Bridging the gap: Transversal technologies to boost Romania’s resilience

A competitiveness crisis between Europe and other major regions has been quietly unfolding for two decades, centered on a corporate and technology gap. Unless tackled, this divide threatens to handicap Europe across many dimensions, including growth, inclusion, sustainability, and strategic autonomy. The stakes are high: Europe could miss out on a potential corporate value add of €2 trillion to €4 trillion a year by 2040.¹“Securing Europe’s competitiveness: Addressing its technology gap,” McKinsey Global Institute, September 22, 2022. To put this into perspective, this is six times the amount that Europe needs to achieve net-zero emissions by 2050.²McKinsey research finds that reaching net zero by 2050 would require $9.2 trillion in annual average spending on physical assets, $3.5 trillion more than today. For more information, see The net-zero transition: What it would cost, what it could bring, McKinsey, January 2022.

The ongoing conflict in Ukraine has only exacerbated this strain, highlighting the need for economies to be resilient.³“War in Ukraine: Lives and livelihoods, lost and disrupted,” McKinsey, March 17, 2022. Romania, a relatively recent EU member, shares many of the broader region’s technology problems, lagging behind on many indicators of business success. Sharing a border with Ukraine, Romania has also been particularly affected by the Russian invasion. While the country mounted a swift response to the Ukrainian refugee crisis, the conflict has brought to light strategic lacks in Romania’s food security, energy, and defense systems.⁴“UNHCR Romania: Ukraine refugee situation update,” ReliefWeb, July 12, 2022. Not least, a disruption in oil and gas supplies from Russia threatens Romania’s economy.⁵Iulian Ernst, “Romania’s dependency on Russian energy below EU-average but not insignificant,” Romania-Insider, March 29, 2022.

Addressing the immediate challenges is the number one priority for Romania. However, in order for the country’s economy to build long-term resilience and weather future disruptions, it needs to catch up on ten key transversal technologies. Romania’s future growth and competitiveness across all sectors is at stake here—failure to deliver could jeopardize the country’s efforts to improve the lives of its citizens, who still experience low levels of inclusion and well-being relative to the EU average.

Long-held beliefs and trade-offs may need to be reevaluated if Romanian companies are to keep abreast of other regions that are competing effectively in a world of technology disruption. An integrated package of initiatives could create an environment that enables this—and will require leaders to show the same resolve and collaboration that they displayed in their response to the COVID-19 pandemic and the war in Ukraine. Some initiatives may need to happen on an EU level, which Romania could support, while others could readily be implemented on a national, bilateral, or multilateral level.

Sustainability, inclusion, and growth: Where does Romania stand?

Improving the lives of Romanians over the long haul requires sustainability, inclusion, and growth: three factors that reinforce and impact one another.⁶Bob Sternfels, Tracy Francis, Anu Madgavkar, and Sven Smit, “Our future lives and livelihoods: Sustainable and inclusive and growing,” McKinsey, October 26, 2021. Countries that have experienced faster growth over the past four decades had lower market inequality in the 2010s; see Philippe Aghion, Reda Cherif, and Fuad Hasanov, “Fair and inclusive markets: Why fostering dynamism matters,” VoxEU, January 2022. High growth runs the risk of undermining efforts to improve sustainability. However, growth strengthens confidence and creates a healthy investment climate for sustainability-related innovation, generating the new income streams needed to pay for the energy transition. Lagging growth could also undermine inclusion by limiting the pool of funds available to spend on social programs.

In these respects, how does Romania measure up against its European peers? Identifying Romania’s relative strengths and weaknesses in sustainability, inclusion, and well-being, and growth and prosperity, could help the country to prioritize its actions, and identify where the application of transversal technology would be most effective (Exhibit 1). In our analysis, we assessed the 38 OECD countries on key metrics across sustainability, inclusion, and well-being, and growth and prosperity and ordered them in deciles. Subsequently, we placed Romania in one of the deciles based on its performance across the same metrics (decile 1 being the best score, and decile 10 being the worst).

Sustainability

Romania’s record on sustainability is good: emissions per capita are low, below those of both its Central European (CE) peers and the five top-performing EU economies. Its fossil-fuel consumption is also lower than that of other CE countries, on par with the EU-30 average, and Romania has also pledged to phase out coal by 2032 and reach net-zero carbon emissions by 2050.⁷“Share of fossil fuels in gross available energy,” Eurostat, April 2, 2021. Meeting the ambitious commitments will require a concrete plan, which has yet to be published.

Although Romania’s sustainability picture is relatively healthy, this has not necessarily translated into more satisfying or financially abundant lives for its citizens. Indeed, Romania’s strong sustainability could reflect a more sluggish economic output than its EU peers.

Inclusion and well-being

Romania lags behind its CE peers, particularly when it comes to income equality, with a relatively high Gini index of around 34 percent in 2020 (compared with around 27 and 28 percent for Poland and Hungary, respectively), indicating high income inequality.⁸“Living conditions in Europe—income distribution and income inequality,” Eurostat, June 2022. In fact, Romania’s rate of low-income workers is the highest in the European Union, with one in three Romanians at risk of falling into poverty.⁹Manuela Gazibar and Loredana Giuglea, Inequalities in Romania, World Vision Romania, June 2019.

As a region, Europe has the highest life expectancy at birth in the world: the EU-30 average is 80.4 years.¹⁰“Mortality and life expectancy statistics,” Eurostat, April 25, 2022. However, Romania performs relatively poorly, with an average life expectancy of 74.2 years.¹¹“Mortality and life expectancy statistics,” Eurostat, April 25, 2022. When it comes to social mobility, which is computed by combining measures for health, education, technology, work, resilience, and quality of institutions, Romania had an index score of 63.1 in 2020—among the bottom five European countries (Denmark scored the highest, with 85.2) although still higher than most developing countries.¹²The Global Social Mobility Report 2020: Equality, opportunity and a new economic imperative, World Economic Forum, January 2020.

Although Romania has a national plan to improve social inclusion and reduce poverty, some key actions have been delayed, such as boosting employment, reducing the early school dropout rate, and improving national health programs.¹³Manuela Gazibar and Loredana Giuglea, Inequalities in Romania, World Vision Romania, June 2019.

Growth and prosperity

Along with the five top-performing EU-30 countries, Romania’s per capita GDP has shown strong growth over the past two decades: at 6.7 percent in 2021, it was notably better than that of Europe overall or of the United States, and slightly ahead of its CE peers.¹⁴“GDP per capita growth,” World Bank, August 2022.

Along with other CE countries that are part of the European Union, Romania has benefited from participating in the single market, with European direct investment and labor mobility contributing to rapid growth.¹⁵“EU direct investment positions, breakdown by country and economic activity (BPM6),” Eurostat, June 20, 2022. Romania has been an EU member for 15 years, and Europe is the country’s greatest investor and main strategic partner, contributing to 89.5 percent of Romania’s total foreign direct-investment stocks.¹⁶Foreign direct investment reports, 2004–21, Banca Naƫionalǎ a României.

Although data on Romania are limited, looking at CE peers, we see a large gap between company profits in this region and in the rest of Europe and the United States Between 2014 and 2019, large CE companies were 51 percent (eight percentage points) less profitable by ROIC than those in the United States, even as growth was 6 percent greater, potentially symptomatic of their home-economies’ lag in sustainability, inclusion and well-being, and growth and prosperity (Exhibit 2).

Ten transversal technologies—must-haves for Romania

In each of these vital areas—sustainability, inclusion, and growth—adoption of transversal technologies could aid Romania to close its corporate and technology gap, while enhancing Europe’s competitiveness. Several of these key technologies, such as applied AI, have greater transversal capabilities than others and could impact all sectors in some way (Exhibit 3).

Romania’s technological position is mixed, with some positive developments in production and adoption. However, when compared with the top five performers in the EU, Romania lags behind in innovation, mainly due to a lack of capital for basic research (Exhibit 4).¹⁷Elena Vrabie, “From Bucharest to Cluj: how is AI adoption in Romania moving,” The Recursive, September 23, 2021.

To assess Romania’s position for each transversal technology, we compared its performance to that of the top five EU-27 and UK performers—the Romanian score is expressed as a fraction of the average of their score.

1. Next-level process automation: Process automation can help companies turbocharge their operations by improving process efficiency and enhancing functionality. From collaborative robots in industry to virtual clinical trials in healthcare and military robots in defense, this technology can be widely applied across sectors.

   Compared with the average for EU counterparts, Romania is ahead on innovation but lags behind on adoption of next-level process automation. Process automation is a key focal technology for Romanian innovation, with companies such as UiPath leading the way in robotic process automation globally. Yet, with low adoption, Romania could be missing out on the benefits that process automation can bring.

2. Future of connectivity: Technologies such as smart cities in industry, remote monitoring in healthcare, and smart branches in business services could be the future of connectivity. These technologies bring humans and technology closer, immersing users in an augmented reality with widespread applications to boost efficiency and productivity.

   Although Romania’s innovation and production of these technologies is low compared with that of the EU-30’s top five performers, its adoption is high. Telehealth, for instance, saw a boost in adoption, due to COVID-19 restrictions in Romania prompting remote consulting.¹⁸Elena Vrabie, “The Romanian Healthtech industry takes off with a telemedicine momentum,” Recursive, April 9, 2021. Both health practitioners and patients in Romania have relayed their willingness to use telehealth technology, which, coupled with high-speed internet, could be key to its successful adoption.¹⁹Remus Gaga et al., “Lights and shadows of the perception of the use of telemedicine by Romanian family doctors during the COVID-19 pandemic,” International Journal of General Medicine, April 2021, Volume 2021, Number 14.

3. Distributed infrastructure: Distributed infrastructure is the umbrella term for object-oriented and other information technologies used by software architects, including edge and cloud computing. These make use of remote servers hosted on the internet (instead of local servers) to manage, store, and process data, and have broad applicability across sectors.

   However, Romania is trailing significantly here, relative to the EU-30’s top five economies, and ever more so on a global scale. The share of companies that used cloud computing services in Romania in 2021 was 14 percent, compared with 27 percent for CE countries and 41 percent for the European Union.²⁰“Cloud computing—statistics on the use by enterprises,” Eurostat, June 22, 2022.

4. Next-generation computing: Next-generation computing (also called high-performance computing) uses technology based on quantum phenomena to process data. This allows for more complex calculations that improve productivity, with a range of uses across sectors, such as aerospace and defense, and energy and utilities.

   Romania is behind on innovation relative to the EU-30’s top five countries and lacks next-generation computing technology adoption and production. As this lack of production and adoption is widespread across the European Union, Romania and other EU countries could be missing out on lucrative opportunities. The global next-generation computing market is forecast to grow at a CAGR of 19.4 percent from 2021 to 2030, to reach approximately $782 billion by 2030.²¹Next generation computing market, Allied Market Research, March 2022.

5. Applied AI: As technology continues to transform the world, AI can have applications beyond customer-facing functions. Used across myriad sectors, including in smart power plants, autonomous vehicles, and precision agriculture, applied AI is showing signs of advancement in Romania, where innovation is poised to catch up with production and adoption.

   Romania’s level of innovation is relatively embryonic compared with the top five EU-30 performers. While it has been the second-largest publisher of AI research in the region over the past two decades—after Poland—its actual spending on investments lags behind that of EU counterparts.²²Country rankings, Scimago Journal & Country Rank, August 2022. Romania is ahead in terms of production and adoption, with more than 50 start-ups in the field of agritech alone.

6. Future of programming: The future of programming is expected to trend toward a no-code or low-code development environment with increasingly automated processes, such as Software 2.0. This could boost the efficiency and speed of programming development across sectors, with the most focus in the automation, machine learning, and AI industries.

   Romania is making headway here, with a solid performance in innovation and production, but a softer showing in technology take-up. The country has given rise to leading innovators in AI, such as DRUID AI—an end-to-end platform for AI-driven conversational business applications.

7. Trust architecture: Trust architecture involves a set of cybersecurity paradigms that focuses on protecting resources (such as assets, workflows, services, network accounts, etcetera). Trust principles can be used to plan industrial and enterprise infrastructure and workflows, with a broad range of applications from cybersecurity in defense to smart sourcing in consumer and retail.

   Romania shows signs of promise here, with strong production and adoption. The country performs relatively well against the EU-30’s top five performers, with homegrown company Bitdefender consistently ranking among top global cybersecurity players. Romania has also given rise to novel security solutions, such as TypingDNA, which assigns a biometric “fingerprint” to a person’s typing style for reinforced security.

8. Bio revolution: Advances in biological science, coupled with the development of computing, automation, and AI, are supporting fresh innovation. This bio revolution could significantly impact economies and lives, from health, agriculture, and consumer goods to energy and materials.

   The biotech industry is nascent in Romania, with some innovation but very little production or adoption relative to the EU-30’s top five countries. Romanian innovation players are slowly emerging, such as Rayscape, whose software solution uses a recognition algorithm to help radiologists detect lung nodules, and .lumen, a research start-up that aims to empower the blind.

9. Next-generation materials: Next-generation materials with novel properties can increase functionality and reduce costs throughout manufacturing, with potential for major energy, carbon, and economic benefits. However, breakthroughs in materials science and engineering are needed to enable these new capabilities.

   In Romania, demand for these materials exists, but innovation and output are lacking—creating an opportunity to kick-start the sector. The 50 largest manufacturers of construction materials in Romania saw a cumulative turnover of about €2.35 billion and a net profit of approximately €365 million in 2020.²³Andreea Guţu, “Top foreigners dominate the local construction materials market. The Germans and the Swiss, the biggest producers present in Romania, with businesses worth billions of lei,” Profit Insider, December 23, 2021.

10. Future of cleantech: Cleantech can contribute to a cleaner, more sustainable world. The use of sensors, gateways, embedded radios, and cellular routers can optimize process efficiencies by removing the need for natural resources and manual monitoring. Renewable-energy systems and sustainable products and services are some examples of cleantech, with a wide range of industrial uses.

    Innovation and production have not kept pace with adoption. Romania has few cleantech patents compared with its CE peers: for example, from 2012 to 2021, Romania produced only five patents in environmental technologies, compared with 86 from Poland.²⁴European patent applications, European Patent Office, September 22, 2022. Romanian automotive company Dacia started producing its own electric vehicle—the Dacia Spring—joining in on the global trend of electrification.²⁵Nicolas Le-Boucher, “Dacia Spring Electric: Dacia’s first all-electric car,” Renault Group, October 20, 2020.

The time to act is now: Ramping up Romanian technological capabilities and competitiveness

Romania, like most of Europe, is being outperformed by non-European competitors in industrial-scale technology adoption. The country’s lack of scale in transversal technologies jeopardizes its position in nearly all sectors, including current strongholds such as trade, manufacturing, transportation, construction, and IT and communications.

Despite these challenges, Romania has substantial strengths, including a booming digital economy and a strong automotive sector, bountiful natural resources, a growing renewable sector, agricultural potential, and EU membership.

Addressing Romania’s key challenges

As the sources of competition—and growth—shift toward disruptive innovation and intangibles, scale, speed and established technology ecosystems are increasingly vital to level the playing field. In this context, Romania shares the four mutually reinforcing challenges of the broader EU: market fragmentation and lack of economic scale; less-developed risk-capital and scale-up funding; a complex and slow regulatory environment; and smaller and less-established technology ecosystems and firms (Exhibit 5).

To rebound faster from the current crisis, Romania requires more competitive markets and stronger human capital than its EU peers. Competition is key to unlocking opportunities and creating jobs, yet a lack of quality education in some of Romania’s regions hinders the country’s productive potential and broadens the inequality gap.²⁶Eurasian Perspectives, “To advance, Romania needs more competitive markets and stronger human capital,” blog entry by Donato de Rosa and Alexandria Valerio, World Bank, May 12, 2020.

There are numerous actions Romania could take—alone, bilaterally, or multilaterally—to scale up technologies, become more agile, and level the playing field.

Scale and scale-up funding

Decision makers in Europe and Romania are aware of the need to close the technology gap and as such have implemented initiatives to enable corporates to build scale in key technology areas. Romania could consider the following initiatives to increase and pool its resources and support cross-border scale-up and consolidation:

• Consider opening more funds for risk capital. The capital raised by Romanian start-ups more than tripled last year, from approximately €30 million in 2020 to €116 million in 2021.²⁷Romanian venture report 2021, Howtoweb, 2022. Romania could reduce its restrictions and capital requirements to enable asset managers and pension funds to invest more in alternative asset classes such as venture capital and private equity. Going one step further, it could build pension institutions that operate at the scale and sophistication of global leaders. Yet unlocking this finance hinges on the creation of an ecosystem of angel investors, as well as an innovative policy for venture capital funds. On top of this, co-investment schemes and tax incentives could be applied in the latter phase to support early-phase companies.²⁸Romanian venture report 2021, Howtoweb, 2022.
• Potentially establish joint public procurement and public investment in R&D with other EU members. Europe pools only 0.2 percent of its total public procurement at the European level, compared with 45 percent at the federal level in the United States. Moving to joint procurement in innovation-related areas, from defense to healthcare to education technology, would allow for larger bets and more regional focus, and would build an environment for scaling up leading Romanian firms. For example, countries pooled their orders for medical supplies during the COVID-19 pandemic, which was supported by legal frameworks. Romanian leaders could also consider increasing compensation schemes for regions that are lagging behind.
• Stimulate investment in technology by potentially supporting rising companies. In addition to the existing tax breaks at home, the Romanian government could support Romanian companies’ expansion abroad through several measures, such as by providing legislative and logistical support or low-interest financing programs for access to other markets (as demonstrated by Poland and the Netherlands).²⁹Mihai-Alexandru Cristea, “More unicorns born in Romania? Solutions to better promote tech founders,” Business Review, March 16, 2021. Romanian state initiatives, such as the support scheme, could further help Romania increase subsidies for the renewables sector.
• Stimulate early demand for new technologies with the government potentially acting as an early adopter. Collaboration between the private and government sectors could be key to unlocking opportunities and supporting economic recovery. An example is the IT sector: although Romania has established a telecommunications infrastructure that offers fast and affordable network access, its digital public services are underdeveloped.³⁰Kamil Całus, “Digitisation in Romania accelerates during the pandemic,” Centre for Eastern Studies (OSW), September 22, 2021. The pandemic prompted authorities to introduce new technologies and encourage their use, but public services’ digital availability and quality are below those of private ones.

Improve the talent pool

Romania could consider several initiatives in order to enrich the talent pool and thus help Romanian firms to remain competitive in a global context:

• Create opportunities for low-income students. Each unemployed person who drops out of school costs the Romanian state around €18,000 in their lifetime.³¹The cost of education: Investment, efficiency, impact, Deloitte, August 2021. Coupled with unrealized gains from income tax, the state loses as much as €272,000 over this period. Furthermore, Romania’s education system has long been underfunded: the average government expenditure on education in the European Union was 5 percent of GDP in 2020, but only 3.7 percent in Romania.³²“Total general government expenditure on education, 2020,” Eurostat, February 28, 2022. Although Romanian public universities receive almost 63,000 fully paid study grants for first-year students, only around 2,000 are dedicated to students from rural areas.³³“Number of places—study grants (first year) financed from the state budget for university undergraduate studies, in the form of full-time education, from state higher education institutions, for the 2018–2019 academic year,” Romanian Ministry of Education. Creating further opportunities for low-income students could enable their social mobility, ensuring the state’s expenditure goes toward economic development.
• Nurture and retain talent in science, technology, engineering, and mathematics (STEM). Romania’s growth potential lies here—a third of the country’s graduates were in STEM fields in 2020, and Romania has the second-largest share of people ages 25 to 64 working in these fields in the European Union (after Ireland).³⁴“HRSTO by occupation, age 25-64, 2021,” Eurostat, May 11, 2022. The number of STEM graduates in Romania has grown by 10 percent from 2015 to 2020, likely driven by the attractive salaries and tax incentives in the IT industry.³⁵Carmen Radu, “IT salary map. How much does a programmer in Romania earn compared to the neighbors and where are the highest salaries in the sector?” Economedia, July 15, 2022. Overall, Romanian decision makers could consider greater coordination, increased budgets, and more visibility to attract, develop, and retain STEM and entrepreneurial talent, including talent from abroad. Romania could further attract foreign talent by introducing tax reductions for digital nomads (such as Greece), or by shifting immigration policies to a points-based one, as used by Australia.³⁶“Portugal introduces new campaign to attract digital nomads from Britain,” SchengenVisaInfo.com, August 12, 2022; Rosalind Smith, “What are countries doing to attract international talent?” Mauve Group, accessed June 2022.
• Double down on funding education in the sector and supporting technological transformation. The education system may require reform to grasp this opportunity, as it is less established than its EU counterparts. While a minority of Romanian students excel, almost 40 percent of 15-year-olds have not mastered basic skills according to the OECD Programme for International Student Assessment (PISA) 2015, and more than 15 percent leave school before completing their higher secondary education.³⁷“Early leavers from education and training,” Eurostat, May 2022. To give every student a chance to reach their full potential, Romania could enhance its evaluation and assessment system by setting higher aspirations for teaching and learning with greater support for students and teachers. For example, the country could design its examinations to assess a broader set of skills.

Speed and simplicity

Speed will be vital in Romania’s journey toward closing technology gaps. The COVID-19 pandemic showed that regulators in Europe and elsewhere can become more agile—this speed could now be applied to a broad range of innovation-related areas.

• Develop fast-track regulatory approval and decision-making processes. In disruptive innovation, speed matters, yet countries in Europe tend to move relatively slowly, with lengthy consensus-based decision making and slower administrative processes. Regulators could take an accelerated approach to tech-enabled sectors, even if that means occasional setbacks and adjustments. This could be particularly powerful when paired with a common corporate rulebook. For example, Romania could increase the speed at which medicines approved by the European Medicines Agency become available to the public: the country currently has one of the longest time-to-availability in the region (775 days, relative to European counterparts, where evaluation takes up to 210 days).³⁸EFPIA patients W.A.I.T. Indicator 2020 survey, IQVIA, April 2021.
• Incentivize companies to invest in employee training and reskilling. For rapid technology adoption, labor markets will need to be flexible. As disruptions spread, more workers will need to change occupations or activities. Labor market rules will likely need to be amended to support faster reallocation. Through Romania’s National Strategy for Employment, the government could implement education and vocational-training programs to develop skills for an adaptable and resilient workforce. To incentivize companies to train employees and develop their professional competencies, Romania could offer tax credits, subsidies, grants, and vouchers.

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As the Ukraine war looks set to continue, and geopolitical and technological shifts disrupt the status quo, Romania can kick-start collaborations between its private and public sectors and with other EU member states to make the trade-offs needed for technology and competitiveness. This could be key to Romania keeping up with global rivals and propelling economic growth and investment, while supporting social progress.

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