Successful economic development is a process of successive upgrading. As nations develop, they progress in terms of their characteristic competitive advantage and modes of competing. Following Porter’s model[1], we can identify three stages of economic competitiveness. First, there is the Factor-driven economy, where basic factor conditions such as low-cost labor and access to natural resources are the dominant sources of competitive advantage. Second, there is the Investment-driven economy, where competitiveness is a result of increasing the efficiency of production and of improving the quality of the produced goods or services. Third, there is the Innovation-driven economy, where the ability to produce innovative products and services at the global technology frontier using the most advanced methods becomes the dominant source of competitive advantage.

Innovation ranks from creating to adopting the new

According to OECD definition, “Technological innovations comprise new products and processes and significant technological changes in products and processes. An innovation has been implemented if it has been introduced on the market (product innovation) or used within a production process (process innovation). Innovations therefore involve a series of scientific, technological, organizational, financial and commercial activities“. The complete innovation process involves creation of the new and its implementation. The later can be done directly or after a transfer process through the knowledge market.

This paper will address both the process of creation and the adoption of the new.

Innovation means more than research

In particular, the evolving views reflect the transition from the linear view on the innovation process to the current systemic one. While both of them position RD as either the initiating or the decisive factor of the innovative process[2], most recent approaches[3] tend to give always-higher emphasis to factors defining innovation outside research and even outside the technological progress, as well as to other related sides of the phenomenon as organizational and managerial changes. This also stresses the importance of entrepreneurship.

Innovation is one of the key factors explaining the differences of growth rates in OECD

What at microeconomic level means competition, at macroeconomic level translates into growth. According to OECD studies[4], “in the last decade, per capita growth rates in OECD countries have ceased to converge. Productivity has accelerated in some of the economies, most notably the United States, and slowed down substantially in others, such as continental Europe and Japan, while signs of what has been named a New Economy, driven by the upsurge of new technologies, have emerged”.

In addition to the primary influences of capital accumulation and skills embodied in human capital, the econometric analysis confirms the importance for growth of RD activity, the macroeconomic environment, trade openness and well-developed financial markets. Using a standard proxy for technological progress, multi-factor productivity (MFP) growth[5], there is evidence that these processes have been particularly important in Australia, Canada and the United States in the second half of the 1990s.

Europe is questioning its results

According to Sapir Report[6], “despite the institutional achievements of the EU its economic performance is mixed…The EU failed to deliver satisfactory growth performance, in contrast not only with expectations but also with recent US accomplishment”. In the EU, there has been a steady decline of the average growth rate decade after decade and per-capita GDP has declined decade after decade.

Europe’s unsatisfactory growth performance during the last decades is “a symptom of its failure to transform into an innovation based economy”. This is reflected by the benchmarking exercises on innovation related indicators.

US-EU15 gap in main innovation indicators

Source: 2003 Innovation Scoreboard

As Sapir report further explains, ”A system built around the assimilation of existing technologies, mass production generating economies of scale, and an industrial structure dominated by large firms with stable markets and long term employment patterns no longer delivers in the world of today, characterized by economic globalization and strong external competition. What is needed now is more opportunity for new entrants, greater mobility of employees within and across firms, more retraining, greater reliance on market financing, and higher investment in both RD and education. This require a massive and urgent change in economic policies in Europe”

2. The reaction of Europe: the Lisbon Strategy

In March 2000, The European Council Lisbon, stated the target for EU to become by 2010 “the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion”[7] The goal of the Strategy is to help Europe to fill the gap with the USA, that has outpaced the developments in the European zone.

The knowledge-based economy is a larger concept that integrates alongside innovation the information society and the human capital.

Box 1: Innovation as part of the knowledge-based economy

The EU approach is mirroring the World Bank framework for assessing the development of KE (see the program “Knowledge Assessment Methodology” - http://info.worldbank.org/etools/kam2004) consisting of four pillars, as follows:

An educated and skilled population

A dynamic information infrastructure.

An efficient innovation system.

A supportive economic and institutional regime.

As suggested by empirical evidence, these pillars are reinforcing each other, eventually leading to a behavioral shift in the business organization.

OECD (2003) suggests that the information and communication technologies (ICT) are very important for innovation. This is happening on three levels:

-          The ICT use is increasing the efficiency of innovation

-          The embodiment of ICT in the productive capital represents the main driver of pick-ups in productivity growth

-          Technological progress in the ICT industry itself in those countries where this industry has a relevant size, is an important driver for growth.

This trend is expected to continue as innovative ICT-based businesses and markets are still at an early stage of development and further changes may be expected in the future.

Nonaka and Takeuchi (1995) have emphasized primordial role of human beings for the knowledge creation. While computer systems are privileged carriers of information, knowledge resides in the user's subjective context of action based on that information.

Since 2000, the Lisbon pillars have developed into a full-pledged Strategy, covering almost all of the EU's policy areas: economic, social and environmental. The Strategy is under permanent updating and reconfiguration, as long as both the theoretical framework and the policy context evolve.

The fulfillment of the Lisbon strategy enjoys the highest political attention: the European Spring Report, dealing with the progress in achieving the Lisbon targets and with deciding future priorities, is one of the most important document on the agenda of the Spring European Council, gathering together EU Heads of State and Government[8].

The central focus of the Strategy remains higher competitiveness through innovation and research[9], although both the concepts and the political means to achieving them have changed substantially during the last periods. And with the innovation for knowledge-based economy in the heart of the Lisbon Strategy, innovation policy has gain increasing interest from both the policy makers and the general public.

Since the adoption of the Lisbon Strategy, other four Spring Reports have been published, with each of the Spring European Council proposing different understanding in approaching the field of innovation and research. These reflected changes in the visions of the problem, but also the need for refinement of policies (Stockholm, March 2001, Barcelona, March 2002, and Brussels 2003, Brussels 2004)[10].

3. Romania in the face of competition

Romania has the lowest competitiveness index in the EU and candidate countries

Currently, Romania is a laggard in terms of competitiveness. According to Global Competitiveness Report 2003-2004, Romania is ranking on the 67^th position out of 80 countries, far from most of the candidate countries (evaluation for 2002). This is particularly worrying, as besides the challenges coming from global market competition, Romania will confront with the internal competition of EU. This creates a huge pressure at the current gap. The goal of convergence calls for an accelerated transformation given that EU is in itself a fast moving target.

Most of the Romanian economy of today is to a large extent factor-driven

Most of the domestic firms produce goods or services designed in other, more-advanced countries. Technology is assimilated through imports, foreign direct investments and imitation. Firms have limited roles in the value chain, focusing on assembly, labour intensive manufacturing, and resource extraction. However, there is also a part of the economy, which may be considered investment-driven. The last couple of years have brought new investment in efficient infrastructure and policy measures aimed at creating a business-friendly administration. The products and services become more sophisticated. Technology is accessed through licensing, joint ventures, FDI and imitation. At the same time, embryos of an innovation-driven economy have developed, especially in the Information and Communication Technology (ICT) sector, which has a high competitive potential.

The cost-benefit ratio of accession is highly dependent on the ability to increase the innovation capacity

While the financial flows and the compulsory investments resulting from integration are more often acknowledged, the more consistent benefits are connected with competitive growth. Thus, the main challenge of integration is dependent on a successful shift of the way of production, towards a more innovation-based one. With progress in the integration process, the companies will need to respond to an ever-increasing competitive pressure, following several factors:

· The increase in the activism of the EU companies in Romania

· Trade openness will continue to upgrade domestic consumers’ preferences on the internal market and the higher revenues will free resources for developing more sophisticated tastes.

· After integration in the EU and the adoption of EURO, the exchange rate policy will be no longer able to help local exporters.

· With lower-tech exports, Romanian companies might face the fierce competition from the emerging low costs economies, as well as the risk of delocalisation of the existing FDI.

At the current level of development of Romanian economy the urge for structural reforms tends to shadow the more subtle, whilst equally important, issue of innovation. While EU is currently most concerned with social cohesion, job creation and priority to research and innovation, this seems less applicable to Romania in the short-run, where restructuring (incl. job destruction), wage limitation, control on inflation and improving basic business environment (incl. control on payment arrears) are the top priorities. Romania, as candidate country is guided primarily by the Copenhagen criteria following the target of “establishing a functioning market economy and having the capacity to withstand competitive pressure and market forces within the Union”. While integration into the single market without market economy is not possible, lack of emphasis to preparing the capacity of the country to withstand the competitive pressure might hinder the country position in the longer run. A decisive action in the field of Research-Development and Innovation (RDI) might be the key of reconciling the two sets of objectives.

4. Where does Romania stand

The Summary Innovation Index is positioning Romania in a catching-up position but with a very low staring point

The recent trends allowed the upgrade of Romania’s position in the Summary Innovation Index (SII) to a catching-up position. Leaving aside the rather debatable meaning that the indicators hold for Romania, hiding various local realities, the catch-up process risks to be rather slow: assuming freezing European values and sustained rates of growth for Romania, at their 2003 levels, between 5 and 10 years are needed for catch-up even for the most fast growing indicators in the scoreboard. A more realistic scenario, implying learning curves and reasonable assumptions regarding the rate of growth at the European level would push the duration of convergence at over 20 years. The very high rates of growth need to be insured for significant periods so that the catching-up to become a perceived reality can by induced only through in-depth, coordinated policy action.

Positions of the countries relative to the EU-15 Summary Innovation Index

Source: European Innovation Scoreboard, 2003

Box 2. The monitoring system used by EU

Several instruments are put in place to benchmark and monitor the progress of EU members and candidate countries in fulfilling the Lisbon criteria. For the analysis of the progress in RDI, a multi-level analytical framework is constructed and implemented, in order to support the “open coordination approach” adopted by the European Union, as follows:

The Thematic Trendchart Reports are annual in-depth policy studies concentrating on main policy intervention areas identified for the enlarged EU, namely Industry – Science Relationship, Innovation Financing, Intellectual Property, Start-up of Technology Based Firms. Theme – specific Trend Reports are also published without a fixed periodicity.

The Country Trendchart Reports are monitoring the actions taken in implementation of the main policy priorities as described by European Documents. An assessment is made regarding on the current and expected effects of the measures under review.

Innovation Scoreboards are the main statistical tool of the “European Trend Chart on Innovation”, developed yearly. It allows relative strengths and weaknesses of the innovation performances of the EU Member States and candidate countries to be assessed. The “European Innovation Scoreboard” compiles a set of commented indicators under four categories: Human resources, Creation of new knowledge, Transmission and application of knowledge, Innovation finance, outputs and markets. It also propose a Summary Innovation Index as a weighted average of the re-scaled values of the indicators, where the highest value is set to 1 and the lowest value to 0. The value of the SII ranks by definition between 0 and 1. Data are missing for many indicators for the Acceding and Candidate countries, the US and Japan. Therefore two composite indicators have been calculated in 2003 report:

• The SII-1, covering all indicators, is provided for the Member States, Switzerland, Iceland

and Norway.

• The SII-2 is calculated for all countries, using twelve widely available indicators: these

include all five human resources indicators, all six knowledge creation indicators and ICT

expenditures.

For all indicators in the Innovation Scoreboard, Romania is significantly below the EU average

There is no doubt that the policy and innovation paths are different from one country to another: the “open coordination method[11]” is nothing about standardizing the policies. The discussion below intends to present the main features that define the profile of Romania relative to the rest of the analyzed countries and the characteristics of the Romanian innovation path.

The relative position of Romania against the EU15 average is summarized in the graph below:

Source: European Innovation Scoreboard, Country Profiles, Romania 2003

For all the 12 indicators, for which data is available, but one, Romania shows values less than half of the EU average. As for some of the indicators the relative position of Romania is 1% or less, the registered growth rates are rather irrelevant.

As for some of the indicators the relative position of Romania is 1% or less, the registered growth rates are rather irrelevant.

The European Innovation Scoreboard identifies that at the level of Candidate Countries the major strengths for Romania are the trend for education, trend for public RDI, trend for USPTO patents. The major weaknesses remain trends for business RDI, current performance in number of all patents.

The less worrisome figures when compared with the EU are in human development areas, the employment in high-tech manufacturing in particular.[12] The comparison of trends and levels show that the relative advantages of Romania in innovation field are connected with the quality of human resources, although this conclusion should be regarded with some caution.

The structural indicators reveal huge gaps in international patents

Although Romania had a Co-operation Agreement with the European Patent Organization (EPO) on the extension of the effects of the European Patents to Romania, the number of applicants for an EPO patent is insignificant. However, it is expected that at least from the point of view of access, the situation will improve, as since March 2003 Romania became a member of European Patent Convention (EPC), agreement replacing the extension of patents.[13]

Number of patent applications to the European Patent Office (EPO) per million inhabitants

	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001
US	86	88	91	96	106	117	130	142	166	170 (ps)
Japan	97	89	90	88	101	115	123	132	160	175 (ps)
EU15	84	83	86	92	97	115	130	141s	159 s	161 (ps)
CC average	:	3	3	3.7	3.8	4.5	5.5	5.4	7.7	7.6 (ps)
Romania	0.35	0.35	0.26	0.79	0.75	0.4	1.33	0.98	1.11	0.76 (p)

Source: Structural indicators; (ps) = provisional estimate; (p) = provisional;

Data registered by the United States Patent and Trademark Office (USPTO) refer to patents granted as opposed to applications, which is the case of the EPO data. However the situation for Romania is not different: not only that it ranks on the last place, but at a great distance from the other candidate countries, except Bulgaria.

Patents USPTO per million inhabitants

	1998	1999	2000	2001
US	304	315	315	322 (s)
Japan	248	249	250	265 (s)
EU15	67	69	74	80 (s)
ACC	2.18	2.30	2.31	2.54 (s)
Romania	0.18	0.27	0.31	0.49

Source: Eurostat - Structural indicators. (s) = Eurostat estimate

One should say that when referring to this indicators there are several different benchmarks: first U.S., then the “engines” of Europe (Germany and at a great distance France), then the most of EU members and some more advanced candidates, and a more heterogeneous group of the latecomers. The quantitative gaps between these quite distinct benchmarks reveal systemic differences. From this point of view, the number of Romanian patents is simply characterizing a non-functional system, which requires a profound reconfiguration.

Domestic patents are also very low

From the very beginning it should be mentioned that the whole set of documents released by the Romanian authorities regarding the evolution of research, development and innovation system do not address the issue of patents. It is, for instance, the case of the Annual Report for Research, development and innovation in 2001-2002 issued by MER, or of the Pre-Accession Economic Program (PEP) issued by the Romanian Government in August 2003 (although it has a dedicated chapter called Scientific research, technological development and innovation).

Moreover, the report for 2001-2002 does not refer to the way in which the results of research would be monitored. On the other hand, in PEP it is mentioned that during 2003 451 programs (out of 3286 financed by means of the National Plan for Research, Development and Innovation) have been “finalized, and permit the transfer of the respective results, in their larger majority new or improved products or technologies, to the economic environment”.

This situation where the results are not evaluated or are self-evaluated maintains the RD system closed and unable to connect with the industry. There are two possible reasons for this.

First, intellectual property is still appreciated only for its basic function, that of protection, without consideration for its more important role, that of creating a market. This maintains the validity of the statement that “the limited comprehension, among the various actors, of the process of technological transfer (i.e. Romanian research- Romanian patent-investment-beneficiary company practically stopped the relation [between RD and economy]”[14].

Second, internal patents show extremely low values, revealing the crisis of Romanian research system.

Patent applicants at Romanian State Office for Inventions and Trade Marks

	1998	1999	2000	2001	2002
Romanian applicants	1299	1061	1003	1228	1477
Foreign applicants	473	342	289	281	205
Total (Law 64/1991)	1772	1403	1292	1569	1682
Romanian patent applications per million inhabitants	58	47	45	55	66

Source: Romanian State Office for Inventions and Trade Marks, Annual Report 2002

Most of the patents applications are coming from inventors, their share showing an increasing trend since 1998, reaching 75% in 2002. This fact is reflecting at the same time the creativity potential of Romanians and the weak capacity of the research system to use this potential (although 70% of the research units are supposed to perform technological research) and to direct it towards more complex innovations.

The cost of the patents is very low by international standards, and the institution offers possibilities to advertise the patent in view of commercialization. Nevertheless, limited interest from the agents to protect and especially advertise the innovation is manifest.

5. Understanding the facts

The purpose of this section is to analyze the RDI framework in Romania through an integrated vision of a functional innovation system, aimed at enhancing economic competitiveness. The proposed framework is based on the most recent theoretical background underpinning the Lisbon strategy and its further developments and describes both the role of innovation in the economic structure of a country, and the functionality parameters of the innovation system defined. [15]

In our model, the innovation process involves five elements:

the research system (which is the center of knowledge production)
the innovation drivers (enterprises, which transform knowledge into market products)
the innovation infrastructure
the capital and financing channels
the labor resources and education services (human capital)

In reality the five elements are often overlapping, as for instance a research unit can also function as an innovation driver, companies might have their own research units, etc. but theoretical simplification may be more useful in order to grasp better the different functions of an RDI system.

5.1. The Research system

The emergence of innovation centers within the research system is slow

The most common classification groups the research units into: Research institutes, Research departments of universities, RD companies, RD departments of the companies. From the beginning it should be mentioned that we are primarily focusing on the issues associated with the applied research, as it is closer to the context of innovation policy.

In Romania, the definition of the research system is given by the Ministry of Education and Research (MER), which is also used, with some minor methodological differences, by the National Institute for Statistics. The definition of MER – Research presents the Romanian research system as comprising 590 units developing research-development activities, grouped in the following[16] classes:

- 34 national research-development institutes, under the coordination of the central public administration. The 34 national research-development institutes are distributed under the coordination of 8 ministries. The most important coordinating ministry remains MER, which has 18 national institutes under its direct responsibility.

- 227 public institutes, subordinated to MER, other ministries, Romanian Academy and Academy for Agricultural and Forestry Sciences (AAFS) and Academy of Medical Sciences;

- 15 research-development institutes operating on the basis of the GD No. 100 of 1991 and which are in process of re-organization in legal forms according to the norms in force;

-310 joint-stock companies, public or private companies, that have the research-development as main object of activity. These companies have at least a RDI department, with a minimum number of 8 employees working within. MER definition is quite narrow, and does not include any company from the ICT field.

According to MER, the research system focuses on three main segments with various contributions to the RD activity at a national level, and that is:

a) Technological research, carried out mainly through the national programs for RDI, coordinated by the MER – Research, which represents about 85% of the total amount of RD activity. The financing of the national programs for RDI is made through a competitive system.

b) The research oriented towards the natural, exact and social and humanistic sciences, carried out in the institutes coordinated by the Romanian Academy and partially by the Academies specialized in the field (The Academy of Agricultural and Forestry Sciences, The Academy for Medical Sciences) that represents 10% of the total amount of RD activities. For this segment of activity, the financing is achieved mainly in an institutional regime.

c) The research performed in the universities, carried out mainly through programs coordinated by the National University Research Council– NURC – and which represents 5% of the amount of RD activity. This activity is financed in a competitive regime from special sources allotted. University education and research are fractured from the activity of research institutes. The networking between Research institutes and the university is almost missing. Moreover, university research is too theoretical[17], and important efforts should be made in order to establish a genuine RDI tradition in universities.

The main classification of research activity is into applied and fundamental research, but this does not perfectly match the taxonomy of the institutions nor of the financing instruments. The closest classification is provided by NIS, according to which the expenditures for RD projects were distributed in 2002 as follows:

- applied research - 56.4%;

- development projects (prototype and demonstration) – 22.9%

- fundamental research – 20.7%

The private research represents only 20% of the total research

As RD activity is still concentrated in the public sector (about 80% of research activity)[18], it presents the specific bureaucracy and lack of initiative (reflected also in the weak marketing activity), all these resulting in the weak capacity to produce marketable outcomes. In 2002, the share of the private sector in total expenses for RD was 20.6%. However, the companies specialized in RD received only 0.5% of the total RD expenditures. Possible explanations regarding the low share of private sector in the research activity, both as a client as well as a supplier, might reside in the low capital availability (including the non-competitive allocation of resources from the state budget) and the lack of entrepreneurship in the research field.

The situation is aggravated by the legal ambiguity regarding the possibility in paying the researchers from the state-owned research units for the non-budgetary projects, which creates a major constraint in stimulating the researchers’ initiative.

Moreover, the trials made so far to privatize some of the RD units proved unsuccessful, as 95% of the privatized units were closed afterwards[19] , mostly because up to now the privatization of the RD units have been made through the same procedures as for the other economic units.

The human capital is deteriorating…

As a consequence of the low budget, the number of researchers decreased constantly (from 1.62 per 1000 inhabitants in 1991 to 1.1 in 2002[20]), simultaneous with the increase in the average age[21]. The community of researchers from the research institutes is surviving from a mix of national and international financing, which is nevertheless insufficient for ensuring a steady motivation and efficiency. Facilities to the youth 16-24 years old, pupils and students, wishing to work in research (GD no. 442/2003 regarding the approval of measures to attract, prepare and establish youth in research) have been granted, but the measures have been too recently introduced to have produced already accountable results.

...and the research system is under-capitalized

Again as a consequence of the low budgets, research infrastructure became morally outdated (5 to 10 years)[22]. Even in 2002, the investment covered only 13% of the total RD expenditures (less than 10% for technical equipment only), while the wages represent roughly half (49.1%).

It is not surprisingly therefore that a research system that perform mostly activities related with the production and industrial technology (41.9% of the total expenditures with research and development are dedicated to this type of research), facing low wages and low capital investment, encounter serious difficulties in become a system of innovation centers. Again, some success stories might be found.

The research system structure is very diversified by domains, fact that represents an opportunity for future development but, in the context of the low total budget, is translated in a dissipation of resources. Instead of being prioritized, money from the state budget dissipated into a very large number of projects, sometimes affecting their chances to produce substantial output.[23]

5.2. The innovative companies

Research-based innovation in the business sector is performed in islands of specialization

The knowledge economy puts in the center of the innovation system the innovative enterprise, of which technological / knowledge investment decision, therefore behavior, is the very driver of economic growth (Soete, 2004). It balances the expected benefit from innovation given the perceived consumer preferences with the cost of developing traditional products at the average profit margin, on a specific market, and are initiating the innovative process, based on their market strategies. Therefore, firms acting as innovation drivers should not be regarded as a passive demand for knowledge, but rather as active designers of the innovation.[24]

An important distinction needs to be highlighted, and it follows the earlier one between the innovation with and without research. A company might be innovative without running a research department. Those that have such a department (as discussed above) are automatically included in the innovative system, under the assumption that the efficiency of the research expenditures results for the innovation it brings to life. The companies that perform in-house research activities are usually seen as the network alignment nodes through knowledge diffusion, unless a very clear model of clusters around other knowledge centers (as universities of research institutes) is not dominant on a given market.

Based on an analysis on the expenditures for research and development as well as employment, one can asses that the model of Romanian applied research weights more the research developed in-house. Based on the funds spend, 59% of the research is performed in the business sector, excluding the companies that have RD as main object of activity. 50% of the research staff but only 39% of the researchers are hired in the business sector for research and development activities.

The distribution of the in-house RD expenditures and staff on activities (2002)

	Total employment	Researchers	Expenditures	Share of RD expenditures in turnover (2001)
Agriculture, forestry, fishery	17.5%	11.5%	12.6%	0.79%
Extractive industry	6.3%	7.0%	9.3%	0.44%
Food and beverages	0.5%	0.6%	0.6%	0.00%
Textile and clothing, leather and footwear	1.7%	0.8%	0.6%	0.03%
Wood and woodwork	0.2%	0.2%	0.1%	0.02%
Cellulose and paper	0.5%	0.5%	0.5%	0.06%
Oil processing, cork and nuclear fuel	3.2%	3.6%	7.5%	0.12%
Chemistry	5.9%	5.9%	6.3%	0.32%
Rubber and plastics	1.3%	1.3%	1.4%	0.08%
Construction materials	2.1%	1.3%	1.2%	0.10%
Metallurgy	4.1%	4.3%	5.6%	0.43%
Metallic construction, machinery and equipment	45.3%	51.7%	45.0%	0.96%
Other manufacturing	1.7%	1.5%	0.8%	0.03%
Electric energy, water and gas	1.5%	1.7%	2.6%	0.19%
Constructions	1.6%	1.4%	1.2%	0.03%
Other (excl. specialized RD)	3.8%	4.1%	3.7%	0.01%

Source: Authors’ calculations based on NIS data, 2002

Theoretically, the RD intensity increases with the size of the companies given the fact that these companies have the financial resources to sustain RD activities. Many of the big companies in Romania still base their market leadership position on appropriation of various advantages derived from the state ownership. Often, their RD activity is a legacy of the former regime. Therefore, given the sectoral orientation of these companies and the above mentioned characteristics, we can asses that they have only limited potential of shaping network alignment and are not drivers of innovative activity, except some islands of excellence in selected sectors, both new and traditional. According to Romanian government (MDP and FTD, 2002) estimates in 2002, the Romanian exports continues to be dominated by low-tech exports, heavily relying on low and medium skills labor (75.6% of the total exports). Besides, Romania is still an outsourcing destination, rather far from the production frontier (certain sectors, as ICT, might be find closer, mainly due to their possibility to exploit the advantages derived from the high level of codification of knowledge inner to the domain, making this industry the frontrunner of the globalization[25]). The MNCs are transferring to some extent technology, but less RD know-how, as they are innovating in their headquarters[26]. Again, exceptions are companies in high-tech as IT and telecommunications. We can asses that so far, Romania did not succeeded in transforming the competitive pressure from opening the external trade into a stimulus for local innovation. This situation started to change recently, but again, sectoral differences are very important.

The companies’ propensity for innovation is very low

The conclusion so far is that the current stage and model of development did not push Romanian enterprises towards a RD-based functioning. However, this view might be nuanced when distinguishing between innovations based or not on RD activity. Size is the main factor that affects the profile of an innovation driver. Vossen, 1998, show that there are several sources of relative advantages that small and big companies hold with respect to innovation. Large companies have better access to bank financing, and can afford better to assume risks derived from RDI activities. On the other hand, SMEs are more flexible, and can adapt faster to demand changes. SMEs have less inertia, and even though they are more dependent on financing and infrastructure, they play a key role as innovation drivers.

Essentially the relative strengths of big companies lie in their resources while of small companies in their flexibility. In this case, the challenge for the management is to seek for higher flexibility in large organizations or to compensate for lower resources through clustering and cooperation for the small enterprises.

Another possible differentiation is between start-ups and existing firms. Start-ups are by excellence innovative, as they often improve the existing production processes. New firms bring fresh business ideas, which lead to innovation. On the other hand, older firms benefit from their experience, and thus they are more mature when deciding to innovate. For an existing firm, the fine-tuning of an innovation is easier, carrying fewer risks.

Also, the systemic view on innovation open wider possibilities for the innovative enterprises to locate on different levels of innovation, levels that are independent on RD per se. Any of the circles that can be extracted from the representation below might be a possible business trajectory for an innovative company.

The innovative business trajectories in a systemic view on innovation

Source: Kolk (2004)

The recent tendencies in investment and trade developments show that there is some increasing awareness in the business environment regarding the need to upgrade the technological level. Unfortunately, the innovation pattern had already been lost: the share of enterprises with applied technological innovation decreased from 32% in 1996 to 10% in 2000 and the share of enterprises in which new or improved products value is over 10% of turnover decreased from 16% to 3% over the same interval[27]. There is no recent data on the level of innovation activities in Romania, therefore inferences are to be indirectly made, through the existence of the innovation preconditions.

One very important signal of low diffusion of innovation is the very low level of innovation diffusion in Romania, even below the RD-based innovation

Despite its technically qualified labor[28], Romania is struggling among the last positions between the countries in the Innovation Scoreboard sample, both in term of RD based innovation and diffusion of innovation[29]. The failure in dissemination of knowledge partially due to the lack of vision that affects the (mostly state-owned) research system is reflected by Romania being one of the very few countries producing more RD based innovation that it is able to diffuse. A status surprising and costly for a country from the catching-up group, that Romania shares with countries rather known from their islands of high-tech industry and associated niches on the world market. Romania owns this status also to its type of development: horizontal not up-grade (low share of high-tech, low ICT appropriation, low technological transfer) inducing unfavorable entrepreneurship characteristics.

Source: European Innovation Scoreboard, 2003

The innovation preconditions are weak, and the aggregating entrepreneurship acts sporadically

Several factors are recognized by the literature as conducive to an innovative business environment:

Basic factors for modern businesses: educated labor and capital. These are analyzed in previous sections. To these adds the active presence of entrepreneurship. The number of companies (below 20 active companies per 1000 inhabitants) is still low, as compared with the average of 45-50 per 1000 inhabitants in the EU and the network alignment process is still ongoing. The image of the entrepreneur: 57% think that the businessmen are mostly corrupt. Only 28.7% of the population have a pro-market behavior (BOP, Fall 2003).

Potential demand: young educated population, purchasing power and human development, business investment propensity.

When compared with other European countries, the share of Romanian youth is higher, although aging phenomenon started to appear. The poverty rate is high[30], Romania ranked 58^th in terms of HDI[31] out of 162 countries in 2001, which marks a slight improvement from the last years (64^th in 2000), while indicating that transition’s effects are still visible, at least for the poverty level. The demand of the local customers is rather not sophisticated. The Global Information Technology Report 2003 ranks Romania on the 73^rd position (out of a sample of 82 countries), with a score of 3.47 (out of a maximum of 7) in terms of sophistication of local buyers’ products and processes. Global Competitiveness Report ranks Romania on the 75^th position (out of 102) with respect to technological sophistication, 65^th on the firm level technology absorption. 75% of the population appreciate that the revenues are enough for the immediate necessities at most. Romanian exporters still compete mostly on costs on the international markets.

Businesses investment propensity show awareness regarding the need for investment. In particular, the rate of growth of investment in machinery and transport equipment (12.6% in 2003) outpaced by far the growth in total GDP, being mainly fuelled by a significant growth of imports of machinery and equipment (17.6% growth in 2003 after 16% in 2002).

Modern market oriented entrepreneurship: awareness, innovation management, ICT appropriation, e-commerce

Among an overwhelming literature, OECD, 2003 states that “entrepreneurial activity contributes extensively to innovation and adoption of new technologies and, ultimately, to productivity growth. New technologies are often more efficiently harnessed through the creation of new enterprises and the redesign of existing ones, both factors depending on the entrepreneurial environment”. This calls however, for modern approaches of doing business implying:

- awareness regarding the need and usefulness for innovation; Although for the moment there are still other factors that might have positive impact on the companies growth, this situation will change soon Trade openness will continue to upgrade consumer preferences on the internal market and the higher revenues will free resources for developing more sophisticated tastes. The increasing trade deficit in 2003 argue in favor of this assumption. After integration in the EU and the adoption of EURO, the exchange rate policy will be no longer able to help local exporters. With lower-tech exports, Romanian companies might face the fierce competition from the emerging low costs economies, as well as the risk of de-localization of the existing FDI. Under the pressure of losing both internal and external competitiveness, the Romanian companies will be forced to adopt innovation-oriented business strategies to survive.

- innovation management techniques based on intangibles, increasingly important today as a result of a number of factors, such as the "dematerialization" of manufacturing and the industrialization of services and the recognition of knowledge as the main source of competitive advantage and on understanding of the role of high skilled human resources and on participative business organization

- ICT appropriation and e-commerce practice: In 2002, the amount of expenses and investment in industry and services reached EUR 384 mil for IT products and services (EUR 93 per employed person) and EUR 376 mil for communication products (EUR 91 per employed person)[32]. As this means less than EUR 8 per month per person for IT and almost the same figure for communications, we can assess that it is a very low level. In 2002 the share of enterprises selling online was 0.6% of the total.

Noteworthy, for all companies, the quality of the business environment is strongly correlated with their propensity to innovate. In Romania, the business climate has improved over the last years, but much remains to be done in order to create a friendly environment for doing business and for innovating. Several monitoring instruments[33] have shown, among others, that in Romania businesses complain about market entry and exit procedures, which they still perceive as obstacles, about legislative instability or about the high amount of red tape, which increases the cost of doing business. All these regulatory and administrative barriers hamper business creation and development, thus reducing the number and the economic power of potential innovation drivers. Product market regulations are generally complying with the relevant aquis, being of moderate stringency. Strong employment regulation, instead, as Romania has, would favor, according to the OECD countries, high-tech high-concentration industries. For these, innovation is incremental, therefore it is less costly to further train a current employee than to hire and prepare a new one. Further development of the ICT sectors, currently perceived as most innovative, are favored by this structure.

5.3. The capital and financing channels

The percentage of RD expenditures in GDP is placing Romania on the last position in Europe, with a strong trend of divergence from the EU-15 average.

The negative economic growth over the period 1997-1999, led to austerity measures and restricted budgets which have influenced RD expenditure. Indicators, such as Gross Expenditure on Research and Development (GERD), recorded a downward trend from €198.9 million in 1996 to €148.4 million in 2000, representing respectively, 0.71% and 0.37% of GDP. The economic crisis affected GERD not only in absolute value, but underlined also the decreasing priority of the RD and innovation sector in the overall economy. Between 1996 and 2000, the relative importance of this sector decreased by almost a half, with similar value in 2001.

It is unlikely that private financing would grow much faster than the state one

Through the Lisbon Agenda, the European Union has set an indicative target of two thirds private financing and only one third public financing for RDI activities. However from all members and candidate countries, it is only Sweden that barely approaches to this criterion, with the share of private research of 67% . In Romania, the share of private financing in total is relatively large when compared with other candidate countries or even with EU member states (candidate countries average in 1999 was 55% while EU average was 44%). That’s why, Romania should not rely on a very consistent growth of private without one of the state budget. Considering that Romania would maintain the current state budget expenditure, and the private financing grows to this empirical maximum, it will still remains the laggard of Europe concerning the share of RDI expenditure in GDP. The experience shows the business RD expenditures emulated the decrease in public expenditure, situation explainable taking into account at least the stimulating effect of co-financing.

Business RD expenditures (BERD) - % of GDP

Source: 2003 European Innovation Scoreboard

Generally speaking, the capital for innovation activities can be divided into market financing that include the dedicated financial instrument, “venture capital” with all its variants: seed capital, risk capital, etc. but also banking financing, enterprises own resources and state direct financing through state aid, which includes grants and fiscal incentives.

5.3.1 State budget financing

Over past decades, OECD countries have tried to increase the amount of resources devoted to RDI – although there has been some reduction in recent years, largely due to falls in defense-related government outlays. A larger amount of RDI resources have been channeled directly to the business sector, as firms started to play a greater role in supporting research and innovation. Given the fact that the returns of RD expenditure across sectors are very different, the private sector may be better able to channel resources towards high return RD activities.

Many OECD governments encourage RDI in the private sector by using grants, subsidies, loans and tax credits. Evidence of large differences in the scope and expected returns of RDI activity across sectors seems to speak in favor of a more market-based (e.g. tax credits) strategy, instead of resorting to direct forms of support to specific industries, unless the latter are motivated at directing industrial RD towards areas with potentially large social benefits.

State direct financing

Given the contribution of research, development and innovation (RDI) to productivity growth, economic performance and the achievement of social objectives, it is generally agreed that governments have a role in encouraging appropriate RDI levels and expenditures. With regard to business RDI, the national authority may choose fiscal incentives, subsidies, patent rights or other instruments to increase research investments. In Romania such aid is however limited by state aid regulations, which have been transposed from the acquis communautaire.

The budget financing is very low and on a divergent trend with EU average

In 2002, the funds allocated for research from the State budget represented EUR 96 mil., representing almost 0.21% of GDP, marking a slow increase from 0.2% in 2001[34] (include self-financing). In 2003 these share had again a comeback to 0.18% (0.16% before the rectification of the state budget) and for 2004 the announced share is 0.21%.[35]

In 2002, 71% of the amount has been allocated from the budget of MER, 18% from the Romanian Academy and 10% from the budgets of other ministries.[36]

There are some tensions regarding the distribution of the state financial resources between the universities and the research institutes of the Academy, mainly because universities have their utilities paid by the state, whereas research institutes pay them themselves.[37] Such tensions are generally affecting the collaborations between the universities and the research institutes.

It is only in 1997 that the first system for financing projects not institutions was introduced, namely the National Plan for Research, Development and Innovation[38] (NP-RDI). This was based to a higher degree on competition, its priorities being established according to the Medium-Term National Strategy for Economic Development, updated within the Pre-Accession Economic Programme. But the hesitations and the “half commitment” in implementing the policies were felt once more. Law 191/1999 prolonged the operability of the previous program ‘Horizon 2000’ until the year 2002. Hence, the tow systems have been simultaneous in operation, the switch being performed gradually.

Until 2001 there were 4 NP-RDI programs, the resources being allocated mostly for RELANSIN (Re-launching Industry by Scientific Research). But, this program covered too many fields, was ineffective and in disagreement with the new system of resource allocation described above. As result, NP-RDI was restructured to cover another 10 programs in line with the national priorities established by PEP, including one regarding the development of the information society.

In 2003, two new forms of funding by means of programs of RDI activities were launched (beside the NP-RDI)[39]:

- Funding by means of nucleus research and development programs (programs specific to the national institutes or public institutions), on medium and long-term, those institutions that support the lines of research of strategic interest in the scientific and technical domains specific to the respective institution. The nucleus programs are advised by the coordinating central public administration body and approved by the MER. The funding shall be done directly by the MER, to a maximum level of 50% of the RD revenues of the RD institution of the former year;

-Funding by means of sectoral RD programs, dedicated to solving sectoral technological development problems, in agreement with the strategies of the respective sector development;

Although these financial schemes have been introduced, it is not clear which players can benefit from them, as these units have not been clearly attested yet.[40]

Beside the low level, the financial resources allocated from the state budget are very inefficiently allocated. In 2003 the Court of Accounts[41] has finalized an audit report regarding the efficiency of the public funds allocated for the National Research Programme Horizont 2000 (ongoing between 1996-2002, with a budget of approximately 343 mill EUR) revealing the bad management and the lack of interest for the efficient allocation of resources[42]. The report also noticed the absence of a unique board to co-ordinate the whole program and that “some of the resources have been used to finance different companies by accepting their collaboration without being fully covered by documents”. On the background of the lack of transparency, similar topics have been financed under different organizations, and also loss-making companies have been accepted (which is against the law). Taking these facts into account, it is unlikely that the artificial demand created through public resources will meet the real demand from the industry. As long as the state is not behaving as an exigent beneficiary for the financed projects, the research units will not learn to produce marketable outcomes. This also explains how it is possible that “many institutes have been studying the same subjects for 20 years”.[43]

State aid regulation for RDI in Romania.

In 2002, the Competition Council adopted a specific regulation on State aid for research and development. The regulation contains provisions on research and development aid related to the Law 143/1999 on State Aid and makes a distinction between fundamental research, industrial research and pre-competitive development activity.

The allowable intensity of aid will be determined by the Competition Council on a case-by-case basis; the fundamental research and industrial research and industrial research may qualify for higher levels of aid than pre-competitive development activities.

The aid for fundamental research can be awarded at a gross aid intensity of up 100%. The gross aid intensity for industrial research must not exceed 50% of the eligible costs of the project and for pre-competitive development activities this intensity is 25% of the eligible costs for the project.

Technical preparatory feasibility studies for industrial research activities may qualify for aid amounting to 75% of study costs, while such studies preparatory to pre-competitive development activity may qualify for support amounting to 50% of study costs.

Where the aid is to be granted to SMEs or the research project is carried out in an assisted area (e.g. D-zone), the aid intensity may be exceeded with an extra 10 percentage points. Where the research project is in accordance with the objectives of a specific project or program undertaken as part of the European Community’s current framework program for RDI or involves effective cross-border cooperation between partners from Romania and EU Member States, it will qualify for an extra 15 to 25 percentage points. Nevertheless, the aid cannot exceed the maximum of 75% intensity for industrial research and of 50% intensity in the case of pre-competitive development.

As regards RDI aid concerning agricultural products, the Competition Council will allow gross state aid intensities of up to 100% if the firms fulfill some cumulative conditions. Individual grants of aid under RD scheme must be notified for any individual project costing more than EURO 25 million and for which it is proposed to provide aid with a gross grant equivalent of more than EURO 5 million. The ad-hoc aid is to be notified if it is above the de minimis level (ROL 1 billion, over a max. 3 year-period)[44]. The enforcement of EU state aid rules should lead to a reorientation towards horizontal schemes in favor to RDI.

What kind of state aid is suitable for RDI?

The direct funding of industry research - through grants or subsidies - has the advantage of allowing governments to retain control over the nature of RD conducted. Subsidies ensure that industry helps address important public missions - such as defense, health care or energy development - or areas where significant gaps exist between public and private returns to RD. Moreover, government funding of business RD has a positive effect on business-financed RD, particularly in enhancing the capacity of firms to digest the knowledge generated through public research.

However, direct financing of industry RD leaves governments open to criticisms of picking winners and losers – in terms of both the topics that receive attention and the individual firms that receive government funds. Government financing can displace private RD investments and distort market competition. Although RD subsidies are sometimes favored over fiscal incentives due to their greater transparency, such supports can incur lock-in effects and be extremely difficult to phase out. Fiscal incentives to RD have a different set of advantages and disadvantages. These measures generally provide a tax credit or allowance for some portion of business RD expenditures. By reducing the cost of RD, fiscal relieves raise the net present value of prospective research projects.

Nevertheless, the place of incentives targeted to research must be examined within the context of the overall tax system of a country and its objectives. The value to firms of RD fiscal incentive programs is strongly influenced by overall corporate tax rates. Enterprises in many countries would prefer general tax relief or lowering of corporate taxes rather than targeted incentives to certain types of investments such as RD.

Fiscal incentives in Romania are mostly associated with the setting of industrial and technological parks

The Law 50/January 2003, approving the Government Ordinance 14/2002 regarding the Scientific and Technological Parks introduces local tax exemption for RDI activities within the parks.

The tax-exemption for import of equipment and know-how could have been used and was used as incentive for increasing the innovation rate through technological transfer, but recently the new Law 345/2002 on VAT abrogated it. The measure of tax exemption for implementation of patents was abrogated in 2000, although it is generally considered as one of the most common fiscal incentives for RDI.

Another measure supporting the start-up of technology-based companies is the preferential tax payments regarding software and information technology specialists’ salaries - they are exempt of taxes on their salaries.

The efficiency of governmental grants and subsidies is questionable

There is a need for more transparency, and larger access to allocation criteria and also for periodical auditing provided by external experts. In order to ensure proper evaluation, there is a need for Technology Roadmapping (studies encompassing visions of possible future technological developments, products or contexts, the output usually comprising graphical representations of nodes and links[45]). Last but not least, state financing through grants should be provided only for research activity, which can match actual demand under the form of a patent request[46].

Funds for technological transfer are introduced for connecting industry and research

In Romania, the ‘Medium Term Strategic Orientation of the Research Development and Innovation Activities’ identified two main obstacles hindering the development of innovative firms and new technology based firms. One obstacle is internal to the RD system, namely insufficient public funds, outdated infrastructure and the lack of specialized human resources. The other concerns the reduced capacity of enterprises to absorb new technologies and know-how and the low level of expenditure of enterprises on RD activities. To address these shortcomings, the Government intends to encourage investments through the establishment of an Investments Fund for Technology Transfer and Development. Other proposed initiatives are designed to stimulate start-ups and new technology based firms (NTBF), notably through the creation of incubators and research networks.

A number of schemes promoting entrepreneurship and supporting start-ups have been put in place. An example of such a scheme, which covers all regions, is the Grant Support Scheme for Start-up businesses, microenterprises and new SMEs under the Phare programme, economic and social cohesion component.

The budget funding should be allocated similarly to venture capital.

The state funding channels must act as a real demand for innovation, starting a competing market, both for companies and for other venture capital providers.

It is true that sometimes the output of the innovation process envisaged by the state funding might be broader than the benefits of the companies involved, as in the case of environmental protection. If so, this should not imply being less exigent, but having clearer definition and criteria for these objectives.

5.3.2. Market financing

Although state policy and resources are important for developing and financing RDI, the bulk of funds supporting innovation need to come from the private sector, through market financing.

In Romania, the latest available data (2002) show that the GERD was made from 48,4% public, 44,6% private and 7% foreign expenditures. Such a distribution of expenditures is worrisome, as not only shows that private contribution to RD is far from reaching two thirds of GERD, but also that market expenditure is unable to match a state contribution that is extremely low as percentage of GDP (0,23%).

Expenditures on RD on sources of financing

Sectors Sources of funds	Total	RD companies and departments	Governmental research sector	Higher education sector
Total	100%	100%	100%	100%
Domestic funds	93.0%	95.0%	94.0%	83.5%
- public funds	48.4%	33.0%	78.8%	60.9%
- own funds (prototypes, services)	30.5%	48.9%	2.8%	1.7%
- economic agents (extra mural research)	9.7%	11.3%	8.4%	5.6%
- university research	2.5%	0.4%	0.5%	13.8%
- other resources (incl. credits)	1.9%	1.4%	3.5%	1.5%
Foreign funds	7.0%	5.0%	6.0%	16.5%

Source: RD activity in 2002, National Institute of Statistics

Almost half of the research activity developed by specialized companies or departments of the companies is financed through so called own production, in particular consultancy services, but also through external research and development programs (48.9%). Public funds are an important source of financing for all types of companies, although come secondary for the private RD companies. From the total research activity, 60% is performed in the business sector, but only 24% in the private business sector.

Why is the contribution of the private sector towards RDI so low in Romania? To what extent market financing is responsible for low levels of RDI? It is not easy to find a simple answer to such questions. Nevertheless, several explanations are possible.

Firstly, the official statistics concerning GERD are undervaluing the amount of private expenditures for RDI. According to the official methodology of the National Institute of Statistics (NIS), only the specific activities of private enterprises with an RD department, employing at least 8 researchers, are counted as private expenditures. As a result, only a limited number of private enterprises are taken into account as supporting RDI. Unfortunately, the accounting system does not encourage enterprises to outline RD expenditure separately. As a result, a more precise estimate of private RDI is difficult. Nevertheless, it is clear that a number of other enterprises, especially from the IT sector, should be included in the statistics in order to have a better perspective on private RDI activity.

Secondly, structural constraints are still important for explaining why private RDI is reduced. On one hand, there is strong path dependence, in the sense that the state still perceives itself as the main promoter of RDI activity, regardless the fact that it does not have either the financial resources or the market insights in order to meet the actual demand for RDI. Only recently the state has acknowledged the need for enlarging the official RDI infrastructure by allowing the private sector to join the new category of “infrastructure entities”. On the other hand, investments are still reduced, keeping the Romanian economy undercapitalized, and unable to reach beyond the factor-based model of competitiveness.

Thirdly, there is a need to distinguish between the propensity of firms to pursue RDI and their capacity to finance such projects. The behavior of firms has been analyzed in more detail in the section dedicated to firms as RDI agents. Therefore, in the following, the analysis will focus on market financing by using resources other than the internal profits of the firms.

The main sources of financing for RDI are venture capital institutions and the banking sector. In some cases, banks may also have venture capital divisions, but usually there is a clear difference between the two categories of financing institutions.

Venture capital per se is not a significant presence on the Romanian market

Venture capital usually means investment in shares of companies, which are not listed at the stock exchange. The investment is usually on the medium term and has a high degree of risk by its very nature. Such features make venture capital very important when it comes to financing innovative research, which takes time and has an unpredictable outcome. In Romania only general investment funds exists, in an insufficient number and with rather low level of portfolio investments financing only occasionally innovative enterprises.

The Romanian venture capital market is still very young. The capital available for private equity investment is raised abroad and as a result the market is heavily dependent on how Western institutional investors perceive the country. Private equity funds committed to Romania were estimated in 2000 at around $300m[47]. In the last three years, the venture capital market has had a positive evolution, although modest in relative terms if compared to the banking sector.

Regional venture funds are becoming more active compared with country funds, particularly with respect to large deals. However, competition is not very intense. Neither is competing with banks, as they are not yet prepared to prove long-term development finance.

Venture capital funds active on the Romanian market

Venture capital company	Financing target	Amount
Advent International Romania	Stable companies, which can prove their profitability	min. USD 5 mil.
AIG New Europe Fund	Existing lucrative companies	approx. USD 10 mil.
Global Finance International Ltd.	Mature companies, with turnover over USD 6 million.	USD 2-3 mil.
Danube Fund	Companies able to assimilate the minimum amount available	min. USD 500000, max. USD 2-3 mil.
Environmental Investment Partners	Companies with minimum 3 years of activity and turnover over USD 800000	USD 1-3 mil.
ORESA Ventures Romania	Private companies with competitive management and growth potential	USD 1 mil.
Romanian Investment Fund (Cyprus) LTD	Medium and large companies with growth perspectives	USD 1 mil.
Romanian Post Privatization Fund	Medium companies with growth potential	USD 1 mil.
Baring Private Equity Partners (Romania) SRL	Market leading companies	min. USD 7 mil.
Romanian American Enterprise Fund	All companies with growth perspectives (including SME for which loan programmes are also available)	USD 50000 – USD 500000

Source: www.basepoate.ro

On the Romanian market there are ten venture capital funds that have been active in the last few years. It is worth noticing that with the exception of the Romanian American Enterprise Fund (RAEF), no other venture fund provides financing for smaller companies, such as SME. Moreover, most of the available venture capital is conditioned by a minimum amount of financing, which is an important barrier for smaller scale- businesses.

Another important aspect is related to the experience of the company requiring venture capital. Most venture funds do not consider new firms or start-ups as eligible for financing. Instead, they tend to focus on stable and mature companies, which are key players on their respective markets. The exceptions are usually confirming the rule, in the sense that smaller companies are eligible for financing only if they can prove their potential leadership in terms of market share and profitability.

Most of the venture capital available is provided for large-scale investments

The bottom line is that on the Romanian market there is no venture capital designed for the first staged of RDI activity, but more for the expansion of the beneficiary, usually in an extensive way (e.g. expanding the market from local to country level).This is not only a result of lack of competition, available funding and underdevelopment of the financial market in general, but also the consequence of the concerted action of other factors such as the level of risk propensity, the capacity for technical evaluation or the dynamics of the knowledge transfer processes.

Being highly dependent of risk, the private venture capital is exponentially connected with the quality of the business environment. The Romanian business environment is yet far from being business friendly, in spite the important progress in the last couple of years.

The availability of technical evaluation is critical

The capacity for technical evaluation cannot be built on green field. There is a need for a specific market of RDI projects, and for an accumulated knowledge regarding technology foresight. A venture fund must assess the success of a new technology by evaluating its impact on the domestic market. Such an initiative may come from the venture fund, inspired from positive impacts on other markets, but venture funds alone cannot create the necessary capacity for technical evaluation.

Last but certainly not least, there is a sort of chicken-egg dilemma. Should venture funds wait until the Romanian companies are mature enough to realize the importance of technology transfer and innovation, or should they encourage directly such a competitive behavior? What should happen first? It is clear that a proactive behavior of venture funds would be helpful, but there are reasons explaining their complacency.

In other words, venture funds may be blamed for not supporting RDI activities, but only to a certain extent. Their reluctance should not be seen as malevolence but as prudential acting. Venture capital granting is a knowledge intensive activity and maybe the knowledge transfer regarding the financing of RDI has not been accomplished yet. Hopefully, venture funds will soon realize the importance of RDI, and will be more active in this field.

The quest for the most appropriate conditions to foster investment opportunities and economic growth needs to focus on enhancing market efficiency and innovation, promoting the accumulation of knowledge and increasing the diffusion of new technologies.

For Romania, encountering significant problems in reducing the significant market distorting state-aid[48], switching from vertical to horizontal state-aid (including for RDI purposed) might be a particularly difficult policy exercise.

The need to ensure flexibility of the financial environment had been included in the Lisbon Strategy mainly by the use of the venture capital with the acceleration of Financial Services Action Plan was recognized by the EC as a priority for 2003. Romanian enterprises, potential innovators, still suffer from basic under-capitalization, although the functioning of the banking system significantly improved recently.

Therefore, the potential tensions might appear in financing the innovation, which is, as it will appear further, one of the key areas for stimulating RDI in the case of Romania.

Nevertheless, in the RDI area the potential policy tensions are not particularly likely to harm the coherence of the entire integration process. Moreover, a decisive, early action in this respect might generate significant positive spillovers.

Ensuring that the capital would flow towards innovation is one of the most daring challenges even for European countries. From the front-runners, only Norway gives high priority to financing tools. Nevertheless, a variety of instruments have been developed by member states and candidate countries alike to insure mobility of private capital, transparent state support, equity finance, venture capital, creation of guaranty mechanisms. Tax incentives are granted for a variety of motifs, as shown below. Financing the innovation remains one of the key issues in innovation policy.

Banking Sector

If venture capital is critical for financing innovation and supporting innovative research in order to push forward the production frontier, the banking sector has a major importance in facilitating technology transfer and preparing the grounds for innovation. For a country like Romania, where the technology level is low, the first stage for competitive upgrading is the technology transfer and the process of catching up with the already existing technologies on the international market. In the vast majority of cases, innovation is possible only after the technology updating. Therefore, the banking sector plays a key role in supporting RDI through financing licenses, franchises, investment in new technologies and ICT etc.

In Romania, the banking sector is going through a profound transformation. Large foreign banks have opened branches in the country and several smaller private banks are expanding, creating a stronger banking sector. There are signs that bankers are becoming more interested in establishing relationships with Romanian companies and getting to know more about their businesses than just their current monthly cash flow[49]. It is likely that the banking sector will challenge the equity investments made by venture capital funds the years to come.

There is no financing program on the market designed particularly for RDI activities yet

The banking sector was and still is reluctant to mobilize resources for RDI investment. The reason for such behavior is threefold. First, investment in RDI, even when it is only the case of technology transfer, is risky, especially in the case of Romania, where the regulatory framework is so fickle. Second, the interest rates are very high, mainly due to high inflation and risk premium. Third, the National Bank of Romania (NBR) has sterilized most of the resources of the commercial banks by offering higher-than-market interest. All the above have caused a rather passive behavior of the banking sector regarding RDI.

The last two negative factors affecting the financing patterns of banks are most likely to disappear in the following years, as the structural reforms will be completed and NBR will adopt inflation targeting policy. However, the first factor will remain a major obstacle in providing adequate financing for RDI. The risk incurred by RDI investment explains why venture capital is more suitable than bank funding in this field. Nevertheless, the banking sector remains a major source for RDI support, especially given the evolution of guarantee instruments available.

In Romania, both the interest rate and the required guarantees are influenced by the state guarantee policy and the funding and guarantees provided through foreign assistance.

…but there is an embryonic orientation towards SMEs

The National Agency for SME and Cooperation (NASMEC), as the main governmental authority designing the policy towards SME, coordinates a public guarantee fund called the National Guarantee Fund of Credits for SME (NFGCSME). The fund is rather limited in its size, and in 2003 it supported only 158 guarantees with a total value of around EUR 10 million. The fund has two instruments of providing guarantees to banks, in order to support their loans to SME: the risk sharing agreement and the guarantee agreement.

The risk sharing agreement allows the banks to obtain 50% of the credit from the guarantee fund immediately, if the beneficiary does not return the loan. An additional amount may be given to the bank later, in order to compensate the remaining difference after the judicial execution of the debtor. Unfortunately for the banks, the liquidation procedure may last quite long, and often it takes more than one year to settle the account with the guarantee fund.

The guarantee agreement provides the bank with immediate 100% reimbursement of the credit at request. This is more attractive for the banks, but at the same time requires a bank provision of 100%, according to the regulations of the National Bank of Romania (NBR). Moreover, the commission for this scheme is up to 3%, which is significantly higher than for the first instrument.

The banks are not very enthusiastic about the guarantees available through the public fund. The duration, procedures, fees and level of mandatory provisions, all of these have often discouraged banks from signing agreements with the National Guarantee Fund.

The utility of the fund is unarguable, nonetheless, in order to increase the efficiency of public guarantees, it may be advisable to make the procedure more flexible and easy to implement for the banks. Moreover, the idea of creating an entire network of guarantee fund, following the Polish example, seems to be rewarding. The knowledge of such decentralized funds would allow adapting the guarantees to the specific financing patterns required at the local level[50].

Another interesting idea is that of creating private guarantee funds under the management of the business associations, which can provide more credibility when asking banks for financing[51]. Unfortunately, business associations are still underdeveloped in Romania, and it will take a while until they become powerful enough to create guarantee funds.

Apart from the public guarantees, a significant factor in facilitating bank financing is foreign assistance. Several foreign financial institutions such as the EBRD[52], KfW[53], EU-PHARE[54], EIB[55], EIF[56] etc. provide reimbursable and non-reimbursable financing with low interest rates or guarantees. Most of the foreign assistance is intermediated by local banks, through special agreements. The financing provided by foreign assistance schemes is conditioned upon certain eligibility criteria, which define the type of beneficiary, the activities eligible for financing and the minimum/maximum funding available. External conditionality is often more rigorous than the conditions asked by local banks, which limits somehow the access to this type of financing. Nevertheless, foreign assistance contributes in a positive way to make available more and better financing on the market, and to enrich the know-how of local banks in addressing the needs of the companies.

But even in these conditions, when public guarantees and foreign assistance encourage financing, banks still do not provide adequate financing for investment, not to mention for RDI investment. Financing for investment remains low in Romania, even though its share is increasing each year. Banks have started to see the potential for supporting investment, and to some extent, technology transfer, but they still lack incentives for focusing entirely on such activity. The sterilization policy of the National Bank often proves more attractive in terms of placing bank resources than financing investment of domestic companies. The status quo will change in a few years, but perhaps the banks should consider more seriously reorienting themselves to the market, instead of taking advantage of the comfortable opportunities provided by the National Bank in its quest to maintain monetary equilibrium.

5.4. The innovation infrastructure

The innovation infrastructure bridges the research system and the innovation drivers, basically including:

Incubators, which provide basic infrastructure for start-ups;
Technological parks, which provide experimental facilities;
The knowledge market (transfer of intellectual property and technological transfer)

Of course, different combinations of these elements might be imagined, including financing channels, but again, for more relevance, we will stick here to the theoretical classification.

No clear evidence of business incubators

Although MER estimates that there are around 50 incubators, there is neither a comprehensive list of them, nor clear criteria for an entity to qualify in this category, or evaluations of third activities. Recently, an increasing role in stimulating the business incubators belongs to the National Agency for SMEs and Cooperation, which provides a list of 20 units.

One important distinction that should be made is between the innovation incubators and the more general business incubators, in the sense that the former are more complex, as they need to provide more flexible assistance, ultimately for something that has not been done before.

Significant progress have been made lately regarding industrial, technological and software parks

In Romania, the former Ministry of Development and Prognosis elaborated a program for the development industrial parks (approved by GD 1116/2001). The legislative framework provides tax incentives to investors in industrial manufacturing and related businesses, most significantly impacting the information technology industry. This program of regional economic development started in the beginning of 2002, and the experience gathered during its implementation will serve as a benchmark for the formulation of future policy for the development of industrial parks.

Another direction regards the establishing science and technology parks, as well as software parks in a number of cities. Both the Ministry of Education and Research and the Ministry of Communications and Information Technology aim to attract to the parks mostly small, start-up companies that cannot afford to pay a large amount of money on rent or public utilities. The intention is to create such parks in every Romanian city that has a university center. Negotiations with investors are at an advanced stage in four to five major cities (Brasov, Bacau, Timisoara and Iasi) with the most advanced software park already running in Galati. Software companies locating to the park benefit from real incentives both from the State and local authorities that can range from the exemption of income taxes for employees to commercially attractive rents. When the company reaches a level of development sufficiently for self-support, another company will take its place in the park.

However, the policy centered on the creation of science and technology parks appears to be mainly driven by real estate rather than by technological development or innovation interests.

The intellectual property protection is becoming a reality

Although the establishment of the main IPR setting is relatively recent[57], it proved its efficiency with the latest drop in the previously very high piracy rate[58], which otherwise could obstruct the development of very innovative local software industry.

The technical part of the intellectual rights protection is properly ensured by OSIM, but there are still doubts regarding the ability to ensure the legal action when this right has not been respected.

IPR system can play only a passive role for the knowledge market, that of attesting the copyright ownership in proper conditions for those demanding so. Thus speaking, it is not up to this system to convince different actors to protect their intellectual property.

The companies are not patenting

As mentioned in chapter two, the number of patent requests is very low, situation partially explainable by the lack of awareness at the level of enterprises. Although the cost of patenting is not high, the number of requests for patents is not increasing.

The recent decision of MER of financing only the projects finalizing through a patent request may contribute in changing the behavior in this respect.

Recent measures stimulate technological transfer

The Romanian Government, through the Ministry of Education and Research, has recently proposed, by drafting a Governmental Decision, a National Program for developing the innovation and technological transfer infrastructure. The proposed Program recognizes the importance of the innovation infrastructure and aims at encouraging, through state aid, the actors and institutions which contribute to the developing of the RDI infrastructure.

One important aspect of the proposed regulation is that it includes in the innovation infrastructure only the accredited innovation entities, which are specifically defined through GD 406/2003. Therefore, only such innovation entities are eligible for state financing within the framework of the proposed program.

What does the Government understand by innovation entity? In GD 406/2003, there are specific conditions regarding the eligibility of a firm or a department of a research institution to be considered as an innovation entity. The applicants for such a status must provide certain documentation, and need to score at least 70 points out of 100, according to several criteria, in order to be accepted in the innovation infrastructure.

Although the governmental initiative is commendable, as it aims at creating a strong network of entities, capable of giving more substance to the innovation infrastructure, there is also a negative side of the project, which needs to be addressed. Do we really need such strict definitions, and restricted access to join the innovation infrastructure? The answer depends on several factors, as the ability to ensure a real transparency of the selection process (in order to avoid suspicions), the costs and bureaucratic efforts needed have to pay, and, most important, of a real access to public financing once they qualify. Unless all this conditions are accomplished, the decision will lead only to further loose of the competition for innovation financing.

Other measures meant to encourage the technological transfer include[59]:

- The INVENT Program (with a total value of 500 billion ROL in 2004-2006[60]) destined to support the appliance of inventions. However, there are serious doubts regarding the stimulating effect for innovation, as by now a large part of the patents accepted for financing in this program were older than five years

- The enterprises co-financing 50% of the RD activities obtain the full right of applying it. Moreover the state may finance 20% of the applying costs.[61]

- The Ministry of Education and Research may finance the technological transfer of the innovation from the high-tech industries.[62] Also the ministry may co-finance the appliance of some research results for the companies owned by persons less than 35 years old.

5.5. Human capital and the education services

Along with capital, labor is another factor of production that is crucial to RDI. The existence of skilled researchers, able to instill innovation in the economic system, and to push forward technological development by offering innovative solutions, is a prerequisite for a competitive knowledge-based economy.

The Romanian education is not practice-oriented

The education system must therefore provide a constant lot of new researchers, thus providing continuity to the innovation process. The quality of higher education in particular, is extremely important in refreshing the stock of researchers, and in providing them with up-to-date knowledge.

Typically, Romanian education in math and science is quoted as very highly qualitative[63]. But serious concerns are to be rise on the ability of the educational system to transfer practical knowledge, ready to be actively used[64], including entrepreneurial skills.

Romania has one of the lowest share of tertiary educated population in Europe

Although the total number of students increased by almost 70 percent from 1996 to 2002[65], the number of tertiary education graduates in Romania is still has less than half than EU average[66]. Moreover as the number of students increased mostly in Economics and Law, the share of Science & Technology field diminished even further. The main reason is the weak demand on the labor market for these graduates, due to the delayed economic recovery. Moreover, the contribution of the private universities in S&T is insignificant, because of the same weak demand.

Despite their highest unemployment rates, we would say that the structure of the economy tends to favor qualified workers, those with average and specialized technical education, a group whose share in both active population and in employment increased steeply. But, in 2002, only less than 80%[67] of the working population with tertiary education have a position corresponding to their educational attainment. With a simultaneously tendency of the reformed and more market oriented educational system to adjust to the labor market realities, the graduates from the S&T system tend to decrease, and, unless policies successful in creating demand for the high-skilled are put in place, the risk of vicious circle in human resources might arise.

The companies are not aware of the role of life long training

Education is a continuous process, which does not stop after the school age period. Constant training is the key to progress in a global world, which changes at an incredible speed. The promotion of the life-long learning concept should be at the core of a successful RDI system.

Unfortunately, less than 5% of the Romanian labor force had participated in work related trainings provided by employers or other organizations over the four weeks prior to the survey in 2002.[68] This percent is not only the lowest in the candidate countries, but is less than half of the average of the candidate countries. However, 16% of the Romanian respondents took part in self-directed lifelong learning (in work related matters), which is not a small figure.

Education is important not only for supplying researchers, but also for providing knowledge to entrepreneurs. The innovative behavior of entrepreneurs can be stimulated through business education, in fields such as entrepreneurship, management, marketing etc. The appetite of the innovation drivers for developing their businesses is strongly influenced by their ability to think strategically and act in a professional way.

The concept of Science for life is not yet familiar in Romania

Beside the life long training, which is focused on certain aspects, an important dimension of education outside school is represented by the dissemination of the scientific evolution through media. Pubic awareness regarding these scientific evolutions may play a significant role for the innovative propensity.

International mobility is contributing to behavioral changes

As Romania increased its participation in a series of mobility programs (see Corint), both for students and researchers, these is expected to induce a changes in behavior especially in aspects regarding the market orientation of the research.

ICT is playing a more important in education

As mentioned in the first chapter ICT and innovation are generally correlated both in practice and at the behavioral level. That’s why the increase registered in the last years for the number of computers and Internet connections, both in secondary and tertiary education units, it is expected to stimulate the innovative abilities of the graduates.

The European policy framework is increasingly demand oriented

The list of EU policy lines is those defined in Commission’s 1996 Action Plan on Innovation and most of these measures are meant to stimulate the demand for RD as well as the absorption capacity of the enterprises. Nevertheless, while punctual policies are linked with sectoral performance, in an often endogenous way, the overall performance of the RDI system depends on the coherence of the policy mix, especially in an emerging context as the innovation is.

The Romanian policy mix is relying on human capital

An evaluation of the real priority ranking among the innovation policy mix in 2000-2003 period show that education alongside IPR were the front runners.[69]

The assumption seems to be that improvement of the legal and regulatory environment will create the conditions for a qualified labor force to generate the innovation process. In the same paradigm, factors that hinder this to happened are exactly those that are given the lowest attention to in the latest period: lack of vision on the RD supply side, of awareness on the demand side and serious shortcomings in the financing of innovation area as shown in the previous section. Despite its technically qualified labor[70], Romania is struggling among the last positions between the countries in the Innovation Scoreboard sample, both in term of RD based innovation and diffusion of innovation[71]. The failure in dissemination of knowledge partially due to the lack of vision that affects the (mostly state-owned) research system is reflected by Romania being one of the very few countries producing more RD based innovation that it is able to diffuse. A status surprising and costly for a country from the catching-up group, that Romania shares with countries rather known from their islands of high-tech industry and associated niches on the world market.

Unless more consistent results are obtained in the functionality of the innovation system and mostly in the connection between industry and research, the efforts made on the education line are raising the risk of simply financing the brain drain, especially at the given the short-comes of researches in EU.[72]

6. Conclusions

Aiming at building a innovation-based economy is a rational goal for any state. This is the path to competitiveness, growth and economic prosperity. But one thing is to aim at reaching an innovating economy, and another thing is to actually accomplish such a daring goal. For a country like Romania, which is still struggling in its attempt to reach a market-based economy, it may sound inappropriate to talk now about innovation and knowledge. How can we push for innovation if the structural foundation of the economy is still weak and wobbly? Perhaps we should do one step at a time. First, focus on finishing the economic transformation process, and then aim at enhancing the competitiveness of the economy. If the economy will be sound, the need for innovation and technology transfer will be natural.

Unfortunately, Romania does not have the luxury to wait any longer. In its quest for joining the European Union, Romania needs to concentrate its resources on real convergence. Without determined actions and policies, Romania will have to wait around eighty years in order to reach the average income per capita of the EU[73]. This is not acceptable. Therefore, the only solution for Romania is to burn stages, and to push for an accelerated and vigorous catching-up policy. Such a policy needs to start from enabling innovation, research and development, as instruments for growth leaps, which can eventually transform Romania into a competitive economy.

Basic economic wise would argue that sustained per capita growth can not be achieved by investment and macroeconomic conditions only, if not supported by an increased level of technological progress, enhancing the value of capital and labor at the level of companies. In this sense, the shift from exploiting resources to exploiting knowledge is the milestone of the shift from cost-based competition to value-based competition. At the level of policy makers, as well as at the level of business community, there is a fundamental need to acknowledge that the systemic approach on innovation means that there is no simple one-way relationship between the RD activities and the business community (O’Doherty and Arnold, 2003). Both ends are equally important, since both the production of knowledge and the absorption capacities are key to the innovation process.

The current level of innovation in Romania is endangering not only the general competitiveness of the companies but their future ability to survive the integration in EU.

Hence, there is an urgent need for a systemic upgrade that can be achieved only with the participation of all the actors: companies, state institutions, research units and venture capital providers.

The companies should not only become aware of the need for innovating but to take consistent action in building the needed abilities. Innovation requires specific skills (as for instance to see the market opportunities in correlation with technological evolutions, to identify the technical solutions, to evaluate cost-benefits ratio, to properly evaluate the risks, to identify the resources needed, stress the role of ICT and high-skilled persons, etc.), that are to be gained by the employees, the managers or embedded in the organization of the company.

The task for the state is twofold: to ensure the convergence for the budget resources with the EU average (expressed as share of GDP) and, at the same time, ensure a real competition for the resources allocated. The latter should be based on complete transparency and orientation of the output towards market needs. A functional system in this direction is likely to support a learning process for both the innovation drivers and the research units, and gradually build a market for innovation.

As the state is also the owner of most of the technological research units, it should ensure for these an upgrade of the innovation management skills, in order to increase their ability of taking the market opportunities.

As in the case of the other actors, the private financing needs also specific skills for acting in this field, especially in order to evaluate the expected success of different innovations. But taking into account not only that innovation is expected to ensure higher return rates, but that also it become compulsory for the long tern development of the companies, this upgrade seems a step to make.

References

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O’Doherty, D, Arnold, E, Understanding innovation, IPTS Technical Reports, 71/200;

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*** Enterprise Policy Performance Assessment 2003, OECD-Investment Compact, Paris 2003;

*** European Innovation Scoreboard 2003, Chapters R&D-based vs. diffusion based innovation and Innovation in services http://trendchart.cordis.lu/scoreboard2003/html/inno_paths

*** European Innovation Scoreboard Country Paper for Romania, 2003 (www.cordis.lu).

*** Global Information Technology Report 2002-2003, Oxford University Press

*** Innovation policy in six candidate countries. The challenges. Final Report. Study coordinated by ADE for Enterprise DG, European Commission 2003;

*** National Plan for Research, Development and Innovation for the period 1999-2005, MER, Bucharest 1999;

*** National strategy for intellectual property (2003-2007);

*** Research, Development and Innovation 2001-2002, Ministry of Education and Research, Bucharest, January 2003;

*** Romania, your business partner, The Agency for Governmental Strategies, Bucharest 2003;

*** Tax incentives for research and development: trends and issues, OECD, Paris 2003;

*** Thematic Trendchart Report “Intellectual Property” (August 2003);

*** Trendchart Report “Industry-Science Relationship” 2003.

*** The sources of Economic Growth in OECD countries, OECD, 2003;

***, Comerţul exterior al româniei în anul 2002. Programul de acţiune privind dezvoltarea comerţului exterior în anul 2003, Ministry of Development and Prognosis and the Foreign Trade Department.

[1] Building the Microeconomic Foundations of Prosperity: Findings form the Microeconomic Competitiveness Index, Michael Porter in Global Competitiveness Report 2002-2003, World Economic Forum, Geneva 2003;

[2] Communication from the Commission to the Council, the European Parliament, the European and Social Committee and the Committee of the Regions. Innovation Policy: updating the Union’s approach in the context of Lisbon Strategy, COM (2003) 112, Brussels, 11.3.2003;

[3] http://www.cordis.lu/innovation-policy/studies.html;

[5] Estimates of multi-factor productivity (MFP) growth are often used to proxy technological progress. They are obtained as the residual output growth once the weighted contributions of changes in capital and labor inputs are accounted for;

[6] Andre Sapir- Chairman, An Agenda for a Growing Europe – Making the new economic System Deliver, Report of an Independent High-Level Study Group established on the Initiative of the President the European Commission, July 2003;

[8] For further information see: http://europa.eu.int/comm/lisbon_strategy/intro_en.html;

[9] The background theory corresponds to Michael Porter approach of transition from cost competitiveness to innovation competitiveness;

[10] Other several councils have dealt with issues related to Lisbon targets, (Feira, June 2000, Nice, December 2000, Gothenburg, June 2001, Laeken, December 2001, Seville, June 2002, Thessaloniki, June 2003, Brussels, October 2003, Brussels, December 2003).

[11] “Open method of coordination” is a new form of collective action to foster compatibility, consistency or convergence between Member States’ public policies. Covering a variety of arrangements, it stands half way between pure legislative integration and straightforward cooperation (http://europa.eu.int/comm/governance/areas/group8/report_en.pdf)

[12] The indicator “employment in the high-tech sectors” includes NACE sectors: chemicals (NACE 24), machinery (NACE 29), office equipment (NACE 30), electrical equipment (NACE 31), telecom equipment (NACE 32), precision instruments (NACE 33), automobiles (NACE 34), and aerospace and other transport (NACE 35). The total workforce includes all manufacturing and service sectors. This indicator is equivalent to the indicator used to benchmark national RD policies.

[13] http://www.european-patent-office.org/news/info/2002_12_19_e.htm

[14] European Trend Chart on Innovation, Country Report Romania in 2000;

[15] For more easiness in reading, all the technical references are addressed separately.

[16] Research, Development and Innovation 2001-2002, Ministry of Education and Research, Bucharest, January 2003;

[17] Only 9% of the business RD expenses are oriented towards university based research, covering only 5.6% of the total RD activity in the universities (NIS, 2002)

[18] According to the National Development Plan (2001-2005)

[19] Declaration of Radu Minea, President of RD Trade Union in Romania during the debate “Romanian research- Where to?”, in Adevarul, December 19th 2003.

[21] 61.5% of the RD employees are over 40 years of age (NIS, 2003)

[23] The trend towards dissipation of resources was recognized in Report on Research, Development, and Innovation, 2001-2002;

[24] Lengrand (2002) describes three generations of the innovation models: linear, with feed-back and systemic. The linear one begins with laboratory science and moves through successive stages till the new knowledge is built into commercial applications that diffuse in the economic system. The feed-back model involves two-way communication across different points in the innovation process, while the systemic model include almost permanent collaboration;

[25] Nevertheless, OECD, 2003 observes that although ICT industry have seen major effects from the technological progress, there are significant differences in these effects among countries

[26] Some of the MNCs do innovate locally, mainly in order to adjust design, packaging and distribution to correspond to domestic market demand

[27] Innovation policy in seven candidate countries: the challenges. Innovation policy profile: Romania, Study coordinated by ADE , March 2003;

[28] Using the results from the Global Competitiveness Report 2001/2002, Romania appears as leader among candidate countries in Availability of Scientists and Engineers;

[29] According to the Global Competitiveness Report 2002, with respect to indicators as Quality of Scientific Research Institutes, Local Availability of Scientific and Training Services, and University-Industry Research Collaboration, Romania is either the clear laggard among European countries or close to this situation;

[30] According to World Bank estimates, only between 1989 and 1998 the poverty increased 6 folds. In 2002, the share of poor was estimated at 29% of the population (World Bank, Poverty Assessment, www.worldbank.org, National Anti-Poverty Commission, www.caspis.ro), with 11.8% living in extreme poverty (National Anti-Poverty Commission, www.caspis.ro).

[32] NIS, data per employed persons was calculated based on 2001 employment.

[33] OECD-Investment Compact, FIAS, WB, EC;

[35] Declaration of Alexandru Athanasiu – Minister of MER during the debate “Romanian research- Where to?”, in Adevarul, December 19th 2003.

[37] Declaration of Alexandru Athanasiu – Minister of MER during the debate “Romanian research- Where to?”, in Adevarul, December 19th 2003.

[38] Regulated by GD 48/1998, and GD 562/1999. Though GD 556/ 7 June 2001, the number of RDI programmes increased to 14 www.mcti.ro;

[40] Declaration of Virgil Gândea, General manager of the National RD Institute in the field of Modernising agricultural equipment, position sustained by the minister of MER during the debate “Romanian research- Where to?”, in Adevarul, December 19th 2003;

[41] The Court of Accounts is the supreme body of external subsequent financial control on the formation, administration and use of the financial resources of the state and the public sector. (Law 94/1992 on the organization and operation of the Court of Accounts, republished, modified and completed by the law 77/2002);

[43] Declaration of Alexandru Athanasiu – Minister of MER during the debate “Romanian research- Where to?”, in Adevarul, December 19th 2003;

[44] Romania, your business partner, The Agency for Governmental Strategies, Bucharest 2003;

[45] Science and Technology Roadmapping: from Industry to Public Policy, Olivier Da Costa, Mark Boden, Yves Punie and Mario Zappacosta, IPTS;

[46] The Ministry of Education and Research has already planned to introduce patent-related conditionalities when granting public funds;

[47] According to the data provided by Oresa Ventures Romania (http://oresaventures.com/romania.html);

[48] Global Competitiveness Report 2003 rank Romania on the last position out of 102 countries with respect to the extent of distorsive government subsidies;

[49] according the analysis provided by Oresa Ventures Romania (http://oresaventures.com/romania.html);

[50] as suggested also by Mr.Eugen Ovidiu Chirovici, President of NASMEC, in the interview published in Piata Financiara, SME Financing special focus, March 2004;

[51] idea pointed out by Ms. Silvia Ciornei, President of the National Guarantee Fund of Credits for SME, Piata Financiara, SME Financing special focus, March 2004;

[52] European Bank for Reconstruction and Development;

[53] Kreditanstalt für Wiederaufbau – German Government assistance;

[54] PHARE is one of the pre-accession funds provided by the EU;

[57] National Patent Office was created in 1998 as autonomous body; Romanian Copyright Office was created in 1996

[58] The software piracy rate has dropped from 93% of total sales in Romania to 67% (IIPA 2001-2002, http://www.iipa.com/pdf )

[59] According to the National Strategy for Intellectual Property;

[61] According to the GO 57/2002 approved by the law 324/2003;

[63] The Global Information Technology Report 2003 ranks Romania on the 9th position (out of a sample of 82 countries), with a score of 5.81 (out of a maximum of 7) in terms of quality of Math and science education;

[64] The OECD Programme for Students Assessment, the PISA survey, conducted in 2000 with the purpose of measuring the quality of education of 15-years-olds “assessing young people capacity to use their knowledge and skills in order to meet real life challenges, rather than merely looking at how they have mastered a specific school curriculum” ranked Romania on position 30 out of 32 countries (28 being members of OECD), before only Mexico and Brazil;

[65] Data source: Romanian Statistical Yearbook, 2002 and Higher education at the beginning of the year 2002-2003, National Institute of Statistics;

[67] Calculated based on Labor Force Survey, 2002 as share of employees with long and short term education working as high-level clerks and specialists with intellectual and scientific jobs;

[69] Data extracted from the 2003 European Innovation Scoreboard and the European Commission Regular Report on Romania 2003 (www.cordis.lu);

[70] Using the results from the Global Competitiveness Report 2001/2002, Romania appears as leader among candidate countries in Availability of Scientists and Engineers;

[71] According to the Global Competitiveness Report 2002, with respect to indicators as Quality of Scientific Research Institutes, Local Availability of Scientific and Training Services, and University-Industry Research Collaboration, Romania is either the clear laggard among European countries or close to this situation;

[72] "Far from reaching the Lisbon objectives in terms of the numbers of scientists needed, Europe risks a crisis with the number of scientists sharply decreasing," says Prof. José Mariano Gago the chairman of a high-level expert group which presented recommendations on increasing Europe's human resources for science and technology to European Research Commissioner Philippe Busquin at an international conference held in Brussels on April 2^nd;

[73] According to the t-distance estimate of the Economist Intelligence Unit, London 2003;