[Focus Article] – Funding and Supporting Innovation in the Western Balkans

Funding and Supporting Innovation in the Western Balkans

The capacity to innovate, adjust and adapt to an ever moving and more competitive setting is more and more vitalto guarantee a sustainable development in businesses. In such a context, the Western Balkans Six are in a catching-up and modernisation process to create ecosystems encouraging innovation, research, development and entrepreneurship. Corresponding institutions and programmes are being established in the region while EU support is also at disposal.  Across all fields, innovation is the key engine for growth while know-how and financial resources represent the fuel to boost the Western Balkans’ technological development and start-ups through research and innovation activities facing regional challenges, such as the impact of the COVID-19 pandemic. By combining financing and knowledge, the Western Balkans stand better chances to create innovative solutions and to foster economic development creating a high-skill labour market and fostering brain-gain.

The Western Balkans’ innovation potential

The emerging potential of the Western Balkans based on innovative ideas and creativity can be translated into new business opportunities and growth, when overcoming the present economic and administrative challenges. Data from the Global Competitiveness Report indicates that the Western Balkans have progressed and reduced the gap separating them from the European Union on many productivity drivers; they are one of the areas in Europe with the best growth prospects for the future.

The WB6 are being featured in the European Innovation Scoreboard (EIS) providing a comparative assessment of research and innovation performance in Europe, though showing a significant innovation divide from the EU. Bosnia and Herzegovina, Montenegro, North Macedonia and Serbia are classified emerging innovators thanks to specific strengths of their innovation ecosystems – local innovators and firm investments, employment impacts, use of information technologies, and attractive research systems (see the 2021 EIS study).

The development of a robust private sector is essential for socio-economic development and regional integration, and for improvement of the region’s competitiveness and job creation. Up to 99% of all companies across the Western Balkans are small or medium-sized enterprises (SMEs); they generate around 65% of the total business sector value added and account for 73% of the total business sector employment.  Supporting SMEs is thus a promising way to fostering socio-economic growth, innovation, social integration and job creation. Support to the private sector and competitiveness have been identified in the EU’s Economic and Investment Plan for the Western Balkans as flagships1 and require, in particular, increased investments in SMEs and in their capacity to innovate, scale-up and grow. The Western Balkans Investment Framework (WBIF), including its private sector platform Western Balkans Enterprise Development and Innovation Facility (WB EDIF), and the Western Balkans Guarantee Facility, gathering Western Balkans partners, bilateral donors and international financial institutions, will be the main vehicles to ensure swift deployment of the investment package.

SMEs in the Western Balkans do have indeed a strong propensity to innovate. Innovation policy has gained prominence in the region in the last years. Serbia and North Macedonia have established holistic innovation strategies, and with the support of the World Bank, innovation funds have been created in North Macedonia, Serbia and Montenegro. Kosovo has taken steps towards drafting an innovation law, and Albania is strengthening academia-business cooperation. The WB6 have piloted and implemented successful programmes but the region is too fragmented to have the necessary scale for crowding in additional investment, particularly from outside the region.

The first venture capital fund in the region – South Central Ventures, established under the Enterprise Innovation Fund – has realised eight portfolio investments in the region. Incubator infrastructure and technology transfer efforts have expanded across the WB6. Bosnia and Herzegovina has established several technology parks, some of them founded by private investors. Outreach activities to link with the diaspora are emerging all over the region with Montenegro and Albania having established dedicated programmes and platforms.

The right mix of funding instruments over the innovation-investment cycle

It’s a matter of fact that a pulsating SMEs sector is a vital ingredient for a healthy market economy. One of the biggest constraints for businesses and firms located in the Western Balkans is inadequate access to finance, an obstacle that has to be tackled by the authorities through specific policy measures.

Several programmes and instruments for funding innovative activities exist at EU level. Classical financing programmes address the constraint of inadequate access to finance by enabling access to bank loans with improved conditions, to riskier SME categories, as well as to targeted equity investment and support in order to foster the launch and the development of high-growth and innovative organisations. However, finance alone cannot meet the challenges that SMEs are facing; they also need non-financial support, such as guidance and advice on how to create and develop their business. Selected network programmes can be of great help in activating trade links, especially for the SMEs in the WB region. Both funding needs and funding availability are closely related to the stage of development of innovation projects.

Different financing instruments for innovation can be exploited, depending on the specific phase of the innovation cycle. In general, direct funding (by grants) is to be preferred when close to the research phase. This is due to the “public good” character of research, namely its outcomes are non-excludable. Even if intellectual property rights are secured, some elements of this “public good” character are still in place. 

Foundations or start-ups are usually financed from a combination of own resources, grants (pre-seed phase) and public or private venture capital and business angels. Usually, bank loans are not available for them. In the very first stage (“seed”) in the start-up life cycle, the costs of setting up the firm, the costs of R&D and/or innovation activities necessary to develop or refine the business idea (e.g., proof of concept, prototype development, product refinement, etc.) lead to rather high operating costs. These costs are not yet matched by corresponding market revenues. At this stage, start-ups face a great risk of running out of funds (“burning cash”), hence the notion of the “valley of death,” which indicates that many innovative start-ups eventually fail right there. Since these start-ups do not have a track-record of business and they usually cannot offer securities (e.g., machines, buildings etc.) banks are not eager to lend them loans.

In the later phases of the innovation cycle, which correspond more to “classic” investments, loans or bank guarantees are a common and effective instrument to finance respective activities.

For more information on many of the programs for funding or for suppoting innovative activities in the Balkans, please visi tour dedicated section here.

1 Flagship 9 – Investing in the competitiveness of the private sector, and Flagship 10 – Youth guarantee

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