Knowledge Creation in Central and Eastern Europe: The Role of Sectoral Composition

Abstract

Developing countries allocate significantly fewer resources to the development of new technologies; they usually concentrate their production on low-cost or labor-intensive production. These low-tech industries are, by definition, the consumers of new technologies and do not need to allocate resources to research and development. In this chapter, authors seek to show the importance of the role of sectoral decomposition in knowledge creation across countries with different levels of development. Microdata of fourth European community innovation surveys (CIS 4) from 16 European countries, consisting of a total of 104,717 firms was used. Results indicate that the role of sectoral decomposition of the lower level of knowledge creation in Central and East European countries is relatively modest. The structure of industry explains only 15% of the lag compared with European average expenditure on R&D, and 20% of the lag compared with average expenditure on innovation. Estimation of firm-level knowledge production function shows that innovation varies across firms the most due to the country-specific factors and industry-specific factors play only a minor role.