Home EuropeEurope II 2008 Business innovation and ICT in the Baltic region

Business innovation and ICT in the Baltic region

by david.nunes
Prof. Edvins Karnitis Issue: Europe II 2008
Article no.: 4
Topic: Business innovation and ICT in the Baltic region
Author: Prof. Edvins Karnitis
Title: Expert Forum; Commissioner
Organisation: National Development Plan; Public Utilities Commission, Latvia
PDF size: 312KB

About author

Prof. Edvins Karnitis is a Commissioner of Latvia’s Public Utilities Commission and a Member of its Expert Forum for the National Development Plan. Prof., Dr. Sc. Eng. Edvins Karnitis is a Leading Researcher of the University of Latvia, a Member of the Advisory Board of Riga Technical University, an Analyst of the National Commission of Strategic Analysis, and Chairman of the Expert Team on Monitoring the Implementation of the National Development Plan. He has worked as Adviser to the Prime Minister and Minister of Economy of Latvia, and has participated in the elaboration of national strategic programmes for knowledge-based development and knowledge economy in Latvia. Dr Karnitis is the author of more than 170 scientific and technical publications.

Article abstract

The Baltic States and their economies and businesses are mostly small, so they count upon ICTs to help drive their development. ICT expenditures in the Baltic region are high. Latvia spends 9.9 per cent of its GDP compared to 5.7 per cent for the EU 27, and Estonia’s broadband penetration is higher than the EU’s average. Large enterprises use ICTs heavily, but the smaller companies lag far behind, which often keeps them from doing business with large and transnational companies.

Full Article

Knowledge-based development scenarios are becoming more and more popular worldwide. The decision adopted at the Lisbon Summit Meeting in 2000 determines precisely this strategy for the development of the EU. The Baltic States also – Estonia, Latvia and Lithuania – have always respected knowledge. We have defined the basic resource for our growth as the knowledge and wisdom of our inhabitants, and the ability of each individual to make use of them.1 Development of an innovative economy is a principal component of our growth model. As the importance of knowledge and innovation in business increases, cooperation between partners and the transfer of knowledge become more intensive; this means a radical increase in the processing, collection and sharing of information. To a great extent, these activities are supported by the use of advanced information and communications technologies (ICT) in business. In fact, it is thanks to ICT that knowledge-based developmental processes have become possible. A turnabout is going on: Latvia and Lithuania are ranked as efficiency driven economies and Estonia -is already transforming itself into an innovation driven economy. The factor driven model, which is based on low added value products and processes, is currently not very significant in the Baltic.2 There are, though, a number of factors that help drive innovation in the Baltic States: • the limited human resources and small economies: all of the states together comprise only 0.1 per cent of humanity, our GDP is about 0.2 per cent of the world’s GDP; for this reason participation in international partnership networks is a principal necessity for Baltic companies; • a high proportion of micro, small and medium-sized enterprises (Latvia – LV – more than 99.9 per cent) and lack of large enterprises, especially with 1000+ employees; naturally, only a few have their own R&D departments, although this is increasing (LV -18 per cent of enterprises in 2003, 24 per cent in 2007); • a high and increasing share of service sectors in each of these economies – 75 per cent of total value added in LV (2005) in comparison with 50 per cent in EU25; service innovation requires highly regular, persistent, real-time contact with partners compared to the contact needed for manufacturing innovation;3 • the concentration of R&D personnel in the academic sector; business sector’s R&D personnel account for only 0.27 per cent of the total labour force in EE (Estonia), 0.18 per cent in LV and 0.1 per cent in LT (Lithuania) in 2005, in comparison with the EU25 – 0.6 per cent, FI (Finland) – 1.6 per cent; this increases the need to actively outsource R&D and the transfer of knowledge and technology: 43 per cent of innovative enterprises (LT) had some kind of cooperative arrangements in 2004-2006, 27 per cent used extramural R&D, 31 per cent acquired external knowledge; • the high capacity of the R&D sector is corroborated by its intensive financing abroad: LV – 18.5 per cent of gross expenditure on R&D in 2005, EE – 17 per cent (EU27 – 8.5 per cent, FI – 3.2 per cent); and • mentality and traditions – stability at work; job-to-job mobility of highly qualified people is comparatively low: EE – 5.2 per cent in 2005, LV – 5.7 per cent, LT – 5.95 per cent, EU27 – 6.1 per cent, FI – 8.7 per cent. These characteristics make close cooperation necessary for effective and reliable knowledge exchange and to integrate the activities of internal and external partners. There were high growth rates for innovative activities in the Baltic States from 2003 to 2007.4 Because of the above mentioned characteristics, the intelligent use of ICTs serve Baltic enterprises – perhaps more than many other countries – as a powerful catalyst for innovation. ICT investments and the penetration of broadband Internet connections are important factors in characterising the level of innovation in any country. There is a clearly positive reciprocal link between the use of ICT to facilitate business processes and drive greater productivity, and higher income. These, in turn, can stimulate greater investments in technologies and services and create new opportunities for growth. The level of ICT expenditure in the Baltic has been consistently high; LV is the EU leader (9.9 per cent of GDP in 2006), EE is the next (9.7 per cent) compared to 5.7 per cent for EU27 (Figure.1). Our weakness is the small percentage of total investments dedicated to IT tools and services. Without a broadband Internet connection, no enterprise today can ensure effective cooperation with scientific institutions and cluster partners. The total broadband penetration rate in Estonia (20.0 in 2007) is higher than the EU average (18.2); and Latvia and Lithuania are quickly catching up too. The number of connections in households, libraries, educational and public institutions is also rapidly increasing. There are problems with the development of business broadband connections in comparison with EU growth rates (Figure. 2). Indicators at large enterprises are not bad, but let us remember that use of ICT by such enterprises is close to the saturation point. Still, small and medium enterprises lag far behind the EU average growth rate; and they are falling further behind, although at one time they were quite good. Introduction of ICT is not an end in itself; the goal and effectiveness of their use is of key importance. In addition to obtaining and exchanging information, it is clear that migrating to a network environment, including ‘intranets’ and ‘extranets’, and transferring business activities to that environment creates extensive opportunities to improve and integrate the process of innovation for product design, development and manufacturing within the enterprise and in cooperation with partners. There is visible correlation of the innovation efficiency (i.e., transformation of innovation inputs into outputs) with the level of internal and external integration of business processes (Figure. 3).5 For example, the enterprises of Sweden and UK are poorly integrated and in spite of very strong inputs to the process of innovation they are comparatively inefficient. The use of ICT by Baltic enterprises – levels of both internal and external integration are substantially below EU average figures – is still insufficient and relatively inefficient. Large enterprises are the most active users of ICT in the Baltic region as everywhere, while small enterprises are at a lower level of development in all aspects. The usage of ICT by micro enterprises is in its infancy by any measure; even the spread of fundamental technologies has not risen above the average level of the active development stage, to say nothing of process integration. This has resulted in the low efficiency of innovation in the Baltic States and weak exploitation of existing innovation. Clearly, the failure of enterprises to appreciate the importance of ICT does nothing to facilitate the emergence of innovative economies in the Baltic States. The motivations for enterprises to more aggressively adopt and use ICT remain insufficient, so business people choose short-term solutions as opposed to investment in technology. This shows, in turn, that the governmental business support programmes have not been as well targeted and effective as could be hoped. This situation is very risky for Baltic enterprises. Micro and small enterprises may find themselves entirely excluded from the networks of partners and suppliers of large and transnational companies. This is why micro and small enterprises require specific support, including EU funds, to help them use ICT in business processes. They need help in other ways as well – enhancing the strategic perception of employee management and IT skills, supporting the development and introduction of specific e-solutions for small/micro enterprises, organising small partners into clusters, providing competence centres, and building business networks to facilitate partnership with large enterprises and the like. The potential benefits for enterprises in Estonia, Latvia and Lithuania can be seen clearly if we look at the achievements of those countries in the EU that have done best in this regard.

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