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THE CAUCASUS & GLOBALIZATION
Gulshen YUZBASHIEVA
D.Sc. (Econ.), head of the Department of Economic Theory and History of Economic Thought at the Institute of Economics, National Academy of Sciences of Azerbaijan (Baku, Azerbaijan).
DEVELOPMENT OF INDUSTRY UNDER TECHNOLOGICAL CHANGE (A Case Study of Azerbaijan)
Abstract
This article examines the development of industry under technological change, analyzes the trends identified, studies the causes of the current situation in Azerbaijan's industry, and determines the factors contributing to its growth. The author proposes recommendations on using the
benefits of modernization in industry and argues the need for fundamental structural changes to increase the production of high value added products, especially high-tech products, and to improve the competitiveness of domestic products in the world market.
KEYWORDS: industry, structural changes, innovations, modernization, technologies, transformation, Azerbaijan.
Introduction
Under conditions of largely intensive reproduction, the problem of social production efficiency and, consequently, the problem of improving the structure of the economy come into sharper focus. It has become possible to solve major social and economic problems mainly through qualitative structural changes with emphasis on changing the existing proportions. That is why, considering the constant changes in the socioeconomic conditions of society's development, effective development of the economy is inevitably connected with changes in its sectoral structure. From this it follows that optimal economic structure cannot be presented in the form of any kind of fixed structural relationships. Moreover, there is no "optimal" structure of the economy whose achievement would make it unnecessary to keep improving this structure in accordance with the changing conditions of reproduction because at each stage of development its main elements are in a state of constant movement, development and change.
Today there is an awareness of the need for structural changes, but little attention is being paid to analyzing the factors and conditions that have contributed to the changes that have occurred and to identifying positive and negative trends in the economy. The point is that the development of the modern economy is characterized by a combination of different trends, which have a mixed effect on the dynamics of indicators traditionally used in economic analysis. Superficial mechanical monitoring
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of these indicators often leads to erroneous conclusions about the development of the economy. Today, structural changes and a transition to a new technical and technological base are necessary, in the first place, to resolve certain socioeconomic problems:
■ to overcome emerging obstacles and adapt the economy to the new, more complex conditions of reproduction. This is particularly important because such economic development helps to improve the investment climate, stimulate business, and increase labor productivity through a modernization of production, with emphasis on sectors of importance to the country's entire economy. Modernization should not so much ensure high rates of economic growth as serve to enhance the existing potential;
■ to find resource-efficient ways of economic development, increase the impact of R&D and ICT, of scientific and technological processes; to develop new forms of economic specialization and integration, etc.
The experience of recent years has made significant amendments to the economic strategies of countries rich in natural resources. Practically all of them have set up reserve funds so as to be independent of external market fluctuations. Reserves have made it possible to significantly mitigate the effect of the crisis, but they also have a negative side: a slowdown in the structural modernization of industry. Oil and gas revenues balance the budget; there is moderate economic growth; paramount importance is given to social problems; and efforts are being made to build an innovative economy. In the opinion of Vladimir Mau, the best approach is one that "provides for balancing the budget at a revenue level that is historically stable and does not make the country dependent on factors beyond the control of the national government... Budget restraint is not the most popular policy but a strategically safe one."1 The new conditions in Azerbaijan's economic development have created totally new problems that need to be addressed.
The Current Situation in Industry
Real structural transformations promote sustainable economic development, balance the operation of various economic structures, and help to remove distortions in their development in order to achieve the set goal: to increase the competitiveness of the national economy based on faster scientific and technological development and the innovative component of the economic system. This is particularly important because the structure of the economy is not only the range of its sectors and industries, but also the proportions between them, which determine the efficiency of different areas of economic activity.
Mustafa Kemal Ataturk emphasized that a nation with an underdeveloped economy can never recover from poverty and subjection, from social and political disasters. Successes in government depend on the degree of achievement in the field of the economy. There is no developed state that would not think about the economy before the army and the navy. To protect the state's independence and make it prosper, all efforts and resources should be directed toward economic development.2 One of the ways of addressing this task in Azerbaijan is by restructuring the economy, including industry, which is distorted, high-cost, low-profit and uncoordinated, with low labor productivity. In these
1 V.V. Mau, Forbes (Russian issue), May 2011, p. 40.
2 M.K. Ataturk, "Epokha ekonomiki. Iz rechi na otkrytii ekonomicheskogo kongressa v Izmire 17 fevralia 1923" (Economic Era. From the Opening Speech at the Izmir Economic Congress on 17 February 1923), Turtsia — vchera, segodnia, zavtra, March 1991, pp. 4-5.
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conditions, the government gives top priority to industry. The problem of structural development should be addressed so as to ensure full use of human capital and increase its contribution to national wealth, enhanced by innovations in the area of natural resource and physical capital. The system of strategic planning should identify the basic structural imbalances in the development of industry, set the necessary proportions, and select the tools for achieving them. The planning system should provide for the implementation of the following principles: integrated approach, effectiveness, optimal and balanced structure, scientifically valid decisions and plans, and flexibility. In this connection, it makes sense to look for acceptable ways to transform the system in order to remedy its defects for maintaining and promoting growth in industry and science, which ensure, together with the resource base, an improvement in social welfare.
As we know, economic reforms in Azerbaijan have led to significant changes both in the structure of the key macroeconomic indicators and in the proportions and relationships between them. The trend that is most significant for the national economy is an increase in the share of the service sector in the gross domestic product compared to the real sector. In the opinion of most economists, an increasing share of services in GDP indicates a significant level of market development and maturity of the economy. For example, the sectoral structure of gross value added changed toward an increase in the share of services (trade, finance and intermediary activity) and a decline in the share of goods. By 2000, the share of services in GDP was 38.5%, and the share of industrial products, 30.8%. The increase in the share of services in the structure of GDP was said to indicate that Azerbaijan was moving closer to the level of developed countries with a post-industrial economy. In actual fact, this structural change was caused by the country's deindustrialization and over-expansion of trade intermediary services. Since 2005, the share of industry has tended to increase. In 2011, its share in GDP was already 53.7%, while that of services was down to 26.9%.3 But this does not mean an actual decline in the production of services. It only shows that manufacturing production has increased due to government efforts to develop the non-oil sector (to open plants and factories, modernize existing production, etc.). In 2013, GDP was 57.708 billion manats (AZN), with the non-oil sector accounting for AZN 29.982 billion (52.0% of the total). From 2005 to 2012, GDP increased from AZN 12,522.5 million to AZN 53,995.0 million, but annual growth slowed from 26.4% in 2005 to 2.2% in 2012, although compared to 2011 growth rates increased by 2,1%. The industrial production index increased from 95.0% in 2011 to 97.7% in 2012, but compared to 2005 it declined: that year, industrial production rose by 33.5%. Growth rates in the key sectors of industry declined as well. For example, the extraction of mineral resources in 2011 and 2012 decreased from the previous year by 8.4% and 4.2%, respectively, but compared to 2005 there was a sharp decline: at that time, annual growth in resource extraction was 41.5%. In manufacturing, annual growth slowed from 16.0% in 2005 to 7.1% in 2011 and 5.4% in 2012. Changes in other macroeconomic indicators show a similar trend.
Investment processes give no reason to expect faster economic growth either. Gross fixed capital formation fell from 27.3% in 2011 to 18.5% in 2012, and then to 15.1% in 2013, while the investment structure deteriorated: the share of agriculture in total investment was 4.4% in 2010, 3.4% in
2011, and 4.2% in 2012; the share of industry was 43.2%, 41.9% and 39.2%, respectively. The share of manufacturing in total industrial investment was 29.8% in 2010, 25.3% in 2011, and 25.0% in 2012. Despite the downward trend in mining sector investment, the share of investment in manufacturing remains lower than in export-oriented extractive industries: 5.1% in 2010, 6.6% in 2011, and 5.6% in
2012, which points to a strengthening of the commodity-export trend in the development of industry. At the same time, export value is decreasing, although exports have always been a key factor behind recovery growth (the Azerbaijan economy is in need of such growth: although there was no sharp drop in production under the impact of the global financial crisis, growth rates for almost all macro-economic indicators declined). In 2011, exports reached 95.1% of the previous year's level; in 2012
3 Natsionalnye scheta. Statisticheski sbornik, Baku, 2013.
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the figure was 86.2%, and in 2013, 92.0%,4 even though there was no decline in the world price of oil, the country's main export commodity. In the investment structure, the share of investment in the renewal of machinery and equipment by way of imports reached 45.5% in 2012, which means that dependence on imports in the field of investment goods remains steadily high. The economy is increasingly losing its own technological base for development. Consequently, economic modernization in Azerbaijan lags behind the developed countries.
Growth prospects depend on the ability to create a favorable investment climate, where an important role is played by government support for real sector investment, the quality of public administration, and measures to stimulate business, promote competition and raise labor productivity by modernizing production. What the country needs is real modernization in all areas based on its own national identity, and not just transformations. Despite some growth in industry, the share of the mining sector (resource extraction) in the structure of value added has increased. In 2005, its share was 67.4%, manufacturing contributed 25.9%, and the power industry, 6.7%, whereas in 2012 the figures were 78.8%, 15.3% and 5.9%, respectively. In manufacturing, there has been a decline in the share of all industries. For example, the share of the food industry fell from 3.62% in 2005 to 2.06% in 2012; light industry shrank from 0.65% to 0.41%, chemical and petrochemical production from 2.71% to 0.81%, the forest industry from 0.37% to 0.22%, building materials from 1.6% to 1.0%, engineering and metalworking from 5.05% to 2.4%, oil refining from 9.9% to 7.3%, and metallurgy from 2.0% to 1.1%, respectively.
The industrial structure at the microeconomic level is also far from optimal. In 2013, there were 712 enterprises in resource extraction (644 of them small); 5,136 enterprises in manufacturing (including 4,758 SEs); 276 enterprises in the power industry (116 SEs), and 419 enterprises in water supply (325 SEs).
As a result, the slowdown in output growth has continued, although rising demand points to an untapped potential for industrial growth. Significant results have been obtained in areas where purposeful efforts are being made to modernize production. In 2013, for example, the newly created high technology park in Sumqayit presented the first results: photovoltaic panels and arrays, a new textile factory and a petrochemical plant; a household waste recycling plant has opened in Baku, and an aluminum products factory, in Ganja. Based on the cluster, it is planned to build an oil and gas processing and petrochemical complex, which will help to create a processing chain up to the production of the final product, to improve competitiveness and increase the volume and range of exports. The development of information technologies has a multiplier effect because these technologies not only produce additional GDP, but also enhance the effect of the operation of industries where they are applied. For example, modern third and fourth-generation rolling mills or machining centers are impossible without them. That is why modernization and fundamental structural changes in industry designed to meet current challenges and to increase the production of high value added products, especially high-tech products, are becoming a strategic task. But growth in the non-oil sector does not mean a reduction in the physical volume of oil and gas exports; it only implies the need to export finished products, especially high-tech and knowledge-intensive goods and services. This could include industries for whose development there are favorable conditions.
To assess the potential for the development of various sectors of industry, we used a model of analysis based on identifying the dynamics of economic development. The dynamism of development determines the lines of development from the perspective of structural dynamics. The structural dynamics process serves to transform structure in terms of innovation technology (new technologies determine the formation of a new technological base), in institutional terms and in market terms within the framework of the existing technological order. Transformation alters the structure of industry and, under the impact of the structural dynamics process, changes the quality of the economic potential of industrial sectors. This is important because the key condition of qualitative structural
4 Azerbaijan v tsyfrakh. Statisticheski sbornik, Baku, 2013.
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development is a combination of positive structural changes and economic growth, which leads to a shift in structural dynamics towards innovation and technological change.
As our calculations show, the overall dynamics of structural changes are positive. The growth rate is positive only in manufacturing and the power industry, although in 2009 growth in these sectors was also negative. Since 2011, growth rates have been negative for both industry in general and resource extraction in particular. The structural lead for the whole of industry and for extraction is larger than the structural lag, which shows that timely measures have been taken. But in manufacturing and the power industry the structural lag is larger than the lead, as evidenced by the negative growth for industry as a whole. The structural elasticity of output is negative for industry as a whole and for extraction, but in manufacturing and the power industry the trend is positive. The effectiveness of structural changes in employment, investment and output is positive (but less than unity), which shows that the technological component of industry is beginning to develop based on innovation in accordance with the requirements of the existing technological order. There is an increase in the production of fundamentally new goods, and higher investment and innovation activity in promising areas. The structure is gradually changing as it is modernized with an expansion of the new technological order, and this creates conditions not only for growth, but also for industrial development because investment is redirected from sunset industries to new ones.
In practice, these changes have reoriented industry toward imports of technology (a characteristic feature of primary-producing periphery countries). Export-oriented natural resource industries buy an increasing part of their equipment abroad. There is no demand even for fairly competitive domestic engineering products for the fuel and energy complex (FEC) among natural resource corporations, which tend to buy foreign machinery because the contracts they conclude do not provide for the use of competitive domestic products, as they do in Norway. In the structure of technological innovation costs in industry, the main items in 2005 were the purchase of new technologies (95%) and the purchase of equipment and machinery associated with technological innovation (3.4%); in 2012, the figures were 58.5% for the purchase of equipment and machinery associated with technological innovation, 27.9% for research and development, 6.0% for the purchase of new technologies, and 5.7% for the development and implementation of new processes, products and services.5 This indicates a low level of efficiency in industry. Commodity specialization, low wages, small share of research funding, low education level, low-skilled labor, low scientific and technical potential, and export of capital—all of these are characteristic features of a peripheral economy.
The process of production renewal based on new technology in Azerbaijan is not yet in full swing. As Sergey Glazyev rightly notes, "the incipient recovery is mainly driven by short-term factors and is taking place on the old technological base. In technological terms, the economy is still a mixed one. It has fallen apart into a relatively prosperous export-oriented natural resource sector and a domestic sector that is shrinking under pressure from imports and is increasingly falling behind its foreign competitors."6 This is evident, among other things, from the structure of industry in Azerbaijan: an increase in the share of extractive industries (78.8%) and a decrease in that of manufacturing (15.3%); there are also changes in the structure of fixed capital investment: 63.9% in resource extraction and 14.2% in manufacturing (2012).7
So far, the existing investment mechanisms cannot solve this problem. Its solution is important because export-oriented sectors which earn high profits due to a favorable pricing environment have ample opportunity to invest compared to manufacturing enterprises, whose opportunities to invest are limited. That is why, now that most industries have a low profit margin because of price disproportions and many production enterprises continue to operate at a loss, the achievement of sustain-
5 Promyshlennost Azerbaidzhana. Statisticheski sbornik, Baku, 2013, p. 94.
6 S.Yu. Glazyev, "Gosudarstvennaia ekonomicheskaia politika Rossii v usloviyakh globalnoi konkurentsii," Sovremen-
naia konkurentsia, No. 2, 2007, p. 29.
7 Promyshlennost Azerbaidzhana. Statisticheski sbornik.
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able production growth is problematic. At the same time, it should be noted that most of the idle industrial capacity can still be brought back into operation if the financial position of enterprises improves.
It is particularly important to take this into account because the potential for production growth at existing facilities is low and investment is needed for their modernization on the basis of new technology. The remaining scientific and technical potential does not yet create the conditions for restoring and maintaining expanded reproduction of some key technologies of the current and new technological orders. To remedy this situation, it is necessary to build national competitive advantages in the key development areas of the new technological order, with a proper concentration of financial, investment, information and intellectual resources available in the country, which requires the implementation of appropriate investment, structural, industrial, scientific and technological, pricing and other components of the country's policy of sustainable development. It is important to improve the dynamics of industry so that it could act as an engine of technological progress in Azerbaijan. The industrial structure should correspond to development that takes into account the country's potential, serves national interests, and is in line with world economic processes. The choice of modernization as a way of development instead of development based on natural resources is somewhat overdue, and the measures being taken to resolve these problems are of little effect because we have a consumer economy and the task today is to go over to an innovation economy. But a "consumer economy" and an "innovation economy" are two fundamentally different types of economy and two different models of economic development. That is why an appropriate model here is an economy based on innovation, which makes it necessary to determine the impact of an innovative environment on the development of industry.
The Impact of an Innovative Environment on Industrial Development
As we know, Azerbaijan's President Ilham Aliev has announced a new stage of economic transformation because the country needs an economy with a competitive industry and infrastructure based on modern technology, with a developed service sector and efficient agriculture. That is why the government of Azerbaijan has set a strategic goal: modernization of industry, the conditions for which have been created after the completion of the transition period and the achievement of stabilization. To realize this strategic goal, it is advisable to create an innovative environment, which actually serves to increase the competitiveness of industry not only in the domestic but also in the global market.
A general idea of the scale and pace of development of the innovation process can be gained from data on R&D expenditure as a percentage of GDP, income from inventions, patents and copyrights in the area of R&D, exports of high-tech products, etc. The most important indicator here is the first one because it does not depend on the size of the country, while the other indicators can be regarded as additional, considering the different national economic potentials.
The structure of expenditures on technological innovation by funding source has tended to change both for industry as a whole and for manufacturing, but not dynamically. Whereas in 2005 extra-budgetary funding accounted for 3.0% of such expenditures for industry as a whole, enterprises accounted for 7.6%, the state budget for 80.8%, and other funding sources for 8.6%, in 2010 the share of enterprises was already 44.0%, and that of other sources 56.8%; in 2011, the share of enterprises was 72.8%, and that of the state budget 27.2%, and in 2012 the figures were 98.4% for enterprises and 1.6% for other sources. In manufacturing, enterprises in 2005 accounted for 27.8% of expenditures, extra-budgetary funding for 18.9%, and other sources for 53.3%; in 2010, the share of enterprises was 44.0%, and of other sources 56.0%; in 2011, the figures were 70.7% for enterprises
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and 29.3% for the state budget, and in 2012, 98.1% for enterprises and 1.9% for other sources.8 Increasing shares of financing by enterprises indicate an improvement in their performance. This trend is confirmed by technological innovation expenditures for various implementation areas.
In 2005, the pattern was as follows: 82.4% in resource extraction, 16.1% in manufacturing, and 1.5% in the power industry; by 2012, it changed to 8.3%, 86.7% and 5.0%, respectively. Whereas in industry as a whole the share of expenditures for the development and implementation of new products, services and processes was 1.6% of total technological innovation expenditures, for the purchase of machinery and equipment associated with technological innovation 0.3%, and for the purchase of new technologies and software 95.0%, in 2012 the figures were 5.7%, 58.4% and 7.8%, respectively. In resource extraction, the share of expenditures for the purchase of machinery and equipment associated with technological innovation fell from 100% in 2005 to 6.4% in 2012, losing ground to the development and implementation of new products, services and processes (0.3%) and the purchase of new technologies and software (93.0%). In manufacturing, the ratio changed from 0.5% for the development and implementation of new products, services and processes, 20.8% for the purchase of machinery and equipment associated with technological innovation, and 78.6% for the purchase of new technologies and software in 2005 to 6.5% and 61.1% for the first two items in 2012 (that year, there was no funding for the purchase of new technologies and software). In the power industry, expenditures for the development and implementation of new products and services accounted for 100% of total technological innovation expenditures in 2005, whereas in 2012, 100% of the total was spent on the purchase of machinery and equipment associated with technological innovation.9 All these tendencies have had an effect on the production of innovative products (see the table).
Table
Innovative Output in Industry (%)10
New Products Improved Products
2009 2010 2011 2012 2009 2010 2011 2012
Industry 100 100 100 100 100 100 100 100
Resource extraction — — 15.7 1.7 — — 72.4 22.5
Manufacturing 100 100 84.3 98.3 100 100 27.6 77.5
Innovative Products Innovation Process
Industry 100 100 100 100 100 100 100 100
Resource extraction 16.7 0.1 2.2 13.0 0.4 — — —
Manufacturing 83.3 99.9 97.8 87.0 94.4 100 100 86.1
power industry — — — — 5.2 — — 13.9
8 Promyshlennost Azerbaidzhana. Statisticheski sbornik, pp. 92-93.
9 Ibid., pp. 94-99.
10 Ibid., pp. 89-91.
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As the table shows, manufacturing had the largest share of new products: 100% of the industry total in 2009, 84.3% in 2011 and 98.3% in 2012; resource extraction had 15.7% in 2011 and 1.7% in 2012. For improved products, manufacturing had 100% in 2009, 27.6% in 2011 and 77.5% in 2012, and resource extraction had 72.4% in 2011 and 22.5% in 2012. For innovative products, resource extraction had a share of 16.7% in 2009, 2.2% in 2011 and 13.0% in 2012, and manufacturing had 83.3% in 2009, 99.9% in 2010, 97.8% in 2011, and 87.0% in 2012. For the innovation process, manufacturing accounted for 94.4% in 2009, 100% in 2011 and 86.1% in 2012. That is why it would make sense to restore industry and industrialize the country based on new technology both to meet the needs of the domestic market and to develop exports of goods. Under the current conditions, Azerbaijan should give priority to promising areas in the development of the new technological order, which will provide an opportunity for rapid real growth through faster development of key lines of production and factors of the new technological order. This will in turn promote an intel-lectualization of production in many sectors and encourage continuing education in most professions. Information and educational services enhancing the role of science and education, the basic sectors of the new technological order, will become dominant. But this does not mean that the natural resource sector will be reduced in favor of manufacturing. The FEC should turn into a significant knowledge-intensive and high technology complex helping to solve structural problems and providing a basis for economic growth designed to improve the country's competitive position. In the long-term development of industrial production, the main task is to create a sectoral structure that would meet the current requirements of economic growth based on an innovative renewal of production and an improvement in its efficiency and competitiveness. Hence, market forecasts of technological development, the emergence of innovative products and new generations of technology and machinery are important in this context: their results will help the state to formulate its industrial, scientific and technological policy, while businesses can use them as a guide in their strategic development and long-term investment.
By Way of Conclusion
Modernization is a key priority of socioeconomic policy, and this requires structural changes within each sector because it is necessary to adapt to the radically changed general, internal and external conditions of the country's economic development. The fuel and energy complex could be the main customer for products and services considering that today it is important to merge the value chains of complementary sectors: FEC, petroleum engineering and metallurgy. This will help to revive engineering and ensure rational development of metallurgy, to maximize capacity utilization and reduce imports of expensive foreign equipment and technologies. The chemical and petrochemical industry is another attractive destination for private capital in search of profitable investment opportunities. Chemical and petrochemical products can be of interest to oil and gas producers because they should not confine themselves to exports or primary processing of oil and gas but should branch out into areas where natural or associated gas is used as a feedstock and make more investments in refining capacity. For example, this could include the creation of chains of technologically related enterprises: "plastics" chains, "tire" chains, "fertilizer" chains, "chemical fiber" chains, etc. Ultimately, growth should be mainly generated not by metal- and energy-intensive industries, but by manufacturing industries such as engineering and metalworking, chemical and petrochemical industry, oil refining, and food and light industries, with the implementation of an energy-saving policy. Knowledgeintensive, high technology industries naturally grow out of a general economic expansion, and economic restructuring should primarily focus on industries that have always been the starting point for the development of mass markets and sustainable growth.
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Despite increasing competition and the importance of finding a definite niche for our products in the world economy, we have paid little attention to marketing research and technological innovations. In assessing the situation, we can conclude that new machinery is insufficient to accelerate labor productivity growth: the important thing here is to organize the reproduction process using the opportunities offered by more advanced information technologies. It is known that with low rates of economic growth the scientific and technical potential builds faster than it is used up. In Azerbaijan, it is currently used up faster than it builds. To accelerate industrial growth, we should exploit various opportunities (including those provided by the international division of labor) arising from the favorable environment for the development of manufacturing.
Rapid labor productivity growth is possible if the natural resource potential is combined with the development of human capital and the use of new, progressive forms of doing business. Economic growth in developed countries is 70% dependent on human capital and 30% dependent on productive capital and natural resources. Innovations integrate the world economy. Economic priorities are shifting toward the creation of mechanisms that ensure the fastest possible translation of the results of basic and applied research and development into industrial products because natural resource business has little interest in developing science. The acquisition of existing technologies and equipment does not create strategic advantages for an enterprise because such technologies are basically available to its competitors. That is why it is necessary to organize in-house technology development. Today, advanced technology is the key to market success, and people are the main competitive advantage. At the same time, even following the path of innovation-driven development it is possible to sell natural resources. The question is what to sell, and this depends on the country's technological level.
In a situation where the ties between science and the economy have weakened, foresight (futures studies) helps to strengthen these ties and places science, technology and innovation at the center of national socioeconomic development. This will help to accomplish the main task of structural and investment policy: to restore engineering output, which has fallen to an unacceptable level, but in a new, consumer-oriented structure. The world economy is prone to recurrent crisis phenomena, which affect not only certain types of products, but also certain regions. This makes it necessary to minimize risk or potential losses from a decline in exports. For this purpose, we should renew and strengthen the main components of the innovation system such as the potential of small and medium enterprises developing and implementing risky scientific and technical projects; develop national engineering as the basis for innovative economic growth; retool industrial enterprises; encourage research and development by innovative small enterprises under contracts with large firms in primary processing in order to make innovation activity more flexible and dynamic; encourage enterprises to turn R&D into final products and organize their distribution; increase public funding of R&D primarily in the fields of natural science, engineering and technology, academic science and education, which promotes innovation activity in the business sector; create national innovation systems aimed at implementing the complete innovation cycle (basic research-applied research-development-production of knowledge-intensive products-commercialization of knowledge-intensive products); integrate research and innovation with the real sector of the economy, restore industry science (the system of industry research institutes and design offices); improve the basic theoretical and methodological principles of innovation-program policy and realize their effect; and ensure the maintenance and growth of the country's economic potential as a basis for the formation of Azerbaijan's socioeconomic policy.
Under the government's policy of implementing an innovative development model and realizing the "knowledge economy" concept, the state's role in supporting innovation-investment structural changes is to set up research centers with mixed funding, encourage the creation of innovation clusters, ensure real economic returns on investment in R&D, award public contracts for innovative products (in implementing state energy-saving, informatization and ICT development programs), and establish a system to analyze demand for sci-tech and innovative products by stimulating the development of
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public and mixed research and consulting centers requiring coordination of regional, industrial and innovation policies. The creation and development of industries based on new and high technologies are not only a means to achieve and maintain high competitiveness of the national economy in the world market, but are also important for qualitative changes in the economic structure.
According to Charles Wheelan, "economics presents us with a powerful, and not necessarily complex, set of analytical tools that can be used to look back and explain why events unfolded the way they did; to look around and make sense of the world; and to look forward so that we can anticipate the effects of major policy changes... If we are to make the best use of these tools, we ought to think about where we are trying to go. We must decide what our priorities are, what trade-offs we are willing to make, what outcomes we are or are not willing to accept."11 Somewhat slower growth in the economy as a whole is due to the impact not only of foreign, but also of domestic factors. Increasing investment in sectors that enhance economic efficiency, including efficiency in industry and its key areas, will remedy the current situation and promote comprehensive modernization in accordance with the set goal and the priorities of industrial development.
11 Ch. Wheelan, Naked Economy. Undressing the Dismal Science, New York, 2002, pp. xxii, 229.
