Business innovation: Nothing ventured, nothing gained

By bne IntelliNews May 19, 2015

Guy Edmunds in Tbilisi -


The European Bank for Reconstruction and Development’s most recent economic outlook makes dismal reading for countries in the Caucasus and Central Asia. Deepening recessions in Russia and Ukraine will lead the Belarusian and Armenian economies to contract in 2015, the bank says, while Kazakhstan will only grow by 1.5% and Georgia by 2.3% – less than previously thought. After years of encouraging catch-up growth before the 2008 financial crisis, the danger is that some countries become “stuck in transition” – highlighting the need for new economic drivers.

The divergence between two ex-Soviet countries, Georgia and Estonia, illustrates the problem. According to the the World Economic Forum’s Global Competitiveness Report in 2014, which compares 144 countries worldwide, Georgia’s GDP per capita is $3,604; Estonia’s is $19,031. Georgia’s higher education and training comes in 92nd place out of 144 countries; Estonia’s is 20th. In terms of financial market development, Georgia lies in 76th place, while Estonia is in 29th. Georgia’s worst rankings lies in business sophistication, where it comes in 113th place, and innovation, where it languishes in 121st place.

To make Georgia more competitive, Nodar Khaduri, the finance minister, highlights the need to improve the country’s human resources, strengthen vocational education, and increase access to finance. Focus on macro-level factors is vital, the EBRD concludes, but much can also be done to support innovation at the level of individual firms. Here, laggards such as Georgia have an advantage: rather than reinvent the wheel, they can simply need to adopt and adapt innovations from elsewhere.

Go forth and innovate

Innovation can consist of many things, the EBRD’s Transition Report 2014 points out: new products and processes, or novel marketing and management techniques. Such changes can increase low productivity rates, which are a particular hindrance to growth. In general, emerging market firms are less productive than those in richer countries, but that masks significant variation within emerging markets. The challenge is for less productive firms to follow the example of the most productive ones.

Experience to date in emerging markets suggests a number of common themes. International competition forces exporters to become more innovative than non-exporters. Moreover, although most innovation takes place in high-tech sectors, it can have much greater impact in low-tech sectors. Here, governments can play an active role in persuading companies to innovate, as the firms that are most hostile to innovation are likely to be those who would most benefit from it.

That highlights the importance of good management. Foreign-owned companies have an advantage, since foreign owners are quicker to shake things up and improve the ways firms are managed. Attracting multinational corporations is particularly important, says Beata Javorcik, an economist at Oxford University, as multinationals spend huge amounts on research and development, bringing knowledge into emerging markets. And that knowledge can spill over to local suppliers, who are forced to step up their game to join global supply chains.

George Chirakadze, President of UGT, a Georgian technology company, agrees. The lack of an educated workforce is a major problem, he points out, which requires significant investment. Moreover, there is a huge gap in Georgia between companies: a few large companies produce a big chunk of the country’s GDP, while others lag far behind. But since those Georgian companies have limited budgets to encourage innovation, foreign companies can play a critical role in driving things forward.

Of course, emerging markets can have advantages in some sectors. For example, Georgian banks have very modern technology systems precisely because they started from scratch, and so suffered none of the “legacy issues” that older banks encounter. Banks constitute one of Georgia’s strongest sectors.

Yet not all legacies from the past are bad. Armenia is a good example of a country that has built on its legacy and adapted it to modern times – with support from abroad. The collapse of the Soviet Union spelt the end of its flourishing state information and communications technology (ICT) industry, but an injection of cash, up-to-date know-how and confidence from US software companies (mainly owned by diaspora Armenians) brought the sector back on to strong footing. Today, the IT sector in Armenia is thriving.

Innovation is not guaranteed to work. Instead, Albert Bravo-Biosca, an economist at NESTA, an innovation charity based in the UK, recommends trial and error. One way of exploring what works and what doesn’t is through randomised control trials. Although these are widely used in development economics and the pharmaceutical industry, they tend to be much less widely used by companies, particularly in emerging markets.

Embracing innovation also requires redefining attitudes to risk and failure. Here, the education system can play a role in terms of increasing financial literacy. And firms can adjust their incentives to encourage calculated risk-taking – within reason. As the old adage puts it, you have to speculate to accumulate.

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.