The Role of Institutional Development in Education System: R&D and Innovation and their Impact on Economic Growth

Shukarov, Miroljub; Maric, Kristina Conference Paper The Role of Institutional Development in Education System: R&D and Innovation and their Impact on Economic Growth Provided in Cooperation with: IRENET - Society for Advancing Innovation and Research in Economy, Zagreb Suggested Citation: Shukarov, Miroljub; Maric, Kristina (2015) : The Role of Institutional Development in Education System: R&D and Innovation and their Impact on Economic Growth, In: Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference, Kotor, Montengero, 10-11 September 2015, IRENET - Society for Advancing Innovation and Research in Economy, Zagreb, pp. 186-192 This Version is available at: https://hdl.handle.net/10419/183647 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc/4.0/ 186 ENTRENOVA 10-11, September2015 Kotor, Montenegro The Role of Institutional Development in Education System: R&D and Innovation and their Impact on Economic Growth Miroljub Shukarov, Kristina Maric South East European University, R. Macedonia Abstract The aim of this paper is to provide a closer look of the institutional development in educational system and its impact on economic growth. Accumulation of human capital and technological development are factors that are considered to be crucial for economic growth. Thus, investing in education, R&D and innovation is essential for a country’s prospects for economic growth. However, the main idea is to present this topic from institutional point of view. By using literature and statistical analysis, the paper investigates whether the degree of institutional development in country’s educational system is sufficient enough to create prospects for economic growth. We compare 4 different countries, Macedonia and Serbia, non EU countries and Bulgaria and Slovenia member countries of the EU. The research findings indicate to the fact that institutionalized society with higher degree of institutional development in this case in the educational system is more likely to boost the economic growth. The results also indicate to the fact that societies in which the degree of institutional development is higher, as it is in our case in Slovenia and Bulgaria, are more likely to produce well qualified and skilled labour force which will further impact the economic growth. Keywords: institutions, institutional development, educational system, innovation, economic growth JEL classification: I2, I250, I280, O430 Introduction The issue of economic growth and factors encouraging it is highly debated in the past decades. Accumulation of human capital is one of the key factors promoting economic growth. Human capital is the stock of knowledge that people have learned and maintained. The more human capital one economy has the more creative its labour force can be, the more prospects for productivity the economy will have. Thus, it could be stated that education gives people skills that enable them to be more productive and creative. However, this paper tries to identify the factors affecting economic growth from another perspective, a deeper one, which is the impact of institutions and their degree of development. Before proceeding any further it has to be stated that under the term institutional development in this paper we use the definition postulated by the Nobel Laureate Douglas North (1991), who defines institutions as clearly defined rules, regulations, norms within the society, or simply as rules of the game. In that manner, it could be stated that accumulation of human capital can only influence the economic growth, if there is a constant creation of new job vacancies, either through FDIs or investments in R&D and innovation. In order to depict a closer look at the impact of institutional development on economic growth, we try to identify the impact of institutional development on education system in four different countries: Macedonia, Slovenia, ENTRENOVA 10-11, September2015 Kotor, Montenegro Serbia and Bulgaria. The goal of this paper is to try to identify the role of institutional development in educational system on economic growth by comparing four different countries. After the introductory part, the paper further proceeds with presenting the literature review which has an attempt to present the basic rational behind the topic. After presenting the literature review in which the institutional development of the four countries of interest is presented, the paper explains the basic methodology, thus further proceeds with the presentation of the results followed by brief discussion and finally it finishes with the concluding remarks. It could be stated that in almost all countries, governments play a fundamental role in education, health, infrastructure and technology, and policies and expenditures regarding each of these areas. Also, it plays a key role in the balance of spending among these areas, and in that way creates the economy. Briefly speaking, all governments really do have an industrial policy. However, the only difference is among those who construct their industrial policy deliberately, and those who let it be formed by others, usually by particular interests, who view with each other for concealed and open subsidies, for rules and regulations that favour them, usually at the expense of others (Greenwald and Stiglitz, 2012). Most transition countries have put an attempt in terms of resource constraints and knowledge deficiencies. Their development depends significantly on numerous factors, including the quality of the institutional and regulatory framework and its implementation, the physical infrastructure, the sophistication and depth of financial markets, the quality of educational institutions and labour skills, and the protection of intellectual capital. Greenwald and Stiglitz (2012) also state that learning requires resources, including access to capital, which in downturns of the economy is rationed thus investments in R&D are often surrendered. This has an utmost implication for policy: policies which expose countries to a high level of instability, or which increase the economy’s instability have an unfavourable effect on knowledge. Examples include financial and capital market liberalization and deregulation (Rashid 2012; Stiglitz et al 2006; Stiglitz 2008), and tarrification (Dasgupta and Stiglitz 1977). Research shows that societies that have advanced educational systems, in this context it implies institutionalized societies do the best at developing and integrating new technologies into their economies partly because educated workers are more able to think for themselves and solve problems creatively. Government can also play a crucial role in the process of development of technology by providing research and development funds to universities and researchers. Although, there is not much literature on this specific topic, it has to be stated that Bartlett, W. et al. (2012), claimed that the educational system in Bosnia and Herzegovina lacks a higher degree of institutional development, thus the corporate and business sector are not in a position to invest in R&D and innovation thus, be able to compete in the global and rapidly changing business environment. EU Member Countries Representatives Slovenia Comparing Slovenia to the other transition countries, it has to be claimed that unlike the other transition countries, Slovenia adopted a gradualist approach to privatization from the start. In the period of EU accession the Slovenian policy changed to a larger accent on horizontal industrial policies, and the exclusion of subsidies and state aids for industry in keeping up with the EU release (Šuštar, 2004). In the process of synchronizing with the horizontal approach to industrial policy, Slovenia implemented a program for developing industrial clusters connecting 188 ENTRENOVA 10-11, September2015 Kotor, Montenegro companies and research institutes beginning with a pilot program in 2000-2003 (Palčič et al. 2010). By doing that, it intended to promote knowledge transfer from research institutes to the companies in the cluster. The Slovenian industrial policy focused on support for small firm clusters and networks, throughout a decentralized system of support for innovation using technology parks and university-sponsored byproducts (Bartlett and Bukvič 2006). Thus, one might say that the main policy approach was to maintain the old established industrial base though establishing a core of high growth small businesses which would be capable of creating high quality jobs (in terms of value added per worker). Bulgaria Bulgaria had a long lived tradition of investing in high tech industries dating back from the communist era when it specialized in computer industries. Even though the large number of big corporations generally collapsed in the 1990s, a considerable number of high tech SMEs developed with a support from the state (Bartlett and Rangelova, 1996). Regarding the final standard annual report in 2005 Bulgaria’s industrial strategy generally fulfilled the principles of European industrial policy. In that manner it could be stated that the privatization and reformation process had moved forward and Bulgaria had enhanced the business environment, strengthened the banking sector and attracted foreign investments. Nevertheless, with the intention of completing its preparations for EU accession, Bulgaria was demanded to continue to develop an industrial policy involving promotion of R&D and innovation and reinforce economic competitiveness, complete its privatization strategy as well as the reformation of the steel industry. The EU industrial policy, to which Bulgaria was asked to match, was limited to attracting the competitiveness of enterprises in general, promoting an environment conducive to inventiveness and to the creation of SMEs, and to exploiting the industrial potential of innovation, research and technological development. By 2011, Bulgarian industrial policy was entirely in line with the EU industrial policy reform. This was neatly summarized in the National Reform Programme document for 2010-1013 adopted in April 2011 cited by Bartlett, (2011) according to which the government policy in Bulgaria supported R&D and innovations by businesses, increase of the rate of knowledge transfer towards them throughout the development of high-technology parks and technological incubators, centres for transfer of technologies, etc. Non EU Member Countries Representatives Macedonia The current trend of adopting Industrial policy in Macedonia was developed in an attempt to follow the EU horizontal approach, clearly influenced by the EU preaccession process. The industrial policy of Macedonia according to the Ministry of Economy (2009) aims to attract FDI, promote R&D and innovation, promote SME development and entrepreneurship, and develops clusters and associations. The implemented measures are intended to support applied research, development and innovation in industry, encourage knowledge transfer between universities and industry, support industry in employing researchers, motivate transfer of technology, create technological industrial zones, protect intellectual property rights, and develop an integrated innovation policy. The vision of the policy is to encourage the production of higher value-added products and services based on knowledge, innovation and collaboration. ENTRENOVA 10-11, September2015 Kotor, Montenegro Serbia Same as in the case of Macedonia, Serbia is also trying to follow a horizontal industrial policy according to the EU accession requirements. Thus, the industrial policy is focused on creating sustainable industrial growth and development, developing of institutions, improving the investment climate, as well as strengthening the regional and global competitiveness, festering development of entrepreneurship, increasing and restructuring export, reforms of the educational system in line with needs of the economy, active and dynamic cooperation between science and industry, stimulating the process of innovation, developing of the regional industrial centres and regional business infrastructure. The industrial policy adopted in Serbia from 2000-2010 inverted the policy of the previous government which had given large subsidies to enterprises in order to maintain employment. It also involved the privatization and restructuring of the economy, attraction of FDI, creation of a competitive business environment, and the escalation of the entrepreneurial sector. Methodology The methodology employed in this paper is based on empirically gathered data from the site of World Bank Data Base. We analyze several indicators from the period 2000 – 2013. We take the GDP growth as percentage in order to see whether the economy is experiencing growth or decline. Also, we consider as an important factor the population growth, since it can predict the future trends in school enrolment. The primary and tertiary school enrolment rates are found to be crucial for this topic. Also, we consider the FDIs and investments in R&D to see to which degree the countries are institutionalized and whether they follow the EU regulatory postulates. The unemployment rate is also important in this case, especially the unemployment rate of graduate students. Results In the above reports it was stated that EU representative countries and non EU countries are both following EU directives in terms of boosting the economy to grow. However, the statistics say the opposite. In Macedonia, the data presented in the below Table 1 even though the GDP is in upwards trend, still the investments in FDIs and R&D is still positive but declining. Having the population growth declining, it is reasonable to have a decline in the primary school enrolment. However, it is obvious that there is an increase in the tertiary school enrolment ratio. But, with a declining trend of the population growth and a decline in the primary school enrolment, this number will decline through years. Also, it is vital to state that even though the percentage of FDIs is positive still the country has high unemployment rate, of around 30% for the analyzed period. 190 ENTRENOVA 10-11, September2015 Kotor, Montenegro Table 1 Macedonia Source: World Bank Database For Slovenia, data represented in the below Table 2 it is the opposite case. The investments in R&D are increasing over time, as well as the enrolment in the tertiary school. Unlike in the case of Macedonia, in which there is no available data for unemployment rate of graduate students, in Slovenia the percentage is high. Table 2 Slovenia Source: World Bank Database In the case of Serbia data represented in the below Table 3, it is obvious that there is a negative population growth percentage. However, the school enrolment in both primary and tertiary has increased over time. The investments in R&D are also increasing over time. There is no availability of data for the unemployment rate of the graduate students enrolled in the tertiary schools. ENTRENOVA 10-11, September2015 Kotor, Montenegro Table 3 Serbia Source: World Bank Database On the other side, the case of Bulgaria data represented in Table 4 is very similar to Slovenia. Both countries as EU member countries, as following the regulative postulates that the countries have to have institutional developments, in our case, have to have investments in the R&D sector, and tend to invest in education. Table 4 Bulgaria Source: World Bank Database Discussion and conclusion From the results of this study we can state that the higher the institutional development higher the prospects for economic growth. The countries that are EU members are more institutionalized, have lower unemployment rate, higher investments in the R&D but lower FDIs. They seem to manage to follow their created industrial policies, unlike the case of non EU countries, Macedonia and Serbia. The study has several limitations. First, for the case of Macedonia and Serbia we have missing data. Moreover, the study should be based on analyzing more factors, not the selected ones, in order to depict the total degree of institutional development. The selected countries are not very transparent in their data. Having clearly defined rules and regulations, meaning having institutionalized societies, the country can experience prospects for future economic growth. The human capital can have an impact on economic growth only if there is a creation of new job vacancies. By having high enrolment rate in the graduate schools, and having high investments in the R&D and higher degree of attraction of FDIs, the country can experience high economic growth, if the institutions are developed, 192 ENTRENOVA 10-11, September2015 Kotor, Montenegro ceteris paribus. The prospects for further research might include the issue of Brain gain or Brain drain, since it is the usual occurrence in the developing countries. In the case of Macedonia and Serbia as non EU members countries, it could be easily measured the mobility of citizens that emigrated in order to gain better education and experience in the Western countries. References 1. Bartlett, W. (2000) “Industrial policy and industrial restructuring in Slovenia”, Journal of Southern Europe and the Balkans, vol. 2 No. 1, pp. 11-24 2. Bartlett, W., Bukvič, V. (2006) “Knowledge transfer in Slovenia: promoting innovative SMEs through spin-offs, technology parks, clusters and networks”, Economic & Business Review for Central and Eastern Europe 3. Bartlett, W., Čičić, M., Ćulahović, B. (2007), “Institutional issues and knowledge transfer to the business sector in Bosnia And Herzegovina”, Journal of Knowledge Economy and Knowledge Management, Vol. 7 No. 2, pp. 199-224 4. Bartlett, W., Rangelova, R. (1996), “Small firms and new technologies: the case of Bulgaria”, in: R. Oakey (ed.) New Technology-Based Small Firms in the 1990s, Vol. 2, London: Paul Chapman, pp 66-79 5. Dasgupta, P., Stiglitz, J. E. (1977), “Tariffs versus Quotas As Revenue Raising Devices Under Uncertainty,” American Economic Review, Vol. 67 No. 5, pp. 975-981 6. Greenwald, B., Stiglitz, J. E. (2012), “Externalities in Economies with Imperfect Information and Incomplete Markets,” Quarterly Journal of Economics, Vol. 101 No. 2, pp. 229-264. 7. MoE (2009) Industrial Policy of the Republic of Macedonia, 2009-2020, Skopje: Ministry of Economy 8. North, C. D., (1991) “Institutions”, The Journal of Economic Perspectives, Vol. 5 No. 1, pp. 97-112 9. Palčič, I., Vadnjal, J., Lalić, B. (2010) “Industrial clusters in Slovenia – a success story?”, Acta Tehnica Corviensis – Bulletin of Engineering, Vol. 4 No. 3, pp. 143-150 10. Rashid, H. (2012), “Foreign Banks, Competition for Deposits and Terms and Availability of Credit in Developing Countries” 11. Šuštar, B. (2004) “Industrial structure and international competitiveness of post-communist Slovenia”, Post-Communist Economies, Vol. 16 No. 1, pp. 74-88. 12. Stiglitz, J. E. (2008), “Capital Flows, Financial Market Stability, and Monetary Policy,” in Monetary Policy under Uncertainty, Proceedings of the 2007 Banco Central de la República Argentina Money and Banking Seminar, 2008, pp. 123-134. About the authors Prof. Dr. Miroljub Shularov is a full professor at South East European University, Tetovo Macedonia. He finished his Bachelor of Economics and Master of Arts in Urban Economy at The University St. Cyril and Methodius, in Skopje Macedonia. He finished his PhD of Economy from 1983 till 1987 at the University of St. Cyril and Methodius and his thesis was “Urban rent as a factor of spatial economy in Yugoslavia". He has various publications available on the site http://www.seeu.edu.mk/en/~m.shukarov. The author can be contacted at m.shuk[email protected]du.mk Kristina Maric, PhD Candidate at South East European University finished her Bachelor of Business and Economics and Master of Science in Banking and Finance at University of Sheffield, UK. She started her PhD at South East European University at December, 2013. The first publication was on topic Institutional development as economic growth driving factor – tax system influence in Macedonia, Bulgaria and Romania, which was published by the Innovation Institute in the Global Business Conference in Tignes, France, February 2015. The author can be contacted at [email protected]