Georgia’s Innovative Development Prospects Under Conditions of Globalization

Shota Shaburishvili, Doctor of Economics, Assistant professor

Under conditions of globalization based on technical revolution widespread technological changes eliminate traditional differences between low and high technological branches and shift the general vector of development from static, temporary comparative advantage to innovation based, dynamically changing competitive advantage.

In other words long term upward trend in public welfare is impossible to imagine without innovations.
One could find many definitions of innovations in the modern economic literature. Innovation is technological, technical and managerial novelty based on scientific advances and experience, as well as the latest and materialized idea recognized in the market. In a broader sense it is the outcome of ideas, experiments and research transformation, new or improved researched or social – economic results designed for practical use.1 The essential characteristic of innovation is novelty, ability to satisfy market demand and commercial viability.
From the novelty viewpoint, innovations include:
Ø New or improved goods;
Ø new or improved technological process;
Ø New forms of managing production, trade, financial or any other activities.
From market demand satisfaction viewpoint, innovations can be:
Ø Evolutionary. It manifests itself in modification of an existing product and is created in response to the familiar market needs. However, it is considered to be the best way of satisfying demand
Ø Revolutionary, directed to satisfying demand, originated simultaneously with a novelty. Innovations of this kind are rarely and unexpectedly born. Actually, they create new market.
Comparison of revenues and costs is the basic criteria of realization of any new idea. Technical novelty can not be regarded as innovation unless it brings an economic effect in terms of profit, reduction of production costs, improvements in productivity, etc.
Development of competitive, innovation based production can be enhanced by means of technological advances and modernization of production base. In this context, the branches of “new economy” should be emphasized, such as aerospace, pharmaceutical, radio, television and communication technique, computer, exact medical and optical equipments. Traditionally, companies of highly developed countries – USA, Japan, Great Britain, Germany, France – dominate the market of advanced technologies. New Industrial Countries of South East Asia Hong Kong, Malaysia, Taiwan, Singapore and South Korea are their important Competitor in several segments of the world market.

In the age of globalization the fate and future of a country and its competitiveness in the market depends on its ability to be included into the new innovation contours of the world economy. Besides production of scientific knowledge and technological know-how increasingly depends on research conducted in the framework joint projects. The documents of OECD indicate that countries’ participation in research and development internationalization processes is influenced by the following factors:
ü Size of the country (small countries have more internationalized R&D sector);
ü Level of technology saturation;
ü Geographical closeness to the active R&D regions;
ü Industrial specialization;
ü Nature of foreign subsidiaries, etc.
Contemporary innovation processes are characterized by essential changes in the role of science. Now science is not only the source of innovative ideas but also the penetrating resource all of the steps of innovation process. Innovation process has assumed systemic, complex character. It resulted in a qualitatively new method of scientific production. The principal characteristic of it is knowledge production within the context of its use, interdisciplinarity, heterogeneity and organizational diversification, increase in social responsibility, quality control system based on broader principles.
Revolutionary changes caused by new technologies transform conscience. The technologies themselves which took the name high hume instead of high tech became the most profitable business.3 This resulted in the development of high technological sector of the world economy. Spending on research and development is increasing.
According to OECD report “Science, technology and industry – 2003” (the report is published in every two years) the overall world expenses on R&D was 800 billion dollars, including, in 30 OECD countries – 645 billion, which was 2,33% of their GDP, in joint rating USA is a leader, with spending of 282 million $ in 2001. Japan takes the second position _ 103 million $, The following positions are taken by Germany – 53,9, France – 35,1, Great Britain- 29,4, South Korea – 22,3, India – 19, 4; Canada- 17,4; Italy – 15,5 Brazil – 13,7; Russia – 11,6; Taiwan – 10,9; Sweden- 9,9; Australia- 7,7; Israel – 6,4; Finland – 4,7 billion dollars. By the share of spending on R&D Israel takes the leading position – it spends 4,81 % of its GDP. Georgia takes 56th position.4
Since 2001 European Commission has been conducting research Innobarometer, which aims at studying the role of innovations in the European Business. The results of the last two years published in 2005 look as follows:
ü Four of five companies had entered the market of new or modernized products.
ü The share of companies investing 51% of their total investments in innovations had been 14%.
ü Only one of ten companies had not invested in innovations at all.
ü Exporters and newly established companies had been the most active innovators.
ü 86% of managers believe that market in which they operate makes them be active innovators.
ü 90% of managers believe that their companies should continue investing in innovations.
The accepted wisdom is that innovators entirely depend on “good luck” in their innovative activities, because the chances of complete loss and huge success are almost equal while implementing innovations. The economists Chan Kimm and Rene Mauborne have studied the problem for ten years and explored 200 innovation implementation cases. In their work “Profitable Business Idea: they distinguish 4 essential economic prerequisites of commercially viable business idea. These prerequisites are integrated into “commercially viable business idea” index, which can be applied by innovators:
1. Benefit: whether new goods and services attract consumer;
2. Strategic calculation of prices: what price strategy is applied by a firm in order to attract mass consumers;
3. Business model: how profitably can a firm realize new idea? Are the innovators capable to accomplish certain tasks?
4. Opportunity of definition of potential complexities.
We can distinguish three main stages in innovators’ foreign economic activities:
At the first stage companies export final products. That is the export of technological and other novelties in indirect way. Naturally, science intensive export requires huge investments in research and development. Despite this, it is regarded as the most profitable activity. Except for company’s competitiveness, science and technological potential of home country, labour skills, employment and national income, as a whole, increases.
At the second stage companies start producing innovative products via FDI. It enables innovator to save transport costs, use cheap foreign labor, materials and seize new segment of foreign market. It is useful for the recipient too, because FDI are additional source of income, which helps to accelerate technological progress of a country.
At the third stage technologies are sold abroad. AS a rule, technology has not a special innovative value for the exporter any more, although there are segments of the world market, where it still can bring some profit. For example, those technologies which are already obsolete in developed counties, may have considerable value from novelty viewpoint and be commercially viable abroad.
International marketing methods are needed to make full use of innovative products potential. When studying new idea or potential consumer of research results, one should take into consideration:
ü Innovative priorities of a country.
ü Experience of innovation implementation
ü Competitive position of a firm in local and international markets
ü Degree of interest in strategic partnership with an innovator.6
Under global competition interfirm and intersectoral collaboration is a widespread means of increasing efficiency of innovative activities. Contacts between government, universities, industrial and science organizations are also intensified. The main forms of collaboration include science and technical parks, innovation centers, joint ventures, university scientific and technological centers, agreements on industrial and university research, research consortia. Powerful research and production complexes as a rule are created around universities. One of the best examples of it is the Silicon Valley in the USA, which was established at Stanford University. Its creation was determined by high technology industry. There are more than 4 thousand computer firms in Silicon Valley. 1/3 of USA rockets and air planes are produced there, 1/5 of world production of semiconductors, 1/6 of computers. The American corporations IBM, Intel, Japanese Sony, Taiwan Acer Corporation and other companies have research centers in Silicon Valley.
Formation of new technological foundation of companies complicates “science-technology, production-consumption system”, which, in its turn, adds new functional elements to the innovation process. Except for marketing, investment component has taken an important position in financing it. Financing the innovation process is a very acute problem. Attraction of investments to innovation projects is difficult because of their long-term character and absence of return at the first stage. There is also the risk that these investment will not provide any return at all. Private sector is the major source of financing R&D activities in Western countries. More than 70 % of research expenses are financed by the private sector in the highly developed countries.
Under conditions of globalization, innovative development of countries depend not only innovators’ attempts, but also on the effectiveness of government policy. On the basis of developed countries’ experience, we can distinguish the following directions of government participation in these process:
ü Structural policy. It includes business environment for the innovators. Of course, it should aim at permanent improvement and expansion of the prospective innovation “greenhouse”. It requires more various initiatives: technological, competitive policy, deregulation, tax relief, shares in large research projects, favorable terms for crediting innovative activities, providing land or other facilities to innovative companies and science organizations free of charge, infrastructure development.
ü Intermediation (broker) policy. The state undertakes organization of meetings between science and business circles, governmental agencies. That helps to make close contacts and strategic partnership.
ü Pretentious consumer policy. The state sets high standards for quality of goods and services, technologies or technological process that makes firms elaborate and implement novelties.
Thus, two level system of factors define the prospects of innovative development under conditions of globalization. The first level encompasses those strategies and methods, which are applied by the firms to reach and maintain competitiveness in the world market. At the second level government is a decisive factor, which provides direct or indirect support for local innovative firms.
Unfortunately, Georgia’s export and economy structure makes draw two unfavorable conclusions:
1. Innovative activities of Georgian firms is low. That impedes to reach and maintain international competitiveness;
2. Georgian model of economic development does not correspond with and is not even similar to that of developed countries. Georgia does not hold not a single niche in the world market of innovative products.
Georgia is rich in intellectual capital. Accordingly, Georgia possesses the most significant resource for economic development and its rational use will provide considerable growth. It is necessary to realize that the long-term development vector of the country must be determined by human capital. Georgia needs national policy, which will lead to formation of a powerful innovative sector. Our country will be able to take its worthy position in global division of labor by means of the very sector.
Georgia has considerable advantages and opportunities to shift the new model of development:
o Universal secondary education system;
o Developed (reformed) higher education system;
o A large network of research institutions;
o Internationally recognized scientists;
o Cheap and high skilled labour;
o Liberal trade regime;
o Favorable investment climate
o Opportunities of formation free industrial zones;
o Democratic political system;
o Favorable geographical location;
o Membership in international organizations;
o Participation in international projects.
The main weaknesses and threats for Georgia’s innovative development are:
· Low technological level of production facilities;
· Lack of financial resources for modernization and renovations;
· Low quality of management;
· Imperfect institutional and legal mechanisms for stimulation of innovative activities;
· Deformation of industrial structure
· Weak orientation on quality improvements
· Threat of political instability, lost territories
· Economic sanction on the part of trade partners.
The experience of some developed and developing countries (China, India, Vietnam, countries of Central and astern Europe) shows that attraction of FDI accelerates innovative processes. Production system modernization by means of foreign resources enabled these countries to reach foreign markets and take certain niches there. Entry of transnational corporations encourages innovative development: subsidiaries are established not only to produce goods and services, but also have research function. After the Revolution of Roses there was a considerable shift in FDI attraction in Georgia. In 2004 FDI inflows was 0,5 billion dollars, in 2006 – 1,2 billion and in 2007 attraction of 1,7 billion investments is pre-estimated. This is about 22-23% of GDP. The success is due to the investment climate improvement measures taken by the Georgian government, including:
ü Tax reform. By the new Tax Code adopted in 2005 business taxation rates and taxes were reduced. According to the research of the World Bank and the European Bank of Reconstruction and Development, in 2002 84% of interviewed companies considered tax administration the major problem. In 2005 this indicator fell to 23%. President’s new initiative regarding elimination of social tax and reduction profit tax form 20% to 15 % is also very important.
ü Liberalization of foreign trade. By the Customs Code adopted in 2006 customs procedures were facilitated, customs tax rates were reduced, import of long-term assets is imposed by zero duty, that stimulates foreign trade and especially trade in high tech products.
ü Facilitation of company registration procedures. Changes in the Georgian Law on Entrepreneurs limit registration dates and eliminate various bureauctratic impediments that make Georgian business more attractive.
ü Facilitation of licensing, leaves and labour regulation. Georgia has one of the liberal legislation in this field.
ü Free industrial zones should play an important part of attraction of high tech FDI.
Although, it should also be noted, that only technological novelties accompanying FDI are not sufficient to form sustainable innovative sector. It requires innovative potential evaluation. Scientific elaborations and inventions should be brought to “market conditions”. It also requires search for novelties and stimulation of demand for them, establishment of innovative firms and governmental support for their access to the foreign markets, development of venture business. At leading universities of the country (Iv. Javakhishvili Tbilisi State University, above all) it is reasonable to establish business incubators, technical parks.