FRIEDRICH-EBERT-STIFTUNG – A NEW GROWTH MODEL IN EU-CEE – Pursue an active industrial policy: Market forces alone are unlikely to fundamentally change these patterns. Instead, specific policies aimed at attracting knowledge-intensive segments of the value chain will be required. This points to the need for an advanced development state or, ideally, an entrepreneurial state to handle and guide the economic integration process. The Asian Tiger model is not possible within the EU, but other options are still available(see be­low). – Redirect existing industrial policy towards a Na­tional Innovation System(NIS): Together with do­mestic state aid provided, EU-CEE spends between 1.7 percent of GDP(EU Balkan countries) and 3.7 percent of GDP(Visegrád countries plus Slovenia) on industrial pol­icy-related measures(Landesmann/ Stöllinger 2020). How­ever, redirecting these policies towards functional upgrading would be desirable. This is particularly true of the Visegrád group and Slovenia, which have reached an appropriate income level to make the switch from an imitation-based growth model(fuelled by foreign tech­nologies) to an innovation-driven growth model relying on a NIS. Comparatively low levels of R&D(given the income level), the allocation of most R&D expenditures directly to MNEs, and an underdeveloped NIS mean that functional upgrading is a major challenge for EU­CEE. 52 Overcoming this challenge is necessary, though, if the EU-CEE economies are to avoid a functional de­velopment trap. – Build an entrepreneurial state: Developing an en­trepreneurial state is particularly important given the present context. As outlined in the introduction, this is difficult and requires dedicated public officials and high quality specialised agencies to provide research and technical support. These, in turn, should be part of a network with universities and potential lead firms in the relevant sector. The state should step in to pro­vide basic research to support these potential lead firms. The institutional regression in some countries in EU-CEE makes this is especially challenging. Yet, for at least some EU-CEE countries, institutional standards are at a reasonable level, meaning that the pursuit of elements of an entrepreneurial state could produce positive results. – Use the room available within EU rules and take advantage of funds from Brussels: Rein­forced World Trade Organization rules and(especial­ly) the strict corset of EU competition rules do not give the EU-CEE countries the policy space they need to implement active industrial policies, even if they wish to do so. However, it is also true that EU state aid rules provide numerous exceptions for R&D and 52 System-oriented innovation theory stresses that MNEs in developed countries derive their ownership advantages, inter alia, from the bene­fits for their R&D activities arising from more sophisticated National In­novation Systems(Pavitt 1995). innovation aid. Moreover, all EU-CEE countries re­ceive considerable transfers from the various EU Re­gional Funds. 5.3 FOCUS ON AREAS WHERE THE ADVANTAGES OF RICH COUNTRIES ARE NOT SO INGRAINED Very few countries are truly advanced in the digital econ­omy, and overall, Western Europe has a much more limit­ed head start over EU-CEE than in other sectors. Barriers to entry are generally lower, with the infrastructure re­quired for a modern digital economy easier to introduce than for manufacturing. Human capital in the digital econ­omy is also extremely important, and, as we have shown, this is an area of relative strength for EU-CEE. Physical ge­ography, and specifically proximity to Germany, is less im­portant in the digital sphere. Finally, the digital economy has received a huge positive shock from the pandemic. EU-CEE should: – Estonia as a blueprint: This is a basic but potentially important point. One of EU-CEE’s very few true eco­nomic success stories in the global comparison is Esto­nia with its digital economy. Other governments in the region should take what Estonia has done well into consideration. – Make sure that workers share in the gains of dig­ital growth: The major positive digital shock provided by the pandemic could significantly increase the effi­ciency and productivity of labour. However, for that to translate into faster and inclusive growth, it will need to be accompanied by wage increases(see below for more on wages in general). – Focusing support on smaller firms: While big firms should have few issues making the transition to digital­isation, support should be provided for SMEs. EU-CEE countries should combine national resources and EU funding in the framework of the Digital Europe Pro­gramme, in line with a new SME strategy for a sustain­able and digital Europe. These funds should then be used for training and helping SMEs adopt remote work practices, digitise business processes, establish and maintain online sales channels and advertising, and improve social media for branding and marketing. – Helping workers make the transition: Policy meas­ures to upskill and re-skill employees for a more sus­tainable digital transformation should be prioritised in national strategies. This is a joint task for the private sector and national labour market policies, with possi­ble additional funding from the EU Just Transition Fund and the new Recovery and Resilience Fund. National policies focusing on boosting the attractiveness of STEM education and addressing gender imbalances in education(especially in Slovenia and Lithuania) could counteract labour shortages in this field. 52