Socio–Economic Barriers of The Research and Development Sector in Croatia1

Zoran Aralica, The Institute of Economics, Zagreb zaralica@eizg.hr 1. Introduction Research and development (R&D) as well as other technological activities characterize a great heterogeneity and the diversity which appear within each category of technology activity. On the national level, Gross Expenditure on R&D (GERD) includes Government Expenditure on R&D (GovERD), Business Expenditure on R&D (BERD) and Human Expenditure on R&D (HERD) where each of these categories has its own purpose. BERD are oriented toward improvement of the business results, whereas R&D activities in the government and/or the education sector oriented to achievement of broader social objectives such as education of population in country. The complexity of the technologies and its activities make difficult social-economic evaluation of the impacts, since the evaluation needs to include the cost and benefits analysis on private and public level. Traditionally, the importance of the technologies had been analysed via production function where technological progress was captured by residual part of the production function i.e. total factor productivity. Until recently, that was a dominant type of the analysis. However within this approach any policy conceptualization was difficult, result of small number of the information which is possible extract from the production function. A new evolutionary approach has become more accepted especially in the EU policy (e.g. European Innovation Scoreboard indicators). This approach describes the knowledge creation and knowledge diffusion that include institutions and the enterprises in the national economy. In comparison to former approach this approach provides more information that describes the R&D sector. Main disadvantage of former approach that it provides information relating to technology, whereas socio-economic context related to the technological activities are neglected and that hampers impact assessment that describes the use of the technology and their activities. To be precise, the main characteristics of the technologies are their interconnectedness with environment, where creation of any type of technological activities without any use in the socio-economic practice through the market and/or non market mechanism has little importance. The Croatia's approach to the EU imposes the new priorities to the national R&D sector, which include dramatic increase of R&D investments to the business sector i.e. these investments should reach two thirds of total investments in R&D. It automatically creates the limitations to the R&D system, because it imposes orientation of the R&D sector towards commercialization of the R&D activities subordinating the other social function of the system
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The article will be published in publication 'Inovacijska kultura i tehnologijski razvoj' edited by prof. Juraj Božičević, for a few months, so I would like to appreciate to prof. Božičević for giving me a permission to publicate on the website.

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such as need to education2 and includes education of future entrepreneurs responsible for production of innovative products and/or services. Fostering a new approach means better knowledge utilization which includes improving macroeconomic variables such as export competitiveness, employment and gross domestic product. Hence, the increase of effectiveness of the R&D sector necessarily result to achieving of broader socio-economic objectives connected with increase of competitiveness, increase of employment as well as increase of living standards, and it requires existence of an adequate financial system which could sustain this framework. Therefore, this explanatory paper is structured as follows. The analysis of the R&D sector which includes institutions from public sector and the participators from the business sector will be provided in the next section, as well as the main obstacles (barriers) related to knowledge creation and diffusion. Third section includes socio-economic framework analysis and its connectedness with the R&D sector development. Discussion about the importance of the financial sector and its influence on the socio-economic framework including the technologies is broken down in fourth section. Concluding remarks will be provided in the last section. 2. R&D sector and the barriers of its development Engel's law gives a theoretical foundation to the use of technology in society. This approach implies higher increase of income means higher proportion of industrial product consumption in economy. It implies the increase of industrial production parallel with improving use of the technologies which results to increase of investments into the technologies. Various technological activities innovation activities, inventive activities and R&D activities characterize a strong heterogeneity. Moreover, the rise of heterogeneity has been parallel with increase of importance of the technological activities as a whole, i.e. more intensive use of one type of technological activity effects on increase in use of the other types of technological activities. Hereby the use of the technology should be tightly connected with the positive results valorised by individual and/or company. So, use of technology and its activities within social economic context could be explained by theories of motivations3 where these activities gives a reliable inputs for explanation of the innovation activities connecting human needs and human action, explained by Theory of needs (see Maslow 1943, Murray 1938, Alderfer 1969) as well as explaining connection between human actions and desirable results of these actions where theoretical foundation are Theory of external effects (e.g. Herzberg 1959); Theory of expected results (see Porter i Lawler 1970, Laurie 1989); and Theory X and Theory Y (see Mac Gregor, 1960). Heterogeneity4 of R&D activities affect on systematization of the R&D sector. Within the R&D sector, there are institutions responsible for planning and implementing the programmes related to R&D as well as the institutions and the participators from the business sectors responsible for commercialization of these activities or conducting the social functions such as education, as well as providing data of the public interests (e.g. Bureau for Statistics). As a
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Introduction of the tuition fee for students within the University is justified by the insufficient coverage of the costs by the Ministry of Science Education and Sports to the Universities. 3 Marušić (2006) systematized motivation theories as follows Theory of needs, Theory of external effects, Theory of expected results and Theory X and Theory Y. For more information please see Marušić (2006) 4 Heterogeneity has a logic if it is known that any knowledge created by an individual not be subject to exchange on the market and not necessarily aimed at creating income.

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concept it is tightly connected with National innovation system (NIS)5 where the difference relates to emphasis of R&D activities in case of R&D sector6. The socio-economic system responsible for planning, implementation of the R&D activities, consist of three levels. First level includes the highest governmental bodies in the country responsible for R&D activities planning. Second level includes the Ministries and agencies responsible for planning and implementation science and research programmes7. Third level includes heterogonous group of the institutions and the firms which conduct R&D activities, investing within company and as a result of that selling innovative product and services on the markets or providing crucial social function where education is dominant public service. Activities within the system are result of the existence of the programmes related to stimulating and financing earlier set up objectives. So the R&D policy should be oriented towards diminishing of socio economic weakness perceived by decision makers as barriers. Therefore, in the achievement of social objectives are important mechanism aimed at evaluating the success of those objectives (v. Švarc, J., Lažnjak, J., 2008). International dimension of the analysis makes possible the comparison of Croatia's R&D system with the systems of the similar countries, especially Central Eastern European (CEE) countries8 as well as Southeastern European (SEE) countries9. Therefore, a new dimension of the analysis has been achieved where interdependence between the R&D systems related variables and macroeconomic variables (where the export competitiveness variable is the most interesting) could be analysed. One of the most effective ways of monitoring overall the innovation activities is summary innovation index, developed by the EC (see EC 2008b). The index depicts knowledge creation, diffusion and economic effects results of use of the technology in country. It includes the categories enablers, firm activities and output10. Regarding the next table which depicts summary innovation index the only countries with more critical values than Croatia are Bulgaria, Lithuania, Romania and Turkey.

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National innovation system (NIS) entails actors, relationships and interactions among actors that influence creation, diffusion, utilisation and commercialisation of knowledge within a country – with the emphasis on research institutions, business sector and government (cf. Kuhlmann, 2001, Lundvall, 2005) 6 In case of National Innovation System there is no emphasis on particular type of the technological activity. 7 In Croatia, the Ministry of Science Education and Sport and the Ministry of Economy are main institutions responsible for planning and implementation of the programmes related to research and development. 8 Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia and Hungary consist of group of Central and Eastern European countries. 9 Croatia, Bosnia, Kosovo, Montenegro, Serbia, Albania, Macedonia, Bulgaria, Romania, Moldova and Greece belong to group of Southern East European countries. 10 First group Enablers consists of two complex indicators Human Resources and Finance and Support; The second group consists of three complex indicators Firm Investments, Linkage & Entrepreunership and Throughoutput; Third group of indicators named Output include two complex indicators Innovators and Economic effects (PRO INNO Europe 2009: 7).

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Table 1: Summary Innovation Index
0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 T R RO LV BG HR PL SK PT EL HU IT CZ EU AT DE SE

Source: EIS (2008)

All these country including Croatia belong to the group of countries with very low innovation performance values named catching up countries11 (EIS, 2008:7)12. In comparison to other countries Croatia achieves the greatest results in category the innovation results, more precisely within index named innovators - composite index explains the number of firms that have introduced the innovation within their enterprises. On the other side, the lowest results Croatia shows in composite index throughputs enhances the results of inventive activities (patents, trademarks, design and including data from technological payment balance) 13. The group memberships are stable, but there are countries that moved to upper groups, Cyprus, Malta, Latvia and Romania (EIS 2008: 10). Accepting the Lisbon Agenda14, where obligations in the field of the R&D sector are primarily focused towards increase the ratio of the business sector investments into R&D compare to other part of the R&D sector (without including other parameters such as level of GDP in case of the small countries like Croatia) produce hampering effects on the R&D sector development. This could be explained by the fact that national innovation system differs across the countries where the largest differences between the countries appear in knowledge creation mechanism (e.g. measured by number of EPO patents). If we accept Amable's (2000) ‘institutional complementarity’ argument where national innovation system and corporate governance are functionally interrelated15, this implies in developing country such as Croatia shortcomings in terms of competitiveness (cf. Račić, Aralica, 2006). Therefore the R&D system development in these countries should be oriented towards increasing number of innovative product and services, primarily through the strengthening innovative infrastructure in the national economy. As a result, barriers in the R&D sector development are as follows:
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The group includes other similar countries in SEE and CEE and these are Bulgaria, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Turkey. 12 Other group of countries named as follows Innovation leaders, Innovation followers and Moderate Innovator. 13 These are Turkey, Romania and Lithuania 14 The action plan aiming at make the EU the most dynamic and most competitive knowledge-based economy in the world capable for sustainable economic development with higher levels of employment, sustainable economic growth, greater social cohesion and the existence of environmental concerns. 15 Their co-evolution depend on environmental demands and internal structures and relationships.

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 Low level of inventive activities,  Low complexity of innovation activities  Low level of employees engaged in R&D in total number of employees compare to the EU 27 average Despite of the fact that Croatia belongs to the Eastern European countries with the highest number of EPO patents application behind Slovenia and Czech Republic (during the period 2000-2006), Croatia (7.1)16 is lagging behind the EU 27 average (114.91), in 2006. Moreover, Croatia has noticeable lower level of innovation cooperation (10.88%)17 in the period 2004 – 2006, compare to the EU 27 average (25.5%) in the period 2002-2004 (EUROSTAT). In addition, modest results appear within the category share of employees in R&D activities in total number of employees, where very low results appear in the business sector; In 2006, Croatia (0.13) 18 compare to the EU 27 average (0.59). The Barriers in the R&D sector development could be explained by importance of these activities within the socio-economic system. So, if knowledge as a widely defined concept does not present motivating force in society, it is reasonable expect that R&D sector has sporadic role in economy. As a consequence the barriers imply the existence of low level of competitiveness in the national economy (more explanation in next section). The analysis of the mechanism (cf. EC 2008a, cf. EC 2008b) related to the R&D sector development in Croatia warn about insufficient level of technological activities within the national economy. Therefore more effective planning system and implementing mechanism as well as evaluation of financing (especially public funds expenditure) are required. Low level of the Government commitment towards achievement of the social objectives specified within the strategic documents related to science and research sector19 could be proved by the facts. Share of R&D investments in GDP had been volatile during the period 2000-2007, even more share of R&D in GDP were declined in 2005 (0.87) and in 2006 (0.76) (year on year comparisons), primarily as a result of non-predictable government spending, where the Government commitment to fulfill Lisbon Agenda was neglected despite the fact that Lisbon Agenda was a crucial input of each strategic document in Croatia (please see footnote 19). Moreover, current the financial crisis (in the national economy escalating primary in constant decline of GDP and increase of unemployment20) definitely hamper functionalizing the R&D sector. This scenario leads to further declining of the R&D investments in all sectors making urgent need for the evaluation of the R&D system, especially these parts relate to expenditure of public financial resources.

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The values are relative and relate to one million inhabitants. Values for Croatia are author's calculation. 18 Percentage share of researchers in total number of employees 19 The Science and Technology Policy of the Republic of Croatia 2006-2010; The Action plan for the period 2007-2010 - Science and Technology Policy of the Republic of Croatia; The Action plan for Fostering Investments in Science and Research are the main documents in the last five years regarding R&D sector. 20 In the financial sector manifests primarily in reduction of international short – term debts and reduction of the bank sector in financing private consumption

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3. Socio economic Framework of the Analysis of Technology The analysis of the technology and its activities are not possible divide from the production and consumpution in country, therefore the analysis of the productivity, comaparative advantage and the competitiveness has crucial importance for understanding the technology and its activities, i.e. answering on the question how society use the technology? Therefore enhancing the analysis of technology and its activities within socio-economic process enable understanding the importance of the technology which has for the society. These statements are not in contradiction with theoretical foundation of technology, based on exogenous growth model (where technology is exogenous variable) and endogenous growth model (where technology is endogenous variable). Moreover, the analysis of the innovation sources show that the majority of the new knowledge i.e. invention and innovation are result of external knowledge, i.e. not a result of own R&D, and more concerns to small and medium enterprises in comparison to large enterprises21. That is an avenue for strengthening social innovation 22 as well as importance of the research infrastructure and research technology organization which could produce these innovations, where interaction between institutions and the companies within the R&D sector result to positive and negative impacts that may take years. In the last ten years in Croatia the export competitiveness had been declining measured by various indicators comparative advantages and competitive advantages (see Aralica 2009, EIZ 200923, Jošić, 2008). The decline had been parallel with the trade liberalization and financial liberalization processes as well as the increase of total debt in Croatia. Trade liberalization between Croatia and the EU countries as well as between Croatia and CEFTA countries 24 has intensively started since 2000. That was primary results of the EU countries export increase to Croatia. Consequently, the trade and the financial liberalizations result to increase of the investments as well as the increase of importance of innovation activities primarily oriented to domestic market25. The investments are tightly connected with the increase of the knowledge transfer result of increase of import (primarily through equipment acquisition) as well as result of increase of foreign direct investments in smaller extent compare to import, where investments are connected with the production within lower value added sectors (cf. Fagerberg, Srholec, 2007). So, Croatia's approach to the EU has not let to the increase of its export competitiveness compare to the EU countries. These findings could be explain by difference in quality of technological activities (primarily innovation) in the national economies and these facts are frequently neglected within the evaluation by the relative relations (e.g. percentage) where the analysis of innovation activities often come down to relative share of innovative enterprise in total number of enterprises without research what is a size of the national income that innovative activities produce in the national economy? 26
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This statement is more appropriate for a developing country relative to a develop country. Howaldt and Schwartz (2010: 21) define social innovation as a new combination and/or new configuration of social practices in certain areas of action or social contexts prompted by certain actors or constellations of actors in an intentional targeted manner with the goal of better satisfying or answering needs and problems than is possible on the basis of established practices. 23 PhD Goran Buturac is responsible for part of a project study EIZ (2009) related to the competitiveness. So, all citations to reference EIZ (2009) related to his contribution within the project study. 24 CEFTA- Central European Free Trade Agreement in that time included Bulgaria, Czech, Hungary, Poland, Romania, Slovakia and Slovenia. Croatia joined to CEFTA in the year 2002. 25 Hereby the differences in competitiveness occurred in parallel with differences in the levels of innovation activities, Croatia belongs to the group of country with the lowest innovation activities results in contrast to the main trade partners Austria, Germany and Slovenia. These countries have better innovation performance results. 26 Normally the small number of companies participating in innovation activities, on average produced a small number of innovative products and these companies earn less money. Therefore, one of the main objectives of
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The qualitative differences of innovation processes between countries shapes the innovative capacity of the society, where society with low share of engaged human potential in creation of the new knowledge parallel with dominant production of products with low value added could expect the existence of low innovation capacity within the society. In Croatia, competitiveness27 was analyzed using comparative analysis, country's competitive analysis in comparison to other countries where the analysis was conducted within the whole economy (see EIZ, 2009; Jošić 2008). Although, researching Croatia's competitive advantage Aralica (2009) explored the relationship between exports and imports between Croatia and the selected countries. Croatia has achieved the competitiveness in food production and raw material production, parallel with declining share of industrial products in total export (Jošić, 2008). But the products those are with significant comparative advantage in the manufacturing are under-represented in export (EIZ, 2009: 365). This could be explained by the fact the national companies domestic market is more important compare to foreign markets. Croatia's international trade characterizes high level of inter-industry exchange relative to intra-industry exchange, and this implies low level of inclusion of Croatia's companies within MNC value added chain i.e. foreign investments are more presented within service sector in comparison to manufacturing. Within the structure of intra-industry exchange of manufacturing horizontal and vertical exchange are dominant parallel with a low relative unit value of exports and imports (RUV<1.15) (EIZ, 2009: 372). However, using the metodology of product distribution according to technological complexity (Lall, 2001) Aralica (2009) found that in Croatia, the highest number of export competitive advantage on international individual market appear within high tech products (measured by Lall (2001) methodology that include pharmaceutical products and electronic products). But these positive cases are not enough for creating competitive advantages on the national level, since the largest part of Croatia's international trade are in technological non-intensive products, importance of technology (especially high technology) are not sufficient on creating the export competitiveness. This could be explained by the fact there are enterprises in particular industry (pharmacy) which succesfully export these products, more than Croatia imports from particular countries i.e. CEE countries, however the number of successful companies are small28 and these companies could not increase competitiveness in the national economy. So the analysis shows that the problem of barriers and low level of knowledge demand connected with low level of competitiveness and should be analysed in broader socioeconomic context. In Croatia, lack of development vision on the national level appear in combination with industrial programmes primarily oriented towards privatization and financial reconstruction. Moreover, in Croatia's economy are dominant sectors like Trade (it share was 10.9% in GDP in 2007) as well as Real Estates (it share was 10.5% in GDP in 2007). At the same time these sectors are not depend on investing into own knowledge in large extent. Moreover, these figures downsize the importance of inventive and innovative activities in the national economy. Within the international trade it makes focus on nontechnological products. However there are economic activities with important proportion within GDP, parallel with large investments in R&D. In 2005, the share of Construction in
the development of entrepreneurship should be an increase in the number of innovative companies. 27 The concept of competitiveness (which indicates an increase and the increased use of knowledge) has four sources: a) the price at which goods are produced, b) the demand for goods and services either in domestic and / or foreign markets, c) knowledge and technological capability that has the company and d) absorption capacity to conduct innovative activities (Fagerberg, Srholec, Knell 2007). 28 According to national classification (NACE) data pharmaceutical sector in Croatia includes up to ten companies in the period of the analysis in 2009. So, these companies created the Croatia's export competitiveness on the selected markets in the period of the analysis.

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GDP was 6.1%; R&D investments were 3.6% of BERD. At the same time Manufacturing share was 15.9% of GDP; with R&D investments representing 40.4% of BERD (EC 2009: 19). So, investements into R&D activities are tightly connected with the production where innovation activities require appropriate choice of resources (tangible material resources and related to human resources). Moreover, the level of R&D activities are primarily result of structure of the national economy which in the same time determinate knowledge demand, connected with the use of technology and its activities. Low level of different technological indicators (e.g. low level of inventive activities, low level of business expenditure on research development, low level of share of R&D employees in total number of employees) means low export competitiveness frequently connected with dominant role of consumption in GDP on the national level. So the increase of the competitiveness have to result to increase of social capacity in country, especially these capacities related to knowledge creation and knowledge implementation, where Korea, Taiwan and Singapore are good examples of this policy apporach (cf. Fagerberg, Srholec, Verspagen 2009: 58). As a consequence of importance of social capacity concept, competitive advantages become superior compare to the comparative advantage. That is a result of the fact, that the competitive advantages includes institutional framework analysis, which emphasis the importance of social innovations where broader number of participators are involved in comparison to innovation within the companies. Currently, on the global level the concept of planning and creating of the innovation systems show better results in comparison to the model of the knowledge management based on the market principle (hands off) proposed by IMF and World Bank (cf. Fagerberg, Srholec, Verspagen, 2009: 59). It seems that the key element of the future development are sufficient number of the companies responsible for production of innovative products, where on the first place comes the innovative capacity of the companies which could produce innovative products and services for the international markets. 3.1. Financial and Real Sector Interaction and Influence on Financing of Technology Interconnection between financial sector and the technology are result of interaction between financial and real sector where role of the technology depends on characteristics of economic activities. Financial sector strengthening on the global level and its influence on the national economy in each country becomes important as a question of financing of the technology. This approach requires existence of effective production which could be depicted on the macro level in terms of productivity growth and it requires existence of qualitative workforce able to transfer knowledge in more effective production. There are five channels29 that transfer impulses from financial sector to real sector in the national economies. Among them, interest rate and exchange rate are the most influental mechanisms. The interest rate mechanism influences on capital price related to financing of economic activities of company (tightly connected with cost of production) whereas the exchange rate simoultanly influence on export and import prices. Since the investments in country are result of lending capital from abroad, forming of the capital price is a result of capital prices lending, borrowing capital to the clients as well as differences in these prices result of the market risk perception. In case of exchange rate, stabile nominal exchange rate and existence of inflation higher than in other European countries, means increase of
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These are interest rate channel, exchange rate channel, direct monetary transmission, channel of assets, derived credit channel and derived channel of expectation.

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expenditure in EUR, proportionally to difference in inflation rates 30. As a consequence imported products displace domestic products, since domestic products have become more expensive during the period, result of the increase of expenditure (e.g. salary), within the companies. In Croatia policy de facto fixed exchange rate (officially fluctuating) its logic based on price stability. It implies conducive condition for foreign capital inflow aimed at stimulating new investments, and that implies higher intensity of use of the technology in the national economy. These processes are parallel with mechanism of creation national currency solely on the net foreign assets. According to Zdunić (1999) this model results to inliquidity of economic and bank system as a whole. Capital inflow is tightly connected with bank allocation, where the banks try invest their money into the firm's profitable projects, primarily with collateral in assets. So, economic activities with larger number of realization phases (technology intensive production) with higher level of perceived risk are not priority for the financial secotr, i.e. result of perceived uncertain future earning. The capital inflow affect price increase investments in country as result of the income increase. In that scenario the investments require more financing, and result to increase of market value of assets. In case of the entrepreneur’s incapability to export products and services, the macroeconomic condition based on free capital inflow produces difficulties on macro level, with balance of payment, connected with increase of total debt in country. So result is that the macroeconomic stability depends on value of the assets which country possesses and secure paying the outstanding financial claims. Consequently, non stimulating macroeconomic framework put financing of the technologies as well as financing projects (micro level) where technologies have an important place in an adverse socio-economic context. No matter what it is econometrically difficult to prove there are several papers (Tkalec, Vizek, 2009; Pejić-Bach, Posedel, Stojanović 2009, EIZ 199831) that provide the analyses between financial and real sector, i.e. effects of the financial sector on industrial production, GDP and export. Tkalec and Vizek (2009) proved a strong negative interdepedence between goverment spending and industrial production where the industries were classified according to the technological levels32 (medium high technology level is only exception). In regard to demand from the international markets there are no statistical interdepedence between five most important partners on the one hand and Croatia on the others. Regarding real exchange rate its increase unfavourable influence on industrial production within medium high technology, but positively on the low technology industries i.e. statistical significance has not observed for the other technology levels. Moreover, Pejić-Bach, Posedel and Stojanović (2009) proved that increase of disposable income effects on profitability of the bank sector measured by indicators return on assets. In the project study EIZ (1998) was found that United States Dollar appreciation against to Kuna (KN) and then German mark (DEM) as well as the appreciation of the KN in relation to the DEM has deteriorated image of Croatia's exports. Interaction between financial sector (using exchange rate as financial channel and capital inflow) and non competitive real sector decline the competitivenes of the national economy (EIZ, 2009; Aralica, 2009; Jošić, 2008). That means in case of the existence of socio-economic framework where social economic development in country should be based on the innovative products, more effective way of financing the overall technological capacity of society is required. That is important regarding to evaluate the socio-economic effects of these projects.
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Increase the share of imported products within the domestic production creates two negative effects. The first reduction of the employment of domestic resources, connected with higher level of unemployment in the national economy and the second negative values in the balance of payments, connected with increase of the debt. 31 That is a project study 'Export possibility state and perspectives' where PhD Gorazd Nikić was a project leader. 32 High technology, medium high technology , medium low technology sector and low technology sector are included within the technology classification (EUROSTAT, 2010:2).

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4. Concluding remarks The crucial importance for evaluation of the technologies and its activities has the productivity analysis, the competitive advantage and the comparative advantage, since these analyses explain the use of knowledge in society. In regard to immanent interconnection between financial and real sector, financial sector should be included in the technology activities and its activities analysis in the larger extent because development of the financial sector differ across the country and influence financing of technological activities i.e. this approach is definitely neglected by mainstream economic explanation, money does not influence real sector in the long term. The integral processes Croatia's approaching to the EU imposed a new framework to the R&D sector, which requires increase R&D investments into the business sector (two thirds of whole investments into R&D should come from the business sector in the national economy). This solution produce constraints mainly related to adaption of the whole social economic system which is accepted without the analysis of knowledge supply and demand in the national economy. The barriers which appear in Croatia and related to R&D sector are 1) Low level of inventive activities; 2) Low complexity of innovation activities and 3) Low level of employees engaged in R&D in total number of employees compare to the EU 27 average. These barriers are parallel with declining export competitiveness in relation to the main trade partners (see Aralica 2009, EIZ 2009, Jošić, 2008). Moreover, the market and financial liberalization have not resulted to increase of competitiveness. However, in the current stage of financial crisis positive signal have been appearing, exports of goods grew (4.6%) in first quarter of the current year (year on year), unfortunately without effects on GDP growth i.e. real GDP drop (-2.5%) in the same period (EIZ, 2010: 3). Financing of the technology and technological activities are affected by mechanism of the creation of Kuna based on net foreign assets. That is tightly connected with placement of funds through banks, directed primarily towards profitable projects (with insurance collateral), where economic activities with several phases in project realization such as production, based on use of technology and its activities in large extent are not bank's priority activities, because of perceived market and investments risks. Further research in this field is required. Strong econometric evidence with econometric model where the variables credit supply and liquidity in the financial sector should be introduced, aimed at testing their connection with the technological activities. Advancement of the importance of the technologies requires a systematic approach which includes a new conception the economy development, where the national economy should based on the new innovative products and processes where industrial policy and regional policy should be the main policies within this approach. Particular solution based on increase of R&D investments without progress on the level of export competitiveness, employment and Gross domestic product are not viable. It does not produce socio-economic effects that justify the invested funds primarily in the public sector. This finding is important for the overall public and for other important economic activities in Croatia such as agriculture. 5. Literatura

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