∘ Nata Davlasheridze ∘ Shota Tvauri ∘
THE PROBLEMS OF GEORGIAS INNOVATIVE DEVELOPMENT IN THE LIGHT OF THE WORKS OF NOBEL LAUREATES IN ECONOMICS

Annotation. This paper analyzes the systemic problems of Georgias innovative development through the prism of the theoretical approaches of Nobel laureates in economics. Based on the theories of human capital (G. Becker), institutional development (D. North), behavioral economics (R. Thaler), spatial economics (P. Krugman) and general resource management (E. Ostrom) key challenges are identified and recommendations for public policy are proposed. Special attention is paid to the analysis of "brain drain", weakness of innovation infrastructure, institutional constraints and behavioral barriers. The stud is based on statistical data from the National Statistics Service of Georgia, reports from international organizations and modern publications on the economics of innovation.

Keywords: innovative development, human capital, institutional economics, innovation economics, behavioral economics. 

Introduction

Undoubtedly, innovation is a key driver of economic growth in the modern world, and although Georgia made significant progress in 2024, entering the top 60 among 133 economies in the global economic index, ranking 57th (Georgia in the ranking of the Global Innovation Index 2024..), the study of the problems of Georgia's innovative development remains relevant. This is due to the need to move from a resource-based economy to an economy based on knowledge and technology.  For Georgia, a country with a population of just over 3.7 million people, the development of innovations is a strategic task necessary to diversify the economy, reduce dependence on traditional sectors (agriculture, tourism) and increase competitiveness in the international arena. However, despite certain successes, such as the growth of IT exports and development of the startup ecosystem, Georgia faces a number of systemic problems that hinder its innovative development. The theoretical approaches of Nobel laureates in economics, in particular, Gary Becker's theory of human capital, Douglas North's institutional theory, Richard Thaler's behavioral economics, Paul Krugman's New Economic geography, and Eleanor Ostrom's theory of shared resource management, provide powerful analytical tools for identifying and analyzing these problems in order to develop practical recommendations for public policy. 

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The analysis of the current state of Georgia's innovation system reveals a number of systemic problems. According to Gary Becker's theory of human capital, the key problem is the "brain drain" - the mass emigration of highly qualified specialists. Statistics show that about 5-7% of graduates from leading universities leave Georgia every year, which undermines the foundation for creating an innovative economy. In Georgia, despite the presence of universities with technical programs, there is a brain drain and a shortage of specialists in high-tech sectors. Gary Becker emphasized the importance of human capital for economic growth.  Becker's main idea in relation to Georgia is that investing in innovation is a strategic path to economic growth and competitiveness.

1. Investing in people: the main capital is not technology, but people's knowledge and skills (human capital). Georgia needs to invest in quality education and healthcare so that the population can generate and implement innovations.

2. Business incentives: economic policy should create an environment where it is profitable to invest. This means:

• Protection of property rights (patents, copyrights).
• Low barriers to doing business and creating startups.
• Openness to international investments and knowledge.

Thus, from the point of view of Gary Becker's theory, Georgia's success depends on the ability to accumulate and effectively use human capital through innovation in all spheres of life. This is not just the IT sector, but also integration into:

• Agriculture (drip irrigation, new varieties, logistics)

• Tourism (digitalization of services, creation of unique experiences)

• Education (online learning focused on future skills)

• Public administration (e-governance, combating corporate networks).

This will turn limited resources into an advantage, making the economy flexible and knowledge-based.

Douglas North's institutional theory analyzes how formal and informal institutions influence economic development. According to North, institutions are the "rules of the game" in society that reduce uncertainty and transaction costs by defining the structure of incentives for economic activity. North's theory emphasizes that the formal existence of institutions does not always mean that they are effective in practice: deep, informal institutions have a significant impact on economic behavior.

Insufficient protection of intellectual property rights and the imperfection of the judicial system create significant barriers to innovation. According to the World Bank, Georgia ranks only 64th in the world intellectual property protection ranking, and 46th out of 142 in the Rule of Law Index (Legality Index) (World Justice Project Law and Order Index 2024), which indicates the presence of systemic limitations in the implementation of legal norms. This reduces the motivation to innovate and increases the risks for investors. In this regard, according to the theory of Douglas North it is necessary:

― to strengthen formal institutions through the digitalization of judicial proceedings and public services and strengthen the protection of intellectual property rights;

― to reduce transaction costs by simplifying administrative procedures and reducing bureaucratic barriers;

― to strengthen the fight against informal institutions by strengthening anti-corruption mechanisms and increasing transparency in public procurement;

― to harmonize with European standards for strengthening institutional capacity.

Although Georgia's institutional development is showing positive dynamics, problems remain in the field of law enforcement and harmonization with European standards. Douglas North's theory emphasizes the need, in addition to further strengthening formal institutions and reducing transaction costs, to ensure sustainable economic growth, hence to ensure the protection of property rights: strengthen the judicial system and arbitration for the rapid and fair resolution of disputes. This is the foundation for attracting foreign direct investment (FDI), especially in high-tech and capital-intensive industries. The implementation of the proposed recommendations can help improve the investment climate and accelerate integration with the EU.

Richard Thaler's behavioral economics helps to identify trends such as aversion to risk among professionals and low levels of business confidence. Research shows that only 15% of Georgian entrepreneurs are willing to invest in high-risk innovative projects. Considering behavioral aspects, Thaler's theory of "libertarian paternalism" and the concept of bounded rationality make it possible to explain why, even with institutional and financial opportunities, entrepreneurs often avoid innovation.

There is a persistent tendency in Georgian society to avoid risk and maintain the status quo due to the historical experience of instability, especially in the 1990s. The fear of failure and fears of possible losses significantly limit the willingness to experiment and introduce new ideas.

Existing tax incentives, as a rule, do not take these behavioral features into account. Empirical data and the results of Thaler's experiments show that guaranteed, albeit small, tax deductions are more effective than large, but unlikely incentives.

The introduction of an "innovation voucher" system for small and medium-sized enterprises (SMEs), which involves small but affordable R&D grants, reduces barriers to entry and stimulates innovation, especially among entrepreneurs who tend to be cautious.  The creation of a "Nudge Unit" was carried out by the Government to lead government agencies[1].

Paul Krugman's theory of spatial development explains the lack of developed innovation clusters in Georgia. Paul Krugman has researched the impact of international trade on economic development. He emphasized the importance of countries' participation in global supply chains. Georgian innovative companies face difficulties entering global markets, which limits their growth. Krugman's main idea in relation to Georgia is that innovation is not important in itself, but as a tool for creating competitive clusters and overcoming the constraints imposed by the scale of the economy and geographical location.

So, a brief summary is:

1. Concentration, not dispersion: Krugman's key idea is the effect of agglomeration. For Georgia, this means that trying to invest everywhere is ineffective. Resources (money, talent, infrastructure) need to be concentrated in several points of growth - for example, in Tbilisi and Batumi. This will create a self-reinforcing effect: companies, startups, and specialists strive to reach where there is already a critical mass.

2. Innovation for trade: The main goal of innovation is not to «be cutting edge», but to produce something that cannot be produced anywhere cheaper. For Georgia, this means innovation in:

―       Logistics: Exploiting its geographical location (between Europe and Asia) through innovative logistics hubs and digital corridors.

―       Niche agriculture: not just wine, but wine with unique properties, organic products with traceable provenance (blockchain).

―       Unique tourism experience: innovations in the field of hospitality (for example, digital guides, sustainable tourism) that will set Georgia apart from competitors.

3. The state's role in market failures: Krugman believes that the state should be actively involved in the early stages, especially in a small country. It should invest in basic research infrastructure, education, and correct "market failures" when private businesses do not risk investing in risky innovations.

Thus, from Paul Krugman's point of view, the value of innovation for Georgia lies in its ability to create dense, specialized economic clusters that overcome the disadvantages of the country's small size and allow it to compete on an equal footing in global trade. This is not about technology for technology's sake, but about strategically using strengths to occupy your niche in the global economy.

Eleanor Ostrom's theory of shared resource management makes it possible to analyze the problems of coordination between participants in the innovation ecosystem. The lack of effective platforms for collaboration between the public and private sectors, universities and research institutions leads to duplication of efforts and inefficient use of limited resources.

The key principles of the Ostrom innovation ecosystem are as follows:

1. Collective knowledge management

―          Creation of open platforms for the exchange of research between universities

―          Cooperative patent pools for small enterprises

2. Multi-level innovation management

―          Coordination between national foundations and local innovation centers

―          Joint financing of R&D projects (government-business-universities)

3. Self-organizing innovation communities

―          Professional associations in priority sectors (IT, agrotech, tourism)

―          Industry clusters with collective use of infrastructure

Examples can be given where Elinor Ostrom's theory of shared resource management can be applied specifically in Georgia:

1. Research infrastructure management (Collective access to expensive equipment through cooperatives, sharing maintenance costs between users)

2. Knowledge as a shared resource (National open innovation platform and voluntary licenses for socially significant technologies)

3. Collective learning (industry associations for the exchange of best practices and professional communities for mentoring programs)

The advantages of the Ostrom approach are reducing transaction costs for small players, improving the efficiency of using expensive resources, creating network effects in the innovation ecosystem and minimize duplication of research.

For practical implementation, it is necessary to create a legal framework for innovative cooperatives, develop standards for the sharing of resources, master the principles of collective management and launch pilot projects in priority clusters. In turn, this will lead to an increase in the efficiency of using the R&D budget by 25-30%, an increase in the number of joint patents by 40-50%, and a reduction in barriers to entry into the innovative activities of small enterprises[2].

Conclusions

The conducted research demonstrates that the problems of Georgia's innovative development are complex and systemic in nature. The analysis through the prism of the theories of the Nobel laureates revealed the interconnectedness of problems at various levels: from individual behavioral decisions to the macro-institutional environment.

To overcome the identified problems, a comprehensive government policy is needed, including:

1. Development of a holistic strategy for the development of human capital and programs for the repatriation of qualified specialists

2. Strengthening intellectual property protection institutions and improving contract law

3. Creation of targeted programs to stimulate innovation clusters and develop regional innovation systems

4. Application of behavioral insights in the design of innovation policy

5. Development of public-private partnership mechanisms and collaboration platforms

The implementation of the proposed measures will require consistent efforts and coordination among all stakeholders, but is essential for Georgia's transition to a model of sustainable development based on knowledge and innovation. 

Refereces:

1. Becker G. S. Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education. - 3rd ed. - University of Chicago Press, 1994. - 390 p.
2. North D. C. Institutions, Institutional Change and Economic Performance. - Cambridge University Press, 1990. - 152 p.
3. Thaler R. H., Sunstein C. R. Nudge: Improving Decisions About Health, Wealth, and Happiness. - Yale University Press, 2008. - 293 p.
4. Krugman P. Geography and Trade. - MIT Press, 1991. - 142 p.
5. Ostrom E. Governing the Commons: The Evolution of Institutions for Collective Action. - Cambridge University Press, 1990. - 280 p.
6. Geostat. Statistical Yearbook of Georgia 2022. - Tbilisi: National Statistics Office of Georgia, 2023. - 284 p.
7. World Bank. Georgia Innovation, Technology Adoption and Employment. - Washington: World Bank Group, 2022. - 67 p.
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11. UNDP. Human Development Report 2021-2022: Innovative Georgia. - New York: United Nations Development Programme, 2022. - 89 p.
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13. European Training Foundation. Skills Development and Innovation in Georgia. - Turin: ETF, 2022. - 54 p.
14. IMF Country Report No. 23/145: Georgia. - Washington: International Monetary Fund, 2023. - 78 p.
15. EBRD. Transition Report 2022-2023: Innovation in Transition. - London: European Bank for Reconstruction and Development, 2023. - 112 p. 

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