Ukraine, like the other five countries in Eastern Europe and the South Caucasus (EESC) - Armenia, Azerbaijan, Belarus, Georgia, the Republic of Moldova - has grown rapidly following a rocky and difficult transition from a centrally planned to a market economy over the past decades. This momentum, however, is slowing across the sub-region as current growth drivers wane and countries must sustain and ramp up governance and market reforms. Overreliance on remittances, a narrow range of commodity exports, and private and public debt, rising sharply in response to the economic and social effects of the COVID-19 pandemic, leave the region exposed to external shocks. The pandemic alone may trigger a decline in Gross Domestic product (GDP) of up to 7.2 per cent in Ukraine in 2020, according to a recent estimate by the International Monetary Fund.

The new Innovation Policy Outlook (IPO) of the United Nations Economic Commission for Europe (UNECE) reviews and compares innovation performance and governance across the EESC sub-region. Complementing quantitative composite indices, the IPO compares innovation ecosystems in six countries with similar economic, structural, legacy and institutional features, challenges, and opportunities. It is an essential part of UNECE support for trade and economic cooperation among its member States.

Lower and fluctuating prices for commodities such as steel and grains, leading sources of export revenue, mounting public debt, the consequences of the COVID-pandemic, and low levels of diversification of exports and economic output overall undermine the long-term prospects for the Ukrainian economy.

That is why innovation – or trying out new ideas to create value, interact, and govern – is essential to put Ukraine on a solid, diversified and well-integrated foundation for long-term sustainable development. Most of the potential lies in absorbing and adapting new ideas, new business models, and technology that has worked elsewhere across the economy. As the IPO shows, Ukraine, despite these problems, has several elements of a potentially vibrant innovation system in place: a well-educated labour force, competitive wage levels, a long tradition of commitment to research, natural endowments, a large domestic market and increasingly easy access to international markets, a diaspora that could bring ideas, investment, contacts, and skills; and a nascent but dynamic and export-oriented ICT service sector.

Recognizing this imperative, Ukraine has taken several important steps to reform innovation governance over the past years. These include:

• A strong, consistent political and societal commitment to innovation. The country also has a long-standing scientific culture and centres of research excellence and strong historic linkages with foreign partners in science and innovation fields.

• A raft of mechanisms to promote innovation and knowledge absorption. Ukraine set up the Small and Medium-sized Enterprises Development Office in 2018 to support entrepreneurship through, inter alia, trainings and services. National and regional competitions serve to enhance the growing start-up movement and create platforms for knowledge-sharing and product development. Research funding allocation increasingly takes place ensuring broad competition, linkages, and commercial potential.

• A new innovation strategy that is comprehensive, emerging from a transparent consultation process. A legal framework exists that sets quality standards for policy preparation and efforts are made in modernizing public governance, in particular since 2016, when the legislature adopted the Strategy for Public Administration Reform and the Law on Civil Service.

Enabling and promoting innovation also involves tackling a range of systemic constraints in the economy. Political and economic instability, lacking rule of law, complex legacy regulations, and the weak quality of institutions hold back investment overall - compounding the risk already inherent in innovation in particular. A central concern is the absorptive capacity of the private sector to absorb and try out ideas – indicators ranging from investment in research and development (R&D), organisational and technical capacities, and  high-tech exports point to low levels of systemic private sector ability to do so systematically.

The IPO points to three important areas to address:

• Innovation policy governance mechanisms are underdeveloped. Regulations are inadequate, contradictory, outdated and at times poorly enforced leading to gaps in legislation, including Intellectual Property Rights (IPRs), tax and insolvency, and spin-offs.

• Innovation policy tools do not fully stimulate innovation linkages and the potential for knowledge diffusion is not sufficiently leveraged. Elements of the innovation system are often ineffective due to a lack of finance, a decline in interest, and low capacity. Industrial technology assistance, brokerage schemes for technology upgrading, and standards, testing and certification instruments for SMEs are largely unavailable.

• Innovation policy processes show significant gaps remain in the practices of planning and making policy. Monitoring and evaluation are insufficient and overly focused on outputs, with few systemic linkages to ensure that learning feeds into the policy design process in line with the objectives of the innovation strategy.

In this spirit, recommendations of the IPO for Ukraine include:

• Set concrete objectives for and improve coordination to fund and carry out activities under the national innovation strategy. Conduct a gap analysis, identifying legislative gaps and overlaps with a view to the objectives in the innovation strategy. Clarify the roles and mandates of all bodies responsible for the innovation strategy, especially new bodies such as the Ministry for Digital Transformation. Build on the momentum of the smart specialization initiative to create mechanisms for developing regional science and innovation policy initiatives. Strengthen the capabilities of research organizations and Higher Education Institutions to raise international funding.

• Strengthen industry science linkages and support knowledge diffusion. Formulate an explicit cluster policy framework and introduce innovation voucher schemes, cooperative R&D grants and support for public R&D institutes in establishing structures and capacities needed for linkages between academia and the business sector.

• Improve quality-control mechanisms to ensure that cross-sectoral government strategies are evidence-based and contain the elements necessary to guarantee the quality and applicability of policies. Set up concrete, annual action plans, and systematically assess impact of interventions, emerging opportunities, and constraints. Ensure continuous monitoring and evaluation based on output and impact metrics – and use these results to cancel, modify, and scale up interventions and inform subsequent policy design to increase efficiency of spending and the catalytic effects of interventions.