the country had very decent 1,17%, onwards. However, Ukraine scores high among EaP states, with only Belarus performing better – 0,76%. All other EaPs have nothing to brag about – less than half a percent of their GDP brings the future closer.

In the post-communist countries, where innovation funds are largely controlled by the state (more about this below), GDP per capita seems to be quite important for relative investments. Accordingly to IMF, Belarussian GDP/population ratio is indeed better than in Ukraine – around $15 000 against $7 000 (both amounts are in current PPP) in 2012. The neighboring Russian Federation, as a state-controlled and high-allowance country, allocates 1,16% of its GDP to innovations, which proves my assumption. Among EaPs, only Azerbaijan evidently breaks the tendency. Thus, having better personal income conditions than Ukraine, this county invests in innovation even less than Armenia – 0,22% against 0,27%. Probably, it can be explained by natural resource trap – Azerbaijan heavily relies on oil. Additionally, Moldova performs slightly better than expected when looking at its per capita money – 0,4%, but this investment is hardly significant anyways.

For real R&D investments, the factor of overall GDP seems to be most influential. Ukraine is clearly ahead of all EaPs by absolute numbers, as its domestic production is advantageous. So, the country’s annual $2,4 billion on innovation is a strong argument against $1 billion in Belarus (PPP). Other states like Azerbaidjan ($202 million), Moldova ($49 million), and Armenia ($48 million) are far below (unfortunately, neither relative, nor absolute data is available for Georgia). Again, only Azerbaijan is an evident outlier when its production output is taken into account, since the country invests much less than expected. However, returning to my example, Russia puts up $33 billion. In comparison to this number, Ukraine can hardly be proud of its regional leadership.

 

Gross Domestic Expenditure on R&D in Eastern Partnership states

 

More from state, more from abroad

Looking at the structure of innovation funding, it can be seen that around 46% of annual R&D expenditure comes from the government in Ukraine, which is common for post-communist states both inside and outside the EU, but is quite different from most Union members. For instance, Russian government contributes 67%, Armenian one – 60%, Polish one – 55%, Slovak one – 50%, Romanian one – 49%, and Belarusian one – 45% in the same 2011 year. In contrast, core EU states tend to be more modest in this regard. For example, France invests 37%, and Germany – around 30%, not to say about Scandinavian states like Denmark and Sweden – around 28% in each case. Eastern EU members from relatively early integration waves happen to be somewhere in between, as Hungarian government contributes 38% and Czech one – 37%, with both trends going down. Possibly, such picture can be explained by the existence of EU-level programmes that alleviate the dependency on the state for nurturing innovations. Post-communist countries need some time to adapt to this system. At least, the difference in governmental R&D expenditures remarkably overlaps with the Warsaw Pact demarcation line today.

The trend looks even more salient when another major source of R&D dough is taken into account, namely business enterprises. They are responsible for around 27% of R&D funding in Ukrainian case, which is on the level of Russia, Belarus, and Poland again, but strikingly differs from most Western neighbors. In the latter ones, a usual level is approximately 45% and even more. Thus, private business is much less influential in innovation processes in Ukraine than the government.

At the same time, the share of foreign investments in Ukrainian innovations is relatively high – 25%. Here, it is difficult to trace a certain geopolitical pattern, but the EU level is usually not more than 15%, with Austria and the Czech Republic being on the top with such figure. In EaPs, the exterior part tends to be even lower, as 8% in Belarus is a good example. But there is no clear line to draw, since France also has 8%. It seems that Ukrainian number is generally high, and such situation can be explained by a huge interest from powerful countries like China.

 

The differences in modern governmental shares in R&D expenditures remind Warshaw Pact separation of countries. Source: historiana.eu.

 

All together

Overall, research and development as an indicator of innovation activities is not sufficiently supported in Ukraine – only 0,73% of GDP. Still Ukrainian R&D is better sponsored than in other EaP states. Possible factors to explain this state of affairs is the highest GDP level in the region, as well as a comparatively high per capita allowance. Except of Azerbaijan, these factors correspond the the levels of investment in all EaPs and Russia as the countries where innovations remain largely state-assisted.

Around 70% of money for R&D in Ukraine comes from the government and foreign investments, the first indicator being higher than in the EU on average, but normal for all post-communist states, and the second one being generally boosted. These two leave little space for business contribution which amounts to only 27% – almost 20% less than in the EU neighbors of Ukraine.

The dependency on the governmental sources of money cannot be called positive, since Ukrainian state bureaucracy is corrupt (the country was the 144th state by corruption in the world in 2013). And the external sources are just external. Considering its more favorable GDP conditions, the country cannot be claimed particularly successful in research and development financing in comparison to the EaPs as well. Ukraine has a long way to go in terms of restructuring its innovation investments. The first step would be to increase the reliance on finance from domestic business enterprises.

In the next part, R&D performance will be considered.