Innovations during the war: is it on time?

The Institute for Economic Research and Political studies of Ukraine, at the request of the Ukrainian Cluster Alliance, conducted research on the state of innovation among manufacturing enterprises. In April-May 2023, about 500 enterprises, mainly from industrial sectors, were interviewed. And on May 22, a discussion was held regarding these results. This publication summarizes the main information and conclusions of these events.

Survey results

Yevhen Angel, a senior researcher at the Institute, presented the research data. From the key facts of the survey:

• The “innovative portrait” of our enterprises looks as follows. 18% of enterprises did not have innovative activities either before the war or during the war. As the size of the enterprise increases, so does the probability of innovative activity . Most often, innovative activity occurs in the chemical industry, metallurgy and mechanical engineering. And the more internationalized a company is, the more likely it is to be innovative.
• If we interpret innovations in the sense of presence of the latest or old technologies, this is one of the least relevant issues for manufacturers today. In the first places among their needs for growth of production are completely different factors: instability of the situation, a sharp drop in demand, an unfavorable regulatory climate.
• There is an interesting statistic in the presentation that crisis situations have always reduced attention to innovation (a relative exception was only during COVID-19). Accordingly, even now 77% of respondents say that innovative activity is not relevant at all, or only in certain cases. The remaining 23% of those for whom innovation remains relevant are, as a rule, large enterprises and exporters. Obviously, they are among the 19% who increased spending on innovative activities during the war. This is the only positive signal from the survey.
• However, the situation is different among large enterprises – if innovations are relevant for metallurgists, machine builders and chemists, then everything is sad in the construction industry.
• For 42% of the respondents, the reasons for reducing the costs of innovation are purely financial: the prices of raw materials have increased significantly, logistics costs have increased, and against the background of a significant drop in demand, it is necessary to save on something. Probably, innovation is not the only article where companies save money.
• Among the measures that can stimulate innovation: long-term sectoral development programs, fiscal incentives and improved formats of communication with innovators (and we know very well that all this was practically absent in the state and does not exist).

Presentation by Yevhen Angel:

Theses for discussion from UCA

Oleksandr Yurchak, who presented UCA positions, added several theses that integrate this picture into a wider panorama of innovative development, or, more precisely, stagnation of the last 5-7 years.

• “During the war, there is a very small room for innovation, and the very concept of “development” is in question” – the survey data eloquently illustrate this thesis. It is obvious that the concepts of “survival” and “development” are, if not antonyms, then definitely not identical, and the latter, including innovative development, require appropriate conditions. The current situation in Ukraine is not at all conducive to development of innovations for obvious reasons. Another question is how key actors understand this challenge and how they respond to it.
• From the point of view of APPAU and UCA, the situation with a drop in demand for innovative developments was completely predictable. At the beginning of the war we saw a dramatic drop in demand in most markets, and during the year the situation remained practically unchanged. The second signal was the very low activity of SMEs participating in UCA clusters in our campaign “Innovations meet clusters” in August 2022. Actually, that is why we positioned our EIF program (Export-Internationalization-Fundrasing)  and innovation grants support as tools to “rescue” innovative SMEs and startups. Because if the market cannot buy their products, then at least for a while you can survive on grants.
• As for other actors of innovative ecosystems, primarily from the State, we observe a strong inertia of processes and a certain lack of understanding of what is happening. Any crisis can be responded to with regulatory incentives, but it is important to understand the priorities of these interventions. Digital innovation in industry is rather associated with the notion of Industry 4.0. Priority #1 here in the last 5 years was not about the presence of startups or developers, not about accessibility to technologies, but about stimulating demand among End Users, enterprises from Manufacturing, Energy and Infrastructure. After all, we have always had enough developers and integrators of various categories. APPAU has presented its positions on this in numerous articles, analytical reports, concepts of new strategies, etc. Proposals for NES-2030 and benchmarking analysis of regulatory incentives in Industry 4.0 should be considered last ones. We did not see an understanding of these positions from government officials either before the war or during the war. Instead, the populist hype around startups continues, although their fate or contribution to the real solution of economic challenges in any of the production sectors remains extremely low. 
• Not only government officials, but also a large part of policy-makers from academia and consultancy ignore the work of Industry4Ukraine experts (today more represented in UCA), who argued for the principle of selectivity (derived from UNIDO works) in strategic approaches and the need to focus on key elements of innovative ecosystems and relevant action programs, such as:
  • key institutions: State agency for development of Industry 4.0 (5.0 is required today), network of Digital Innovation Hubs (DIHs), network of innovation clusters, network of independent Industry 4.0 experts.
  • key instruments: this is about industry incubators and accelerators, upskilling – reskilling programs for SMEs, export-internationalization programs, programs for stimulating customer demand through regular meetings with developers in the format of so-called technology and innovation days, brokerage events, etc.
• Positive signals are the growing interest in MilTech and the launch of relevant accelerators, the growing attention of donors to the issue of innovation among SMEs, the shift in the Ministry of Education and Sciense, etc. At the same time, without proper coordination at the State level and inclusion of the instruments and institutions mentioned above, these changes will not have the proper effect.

Summarizing this discussion with the answer to the posed question “is it on time?”, we can say, rather “no” – most manufacturing enterprises are definitely not into innovation, no matter how bitter it is to admit this to the representatives of innovative ecosystems. But even the 20% that the survey says even increased investment in innovation during the war, is quite a large number in terms of economy. These are thousands of enterprises and, therefore, we cannot say that there is no one to work with in Ukraine. On the contrary, it is about changing approaches and about much stronger interaction and consolidation of representatives of innovative ecosystems, and about their joint priorities of actions. Where the focus should be on maintaining or increasing demand among end customers, stimulating it through regulatory instruments, and not exclusively on startups, as is the case today.

In general, the participants of the discussion demonstrated a sufficient consensus around the above theses, and similar unity of views has long existed among expert communities of industrial sectors. The only question is how to convey these theses to government organizations, as well as donors – because most of the decisions and tools of influence are now in their hands.

One of the possible methods of influencing stakeholders, which UCA will begin to systematically apply from 2022, or, more precisely, to continue this tradition from Industry4Ukraine, is the regular issue of Position paper. The topic of such a document is obvious – it should be something like “Innovation in Wartime: Challenges and Prospects”. And it is clear that the results of the above study and the expert discussion held on May 22 are a good starting point for such a document.

UCA Executive Direction sincerely thanks the partners from the Institute for Economic Research and Polical Studies for the conducted research and organized discussion. We invite innovation development experts to join the Innovation Committee and actively participate in its work.