assessing the innovation potential in ukraine econ... · 2020-01-05 · assessing the innovation...

Assessing the innovation

potential in Ukraine

Recent track record and implications for low-carbon

development

Low Carbon Ukraine – Technical Paper No. 1 (April 2012)

Project

“Capacity Building for Low Carbon Growth in Ukraine”

Assessing the innovation potential in Ukraine

Technical Paper No. 1

ii

Contact:

DIW econ GmbH

Dr. Lars Handrich

Mohrenstraße 58

10117 Berlin

Germany

Phone +49.30.20 60 972 - 0

Fax +49.30.20 60 972 - 99

[email protected]

www.diw-econ.de



iii

Table of contents

1. Introduction ..................................................................................................................... 1

2. Ukraine’s innovation record over time and across sectors .............................................. 2

2.1 Inputs: R&D expenditures ........................................................................................ 2

2.2 Outputs: Patents and innovative products ................................................................ 3

3. Ukraine’s innovation record in international comparison ................................................. 7

3.1 Inputs: R&D expenditures ........................................................................................ 7

3.2 Outputs: patents per capita ...................................................................................... 8

4. Domestic potential for innovative growth ........................................................................ 9

4.1 Research intensity of patents ................................................................................... 9

4.2 Patents and economic growth .................................................................................11

5. Conclusions ...................................................................................................................12



iv

Executive Summary

Innovations are crucial for shifting from a conventional to a sustainable low-carbon economic

growth trajectory. This technical paper assesses the current innovation potential in Ukraine

and infers to what extent innovations contribute to economic growth.

We analyse input and output factors of innovation in Ukraine over the recent past and across

different economic sectors:

� We find that expenditures in R&D have fallen at a rate of 7% between 2005 and

2011. Thus spending in R&D measured as a share of GDP decreases from 0.14% in

2005 to 0.08% in 2011.

� Sectoral R&D funding fluctuates heavily over time and has declined across all

industrial sectors except for food processing between 2009 and 2011.

� Despite decreasing expenditure in R&D, patent applications and registrations have

increased from 2009 onwards. This is due to the fact that the share of foreign patent

holders increased over the last years.

� Innovative outputs show high volatility and sensitivity to business cycle downturns.

The share of innovative industrial production has contracted sharply by 40%

between 2007 and 2009 and has still not reached the pre-crisis levels by 2011.

� The innovation intensity of output varies widely between industrial sectors, with some

small sectors showing substantial innovative capacity.

When comparing Ukraine with other benchmark countries we find that Ukraine is placed in

the middle field regarding the expenditure in R&D, spending a larger share of GDP on R&D

than Poland, Belarus or Kazakhstan. Compared to Russia, however, Ukraine would need to

increase R&D expenditure by a factor of 1.5. Measuring innovation by the number of

patents per capita Ukraine currently takes a place in the lower half among the

benchmark group, having 3 times less patented inventions per year, than Belarus or

Russia. The difference to the advanced economies such as the EU and the United States is

even larger.

Ukraine spends little R&D per patent. Most advanced economies spend more resources

per patent. In this regard, a low level of spending per patent may not be so much a signal of

efficiency, but rather an indication that the registered patent is not the result of prolonged

domestic innovative research.



v

We evaluate the capacity of patented technology to induce economic growth and conclude

that growth of Ukrainian GDP was driven much less by R&D than in other nations,

implying that Ukraine’s domestic capacity for a growth path driven by technological

innovation is still limited at the moment.

We conclude that the switch of the Ukrainian economy towards a low carbon economic

growth trajectory will require initially large transfers of technology from abroad. This should

be accompanied by efforts to increase domestic research capacity.



1

1. Introduction

Innovations are crucial for shifting from a conventional to a sustainable low-carbon economic

growth trajectory1. This technical paper assesses the current innovation potential in Ukraine

as well as to what extent innovations contribute to economic growth. Firstly, innovations lead

to products and services with high value added. This in itself can raise GDP and improve the

economy’s future capability for growth. Secondly, a focus on intensive growth through

innovation, rather than extensive growth through the accumulation of production factors,

stresses less the environment. The extent of intensive growth is also not limited by the

availability of finite natural resources. Thirdly, the realisation of sustainable low carbon

growth relies on the development and implementation of advanced green technologies, like

for example efficient methods of steel making. Such technologies can either be developed

domestically, or be imported from abroad. If these innovative products are produced

domestically, this will present additional sources of value creation and economic growth in

Ukraine.

Ukraine has undertaken some steps towards stimulating its innovation potential as outlined in

the “Strategy for Innovative Development of Ukraine”, adopted in 2009. This is supplemented

by the “Concept for reforming the government policy in the area of innovation until 2014”, as

well numerous policy initiatives that have identified strategic sectoral and regional priorities of

innovative development.

These steps indicate the awareness among policy makers of the importance of innovations

for economic growth in Ukraine. But it is yet too early to assess the impact of the recent

policy changes2. In the remaining part of the technical paper we evaluate Ukraine’s current

track record and potential of innovation, rather than gauging the outcome of specific policies.

In order to accomplish that, we adopt three different perspectives. We first evaluate Ukraine’s

track record of innovation over time, placing special emphasis on the evolution of innovation

in sectors of strategic importance to low carbon and innovative growth. Secondly, we

compare Ukraine’s performance against a suitable international benchmark group of

countries. Finally, we appraise Ukraine’s current domestic capacity for innovative growth.

1 See for example Aghion, Hemous and Veugelers (2009): No Green Growth Without Innovation. Bruegel Policy Brief 2009/07

2 For a qualitative assessment of the policies and institutions of the national innovation system, see United Nations Economic Commission for Europe (2013): Innovation Performance Review of Ukraine



2

2. Ukraine’s innovation record over time and

across sectors

For assessing innovation we study inputs used in the research and development (R&D)

chain, and the outputs from that process. Input criteria primarily include spending on R&D.

Output criteria are registered patents, or the money value of innovative production.

2.1 Inputs: R&D expenditures

As shown in Figure 1, real spending in R&D in Ukraine has generally exhibited a downward

trend over the past years. Having reached a peak in 2006 by spending 910 million hryvnia

over all industrial sectors, expenditures have decreased to a value of 395 million hryvnia net

of consumer price inflation in 2011. This implies an annual decline of 7%3 for the years 2005

to 2011.

Figure 1: Real domestic spending on R&D in Ukraine 2005-2011, by industrial sector

Spending deflated by consumer price index, prices of 2005.

Source: State Statistic Committee of Ukraine. Calculations: DIW econ

3 Given the relatively high rates of inflation in Ukraine, the calculation of real money values is sensitive to the choice of the price index used in deflating the nominal spending figures. If instead of the consumer price index, the official GDP deflator is used, compound annual growth rate will decrease to -11%.

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0.10

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0.25

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1,000

2005 2006 2007 2008 2009 2010 2011

R&

D s

pe

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, %

of

GD

P

Re

al

R&

D s

pe

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ing

(m

io.

hry

wn

ja)

Others

Processing of

other Minerals

Food Processing

Metallurgy

Chemicals and

Petrochemicals

Machinery amd

Equipment

R+D spending, %

of GDP



3

The largest share of expenditure in R & D is held by the machinery and equipment industry.

Hence the development of expenditure is mainly driven by this sector. Between 2006 and

2011, expenditure in R&D in this sector reduced by 56%. Another large part is accounted for

the chemical and petrochemicals industry which reduced its expenditure by 28%. Only the

food processing industry increased their R&D expenditure - albeit from extremely low levels -

from 1.7 million hryvnia in 2005 to 10.9 million hryvnia in 2011, which implies a growth factor

of 6.4.

However, over the same time period, Ukraine also registered a rise in GDP, which has

moved contrary to the R&D spending. As shown by the line in Figure 1, this implies that R&D

spending relative to GDP has decreased over the period. Whereas in 2005 the amount

equivalent to 0.14% of GDP was spent for R&D, this share had fallen to only 0.08% of GDP

by 2011. Furthermore, R&D often requires long-term efforts, which are disrupted by strong

annual budget fluctuations. The latter is apparently the case in Ukraine.

In most innovative economies, a significant portion of R&D is spend at the firm level. The

proximity to market demands allows firms to develop products with a potential of being

commercially successful. Developing innovation at the firm level should therefore be a crucial

part of a national innovation strategy (UNECE, 2013).

2.2 Outputs: Patents and innovative products

Patents are often used as a proxy measure for research output. Patents represent an

inventor’s recognised claim to the result of the research process, and therefore constitute

one step towards bringing innovative products to the commercial market. Figure 2 gives an

impression of the evolution of patent applications and officially granted patents in Ukraine

from 2006 onwards. The patents illustrated are on inventions only.



4

Figure 2: Patent applications and approvals in Ukraine, 2006-2011

Data: State Statistic Committee of Ukraine. Calculations: DIW econ

Despite decreasing R&D spending, the number of patent applications and patents

granted increased from 2009 onwards. Applications and grants move very closely over the

years implying an exceptionally high success rate of patent applications in Ukraine. Over the

six years observed, a cumulative total of almost 96% of applications were approved4. This

suggests that a large share of patents registered in Ukraine do not correspond to completely

new inventions, but rather represent a transfer of technologies that have already been

successfully patented in other countries.

Over the last years the share of invention patents held by foreign residents increased. While

in 2005, 37% were held by foreign patent holders, this share increased to 53% in 2011

(Figure 3). This might be the reason for a growing number of patent applications and

decreasing R&D spending at the same time.

4 In comparison, the USA exhibited a cumulative approval rate of only 41% over the same time period, whereas the corresponding figure for Germany is even lower at 34%.

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3500

2006 2007 2008 2009 2010 2011

Nu

mb

er

of

pa

ten

ts

Patents applications

Patents granted



5

Figure 3: Share of invention patents held by domestic and foreign residents in Ukraine, 2008-2011

Data: WIPO. Calculations: DIW econ

Although patents are a useful measure of scientific output, they do not offer any information

on the economic value of the underlying inventions. A suitable metric of the economic value

of innovative output is the money value of innovative production. In absolute figures,

innovative production in industrial sectors (including extraction of natural resources) in

Ukraine amounted to 42 billion hryvnia in 2011. Figure 4 tracks this metric expressed as a

percentage of total output (GDP) over the past seven years, as well as displaying the

innovative contribution of key industry sectors to total GDP.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011

Foreign residents

Domestic residents



6

Figure 4: Value of innovative industrial production in Ukraine as percentage of GDP 2007-2011, by industrial sectors

Data: State Statistic Committee of Ukraine. Calculations: DIW econ

As shown figure 4, the share of innovative industrial production has contracted sharply

during the downturn of the business cycle decreasing to 60% of its original share of GDP in

2009. Due to the fact that innovative production in the coke and oil refining sector has

experienced a remarkable upswing, total innovative industrial output remains at more or less

constant levels.

The coke and oil refining sector was the only sector able to expand its innovative production

during and after the crisis. Starting in 2005 when the share of GDP was at 0.16% it increased

to 1.25% in 2011, representing an innovative output that is 24 times higher in 2011. In

addition to that, the machinery and equipment sector as well as the metallurgy sector

decreased strongly from 2008 to 2011. Both sectors together have accounted for the bulk of

innovative production in the industrial sector during the past years.

Expressing the volume of innovative production in a sector as a share of total production in

that sector, we arrive at a measure of innovation intensity of output in a sector. This measure

is graphed in Figure 5. Clearly, the innovation intensity of output varies widely by sector.

As expected, the coal and oil refining industries in particular as well as the machinery and

equipment industries produce a comparatively high percentage of innovative output. These

industries can accordingly be classified as highly innovative.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2005 2006 2007 2008 2009 2010 2011

% o

f G

DP

Food Processing

Wood

Coke and Oil

Refining

Chemicals and

Petrochemicals

Metallurgy

Machinery and

Equipment

Others



7

Figure 5: Share of innovative production in total sectoral production in key industrial sectors, 2011

* The value for the sector cut at 10% for better representation, complete value: 21.6%. Data: State Statistic Committee of Ukraine. Calculations: DIW econ

3. Ukraine’s innovation record in international

comparison

This section puts Ukraine’s innovation record into a comparative perspective by contrasting it

against an international benchmark group of countries. This group includes relevant peers

among the transition economies of Eastern Europe and the Commonwealth of Independent

States (CIS), Turkey and China, as well as the United Kingdom, Germany and the USA..

3.1 Inputs: R&D expenditures

In order to make R&D expenditures across countries comparable, we use data assembled by

UNESCO on harmonised Gross Domestic Expenditure on R&D (GERD), which includes

research outlays by private and public institutions and enterprises. Figure 6 shows the

relevant data for the total group of 12 countries.

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Sh

are

of

inn

ov

ati

ve

ou

tpu

t in

se

cto

r o

utp

ut

(%)



8

Figure 6: Expenditure on R&D (GERD) as % of national GDP in 12 countries, 2009

Data: UNESCO, Calculations: DIW econ

Clearly, Ukraine needs to drastically increase its spending in R&D if it is to catch up with the

advanced economies. But in comparison to the other transition economies in this sample

Ukraine takes a middle place. If Ukraine were to catch up to the level of its neighbour Russia,

it would need to increase spending only by a factor of 1.5, whereas trying to achieve the

value of Germany would imply an increase by a factor of 3.3.

3.2 Outputs: patents per capita

Figure 7 displays the number of patents for invention as registered by the World Intellectual

Property Organisation (WIPO) per million inhabitants. Using this measure, Ukraine takes

only a lower place among the benchmark group. Thus in comparison to Russia or Belarus

Ukraine registers 70% less patents per million inhabitants and so the gap to the advanced

economies in Europe and North-America remains very large.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Pe

rce

nta

ge

of

nati

on

al

GD

P



9

Figure 7: Patents for inventions per million inhabitants in 12 countries, 2009

* The value for USA cut at 800 for better representation, complete value: 1228 Data: World Intellectual Property Organisation (WIPO), Calculations: DIW econ

4. Domestic potential for innovative growth

This section assesses the potential of domestic Ukrainian R&D to create innovative growth.

Two links therefore need to be evaluated: firstly the capacity of R&D spending to generate

domestic innovation (measured by patents), and secondly the capacity of the innovation to

generate economic growth.

4.1 Research intensity of patents

Putting input and output indicators of innovation together, the R&D intensity of a patent,

which is the amount of spending necessary to trigger a single patent, can be derived for each

country. This is a measure of the capacity of research spending to create innovation,

sometimes referred to as the “efficiency” of R&D5. This metric is displayed in Figure 7.

5 See for example World Bank (2011): Igniting innovation: Rethinking the Role of Government in Emerging Europe and Central Asia. The authors calculate a similar measure, based on US Patent Office (USPTO), rather than WIPO patent data.

0.0

100.0

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800.0

Pate

nts

per

mio

llio

n p

op

ula

tio

n



10

Figure 8: R&D spending per patented invention in 12 countries, 2009

GDP in thousands of US dollar at purchasing power parity. Data: WIPO / UNESCO, Calculations: DIW econ

Using this measure, Ukraine is placed in the lower half of this sample of countries. Most

advanced economies spend more resources per patent. In this regard, a low level of

spending per patent may not be so much a sign of efficiency, but rather indicates that the

registered patent is not the result of prolonged domestic innovative research. This

interpretation would be in concordance with the assessment of the high success rate of

patent applications in Section 2.2: many patents registered in Ukraine may constitute partial

transfers of already established foreign technologies, which is a process that takes up

comparatively little domestic R&D spending. These the figures of patents do not primarily

present wholly original domestic research. However, the are no other data available, which

would allow a more precise assessment of domestic innovative capacity. Figure 9 presents

data on the place of residence of patent holders in Ukraine, which is the closest measure

available. As the graph shows, more than half of the patents filed in Ukraine come from

foreign residents. Only Hungary has a larger proportionally share of foreign patent holders

than Ukraine.

In Ukraine patents applications are not as dependent on expenditure in R&D because of its

large share of foreign patent holders. It is obvious that a large part of the expenditure in R&D

and the development of technology are made abroad.

0

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2500

3000

3500

4000

Th

ou

san

d U

S -

$ a

t P

PP



11

Figure 9: Share of invention patents held by domestic and foreign residents in 12

countries, 2011

Data: WIPO, Calculations: DIW econ

4.2 Patents and economic growth

We now proceed to evaluate the effect of Ukraine’s patents. In the context of a low carbon

economic growth strategy, the main purpose of patented technologies is to lead to resource

saving innovations that promotes growth. To this end, the capacity of patented technology to

induce economic growth is evaluated by comparing the correlation over time between

granted patents and GDP in six countries from the international benchmark group (Table 1).

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Domestic residents Foreign residents



12

Table 1: Strength of correlation between GDP and granted invention patents in selected countries, 2003-2011

Country Correlation coefficient USA 0.985

Germany 0.916 Russia 0.903

UK 0.895 Poland 0.878 Ukraine 0.330

GDP at purchasing power parity, constant 2005 prices.

Data: WIPO. Calculations: DIW econ

The correlation coefficient can take on values between -1, which indicates a perfectly strong

negative relationship and +1, indicating a perfectly strong positive relationship between

developments in GDP and granted patents. The results show strong positive relationships in

all countries except Ukraine. This indicates that growth in Ukrainian GDP was driven

much less by patents than in other nations, implying that Ukraine’s domestic capacity for

a growth path driven by technological innovation is still limited at the moment6.

5. Conclusions

This paper has investigated Ukraine’s innovation record over time and provided an

assessment of Ukraine’s potential to domestically generate innovation-driven economic

growth.

Generally, both input and output measures of innovation show no clear upward trend over

the last decade, even during Ukraine’s remarkable phase of economic growth. Conversely,

industrial innovation output does seem to contract sharply in the face of business cycle

downturns. This may suggest that many enterprises still perceive R&D investments as being

a risky “extra” rather than an essential part of core business activity. Presenting businesses

with better risk smoothing mechanisms and more stable and more long-term financing for

promising innovative research, may help to improve both the level as well as the resilience of

innovative output in Ukraine.

6 The correlation coefficient does not specify the direction of causation (if any exists) between the two variables, so that it is technically possible that a higher GDP leads to more innovation and hence to more patents instead of the reverse direction. However, as patents are the outcome of a lengthy research process as well as a lengthy administrative registration procedure, it is unlikely that higher GDP leads of more patents within the same year. This means the chain of causation implied in this paper is the most probable one.



13

In the recent past we observe from the official statistics a rather worrying development in

Ukraine, as the share in innovative production of the usually as R&D intensive classified

sectors, primarily machinery and equipment and chemicals, has declined considerably. At

the same time the share of less R&D intensive sectors like coke and refineries started to

dominate the innovative output in Ukraine.

To counter this unfavourable development policy efforts need to be intensified in order to

diversify into sectors that display high innovation intensity and thus have a more a long

term outlook for development of greener technologies and low carbon economic growth.

From an international perspective, it is clear that Ukraine has not yet devoted as large a

share of its national income to innovation as relevant benchmark countries. This clearly

implies the need for Ukraine to significantly raise the volume of R&D spending if it is to

generate the capacity for domestic innovative growth in the future.

At present, the capacity for domestic innovative growth is constrained, as indicated by the

low research intensity of the patents registered in Ukraine, as well as the low capacity of

these patents to generate GDP growth.

Shifting the economy on a low carbon economic growth trajectory will require that Ukraine

initially relies on technology transfers from abroad. Once a large stock of modern

technologies is imported, this may help to stimulate domestic innovation and economic

activity. In parallel, domestic efforts to increase Ukraine’s innovative capacity must continue

to be supported.

assessing the innovation potential in ukraine econ... · 2020-01-05 · assessing the innovation...

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