Smart in Croatia Specialization Public Disclosure Authorized Public Disclosure Authorized DIRECTIONS IN DEVELOPMENT Countries and Regions Smart Specialization in Croatia Public Disclosure Authorized Inputs from Trade, Innovation, and Productivity Analysis Arabela Aprahamian and Paulo Guilherme Correa, Editors Public Disclosure Authorized Smart Specialization in Croatia DIRECTIONS IN DEVELOPMENT Countries and Regions Smart Specialization in Croatia Inputs from Trade, Innovation, and Productivity Analysis Arabela Aprahamian and Paulo Guilherme Correa, Editors © 2015 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 18 17 16 15 This work is a product of the staff of The World Bank with external contributions. 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Smart Specialization in Croatia • http://dx.doi.org/10.1596/978-1-4648-0458-8 Contents Acknowledgments xiii Abbreviations xv Executive Summary 1 Chapter 1 Introduction 5 Background 5 Aim and Structure of the Report 7 Note 8 Bibliography 9 Chapter 2 Smart Specialization 11 Smart Specialization: The Main Concepts 11 Smart Specialization: Incomplete Information and the Political Economy of Lobbying 13 Operationalizing Smart Specialization: Access to Information 14 Smart Specialization: Implications 16 Promising Sectors for Smart Specialization 21 Notes 21 Bibliography 21 Chapter 3 Croatia’s Trade: Performance, Competitiveness, and Potential 23 Chapter Summary 23 Export Growth 24 Market Orientation and Export Diversification 25 Exports’ Economic Complexity, Sophistication, and Quality Upgrading 30 Product-Space Analysis 35 Identifying High-Potential Export Opportunities 37 “Low-Hanging Fruits” for Croatia Are Few and Far Between 42 Could Croatia Become a Bigger Player in GVCs? 45 Smart Specialization in Croatia • http://dx.doi.org/10.1596/978-1-4648-0458-8 v vi Contents The Importance of Services Exports 47 Notes 52 Bibliography 52 Chapter 4 Stylized Facts on Productivity 55 Chapter Summary 55 Exploring Firm Heterogeneity: Are There Regional, Export Status, Ownership, and Size Trade-Related Disparities? 56 Entrepreneurship: High-Growth Firms and “Gazelles” 59 Firm Dynamics and Productivity Growth: Firm Entry and Exit 61 Factors That Can Affect Productivity 70 Notes 75 Bibliography 76 Chapter 5 Innovation Challenges for Smart Specialization 79 Chapter Summary 79 What Is the Importance of Research and Innovation? 80 Recent Innovation and R&D Performance 82 Business R&D Determinants 93 Modest Research Excellence and Science—Industry Collaboration 102 Inadequate Policy Governance 106 Notes 111 Bibliography 113 Chapter 6 Conclusions and Policy Implications 115 Conclusions 115 Policy Implications 118 Note 124 Appendix A Examples of Potential Areas for Research and Innovation Specialization 125 Boxes 4.1 Sample Characteristics 57 4.2 Croatia Shows Low Rates of Firm Entry and Exit 63 5.1 Assessing the Impact of UKF 98 5.2 Assessing the Impact of RAZUM 99 5.3 Assessing the Impact of SPREAD (IRCRO) 105 Figures 1.1 Croatian GDP per Capita and Growth Rates 6 1.2 Structure of the Report’s Analysis 8 Smart Specialization in Croatia • http://dx.doi.org/10.1596/978-1-4648-0458-8 Contents vii 2.1 Access to Information, Risk Level, and Policy Making 14 2.2 RIS3—A Simplified Typology 15 2.3 Examples of RIS3 Experimentation and Adaptation Stage 20 3.1 Export Openness and per Capita GDP, 2007–08 vs. 2011–12 25 3.2 Export Growth and Change in Market Share, 2006Q1–2013Q1 26 3.3 Export Market Distribution, Croatia, 2002 vs. 2012 26 3.4 Market Concentration: Herfindahl-Hirschman Index, Croatia and Peer Countries, 2002 vs. 2012 27 3.5 Export Growth Orientation, Croatia’s Top 10 Export Markets, 2007–12 27 3.6 Growth Orientation of Top 20 Export Sectors, Croatia, 2008–12 29 3.7 Intensive and Extensive Margin of Trade, Croatia 30 3.8 Economic Complexity of the Export Basket, Croatia vs. Peers, 2000–08 31 3.9 Revealed Factor Intensity of Croatia’s Exports, 2012 32 3.10 Relative Quality Elasticity, Croatia vs. Peers, 2012 33 3.11 Price vs. Quality Elasticity, Croatia vs. Peers, 2012 34 3.12 Change in Relative Quality and Market Share of Top Croatian Exports, 2000–10 35 3.13 Croatia’s Product-Space Maps, 1992–2012 36 3.14 Emerging Exports, 2012 39 3.15 Marginal Exports, 2012 42 3.16 Significant Exports, 2012 43 3.17 Declining Exports, 2012 43 3.18 Proximity of Croatian Exports to High Global Demand 44 3.19 Minimal Spanning Tree, Exports of Intermediates, 2010 46 3.20 Exports of Parts and Components, Croatia and Six Regional Peers 47 3.21 Croatia vs. Peers, per Capita Services Exports vs. Income, 2002–04 vs. 2008–10 48 3.22 RCA by Services Subsector, Croatia, 2000, 2005, and 2009 49 3.23 Croatia vs. Peer Countries, Services Sector Share in the Value Added, 1990, 2000, and 2010 Sector Share in Value Added vs. GDP per Capita, 2008–10 50 3.24 Sector Share in Value Added vs. GDP per Capita, 2008–10 51 3.25 Services Export Sophistication, Croatia vs. Peers, 2000–09 51 4.1 Percentage Difference of Firms in the Adriatic Region vs. Continental Region Average 58 4.2 Percentage Difference of Firms with Different International Exposure vs. “Exporters and Importers” Average 58 4.3 Percentage Difference of Different-Size Firms vs. Large Firms (>250 Employees) Average 59 4.4 Percentage Difference of Private and Mixed Firms vs. SOE Average 59 Smart Specialization in Croatia • http://dx.doi.org/10.1596/978-1-4648-0458-8 viii Contents 4.5 Entry Density and GDP per Capita, 2008–12 60 4.6 High-Growth Firms’ Rate, 2010, Measured by Turnover Growth 61 4.7 Gazelles’ Rate, 2010, Measured by Turnover Growth 62 4.8 TFP Change Decomposition by Type, 2008–12 67 4.9 TFP Change Decomposition by Region, 2008–12 67 4.10 TFP Change Decomposition by Ownership, 2008–12 68 4.11 TFP Change Decomposition by Type and by Export Status, 2008–12 68 4.12 TFP Change Decomposition by Type and by Macro Sector, 2008–12 69 4.13 TFP Change Decomposition by Type and by Services Macro Sector Group, 2008–12 70 4.14 Total Noncrisis State Aid 71 4.15 Noncrisis State Aid: Selected Aid Categories for Croatia, 2011, and EU-27, 2012 72 4.16 Sector-Specific Aid, 2009–11 73 4.17 Intensity of Local Competition, 2013–14 74 4.18 Measures of the Ease of Doing Business (Distance to Frontier) 75 5.1 Share of Innovative