1

Development of a Knowledge-Based and Innovative Economy in Azerbaijan –– Evaluation and Recommendation Document

Innovation Economy

Azerbaijan Focus on ICT

UNDP 2

This document has been prepared by the United Nations Development Programme (UNDP) in Azerbaijan We wish to express our appreciation to the many persons who performed background research for this document, and to the many persons in Azerbaijan who gave the ir time for interviews.

3

Table of Contents List of Abbreviations ...... 6 Executive summary ...... 8 Defining a National Innovation System ...... 9 The Challenges of National Innovation ...... 10 The Landscape of Azerbaijan’s Economy ...... 10 Structural Characteristics of the Economy in Azerbaijan...... 11 Institutional Characteristics of Azerbaijan’s National Innovation System ...... 12 Demographics ...... 12 Role of Petroleum ...... 13 Still-Emerging Non-Oil Sector ...... 13 New Experience in Manufacturing ...... 14 Building Logistic Systems for Exports ...... 14 Operating the Patent System ...... 15 The Innovation System for ICT in Azerbaijan ...... 16 The Value Chain of ICT Innovation ...... 16 National cloud and infrastructure services ...... 19 Focused innovations of small entrepreneurial teams or individuals ...... 20 The Azerbaijan National Academy of Sciences ...... 20 The Role of Government ...... 22 Implication for ICT Innovation ...... 23 The Role of Universities ...... 25 Strategy I – Concentration and Focus ...... 26 Strategy II – Outreach to Specialised Educational Institutions ...... 26 National Fund to Support Entrepreneurship and the Role of the Private Sector ...... 28 The National Business Incubator System ...... 30 The Innovation Triad – Three Innovation Mechanisms for ICT ...... 30 The ICT University ...... 31 The High Technology Park System ...... 32 The ICT Fund ...... 34 The Role of Government Ministries and State Organisations ...... 36 The Role of Innovation Centres ...... 40 State Agency for Public Service and Social Innovations ...... 40 Next Step Innovation Centre ...... 41 Uluchay Social-Economic Innovation Centre ...... 41 Social Innovation Lab ...... 42 Barama Innovation and Entrepreneurship Centre ...... 42 National Innovation Centre of Azerbaijan National Academy of Sciences ...... 43 Information regarding patents ...... 43 Benchmark of Azerbaijan’s Innovation System ...... 43 4

Recommendations ...... 45 Appoint a national Chief Information Officer (CIO) for Azerbaijan ...... 45 Role of Government CIO ...... 46 Challenges for a Government CIO...... 49 The Model of the ICT Fund should be extended to all sectors of innovation ...... 49 Encourage more funding for start-ups...... 50 Consider more intensive use of government purchasing policies ...... 51 Import Substitution ...... 51 Capital Formation ...... 52 Build a national supercomputer centre with virtual machine architecture ...... 53 Appoint a Study Group to Develop Plan for Cross-University ICT Innovation Pathway ...... 54 Create a national study group to consider improvement of the patent system ...... 56 More intensive utilisation of online educational resources ...... 57 More use of vendor-provided training and certification programs ...... 57 Improve coordination between ministries in supporting the innovation system ...... 59 Centralise government funding for start-ups in a single department using the current ICT Fund as a model ...... 61 Background of this document ...... 62 Timing of research ...... 62 Methodology ...... 62 Works Cited ...... 63 List of Figures ...... 65 List of Tables ...... 65 Appendix – Laws Regarding Intellectual Property Rights in Azerbaijan ...... 66 Main IP Laws: enacted by the Legislature ...... 66 IP-related Laws: enacted by the Legislature ...... 66 Implementing Rules and Regulations ...... 67 Appendix – Issues for a National Commission to Examine the Patent System in Azerbaijan ..... 70 Appendix – Universities in Azerbaijan ...... 71 Public Universities ...... 71 Private Universities ...... 71 Educational Institutions Located in Baku ...... 71 Appendix – System of Checks and Balances for National Chief Information Officer ...... 73 Appendix – Table of ICT Domains and Universities ...... 76 Appendix – Ministries of the Government of Azerbaijan ...... 77 Appendix – State Committees and Companies of the Government of Azerbaijan ...... 78 Appendix – Economic Fields Receiving Entrepreneurship Funding from the Ministry of the National Economy’s Fund for Entrepreneurship Support ...... 79 Appendix – Strategic Roadmaps Approved by President of Azerbaijan ...... 80 5

Appendix – International Business Incubator Associations & Organisations...... 81 Appendix – Evaluation Methodology of the ICT Fund ...... 84 Evaluation Criteria of the Projects and Final Opinion ...... 84 Project Information ...... 84 Expert Evaluation Template ...... 84 FINAL OPINION ...... 86

6

List of Abbreviations

AABI – Asian Association of Business Incubation ADA – Azerbaijan Diplomatic Academy ADT – German Association of Innovation, Technology and Business Incubation Centres ANAS – Azerbaijan National Academy of Sciences ANCES – Asociacion Nacional de CEEI Espanoles ANPROTEC – Brazilian Association of Science Parks and Incubators AVIE – Asociacion de Viveros e Incubadoras de Empresas BASTIC – Baltic Association of Science, Technology Parks and Innovation Centres BBIA – Beijing Business Incubation Association BIAK – Business Incubation Association of Kenya BIIA – Business Innovation and Incubation Australia BSCE –Bachelor of Science in Computer Engineering BSCS – Bachelor of Science in Computer Science BSIT –Bachelor of Science in Information Technology CABI – Canadian Acceleration and Business Incubation Association CAD – Computer Aided Design CAAD – Computer Aided Architecture Design CBIA – Chinese Business Incubation Association CIC – Caspian Investment Centre CIO – Chief Information Officer DIA – Dutch Incubator Association EBN – European Business and Innovation Centre Network e-Commerce – Electronic Commerce (business transactions intermediated by the Internet) e-Government – Electronic Government (refers to use of computerisation in government administration) EIA – Egyptian Incubator Association EIF – Enterprise Incubator Foundation GDP – Gross Domestic Product GIS – Geographic Information System FDI – Foreign Direct Investment HBIA – Hungarian Business Incubator Association Hi Tech – High Technology IBM – International Business Machines Corporation IASP – International Association of Science Parks ICT – Information and Communications Technologies (includes telecommunications) INNA – Innovation Network Austria IoT – Internet-of-Things ISBA – Indian STEPs and Business Incubators Association KOBIA – Korea Business Incubation Association MCSA – Microsoft Certified Solutions Associate 7

MIS – Management Information System MOOC – Massive Open Online Course (MOOC) MySQL – My SQL (Structured Query Language) (A flavour [type] of SQL) NCIO – National Chief Information Officer NINA – National Incubator Network Association NVBEO – Dutch Association for Business Centres and Economic Development PBICA – Polish Business and Innovation Centres Association PCT – Patent Cooperation Treaty Poly – Polynomial smoothing (used in statistical trend analysis) SABTIA – South African Business and Technology Incubation Association SISP – Swedish Incubators and Science Parks SSR – Soviet Socialist Republic SQL – Structured Query Language (for accessing relational databases) Status Quo – (Latin. state in which) the existing state of affairs TFP – Total Factors of Production UBICA – Ukrainian Association of Business Incubators and Innovation Centres USSR – Union of Soviet Socialist Republics (1917-1992)

8

Executive summary If there is to be an improved government policy to accelerate the pace of ICT innovation in Azerbaijan, then the most pressing challenge to solve is lack of coordination. Throughout Azerbaijan’s economy and institutions, there are numerous “islands” of creativity and exploration, but there is no system of inter-organisational networks to enable the right hand to know what the left hand is doing. Azerbaijan has an “Innovation Triad” consisting of the ICT University, and ICT Fund, and the High Technology (Hi Tech) Parks. There are numerous business incubators in virtually all facets of Azerbaijan’s economy. There are centres of excellence in higher education in almost every field – medicine, agriculture, engineering, hard science, economics, oil exploration, and finance. The government itself has made strong efforts to automate delivery of government services (e-Government) and improve the collaborative process between citizens, civil society, and government strategy makers and planners. All of these efforts exhibit the determined and focused national character of Azerbaijan, a nation on the move. Nevertheless, it is assessed that the lack of coordination between these numerous excellent efforts inhibits effective ICT innovation. With improvement in coordination, Azerbaijan should be able significantly to increase the pace and quality of ICT innovation, without spending even one extra Manat. In addition, there are significant opportunities for Azerbaijan’s government to make targeted investments in a national ICT infrastructure that will dramatically increase the landscape of white canvas upon which innovators can paint their ideas. In the recommendations, we address details of these potential investments – including deployment of a national super-computing centre – and show how they can radically reduce overall expenditures on ICT nationwide, greatly magnify computing capacity, improve cyber security and simplify cross-ministerial and government-to-industry information and transactions linkages. Finally, it is the nature of Azerbaijan’s society and the organisation of its government, that such significant change can only be directed from the top. In that connection, we recommend appointment of a national Chief Information Officer (nCIO) to be the architect of these changes.

9

Defining a National Innovation System A reasonable definition of innovation emphasises the impact that inventions have on society as a whole. In other words, it is not enough merely to have a great deal of inventive activity, the creation of novel items. Instead, it is necessary to consider how inventions and novelties have an effect on systems and interactions underpinning society as a whole. Without this secondary effect of the invention, then in this line of thinking, there is no innovation.

Innovation is: production or adoption, assimilation, and exploitation of a value-added novelty in economic and social spheres; renewal and enlargement of products, services, and markets; development of new methods of production; and establishment of new management systems. It is both a process and an outcome. (Edison, Ali, & Torkar, 2013)

Innovation can be thought of as an element reflected in the neoclassical production function that relates output and inputs 푌 = 푓(퐴, 퐾, 퐿) where Y is the output; A is the level of technology; K is the amount of capital stock, and L is the amount of labour available in the society. This type of function is used to study how changes in technology and factor productivity can raise the output in society as measured by GDP (Solow, 1957). It is possible to modify this neoclassical production function by substituting investments in telecommunications for K and the number of full-time persons working in telecommunications as L. 푌 = 퐴퐾훾퐿훿 or 퐺퐷푃 = 푓(푇퐹푃, 푇푒푙푒푐표푚 퐼푛푣푒푠푡푚푒푛푡, 푇푒푙푒푐표푚 푊표푟푘푒푟푠) if γ and δ are constants used to adjust the number to match the characteristics of the telecommunications technologies (Samoilenko & Osei-Bryson, 2008). The same approach can be used if we used the same approach for study of ICT, in which case we would use 퐺퐷푃 = 푓(퐴, 퐼퐶푇, 퐿) for the amount of capital investment in ICT, and the number of persons using it. 10

In general, this type of Cobb-Douglas production function would provide a theoretical basis to explain the growth of GDP. In this connection, the general notion is that as a nation invested more strongly in ICT, it would experience increases in GDP. The A factor is crucial because it is a measure of the total factor productivity. In plain terms, this is a measure that indicates how well innovations or inventions are used in society.1 We can think of an innovation system, then, as that arrangement in a society that allows investments in infrastructure, including ICT, to be used in a way that it increases the overall factor productivity of society. This idea has an underlying assumption that a single and discrete investment in ICT or labour can have an effect on multiple productivity factors p.

퐼퐶푇, 퐿 → (푝1,푝2,푝3, ⋯ 푝푛) The innovation system works when some force, either directed or spontaneous, causes society to re-arrange itself so that how it uses infrastructure and technology, including ICT, so as to make itself more productive. Since the concept of a system involves a feedback cycle, an innovation system as a whole first sets in place some force that then has an effect on productivity factors which then are exercised leading to a change in society, followed by a repeat of the cycle. The Challenges of National Innovation The concept of national innovation necessarily a strong or resource-rich party that can take those actions necessary to influence the investments in infrastructure, the level of labour available in emerging sectors of the economy, and the means or context through which these investments have an effect on productivity factors. There are only three sources of these forces: First, these forces can emerge from private actors that have a compelling influence over society. Second, these forces can be imported from outside of a country. Third, these forces can be created and strongly stimulated by government. For most countries, it is the role of government that is most determinative in setting the development trajectory of the society as a whole. This is particularly true for provisioning of large-scale infrastructure projects that may be undertaken only by the superior resources available to government. In this context, the term “national” innovation system refers essentially to those parts of transformation in productivity factors that are brought about by active government policies. The Landscape of Azerbaijan’s Economy Azerbaijan has certain unique characteristics that strongly influence the way in which we can think about the Cobb-Douglas production function within the context of innovation. The

1 For an extreme example, if a society such as Azerbaijan invested a great amount of capital in ICT, but left the equipment in warehouses, outside of use of society, the A factor would be zero because there is no productivity gained from the capital investment. 11

reality is that economic theory rarely works when no consideration is given to historical and cultural factors of the system (region; “SoSmart” App country) being examined. Automatically changes mobile telephone First of all, the percentage of GDP accounted into mute (vibrating) mode depending for by the petroleum sector is vast, more than on venue and time. Students download 80% of Azerbaijan’s GDP is taken from sale of their schedule into the phone. When in oil products. The practical effect of this is that classroom, the mobile phone is silent if we use growth in GDP as the dependent and does not disturb study. variable, then measurement and assessment will be complicated by the very small share of Developed by students of Azerbaijan non-petroleum activities in Azerbaijan’s State University Economics (UNEC). economy. In other words, even if the level of investment in non-petroleum infrastructure was very great, it would not produce any significant change in GDP because of the role of petroleum. A second factor is the limited population of Azerbaijan, a country of approximately 9.5 million persons. The practical effect of this small number is that the L factor is so small that it is uncontrollable and also it is unlikely to have a significant effect on Azerbaijan’s GDP. Structural Characteristics of the Economy in Azerbaijan These structural characteristics of Azerbaijan’s economy complicate our ability to understand the effect of its non-petroleum innovation system. If we are not going to examine the level of GDP as the dependent variable, then what is there to assess, monitor, measure and assess? Here is where we must look to the future. It is assumed that within approximate one- quarter of a century, the oil supplies that have fuelled Azerbaijan’s growth since becoming an independent nation state will dwindle, leaving the country with a bitter and unsettling drop in its GDP. This will make it impossible for the Government of Azerbaijan to feed its people, or engage in any significant infrastructure projects. Therefore, the primary focus of concern is how non-petroleum productivity factors can improve over the long-term, leading to strong innovation across Azerbaijan’s society when the oil revenues dry up. This observation then leads to the central concern of this assessment:

What are the steps the Government of Azerbaijan can take to improve its non-petroleum productivity factors so that in the not-too-distant future it will be able to continue to enjoy a stable society and continued development of its human resources and economy? 12

Institutional Characteristics of Azerbaijan’s National Innovation System Azerbaijan faces a number of constraints on its national innovation strategy. These must be understood and overcome if Azerbaijan is to move forward with its development strategy. Demographics With a relatively small population of 9.5 million persons, Azerbaijan is faced with two immediate problems. First, in any manufacturing venture, its market is so small that it is difficult to think of any way to reach efficient economies of scale in manufacturing of either tangible goods or in production of information-based value. Second, the small population means that the internal market of Azerbaijan is relatively small. One effect of this is that Azerbaijan’s bargaining position via-a-vis outsider technology firms or others is weak. Unlike some countries with considerably greater internal markets, Azerbaijan is not able to place onerous conditions on foreign companies or investors interested in its market. Azerbaijan might even face reluctance on the part of some companies or peoples to engage in Foreign Direct Investment (FDI) in its economy.

Patent Correlation with GDP 300

250 y = -7.4534x + 15126 R² = 0.3476

200

GDP 150 2016, 131 Patents

NUmber 100 Linear (GDP) Linear (Patents) 50 2016, 37.858

0 y = 4.4518x - 8902.6 2000 2005 2010 2015 R² = 0.7431 Year

Figure 1 Correlation between GDP and Patents Awarded in Azerbaijan 2000-2016

13

Role of Petroleum As mentioned previously, the share of GDP accounted for by oil is vast. This means that Azerbaijan’s economy and society both have grown dependent upon the flow of oil resources. It is not clear how well the vast resources brought in by petroleum have been capitalised upon. Approximately 93% of Azerbaijan’s exports are accounted for by mineral products. Of the remaining, agricultural products are the only remaining significant sector, accounting for approximately $7 billion per year (OECD, 2011)(p. 92, Table 2.11 Share of main exports of goods by category in total exports). There are indications, however, that a very vast amount of oil resources has been converted into building infrastructure, including roads, lighting, education, and multi-purpose buildings. For example, the amount of new construction since independence has been astounding. Practically the entire infrastructure of Azerbaijan has been re-built, and even today this construction is accelerating with projects such as new pipelines and the railway linkage with the State of Georgia. Probably the greatest amount of investment in infrastructure has gone into buildings, both commercial, and residential, and secondarily into roads.

Still-Emerging Non-Oil Sector Apart from construction, which has been “Whatto” App booming, other parts of Azerbaijan’s economy are relatively weak. Two other promising The app suggests correct clothing for use industries have been highlighted, tourism and according to days or the week, business agriculture. meetings, events and the weather. User photographs their wardrobe and enters There is a significant amount of tourism to into the app’s database. The app will Azerbaijan from other countries in Central Asia match colour and style of clothes. and the Middle East. In this respect, Azerbaijan has several advantages. First, it is officially a Developed by students of Azerbaijan secular society, and this means that in many State University Economics (UNEC). respects it is more liberal than many of the more conservative societies surrounding it. As a consequence, when tourists from more restrictive countries visit Azerbaijan, they are able to relax, without fear of cultural or religious guardians watching their every move. Second, Azerbaijan has a wide range of high value stores selling leading European brands. Third, Azerbaijan is much closer than other tourist destinations. Fourth, Azerbaijan has invested in many hotels and supporting infrastructure that serve as a comfortable venue for vacationers. In addition to the newer resorts, Azerbaijan has a long history of receiving visitors to hot springs and other health resorts. The agriculture sector has been more difficult. Azerbaijan produces a wide variety of high- quality and delicious foods, particularly vegetables such as cucumbers, tomatoes and 14

apples. But the export of these items is hampered by poor transportation and deficiencies in packaging materials suited for long-range transport. For example, during 2016, a large part of the apple harvest was simply allowed to rot because there was no practical and cost- effective way for farmers in the North to dispose of their crops. There was been a very small amount of effort to improve Azerbaijan’s manufacturing or assembly of IT equipment. There is one story of success indicating that Acer computer has been set up to do some light assembly in Azerbaijan. In general, however, labour costs and economy of scale problems plague Azerbaijan in its quest to import significant manufacturing. We should assume that this situation will continue. A test of the non-oil sector would take place if the oil sector were severely disrupted or eliminated altogether. Here, the recent drastic decline in petroleum prices serves an as illustrative example. During this financial crisis, Azerbaijan’s economy severely contracted, and yet there was little if any compensation made by the non-oil sector. In fact, the contraction of the petroleum part of the economy was not mitigated by a rise in shares or activities in non-oil sectors. From this we can conclude that without the petroleum sector, Azerbaijan’s economy would quickly collapse, and at this time, there is no industry operating that would be able to fill the void. New Experience in Manufacturing There is little significant experience in Azerbaijan for manufacturing. Azerbaijan has remained an import-led economy. It does not have an internal market large enough to support economies of scale in manufacturing. In terms of economic theory, it is logical for Azerbaijan to import items into its economy instead of engaging in import substitution strategies, with the exception of agricultural products. Much of this is a historical remnant of the Soviet era. During that time, the economy of Azerbaijan was integrated into the larger economic system of the Soviet Union. This integration had a commanding influence on how && developed. Even though the Soviet Union was dissolved in 1992, and as this report is being written it is almost two decades later, the fact is that not enough time has gone by to enable && to restructure and re-orient its economy. It would be unrealistic to think otherwise. Companies are not individuals, and countries are not companies. Each has their own natural rate of transformation and change. Interviews reveal that Azerbaijan has set up more than one free trade zones, intended to attack companies with very favourable tariff and tax policies. The setting up of free trade zones is a proven strategy for many countries. In Azerbaijan, it had not met with substantial success. The result is that there is little if any expertise in Azerbaijan for manufacturing. Building Logistic Systems for Exports Reports indicate that during the recent harvest for apples many were left to rot because the company did not have any transportation mechanism available to get the applies to a better market. 15

There are two aspects revealed in this problem. First, there are indications that Azerbaijan does not have an industry that is focused on how package and transport perishable food stuffs. Second, there is a poor infrastructure available for reaching foreign markets that might be interested in taking some of the exports. As noted earlier, the train line that has been put in to connect Azerbaijan with Georgia will provide a platform for exports of foodstuffs. Unless a better transportation system is put into place, Azerbaijan will continue to have chronic problems in exporting. Finally, there is little indication of a regional, national or international orientation in development of exports, and little if any cooperation between potential exporters. Operating the Patent System Finally, there are indications that the patent system in Azerbaijan is not being used as a contributor to innovation. It is generally recognised that protection of intellectual property is an important stimulate to innovation. It is through patents that entrepreneurs are able to obtain a significant return on the time and money they have invested in creation of something new and useful.2 See Figure 1 Correlation between GDP and Patents Awarded in Azerbaijan 2000-2016 on Page 12 for an analysis of patents in Azerbaijan. The data indicates that in the past three half-decades, the number of awarded patents on average has decreased by a significant amount. There are approximately 7 less patents per year awarded. There is no correlation between the overall state of Azerbaijan’s economy and the number of patents awarded. This indicates a systemic problem in the regime for intellectual property protection in Azerbaijan. This will be addressed further in this document.

2 Patents are never awarded for novel items that do not have some practical utility. 16

Patent Grants in Azerbaijan 250

200

150

100

50

0

2003 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -50 2001

Resident Non-Resident Abroad Poly. (Resident) Linear (Abroad)

Figure 2 Patent Grants in Azerbaijan

The Innovation System for ICT in Azerbaijan An “innovation system” may be thought of as the system of interactions between various institutions and other actors that result in useful improvements in technology or its use in society. Assuming that there are a number of institutions involved, we can classify the interactions in any innovation system into two classes: interactions that occur randomly as a result of the cumulative outputs of other interactions; and interactions that are planned and directed. Here, we are concerned with directed interactions. In the case of Azerbaijan, the nature of its society is that there is a strong role played by its government. Consequently, the scope of our inquiry is the range of government-directions interactions that result in ICT related innovations. The Value Chain of ICT Innovation Innovation in ICT takes place across a complex value chain that spans from the basics of microelectronic technology, through machine language level systems, into the software superstructure, and finally to true innovation in society, as shown in Figure 1 Correlation between GDP and Patents Awarded in Azerbaijan 2000-2016 on Page 17. Given the placement of Azerbaijan within the world’s economy, and the characteristics of its industrial infrastructure, we can assess that any significant ICT related innovation can take place only at the software superstructure and social utilisation levels. 17

MICROELECTRONICS

MACHINE LANGUAGE

SOFTWARE SUPERSTRUCTURE

SOCIAL UTILISATION

Figure 3 ICT Innovation Levels

Even at the software superstructure level, it is improbably that innovators in Azerbaijan can have a significant effect, except for national programs that help select and standardise how ICT it used across different sectors of the economy. For example, if the government of Azerbaijan invested the funds to create a national cloud service to supply a suite of e- Commerce or e-Government applications to all sectors of society, then this would constitute a major but derivative innovation in the software superstructure. In this type of instance, there would be no re-writing of new fundamental code, but instead focus would be placed on configuration of pre-existing software families to meet the specific characteristics of the desired information process configuration to support the economy or provisioning of government services. It is in the final, social utilisation layer, where we can envision effective innovation possibilities for Azerbaijan. Here, a number of innovations can be created that improve social processes, provide useful services that are unique to Azerbaijan and its society, or help deliver specialised and targeted services to citizens or between organisations.

Practically all innovation by entrepreneurs in Azerbaijan is focused on the social utilisation level, whereas large-scale government supported ICT infrastructure projects address the software superstructure level.

Consideration in the past has been given to working backwards through the ICT innovation layers so more fundamental technologies can be addressed. For example, some attempts 18

have been made to encourage assembly of ICT equipment. With one minor exception, all of these projects have lacked success, primarily because the size of Azerbaijan’s economy does not support the necessary economies of scale. It is assessed that all of these efforts should be abandoned entirely, and all focus should be given to the software superstructure and social utilisation layers of ICT innovation.

• SOCIAL UTILISATION LAYER • SOCIAL UTILISATION LAYER

Low government guidance Some government investment and token investment only but with light administrative control

GOVERNMENT START-UPS AND RUNDING OF ENTREPRENEURS INNOVATION PROJECTS DEVELOPING TARGETED INCLUDING R&D APPLICATIONS OF ICT INFRASTRUCTURE (HI TECH PARKS)

ROLE OF ENTREPRENEURS IN PROVISIONING GOVERNMENT NATIONAL INVESTMENT IN ICT INFRASTRUCURE CLOUD OR OTHER SYSTEMS AND NATIONAL DEVELOPING APPLICATIONS DEPLOYABLE • SOFTWARE SUPERSTRUCTURE APPLICATIONS • SOFTWARE SUPERSTRUCTURE

Government encouragement Strong government in education and national job leadership, investment and creation programs administrative guidance

Figure 4 Role of Government in Stimulating Innovation at Social Utilisation and Software Superstructure Levels in Society

In Figure 4 Role of Government in Stimulating Innovation at Social Utilisation and Software Superstructure Levels in Society on Page 18 we see pictured a matrix with two dimensions. From left to right, we have a sense of the amount of government administrative control. On the vertical axis, we see the level of autonomy of entrepreneurs and the scope of their ICT innovation. The two polar opposites of the most fruitful innovation in Azerbaijan appear in the upper-left and lower-right portions of the matrix. The lower half of the figure illustrates what is assessed to be the most important and effective role for the government of Azerbaijan. In this layer, the government will operate so as to encourage the development of a national ICT infrastructure platform that will be open for use by all registered parties. This includes individuals, small organisations, civic groups, small business enterprises, medium and large-scale enterprises, as well as various government ministries. The government will find it useful to focus on provisioning of basic infrastructure, but in a way that provides a subsidy for their operation. This removes from the user the necessity of investing substantially in ICT or its application. 19

The government of Azerbaijan already has put in place a number of national infrastructure systems, particularly as regards the providing of e-Government services. Today, after much effort, citizens of Azerbaijan are able to visit government-built information centres and get access to a number of crucial government applications and in this single place pay for and receive a number of government benefits. Although these information centres are extremely important, and represent substantial innovation, they are assessed to be only a first step in the creative application of government power to ICT innovation. All of these activities should continue, but at the same time should be wrapped up into a broader effort aimed at informatisation of society. These are a few of the areas where it is possible to improve the national ICT infrastructure of Azerbaijan: 1. e-Commerce. Adoption of a national payment and e-Commerce system based on a single set of standards. This combined with certification of specific software sets (application groups) that are designed to work with the system. Exclusion of others. The result of this effort will be a reduction to zero of the cost of making economic transactions within Azerbaijan. 2. Web services. Roll-out of a national cloud service that will allow registered users (individuals, organisations) to have at their disposal a complete set of web services including the ability to maintain their own website, email, financial services, collaboration capabilities, archiving the long-term recordkeeping, and other services. It is not possible to predict in advance exactly what the result of this type of innovation will be on society. On the down side, there always the risk of unintended consequences, but these hypothetical problems can be easily handled by the registration and licensing system. In order to gain access to the system, a citizen or organisation must register and be accepted. On the other hand, the availability of a standard set of web services available on a standardised basis throughout the nation will do much to aid in creating better utilisation of ICT. Once such standardisation exists, then it will be significantly easier to incorporate use of these national web services into the educational curricula. 3. Broadband Internet. Although significant investment has been made and is continuing, efforts to have universal broadband services throughout the country should continue with heightened project management. It is recommended that a review be made so as to determine if there are any bottlenecks or barriers holding back provisioning of universal broadband. National cloud and infrastructure services In the lower right of the diagram, we see the area where government policy can play the largest role in national innovation. The creation of a national cloud service or as a substitute and roll-out of comprehensive integrated software systems servicing multiple sectors of society is an area where only the government of Azerbaijan has the resources and administrative power to cause any significant effect. This is the most direct and powerful way for Azerbaijan to increase the level of ICT innovation in its society. By providing the infrastructure that can be used in a standardised way throughout society, the government of Azerbaijan can ensure that society as a whole, including both the government and private 20

sectors, will operate in a more efficient way. There is little different in this type of massive investment in ICT and other large investments undertaken by the government such as development of transportation networks (roads) or provisioning of utilities (sewer; water; electricity). In the recommendations, this idea is expressed through the notion of the Government of Azerbaijan building a national supercomputer centre that is based on multiple virtual machine architecture. See the recommendation Build a national supercomputer centre with virtual machine architecture on Page 53. In sum, it is assessed that focus on large-scale computing infrastructure projects driven by the government is the most effective path for ICT innovation in Azerbaijan. Focused innovations of small entrepreneurial teams or individuals In the upper-left part of the matrix, we see the role of the individual entrepreneur or small team. This is the area of innovation that is being addressed by the ICT Fund and the High Technology Park system. Although there is nothing inherently wrong with encouraging innovation in this sector, the data shows that the amount of success has been very small, and the number of entrepreneurs who have even applied to the ICT fund is very small. It is assessed that Azerbaijan should continue to encourage efforts in this area, but these activities should take second place to the larger efforts of increasing the sophistication in utilisation of ICT at the national level. The Azerbaijan National Academy of Sciences The Azerbaijan National Academy of Sciences (ANAS) was established in 1945 and is responsible for conducting research and helping to coordinate activities in science, including social sciences. The current National Academy was originally based on the Azerbaijan Society for Scientific Research and Studies originally attached to Baku State University. During the period of the Soviet Union, the Academy was associated with the USSR Academy of Sciences, operating as the Academy of Sciences of the Azerbaijan SSR. The Academy is divided into six departments and enjoys close relations with forty research and cultural institutions throughout Azerbaijan. See Figure 5 Structure of the Azerbaijan National Academy of Sciences on Page 21. Apart from occasional honorary memberships, regular membership of the Academy is divided into two classes: “active members” (total of 57) and “corresponding members” (total of 104). The president of the Academy is elected by its members. Most of the presidents have served 2-3 years, with the exception of a few who have been awarded lengthy terms. These include Musa Aliyev (1950-1958), Hasan Abdullayev (1970-1983), Eldar Salayev (1983-1997), and Mahmud Karimov (2000-2013). 21

NATIONAL ACADEMY OF SCIENCES

40 AFFILIATE INSTITUTIONS

PHYSICS & EARTH BIOLOGY & SOCIAL CHEMISTRY HUMANITIES MATHEMATICS SCIENCES MEDICINE SCIENCES

Figure 5 Structure of the Azerbaijan National Academy of Sciences

The work of the Academy is partitioned between different scientific councils. These councils cover a broad range of scientific issues including biological problem, philosophy, law, sociology, philology, management systems and informatics, chemistry, mathematics, art, architecture, history, medicine, earth sciences, agriculture and economics. In the ICT field, the Scientific Council on the Problems of Management Systems and Informatics has a network linking together the Institute of Applied Mathematics of Baku State University, an Institute of Control Systems, the Information Technology and Programming Department at Baku State University, an Institute of Management Systems, and a Department of Computational Mathematics, also at Baku State University. It is not clear how the Academy of Sciences is an active participant in the innovation system for ICT in Azerbaijan. Its fundamental design is derived from the USSR Academy of Sciences, and it is associated most closely with Baku State University. This University does not have a computer science department, although it does have a Faculty of Applied Mathematics and Cybernetics. Assuming that the term “cybernetics” is derived from the general meaning employed in the Soviet Union, then it may be said to be linked to computer science, but it is focused primarily on theoretical problems of feedback and control systems. This is very different from the study of innovation, or even the role of applied ICT in complex organisations. Recent meeting of this faculty includes an international convergence on interdisciplinary science, engineering and technology; a Day of National Salvation; a Forum of Higher Educational Institutions; a celebration of the 25th anniversary of diplomatic relations between Azerbaijan and the Republic of Korea (South Korea); and a Year of Islamic Solidarity. 22

It is assessed that based on the public record available at the time of the research for this document, the Academy of Sciences and Baku State University are not involved directly in activities that will stimulate innovation in the ICT sector or accelerate the rapid adoption of state-of-the-art ICT throughout Azerbaijan’s economy. In contrast, the Academy of Sciences plays a strongly political and institutional role, and to a certain extent is a remnant of the Soviet Union. It was not designed to accommodate the type of innovation model that is characteristics of highly geared “Silicon Valley” like start- ups. Nevertheless, in the recommendations, this challenge is addressed with a view to closer integration between ICT innovation in the applied (not theoretical) domain, but building upon the theoretical experience of the Academy of Sciences and the Faculty of Applied Mathematics and Cybernetics at Baku State University. The Role of Government Understanding the role of government in Azerbaijan’s innovation system must be based on the historical developments in its history. The people of Azerbaijan in ancient times followed the Zoroastrianism religion, then switched to Christianity. After invasion by Turkic tribes, the people gradually converted to Islam over several hundred years. Azerbaijan became part of the Russian empire in the 19th century, but in 1918 the Azerbaijan Democratic Republic was formed, but in 1920 it was invaded by Soviet forces leaving Azerbaijan part of the Soviet Union until it collapsed in 1991, after which today modern-day Republic was created. The current president Ilham Aliyev was elected in 2003, then in 2008 with a majority of 87%. There are no term limits for the presidency. These events set the stage for understanding the role of government. Given the popularity of the President in the 2008 election, and the lack of term limits, the prospects for government in Azerbaijan are stable. Having a long-serving leadership opens up possibilities for more sustained long-term planning. There is no need to continue to think of only the next election. Instead, longer-term development goals can be pursued. Since much revenue coming to the government is derived from the export of petroleum products, and given the centralised nature of the Azerbaijan’s government (there are no separate states within Azerbaijan), the implication is that for the foreseeable future the government will play a major if not the dominant role in allocation of resources for investment, including any investment in ICT. The structure of Azerbaijan’s government can best be understood as a unitary state ruled by a single elected leader who exercises authority through a number of top-level ministers who are given various portfolios to management on behalf of the government and Azerbaijan’s people. The ministers in turn are given an allocation of the available national revenue, which they then can allocate to various projects. The ministers are able to control who works with them, and are able to pick persons who are loyal and willing to carry out their policies without reservation. This system of top-down control is then passed downwards through all layers of Azerbaijan’s government. 23

This type of top-down structure in government can work very quickly when the need arises, and it able to set national priorities, and then allocate the resources necessary to carry them out. This type of administrative control structure helps explain the rapid and astonishing growth of Azerbaijan’s landscape, as best seen by its state-of-the-art constructions of some of the world’s most modern buildings. In addition, Azerbaijan had rapidly developed a sophisticated transportation infrastructure and recently completed a major railway linkage to Georgia. Implication for ICT Innovation The structure of Azerbaijan’s economy combined with the strong and leading role of government policy means simply that in order to have significant ICT innovation, the government must play a major part. From the track-record, we know that if the government of Azerbaijan decided to pursue an infrastructure goal, it will gather up the resources to achieve it. An additional factor is the overall size of the country and size of its startup culture, which is small. In general, there are two major forces that drive innovation. First, the role of government; Second, the role of the private sector. In Azerbaijan, taking account of the role of petroleum in the national economy, it is the government that has effective control over virtually the entire economy. This control is exercised through allocation of the national wealth through the ministries. The implication for ICT innovation is that the most effective way for Azerbaijan to make progress is through strong government action. In this connection, there are a number of methods in which a government can influence the deployment of ICT. It is assessed that the most effective way Azerbaijan can accelerate ICT innovation is through targeted government purchasing of ICT infrastructure.

The most effective path for Azerbaijan to accelerate ICT innovation is through government investment in the national information infrastructure.

In Figure 6 Government investment in national information infrastructure we see pictured the different types of government policies aimed at stimulating ICT innovation. We divide up the types of government policies present in Azerbaijan, and arrange them according to the level of reliance on the free market and the concentration of capital needed to reach an effective scale. By making an examination of the current situation in Azerbaijan, we can eliminate or downgrade three of the quadrants. The weakest course of policy of action is to rely on government policies that develop information infrastructure according to the needs of various individual ministries. There is no need for large-scale investment because investment in ICT is found within the operational budgets of each of different ministries making the investment. The degree to 24

which ICT is developed depends to a great extent upon the discretion of individual ministers.

Large Scale Investment Large Scale Investment Weak Market Forces Strong Market Forces GOVERNMENT ACTIVE INVESTMENT INFESTMENT IN IN INNOVATION NATIONAL INCUBATORS INFRASTRUCTURE

Small Scale Investment Small Scale Investment Strong Market Forces Weak Market Forces

PASSIVE POLICIES TO GENERAL STANDARDS ENCOURAGE AND MINISTERIAL INNOVATION DISCRETION

Figure 6 Government investment in national information infrastructure

This is a weak approach because it allows the different ministries to maintain stove-pipe relationships in which each may develop their own standards, manage their own ICT infrastructure, and take actions that are in the best interests of the ministry, even if it might not always be optimal for the country as a whole. A significant amount of progress in the field of e-Government has been made in in this way, and the programs have been successful. Nevertheless, it has not done as much to power innovation in society as a whole. In general, these ministry-driven investments are very important, and have been successful, but are not adequate to transform ICT innovation throughout the entire society. On the lower left of the matrix are the different policies being put in place to encourage innovation but in a passive or long-term way. Examples include long-term educational programs, or the provisioning of government services for e-Government or e-Participation that stimulate the use of ICT by the citizenry. These types of efforts are impressive, and have resulted in a significant increase in use of ICT in Azerbaijan, but it is assessed that this type of passive policy that simply relies on the free market to stimulate ICT innovation is not effective because there is insufficient variation in the types of interactions being offered, and the overall utilisation has a fixed structure, leaving little room for modification. 25

In the upper left quadrant, we see the considerable investment that the government has made in promoting ICT innovation. This includes policies such as the Innovation Triad consisting of the ICT University, the ICT Fund and the High Technology Park system. Interviews and analysis of publications indicate that these policies are having an impressive effect on the stimulation of innovation within Azerbaijan, but the level of innovation reached thus far is far too small to be considered as more than the beginning levels of formation of an innovation cluster. These policies are working, and the number of vetted projects is increasing steadily. Nevertheless, the threshold for this type of approach is very high. This type of approach is aimed at duplication of innovation clusters found around the world. These clusters each work at creation of technologies that address world markets. Evaluation of the success stories found thus far in Azerbaijan indicate only a minimum amount of effort in this direction. The only conclusion we can draw is that this approach to ICT innovation should be considered as inherently more uncertain, and best matched against a very long-term view of technological possibilities. An additional consideration is that even if a few of these companies are successful in the global market, this will have little effect if any on the utilisation of ICT in Azerbaijan’s economy. It might make a few entrepreneurs wealthy, but will not have a substantial effect. This leads us finally to the “magic quadrant” in the upper-right. Here, the government can enact policies that leverage its full power. By taking stronger control over the use of ICT, Azerbaijan’s government can accelerate innovation throughout the entire society. There is no need to rely on the vagaries of the free market, since it works too slowly, and unpredictably. In addition, there is no need to rely on the springing up of entrepreneurs in Azerbaijan, because even if successful, they will end up creating highly focused projects, not capable of introducing the needed transformation across the nation’s entire economy. The Role of Universities Azerbaijan has a number of universities. Some are of a general nature, others are more specialised.3 See Appendix – Universities in Azerbaijan on Page 71. Given the pedagogical focus, it is clear that the majority of universities have little role to play in national ICT innovation. There are two approaches to improving the current situation. Strategy I is to continue to concentrate and focus ICT innovation in a few select national institutions; Strategy II is to use the current centres of ICT innovation to build branches into as many of the other higher

3 It is beyond the scope of this concept paper, but given the transformations being made in all other aspects of Azerbaijan’s society, it might be useful to consider combining all of these universities and schools into two large national universities, one for the humanities, one for science. 26

educational institutions as possible so as to further elaborate study of the role of ICT in specialised domains. Strategy I – Concentration and Focus In the current situation, the Ministry of Telecommunications and ICT has created an Innovation Triad, one part of which is the ICT University. This was originally intended to be a stand-along university, but later was merged into Azerbaijan Diplomatic Academy (ADA). The intention was to have a centralised place within Azerbaijan where students can be trained in the basics of ICT and then be encouraged to pursue innovative ideas, such as start-ups. It is assessed that although this effort is encouraging and in the right direction, the overall effort can be improved by integrating together the ICT innovation potential of the entire University system of Azerbaijan. This is discussed in more detail below. Strategy II – Outreach to Specialised Educational Institutions There does not appear to be a national organisation within Azerbaijan, and within the educational system to promote ICT Innovation. Instead, there are a number of universities, each of which have significant connections with ICT and its application. We can be sure that within each of these institutions, there are persons, both professors and students, who could benefit from being plugged into a national innovation system. If shown the opportunities and if there is a reasonable chance of reward, then people naturally will apply their efforts.

When a nation values and rewards intelligence and innovation, then many people will become intelligent and step forward with innovative ideas.

In Table 3 Coordination of ICT Innovation Programs Across Azerbaijan's University System (representative list) on Page 76 we have listed a number of key higher education institutions in Azerbaijan. Examination of the websites of these institutions reveals significant areas of work that touch upon the leading-edge of much ICT innovation. For a population of 9.5 million persons, Azerbaijan has a relatively large educational establishment. From the point of ICT Innovation and a national effort in that direction, the question then becomes how to better coordinate these different resources. Even without significant investment in further infrastructure and resources, Azerbaijan can improve ICT innovation by coordinating across educational institutions. The current arrangement can be improved with the following approaches: 1. Build a coordination network. A system of organisational arrangements should be put in place to coordinate activities across all of these different programs. This 27

would involve sharing of information, and a regular arrangement of exchanging information related to needs and potential innovations. This would operate somewhat like an international association, or trans-institutional organisation. This needs to be more than a mere social club. Instead, its activities should reflect and ability to respond to national priorities. 2. Increase sharing of ICT infrastructure. By pooling resources and sharing ICT infrastructure, these different groups will be able to purchase larger and more sophisticated computing. This should enable the overall utilisation of their servers and other equipment to reach economically beneficial levels. 3. Coordinate purchasing of ICT infrastructure. Part of this trans-institutional coordination should focus on coordination of purchasing for ICT. This will enable these organisations to achieve better economies of scale, and change purchasing decisions so that thy represent a broader consensus on what is needed going forward. 4. Seek transparency in finding cross-disciplinary innovations. Innovation in both use of ICT and in creation of completely new forms of ICT can be stimulated by building mechanisms to systematically encourage cross-disciplinary thinking and problem- solving. 5. Define a common set of challenges. A national system of prioritisation of ICT challenges should be considered. It is easier to get people to focus on clearly defined objectives. It is the lack of clear objectives rather than the lack of resources that inhibits ICT innovation in Azerbaijan. The entrepreneurs and creative people in Azerbaijan are standing by. It is the definition of the challenge or problem set that is missing. By defining a set of national challenges, and communicating this across to all citizens, through all ministries, Azerbaijan can greatly stimulate innovation. 6. Put in place a national reward or recognition system. It is perhaps an irony of the human character, but ego and recognition is an important driver of achievement. If people know that they will receive national recognition for innovative work, they will try harder to get the work done. Use of the television and radio, and print media channels to “reward” innovators would go a long way towards turning the national dialogue and discourse towards thoughts of innovation.

It is the lack of clearly defined national challenges rather than the lack of resources that inhibits ICT innovation in Azerbaijan.

These concerns are addressed in the recommendation Appoint a national Chief Information Officer (CIO) for Azerbaijan on Page 45. 1. Lack of Coordination. The research and interviews for this assessment failed to find any significant mechanism for coordination between these different institutions insofar as ICT innovation is concerned. It is not clear that apart from random 28

network associations of professors or other educators, people in one institution are not aware of the ICT related events taking place in another. The concept of coordination also means more than simply being aware of activities in other institutions. Instead, it means some type of rational and intelligent effort to ensure that efforts being made in one institution are compatible and consistent with innovative efforts being made in another. There is no evidence that any such arrangement exists. 2. Lack of Shared Resources. There is no evidence of any sharing of ICT resources between these different institutions. Each institution operates autonomously, and as a result there is a duplication of effort. For example, servers providing email and reproduced from one institution to another, even though it would be possible to have a single system. In addition, by combining resources, it should be possible to rationalise expenditures. A similar discussion is provided as concerns the appointment of a national Chief Information Officer (nCIO). 3. Lack of Integration. The nature of ICT innovation is that much progress is made by combining ICT operations across different domains. This happens when there is cross-fertilisation between persons with different perspectives and backgrounds. In this connection, some thought should be given to creating the conditions that will allow different common interest groups to emerge, regardless of the associated institution. Under the current system, there is no integration of ICT efforts. 4. Lack of National Direction for Innovation Effort. The interviews and review of literature did not reveal any national direction for ICT innovation that was of a national scope. The actions by the Ministry of Telecommunications and ICT is remarkable and positive, but the real task for Azerbaijan is to build a national effort and spurring ICT innovation. This can take place only if there is a way to coordinate activities and information sharing across the numerous higher-education institutions in the country. This issue is addressed in the recommendations. See Appoint a Study Group to Develop Plan for Cross-University ICT Innovation Pathway on Page 54. National Fund to Support Entrepreneurship and the Role of the Private Sector Azerbaijan is one of the best places to incorporate a business in the world. It ranks 10 out of 189 in the ‘world Bank’s publication Doing Business 2014 (World Bank, 2014). Azerbaijan has an Economic Freedom index store of 63.6, which is similar to the Philippines and Thailand. It has the highest score in its region. Analysis shows that property rights have been improved, as well as government integrity. The tax burden on corporations has eased. The inflation rate is approximately 4.0%, and unemployment is 4.7%, which is relatively low. The top individual income tax rate is 25% and the top corporate tax rate is 20%, which is very competitive. The overall tax burden is 14.2% of total domestic income, and government amounts to 37.6% of total output (GDP) over the past three years. Azerbaijan enjoys budget surpluses, which average only 0.3% of GDP and public debt is 36.1% percent of GDP (The Heritage Foundation, 2017). 29

Even without significant investment in further infrastructure and resources, Azerbaijan can improve ICT innovation by coordinating across educational institutions.

The private sector share in GDP, according to the Asian Development Bank is 80% percent and the private sector accounts for 72.4% percent of tax revenues (Asian Development Bank, 2016). The assessment notes that “progress in infrastructure has been considerable”, but notes that the private sector faces barriers such as lack of a skilled workforce and “poor educational standards”. It also noted “weak coordination in policy making among government departments”. All of these factors inhibit the dynamism of the private sector in Azerbaijan’s economy. Access to finance for small and medium-sized companies “is still relatively low”. There is still a large informal economy estimated at 30% percent of GDP (Abdih & Medina, 2013).

The Fund for Entrepreneurship is more than 100 times more active than the ICT Fund.

Funding for entrepreneurs and startups has been provided by the Azerbaijan Investment Company and the National Fund to /Support Entrepreneurship. This source of funding has been set up specifically to finance priority projects in the non-oil sectors of the economy. More than AZN1.2 billion has been lent out to 19,400 entrepreneurs. In addition, the Azerbaijan Investment company invested $1.1 billion spread across nine projects, with funding of approximately $190 million each.4 As of December 2017, the Fund reports that it has provided support to 33,959 entrepreneurs, and has granted 2,043,123,701 concessional loans. Analysis of the projects that have been funded indicates that the focus of these activities is almost entirely in the agricultural sector. See Appendix – Economic Fields Receiving Entrepreneurship Funding from the Ministry of the National Economy’s Fund for Entrepreneurship Support on Page 79. As a rough estimate, it is assessed that the activities of the Fund for Entrepreneurship is 103 times more active than the ICT Fund. Although there is no direct investment reported in ICT innovation, it is clear that many of the industries that have been supported by the Fund are large users of computing and telecommunications, particularly in use of automated production systems.

4 The Republic of Azerbaijan Ministry of the National Economy, National Fund for Entrepreneurship Support. The English language of the website is http://anfes.gov.az/en/ 30

The National Business Incubator System The Science Park & Innovation Centre Association Directory lists one science and technology park (High Tech Park Azerbaijan), two business incubators (Pi Campus; Caspian Investment Centre (CIC)), and one business support centre (Uluchay Social-Economic Innovation Centre). There are many others. Incubation centres are a growth industry in Azerbaijan. The number has grown so much that the Ministry of the Economy recently announced that it was creating an organisation that would coordinate the activities of incubation centres as well as develop and carry out a national policy for this form of innovation. The recognition at the national level of a need to introduce some form of coordination into the incubator system is an indication of both their growth and importance. It also points to a deeper issue which is how to introduce some type of rationality into the incubator system. It is still too early5 to fully measure the effects of this new form of coordination. Nevertheless, it is assessed that this type of trans-organisational coordination is a model that should be broadened across all sectors of Azerbaijan’s society. The Innovation Triad – Three Innovation Mechanisms for ICT In the same way that the Ministry of the Economy has introduced and grown a business incubator system, the Ministry of Communications and high technologies has taken the bold step of building a three-legged approach to achieving innovation in ICT. As seen in Figure 7 ICT Innovation Triad on Page 31 the Government of Azerbaijan has taken a strong approach to stimulation of innovation, at least in the ICT sector.6 During the 2011- 2012 period, the government of Azerbaijan created three institutions: The ICT University, an ICT Fund, and a High Technology Park system. The idea behind these policy initiatives was to first invest in human capital by increasing the quality of ICT oriented education. Next, the technology park system would provide a venue for start-ups to work as they create new ideas for commercialisation. Third, the government would provide funding for those innovations that were recognised as being the most promising. This in theory will result in an acceleration of innovation in Azerbaijan.

5 At the time of the drafting of this document, December 2017. 6 Focusing solely on the ICT sector is unlikely to create the level of innovation desired by the Government of Azerbaijan. This is because there is an essential inter-relationship between different economic sectors, and ICT is more or less an integral part of every sector in the economy. 31

ICT UNIVERSITY

ICT INNOVATION TRIAD

HI TECH ICT FUND PARK

Figure 7 ICT Innovation Triad

The ICT University The ICT University initially was designed to be a single place within Azerbaijan where it would be possible to create a concentration of expertise, and train a new generation of students in all aspects of ICT. The counter-arguments to creation of the ICT University emphasised that there already were within numerous educational institutions a number of ICT related courses that were being made available to students. As such, it was not necessary to invest the funds to create yet another institution that in essence would be redundant with curricula that already was in place. The counter-argument was that although there were resources scattered around Azerbaijan and involved in all aspects of ICT, it was important to take advantage of the type of synergy that potentially would occur should it the different academics and trainers be placed in close proximity with each other. In addition, it would be more efficient for investment of national resources if there were a single place of consumption. Finally, with a single focus for ICT, it would be possible to save a significant amount of resources through pooling and sharing of infrastructure resources. This latter view prevailed. As time came to begin the process of putting the ICT University concept into place, Azerbaijan was struggling with a downturn in its economy caused by the fall in oil prices and the economic aftermath of that pivotal event. It became clear that it would be problematical for the government to assemble the resources needed to create an entirely new university. At the same time, the arguments regarding the risk of redundancy faced by creating an institution that would in essence be copying a number of programs that already were operating in other educational institutions continued to echo. As a result of these pressures, and as a means of being able to meet its goals, but also conserve significant resources, the decision was made to abandon the plan to create an 32

entirely new university (a vast and complicated undertaking) and instead integrate an undated ICT curriculum into a pre-existing institution. The result was the choice of Azerbaijan Diplomatic Academy’s School of Engineering and Information Technologies.7 The program offers three undergraduate programs: (1) a Bachelor of Science in Computer Science (BSCS); (2) a Bachelor of Science in Computer Engineering (BSCE); and (3) a Bachelor of Science in Information Technology (BSIT). There are no graduate courses. The faculty has only four assistant professors, and no full professors. It is assessed that further efforts should be made to improve the size of the faculty, increasing its available funding for research and development, deepen the types of courses that are offered, and increase the collaboration between the University and the private sector. A study committee should be formed to conduct a benchmarking evaluation to determine the degree to which the curricula being taught is in line with international standards. Any course that does not fit into an accepted international standard should be dropped and replaced. In addition, a determined effort should be made to re-orient the educational offering so that graduating students have internationally recognised degrees in their respective area of study. Without the important of international standards for Azerbaijan’s ICT education, it is impossible to make any realistic assessment of its effectiveness. The High Technology Park System The second leg of the Innovation Triad is the high technology park system. The “Hi Tech” Park is an infrastructure space provided by the government. It provides essential infrastructure for innovation in the ICT space. The environment is “wired”, and innovators are not burdened with the high capital investment needed in starting a business or creating intellectual property. The Hi-Tech Park is not merely a providing of infrastructure. It is far more. For example, the sharing of ideas between talented individuals who otherwise may not have met can lead to discovery and exploitation of various synergies that otherwise would not be discovered. The Park also organises a number of seminars and other information-sharing sessions that are aimed at expanding the horizons of its participants. In addition, the Hi-Tech Park staff has built international bridges with leading academics around the world, and has integrated some of its actions into an international system of similar parks. Members of the Park are selected only after a rigorous vetting process. The track record of the applicant is studied; there are extensive interviews, and not everyone is selected.

7 Azerbaijan Diplomatic Academy, School of Engineering and Information Technologies. See http://www.ada.edu.az/Pages/school_of-information_technologies.aspx and http://www.ada.edu.az 33

Nevertheless, in spite of these quality measures, there is a generally liberal and flexible administrative orientation aimed at increasing the ease at which innovators can go about their work.

The High Technology Park system provides entrepreneurs and start-ups a stable and “wired” environment for creation of new businesses and intellectual property.

Being selected for participation in the High Technology Park system is not a permanent passport to cost-free living at the expensive of the government. Instead, participation in the Park is given only for a fixed period of time. In order to get an extension or renewal of access, an applicate must have their progress reviewed by an impartial committee. In spite of the rigors of this review process, interviews reveal that it is essentially flexible in nature. For example, when participants are first allowed to join the Park, they are required to submit a projected plan of their development efforts. This plan then serves as the template upon which they are measured during subsequent evaluation review sessions. There are no strictly enforced limits to the number of times an entrepreneur is able to avail themselves of Park services. It is assessed that the High Technology Park system is successful, but that careful consideration should be given to expanding its operations, and increasing the resources for its operation. More funding is needed for increasing the amount of international collaboration possible. It also would help if the Park system developed the capability of systematically matching projects being developed in Azerbaijan with parallel efforts elsewhere. In this connection, the interviews revealed an active need for building awareness of international opportunities both for participants in the Park system, but also for the management and staff of the Parks themselves. Such additional funding count profitably be used for increasing the amount of interaction between innovation centres in other parts of the world and actors in Azerbaijan. Finally, it is assessed that more resources should be allocated to integration of the High Technology Park system into the intellectual property patent regime on Azerbaijan. The interviews revealed several inherent weaknesses in these linkages, and a general down- playing of the importance of patents. One barrier to patent protection is the high cost of making an application. Another problem is the lack of general education and understanding of the important of IP protection for any new innovation not only within Azerbaijan but also internationally. Providing help in the filing of patents would be an important contribution to the innovation community. For example, it might be useful to consider waiving all patent application fees and also providing skilled patent attorneys for free to those ideas that have been carefully reviewed and selected for this special benefit. In the long term, it also would be useful to extend this subsidy for patent filing and application to cover application in 34

Europe, the United States and in Asia. This will supplement the close relationship between Azerbaijan and the Russian Federation in the area of patent protection. The ICT Fund The third and final leg of the Innovation Triad is the ICT Fund. This organisation is charged with channelling speculative funding to start-ups. Projects that received funding do so either through a grant or loan facility. Most funding is in the form of loans. The loans do not come from the government, but instead from the private sector. Selection of which projects or start-up ideas are to receive funding is done by the ICT Fund itself. This is in contrast to the way speculative investments are made in many other countries. In most cases, it is the speculator themselves, whether an individual or an organisation, that picks and chooses which projects to invest in. This is done through a process of “Angel Funding”, followed by various other types of funding, depending on the stage of development of the innovation. In exchange for “Angel funding”, the lenders routinely demand a significant ownership in the borrowing company. This funding also sometimes comes with mandatory board memberships and sometimes a significant amount of operational control over the innovation process. See (Preston, 2011). Table 1 Applicants to the ICT Fund

Year Applicants Cumulative 2014 56 56 2015 67 123 2016 91 214 2017 115 329 y=20.1+32 Examination of Table 1 Applicants to the ICT Fund shows the number of applicants to the ICT Fund for the period 2014–2017. In spite of significant funding instability in operation of the ICT Fund, the number of applicants has continued to rise. The ICT Fund uses a highly-structured procedure to evaluate applicants for funding. This is summarised in Figure 8 ICT Fund Selection Process for Innovations on Page 35. The process begins with receipt of an application. The application requires that the applicant submit a complete technical description of the innovation, and a reasonably detailed business plan that details the investments needed to bring the idea to fruition. A translation of the evaluation form sent out to the appointed experts to evaluate and score proposals submitted for grants appears in Appendix – Evaluation Methodology of the ICT Fund on Page 84. After applications are received, they are reviewed internally first to see if any have easily identifiable problems or inconsistencies or gaps in information that would preclude further 35

consideration. For those applications that survive this first screening, they are sent to qualified reviewers who study the idea closely and make a recommendation regarding whether or not to extend some type of financial aid. The reviewers are hand-picked to ensure that their qualifications and interests match those of the type of innovation being targeted by the potential start-up. Reviewers are given a fixed set of criteria with which they evaluate the innovation idea. These review factors are standardised and are the same for all projects. Careful measures are taken to ensure that there is no way to identify the applicant, and so that the reviewer provides completely unbiased information in their evaluation. This is a blind review process. A single reviewer is responsible for approximately 30 applications during each review period, and each application is reviewed by more than one expert. Each reviewer is considered to be an expert in their field. An additional precaution made is that one reviewer does not know the identity of other reviewers. This is a further safeguard to prevent corruption from contaminating the process. After the external and independent reviewers have completed their work, each application is then reviewed again internally within the ICT Fund to determine which if any will be given no further consideration for funding. This is not the end of the process. For the applications that still are in the running, there is a n additional subsequent review by an advisory board. The use of an additional advisory board helps to ensure that within the ICT Fund itself there is no chance that corruption can contaminate the deliberations.

Receive Application

Identify Review of Qualified Progress Reviewers

Mentoring of Review of Project Application

Funding Selection of (Loan or Top Grant) Applications

Final Review by Selection of Advisory Projects Board

Figure 8 ICT Fund Selection Process for Innovations 36

In the final stage, it is the Advisory Board that makes the final selection of the projects that will be recommended for funding. After this final review is completed, then the applications that have received a positive assessment will be referred to external financial sources (banks) to obtain funding. The great majority of financial aid ins in the form of loans. After financial assistance is obtained, then the intervention of the ICT Fund continues. It then provides an important mentoring function that helps ensure the greatest possibility of success for the start-up. Mentoring consists of a regular consultation with the innovator to help solve problems, and suggest other resources or opportunities that might be considered. As the mentoring proceeds, a regular progress review schedule is put into place to further help ensure success. This regular review process is necessary for two reasons: First, it greatly helps the innovator keep focused on the critical path necessary to eventual success; Second, it helps the financial investors keep in turn with the practical problems being faced as the innovation makes its way into the market. This means, in essence, that the overall financial risk for the entity extending the loan is decreased considerably. After all, if the matter involves a loan, it is important for the loaning institution to keep a careful watch on the prospect for their investment. The ICT Fund currently faces a number of uncertainties that likely are to have an effect on its future. The most important contingency involves funding. It was reported during the course of the research that during the previous year (2016), the budget available for the ICT Fund was unstable. In spite of an almost elimination of its budget, the ICT Fund managed to employ funds available from the previous year in order to continue its work, even after its budget was severely interrupted. Although it appears that the instability in funding for the time being is a thing of the past, the budgetary uncertainty poses a serious risk to this part of the Innovation Triad. After review of the supporting document and research interviews, it is assessed that the operation of the ICT Fund may be too narrow. It has developed a valuable process for evaluation of innovation projects that can be extended into all areas of innovation, not only ICT. Given the number of applications that it is handling, it is estimated that the ICT Fund could handle up to ten times the number of applications and evaluations without having to significantly enlarge its cost. The Role of Government Ministries and State Organisations Azerbaijan and its government is structured in a way that is consistent with the former Soviet Union. There are a number of very powerful ministries, and also a parallel system of powerful state organisations. See Appendix – Ministries of the Government of Azerbaijan on Page 77 as well as Appendix – State Committees and Companies of the Government of Azerbaijan on Page 78. When taken together the army of government ministries and extensive array of state organisations control most of the economic activity of the nation. This carries with it a number of implications for national innovation. 37

1. Institutional innovation is more important than individual start-ups. The resources controlled by these government affiliated institutions is much greater than can be found in any part of civil society in Azerbaijan. The result is that it is easier to find money for systems development and experimentation within these organisations rather than seeking it on the outside from the private market, which in Azerbaijan is not as well developed as in more market-oriented economies. The implication of this is that depending on the spontaneous forces of the free market in Azerbaijan is less likely to be realistic than to work through the institutions that already are in place and themselves have a powerful supporting infrastructures, budgets, connections, and access to internal markets. 2. Innovation is more likely to address known priorities of its host institution. There is little indication8 that individual ministries are focused on areas of challenge outside of their legal domain. Even if there were concerns noted outside the domain of an individual ministry, it is extremely unlikely that any resources would be allocated to find a solution. Ministry budgets are allocated to ministry issues and not elsewhere. The same pattern exists in state committees and state organisations and companies. It also is the pattern in academic institutions. There is no mechanism to compel any other tendency. It is a giant system of stove-pipes.9 The implication for ICT innovation is that ideas and potential solutions that might arise to solve multi- disciplinary or multi-domain problems are unlikely to come to the surface. Since many of the most useful innovations take place through this type of insight, the implication is that this tendency in Azerbaijan acts as an inhibitor to ICT innovation. On the other hand, a second implication is that practically all ICT innovation concerned with economic or other activities that take place within the domain of a ministry will be developed within the ministry and not elsewhere. First, there is no mechanism for outsiders to even know the problems that need fixing; Second, even if there were such a mechanism, there would be no funding available to do the work because it would be done outside the scope of the ministry. Since both the evaluation of objectives, specification of evaluation criteria, and potential source of rewards and of funding for exploration and invention comes only from within the ministry wherein the entrepreneur is engaged, it follows that the general outlook

8 Based on review of literature, analysis of news stories, interviews, analysis of ministry websites, and ICT related events as recorded in press releases, white papers, and other sources in Azerbaijan. 9 The term “stove-pipe” is associated with the management consultant-created field of business “re-engineering”. The term refers to lack of horizontal coordination between different functional components of a corporation. In this document, the term “stove-pipe” refers to the tendency of different government ministries to have intensive and well- established integration vertically within their own structures, but to lack significant capabilities for horizontal integration with activities of other ministries. 38

and priorities will come solely from within the concerned ministry.10 If there were a mechanism in place for ministries to cooperate with each other in defining a set of priorities that are trans-ministerial in nature, then this would improve the prospects of getting ICT innovations that had a broader national impact. See Figure 9 National policies to encourage ICT innovation should encompass trans-ministerial domains on Page 39. By increasing focus on innovation that spans the organisational and subject domains of multiple ministries, Azerbaijan will open up a vast new landscape of innovation. For a patent analysis that takes a look at this process, see (Park, Yoon, & Lee, 2005). 3. Funding for innovation is easier to allocate because there is less moral hazard. Within the ministry setting, however, it is easier to allocate significant resources (money; infrastructure; talent) towards a selected innovation than would be the case if the investment was being passed to parties outside of the purview of the ministry. There is little trust that providing startup money to persons who are organisationally separate from the ministry will be productive. There is a perception that once the money escapes, it will be gone, and its use will not necessarily be in accordance with what was promised. For example, in interviews with groups associated with incubators, examples were given of how some persons would “game the system” so as to extract personal benefits, but without necessarily delivering anything significant in the way of innovation. Although this is a universal moral hazard in speculative investment making, in Azerbaijan there are even fewer contractual and legal safeguards to prevent abuse than in the European Union or United States. The lack of a strong legal and contract system reduces the probability that there will be consequences arising from abuse. This is well known in Azerbaijan, and the result is another strong incentive for ICT innovation funding to take place in a way so that it remains under the control of the ministry. This is an advantage, however, because working within the context of a ministry carries with it lower risk than other alternatives. As can be expected, it there is easier to allocate funding for innovation through a ministry.11 4. There is a stronger likelihood that the power of government purchasing can accelerate the diffusion of innovation. In every society, government purchasing can act as a strong supporter for startup industries. In some models, such as import substitution, government policy focuses on keeping out strategic products, and then directing its purchasing at goods manufactured inside the country, even if they are

10 This is not criticism, only identification of fact. In the recommendations an approach is suggested to supplement this system by making it possible for some priorities and challenges to be defined on a trans-ministerial level. 11 The reader should note that this phenomenon is very different from found in the European Union and United States. The implication is that a completely different model of ICT innovation should be considered. 39

more expensive. The theory is that by receiving the stimulus of large government orders, the domestic producer should be able to reach those economies of scale that are enjoyed by the manufacturer of the items formerly imported. Although in international trade agreements, countries agree that government purchasing policies should not be used as a non-tariff barrier to trade, in reality government purchasing is a very important part of many industries. From the point of view of ICT innovation, we can conclude that like in other industries, government purchasing can play a crucial part in acceleration of creativity. In this connection, it should be remembered that particularly due to language issues, it is extremely unlikely that much ICT innovation will have any market outside of Azerbaijan. As a consequence, the role of government purchasing is even further magnified.

AGRICULTURE MACHINERY BIOTECHNOLOGY TRANSPORTATION CODING

Figure 9 National policies to encourage ICT innovation should encompass trans-ministerial domains

In Azerbaijan’s agricultural sector, for example, graph-theoretic methods have been used to assess the linkages between different components of the agricultural innovation system. This methodology is specifically designed to study how different institutional components as well as other resources interact with each other in a way that their coordination produces more innovation. It has been found that financial and human resources constraints are key barriers to better coordination (Temel, Janssen, & Karimov, 2001). See also (Temel T. , 2004) who states that “ample scope exists for intermediary organisations to be more active in facilitating the flow of information and knowledge between the public and the private organisations in the system”. 40

Although these studies have targeted agriculture in Azerbaijan, it is certain that if studied in using Next Step Innovation Centre the same methodology, a similar conclusion Brings education from the world’s would be reached for other sectors. leading universities to your Azeri The Role of Innovation Centres entrepreneurs. For hardware startups, funding is available to build Azerbaijan also has spun out a number of the first prototype. Mentorship from innovation centres. These centres are organised Columbia University and University under different umbrellas, some through of California Berkeley. ministries, others directly through the Office of Founded by the business community the President of Azerbaijan. in Azerbaijan. Below, we provide only a few examples. It should be noted, however, that there does not appear to be any central coordination between innovation centres, and no single national policy that governs their activities or defines their charters for operation. This indicates that Azerbaijan is aiming to be a “startup economy”. It has removed barriers to creation of innovation centres, and has not allowed the deep hand of bureaucracy to interfere with the proliferation of these activities. State Agency for Public Service and Social Innovations The State Agency for Public Service and Social Innovations, organised under the President of the Republic of Azerbaijan, has been designed to coordinate priorities for innovation between state authorities, academia and the international business community.12 This centre is focused on increasing the efficiency and quality of public services. The centre has a large scope of operations. See Figure 10 Areas of Activities for the Innovations Centre of the State Agency for Public Service and Social Innovations on Page 41.

Azerbaijan is one of the leading countries in the world in focusing on ICT innovation in delivering efficient and friendly government services to its citizens.

The Innovations Centre is focused to a great extent on the use of ICT in providing innovation, but also pays attention to the physical comforts of citizens, including the ergonomic design of government information centres. There is a genuine government priority expressed in improve the lives of Azerbaijan’s citizens. What is perhaps remarkable

12 For details see http://icenter.az/en/about-us/ The Innovations Centre also has a Facebook page at https://www.facebook.com/pg/icnextstep/about/ 41

is that the Innovations Centre also operates a radio station that presents news regarding government services to citizens.

ASAN Pay

Innovations Public and Services Marketing Radio

Software and Mobile Services Services

INNOVATIONS CENTER

Life and Finance and Functional Procurement Support

Law and Kommunal Human Info Centres Resources

Visa Portal

Figure 10 Areas of Activities for the Innovations Centre of the State Agency for Public Service and Social Innovations

Next Step Innovation Centre The Next Step is another type of innovation centre set up by “leading members of the business community”.13 The purpose is to identify talented young people who are innovators. Here is a brief description:

The Incubation program supports companies from conception up through development of a workable demo (A Minimum Viable Product). The Accelerator Program takes companies from their initial revenue through growth stages and global expansion. If the startup is involved focused on hardware, then Next Step has funding available to help build the prototype product. Uluchay Social-Economic Innovation Centre The Uluchay Social-Economic Innovation Centre14 was founded in 1995. It is a non-profit and non-governmental organisation based in Sheki, Azerbaijan. It focused on public policy,

13 See http://icnextstep.com/ 14 See http://www.uluchay.org/ 42

program development and making breakthroughs in delivery of services to the local population. Recent Surf.az work has explored the use of crowdfunding, using the Developed at the Barama Israeli experience as a framework. It has an ongoing Innovation and program for providing legal aid, rehabilitation and Entrepreneurship Centre. It is reintegration of prisoners in Azerbaijan. Although a news aggregator that there is little record of specific activities in the ICT automatically collects the realm, the Uluchay centre is another example of how latest news from around the innovation activities are operating across all sectors of world about Azerbaijan. Azerbaijan’s society. Social Innovation Lab The Social Innovation Lab15 works at solving business and social problems “through innovative approaches to build sustainable business models.” It operates a Startup Academy with briefings on business models, how to do market research, utilisation of marketing and other “growth tools”, review of financial analysis, and how to do “storytelling” to sell the idea to investors. The Social Innovation Lab also organises a “Fuckup Night” on a regular basis.16 The purpose of these meetings is for entrepreneurs to share their experience with failures in startups. The idea behind this is that as much can be learned by studying failure than by studying success. Actually, many observers are of the opinion that in the startup culture, it is more useful to study why things fail. Barama Innovation and Entrepreneurship Centre The Barama Innovation and entrepreneurship Centre17 has designed an incubation program for entrepreneurs that target ideas that can be realised within a 3, 6, 9 or 12-month incubation period. The Centre provides information on startup methodologies and best practices. It also provides advice, mentorship, expertise and networking opportunities. It partners include AAA, USAID, Google Developers, Seedspace, Seedstars World, CRDF Global and the Cisco Entrepreneurship Institute. There are already a number of interesting

15 See http://socialinnovationlab.az/aboutus/ 16 The term “fuckup” is American slang English. Although the root word “fuck” has a sexual connotation, the term “Fuckup” has the meaning of “failure”, with the sense that the failure is caused by making poor decisions. The selection of this slang English-language term is designed to match the social and demographic profile of millennials in Azerbaijan who have a more global and entrepreneurial attitude. It is important for the reader to avoid placing a negative connotation on the term “fuckup” as used in this concept. In places such as Silicon Valley the term is used in normal and accepted conversation. 17 See https://barama.az/index 43

start-ups that have been created in this centre including tedbirli.com, Sehne, Green Baku, Naveen, Blogstar.az, Surf.az, Legendary Gaming, KitabTap, OrderHunt, Automax, Econaider, Minifutbol.az, Tehsil.online, Mr Bee, E-tap, WoWoman, Technote, Yolllan.com, StrikePlagiarism.com, AdBox, Barama Media, MySim, and Memar Stone. National Innovation Centre of Azerbaijan National Academy of Sciences The Azerbaijan National Academy of Sciences office of the Scientific Innovation Centre also created a national innovation centre to focus on innovation and the application of high technology and new knowledge domains to Azerbaijan’s economy. In addition to studying technology itself, the Academy instituted studies of legal and organisational issues. For example, there is analysis of how the introduction of new technologies might require changes in the legal system of Azerbaijan. At the time the centre was founded, it was estimated that Azerbaijan by 2020 will have invested $4 billion dollars in the ICT sector. Information regarding patents See Figure 1 Correlation between GDP and Patents Awarded in Azerbaijan 2000-2016 which shows a decline in the number of patents year after year, discussed earlier. A regression analysis shows that there is a correlation of only -0.5014 between the number of patents awarded and the GDP. This implies that the recent decline in oil prices and also devaluation had no effect on this form of protection of intellectual property. An additional factor is that the total number of patents is not very great, and there is little if any foreign participation in the patent regime. Benchmark of Azerbaijan’s Innovation System Based on a number of indicators, observers have identified a lifecycle seen in today’s innovation systems. See (Gauthier, 2017). We can think of four phases including Activation, Globalisation, Expansion, and Integration. Over time, a key measurement of innovation success is the level of resources a cluster is able to recruit into the innovation effort. In this framework, Azerbaijan is in the “Activation” phase, characterised by less than 1,000 start-ups and “limited local experience”. In this initial stage, fundamental efforts are made to build an innovation community by supplying mechanisms through which local entrepreneurs and investors can be brought together.

Azerbaijan is in the take-off stage for national ICT innovation, but there is significant opportunity for the government to do more.

The later phases include “globalisation”, having 1,000–2,000 startups focused in a single geographic area. In Azerbaijan, this would be Baku. In this phase, efforts are made not only to marshal domestic resources, but to attract resources from outside the country and to 44

create more connections with startup communities in other parts of the world. In the “expansion” phase, growth continues, and there is continued attraction of resources from the outside. In the final phase, “integration”, more than 2,000 startups are operating, there is significant sharing of resources and knowledge internationally, and government policies are aimed at sustaining growth and keeping the economy competitive. Although the Startup Genome framework is arbitrary (e.g., why is the staging between different phases 1,000 and 2,000 startups instead of some other number?), it is a useful way to see the steps towards building and benchmarking an innovation economy. As a result, the key variables to measure are as follows: Level of local experience. 1. Resource gaps. In general, there is need to understand with specificity the resource requirements for innovation to take place, and then to address how to fill the requirement. In order to do this, it is necessary for a government (or other interested community), to make a national inventory of available resources. 2. Ability to attract resources from outside the country. Any innovation cluster must be able to work not only in isolation, but in circumstances in which it is able to get outside resources. What mechanisms have been put in place by the Government of Azerbaijan to aid innovators to match-up with outside resources and enter into mutually beneficial cooperation is an important indicator of success. 3. Number of connections (relationships) between local innovators and counterparts overseas. The literature and experience seems to indicate that any significant innovation, particularly in ICT must address a global world market and not be aimed solely at domestic circumstances. This is particularly important when the market is very small as in the case of Azerbaijan. It follows, therefore, that in order to do this, entrepreneurs in Azerbaijan must have a way to build up connections with counterparts overseas. Consequently, an important role of government will be to help in this match-making. The sophistication and extent with which this is done is an important measure of the effectiveness of a government innovation policy. According to theory, an acceleration in level of connections between a domestic community of entrepreneurs and counterparts in the international community is the key factor that is responsible for moving the cluster (city) from the “expansion” to “integration” phase. 4. Significance of local policies that are designed to promote and sustain innovation. At a larger international innovation ecosystem is put into place, government focus shifts to overall broad policies that will help to maintain the competitiveness (success) of its industries. This is a complex phenomenon that involves the use of all levers of government power in the economy and also internationally.

45

Table 2 Benchmark of Innovation Factors in Azerbaijan's National Policy

Factor Benchmark assessment

Number of Startups The number of startups in Azerbaijan is very small, but not unreasonably proportionate in relation to the population of the country. Nevertheless, in terms of international standards, Azerbaijan need to be made stronger in this important measurement. Ability to attract The interviews revealed only two potential startups in Azerbaijan resources from that have been working with an international orientation. There is outside no evidence that innovators in Azerbaijan have any mechanism whatsoever to attract resources from the outside. Connections with Interviews revealed efforts being made to expand cooperation external startup with various innovation centres around the world, and to thereby communities link Azerbaijan into the international system of innovators. Although there is evidence of a few small connections, it is assessed there is no systematic government policy to fund or encourage this important element of innovation. National policies to The Innovation Triad is an example of a significant and enduring sustain government effort to put in place an innovation infrastructure. competitiveness Nevertheless, it is assessed that there is insufficient coordination between the national innovation community and the legal and administrative parts of Azerbaijan’s government responsible for making policy.

Altogether the benchmark shows that Azerbaijan, and the innovation community within Baku is at the very beginning of its efforts to develop a national innovation engine. How to accelerate these developments are addressed in the recommendations? In general, it is assessed that for innovation to increase throughout Azerbaijan’s economy, there will need to be a closer coordination between national law-making, and the role of government in building infrastructure that is geared towards providing a start-up environment. Recommendations Appoint a national Chief Information Officer (CIO) for Azerbaijan Review of literature, examination of the trade press, as well as a number of interviews has confirmed that there may be an imbalance between the power of individual ministries and the need for a national ICT innovation policy. 46

To speak through analogy, we can say that most of the different ministries have the accepted authority to act some autonomously, that is, they are able to act without a built-in consideration of the effects of their actions on other ministries or on society as a whole. This is normal for any government bureaucracy, and has been documented extensively in the literature. Nevertheless, one negative effect of this autonomy is that there remains a significant area where different parts of the government could share information, and engage in a consensus building exercise. The harsh reality is that so long as individual ministries across the government are empowered to adopt their own ICT policies and standards, the longer will it be before the government is able to build upon cross-ministerial synergies. Role of Government CIO A government Chief Information Officer (CIO) in Azerbaijan would have the role of ensuring the more efficient and state-of-the-art utilisation of ICT throughout Azerbaijan, both in the government and private sectors.

Azerbaijan should hire a government Chief Information Officer (CIO) to coordinate ICT utilisation throughout society.

A government CIO will need to have significant authority to better manage ICT throughout Azerbaijan’s government sector. The effectiveness of a CIO can be measured directly by accounting for the savings in expenditure on ICT hardware, software, and services; and indirectly by seeing the broader systemic effects of better ICT utilisation. The indirect effects are much more difficult to quantify, and are longer-term in nature. 47

NATIONAL NATIONAL GOVERNMENT LEVEL CIO

MINISTERIAL MINISTRY CIO MINISTRY (Strategy & PROCUREMENT LEVEL Operations) (Standardisation)

FUNCTIONAL DIVISION 1 DIVISION 2 DIVISION 3 LEVEL CIO CIO CIO

Figure 11 National Chief Information Officer (CIO) for Azerbaijan

Research indicates that many governments do not have a complete list of their ICT resources. Instead, expenditures on ICT are spread out across the government, hidden in the budgets of various ministries and functional areas within those ministries. Part of the role of the office of a government-wide CIO would be to first complete an entire inventory of the use of ICT throughout all government institutions, and government-affiliated institutions. A government-wide CIO also has important educational and consulting-like responsibilities. In particular, there is a need for a centralised approach to training of ICT professionals who work within government. This will help to eliminate the so-called “management deficit” that may be found hidden at the lower levels within various government ministries. There also is an important informational role for the CIO. By centralising power for ICT and its management and procurement, the result will be to increase transparency and accountability. For example, it will be possible to develop centralised reporting of the status of all ICT projects government-wide. Since reporting will be taken away from the sole control of any particular ministry, it will become easier to identify ICT planning or implementation projects that are failing or have developed severe problems. Ultimately the CIO should have the power to coordinate ICT projects across all of the various ministries of the government. This will allow the creation of a system of performance metrics and the provisioning of an ICT “dashboard” that will monitor both operations and progress of various projects. The appointment of a government CIO will make it possible for Azerbaijan to take advantages of the true economies of scale that are available on today’s computing 48

platforms. For example, with a population of approximately 9.5 million persons, and taking into consideration the size of the Azerbaijan government itself, we can easily see that it is completely realistic for the entire email system of the Azerbaijan government to be placed on a single server, along with all major office applications. There simply is no need to have email and office applications served from multiple data centres when the cost of running these applications from a single centralised platform will be a fraction of what they are costing today. Consolidation of data centres will further reduce costs, raise server utilisation rates, and act as a force multiplier for ICT knowledge being provided by experts. Crucial applications can be developed only once, instead of dozens of times in isolated systems development efforts conducted throughout various ministries. Using a single platform will result in much stronger reliability and security of ICT throughout the government. For example, cyber- security management will be eased by centralisation because instead of patching hundreds of machines, with centralisation it will be necessary to patch only one. Another factor is server utilisation. It would not be surprising if a national audit revealed that many stand-alone agencies within ministries are running their ICT infrastructure at a utilisation rate of only 5%-15%. Generally, it is recognised that with data centre consolidation, server utilisation rates can be raised up to 60%-70% percent. Another way to say this is that the cost for servers will be reduced by 3-4 times, a considerable savings. The important message is that such savings will then be available for ICT professionals to spend on more advanced and leading-edge projects. Some estimates hold that more than one- third of spending is unnecessary or duplicative or otherwise ineffective use of funds for ICT projects. Centralisation of procurement also can generate significant savings, but also lead to faster provisioning, and also much better security. For example, it would be possible for Azerbaijan to put in place a single process for any government employee who is going to be provided with a mobile telephone. Once there is a standardised process for purchasing ICT, organisations will quickly learn how to use it effectively. There are many benefits to having a standardised system for ICT procurement across the entire government. Examples include the ability to increase the mobility of labour, since a single process applicable to all ministries will be knowledge that a person can take from one organisation to another.

By centralising its ICT operations and procurement, the Government of Azerbaijan will be able to reduce operational costs by as much as 75%. Another way to say this is that it will be able to free up that amount of money and invest it in advanced ICT projects.

With a great scale of government purchasing, it will be possible to standardize the ICT refresh rate, and ensure that everyone is working with the same platform. With a known 49

and predictable technology replacement cycle, it will be possible to get better prices from the vendors of ICT. All so-called “commodity computing” (the use of standardised equipment such as personal computers or terminals can be centrally coordinated and controlled. In general, the new philosophy will be “do once, use often”. Data centres and their peculiar applications will cease to be sources of private political “kingdoms”. Instead, ICT in the government of Azerbaijan will become more professionalised, its cost will be reduced, and more money will be made available for investment in important national ICT programs. There is no need to continue to waste money that just as easily be made available for strategic spending in the national interest. More effective spending, more effective management of IT, and elimination of duplicative technology projects will all follow the appointment of an effective government-wide Chief Information Officer for Azerbaijan. Challenges for a Government CIO This type of bureaucratic and strategic change does not come easily or naturally. The naïve idea that the government can simply appoint a powerful government CIO and then everything will be fine is silly. This type of approach will lead to disaster. Instead, it is assessed that a better strategy is to establish a national commission composed of chief information officers that can begin for formulation of a coherent national strategy, define more carefully the role of a national CIO, and then nominate and make recommendations themselves regarding who should fill the role. In order to ensure that each ministry is able to have its point of view considered, some consideration might be given to limiting the term of a government CIO to two years. When they finish their tour, they can return to being the CIO and their respective ministry, and be replaced by another CIO from a different ministry. In this way, a system of cooperation will be set up between different ministries but at the same time, it should be possible to develop various effective national policies. In this type of rotating and shared control structure for such a powerful role in government, it is recommended that a system of checks and balances be put into place. There is discussion of this in 50

Appendix – System of Checks and Balances for National Chief Information Officer beginning on Page 73. For further discussion of the role of the national Chief Information Officer see (Corbin, 2013). In summary, the national Chief Information Officer will be tasked with introducing efficiencies and economies of scale into all government ICT activities and then using the resulting additional funds to improve the overall ICT infrastructure of Azerbaijan. It is assessed that only by creating a national authority for the making of strategic decisions for ICT will & be able to build the important national infrastructure that can serve as the underlying platform the innovation. The Model of the ICT Fund should be extended to all sectors of innovation In previous pages, we have examined the internal structure of the ICT Fund. What we found is a highly disciplined review process that ensures both that the correct and most appropriate qualified experts are involved in the vetting process, but also that the process is resistant to corruption because safeguards are put in place to make reviews “blind”. It is recommended that the interview procedures that have been developed within the ICT Fund be expended by the government to include all types of innovation within Azerbaijan. This would have the salutary effect of standardizing the process of innovation encouragement, but also would go far in the development of more accurate national statistics regarding innovation. In addition, it would greatly extend the informal network of innovation reviewers and other experts who are involved in serving as architects for national innovation. Such an increase in responsivity should be accompanied by a proportionate increasing in funding support from the Government. Encourage more funding for start-ups The interviews revealed a chronic shortage of start-up funding in Azerbaijan. It is not possible to diagnose the precise details for why this is the case, but it is possible to recommend a number of government policies that might greatly increase the amount of start-up funding that is to be made available. 1. Loan guarantees. The government can provide a loan guarantee. Under this type of arrangement, and only under very specific conditions that must be negotiated in advance, the government will stand behind any loan made through this system to any entrepreneur. This will have the effect of greatly reducing the capital risk from angel funding. Once more of the risk is taken out of the market, the amount of money involved and made available to start-ups will dramatically increase. 2. Guaranteed purchasing. For certain products that may be coming into the market, the government can make a commitment to purchase a certain “seed” number of products (or services). For example, currently the ICT Fund has nurtured development of a new technology that helps people keep their back spine straight. 51

This is to particular use for the elderly, and it proving to be a real potential product what can be sold into an international market. In this instance, the government of Azerbaijan could greatly improve the prospects of the company by committing to purchase the technology for use throughout the entire health system of Azerbaijan. The government also could use its international diplomatic presence around the world to showcase the product to appropriate authorities outside of Azerbaijan. 3. Subsidised interest rates. Subject to appropriate safeguards, the government might consider subsidizing the interest rates on loans made to innovators. For example, if a lending institution were planning on charging a 5% annual interest rate, then the government for promising innovations could pay 2.5%, leaving the innovator with the burden of paying only 2.5%. Alternatively, it might consider using a sliding scale of subsidies for interest rates depending on the ranking of the innovation after consideration by the expert specialists and Advisory Board. The very top projects might be given a 100% interest subsidy, so they would pay zero interest. In contrast, projects that receive a slightly lesser but nevertheless favourable evaluation might have only part of their interest subsidised. This would be an excellent use of government funding, and would go very far in helping increase the amount of innovation activity in Azerbaijan because it would lessen the interest burden on both innovators and the institutions from which they borrow. 4. Matching funds. Another alternative would be for the government to provide matching funds for any start-up idea that has gone through the vetting and approval process. Matching funds would provide a certain amount of money either via a loan or as a direct grant in some proportion to the amount of money that is extended in the form of loans by the private sector. For example, if the loan amount was 85,000 Manat ($50,000 US Dollars), then the government would provide an additional 85,000 Manat. This would lessen the burden on the funding source, thus allowing the funding of twice as many projects as under the current system. The above are merely suggestions that might be considered. It is recommended the government of Azerbaijan put together a study group at the highest level to investigate whether these and other approaches are available to increase the amount of funding available for innovators within Azerbaijan. Consider more intensive use of government purchasing policies Government purchasing policies are recognised as being a strong force for innovation if used properly. There are two theories that explain the utility of government purchasing policies: (1) import substitution; (2) capital formation. Import Substitution In some cases, it is possible for the government to cut off completely important supplies or components needed as value inputs in an industrial system. The result is that the local manufacturing industry is forced to develop substitutes that are manufactured or sourced locally, within the country. 52

In some cases, there may be disruptive effects on the national economy if the move towards prohibition of imports of crucial components or raw materials is too sudden. A similar situation occurs when a nation is subject to international financial and economic sanctions. In both cases, domestic industry is given a blanket of protection against competing imports that likely are available at prices lower than the potential cost of production in the home market. The only way to fill this demand is for domestic producers to master the art of producing the raw material or component. An alternative to this scenario is that the foreign manufacturer or supplier of this component may be induced to enter into an investment in the domestic market, even though in the absence of government controls it would not make economic sense to do so. When this happens, there is in effect a semi-forced transfer of technology and associated know-how (trade secrets) into the domestic economy. The essence of a thoughtful government policy is to balance disruption against the medium- term advantages of learning to supply one’s own raw materials or components. Capital Formation An ancillary effect of market reservation is usually the increase in price for the domestically manufactured or sourced raw material or component. According to standard and accepted theory of international trade and comparative advantage, creating a most expensive domestic version of essential raw materials or components goes against economic logic. For example, it is seen as absurd that any reasonable economic policy of behalf of a government would be specifically designed to raise prices. This should, it is argued, automatically lower demand, and at the same time lower overall factor productivity for the country. The counter-argument to this is that the artificially raised prices for the raw material or component is a substitute for capital formation or direct subsidies by the government for a particular technology or product. That is, by allowing prices according to market forces to increase in price, this raises the amount of capital accumulation available to the industry responsible for providing the raw material or component. But this capital accumulation takes place without the need for direct subsidies from the government. Both forced capital accumulation and the increase demand from supply of domestically produced raw materials or components can go far in stimulating the level of innovation in a society. This is a type of forced innovation. It is a direct result of an imposing government policy, and has nothing to do with free market forces which will work, but only in a much slower way, over a greater period of time, and with less certain results.

In Brazil, government purchasing requirements for ICT resulted in the creation of an indigenous industry based on ever increasing levels of domestic value added to production of technology. 53

In the case of Azerbaijan, there have been a few experiments with control over imports specifically for the purpose of encouraging development of domestic alternatives. But it is assessed that in the field of ICT, these policies have had at best mixed results. There is no evidence of creation of any significant manufacturing capability in the ICT sector in Azerbaijan. As a result, it might be easy to conclude that for some reason the economy of Azerbaijan is such that type of public policy is not effective. For example, on one interview conducted for this study, an expert stated that “Azerbaijan’s economy is far too small for any of these policies to work; the nation (Azerbaijan) does not have the market power to command any change in the venue for production or sourcing of many crucial raw materials or components”. It is assessed that this logic is not correct. Instead, the failure of public policy in this line has been due not to the deficient size of the Azerbaijan marketplace, but instead to the lack of any significant tie-in between policy and a comprehensive set of industrial policies spanning all aspects of ICT across a number of application domains. It is further assessed that the Government of Azerbaijan should revisit this policy in great detail, but in a cross-ministerial manner, so as to better coordinate the targeting of raw materials and components, and to better orchestrate what areas are most effective to pursue and encourage for innovation of ICT in the Azerbaijan economy. Build a national supercomputer centre with virtual machine architecture Governed by a national committee organised by a national Chief Information Officer (nCIO), a supercomputing centre based on virtual machine architecture will give the Government of Azerbaijan the flexibility to test and deploy national applications that will benefit the entire government and society as a whole, including all areas of the economy. In order to achieve the greatest possibilities of efficiency in the use of ICT, it is recommended that Azerbaijan examine the feasibility of building a very large supercomputing platform that will service multiple needs throughout the entire country, using virtual machine architecture. A few of the key features of large-scale virtual machine architecture include: 1. Virtual machine Architecture. Using large-scale computing platforms, it is possible to create “servers on demand”. With this type of approach, entire servers complete with an entire set of pre-configures applications can be created instantly as they are needed. Although the server appears to the outside, including ICT management and operations, to be a stand-along machine, in fact it is a virtual machine that exists within the larger supercomputing architecture. What this means, in effect, is that instead of spending large sums building individual data centres, users, including ministries, sub-ministries, state organisations, and others including the private sector, can have provisioned for them large server resources without having to build the server. This type of architecture I many times less cost per user than any other type of computing infrastructure. 54

2. National innovation commons. By using large-scale virtual machine architecture, it would be possible to have virtual servers created for the purposes of experimentation for various inventors, or for organisations that wish to test out new ICT concepts without having to expenditure funds to build the infrastructure. A national innovation common would reduce to zero the barriers to entry for entrepreneurs wishing to create new intellectual property. In addition, an innovation common would allow the creation of specialised communities of interest centred around innovation in selected parts of the economy, such as medical services, property records, licensing, or other government functions. 3. Security. The use of virtual machines is secure because the machines are logically isolated from one another. the breach of one machine does not have an effect on the breach of another. In addition, access controls are provided by the mainframe system architecture, which is generally more reliable than client-server type architecture. Another security factor involves the application of updates and patches to maintain defence against cyber-attacks. With a single virtual machine architecture, it is possible to update multiple machines at the same time. 4. Reliability (uptime). Large-scale computing resources have higher up-times than any other type of platform. For example, in an entire year, they may lose processing for less than a single minute.18 This is the type of reliability that is necessary for operation of a national cloud service. The larger machines of this type rely extensively on the Linux operating system which is generally recognised a being more reliable and other operating systems. The provisioning of a giant computing complex that can become a resource for all of Azerbaijan’s society is analogous to the extraction of petroleum. In the case of oil, the government organises extraction of this resource for the benefit of all of society. With a supercomputing centre, all of society will be able to “extract ICT resources” from this giant “reservoir” provided by a supercomputing centre.

Like drilling for natural gas and petroleum, citizens, businesses, government ministries and state organisations will be able to “extract” ICT resources and applications from the deep reservoir of a national supercomputer centre.

Once the availability of inexpensive computing resources is allowed to flood the market, then the barriers to innovation, and the cost of innovation in the field of ICT will drop dramatically.

18 This is referred to as “six nines” reliability, e.g., 99.9999% uptime for the computing platform. 55

Appoint a Study Group to Develop Plan for Cross-University ICT Innovation Pathway Within the universities of higher learning in Azerbaijan, there is a significant amount of study that is ICT related. In these areas, there is much potential for ICT innovation. See Table 3 Coordination of ICT Innovation Programs Across Azerbaijan's University System (representative list) on Page 76 for a partial listing of universities and illustrative domains of ICT work. Nevertheless, it is assessed that there is a lack of coordination across the various higher learning institutions in Azerbaijan. The result of this is less innovation. It is not even clear whether or not the message regarding opportunities presented by the current Innovation Triad have been disseminated to the relevant department heads in each of these institutions. Azerbaijan needs to fix this problem, but to do so is complicated. It is notoriously difficult to coordinate anything across national institutions, and particularly between universities that are long established and set in their ways. In order to address this issue, it is recommended that Azerbaijan set up a national committee that will examine how to integrate the ICT components of each of these higher educational institutions into a centralised clearing house for exchange of information and eventually for sharing of resources and development of synergies.

INFORMATION SHARING AND AWARENESS (BRIEFINGS AND OUTREACH)

CREATION OF CROSS-INSTITUTIONAL STUDY GROUPS (IDENTIFICATION OF HIGH POTENTIAL ACTORS)

SHARING OF ICT INFRASTRUCTURE AND RESOURCES (USE OF GOVERNMENT CLOUD VIRTUAL MACHINE INFRASTRUCTURE)

COORDINATION OF INNOVATION EFFORTS INTO NATIONAL PLANNING PRIORITIES (SUBSIDIES AND GRANTS TO PRIORITY PROJECTS)

DIRECTION OF NATIONAL INNOVATION EFFORTS BY NATIONAL DEVELOPMENT AND PROCUREMENT AUTHORITY (USE OF GOVERNMENT PURCHASING)

Figure 12 Promotion and acceleration of ICT innovation by deepening the levels of integration across higher education

To so will require a medium-term effort that starts with mere information sharing and awareness building. This first step is intended to ensure that a message regarding national 56

innovation is broadcast to all concerned persons. After that, work should begin on the creation of ad hoc semi-structured study groups designed to identify and vet possibilities for innovation. The outcome of this process will be the identification of “high potential” teams that can pursue some innovative idea. See Figure 12 Promotion and acceleration of ICT innovation by deepening the levels of integration across higher education on Page 55. After that, the various ideas can be vetted and then assigned various national computing resources and other assistance to ensure that the work starts. Funding can be direct, such as cash payments, through providing infrastructure, such as with the High Technology Park system, or indirect such as by allow professors to avoid teaching in exchange for working on innovation. As the products are created, then the promising ones should be subsidised by allocation of government purchasing resources. After a few years of working, it should be possible to integrate this innovation system into the national planning and resource allocation process. At that point, these innovation teams will essentially be working on specialised national projects that also meet important national priorities. Create a national study group to consider improvement of the patent system As seen in Figure 1 Correlation between GDP and Patents Awarded in Azerbaijan 2000-2016, the empirical data concerning patents in Azerbaijan is not positive. This was an unexpected result. For example, Azerbaijan is a signatory to the Patent Cooperation Treaty (PCT) (World Intellectual Property Organization, 1970). Under the PCT, there are a number of regulations in effect (World Intellectual Property Organization, 2017b) that govern and interpret each of the rules found in the PCT. A total of 96 Rules are covered in the document. In addition, there are a number of administrative instructions that provide a complete blue-print for operation of the patent system (World Intellectual Property Organization, 2017a). It is not clear, however, that there is a complete complementarity between the PCT and Azerbaijan’s patent system (Government of Azerbaijan, 2009). For example, in Chapter II Conditions of patentability for subject matter of industrial property, a substance or strain of a microorganism may be considered to be an invention. In addition, the use of a known device, process or substance for a new purpose also may be patented. In particular, Article 8 Conditions of patentability for utility model makes it possible to obtain a patent on a “means of production”. This type of “utility model” may be patented (see Art. 8, para. 2). In spite of this broad language, the data shows a lack of interest in patents. During the interviews, a number of sources reported that patents are not considered to be particularly important in Azerbaijan because there is little faith that they will be enforced, or will truly serve the purpose of the innovator and inventor. One source of this lack of concern might be the lack of faith in effective enforcement. Another possible explanation lies in the barriers in obtaining patents. 57

Patents in Azerbaijan may be held back because of the expensive of obtaining them, or because they have a perceived lack of utility and advantage for the innovator.

There is an insufficient amount of information available concerning the amount of patent and intellectual property litigation in Azerbaijan. If this information were available, it might provide some indicator of the effectiveness of the patent system. It is assessed that the Government of Azerbaijan could benefit from the formation of a national commission (study group) to examine the effectiveness of the patent system. A checklist of key questions to consider is included in the Appendix on Page 70. More intensive utilisation of online educational resources A study commission should be appointed to consider replacement of a number of ICT programs with intensive use of online courses. These courses are available through a number of portals, and the most effective of these are completely free of charge. The online revolution towards use of Massive Open Online Course (MOOC) approaches. There is a learning curve associated with use of the MOOC approach, but the overall value has been clearly demonstrated. See (Yang, 2013) for details of the experience curve. The charter of the commission should be to do an evaluation of the MOOC world, and develop a substitution list where experiments can be run to test replacement of currently running classes in Azerbaijan with the MOOC alternative. An additional part of the evaluation should include possible translation of some highly- valued courses into Azerbaijan’s language. More use of vendor-provided training and certification programs Although there are a number of educational programs within Azerbaijan covering various aspects of ICT, it is assessed that there is a need for students to better take advantage of the specialised training that is provided by vendors. For example, the leading software vendor Microsoft provided five different educational tracks including client, server, productivity, database and development. There is a Microsoft Office Certification. The Microsoft Technology associate is entry-level showing basic knowledge of technology. The Microsoft Certified Solutions Associate (MCSA) is designed to give professionals the skills to design and build technology solutions. These certificates are given in areas such as business intelligence, cloud computing, data engineering, machine learning, SQL server, database administration and development, web applications and server operations. Finally, it offers a Microsoft Certified Systems Engineer covering business applications, the cloud, data management and analytics, mobility and productivity applications. Oracle provides an even wider range of certifications covering applications such as financial management, logistics and supply chain, contract management, human resources, customer 58

relationship management, MySQL database administration, and enterprise management. In addition, Oracle offers a number of certifications that are targeted as specific industries such as health and life sciences, insurance, utilities, the public sector, and communications. Similar programs are available from IBM, Cisco, Apple and most other vendors. In addition, certification and training is provided by manufacturers of components such as Intel and Qualcomm. It is assessed that training for ICT and its use in Azerbaijan can be improved by closer incorporation of vendor-supplied training programs into the formal curricula of training for students. Under the current system, students interested in an ICT career, first go through extensive training at their schools or universities. After those courses are completed, then afterwards they find out that it is necessary to re-train themselves or seek additional and specialised training in order to perform well at their employment. For organisations that do not demand formal certifications in their employees in the ICT sector, they face a risk of wasting resources by continuing to employee persons who may have a “paper” degree in an ICT related field, but who in reality do not have the formal and certified training to do their work. In this case, the overall productivity of the organisation is much lower than it should be. There is no easy solution to this problem. The possibilities range from “incremental” to “radical” as shown in Figure 13 Range of policy changes in ICT education and training. In the most “radical” change proposed, Azerbaijan would completely re-design its ICT related education to take on an orientation that is driven by the specific certifications that are provide by various key vendors. There are obvious challenges to this type of approach. For example, there is the question of the large number of instructors already in universities and schools who are unable to provide instruction that meets the required vendor certification standards. Would they be relieved of their employment, or retrained? How long would it take to make these changes, and what would happen if there was resistance on the part of administrators and others? There also is the issue of the financial costs of making these changes. For example, various ICT vendors charge fees for the training for their certificates. For some, these fees are a not inconsiderable revenue stream. Compared to the cost of current public or even private education, these fees probably are higher. In this connection, one solution might be for the government to negotiate bulk pricing with the vendors to get large-scale discounts in the costs for their educational training services. Similar negotiation takes place in areas such as the purchase of pharmaceuticals for the health-care sector. The same could happen in ICT education. For a middle approach, the government might start with encouragement of use of certificates in public organisations. This would mean in practice making official certificates an integral part of the required qualifications for new employees. In addition, a separate set of career paths, such as faster promotion, might be put in place in order to encourage ICT 59

staff to pursue certifications. If the government either paid for or subsidised formal vendor certification training, this also would help to upgrade the level of human resources in the country. At the same time, this practice can be extended out to government-influenced organisations, including para-statal companies, partially controlled by the government. Policies might also be adopted for stricter certification in the educational sector, both public and private. It is assessed that the government of Azerbaijan has a powerful influence on adoption of various educational strategies throughout the government, but also on all public institutions and even in private enterprise. As a result, it is recognised that the government self must take the lead in this important transformation and upgrading of human resources in this sector. To this end, it is recommended that a study commission or group be put together to study this issue in greater detail to develop a series of recommendations.

Outsource All ICT Training to Eliminate Non- Vendors Certificate Require Vendor Courses in Certification of Schools Integrate All Instructors Vendor Encourage Certificates in Certificates in Public School Status Quo Public Curricula Organisations

Figure 13 Range of policy changes in ICT education and training

Improve coordination between ministries in supporting the innovation system The government of Azerbaijan is composed of eighteen ministries and twenty state committees and companies. See Appendix – Ministries of the Government of Azerbaijan on Page 77 and 60

Appendix – State Committees and Companies of the Government of Azerbaijan on Page 78. Each of these ministries has a specific set of responsibilities that it must answer to and organises itself functionally to accomplish its objectives. Each ministry has an ICT infrastructure that operates so as to enable it to perform its work. Additionally, each ministry, but some more than others, is concerned with innovations and improvements in the use of ICT. There is little indication that the Government of Azerbaijan has a mechanism for ministries, various state committees and companies to coordinate their ICT operations and standards. The result of this situation is counterproductive for the government and also for Azerbaijan’s society as a whole. Problems include: 1. Redundant systems development efforts. Since each ministry and other governmental organisation is operating its own ICT group, there is little sharing of efforts in creating new systems. Systems development resources and insights are not shared as they could be. Many times, what is essentially the same information system is developed over and over but by different teams in different ministries and government organisations. 2. Lower than optimal server utilisation. Since there is little sharing of computing and telecommunications resources between ministries, on average the server utilisation rate is lower than is optimum economically. Computing resources are expensive, and in order to get fully effective use, they should be operated at as full capacity as possible. An idle server is an expensive way to waste money. 3. Inability to share computing and telecommunications resources across informational borders. The formation of separate systems development and ICT management organisations within each ministry complicates the chances of sharing ICT resources across organisational boundaries. There is little experience in Azerbaijan of ministries working with each other in the ICT field for the purpose of sharing resources. Historically this outcome is caused by two factors: First, until recently, it has not been possible to engineer ICT solutions that span the bridge from one ministry to another easily. Second, even when such engineering has become technically easier, still the same problem of coordination would occur if a third ministry and its information system were brought into the picture for the purpose of collaborating. In this type of arrangement, the difficulty, cost, and time for effective coordination between ministries in the ICT field rises exponentially with the number of additional organisations that must be pulled together into a unified effort at systems development. See (Gulati & Singh, 1998). 4. Failure to obtain economies of scale in purchasing. Particularly for “commodity items”19 such as personal computers. If each ministry is engaged in doing its own

19 The term “commodity items” refers to purchased goods that are more or less identical in nature, and distinguished primarily only by their price. An example would be a desktop personal computer – there is little difference from one vendor to another. 61

purchasing for ICT, then the government as a whole will fail to get the lowest price. In addition, there will be diminished transparency in provisioning of ICT equipment. If ministries are able to “buy together”, then they will be able to “save together”. 5. Lack of skilled labour mobility. The habit of using separate systems development efforts within each ministry comes from the idea that the work of each ministry is unique and that as a consequence specialised training is needed to understand the requirements of each environment. To a certain extent, this is correct. On the other hand, there are a number of applications that are more or less the same regardless of the organisation in which they are employed. This includes such commonly used software as email and office productivity suites. For this type of ICT, it should be possible for an expert trained in one ministry easily to migrate to another. Without a system of routine coordination between ministries, each such transfer will require a specialised and unique set up in the administrative system. When this is the case, costs are raised, and the mobility of labour is lessened. In order to avoid these problems and diseconomies, the Government of Azerbaijan should consider putting in place a mechanism for coordination of ICT operations throughout the entire government. Herein, this issue is addressed in the discussion regarding the operation of a Chief Information Officer (CIO) with a portfolio serving the entire government. Centralise government funding for start-ups in a single department using the current ICT Fund as a model In the current innovation system, the ICT fund provides a source of both loans and grants to innovative startup companies. This organisation has developed a sophisticated method of attracting, screening, and a properly rewarding of Information regarding patents ideas that will be useful for further development of innovation in Azerbaijan. The system relies on to a blind referee process in which appointed experts review a number of proposals without knowing the identity of the writer. This is the same type of system used in selecting articles for scientific journals. It avoids the problems of undue or improper influence in the decision- making process. There is not a single set of reviewers. Instead, the reviewers for each project are selected based on their expertise and also based on the nature of the project that is being reviewed. Each of the reviewers operates according to a standardised template for the evaluation. There are multiple reviewers utilised for each project that is being considered. The system is set up so that the reviewers do not have a method for communicating with each other. In other words, this is a true blind review process.

62

Background of this document Timing of research The research for this document was carried out during October-December 2017. Part of the research involved a visit to Azerbaijan by the consultant to conduct interviews and collect first-hand information regarding the innovation system in Azerbaijan. Methodology There are three primary sources of information and data incorporated into this project report. First, we conducted a number of interviews with academics, ICT experts, government officials and others regarding the general situation in Azerbaijan and in particular the level and sophistication of its innovation system. Second, we made an extensive review of scientific literature regarding Azerbaijan and its culture, economy, and technological development. This review of academic scientific literature was supplemented with general literature as concerns development overall and in particular the creation of innovation systems in a country using the various levers of government power combined with their consequences as expressed through the market and socio-economic system prevalent in a country. Third, we made a number of analyses of statistical and legislative law data from the government of Azerbaijan itself for the purpose of getting a series of empirical indicators that might add light to the overall story of the innovation system. Finally, we refined the overall concept of an innovation system itself. This was done within the specific and unique circumstances of Azerbaijan given its historical development, market size, culture, and socio-economic development. The interviews were conducted using the semi-structured technique. In this method of elicitation, the interviewee is asked a series of general and open-ended questions. This gives them the chance to wander into topics that they are concerned most with. In addition, it allows the interviewer to pick up underlying concepts and priorities and values that on the part of the interviewee that otherwise might remain submerged. In this technique, the interviewer only has a general checklist of points that should be covered, and notes are taken to fill in specific data elements that are required for the analysis, but the order to collecting and processing this information if completely flexible. This technique also is useful in releasing tension that might come from an interview, and this also helps to get more genuine and not guarded assessments of the situation. The semi-structured interview technique is particularly suitable when the researcher is in an initial information collection mode and is first formulating the underlying thesis of the research. The chief challenge in carrying out this methodology was coming up with a workable definition of an innovation system that would fit the specific circumstances of Azerbaijan. Innovation systems work differently across different countries, and Azerbaijan has a few unique factors that change the inherent characteristics of any workable innovation system. Once we were able to make these adjustments, then it was possible to proceed more easily with the analysis. 63

Works Cited Abdih, Y., & Medina, L. (2013). Measuring the Informal Economy in the Causasus and Central Asia. International Monetary Fund. Washington: International Monetary Fund. Asian Development Bank. (2016). Private Sector Assessment (Summary), Country Partnership Strategy: Azerbaijan, 2014-2018. Manila: Asian Development Bank. Corbin, K. (2013, June 11). Federal CIOs Need More Authority to Better Manage IT. CIO.com, Online. Edison, H., Ali, N., & Torkar, R. (2013). Towards innovation measurement in the software industry. Journal of Systems and Software, 86(5), 1390-1407. Gauthier, J. (2017). 2017 Global Startup Ecosystem Report. San Francisco: Startup Genome. Government of Azerbaijan. (2009, October 20). On Patent. The Laws of the Azerbaijan Republic. Baku, Baku, Azerbaijan: WIPO available online. Gulati, R., & Singh, H. (1998, December 4). The Architecture of Cooperation: Managing Coordination Costs and Appropriation Concerns in Strategic Alliances. Administrative Science Quarterly, 43(4), 781-814. OECD. (2011). Development in Eastern Europe and the South Caucasus Armenia, Azerbaijan, Georgia, Republic of Moldova and Ukraine. Paris: Organisation for Economic Co- operation and Development. Park, Y. T., Yoon, B. G., & Lee, S. J. (2005, November). The idiosyncrasy and dynamism of technological innovation across industries: patent citation analysis. Technology in Society, 27(4), 471-485. Preston, S. L. (2011). Angel Financing for Entrepreneurs: Early-Stage Funding for Long-Term Success. New York, New York: John Wiley & Sons. Samoilenko, S., & Osei-Bryson, K.-M. (2008). An esploration of the effects of the interaction between ICT and labor force on economic growth in transition economies. International Journal of Production Economics, 115, 472-481. Solow, R. (1957, August). Technical change and the aggregate production function. Review of Economics and Statistics, 39(3), 312-320. Temel, T. (2004). Mapping organisational linkages in the agricultural innovation system of Azerbaijan. Int. J. Agricultural Resources, Governance, and Ecology, 3(1/2), 134-153. Temel, T., Janssen, W., & Karimov, F. (2001). Systems Analysis by Graph Theoretical Techniques: Assessment of the Agricultural Innovation System of Azerbaijan. The Hague: International Service for National Agricultural Research (ISNAR). The Heritage Foundation. (2017, January 1). Azerbaijan Economy. Retrieved December 6, 2017, from www.heritage.org: http://www.heritage.org/index/country/azerbaijan 64

World Bank. (2014). Doing Business 2014 – Understanding Regulations for Small and Medium-Sised Enterprises. Washington: The World Bank. World Intellectual Property Organisation. (1970, June 19). Patent Cooperation Treaty. International Multilateral Treaty. Washington, DC, USA: Available Online. World Intellectual Property Organisation. (2017a, June 6). Administrative Instructions Under the patent Cooperation Treaty as in force from July 1, 2017. Document PCT/AI/18 Superceding PCT/AI/17 CORR dated February 10, 2017. Geneva, Geneva, Switzerland: Available online. World Intellectual Property Organisation. (2017b, July 1). Regulations under the Patent Cooperation Treaty as in force from July 1, 2017. Supplementary Documentation. Geneva, Geneva, Switzerland: Available Online. Yang, D. (2013, March 14). Are We MOOC'd Out? Huffington Post, np.

65

List of Figures FIGURE 1 CORRELATION BETWEEN GDP AND PATENTS AWARDED IN AZERBAIJAN 2000-2016 12 FIGURE 2 PATENT GRANTS IN AZERBAIJAN 16 FIGURE 3 ICT INNOVATION LEVELS 17 FIGURE 4 ROLE OF GOVERNMENT IN STIMULATING INNOVATION AT SOCIAL UTILISATION AND SOFTWARE SUPERSTRUCTURE LEVELS IN SOCIETY 18 FIGURE 5 STRUCTURE OF THE AZERBAIJAN NATIONAL ACADEMY OF SCIENCES 21 FIGURE 6 GOVERNMENT INVESTMENT IN NATIONAL INFORMATION INFRASTRUCTURE 24 FIGURE 7 ICT INNOVATION TRIAD 31 FIGURE 8 ICT FUND SELECTION PROCESS FOR INNOVATIONS 35 FIGURE 9 NATIONAL POLICIES TO ENCOURAGE ICT INNOVATION SHOULD ENCOMPASS TRANS-MINISTERIAL DOMAINS 39 FIGURE 10 AREAS OF ACTIVITIES FOR THE INNOVATIONS CENTRE OF THE STATE AGENCY FOR PUBLIC SERVICE AND SOCIAL INNOVATIONS 41 FIGURE 11 NATIONAL CHIEF INFORMATION OFFICER (CIO) FOR AZERBAIJAN 47 FIGURE 12 PROMOTION AND ACCELERATION OF ICT INNOVATION BY DEEPENING THE LEVELS OF INTEGRATION ACROSS HIGHER EDUCATION 55 FIGURE 13 RANGE OF POLICY CHANGES IN ICT EDUCATION AND TRAINING 59 FIGURE 14 SYSTEM OF CHECK AND BALANCES FOR A NATIONAL CHIEF INFORMATION OFFICER 73 FIGURE 15 STRUCTURE OF THE CONSIGLIERE GROUP 75 List of Tables TABLE 1 APPLICANTS TO THE ICT FUND ...... 34 TABLE 2 BENCHMARK OF INNOVATION FACTORS IN AZERBAIJAN'S NATIONAL POLICY ...... 45 TABLE 3 COORDINATION OF ICT INNOVATION PROGRAMS ACROSS AZERBAIJAN'S UNIVERSITY SYSTEM (REPRESENTATIVE LIST) ...... 76 TABLE 4 EVALUATION CRITERIA FOR SELECTION OF PROJECTS FOR THE ICT FUND ...... 85

66

Appendix – Laws Regarding Intellectual Property Rights in Azerbaijan Main IP Laws: enacted by the Legislature 1. Law of the Republic of Azerbaijan on Legal Protection of Compilations of Data (as amended up to Law No. 639-IVQD of April 30, 2013) (2013) 2. Law of the Republic of Azerbaijan on Legal Protection of Azerbaijani Folklore Expressions (as amended up to Law No. 638-IVQD of April 30, 2013) (2013) 3. Law of the Republic of Azerbaijan No. 504-IQ of June 12, 1998, on Trademarks and Geographical Indications (as amended up to Law No. 823-IVQD of November 22, 2013) (2013) 4. Law of the Republic of Azerbaijan on Copyright and Related Rights (as amended up to Law No. 636-IVQD of April 30, 2013) (2013) 5. Law of the Republic of Azerbaijan on Enforcement of the Intellectual Property Rights and Fight Against Piracy (2012) 6. Law of the Republic of Azerbaijan on Patents (as amended up to October 20, 2009) (2009) 7. Law of the Republic of Azerbaijan on Legal Protection of Topographies of Integrated Circuits (2008) 8. Law of the Republic of Azerbaijan on Selection Achievements (as last amended on February 1, 2007) (2007) 9. Law of the Republic of Azerbaijan on Protection and Development of the Craft (Art) of Azerbaijani Carpet (2004) IP-related Laws: enacted by the Legislature 1. Law of the Republic of Azerbaijan on Approval of the Decision on the Rules on Customs Control of Transfer of Goods Protected by Intellectual Property Rights (2011) 2. Administrative Offences Code of the Republic of Azerbaijan (2011) 3. Criminal Code of the Republic of Azerbaijan (amended version 2010) (2010) 4. Civil Procedure Code of the Republic of Azerbaijan (as amended up to Law No. 972- IIIQD of March 5, 2010) (2010) 5. Law of the Republic of Azerbaijan on Preservation of Historical and Cultural Monuments (2010) 6. Law of the Republic of Azerbaijan on Information, Informatisation and Protection of Information (as amended up to December 30, 2010) (2010) 7. Law of the Republic of Azerbaijan on Advertisement (2010) 8. Law of the Republic of Azerbaijan on Anti-monopoly Activity (2010) 9. Law of the Republic of Azerbaijan on Publishing (2008) 10. Law of the Republic of Azerbaijan on Theatre and Theatre Activity (2006) 11. Law of the Republic of Azerbaijan on Culture (2006) 12. Law of the Republic of Azerbaijan on Electronic Commerce (2005) 67

13. Law of the Republic of Azerbaijan on Unfair Competition (as amended up to December 30, 2003) (2003) Implementing Rules and Regulations 1. Decree of the President of the Republic of Azerbaijan No. 201 of June 27, 2014, on Amending the Decree of the President of the Republic of Azerbaijan No. 749 of August 19, 1998, on the Application of the Law on Trademarks and Geographical Indications (2014) 2. Decision No. 38 of May 2, 1997 of the Cabinet of Ministers of the Republic of Azerbaijan on amendments to the Decision of the Cabinet of Ministers of the Republic of Azerbaijan on Issues related to the Implementation of the Law of the Republic of Azerbaijan on Copyright and Related Rights (2011) 3. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on implementation of the Law of the Republic of Azerbaijan on Copyright and Related Rights (2011) 4. Application for Registration of Databases Protected by Copyright Law (2010) 5. Decree of the President of the Republic of Azerbaijan on amending some decrees of the President of the Republic of Azerbaijan in connection with the application of the Law of the Republic of Azerbaijan on amendments to the Law of the Republic of Azerbaijan on Patents (2010) 6. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on the approval of the Rules of extension of the validity of patents and industrial designs. (2010) 7. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on the approval of the Rules on registration of agreements concerning the mortgaging of the patent right (2010) 8. Decree of the President of the Republic of Azerbaijan on the approval of the Statute and Structure of the State Committee on Standardisation, Metrology and Patent (2010) 9. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on the State Registry of Inventions, Industrial Designs and Trademarks in the Republic of Azerbaijan (2010) 10. Decree of the President of the Republic of Azerbaijan No. 196 of December 21, 2009, on Amending Decree of the President of the Republic of Azerbaijan No. 749 of August 19, 1998, on the Application of the Law on Trademarks and Geographical Indications (2009) 11. Decree of the President of the Republic of Azerbaijan on the application of the Law of the Republic of Azerbaijan on amendments to the Law of the Republic of Azerbaijan on Patents (2009) 12. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on the Approval of the Rules on Wide Recognition of Trademarks in the Republic of Azerbaijan (2009) 13. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on the approval of the Rules of registration of mortgage agreements (2009) 14. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on the Approval of the Rules on Registration of Agreements on Trademarks (2009) 68

15. Resolution of the Cabinet of Ministers of the Republic of Azerbaijan on ensuring Implementation of the Decree of the President of the Republic of Azerbaijan No. 93 dated 14 May 2009 on the implementation of the Law of the Republic of Azerbaijan on Amendments to the Law of the Republic of Azerbaijan on Trademarks and Geographical Indications (2009) 16. Decree of the President of the Republic of Azerbaijan on the implementation of the Law of the Republic of Azerbaijan on Amendments to the Law of the Republic of Azerbaijan on Trademarks and Geographical Indications (2009) 17. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on the approval of the Statute on Patent Attorneys (2009) 18. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on the approval of the Rules on application and examination of application documents for registering trademarks (2009) 19. Decision of the Cabinet of Ministers on the Approval of the Rule on State Registry of Trademarks and the Rule on State Registry of Geographical Indications (2009) 20. Decree of the President of the Republic of Azerbaijan No. 749 of August 19, 1998, on the Application of the Law on Trademarks and Geographical Indications (2009) 21. Decree of the President of the Republic of Azerbaijan on the application of the law on patents of the Republic of Azerbaijan (2009) 22. Decree of the President of the Republic of Azerbaijan on the application of Law No. 580-IIIQD dated 1 April 2008 on amendments to the Law of the Republic of Azerbaijan on Copyright and Related Rights (2008) 23. Decree of the President of the Republic of Azerbaijan on the implementation of the Law of the Republic of Azerbaijan on culture (2008) 24. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on Rules on determining, sharing and payment of the minimum amount of the author's financial reward for the personal purposes of copying phonogramed and audiovisual works (2007) 25. Decree of the President of the Republic of Azerbaijan on the approval of the Statute of the Copyright Agency of the Republic of Azerbaijan (2005) 26. Resolution of the President of the Republic of Azerbaijan on the application of the Law of the Republic of Azerbaijan on amending some legislative acts of the Republic of Azerbaijan in connection with the application of the Law of the Republic of Azerbaijan on Legal Protection of Databases (2005) 27. Decree of the President of the Republic of Azerbaijan on the application of the Law of the Republic of Azerbaijan on Legal Protection of Databases (2004) 28. Instruction on the form of materials and documents included into the application document for State registration of topographies of integrated circuits (2004) 29. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on amendments to the Decision No. 38 of May 2, 1997 of the Cabinet of Ministers of the Republic of Azerbaijan (2004) 69

30. Resolution of the President of the Republic of Azerbaijan on ensuring the application of the Law of the Republic of Azerbaijan on amendments to the Administrative Offences Code and Criminal Code of the Republic of Azerbaijan in connection with the application of the Law of the Republic of Azerbaijan on Legal Protection of Expressions of the Azerbaijan Folklore (2004) 31. Decree of the President of the Republic of Azerbaijan on ensuring the application of the Law of the Republic of Azerbaijan on Legal Protection of Expressions of the Azerbaijan Folklore (2004) 32. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on the approval of the Rules on application and examination of application documents for registering a geographical indication (2004) 33. Decree of the President of the Republic of Azerbaijan on amending some decrees of the President of the Republic of Azerbaijan in connection with the approval of the Statute of the State Committee on Standardisation, Metrology and Patent of the Republic of Azerbaijan (2003) 34. Resolution of the President of the Republic of Azerbaijan on the application of the Law of the Republic of Azerbaijan on Legal Protection of Expressions of the Azerbaijan Folklore (2003) 35. Rules of the Republic of Azerbaijan on the customs control of goods protected by intellectual property rights (2003) 36. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on issues related to the implementation of the Law of the Republic of Azerbaijan on Legal Protection of Topographies of Integrated Circuits (2003) 37. Rules on registration of copyright works (2000) 38. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on the approval of the Rule on the payment and amount of taxes and fees in the field of protection of industrial property (2000) 39. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on the approval of the Rule on the Registration of the Cultural heritage of the Republic of Azerbaijan in the State Catalogue of national cultural property and the Catalogue of protection of cultural heritage (1999) 40. Rules on the content, petition and review of the application for obtaining patent for an invention (1999) 41. Decision of the Cabinet of Ministers of the Republic of Azerbaijan on defining the form of the certificates on trademark and geographical indications (1999) 42. Resolution of the President of the Republic of Azerbaijan on the application of the Law of the Republic of Azerbaijan on Copyright and Related Rights (1996)

70

Appendix – Issues for a National Commission to Examine the Patent System in Azerbaijan

1) Performance metrics of the patent system a) Application review process i) Time and effort required for application ii) Cost of application process including supporting services (legal; specialist) b) Conflict resolution i) Number of conflicts ii) Time for resolution of conflicts 2) Available government support for innovators in developing patent protection 3) Compliance with international standards a) Differences in definitions for patentability b) Conflicts of law with United States Patent System and European Patent Systems c) Compatibility with Patent Cooperation Treaty 4) Administrative procedures and recordkeeping 5) Education a) Legal education standards for intellectual property protection b) Outreach to innovation communities c) Funding for international travel-study for professionals d) Funding for participation in international patent related meetings and organisations

71

Appendix – Universities in Azerbaijan Public Universities 1. Academy of Public Administration 2. Azerbaijan Architecture and Construction University 3. ADA University20 4. Azerbaijan Medical University 5. Azerbaijan State Agricultural University 6. Azerbaijan State Economic University 7. Azerbaijan State Marine Academy 8. Azerbaijan State Oil Academy 9. Azerbaijan State University of Culture and Arts 10. Academy of State Customs Committee of the Republic of Azerbaijan 11. Azerbaijan State Pedagogical University 12. Azerbaijan Technical University 13. Azerbaijan University of Languages 14. Baku Academy of Music 15. Baku Higher Oil School 16. National Aviation Academy 17. Baku Slavic University 18. Baku State University 19. Ganja State University 20. Lankaran State University 21. Mingachevir Polytechnic Institute 22. Nakhchivan State University 23. Sumqayit State University Private Universities 1. Azerbaijan University 2. Baku Eurasian University 3. Khazar University 4. Nakchivan Private University 5. Odlar Yurdu University 6. Qafqaz University 7. Western University Educational Institutions Located in Baku 1. Baku State University 2. Azerbaijan State Economic University

20 ADA University was chosen for the site of the “ICT University” which became in essence a department of ADA. 72

3. Azerbaijan State Oil Academy Public 4. Azerbaijan Medical University 5. Azerbaijan University of Languages 6. Academy of Public Administration 7. ADA University 8. Azerbaijan Tourism Institute 9. Azerbaijan State Pedagogical University 10. Azerbaijan Technical University 11. Azerbaijan Architecture and Construction University 12. Baku Slavic University 13. Azerbaijan Teachers Institute (Baku branch) 14. Azerbaijan State University of Culture and Art 15. National Aviation Academy 16. Azerbaijan State Marine Academy 17. Azerbaijan State Academy of Physical Training and Sport 18. Azerbaijan State Painting Academy 19. Baku Music Academy Public 20. Azerbaijan National Conservatory 21. Qafqaz University 22. Khazar University 23. Western University 24. Odlar Yurdu University 25. Azerbaijan University 26. Azerbaijan Cooperation University 27. Baku Higher Oil School 28. Science and Education Centre 29. Baku Girls University 30. Baku Business University 31. Baku Eurasia University 32. Baku Asia University 33. Azerbaijan Public and Political University 34. Azerbaijan Academy of Labour and Social Relations 35. Baku Islamic University

73

Appendix – System of Checks and Balances for National Chief Information Officer The appointment of a national Chief Information Officer (nCIO) for Azerbaijan carries with it a great deal of power and responsibility. In order for this role to be effective, a system of checks and balances should be put in place to guard against corruption and inefficiency. The role of nCIO should not be thought of as an independent national authority riding above all ministries with unbridled power. Instead, it should be thought of as being a highly collaborative position, and a position of honour and achievement. This system of checks and balances is pictured in Figure 14 System of Check and Balances for a National Chief Information Officer on Page 73. NATIONAL CHIEF INFORMATION OFFICER nCIO FOR 2 YEARS

CONSIGLIERE GROUP PREVIOUS nCIO PLUS TWO APPOINTEES

MINISTRY MINISTRY MINISTRY A B C CIO CIO CIO

Figure 14 System of Check and Balances for a National Chief Information Officer

These are the suggested rules for appointment and operations of a national Chief Information Officer (nCIO). 1) Qualifications for appointment a) Previous experience in a government ministry as a Chief Information Officer; b) Record of successful completion of ICT project of national significance; c) Well-liked by colleagues and no compromising personal information; d) May not be from the same ministry as the previous nCIO e) May not be from the same ministry as the second-previous nCIO; f) Must be approved by the Consigliere Group, including agreement from the Office of the President of the Republic 2) Powers of the National Chief Information Officer (nCIO) 74

a) Lead efforts at building of national ICT infrastructure for Azerbaijan; b) Increase efficiency in government ICT by consolidation of data centres; c) Determine standards for all aspects of ICT used within the government of Azerbaijan; d) Purchase commodity ICT products and services (that will be used throughout the government of Azerbaijan); e) Build and manage a national ICT reporting system that will cover: i) Human resources; ii) Deployed infrastructure; iii) Performance metrics or ICT systems development efforts; iv) Cost and expenditures 3) Term in position a) The term will be two years; b) The term can be extended for 6 months if there is a national need originating from pending completion of an ICT project of national significance 4) Role of the Consigliere Group a) The function of the Consigliere Group is to i) Provide advice to the nCIO on major decisions if asked to do so; ii) Review actions of the nCIO on an ad hoc basis depending on the national interest; (1) Review complaints or concerns regarding pending decisions by the nCIO; (2) Troubleshoot any potential conflicts or problems in the exercise of the nCIO’s authority iii) Provide confidential advice to the nCIO regarding any aspects of their portfolio; iv) Investigate if there is a conflict of interest v) Review all purchasing contracts of USD$1 million or greater. b) Membership of the Consigliere Group i) The Consigliere Group will be composed of three national experts (1) Emeritus nCIO. After completing their assignment, the emeritus nCIO will chair the Consiliere Group (2) Appointee of incoming nCIO. There will be a second member appointed by the incoming nCIO; (a) The second member will serve for a maximum of two years but may be replaced by the nCIO at any time and for any reason; (3) Appointee of Office of President of the Republic. There will be a third member appointed by the President of the Republic; (a) The third member serves at the pleasure of the President of the Republic and does not have a limit to their tenure, and may be replaced at any time as determined by the Office of the President of the Republic (b) Presidential veto power. No recommendation of the Consigliere may be finalised without agreement of the Presidential appointee.

75

Note: The term “Consigliere” (Italian: “counsellor”) refers to an advisor or counsellor to the boss, here the nCIO. If needed, the consigliere may represent the nCIO in important meetings. The consigliere is one of the few entities that can disagree with the nCIO. In practice, the role of the consigliere is to act as an expert advisory council for the nCIO, and to review all matters to ensure top level performance and standards in decision-making.

CONSIGLIERE GROUP Collaboration with current nCIO

APPOINTED BY EMERITUS APPOINTED BY PRESIDENT OF nCIO INCOMING nCIO REPUBLIC Provides advice and continuity Assures national policies Responsible for presentation of ideas to regarding ongoing projects consistent with national strategy be reviewed by Consigliere Group

Figure 15 Structure of the Consigliere Group

76

Appendix – Table of ICT Domains and Universities

University Domain of ICT Innovation Academy of Public MIS; Workflow modelling and innovation; e-Government; e-Participation; Use of Artificial Administration Intelligence; Big Data; National Archives Azerbaijan Computer Aided Architecture Design (CAAD); 3-D modelling; Virtual Reality and Simulation; Architecture and CAD Software Training; Construction University ADA University Host of ICT University Department; Serve as Central Coordination Point for National ICT innovation efforts in Universities Azerbaijan Medical Medical Imaging; Genomics; Bioinformatics; National health database and long-term studies; University Hospital information systems; Cybersecurity of medical equipment Azerbaijan State Genetic modelling of plants; Internet-of-Things (IoT) and sensing devices in agriculture; Agricultural University logistics and distribution modelling for agricultural products; Geographic Information Systems (GIS) for resource allocation and optimisation Azerbaijan State Use of ICT in electronic markets; Trading and banking systems; Cryptocurrency management Economic University and regulation; Modelling of electronic money and “cashless” transactions; National input- out computerised simulation; Azerbaijan State Computerised modelling of shipping and transportation systems; Integration of automated Marine Academy GPS positioning systems in marine informatics; Security communications systems Azerbaijan State Oil Geographic Information Systems (GIS); High speed computerised seismic data modelling and Academy; Baku Higher simulation; Computerised process control and logistics systems; Simulation and modelling of Oil School global oil and gas markets; Online global oil and gas trading and futures systems Azerbaijan State 3-D Simulation; Special effects for videography; Computerised design and manufacturing of University of Culture clothing; Computerise music; Use of artificial intelligence for artistic creation; Computerised and Arts; Azerbaijan modelling of linguistics; Machine translation systems University of Languages; Baku Academy of Music Academy of State ICT customs control systems; Interface systems to Schengen System; Global cybersecurity Customs Committee networking issues; Computerised interfaces to logics and transportation systems; National identity system; Automated inspection; Border security systems Azerbaijan State Computerise learning systems; Open courseware delivery systems; e-Learning; Adaptation of Pedagogical University pedagogical software to Azerbaijan’s language; ICT infrastructure support for student collaboration; Computerised interfaces to social media for educational purposes Azerbaijan Technical Automation and control systems; ICT for theoretical physics and modelling; Management of University electrical grid; Internet-of-Things (IoT) and autonomous vehicles; ICT modelling of logistics and transportation; Atomic and molecular modelling of metals and special materials; Computerise manufacturing systems; Artificial intelligence and machine learning

Table 3 Coordination of ICT Innovation Programs Across Azerbaijan's University System (representative list)

77

Appendix – Ministries of the Government of Azerbaijan The government of Azerbaijan has eighteen ministries. Each is a major institution with many sub-directorates. 1. Ministry of Internal Affairs 2. Ministry of Ecology and Natural Resources 3. Ministry of Justice 4. Ministry of Labour and Social Protection of Population 5. Ministry of Youth and Sport 6. Ministry of Foreign Affairs 7. Ministry of Economy 8. Ministry of Agriculture 9. Ministry of Finance 10. Ministry of Culture and Tourism 11. Ministry of Transport 12. Ministry of Communication and Information Technologies 13. Ministry of Energy 14. Ministry of Education 15. Ministry of Taxes 16. The Ministry of Emergencies 17. Ministry of Defence Industry 18. Ministry of Defence

78

Appendix – State Committees and Companies of the Government of Azerbaijan 1. State Oil Company of Azerbaijan Republic (SOCAR) 2. State Committee on Religious Associations 3. State Customs Committee 4. State Oil Fund 5. Central Bank 6. State Committee on Affairs with the Diaspora of Azerbaijan Republic 7. Statistics Committee 8. State Committee on Refugees 9. State Committee for Securities under the auspices of Azerbaijan Republic 10. State Social Protection Fund of the Azerbaijan Republic 11. State Committee on Standardisation, Metrology and Patents of the Republic of Azerbaijan 12. State Committee for Family, Women and Children Affairs 13. Azersu Open-Type Joint Stock Company 14. State Committee of the Republic of Azerbaijan for Property Affairs 15. Copyright Agency of the Republic of Azerbaijan 16. State Agency on Procurement of Azerbaijan Republic 17. State Town Building and Architecture Committee of the Republic of Azerbaijan 18. State Migration service 19. Civil Service Commission 20. State Agency for Public Service and Social Innovations (Under the President of the Republic of Azerbaijan)

79

Appendix – Economic Fields Receiving Entrepreneurship Funding from the Ministry of the National Economy’s Fund for Entrepreneurship Support

As can be seen from the list below, the focus of investment is primarily the agricultural sector, but there is also investment in construction materials and furniture making.

1. Logistic centres 2. Green warehouse complex 3. Big grain-growing farms (with the application of modern irrigation system) 4. Purebred egg and poultry production 5. Cattle-breeding complexes 6. Alcoholic beverages production 7. Greenhouse complex 8. Vine-growing farms 9. Intensive gardening and seed-farms 10. Agricultural products (fruits and vegetables) processing enterprises 11. Milk processing companies 12. Meat processing (slaughter-house creation) companies 13. Dry fruits production companies 14. Production of mineral water company 15. Bakery 16. Tara production 17. Production of construction materials enterprises 18. Furniture making companies 19. Tourism 20. Other processing and industrial production enterprises

80

Appendix – Strategic Roadmaps Approved by President of Azerbaijan

1. Strategic Road Map for the prospects of the national economy of the Republic of Azerbaijan 2. Strategic Road Map for the development of the oil and gas industry of the Republic of Azerbaijan 3. Strategic Road Map for the manufacture and processing of agricultural products in the Republic of Azerbaijan 4. Strategic Road Map for the manufacture of small and medium entrepreneurship- level consumer goods in the Republic of Azerbaijan 5. Strategic Road Map for the development of heavy industry and machinery in the Republic of Azerbaijan 6. Strategic Road Map for the development of specialised tourism industry in the Republic of Azerbaijan 7. Strategic Road Map for the development of logistics and trade in the Republic of Azerbaijan 8. Strategic Road Map for the development of housing provision at a reasonable price in the Republic of Azerbaijan 9. Strategic Road Map for the development of vocational education and training in the Republic of Azerbaijan 10. Strategic Road Map for the development of financial services in the Republic of Azerbaijan 11. Strategic Road Map for the development of communication and information technologies in the Republic of Azerbaijan 12. Strategic Road Map for the development of utilities (electricity and thermal energy, water and gas supply) in the Republic of Azerbaijan

81

Appendix – International Business Incubator Associations & Organisations

1. Armenia a. EIF – Enterprise Incubator Foundation b. http://www.eif.am/ 2. Australia a. BIIA – Business Innovation and Incubation Australia b. http://businessincubation.com.au/ 3. Austria a. INNA – Innovation Network Austria b. http://www.inna.at/ 4. Belgium a. EBN – European Business and Innovation Centre Network b. http://ebn.be/ 5. Brazil a. ANPROTEC – Brazilian Association of Science Parks and Incubators b. http://anprotec.org.br/site/ 6. Canada a. CABI – Canadian Acceleration and Business Incubation Association b. http://cabi.ca/ 7. China a. BBIA – Beijing Business Incubation Association b. http://www.bjventure.com.cn/www/sort.htm 8. Czech Republic a. Science and Technology Parks Association CR b. http://www.svtp.cz/ 9. Denmark a. Danish Development Parks b. http://www.danskeudviklingsparker.dk/ 10. Egypt a. EIA – Egyptian Incubator Association b. http://www.escwa.un.org/ntpi/egypt.asp 11. Estonia a. BASTIC – Baltic Association of Science, Technology Parks and Innovation Centres b. http://www.bastic.eu/ 12. France a. Reseau National des Pepinieres d’Enterprises b. http://www.pepinieres-elan.fr/ c. RETIS Innovation 82

d. http://www.retis-innovation.fr/ 13. Germany a. ADT – German Association of Innovation, Technology and Business Incubation Centres b. http://www.adt-online.de/ c. SPICE Group d. http://www.spice-group.de/ 14. Hungary a. HBIA – Hungarian Business Incubator Association b. http://www.visz.hu/wp/ 15. India a. ISBA – Indian STEPs and Business Incubators Association b. http://www.innovationcouncil.org.nz/index.php/find- experts/experts/item/incubators-new-zealand 16. Israel a. Israeli Technological Incubators Program b. http://www.incubators.org.il/ 17. Kenya a. BIAK – Business Incubation Association of Kenya b. http://www.biak-kenya.org/ 18. Malaysia a. NINA – National Incubator Network Association b. http://www.nina.com.my/ 19. Netherlands a. NVBEO – Dutch Association for Business Centres and Economic Development b. http://www.nvbeo.nl/ c. DIA – Dutch Incubator Association d. http://dutchincubator.nl/home/ 20. New Zealand a. Incubators New Zealand b. http://www.innovationcouncil.org.nz/index.php/find- experts/experts/item/incubators-new-zealand 21. Poland a. PBICA – Polish Business and Innovation Centres Association b. http://www.sooipp.org.pl/ 22. South Africa a. SABTIA – South African Business and Technology Incubation Association b. https://ec.europa.eu/growth/tools-databases/dem/initiatives/427/sabtia- incubators 23. South Korea a. AABI – Asian Association of Business Incubation b. http://www.aabi.info/ 83

c. KOBIA – Korea Business Incubation Association d. http://www.kobia.or.kr/ 24. Spain a. AVIE – Asociacion de Viveros e Incubadoras de Empresas b. http://avie.es/ c. ANCES – Asociacion Nacional de CEEI Espanoles d. http://www.ances.com/ e. IASP – International Association of Science Parks f. http://www.iasp.ws/ 25. Sweden a. SISP – Swedish Incubators and Science Parks b. http://www.sisp.se/ 26. Taiwan a. CBIA – Chinese Business Incubation Association b. http://www.nbic.org.tw/dbpdf/80.pdf 27. Ukraine a. UBICA – Ukrainian Association of Business Incubators and Innovation Centres b. http://www.novekolo.info/en/ 28. United States of America a. International Business Incubator Association b. https://inbia.org/about/

84

Appendix – Evaluation Methodology of the ICT Fund Below is a reproduction of the form that is used for evaluation of proposals submitted to the ICT Fund. Evaluation Criteria of the Projects and Final Opinion Submitted by the appointed expert under the auspices of the competition for grants to be awarded by the State Fund for Development of Information Technologies of the Ministry of Transport, Communications and High Technologies, Government of the Republic of Azerbaijan. Project Information 1. Project Code 2. Date of submission of the project for complex expertise: ______3. List of documents for the project submitted for complex expertise:______4. Name, surname, patronymic of the expert: ______5. Expert data (work place and position, address, telephone, e- mail):______6. The direction of education, work experience, scientific degree and scientific name of the expert: ______Expert Evaluation Template Evaluation of projects is carried out on criteria 12 (twelve). For each criterion, the project can be 0 (not eligible), 1 (partially fit) or 2 (fully available). Projects with average score16 (sixteen) or more are submitted to the Fund's Supervisory Board for decision-making on financing.

85

Table 4 Evaluation Criteria for Selection of Projects for the ICT Fund

EVALUATION FACTOR EXPERT ASSESSMENT AND ASSIGNMENT OF SCORE SCORE Clarity of Project Goals and Objectives Contribution of the project to the development of ICT in the country Project's potential for commercialisation The project has a clearly defined and justified idea Successful participation of Project Manager or Executor (Executives) in previous ICT projects (domestic and foreign) A substantial justification of the amount of funding required for the grant project in a logical and reality Evaluation of economic calculations carried out in the project Socio-economic importance of the project for the country in the future Coverage of project outcomes and the possibility of its expansion Project Effectiveness and Project Impact Assessment Risks Final Score

86

FINAL OPINION Assessment of the grant projects submitted for the competition by the expert or group of experts on the criteria set by the Supervisory Board of the State Fund for Information Technology Development (hereinafter - the Fund) subordinated to the Ministry of Transport, Communications and High Technologies provides for the efficient decision- making on project financing.

The ______coded project submitted to the ___ Grant Competition, announced at ______of the Fund, has scored __ points on the 12 (twelve) criterion that has been examined and approved by the Supervisory Board of the Fund. Financing of this project is not recommended or recommended. ______(signature of the expert)

______(date)