Sri Lanka’s innovation and entrepreneurship strategy: An agenda to boost economic dynamism

Around the world, shifts in political economy, technology and the environment are contributing to increasingly turbulent conditions in which policymakers are having to respond to complex dynamics and new sources of uncertainty. Science, technology and innovation are often at the heart of these changes.

Sri Lanka has recognised the need to put this agenda front and centre of the country’s economic development framework with the recent adoption by the Cabinet of Ministers of the National ‘Innovation and Entrepreneurship Strategy 2018-2022’. This ‘I&E Strategy’ provides the landmark agenda for moving Sri Lanka towards a more competitive, dynamic, and innovation-driven economy, through which a new growth impetus is provided to an otherwise tepid growth picture. The Strategy’s vision statement captures it nicely, ‘Building a prosperous Sri Lanka together: A resilient and innovative economy with export competitiveness; and an entrepreneurial society with better jobs’.

Why I&E as a priority?

Over the years, Sri Lanka has failed to diversify its economy, introduce new products and services into its export basket, and this has stifled its ability to generate higher paying jobs and integrate more with global supply chains. Unlike competitors in the region – like Vietnam, Thailand, and Singapore – Sri Lanka has added very few new products to our export range and our export composition has remained largely stagnant over time.

As international research shows, no country has successfully transitioned to upper-middle-income and then to high-income status without a strong focus on I&E. Without I&E, Sri Lanka risks being ‘caught in the middle’. Rising wages and other costs prevent the country from competing on the low-cost-low-value end of the spectrum, while the absence of an advanced innovation-driven economy means we are not fully engaged on the high-tech end of the spectrum either. I&E must be the new focus to boost competitiveness and dynamism across all segments of the economy.

To enable firms to become the drivers of economic growth, we need to modernise the private sector to be more productive and innovative. Better use of technologies can bring us closer to the global technological frontier, but resilient growth demands constant innovation.

Current challenges

Several challenges hold Sri Lanka back from fully unlocking the potential of I&E to drive economic growth. The economy is not diversified enough in what it produces, and exports and exports continue to be largely in labor-intensive manufacturing, while technology and capital-intensive exports are low. The private sector, especially SMEs, exhibits weak capabilities to adopt technology and to innovate. In the Government, an overall lack of coordination on I&E policies and programs and the low capacity of public agencies and officials to design, finance, implement, and monitor such policies and programs are key constraints.

Although pockets of research excellence exist, the public R&D system is fragmented and misaligned with the needs of enterprises and society and most institutions operate with little collaboration among themselves. R&D expenditure is also woefully inadequate for a growing middle-income country and the weak incentives regime to reward and recognise R&D and commercialisation of research in public RDI s has led to a ‘brain drain’ of research talent from the country. And while there is an impressive emerging start-up ecosystem in the Western Province, the current business environment and lack of early stage finance and support institutions are key hurdles for growth-oriented start-ups to emerge in other parts of the country.

The I&E Strategy lays a vital foundation for transformative actions to address these challenges, and forms part of a suite of reforms aimed at enhancing trade and exports like the National Export Strategy and the National Quality Infrastructure Strategy, both of which have been adopted by Cabinet and are being implemented.

Government role in supporting I&E

Governments across the world have recognised the importance of public support to encourage private sector innovation. If we are to diversify our economy, the public sector will have to help reduce entrepreneurial risk, promote innovative ventures, and attract and support private investors. By fostering an ecosystem and collaborative approach, and avoiding disjointed initiatives, we can have greater impact.

Meanwhile, Government support of research and development must be seen not simply as spending, but as an investment in Sri Lanka’s future. Because we do not have the resources of wealthier countries, we need to invest much more efficiently than we do today and ensure thatthe public research sector in Sri Lanka needs to be modernised and re-aligned to better serve enterprise needs. These are all elements that are considered in the ‘Innovation and Entrepreneurship Strategy of Sri Lanka 2018–2022’.

Inside the strategy

The Strategy was based on a diagnostic study of the current state of innovation and entrepreneurship in Sri Lanka followed by a year-long process of extensive stakeholder consultations with the private and public sectors. Three Strategic Objectives were identified, along with Operational Objectives and associated priority activities. The Strategic Objectives provide the broad framework for implementation, and are: 1) Support SMEs to innovate and become more competitive in domestic and export markets; 2) Build the ecosystem for scaling up growth-oriented start-ups; and 3) Modernise and re-align the R&D sector to be more enterprise oriented.

The full five-year strategy and action plan contains a good starting point and the set of ‘Priority Actions for Year 1’ provides a useful platform to commence implementation. These need to be done to quickly make a step change in the enterprise ecosystem and put Sri Lanka on a new path towards economic dynamism.

One of the flagship initiatives envisaged under the I&E Strategy is a unique support scheme called the ‘Enterprise Innovation Program’. It’s the first of its kind in Sri Lanka and would set a new benchmark for sophisticated enterprise support schemes. Unfortunately, the launch of it was delayed due to the political crisis triggered on October 26, but is now being finalised for implementation.

Through this, domestic entrepreneurs can get matching grants to support them to develop new products and services, introduce technology into their business, improve production processes, conduct R&D, and overall become much more competitive to meet domestic and global market pressures. This complements the concessionary loans on offer under the ‘Enterprise Sri Lanka’ program, where these entrepreneurs can expand and improve their business with lower cost capital.

Ingredients for success

By adopting this I&E Strategy, Sri Lanka has commenced a journey of leveraging innovation and entrepreneurship to drive enterprise competitiveness in the economy, create better job opportunities for young people, and ignite a new growth impetus at a time when the traditional growth drivers are faltering.It can produce a transformation across society and the public and private sectors, but a few key ingredients are required - effective and coordinated implementation; a commitment to dismantling regulatory and procedural hurdles that get in the way of I&E; greater collaboration and trust between the public and private sectors; and a sustained long-term financial, institutional, and political commitment to the I&E agenda. There is a yearning among Sri Lanka’s young people to create a paradigm shift in our economy.Innovation and entrepreneurship provides an ideal platform to make it happen.