The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) Project Information Document (PID) Concept Stage | Date Prepared/Updated: 08-Jul-2021 | Report No: PIDC31303 Jul 08, 2021 Page 1 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Parent Project ID (if any) Project Name Argentina P175143 Program for Smart Growth via Innovation and Entrepreneurship (P175143) Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) LATIN AMERICA AND May 10, 2022 Jul 07, 2022 Finance, CARIBBEAN Competitiveness and Innovation Financing Instrument Borrower(s) Implementing Agency Investment Project Financing Argentine Republic Agencia Nacional de Promoción Científica y Tecnológica Proposed Development Objective(s) The development objective is to promote private sector innovation and firm growth to create sustainable jobs and raise incomes. The high-level project objective is to help diversify, accelerate and green Argentina’s sources of growth. PROJECT FINANCING DATA (US$, Millions) SUMMARY-NewFin1 Total Project Cost 120.00 Total Financing 120.00 of which IBRD/IDA 120.00 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 120.00 Environmental and Social Risk Classification Concept Review Decision Jul 08, 2021 Page 2 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) Moderate Track II-The review did authorize the preparation to continue Other Decision (as needed) B. Introduction and Context Country Context 1. The COVID-19 outbreak hit Argentina at a time when its economy faced significant macroeconomic imbalances and a highly uncertain outlook. Following a two-year recession, high inflation, and lack of access to capital markets, the strict lockdown imposed to contain the spread of the pandemic triggered a sharp GDP contraction of -10 percent in 2020. The recovery in economic activity started in the fourth quarter of 2020, when the Government of Argentina (GoA) gradually eased confinement measures. In May 2021 a second COVID wave hit Argentina which prompted the Government to tighten again social distancing measures, to prevent overburdening the already strained health system and the slow pace of vaccination. 2. The recovery has been heterogeneous. While activity is above pre-pandemic levels in agriculture, construction, financial activities and manufacturing, other sectors such as hotels and restaurants, and transports and logistics are still contracting. The recovery shows signs of slowing down as the most dynamic sectors that kick-started the recovery in 2020Q4 are showing signs of stagnation. Labor markets are still subdued and have not been responding to the cyclical recovery of the economy. Although labor market participation and employment have increased since the end of the strict lockdown in June 2020, the observed dynamics is driven by the informal sector, as private sector employment has stagnated at very low levels since March 2020, and public sector employment, already at high levels, has increased modestly in the past months. The poor performance of the labor market precedes the COVID outbreak and is one of the root causes of the country’s high poverty rates. One third of working Argentines is in an informal occupation, similar to ten years ago. Formal private sector employment represents less than half of the formal labor force: it reached only 5.9 million in the last quarter of 2020 (latest data available), out of 12 million total formal workers in the same period, and half a million less than in early 2018, at the beginning of the protracted recession. Only 20.2 million Argentines (45 percent of the population) are economically active. 3. The implementation of a fiscal stimulus package to support families and firms – equivalent to 3.9 percent of GDP, coupled with an abrupt decline in revenues, resulted in a central government (primary) deficit of 6.5 percent of GDP in 2020. In a context of restricted market access, financing the response to the COVID-19 shock required an important monetization of the deficit. This has exacerbated macroeconomic imbalances, notably by exerting pressures on inflation, foreign reserves and on the persistent large gap between the official and parallel exchange rates, despite tight capital and price controls. However, the spike in commodities prices since late-2020 contributed significantly to restore stability in the FX market and enabling the Central Bank to partially rebuild its reserves. Jul 08, 2021 Page 3 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) 4. Real GDP is projected to rebound by 6.4 percent in 2021, given the strong 2020 Q4 carry-over effect and ample idle capacity. Uncertainty as well as price and capital controls will limit strong investment growth, which is needed to raise low-productivity levels and generate formal job creation, after many consecutive years of anemic growth. The rebound is expected to be only partial in 2021, and the economy is not projected to reach 2019 GDP levels before 2023. The 2021 budget foresees a reduction in the primary deficit from an estimated 6.5 percent of GDP in 2020 to 4.2 percent. High commodity prices are supporting the fiscal and external accounts, as well as foreign reserve accumulation. The Government has announced additional support measures to households, which is expected to be completely financed by high commodity prices windfall revenues. There are important downside risks to this baseline scenario, notably the evolution of the second wave of the pandemic and the pace of vaccination. Prolonging social distancing measures risks could dent the incipient recovery, and the fiscal balance, via lower fiscal revenues and a renewal of temporary support measures. The latter would in turn require additional deficit monetization, risking accelerating inflation. 5. Even prior the pandemic, Argentina’s economy has been crisis-prone and overly dependent on commodity exports, underscoring the need to implement a long-term growth strategy. Before the pandemic, Argentina has spent one third of the last 60 years in recession, 14 episodes in total, each one of which lasted close to 2 years on average and resulted in negative growth. Unsophisticated products, primarily in the agricultural sector, continue to make up more than 60 percent of the Argentine export basket, leaving the country vulnerable to fluctuations in these resources. This contributes to reduced global market confidence in the Argentine economy. Going forward, it is important to view and focus on innovation and its contribution to growth, and thereby increased domestic value-add, with a longer term, stable vision even at times of crisis. 6. Moreover, the confluence of health, macro-fiscal and environmental challenges requires Argentina to adopt policies that promote smart and green private sector growth that can achieve the most with limited fiscal space . Argentina has committed to not exceed more than 483 tons of CO2 by 2030 (an 18% reduction from the expected trend for 2030) in climate mitigation efforts for the Paris Climate Agreement. Meeting these commitments will require it to rethink its industrial organization and innovations that underpin private sector growth, among others. This commitment as well as other policy initiatives, such as the 2030 Agenda for Sustainable Development and the Partnership for Action on the Green Economy, lay the foundations for a transition from a linear economic system towards circular economic system. Argentina, with an estimated 15 percent of its GDP already dependent on bio-economy value-chain, not only need to mitigate against climate risks, can also take advantage of the greening trends across all sectors and in global markets. Indeed, a recent study by Ernst et. al. (2019) estimates that in 2015, 7 percent of formal jobs in Argentina were green jobs. Furthermore, salaries of green jobs were 20 percent higher than non-green jobs and the rate of participation of young and women was higher for green jobs relative to non-green jobs. Going forward, recovery from COVID-19 and Argentina’s persistent growth imperative will have to dovetail and drive momentum from green growth objectives. Sectoral and Institutional Context 7. Argentina is highly vulnerable to macro-fiscal crises due to its dependence on a limited number of sectors, which are strongly affected by external factors such as droughts, global trade shocks and commodity price fluctuations. Argentina is rich in natural assets and historically has had a large middle class. Extraordinarily fertile land makes Argentina one of the largest agricultural producers in the world. The beef and soy sectors apply some of the most modern Jul 08, 2021 Page 4 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) technologies and practices in the world and are leaders in breeding, agricultural machinery, and innovation. Its 18 ecoregions with different geological, climatic, and edaphic characteristics are home to a rich biodiversity, which brings important opportunities for developing the bio-economy. Argentina also has vast natural resources in energy, with vast potential in wind and solar energy. It is also endowed with the second-highest shale gas and fourth highest shale oil reserves in the world, ranking third in terms of the largest proven reserves of lithium. 8. Argentina’s long-term growth performance has been disappointing, and lack of job creation in recent years has limited the progress made on poverty and shared prosperity. While the share in global GDP of high growth regions such as East Asia and the Pacific (EAP) almost doubled from 15.0 percent to 29.4 percent between 1970 to 2019, Argentina’s share in global GDP fell from 0.9 percent to 0.5 percent in the same time period. These patterns were driven by the stagnation of productivity, also reflected through firms’ incapacity to grow sustainably over time, as most mature firms in Argentina are not significantly larger than new entrants, in terms of employment. Most existing micro, small, and medium enterprises (MSMEs) remain at the same size five years after their creation (while a mature firm in the United States after the same period is nine times the size of a new firm). Table 1 shows that very few micro firms become small (3 percent) and very few small firms become medium (5 percent), which suggests that firms which were initially small always remain small. Furthermore, even medium size firms have difficulties in growing (6 percent), as more medium-sized firms exit markets (11 percent) instead of expanding. Hence, the proportion of fast-growing firms—those that generate most new jobs and additional wage income —is small. Table 1: Transition Matrix by Size – 5 Years (in Percentage) Source: Gialini, Gomez, and Scattolo, 2019. 9. Innovation1 can play a key role in transforming Argentina’s growth trajectory and creating new sources of sustained growth and jobs, especially given the challenges and the trends that will intensify in the context of climate change and growing social inequalities. Sustained growth is dependent on productivity growth, in which innovation is a key ingredient (Schumpeter 1949 [2008]). Reinforcing Argentina’s strengths in innovation has the potential to result in long term growth and deliver shared prosperity. An improved innovation function (inputs-outputs-results, see Figure 1) can also play a key role in addressing pressing challenges such as recovery from the COVID-19 crisis, climate change, and gender inequality (Comin and Hobijn 2004; Comin and Ferrer 2013). Empirical cross-country studies demonstrate that productivity improvements account for half of GDP growth across countries (Easterly and Levine 2001). Thus, transitioning Argentina’s growth model toward one that is innovation-fueled, and thereby generating multiple engines of growth will be critical to escaping the recurrent boom and bust cycles that have plagued the economy for so long. This transition requires a holistic approach, among which is strengthening Argentina’s innovation system by tackling multiple factors that 1 Defined as the introduction of new products, technologies, business processes, and ideas in the market, as well as the invention of new ideas, innovation drives Schumpeter’s creative destruction process (Schumpeter [1942] 2008), underlies modern growth the ory, and is the critical ingredient in historical accounts of how countries achieve prosperity . Jul 08, 2021 Page 5 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) impact Argentina’s knowledge production and application, and the ability to improve firm-level productivity and diversification outcomes. 10. Argentina is widely admired for comparative strengths in its human capital and high-end research capabilities, which is a potential to build upon with smart policies and targeted investments . Argentina’s innovation inputs include several important assets. It has high scores in two out of the seven Global Innovation Index (GII) 2020 pillars: Human capital and research sophistication, which are above average for the upper middle-income group. Argentina has the highest share of researchers per capita in Latin America and some of the top research organizations in the world. Between 2004 and 2016, Argentina expanded its research base by 36 percent (to 3 researchers per 1,000 employees)—the highest increase in the region. In 2019 it ranked among the top 30 countries in the world in terms of the excellence of its research organizations—in both cases significantly ahead of regional comparators such as Chile and Mexico. Meanwhile, knowledge-intensive sectors such as biotechnology, nanotechnology, and software - while still small - emerged for the first time or grew substantially since 1990s; in some related business segments, Argentina became globally competitive. For example, today, Argentina is the world’s third biggest producer of biotech crops, after the United States and Brazil. Argentina produces 14 percent of the world’s biotech crops, making it one of the most prolific producers of new technologies in this sector. 11. The growing strengths in some of the factors serving as innovation inputs were also paralleled by progress on the policy front, which increased the focus on linkages between the academic sector and industries, and on firm-level productivity. Traditionally, Argentine “innovation policy� focused almost exclusively on academic sciences and post - graduate education. Since early 1990s however, the Argentine government increasingly recognized that innovation is a key source of inclusive growth and reoriented efforts to achieve sustainability-linked objectives. The Ministry of Science, Technology and Productive Innovation (MINCYT) has made addressing socio-economic challenges a priority in its guidelines for the development of the country’s innovation system. The Agency for the Promotion of Science and Technology was established in 1996, now referred to as Agencia I+D+i (Agencia Nacional de Promocion para la Investigacion, el Desarrollo Tecnologico y la Innovacion) and administers a wide number of programs to support science, technology and innovation (STI). These programs include the Argentine Sectoral Fund (FONARSEC), which supports innovation initiatives and public-private research partnerships (currently the backbone of Argentina’s S&T policy); EMPRETECNO, which focus on strategic knowledge areas and sectors1, as well as tech based entrepreneurship; and FONSOFT, which focuses on ICT, among others. Moreover, a new technology transfer unit in the National Scientific and Technical Research Council (CONICET) has been supporting linkages between academic research and social and economic outcomes. 12. Despite these sector specific strengths and policy progress, Argentina’s innovation function underperforms with regards to its expected impact on growth. In Argentina, innovation has a positive impact on productivity and produces returns, but these impacts are limited and heterogeneous (Cirera et al. 2020). Argentina’s innovation outputs in terms of new products, processes, and businesses continue to lag significantly behind both regional and structural peers and are not commensurate with the quality of some of its inputs. In the Global Innovation Index (GII) 2020, Argentina scored below average for its income group in five pillars: relevant business regulatory institutions, infrastructure, market sophistication, knowledge & technology outputs and creative outputs. Though Argentine R&D expenditure fluctuated substantially in recent years, it tended to increase through the 1998 - 2017 period, reaching 0.5 percent in 2017. However, at 0.5 percent Jul 08, 2021 Page 6 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) of GDP, gross R&D expenditure is still lower than the OECD average of 2.37 percent, with private sector’s contribution especially low.2 Moreover, a disconnect remains between private sector needs and public research, as well as a misalignment between national priorities and resource allocation3. Although scientific production is relatively strong compared to peers, technology transfer and adoption by firms and investments in innovation at large (public and private) remain low. 13. A set of factors, including gaps across innovation inputs and outputs, and challenges related to macro-micro complementarities (foundations) explain innovation’s subpar contribution to growth outcomes. The Argentine “knowledge function�—the ability to transform knowledge into innovations taken to market—displays inefficiencies and is unable to transform innovation inputs into significant growth. In addition to the gaps across the innovation function, the underlying conditions that impede the accumulation of innovation-related capital— such as access to credit, the cost of doing business, trade regime, and competitiveness framework, as well as those seen as particular to innovation, such as intellectual property rights protection—affect the returns and hence the quantity of innovation investment. Therefore, the authorities should work beyond narrow innovation policies focused on promoting R&D or academic sciences and take a broader view of the overall accumulation problem, including markets, institutions, and individuals and the links among them, this group of factors and interactions are often referred as the expanded National Innovation System (NIS) (Figure 2). Gaps across the innovation function that affect growth impact in Argentina 14. Gaps across the innovation function, such as i) subdued entrepreneurship dynamics, ii) low R&D, iii) inadequate managerial capabilities (including digital aspects), and iv) limited channels of knowledge transfer through FDI and trade; equipment, foreign technology and software investments can explain some of the innovation inefficiencies experienced in Argentina (Figure 2).4 A different economic trajectory is possible with a more efficient and strategic use of Argentine assets in human capital and high-end research and their closer alignment with firm-level capabilities and productivity growth, neglecting these linkages essentially leaves money on the table for the overall economy. 2 https://www.oecd.org/sti/msti2019.pdf 3 Public Expenditure Review of Innovation Policies 2017-2018 in Gurcanlar, Tugba, Alberto Criscuolo, Daniel Gomez Gaviria, and Xavier Cirera. Spurring Innovation-Led Growth in Argentina: Performance, Policy Response, and the Future . International Development in Focus. Washington, DC: World Bank 4 FDI and trade are key channels of technology transfer and knowledge accumulation, however these are affected and restricted in Argentina by a broader system of macro-fiscal policies, recurrent crises, and the resultant limited investor confidence in Argentine markets. As such, the Project will not focus directly on these dimensions given the scope of the underlying policy challenges and the decisions that are out of Project’s scope. Jul 08, 2021 Page 7 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) Figure 1: Innovation Function Figure 2: Expanded National Innovation System (NIS) 15. Rates of firm entry and exit are low in Argentina, and early entrepreneurship has been declining. In 2018, firm density in Argentina was two to four times lower than in neighboring Chile and Brazil. Argentina had only 13 firms per 1,000 habitants, while Chile and Brazil have 48 and 25 firms per 1,000 habitants respectively. Moreover, early entrepreneurship has been declining. Defined as the percentage of the population aged 18–64 who are either nascent entrepreneurs or owner-managers of a new business, early entrepreneurship fell from 20 percent in 2011 to 9 percent in 2018. Considering Argentina’s recent demographics, today about 1.2 million individuals are engaging in some form of early-stage entrepreneurial activity; while as many as 4 million explored entrepreneurship only a few years back (2011)— suggesting a huge untapped potential and low firm survival rates and pointing to a significant number of would-be entrepreneurs. Jul 08, 2021 Page 8 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) 16. Private R&D investments are low – Argentine businesses invest little in R&D, hire a small share of researchers, and have limited links with public research organizations. While total R&D investments are low but similar to peers, the business share of R&D expenditure is the lowest among regional and structural peers (17 percent, as opposed to as high as 50 percent for Turkey). Businesses employ only 9 percent of all researchers, and according to the GII 2020, Argentina scores the lowest among structural and regional peers in creative outputs, including new products, processes, and technologies. The share of Argentine small firms that carried out R&D expenditures is 15.9 percent, much lower than the share of large firms (51.1 percent). Furthermore, Arza et. al. (2019) explain that firm investment in R&D innovation is lower in Argentina relative to its neighbors in part due to the heterogeneous returns to R&D investments. Among the reasons highlighted for these heterogeneous returns are economic volatility, limited sectoral spillovers, and low market competition in many sectors. 17. Limited firm level capabilities and managerial skills also hurt investment and returns to innovation. In Argentina, the quality of management is among the lowest in the region. Management capabilities, as measured by the World Management Survey, are poor, independent of the sector. Low performance hinders the ability of firms to grow, create employment, export, and innovate. Furthermore, managers are unaware of these failures. As indicated by comparing self- scores to management practice test scores, managers in Argentina are prone to overestimating their capabilities. The existence of information asymmetries suggests that public policy has a role to play in affecting behavior and forming management capability. Innovation’s contribution to growth and job creation can be enhanced through improvements in entrepreneurship, firm capabilities, and management practices. Managerial skills are essential for firms’ adoption of new processes, technologies, and products. As explained by Cirera and Maloney (2017), managers that are not able to identify high-return projects or hire talented employees, will negatively impact their firms’ performance and are less likely to invest in or extract returns from innovation. Furthermore, Castro et. al. (2020) find that in Argentina, the quality of management is important for improving firm performance, as good management practices are associated with more investment in R&D and equipment, paying higher wages, employing more workers, and having better export performance. Also, their findings suggest that management can be enhanced by external factors such as more competitive markets, access to infrastructure, and lower red tape costs. 18. Also, key to firm level capabilities, especially in post-COVID era, are digital capabilities, which are underdeveloped in Argentina. The adoption of digital business solutions can generate value-added and productivity growth, not only for tech-based sectors but also across those considered traditional and characterized by relatively smaller firms, such as food and beverages. Recent estimates show that productivity of Argentine firms that carry out digital- technological innovation in high-tech sectors, such as medical and optical instruments, can grow at almost 16 percentage points higher than those firms that do not, while firms that digitally upgrade and adopt in more traditional sectors such as in food and beverage and wood manufacturing can also enjoy higher growth rates than non-tech adopters (1.5 to 6 pp higher) (Gurcanlar and Patiño Peña (2021). However, many Argentine firms are underusing their digital assets as the value- added that is generated by digital technology is lower in comparison to both LAC and the rest of the word, while firms ’ access to and adoption of certain digital assets (such as internet or company websites) are relatively high. Jul 08, 2021 Page 9 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) 19. Current sub-par performance notwithstanding, digital economy offers opportunities for accelerated growth. Of the 22 unicorn startups in LAC, six were created in Argentina5. Recent programs promoting firms that produce high-tech products also showed potential to boost productivity growth. For example, technological transformation support program, EMPRETECNO, produced positive results in terms of firm growth and export performance. Of the total firms that participated, 86 percent continued to operate, and 30 percent exported their technologies three years after exiting the program. Moreover, more than 70 percent of the new tech-based companies created under this program registered sales growth and broke-even within the first 1-3 years of operation. All the firms that participated in this program had strong digital underpinnings both in terms of their operations as well as their production6. In the context of the pandemic, digital technologies have become essential to the operation of many firms, and their role will continue to remain significant and likely grow in the new world order post pandemic and during the recovery. Challenges in the macro-micro complementarities that affect innovation impact 20. The dynamism of the private sector is negatively affected by constraints in the business environment. Although Argentina’s overall Doing Business (DB) 2020 ranking improved marginally from a DB score of 58.11 to 59.0 (100=best), some indicators, such as ‘starting a business’, deteriorated as a result of higher red-tape costs. For example, during 2019- 2020, the local authorities in Buenos Aires made starting a business more difficult by introducing an additional procedure for legalizing the employee books7 for those companies hiring more than 10 employees. Overall, Argentina lags OECD economies across a number of important business regulations including those that are critical for a dynamic, innovating private sector, such as ‘starting a business’ (DB score Argentina: 80.4/ DB score OECD: 91.3), ‘getting credit’ (50/64.3), ‘trading across borders’(67.1/94.3) and ‘resolving insolvency’ (40/74.9) and ‘protecting minority investors’ (62/68.2). 21. Constraints in the business environment impede firms’ market participation and innovation decisions, resulting in subdued private sector growth. In 2017, around 11.3 percent of firms (69,000 firms) exited the market in Argentina. This is larger than the US exit rate of 8.8 percent, reported by Haltiwanger et. al. (2016). Also, 82 percent of firms in Argentina survive after one year of operation and only 34 percent survive after seven years of operation. On the contrary, in the US, most unproductive firms exit the market more quickly, while the survival rate of older firms is higher. These constraints also prevent new and growing firms, and especially international firms from establishing offices in Argentina, instead favoring the use of local contractors to capitalize on the high quality of talent and low salaries.8 High regulatory barriers to business entry and growth, including business registration formalities, discourage entrepreneurship and contribute to an unlevel playing field, stifling competition and productivity. Combined with difficulties in closing a business, this creates low churn and a selection of firms that remain in the market but are less likely to innovate, and thus grow. A 5 After being listed or sold, some of the technology companies from the region have become sizeable. Argentina’s Mercado Libre, which operates online marketplaces, was valued at US$95bn as of February 2021. The first Latin unicorn to be listed on the US Nasdaq, it is the region’s most popular platform for online commerce. Globant, a software firm from Argentina, has acquired multiple technology startups. It is listed on the New York Stock Exchange, headquartered in Luxembourg, and has its main customer base in the UK and the US. Despegar, an Argentinian travel logistics company, is also listed on the New York Stock Exchange. 6 Gurcanlar, Tugba, Alberto Criscuolo, Daniel Gomez Gaviria, and Xavier Cirera. Spurring Innovation-Led Growth in Argentina: Performance, Policy Response, and the Future. International Development in Focus. Washington, DC: World Bank 7 Companies with more than 10 employees need to keep an employee book with updated record of its labor force. The legalization of the book is made by the Ministry of Labor after the company registration at the Registry of Employers. For companies with more than 10 employees, it is required the online procedure at the following website: https://rubricadigital.buenosaires.gob.ar/ 8 Based on interview with Latin American venture fund. Jul 08, 2021 Page 10 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) recent ASA on the financial sector in Argentina9 found that bankruptcies are complex and lengthy processes and its recovery rates are very low. 22. High costs of doing business hurt firms’ ability to invest in innovation as well as its returns. Costs to doing business are high, estimated at 5 percent of income per capita (the OECD average is 3 percent). In recent years, there have been efforts towards lowering barriers to entry and making the registration and operation of firms more efficient with the creation of new modern legal type of simplified corporation (Sociedad por Acciones Simplificadas, SAS) under a Venture Capital Support Law in 201710. Also, through the Régimen de Promoción de la Economía del Concimiento, the authorities have tried to promote the development of high-tech sectors such as manufacturing of digital and audiovisual products, biotechnology, nanotechnology, aerospace, among others by providing firms in these activities with different economic incentives. Despite these steps, important shortcomings remain: product market regulation (PMR) is not conducive to competition in key sectors of the economy, including transport, energy, and retail. According to 2016 data, product market regulation is 30 percent more restrictive in Argentina than the average across 19 LAC countries11. Global experience shows large bureaucratic costs (included in PMR indices), as well as prohibitive product and labor market regulations foster the participation of unproductive establishments in the informal sector, while inhibiting the most productive firms from capturing larger shares of capital and labor factors. Recent Bank studies on firm productivity in Argentina also show that these barriers can create rent-seeking behavior by firms which exacerbate the negative effects on the allocation of resources (Zaourak, 2019) and thus lack of investments on innovation. Incumbents often abuse established connections with regulatory authorities to use these barriers to block access to new entrants (Zaourak, 2019). In particular, barriers to entry take away incentives from firms to carry out productive investments, and Castro et. al. (2019) find that such distortions hamper investment in managerial capabilities in Argentina. Firms that face a cumbersome business environment tend to have a lower managerial quality. Managers have limited time and attention so the more time they dedicate to deal with bureaucracy the less they can focus on management, organization and innovation. 23. Limited access to finance also significantly hinders firm creation, investments in innovation, and ultimately growth. Argentina has amongst the lowest levels of private credit ( 24. Figure33). At 16 percent (2017), credit to the private sector remains low even in comparison to rest of Latin America and the Caribbean (48 percent average in 2017), while interest rates historically average above 30 percent (climbing as high as 73 percent as of 2019). Consequently, financing for innovation and entrepreneurship financing is especially hard to get, as it faces higher thresholds than accessing other types of financing, due to the inherent information asymmetries. Similarly, alternative investment mechanisms such as those that support early-stage and equity financing, or internationally emerging opportunities such as corporate green bonds, among others, are also under-developed. These capital markets limitations affect the allocation of capital across firms, generating allocative inefficiencies at large. As explained by Fattal and Jaef (2019), credit constraints in Argentina have significant impact on young firms, as they cannot 9 Argentina: Financial sector deepening in the aftermath of the Covid-19 pandemic P175198 10 The SAS offers greater flexibility for entrepreneurs, including a streamlined registration process, the option to use digital signatures and electronic company books. When the reform was passed, the authorities expected that most entrepreneurs will switch from SRL corporations to SAS given its advantages. However, the current administration is in the process of rolling back the SAS model leaving entrepreneurs only with the SRL option. This would disproportionately impact SMEs and young firms, especially start-ups which already require high upfront R&D costs. 11 OECD Product Market Regulation database, and OECD-World Bank Group Product Market Regulation database for non-OECD countries 2013, 2016, as of March 2018. Jul 08, 2021 Page 11 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) invest at optimal levels to maximize their profit, constraining their growth. Other financial frictions that arise due to low contract enforcement, collateral constraints, ineffective bank regulations, and disincentives generated by insolvency regimes, among others, also hurt entrepreneurial and innovation activity. Figure3: Domestic Credit to Private Sector as a Percentage of GDP Source: Fattal Jaef (2019). Sample includes Chile, Russian Federation, China, Poland, Vietnam, Albania, Czech Republic, Slovenia Latvia, Hungary, and Bulgaria. 25. Argentina has a small, growing, yet an underdeveloped venture capital (VC) and equity financing ecosystem. In terms of VC funding, rough estimates of US$100m to US$200m in funding commitments and/or VC funds raised between 2017 and 2019 annually show a nascent but growing VC investment scene.12 Still this amounts to only 0.02-0.03 percent of GDP; by contrast, the average OECD country spent 0.08 percent of GDP on VC in 2019, while large investors such as the US invested as much as 0.6 percent through VCs.13 Despite their small size, VC investments have been weathering the recent economic contraction relatively well, and increased in terms of both deals and volume of investment despite Argentina’s shrinking GDP. In 2019, there were 92 private investment transactions in the country, summing up to US$ 1.1bn, almost doubling with respect to the amount of 2018 (US$600m). Of this, private equity, VC, and seed capital 14 contributed with 64.3 percent, 34.5 percent, and 1.3 percent, respectively. Relative to 2018, private equity grew by 66.7 percent, VC by 35.3 percent, and seed capital by 24.1 percent. The sectors which had the highest amount in VC investment were Fintech, Biotech, Enterprise Software, and Agro-technology, accounting for 23.5 percent, 17.6 percent, 17.6 percent, and 11.8 percent of VC investments, respectively. 12 See for example: https://techcrunch.com/2018/07/27/in-argentina-venture-capital-surges-even-as-the-broader-economy-stutters/ and https://www.nathanlustig.com/argentina-venture-capital-overview/ 13 OECD Data. 14 Seed capital indicates earlier stage financing necessary to start a business—often the first source of funding that an entrepreneur receives. Venture capital refers to capital required for larger businesses, generally sourced from a pool of investors. With seed capital, typical investments usually range in the tens of thousands to hundreds of thousands of dollars. Venture capital investments often range into millions of dollars. Jul 08, 2021 Page 12 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) 26. Lack of financing and appropriate risk assessment capabilities, along with information asymmetries also hurt Argentina’s ability to take full advantage of its strengths in research and bioec onomy and the emerging financing opportunities in green economy at large. Similarly, Argentina’s private sector is still far from tapping into the growing investor interest in financing circular economy15. For instance, to date, only a few private corporations issued corporate green bonds, while these are growing financing mechanisms internationally and in many of the regional peers16. By 2030, the circular economy is estimated to yield up to US$4.5 trillion in economic benefits globally, which is leading growth- oriented, as well as sustainability-minded investors to pay attention to this growing theme across both developing and developed countries and in a variety of sectors. The push to create a circular economy will depend strongly on private sector innovation and new business models, and as companies innovate to tackle the challenge, there will be opportunities for sustainable economic growth. Argentina can take better advantage of growth and financing opportunities in the bioeconomy by leveraging its research and natural assets. The EU funded initiative Low Carbon and Circular Economy Business Action (LCBA) found specific opportunities in Argentina for green-low carbon technologies to have transformative impact in areas such as: solar, wind power, thermal efficiency solutions, efficient lighting, energy efficiency in the industry and oil refineries, agriculture and water pumping, collection and treatment, smart agriculture, biogas and biomethane and waste management anaerobic digestion. 27. The “Smart Growth via Innovation and Entrepreneurship� project will support activities to address a set of market and policy failures that hinder Argentina’s ability to take full advantage of its strengths in the innovation function and unleash private sector growth. While many innovation policies are unable to address the hindrance that macro volatility poses to both innovation outcomes and firm decisions to invest in innovation, interventions can still focus on addressing specific market and policy failures that constrain innovation financing, key policy improvements in the business environment that enable firm entry and growth, and building firm capabilities and market linkages to promote productive developments, and exports17. Accordingly, the market and policy failures being addressed by the project are shown in Figure 4 and discussed in detail in Box 1. 15 Innovative debt financing methods of circular economy around the world include, among others: i) green “Use of Proceeds� bond: secured by assets (comparable to standard bonds), ii) green “Use of Proceeds� revenue bond: secured by income-producing projects, Green project bond: secured by a projects assets and balance sheet 16 AES Argentina, the local division of US-based AES Corp, sold the first green bonds on the local renewable energy market in February 2020, raising a total of $48.4 million to finance the completion of two wind parks, both with 100 MW of installed capacity. 17 As part of the evaluation of the EMPRETECNO fund under the preceding Argentina Unleashing Productive Innovation Project (P106752), entrepreneurs who were beneficiaries of the fund cited numerous capital markets, financing, and managerial challenges. These challenges include: i) the high cost of finance and the shallowness of Argentinian capital markets; ii) the inability of financial markets to assess and respond to the risk Jul 08, 2021 Page 13 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) Figure 4: Market and policy failures to be addressed by the project Box 1. Market/Policy failures Market/Policy failures Description Capital markets failure and Argentina’s limited financial markets hamper their ability to finance technology, innovation, and insufficient risk finance entrepreneurship. Empirical evidence for Argentina shows that credit markets are underdeveloped for its level of income per capita (Fattal Jaef, 2019). Combined with often prohibitively high interest rates (climbing as high as 73 percent as of 2019), financing for innovation and entrepreneurship is hit especially hard, as most early-stage entrepreneurs and innovators lack an established cash flow to cover high financing costs associated with innovation. Indeed, according to the Global Entrepreneurship Monitor, the availability of financing for entrepreneurs is lower in Argentina than in any of its regional and structural peers, receiving a score of less than 2 out of 9. A large firm wishing to undertake a comparatively risky activity could select a different technique with appropriate formulas for sharing risk and reward, such as equity issuance, but the range of choices available to small firms is usually narrower (OECD, 2013). In fact, a recent IFC study found that more than 70 percent of Argentina's SMEs have difficulties accessing financing. In addition, a recent ASA on the financial sector in Argentina found that bank credit to the private sector is limited, the financial sector is very shallow and banks lend only a small share of their assets to the private sector and central bank exposure consumes the majority of banks’ assets. Furthermore, Jul 08, 2021 Page 14 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) access to credit is not only a constraint for small enterprises but also for young enterprises or startups. For example, Pasquini et. Al. (2012) documents that Argentinian firms between the age of 6 and 10 obtain their funding resources mainly from share-holder funds (80 percent), with only a small fraction coming from external financing sources. Furthermore, Butler et. al. (2017) finds that young Argentinian firms (less than 5 years) report the largest impacts from financing programs in terms of employment, wages, and exporting conditions. These results imply that credit barriers for young firms can be even more detrimental. An important value of innovation programs around the world has been in the espousing of novel public-private experiments used to address the problem of the inadequate supplies of risk capital for young firms across a range of communities. For instance, the Small Business Investment Company program enabled a generation of US investment managers to obtain their first commercial experience of VC activity via government supported funds 18. There is also an “infant industry� argument for interceding in immature markets (Baldwin, 1969; Irwin and Klenow, 1994). In the UK, a government-founded VC firm, 3i plc and its predecessor ICFC, performed a similar industry development role from 1946 until the late 1980s (Coopey and Clarke, 1995). Recent empirical evidence on the effects of VC programs on the performance of young firms finds that public-private collaboration is essential for positive results. In particular, Grilli and Murtinu (2014) and Cumming and MacIntosh (2006) find that public VC financing resulted in higher output when accompanied by private early-stage equity financing. For Argentina, empirical evidence shows that public funding programs have resulted in higher innovation. For example, Chudnovsky et. al. (2016) find that firms supported by the Argentinian Technological Fund (FONTAR) increased their probability of innovating in 20 percent. Binneli and Maffioli (2007) also studied firms that received public support from FONTAR and found that a 1 percent increase in public support resulted in a 550 increase in real pesos in R&D expenditures. In a previous study on Argentina by Chudnovsky et. al., 2006, the results show positive effects of innovation on economic outcomes. Information asymmetries Firms are also more constrained in accessing credit for innovation relative to other types of financing, due to inherent information asymmetries of innovation financing. In particular, the firm seeking to innovate often has a more intimate knowledge of the innovation and its potential private and social benefits, in comparison to the external financing agent, which is likely to be skeptical of the innovation’s returns. Overall, global experience stresses credit constraints (Aghion, Howitt, and Prantl 2012; Bond, Kutsenko, and Lozitskaya 2010; Hall, Mairesse, and Mohnen 2009; and Mulkay, Hall, and Mairesse 2000) and the depressing impact of uncertainty (Bloom 2007) as reasons for underinvestment in innovation. Reducing the asymmetries of information between lenders and borrowers can foster the competitiveness of the financial system and, consequently, increase firms’ ability to access credit. According to the World Economic Forum, Argentina ranks worse than many of its peers (Brazil, Chile, Colombia, Mexico, and Peru) for different financial development indicators such as, financing SMEs, VC availability, market capitalization, soundness of banks, among others. Combining these empirical facts for Argentina, with theory and evidence from other countries, financial frictions potentially hinder firm productivity in Argentina by distorting technology innovation decisions, as argued by Midrigan and Xu (2014).. Coordination failures There is robust evidence about the existence of significant coordination failures between firms and nonmarket institutions that support innovation performance in Argentina, which reduce the opportunities for learning and the creation of new products and new technologies. Argentina 18 As of September 30, 2020, there were 302 licensed SBICs holding US$19 billion in private capital and US$11 billion of outstanding SBA leverage. For the same year these SBICs reported US$5 billion in financing to just over 1,000 small businesses, creating or supporting an estimated 92,000 jobs. Jul 08, 2021 Page 15 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) scores the lowest among its structural and regional peers in innovation links (Cornell University, INSEAD, and WIPO 2018). It is one of the worst performers in the world, ranking 108th among the 128 countries, as measured by the 2019 GII. According to a survey conducted by the World Economic Forum among countries’ business executives, most Argentine firms report little collaboration with universities on R&D and complain about the absence of deep clusters that enhance and promote productive innovation (WEF 2018). Often, firms cannot afford to engage or coordinate with other firms or the research sector so that the necessary services required to perform the R&D project—testing, prototyping, and so on—are provided. Finally, there remain “islands of research excellence� in universities, public research organizations, and niche sectors, that need to be better coordinated with the rest of productive economy to realize their full potential. Cluster development programs for Argentina have had a positive impact on reducing the negative effects of coordination failures. For example, a development program in the electronics cluster in Cordoba resulted in larger technology-transfer between firms in the cluster, and also more knowledge transfer with other provincial and national institutions and universities (Giulani et. al., 2016). Missing or underdeveloped In Argentina, as in many developing countries, some of the important inputs needed to build firm markets capabilities, such as technical skills and business development services, are missing or underdeveloped in the market. Argentina scores low relative to the OECD in all the main indicators of resilience and adaptability, suggesting that they contribute to underperformance on job quantity, job quality and inclusiveness. Government policies that target innovation can help create these markets, through approaches that phase out government involvement as the markets become increasingly self-sufficient. More specifically, innovation policies will increase the demand for highly qualified workers as well as high-tech inputs. As highlighted by Gurcanlar and Patiño Peña (2021), the Argentine workforce is still lagging developed countries in terms of frontier technological skills, such as AI or Cloud Computing knowledge. Creating the demand for these workers can help reduce the gap. Also, policies can encourage the provision of business advisory services, by assessing the quality and availability of these services, as well as generating capacity building and accreditation for these services (Cierra, 2020). High transaction costs Firms in Argentina face a complex business environment that translates into high costs to operate. These high costs directly affect the ability of firms to accumulate knowledge capital. If a firm invests in innovation but faces high costs to import the necessary machines or inputs, export its outputs, difficulties to use its movable assets to obtain credit and entry and exit barriers, the returns to that investment will be low. Hence, policymakers would need to focus on barriers to all types of accumulation, both because physical capital is a complement and because the accumulation of knowledge capital is subject to all the same accumulation barriers as physical capital (Cirera and Maloney, 2017). R&D externalities Another source of underinvestment in innovation is related to the externalities that are generated by R&D activities. Firms can fail to internalize the social benefits that their innovation may have in addition to their private benefits, resulting in sub-optimal levels of innovation investments. Innovation policies can help address this underinvestment by providing firms with adequate incentives. Castillo et. al (2013) evaluated the impact of the Support Program for the Organizational Change (Programa de Apoyo a la Reestructuración Empresarial ) on employment and wages. This program aimed at strengthening Argentine SMEs by co-financing up to 50 percent of technical assistance plans to be implemented by private certified suppliers. Their findings show Jul 08, 2021 Page 16 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) both process and product innovation created more and better jobs in terms of real wages. Process and product innovation support increased employment by 22 and 19 percent, respectively. Also, as highlighted by Audretsch (2004), it cannot be assumed that desirable innovation spill-over effects, where society gains access to and benefits from the availability of a valuable innovation, are automatic. Nonetheless, the full value of a novel technology and the resulting stream of new products and services are rarely harvested in their entirety by the investors. In a study of 600 high tech start-ups in Germany and the UK, Bürgel et al. (2004) found that the high-tech young firms experienced their first serious competitive threat after a median period of 16 months of sales. Griliches estimates that the gap between the private and the social rate of return spans 50-100 per cent of the private rate of return, suggesting that there are large spill-over effects from innovative investments. For Argentina, Castillo et. al. (2014) find that there are spillover effects from the FONTAR program. In particular, they find that not only direct recipients of FONTAR support had higher employment, wages, and exporting probabilities, but also indirect beneficiaries had a positive impact for these variables as a result of knowledge diffusion arising from the higher innovation of the direct beneficiaries. Moreover, innovation can play a crucial role in the creation of new technologies that promote green growth and circular economies that mitigate climate impacts, while promoting private sector growth. Adoption of new, green technologies by firms not only reduces negative environmental externalities, but also presents new market opportunities for firms to innovate within the circular economy space. As explained by Schroder et. al. (2020), the transition of the LAC region towards a circular economy will depend on supply chain developments and government policies, as well as further investment in R&D, highlighting the importance of innovation activities for the future of green economy. As many countries continue to implement policies to reduce the negative environmental externalities of certain economic activities, firms that adopt circular technologies, in which waste is not discarded but reused within the production processes, will inevitably become more competitive. The World Economic Forum estimates that the private sector’s transition into the circular economy by 2030 can yield up to $4.5 trillion in economic benefits. 19 In the recent years, Argentina has adopted green policy initiatives and commitments (the Paris Agreement, the National Strategy for Waste Management, the 2030 Agenda for Sustainable Development, Bioeconomy Strategy Plan, Partnership for Action on the Green Economy) with the objective of fostering green growth. These initiatives have laid the groundwork for Argentina to transition into a circular economy as well as to become a green knowledge hub in the LAC region. A recent study, on green jobs in Argentina highlights that a transition into a circular economy can result in not only gains for the environment but also in terms of job quality. That is, in 2015, formal green jobs in Argentina were associated with salaries that were 20 percent higher relative to other jobs (Ernst et. al. 2019). Also, this transition can take advantage of the bioeconomy value chain, which already contributes in 16.1 percent to GDP, 12 percent to employment, and 60 percent to exports in Argentina. Hence, innovation to create and implement new circular technologies can play a crucial role in fostering green growth, by capitalizing on the opportunities generated by recent policy initiatives as well as the potential economic gains from green jobs and the bioeconomy value chain. Jul 08, 2021 Page 17 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) Relationship to CPF 28. This project was developed to support Argentina’s diversification of sources of growth against its persistent experience with volatile and commodity dependent growth cycles, an issue that is highly relevant in Argentina. The PDO is consistent with the current World Bank Group’s Country Partnership Framework (CPF) for Argentina (FY 2019 - 2022), discussed by the Board of Executive Directors on September 9, 2014 (Report No. 81361-AR). 29. CPF Focus Area 1, Supporting Argentina’s access to long-term private financing, specifically references the importance of leveraging private financing for development. A key objective of activities under Components 1 and 2 which scale up the EMPRETECNO and FSAT programs, and promote larger entrepreneurship and innovation finance infrastructure is to promote stronger ecosystems that are better equipped to access and leverage private financing, and directly aligns with this focus area. 30. The policy support to strengthen the regulatory framework for innovation under Component 3 also aligns with Objective 2 of the CPF – “fostering stronger market institutions, productivity-led growth, and increased exports�. The activities supported under this component will provide support to strengthen institutional capacity and policy fundamentals for private sector-led growth and an enabling business environment. 31. Activities to support digital skills and capabilities for SMEs and growth-oriented firms (in components 1 and 2) line up with Objective 6 of the CPF, Building Skills for the Future, along with the activities to improve the research and quality infrastructure under Component 3. The component 3 also aligns with this objective’s emphasis on the use of evidence-based public policy making, with its support to M&E infrastructure in innovation policies and investments in human capital and research facilities. 32. Activities directly align with CPF Focus Area 1, Supporting Argentina to implement its NDC. In particular, Objective 8, transitioning to a cleaner energy matrix with project’s emphasis on promoting private sector innovations in bioeconomy and circular economy, and Objective 10, building resilient and low carbon cities, by supporting direct and indirect circular job creation and private sector development in urban settings. C. Proposed Development Objective(s) The Proposed Program aims to support inputs required to diversify and unleash sources of growth, via productivity and innovation-led growth, and with a focus on SMEs, efficiency and financial sustainability. Key Results (From PCN) 1. Beneficiaries (percentage of firms, labs and/or research consortia supported by the project) that introduced to existing or new markets new/improved products/protocols/services (Percentage); 2. Number of technology-based start-ups that formally register as new companies (of which female-owned or lead), (of which contributing to climate change adaptation and/or mitigation impacts) (Number); Jul 08, 2021 Page 18 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) 3. Increase in the annual revenue of beneficiary growth-oriented young and/or small firms two years after receiving project support (of which women owned or lead), (of which contributing to climate change mitigation impacts) (Percentage); 4. Number of business environment improvements adopted (Number); Intermediary results 5. Private capital mobilized for entrepreneurial and innovation financing (US$ Number); 6. Beneficiary firms receiving private financing through the Project (Number); 7. Number of innovative products and processes developed and/or adopted by the private sector that contributes to climate mitigation (Number); 8. Number of upgraded research laboratories, technology centers, advisory networks (of which contributing to climate change mitigation impacts) (Number). D. Concept Description 33. The “Smart Growth via Innovation and Entrepreneurship� Project contributes to education and future of jobs axis of the Economic and Social Council (CES) with its emphasis on support to high growth and young firms and sectors, technology adoption and skills for SMEs. The project will contribute to the diversification and strengthening of Argentina’s sources of growth in the post pandemic environment with a special focus on science-based entrepreneurship, green growth, female entrepreneurship, and digital transformation. 34. Accordingly, the proposed Project will be structured around three components: 1) support to innovation-led private sector growth; 2) promote entrepreneurship ecosystems, early-stage/innovation financing, and digital transformation; and 3) support the strengthening of institutions and policies that promote entrepreneurship, innovation and digital transformation. 35. Component 1: This component will contribute to the growth orientation of the national innovation system by supporting public-private research partnerships, knowledge-based entrepreneurship and firm capabilities for tech adoption in Argentina. To do this it will in part build on existing government programs promoting public-private research consortia, technology transfer and entrepreneurship (such as EMPRETECNO and FSAT), through competitive funding schemes, with improvements on design (technical and financial) and scope in order to achieve scale and ensure financial and operational sustainability. 36. Component 2: This component will leverage the early stage, start-up and innovation financing ecosystem to increase innovation and early stage, growth-oriented entrepreneurship financing. It will support the adoption and use of mechanisms to crowd-in private and alternative financing and of new green and sustainability-linked financing instruments. To do this, the project will finance a “Strategic Innovation and Growth Fund� – to be established by the Agencia and managed by a private firm or professional service team, that will co-invest in innovative start-ups along with the private sector (financial intermediaries and partner investors). The fund will make equity investments through child funds that will include seed and angel funds, accelerators, VC funds, crowdfunding platforms and other investors who meet the project criteria. The fund will also place a special emphasis on investments in green growth, circular economy, female entrepreneurship, and digital transformation. As such, the fund will also seek to build links and attract specialized equity investment funds focusing on sustainable development and circular economy in advanced economies. 40. Overall, Jul 08, 2021 Page 19 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) the activities supported under component 1 build on learnings from support provided under the preceding Argentina Unleashing Productive Innovation Project (P106752) as well as other WBG projects (Morocco, Tunisia, Mexico, Serbia, Zambia, Nigeria and Croatia) supporting innovation and entrepreneurship. 37. Component 3 (PBC and TA based): Support the strengthening of institutions and policies that promote entrepreneurship, innovation and digital transformation. a) Regulatory environment. This sub-component will focus the following policy areas under the coordination and the convening power of the Ministry of Science and Innovation, and the Agencia: i) Registering and operating a business: Creation of an online platform to facilitate and digitalize entry and operational procedures for firms. The operation will support technical assistance activities to support business registration offices (Inspección General de Justicia) to implement the online platform. Activities will include process mappings and diagnostics for the online platform. Post-incorporation procedures such as labor-related registrations will not be part of the technical assistance. ii) Importing innovation inputs: Issuance of new regulations to speed-up process to import intermediate and capital goods. The operation will support technical assistance activities to help Dirección General de Aduanas, based on a risk-based analysis, identify which intermediate and capital goods could obtain automatic import licenses. iii) Trade facilitation: Implementation of new platform to integrate the electronic payment system with the automated declaration/cargo processing system. The operation will support technical assistance activities to help Dirección General de Aduanas design and prepare an action plan to implement the new platform. Activities will include process mappings and diagnostics for the electronic system. b) Institutional and research infrastructure. i) National innovation and growth strategy: TA for long-term innovation strategy and communications/consensus campaign. ii) Improve coordination and M&E in innovation policies: Improve effectiveness, efficiency and coordination among export promotion, entrepreneurship and regional innovation programs and agencies, and streamline and strengthen M&E functions. iii) Increase effectiveness, cost efficiency, relevance and sustainability of research and quality infrastructure. This component would provide support for the consolidation and improved access to and relevance of the research and quality infrastructure in Argentina (public research and quality laboratories, certification, and accreditation institutions). Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Areas OP 7.60 No Summary of Screening of Environmental and Social Risks and Impacts . 38. Based on the available information at this stage, project Environmental and Social (E&S) risk classification is considered to be Moderate under the WB ESF. 39. From the environmental side, and given the nature and scale of activities, low to moderate environmental, health and safety risks and potential impacts are expected under project, mainly associated with applied research (both in research institutions and the field), technological development, and equipment activities. These include, among others: punctual environmental degradation/pollution events in case of an inadequate waste (including e-waste), water and air emissions management; increased risk of occupational incidents and accidents during research activities; minor community health and safety issues related to research and technological development activities; punctual environmental degradation events and health and safety issues during field work. Environmental risks and potential impacts are expected Jul 08, 2021 Page 20 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) to be: (i) temporary and/or reversible; (ii) not significant nor complex/large; (iii) site-specific; and (iv) easily mitigated in a predictable manner. These risks and potential environmental impacts will be managed through the development and application by the UGSA of a set of E&S instruments (Environmental and Social Management Framework, ESMF; Labor Management Procedures, LMP; and Stakeholder Engagement Plan, SEP). The project would also finance a Fund of Funds that would involve a Financial Intermediary (FI); the FI would monitor and manage the E&S risks and impacts of the eligible investments to be financed by the Fund through an Environmental and Social Management System (ESMS), which would clarify the roles, responsibilities and requirements that the FI along with the beneficiaries will need to commit to in order to tap into project funding. 40. From the social side the Project is expected to have only positive impacts and no negative social effects. Its main objective is to support inputs required to diversify and unleash sources of growth, via productivity and innovation-led growth, and with a focus on SMEs, efficiency and financial sustainability. It is expected that project activities will promote innovation that can play a key role in transforming Argentina’s growth trajectory and creating new sources of sustained growth and jobs. The main social risks are associated with the potential exclusion of women and/or vulnerable groups from participating in the benefits of the Project, and challenges associated with the stakeholder engagement processes, including social communication and beneficiaries feedback mechanisms, that may require to be strengthened during Project preparation and implementation in order to reach targeted groups across the country. The ESMF will identify any potential barriers that groups like Afro descendants, people with disabilities, persons within the LGBTI community, and migrants, among others, may face to have access to the activities financed by the Project and look for ways to ensure that: (i) these groups are afforded opportunities to participate in planning and/or implementation of activities financed by the Project; (ii) opportunities to provide such groups with culturally appropriate benefits are considered; and (iii) any potential impact that may adversely affect them are avoided, or otherwise minimized and mitigated. In addition, the Project will also prepare an Indigenous Peoples Planning Framework (IPPF) to carry out a similar assessment with specific focus on Indigenous Peoples, in accordance with ESS7. The ESMF will also describe UGSA’s current social communication and stakeholder engagement procedures and the existing grievance mechanism to inform the preparation of the Stakeholder Engagement Plan (SEP), that will include actions to update these procedures and mechanisms, if required. The preparation of the ESMF, IPPF and the SEP will be informed through virtual consultations with the government agencies and civil society organizations that are focused on the vulnerable groups identified above and other interested parties. . CONTACT POINT World Bank Tugba Gurcanlar, Alejandro Espinosa-Wang Senior Private Sector Specialist Borrower/Client/Recipient Argentine Republic Jul 08, 2021 Page 21 of 22 The World Bank Program for Smart Growth via Innovation and Entrepreneurship (P175143) Implementing Agencies Agencia Nacional de Promoción Científica y Tecnológica Fernando Peirano President fpeirano@mincyt.gob.ar FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects APPROVAL Task Team Leader(s): Tugba Gurcanlar, Alejandro Espinosa-Wang Approved By APPROVALTBL Country Director: Paul Procee 19-Oct-2021 Jul 08, 2021 Page 22 of 22