Understanding and Managing Industrial Transitions
is a Working Group launched by the Joint Research Centre (JRC), which aims to support selected regional and national authorities facing major industrial transitions. The group has developed the POINT review methodology (Projecting Opportunities for INdustrial Transitions) to help countries and regions in transition achieve better results by identifying opportunities and challenges for their capacity to deliver system innovations. The Republic of Bulgaria, at the initiation of the Council of Ministers and the Ministry of Economy is now one of the four territories taking part in this exercise.
In Bulgaria, the review is analysing the current situation and also sketching alternative future directions for the country to tackle socio-economic and societal challenges. It undertakes a bold systemic innovation approach, aiming to propose a whole of government response but also involving the private sector and civil society stakeholders.
Bulgaria faces a number of socio-economic challenges that underpin the need for an industrial transition:
- Low labour productivity and related low levels of income;
- Low share of high-tech production in the economy;
- A demographic crisis which leads to a shortage of labour and skills;
- Providing a high quality and healthy life for its citizens.
The focus of the POINT reviews is on a particular thematic area which holds the potential to leverage change to transform the production and consumption systems. The theme of interest as agreed by the national authorities is the linkage between mechatronics and the Bulgarian ICT sector in order to open up new pathways for digitalisation in society and manufacturing in particular. The theme coincides with the “twin ecological and digital transitions” as defined by the EU in the European Green Deal and responds to the country’s policy priorities. While this report focused more on the digitalisation strand, it bears in mind the two are interrelated and a similar assessment in the future might venture deeper into clean tech.
An important notion of this exercise is that the strengths in the Bulgarian ICT sector can contribute to the further digitalisation of the domestic manufacturing sector and in particular mechatronics. The reinforcement of the linkage can play a role to boost economic performance and create a platform for wider digitalisation in other areas such as green tech, telemedicine and tele-education. The government strategies that particularly impact these thematic areas and can trigger necessary transitions are the closely related digitalisation, Industry 4.0 and education policies. Mechatronics and ICT are priority areas of the current Bulgarian RIS3 strategies in all Bulgarian regions.
Having identified the key actors in mechatronics and ICT, their relations, and the framework conditions, in which they function, the review has examined four key functions of the system, namely: planning and orientation (including mostly government functions and key business stakeholders); resource mobilisation (with a focus on key knowledge provides and financing instruments); production of knowledge, goods and services; and consumption or use. This has entailed desk research, in-depth interviews and a stakeholder meeting in Sofia, which involved key actors in Mechatronics and ICT from the public sector, business, finance, education, intermediaries and other societal groups.
Planning and Orientation
Planning and Orientation relates to activities and processes focused on shaping the future ambitions for the country and regions. This consists largely of the multi-annual policy strategies of various government authorities that underpin the priorities for public investments. It also includes ambitions and plans of stakeholder communities and in particular parts of the business sectors (whether grouped in clusters or associations, leading companies or entrepreneurs) that develop a medium- to long-term vision for their economic activities in Bulgaria.
The POINT review has mapped these activities and the key actors involved. While there are many government strategies that affect the domain of mechatronics and ICT currently the most relevant policy document spelling out future ambitions is the National Development Programme: Bulgaria 2030. This comprises three different strategic goals: accelerated economic development, demographic upswing and reduction of inequalities. In particular, the Development Axis Innovative and Intelligent Bulgaria aim to increase coherence between education and the needs of business and society, raise digital competences, develop regional and local laboratories for testing new technologies and to build human, scientific, organisational and institutional capacity for Industry 4.0.
Bulgaria is a capital-poor country, both in terms of financial and human resources. The population is projected to shrink even further in the coming decades. Resource Mobilisation in general is highly dependent on the Operational Programmes of the European Union. R&D spending in Bulgaria is relatively low with 0,75% of GDP, although it has increased twofold in the last decade. On the positive side a relatively large share of R&D spending is from enterprises and has grown in recent years.
For the mechatronics domain the Operational Programmes Innovation and Competitiveness (OPIC) and Science and Education for Smart Growth (OP SESG) are particularly relevant. Many companies from the mechatronics sector have used these resources for research and innovation projects.
The government has used OP resources to create a stronger intermediary infrastructure in the innovation eco-system. The Centres of Competence and Centres of Excellence were set up under these programmes, following different business models. Most of these centres have direct relevance for the Mechatronics and ICT domains. Regional Innovation Centres (deferred to the next planning period due to the onset of COVID-19) and Digital Innovation Hubs have been set up to work directly with enterprises. As these centres have only been established in the last year, it is too early to demonstrate impacts on changing the transition paths of economic and societal actors. Nevertheless, in the future these organisations could play a larger role in the industrial transition process.
Education at all levels is an important factor to underpin capacity building for a smarter industry as well as for digitalisation of the economy and society. There are severe criticisms on the quality and quantity of education and training in Bulgaria from the business sector and these are confirmed by international studies such as OECD’s PISA. On the positive side the business sector is stepping in and initiating education and training initiatives privately. There is clearly a need for larger coherence between the needs of business and society on the one hand and programmes in higher education and training on the other, as is also noted in the Bulgaria 2030 National Development Programme. Another positive development is that the number of ICT-experts in Bulgaria is increasing and the number of people employed in ICT as well as the share in the national employment is growing. The international performance for both patenting and publication activity show that Bulgaria is still likely to rely on imported technology and fundamental knowledge to deliver on its industrial transformation. A critical aspect of any such transformation would need to include the upgrading of patenting and publication activity in ICT and mechatronics.
Bulgaria has a history in both ICT and mechatronics dating back to the 1980s, which provides the necessary depth of the system for transformation.
In 2018 mechatronics covered 8,349 enterprises with a total turnover of € 8.9 billion, employing more than 162 thousand people. The enterprises in this sector have been actively using the Operational Programme Innovation and Competitiveness (OPIC) for R&D projects. They are amongst the highest R&D intensive companies in the country and those that used OPIC had higher operating revenues than other companies in the mechatronics sectors. Some of the large global multinationals in mechatronics have located manufacturing capacity in Bulgaria in diverse sub-sectors such as automotive, consumer products and general engineering. At the same time, local companies have been developing their sectoral governance structure by establishing their own cluster, which has been one of the more active, and has recently been awarded further support for innovation through the Operational Programmes.
The Bulgarian ICT sector has experienced steady growth in the last twenty years. This trend continued in 2018 when ICT generated €7.4 billion annual revenue and provided more than 127 thousand jobs. This represents an increase of 204% in revenues and 226% in number of jobs as compared to 2010, which significantly outpaced the growth of these indicators for the whole economy for the same period. In the period from 2010-2018 the fastest growing ICT sub-sector in terms of revenue have been “Computer programming, consultancy and other ICT services”. The sector shows a mix of multinationals, mostly in software development, indigenous companies, some with an international reputation, and many spin-outs and start-ups.
Shortage of skilled ICT staff is a persistent issue for the business sector and hampers the growth potential.
There is a large concentration of the mechatronics and ICT sectors in the Sofia region. Therefore, there is also a concentration of financial and human resource mobilisation in the capital region. Nevertheless, all regions, have selected mechatronics and/or ICT as a priority area in their RIS3 strategy.
For a transition path aiming to deliver higher incomes and wealth for Bulgaria both sectors offer good opportunities. A closer integration between these two sectors could reinforce and accelerate these opportunities. Today the competences and business capabilities of the ICT sector are mostly geared to the export markets and foreign clients. They have, only to a limited degree, been mobilised to enhance the digitalisation of indigenous companies, for instance in the mechatronics sector. For Bulgaria to embrace Industry 4.0 (smart industry) and a further digitalisation of the economy and society, these local ICT capabilities and expertise could empower this transition. In doing so, the ICT sector may have an opportunity to develop some of the capabilities necessary for upgrading its position within global value chains. The POINT review explores the extent to which there is a “business case” to make for bringing these two sectors closer together and what role different actors could play in this process.
Consumption (or use)
The domestic market for goods and services from the ICT and mechatronics products is small and not very sophisticated. Overall the low levels of digitalisation in society as well as in the business sector, as shown by most indicators of the European Digital Economy and Society Index (DESI), are currently a barrier for mobilising the domestic markets as an accelerator to commercialise higher value products and services from domestic suppliers. Public procurement for these products is also modest, although the ambitions to expand eGovernment and digitalisation in general could provide opportunities in this respect. It is therefore not surprising that many enterprises in the ICT and mechatronics sector are export oriented. It seems that the export patterns for mechatronics are fragmented across quite a number of unrelated product segments, so no dominant niches are prevailing at the moment.
Pathways for the future
The thematic topic for this review is broad and encompasses several elements of the Bulgarian production and consumption system. The levels at which ambitions can be formulated are:
- Governance and policy level with better-aligned policies across portfolios resulting to an overall increase of public and private funding resources dedicated to the transition and coherent framework conditions, including, where necessary, with targeted changes to regulation.
- Education and skills level: as the shortage of human resources and inadequate levels of skills and education are a major bottleneck, ambitions could be formulated to improve this.
- Businesses: improving productivity, investing in digitalisation, value chain collaboration, entrepreneurship and so on are essentially tasks for the private sector. Ambitions need to be defined in quantitative and qualitative terms for the mechatronics dependent business sectors.
- Business-to-business and business-to-public research collaboration: as this is at a very low level today, ambitions could be set to intensify these that is beneficial for the mechatronics sector and its digitalisation.
- Overall, stakeholder coordination across the system needs to be intensified.
- Demand side: public sector investment and procurement in digital infrastructures, and infrastructures that support a green and sustainable growth can play a mobilising role. The inevitable growth in the use of digital services by the general population, from its current low level, may also offer opportunities for business development and knowledge-intensive employment.
The numerical level of ambition is presented most recently in the National Development Programme 2030, which includes among others the following targets: (i) GDP per capita in PPS relative to the EU average, % , baseline 51.2 -> target 75; (ii) Digital Economy and Society Index (DESI), 36.2 -> 52.2; (iii) Variation in GDP per capita (in PPS) by region, %, 37.5 -> 34; (iv) Population (aged 25-64) participating in education and training, % , 2.5 -> 7; (v) Share of low performers in the Programme for International Student Assessment (PISA) (average for the three subjects of the study) 46 -> 25; (vi) R&D expenditure, % of GDP 0.8 -> 2.5; (vii) Integration of Digital Technology, DESI, %, 18.1 - > 50; (viii) Share of high-tech exports in total export, %, 5.9 -> 15; (ix) Ultra-fast broadband take-up, DESI, % , 9.7 -> 40; (x) 5G readiness, DESI, %, 0 -> 80.
The remainder of this POINT review project is aimed at identifying and elaborating new pathways to reach the abovementioned ambitions. The contributions from the stakeholder meetings on June 4th 2020 are essential to help formulate what these transitional pathways should look like and what can be done to reach their goals. More information: Preliminary Presentation (delivered in Working Group meeting on 9 December 2019).