Final report
STUDY ON THE PROGRESS OF GROWTH AREAS
The study was commissioned by the Ministry of Economic Affairs and Communications, and paid for by using the technical assistance funds of the 2014–2020 Structural Funds.
AUTHORS OF THE STUDY: Siim Espenberg, University of Tartu Kaidi Nõmmela, University of Tartu Erkki Karo, Tallinn University of Technology Egert Juuse, Tallinn University of Technology Kadri Lees, University of Tartu Veiko Sepp, University of Tartu Sille Vahaste-Pruul, University of Tartu Jari Romanainen, Technopolis Group Eesti OÜ
QUALITY EXPERT: Meelis Kitsing, Professor of the Estonian Business School and Head of Economics and Finance Department at Estonian Business School, expert on smart specialisation
The authors of the study would like to thank the representatives of the client Laura Arengu, Priit Tinits, Sille Kraam, Joel Peetersoo and Karel Lember, who were of great help in conducting the study, and all sectoral experts, interviewees and survey respondents, who took the time to contribute to the study.
In addition, the authors would like to thank experts from the University of Tartu and Tallinn University of Technology – Uku Varblas, Jaan Masso, Rainer Kattel and Margit Kirs.
REFERENCE: Espenberg, S., Nõmmela, K., Karo, E., Juuse, E., Lees, K., Sepp, V., Vahaste-Pruul, S., Romanainen, J. (2018). Study on the progress of growth areas. University of Tartu, Tallinn University of Technology and Technopolis Group Eesti OÜ.
ISBN: 978-9985-4-1134-6 (pdf)
THE STUDY WAS CARRIED OUT BY the Centre for Applied Social Sciences (CASS) of the University of Tartu, Ragnar Nurkse Department of Innovation and Governance of Tallinn University of Technology and Technopolis Group Eesti OÜ.
The Centre for Applied Social Sciences (CASS) of the University of Tartu (www.rake.ut.ee) is a network- type applied research centre with a mission to promote knowledge-based decision-making in Estonian society. In addition to the CASS team, experts from the University of Tartu and, where appropriate, from outside, are included in their research to ensure the highest quality. The CASS network includes social scientists, as well as representatives from the field of medicine, science, technology and humanities.
Ragnar Nurkse Department of Innovation and Governance of Tallinn University of Technology (www.ttu.ee/nurkse) is one of the leading social science research centres in Estonia in the fields of innovation research and governance. The institute employs four laureates of the National Science Prize in Social Sciences. The Institute is also one of Estonia’s most active partners in the European Union Framework Programme for Research and Innovation (H2020).
Technopolis Group Eesti OÜ (www.technopolis-group.com) is a representative of the international research consortium Technopolis Group in the Baltics. Technopolis Group was founded in Brighton in 1989 and currently has eight offices both in Europe and Latin America. Technopolis Group Estonia has been operating independently in the Baltic and Nordic markets since 2011. The core business of Technopolis Group is the conduct of research, analysis and evaluation in various policy areas. The strengths of Technopolis are its access to international expertise and its extensive skills in assessment and analysis techniques.
CONTACT DETAILS: Siim Espenberg +372 5901 0758 [email protected] http://skytte.ut.ee/et/rake
Study on the progress of growth areas Table of contents 4
Table of contents
Summary ...... 5 Introduction ...... 15 Methodology of study ...... 17 1. Determination of growth areas and identification of companies ...... 27 2. Development of entrepreneurship in growth areas ...... 36 2.1 Development of economic indicators of growth niches in 2012 and 2016 ...... 36 2.2 R&D cooperation networks of growth fields ...... 52 2.2.1 R&D cooperation in growth fields ...... 52 2.2.2 R&D networking and business growth...... 53 2.2.3 The role of collaborative relationships in corporate R&D activities ...... 55 2.3 Factors and trends most influencing the development of growth fields ...... 58 2.3.1 (Re)definition and delimitation of growth fields ...... 58 2.3.2 Relationship between policy measures and development of growth fields ...... 62 2.3.3 Benefits and problems of support measures from a business perspective ...... 65 3. Proposals ...... 69 3.1 Proposals for determination, monitoring and analysis of growth areas ...... 69 3.2 Policy recommendations to support the development of growth areas ...... 74 References ...... 79 Annexes ...... 81 Annex 1. Description of growth niches ...... 81
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Summary
Developed under the auspices of the European Union (EU), the smart specialisation concept aims to develop regional innovation policy through the determination of regional competitive advantages and prioritisation. Member States have been implementing the concept of smart specialisation for almost 10 years, but to date the success of this concept has not been clear and there are no common principles for its assessment. In Estonia, the national principles of smart specialisation and its implementation have been developed since 2012. During this time, prioritised growth areas have been developed, their selection process analysed and several other analyses have been carried out, however, it remains unclear, which companies belong to the growth areas of smart specialisation and how the growth areas have developed since their selection.
The purpose of this study is to identify the growth areas selected by the Estonian Development Fund, identify the companies belonging thereto by growth niches, analyse their development and volume in the Estonian economy, and make proposals to support the development of growth areas in the future.
Therefore, the authors of this study wish to develop a basic methodology for assessing the progress of growth areas, which can be applied both in Estonia and with some improvements in other EU Member States, and which can be further developed in future studies. For the best results, different stakeholders were involved in the study and several data collection and analysis methods were used. The definition of growth areas was based on the distribution of the fields developed by the Estonian Development Fund and their descriptions. The definition of growth areas and the identification of companies were based on existing data sources and expert assessments. Growth areas were defined by 10 characteristics that the companies could comply with in order to be part of the growth niches of smart specialisation. A total of 14 data sources (databases, pre-compiled lists, etc.) were used to identify the companies that meet the criteria. The selection of companies was based on the view that a company must meet at least one of the criteria to be on the list of growth niche companies. The list was prepared as at November 2018. The analysis of the growth areas was carried out using the information contained in the annual reports of the companies and the data of the Commercial Register (the surveyed years were 2012 and 2016), and interviews with business representatives and focus group interviews with business representatives, professional associations and academic experts were conducted. In addition, an online business survey was conducted and international practices were analysed. On the basis of the information collected by various methods, an overview of the progress of the growing areas was prepared and suggestions were made to support their development, which were validated by a panel discussion of sectoral experts. The study was carried out in close collaboration with the client and a smart specialisation quality expert was involved in the study.
The first part of the study identified growth areas, established companies belonging thereto and analysed their economic performance across growth niches.
As a result of the determination of growth areas, a total of 1700 companies were included in the growth niches in 2012 and 2409 in 2016, with at least one employee and sales incurred during the financial year. The identification of companies revealed that many belong to more than one growth niche (especially in the growth area of information and communication technology (ICT)). According to the economic performance analysis of growth niche companies, the share of growth niche
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companies in all Estonian companies was 3% in 2012 and 4% in 2016. With regard to the number of companies, tools and methodologies in software development, wood construction and health- promoting food were the biggest growth niches, but this is due to the characteristics used to determine these growth niches (namely, based on expert opinion, it was decided to use the Estonian Classification of Economic Activities (EMTAK), which was not used for other growth niches, as one of the characteristics of these growth niches). Between 2013 and 2016, a total of 611 new companies were added to the growth niches. Most of the companies added to their growth niches were tools and methodologies in software development, data analysis and information management and information security and cybersecurity. Compared to the years studied, the number of new companies entering each growth niche has rather declined. The largest growth niches in terms of the number of employees and sales were health-promoting food and wood in construction, arising from the large number of companies in these niches. In four years, the number of employees has grown the most in the ICT growth niches. Sales has increased the most in the following growth niches: tools and methodologies in software development and wood in construction. Both the number of employees and sales have decreased in the growth niches energy and resource efficiency in construction and buildings and oil shale in chemical industry, where the decrease is related to the decrease of individual large companies. These growth niches have the highest sales per company. The export volumes of companies varied widely across growth niches. Absolute export volumes were higher in growth niches, which were also larger in terms of the number of companies and employees. The largest export volume was exhibited by the growth niche production automation, robotics, embedded systems, where the majority of the export volume of this niche belonged to Ericsson Eesti AS. In four years, export had increased the most in growth niches information security and cybersecurity, tools and methodologies in software development, wood in construction and health- promoting food. At the same time, however, the share of exporting companies had declined in more than half of the growth niches, suggesting that the increase in export volume is due to an increase in the export volume of existing companies rather than an increase in the number of added companies. The most common export destinations in 2016 were neighbouring countries Finland (growth niches health-promoting food, nanotechnologies and surface coating technologies, production automation, robotics, embedded systems) and Latvia (growth niches energy and resource efficiency in construction and buildings, oil shale in chemical industry), however, export to other European countries was frequent as well. In 2016, added value per employee was highest in growth niches oil shale in chemical industry, energy and resource efficiency in construction and buildings and data analysis and information management. Added value was the lowest in growth niches health-promoting food and wood in construction. Added value had increased the most in growth niches information security and cybersecurity and oil shale in chemical industry. Companies that cooperate with R&D institutions in growth niches are mainly larger companies in terms of number of employees and sales. Similarly, the key economic indicators of companies that have collaborated with R&D institutions have generally grown faster than growth niches as a whole. The companies that cooperated in some form with R&D institutions in 2016 the most belonged to The growth niche production automation, robotics, embedded systems had the most companies that cooperated with R&D institutions in some form in 2016, whereas the growth niche tools and methodologies in software development had the least such companies.
The analysis of economic indicators revealed that the sales and average number of employees of most growth niche companies are higher than the average of Estonian companies. Furthermore, the added value per employee created by these companies in most growth niches was higher than the Estonian average and increased more than in Estonia as a whole. As labour costs have been higher than the Estonian average in all the niches studied, it can be argued that these companies also pay higher wages than the Estonian average.
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The second part of the study explored the factors most influencing growth cooperation and development in the growth fields.
The results of the survey revealed that many successful R&D cooperation projects to date have been based on random rather than deliberate planning. The promotion of cluster activities has facilitated business cooperation with research in broader support of the sector. Nonetheless, substantive collaboration retreats between companies that cover different levels of the value chain and complement each other’s activities, products and services rather than direct competitors, where interoperability is prevented in most technologies. From the companies’ perspective, R&D cooperation networks play a different role at different stages of product/service development. In the context of R&D based product development, collaborative relationships are most productive within the business sector. There are examples where technology developed in foreign countries serves as the basis for knowledge-intensive production in Estonia, or where the cooperation between a large-scale R&D company and the manufacturer of the end product contributes to the growth of both parties. On-demand cooperation between companies and R&D institutions, which is mainly about product testing, is equally useful and necessary. At the same time, it was emphasised that R&D cooperation in general is largely carried out through appropriate national support measures, therefore, there is also a need for measures supporting smart specialisation. Here, companies feel that national measures are often not adapted to the needs of the growth fields of smart specialisation. In the case of state measures, the excessive bureaucracy involved in applying, which discourages companies from submitting an application, as well as rigidity are said to be inhibiting, which is why development is driven by different programmes and their rules, not by the entrepreneur. In addition, there have also been complaints regarding the unsuitability of the measures for different target groups and the fragmentation of grants and their providers, as well as access to information. In terms of smart specialisation and more broadly the impact assessment of R&D and innovation policy, it was found that, for example, the impact of the cooperation between companies and universities on business should be assessed with some reservations, since the economic performance of companies cooperating with R&D institutions in terms of growth niches, including added value, sales, export and labour costs, may not be the result of cooperation, but a prerequisite thereof. The fact that cooperation is effective does not mean that the cooperation would produce a positive result. Rather, those companies that are already generating higher added value are interested in making a further qualitative leap and may look for collaborations with R&D institutions.
The results of the study revealed that in the light of the global and technological developments in recent years, the descriptions of current growth niches are somewhat outdated and no longer correspond to the developments in growth fields in Estonia. However, the breakdown of growth areas into three main topics – ICT, health technologies and transformation of resources – is still seen as relevant and adequate.
In case of growth niches, the key challenge is to strike a balance between fixing niches and providing flexibility to accommodate potential new trends. Entrepreneurs perceive the supporting and monitoring of the developments taking place in the growth fields as a more dynamic approach to technology and business processes, and they emphasise the need to focus on projects, initiatives and activities. ➢ In the ICT growth field, a situation has currently arisen where most companies cannot be categorised as belonging under one of the growth niches, since their activities cannot
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be determined that narrowly. Nevertheless, as a rapidly changing technological field, ICT is seen as having to find focus, incl. new technological trends where Estonia has the prerequisites for gaining an international competitive advantage. Specific examples included artificial intelligence, robotics, which, in addition to industrial automation/robotisation, should include self-driving, autonomous vehicles and the Internet of Things, as well as cybersecurity. ➢ In the growth field of health technology, it was found that the definition of the growth niche of e-health has proved to be too narrow – it has become clear by now that treatment data is not the main part of the data, but about 10% of overall health data. In addition, genetics, social interaction, the digital image (quantified me/self), etc. have changed a lot in the context of e-health over the time. Therefore, the definition of the field should be broader and focus not only on hospitals and clinics, but also on patients and data collected in connection with them. In addition, it was emphasised that health economics is emerging alongside pharmaceutical industry. ➢ The growth field of biotechnology should be observed as process-based rather than resource- or product-centred, as the same raw material, bacterium and process can in reality produce several products for various uses that may not qualify as health-promoting food. Biotechnology relates to the ability to develop a process that can produce an intermediate compound or product from a natural raw material or resource that can be realised. ➢ In the growth field of knowledge-based construction, the definition of growth niches was considered appropriate, but the content titles identified are controversial. There are three distinct sub-niches that may not interact with each other and have different dynamics and challenges. One of the missing topics in the current growth niche descriptions of knowledge- based success is sustainability as one of the biggest trends in the construction industry. ➢ The niche classification of materials technology growth fields was the most questioned of the current growth fields. While oil shale is clearly a specific nature of Estonia, having justified its place among the priority fields for growth, with regard to the rest, the focus was found to be too narrow. The field of growth should be viewed more broadly than the value of all natural resources with a focus on what is exported from Estonia. On the other hand, sufficient flexibility should be left to all technologies where Estonia can add value in terms of technology or process. In addition, it was emphasised that in the light of global developments, climate and environmental technologies and the carbon-free economy should be included in the niches as separate potential areas for growth and specialisation.
Resulting from the study, proposals were made for determination and further monitoring and analysis of growth areas and policy recommendations to support the development of growth areas.
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The proposals are aimed in particular at enhancing the smart specialisation policy-making activities of the Ministry of Economic Affairs and Communications and the Ministry of Education and Research, and monitoring the progress of growth fields as well as planning R&D and innovation policy measures in the period of 2020+.
The definition and monitoring of the fields of smart specialisation should, first and foremost, utilise the growth field level and growth niches should be seen as directional activities that change over time. Growth niches should be updated on a regular basis, thereby drawing attention to developments in the field. A multi-step approach should be used to monitor growth trends, combining a quantitative and a qualitative approach.
In terms of policy recommendations, one of the main proposals is to make the process of smart specialisation more driven by the logic of the entrepreneurial discovery process. To achieve this, the Ministry of Economic Affairs and Communications would need to establish interactive platforms for continuous monitoring of the development of priority growth areas and for the establishment of cross-sectoral agreements. In addition, the definition of growth fields should be more flexible and the measures less regulated, thereby ensuring greater compliance with the needs and characteristics of growth fields. The broader focus of smart specialisation should be on projects, initiatives and development processes that seek to accelerate the development of growth field companies and increase their added value and export.
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Study on the progress of growth areas Methodology of study 15
Introduction
To stimulate European economic development and growth and increase productivity, the European Union developed in 2009 a concept of smart specialisation (hereinafter “smart specialisation”), which aimed to focus regional innovation policy on the specific development opportunities of the regions by defining and developing competitive advantages. To date, the smart specialisation concept has been embedded in most of the European Union’s Cohesion Policy development and strategy papers, making it an important conceptual starting point for many countries and the basis for R&D investment financing decisions. Since its inception, the European Union has, through various activities, been trying to support Member States in implementing smart specialisation and measuring the results, but rather due to indicative guidelines, Member States have been relatively free to interpret smart specialisation. As there is no common methodology for assessing the success of smart specialisation, it is difficult to compare the economic growth of the regions resulting from the implementation of the concept. However, it has been clear to everyone since the creation of the concept that smart specialisation must be measurable and its results must be comparable. However, it is important to bear in mind that while smart specialisation is a regional policy approach in EU as a whole, then in Estonia and also in Latvia and Lithuania, for example, it is being implemented at the national level, which poses unique challenges in economic theory and policy making – at regional policy level, specialisations are easier to define and bring into focus (provided that there is a horizontal policy at national level that does not exclude support for the development of companies and sectors outside of smart specialisation). At national level, the implementation of smart specialisation has always been accompanied by more general formulations of smart specialisation and broader scope of smart specialisation (see further Karo et al. 2017). Several surveys and analyses have been compiled in Estonia since 2012 for the implementation of smart specialisation and the selection of growth areas, but so far there is no nationally uniform methodology for assessing the progress of smart specialisation and growth areas. Based on the smart specialisation concept, which seeks to identify (including agree on a cross-sectoral basis) and prioritise selected growth areas and high-growth growth niches through an entrepreneurial discovery process1 (which may take the form of sectors, technology implementation processes or specific horizontal activities, e.g. ICT application in traditional sectors), which may not be consistent with the logic of classifying traditional economic activities (e.g. EMTAK (Estonian Classification of Economic Activities) in Estonia and NACE (Statistical Classification of Economic Activities in the European Community) in the European Union, the analysis of the progress of selected areas cannot be based on general sector overviews. In addition, when analysing growth niches, it is important to evaluate the field relationships with other sectors, support for entrepreneurial decision-making, and the size (potential) of the selected growth niches. The latter is important as, in the case of very small niches, the benefits of potential knowledge transfer may remain limited. In order to analyse the progress of the smart specialisation growth areas, it is necessary to develop a specific methodology that provides insight into change, draws attention from both the public and private sectors to failures that need intervention, and allows for the planning of necessary activities and measures.
1 In the context of smart specialisation, the entrepreneurial discovery process means “an inclusive and interactive bottom-up process in which stakeholders from different environments (policy-making, business, academia) discover and generate information about new potential activities, identify new potential development opportunities from such interaction, while policy-makers evaluate how these potentials can be leveraged”. See more: http://s3platform.jrc.ec.europa.eu/entrepreneurial-discovery-edp.
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The aim of the study is to define growth areas developed by the Estonian Development Fund, to identify the companies belonging to them by growth niches and to analyse their development and volume in the Estonian economy based on quantitative and qualitative factors, to propose further determination areas, methods for analysing and monitoring their progress and to collect recommendations to support the development of growth areas.
The growth areas with growth niches selected as a result of the work of the Estonian Development Fund are considered: • information and communication technologies: data analysis and information management; information security and cybersecurity; production automation, robotics, embedded systems; tools and methodologies in software development; • health technologies: e-health; red biotechnology; • transformation of resources: o energy and resource efficiency in construction and buildings; o transformation of wood: wood in construction; o nanotechnologies and surface coating technologies; o transformation of mineral resources: oil shale in chemical industry; o transformation of raw material for food: health-promoting food; and companies operating in these fields in Estonia. In order to achieve the best result, different stakeholders have been involved in the study and various data collection and analysis methods have been used. Seven key research questions were formulated in the study: 1) what is the best way for determining the selected growth areas and niches based on available data and what kind of companies do they consist of; 2) what was the volume of growth niche companies in the Estonian economy and their development in 2012 and 2016; 3) what is the R&D cooperation network of growth niche companies like; 4) what factors and trends have the most impact on the competitiveness and development of growth niches; 5) what methodology could be used to structure and determine growth areas in the future; 6) what methodology could be used for further analysis and monitoring of the progress of entrepreneurship of growth areas; 7) how could policy-makers and other parties contribute to the development of growth areas. The study report gives an overview of the following: • the methodology used in the study; • the determination of growth areas and identification of companies belonging to these growth areas; • the development of entrepreneurship of growth areas, cooperation with research and development institutions (R&D institutions) and factors influencing the development; • the proposals for the future development of smart specialisation. As a result of the study, proposals were made for future methodology for determining growth areas, methods for monitoring and analysing growth areas, and recommendations for supporting the development of growth areas. The study was commissioned by the Ministry of Economic Affairs and Communications; the study was paid for by using the technical assistance funds of the 2014–2020 Structural Funds.
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Methodology of study
The areas of smart specialisation are defined on the basis of the division of the areas developed by the Estonian Development Fund and their descriptions, derived from the Estonian Development Fund sectoral reports2 (hereinafter jointly referred to as “reports of the Estonian Development Fund”) without changing their content. The growth areas, fields and niches developed by the Estonian Development Fund are listed in Table 1 and the detailed descriptions of the growth niches are given in Annex 1 to the report. The quantitative part of the study focuses mainly on the analysis of the growth niche level, but due to the complexity of identifying and analysing growth niche companies, the qualitative analysis and the policy recommendations focus more on the level of growth fields.
Table 1. Growth areas, fields and niches for smart specialisation
Growth area Growth field Growth niche Data analysis and information management Information security and cybersecurity ICT Production automation, robotics, embedded systems Tools and methodologies in software development E-health Health technologies Red biotechnology Energy and resource efficiency in construction and Knowledge-based construction buildings Transformation of wood: wood in construction Transformation Nanotechnologies and surface coating technologies of resources Materials technologies Transformation of mineral resources: oil shale in chemical industry Transformation of raw material for food: health- Biotechnologies promoting food
Source: Specifications of the procurement documents (procurement reference 195924), page 6 A visualized step-by-step description of the study methodology is presented in Figure 1. The figure shows the planned principal activities (marked with a blue background) and sub-activities (marked with a white background) and the results of activities and steps (marked with a green background). The figure shows the steps side by side, denoting the equality of their importance. The time frame of the study is not included in the figure, but not all steps of the study followed each other in time, but the activities were partially parallel.
2 The input of the study consisted of the reports of the Estonian Development Fund (completed in December 2014): Sectoral report of smart specialisation on information and communication technology as a growth field; report on the growth area of smart specialisation health technologies; report on the transformation of resources of smart specialisation.
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STEP I STEP II STEP III STEP IV STEP V
Determination of growth areas Preparation of proposals Preparation of proposals and identification for methodology for determination to support the development of growth niche companies of growth areas of growth areas Qualitative analysis Development of an analysis and of entrepreneurship monitoring methodology for of growth areas entrepreneurship of growth areas
Determination of growth areas Preparation of characteristics Conclusions and establishment (selected characteristics (incl. consideration of the sub- of focus and sources) concepts of Kitsing) (Results of STEPS I–IV) Identification of R&D (Results of STEPS I and II + cooperation consultations with experts) Development of methodology Identification of growth area of companies (Results of STEP I + (Results of STEPS I–III) companies (based on selected questionnaires, characteristics and sources) in-depth interviews) Formulation of policy recommendations Preparation of proposals for (Results of STEPS I–IV) the structure of growth areas RESULT: methodology for (focus group interviews) determining growth areas and Identification of business Preparation of overview on lists of growth niche companies development plans and needs, data sources and missing data with recommendations trends, etc. (in-depth RESULT: recommendations (Results of STEPS I–III) interviews, focus group RESULT: proposals for for entrepreneurship interviews) a methodology for of growth areas the structure and determination Quantitative analysis of growth of growth areas niche entrepreneurship RESULT: analysis and monitoring methodology for business Identification of success growth in growth areas factors and operational (incl. policy measures) needs Analysis of companies’ (focus group interviews) economic indicators (annual reports)
RESULT: growth area entrepreneurial R&D RESULT: development of growth cooperation networks, success niche entrepreneurship in 2012 factors and operational needs and 2016 and volume in the Estonian economy
Figure 1. Methodology of study Comment: on a blue background – the main activities of steps; on a white background – the sub-activities of steps; on a green background – the results of activities and steps Step I – determination of growth areas, identification of growth niche companies and quantitative analysis of economic performance
The aim of the first step of the study was to try for the first time to identify the growth niches identified by the Estonian Development Fund, to identify the companies belonging to them and to analyse their economic performance quantitatively.
The primary input for the study involved the earlier analyses of smart specialisation, previously collected data on companies operating in growth niches, and other documents on smart specialisation implementation in Estonia. Analyses and data collected in the past confirmed that the growth areas were largely selected by qualitative methods and, therefore, lacked clear determination characteristics. It became clear at the beginning of the first step that regardless of the descriptions of growth areas in the reports of the Estonian Development Fund, the definitions of areas are sometimes vague and their boundaries may change if interpreted in different contexts. Therefore, the development of a methodology for determining growth areas based on the smart specialisation theory and existing data sources was initiated. The characteristics of the determination of growth areas were developed on the basis of the reports of the Estonian Development Fund and other recommendations and results of analyses related to smart specialisation, as well as the lists of growth areas and niches previously prepared by the client, i.e. Ministry of Economic Affairs and Communications. These were used as the basis for developing the primary characteristics that companies in growth areas should respond to, and for
Study on the progress of growth areas Methodology of study 19 identifying the data sources where they could be found. The process of selecting the characteristics and data sources was carried out in agreement with the client and the survey quality expert. Sectoral expertise was added to the list as a specific feature, as sectorial experts are the most knowledgeable of companies operating in growth niches that may not be selected based on other characteristics. As the inclusion of sectoral expertise meant the addition of a qualitative data collection method, it was decided to first list companies in each growth niche based on the characteristics available, and then consult with sectoral experts to discuss both the suitability of the characteristics in the given niche context and the lists of growth niche companies. A list of the field experts included in the study is provided in Annex 2 to the report. A total of 10 characteristics were selected for defining growth areas that companies could comply with in order to be part of the growth niches of smart specialisation (see Annex 9). A total of 14 data sources were used to determine the 10 characteristics used to identify the companies (databases, pre- compiled lists, etc.). The identification of the companies was based on the view that the company must meet at least one of the characteristics in order to be included in the primary list (the characteristics were not ranked in order of importance). One of the principles of conducting the survey was to use previous work as input so as not to duplicate already completed work. Therefore, the identification of growth niche companies commenced on the basis of the examples of niche companies included in the reports of the Estonian Development Fund and in the one-on-one lists prepared by the client and forwarded to the research team. Subsequently, companies that were supported by smart specialisation support measures were added to the list on the basis of the client’s data, the niche of which was not questioned by the study authors. Next, the following was added to the list: • partners of Technology Competence Centres, also mainly based on the client’s data; • companies that have participated in R&D cooperation projects as partners or donors from 2007 to June 2018 as seen from the list of the Estonian Research Information System (ETIS); • companies that have carried out international cooperation projects in the database of the Estonian Research Council also between 2007 to June 2018; • if the Estonian Classification of Economic Activities (EMTAK 2008) has a code corresponding to the description of the growth niche and sectoral experts considered it appropriate to include companies with these codes in the preparation of the lists, companies based in the respective business areas were also included in the primary lists on the basis of the commercial register database; • members of sectoral associations in sectors where there is an association which groups only companies related to the description of the growth niche, so that in case of narrow niches, the broader members of the sectoral association were not included in the niche; • Startup Estonia companies engaged in smart specialisation areas; • spin-off companies of the University of Tartu (UT) and Tallinn University of Technology (TalTech) in the areas of smart specialisation; • companies that have submitted patent applications for growth niches, according to the Espacenet database. In addition, research articles were searched in the EBSCO database using the following keywords: growth niche and/or field name, company, Estonia, sector, field of activity. For all characteristics qualified by a separate classification, the authors of the study compiled correlation tables based on the classification of the attribute and the content of the growth niches, according to which the companies were classified as belonging to the growth niches or not. Correlation tables with growth niches for all characteristics and sources are provided in Annexes 3 to 8 to the report.
Study on the progress of growth areas Methodology of study 20
Lastly, the companies in the list, which cooperate with R&D institutions, were compared with the data collected by the Ministry of Education and Research3. The list of the Ministry of Education and Research was used by the authors of the study to verify the cooperation of the companies in the list of growth niches with R&D institutions, and those companies that were on the list of growth niches on the basis of other characteristics but also appeared in the list of the Ministry of Education and Research. During and after the compilation of the list of growth niche companies, the authors of the study contacted sectoral experts in each of the growth niches, who reviewed the list and provided feedback which was used to update and improve the list. The study authors succeeded in contacting one to three industry experts in each growth niche. Contact with experts was complicated by the overlap of the study step with the summer vacation period (expert consultations took place in June and July 2018); it was necessary to stay on the study schedule, but as a result, many experts did not find the appropriate time to contribute to the study. In the first step of the study, companies were listed in all 11 growth niches. A summary table of sources for the identification of growth niche companies and the number of new companies based on them is provided in Annex 9 to the report, and detailed descriptions of the characteristics and sources of the identification of growth niches are given in Annex 10. After identifying and listing growth niche companies, a quantitative analysis of their economic performance began. The economic performance of growth niche companies was analysed separately for each growth niche in 2012 and 2016. 2012 was chosen as the starting point for the research, as the smart specialisation concept was still under development, and the end point was 2016, as it was the most recent information available from the Commercial Register at the time of the study. As the lists of companies are constantly changing (new companies are constantly being added, some are bankrupt or in liquidation, some have changed their field of activity, etc.), the authors of the study did not consider it useful to draw up lists for all the years between 2012 and 2016. A description of the first step activities is shown in Figure 2, which illustrates the time sequence of the step activities in the direction of the arrow. The figure shows the first-stage activities on a light blue background, sources used to identify companies on a white background, and the discussions and coordination during the activities are oval with a white background (all activities were coordinated with the client, and the determination of growth niches and selection of companies were further discussed with a quality expert of the study and sectoral experts). The results of the first step of the study were presented by the study authors at a meeting of the Smart Specialisation Steering Committee.
3 The lists of the Ministry of Education and Research are based on the basic funding data provided by R&D institutions, which have been positively evaluated.
Study on the progress of growth areas Methodology of study 21
Identification of companies Collection Selection of Analysis of background characteristics Lists of the Reports Beneficiaries Partners of Preparation Ministry of economic materials, past and sources of the Estonian of the smart Technology ETIS Sectoral of lists of Economic Associations indicators Studies and for Development specialisation Competence data experts Affairs and of companies determination Fund measures Centres of growth niche gathered Communications information of growth companies niches Spin-off Patent Field of Database Startup companies of Database of the EBSCO applicants activity based of the Ministry Estonia the University Estonian Research database Espacenet on the EMTAK of Education companies of Tartu and Council database database and Research TalTech
S T E P I
Coordination Coordination with the client Discussions with sectoral experts with the client Discussions Discussions with the client with the quality expert
Figure 2. Activities of step I of the study Quantitative analysis Quantitative business analysis of growth areas used data from the Commercial Register, which was based on the annual reports of the companies and, if necessary, the companies were directly consulted with to specify the data. The input to the analysis involved the lists of growth niche companies compiled during previous activities, however, only companies that had at least one employee (full-time equivalent) and sales generated during the reporting period were included in the quantitative analysis. The quantitative analysis covered the following economic indicators of companies: average number of employees, sales, average added value per employee, labour costs, export volume and main target markets, volume and change in tangible and intangible investments, target investments, capital structure and volume (shareholders’ equity and debt). In the main part of the final report, only the results on the number of employees, sales, added value and export are reported in a concentrated form, the rest of the figures are presented in Annex 11 to the report. The following formula was used for the calculation of added value: 풂풅풅풆풅 풗풂풍풖풆 = 풐풑풆풓풂풕풊풏품 풑풓풐풇풊풕 + 풍풂풃풐풖풓 풄풐풔풕풔 + 풅풆풑풓풆풄풊풂풕풊풐풏 The added companies include companies established between 2013 and 2016. Due to the fact that in Estonia, at the policy level, smart specialisation is treated primarily as a part of national R&D and innovation policy (although elsewhere it is rather part of a regional economic policy that may not be so much focused on high-tech development), one of the focus areas of the analysis was the monitoring of companies with potential for cooperation with R&D institutions. Companies that have cooperated with R&D institutions and with high potential for such cooperation (hereinafter abbreviated as “companies that have cooperated with R&D institutions”) include companies that have been added to the list of growth niches based on the following characteristics (Chapter 1, characteristics 4–9):
• the company is part of a sectoral association (including Startup Estonia companies, except the Association of Estonian Food Industry and Tartu Biotechnology Park companies, as being a member thereof does not refer to direct cooperation); • the company has cooperated with R&D institutions; • the company has participated in an international project; • the company has received support from the smart specialisation support measure; • the company has submitted a patent application in the fields of smart specialisation;
Study on the progress of growth areas Methodology of study 22
• the company belongs to the list of companies that cooperated with R&D institutions, prepared by the Ministry of Education and Research. In the niche of oil shale in chemical industry, the expert opinions were also taken into account in determining cooperation. Due to the quality of the data, the analysis thereof posed a number of limitations, which must be taken into account when reading the study report.
• Companies using profit and loss Scheme 2 in their income statement did not have labour costs in the data table provided by the Centre of Registers and Information Systems (RIK), as labour cost information comes from the income statement. In the case of Scheme 2, however, labour costs are not reflected separately in the income statement. • When calculating the average labour cost, only those companies for which labour cost information was available were included in the analysis. • For companies that used the income statement Scheme 2 in order to calculate the revenue, the average labour cost per employee in growth niche was used to estimate labour costs. • In the data tables of the Centre of Registers and Information Systems, the data on some companies were included in the consolidated report for one year and not for the other year. This led to a situation where one year the company had a stated number of employees, but in another year it had not. In order to exclude companies with a missing number of employees from the analysis, the number of employees, sales and export volume of the 15 largest companies in each niche were reviewed and information on the number of employees was added. When the number of employees came from consolidated accounts, the company’s sales, operating profit, labour costs and depreciation and impairment of fixed assets were also reviewed, during which the data table of the Centre of Registers and Information Systems was modified. • There were few companies that had received targeted financing, which makes the figure unstable. • Export data also comes from the companies’ annual reports, and, therefore, the breakdown of sales by destination is as detailed as the companies have provided in their annual reports. This means that many companies have used the breakdowns “other countries”, “sales outside the EU, other” and “sales to EU countries, other” to determine their target countries. • The decline in export and added value indicators in some niches may be due to changes in niche companies, including company’s restructuring, resulting in the fact that a company was part of the sample of quantitative data analysis in one year, but not in another (e.g. Eesti Energia Õlitööstus AS). • The report does not reflect the aggregate results of growth niches (in sum), as there are recurring companies in the growth niches (e.g. Cybernetica AS in five growth niches, Quretec OÜ in four growth niches, Proekspert in three growth niches, Viljandi Aken ja Uks in two growth niches, VKG OIL AS in two growth niches, etc.), the multiplication of economic results of which (especially for larger companies) would be misleading and distort results. Also, it is not possible to count recurring companies only once, as it is impossible to divide the economic performance of companies between different growth niches (especially in case of ICT growth niches), because the companies themselves do not differentiate between them.
Study on the progress of growth areas Methodology of study 23
Step II – networks of R&D activities of growth area companies and the factors and trends influencing their competitiveness
The aim of the second step of the study was to compile an overview of R&D networks of growth niche companies and to identify factors and trends affecting growth and competitiveness of growth niche companies over the last five years and in the next 5–10 years (depending on the growth niche).
The qualitative overview was primarily based on the online questionnaire survey, in-depth interviews with companies, and focus group interviews with companies, professional associations and academic experts. The methodology of this step is described below, based on the data collection method. Questionnaire survey The survey focused on cooperation of growth niche companies with R&D institutions and the impact of this cooperation on business growth and competitiveness. The representatives of companies were asked to answer eight main questions concerning their cooperation with different R&D institutions in Estonia or abroad (in the last 10 years) and to evaluate the cooperation by fields of development. The companies were asked to assess the impact of the cooperation – whether it had a decisive positive impact, a significant positive impact or little or no impact. Decisive positive influence refers to the cooperation that has made the company what it is or the success (competitiveness, growth) of the company would not have been possible without this cooperation. The companies were also asked to specify with which R&D institutions (by name) they had cooperated in order of importance. In addition, companies were asked to indicate which national business development programmes they had participated in and received development support over the past 10 years, and to assess the impact of the support on the company’s growth and competitiveness against other growth factors. Finally, respondents were asked to make suggestions to ensure the success factors of business cooperation in the field of R&D and to remove obstacles. The questionnaire survey schedule was developed in cooperation with the client. The survey was carried out from 22 August to 14 September 2018, using the online environment SurveyMonkey. In the first step of the survey, the survey web link was sent to companies in the selected growth niche list, which, according to the Commercial Register, had sales revenue in 2016 and at least two employees (as an annual average). Companies with fewer than two employees were chosen to be excluded from the online survey because of their low level of cooperation with R&D bodies, including the likelihood of responding to the survey. In total, the survey was sent to the email address of 1459 companies listed in the Commercial Register. One written reminder was sent to companies during the survey period, and to increase the number of responses, companies that had not responded to the online survey and had at least 10 employees in 2016 (as an annual average) were called during the period from 30 August to 14 September 2018. The main contact points were the business telephone numbers listed in the Commercial Register, and for larger companies (based on the number of employees in 2016), the phone numbers were also verified using Google search and business websites. Attempts were made to contact a total of 568 companies. Of these, 80 replied to the questionnaire by telephone, 43 replied to the questionnaire on the web after contacting, the rest agreed to reply online but did not, refused to respond or could not be contacted (the phone call was not answered or the number was not in use). A total of 183 companies responded to the survey, 80 of them over the phone and 103 online. The survey response rate of 12.5% is not sufficient to generalise the results, but it does provide an overview of the responses of the companies that took the survey. The results of the questionnaire survey, together with the profile of the respondents, are provided in Annex 16.
Study on the progress of growth areas Methodology of study 24
In-depth interviews The aim of in-depth interviews was to unlock the diversity of corporate R&D partnerships in their specific development contexts (field of activity, stage of development, cooperation networks, package of national measures used). To this end, a total of 18 companies in different growth fields were contacted, reports were compiled on the basis of reporting and data on the business, financial performance and programme participation of 14 companies and interviews were carried out from 11 October to 15 November 2018 with 12 persons. Interviews with company representatives were conducted as semi-structured interviews. The case study was based on the so-called holistic understanding of smart growth and competitiveness of companies. By understanding, each case (the business model of the company, the different types of collaborative relationships, the role of R&D and collaboration in the growth of the company, the broader factors affecting growth) was first interpreted as a comprehensive system and then, in the context of this system, the role of corporate R&D networking in achieving smart growth, the contribution of public support measures thereto, as well as the major challenges and barriers of growth, R&D networking and the use of public measures. In total, the cooperative R&D relationships of 10 companies were investigated in detail. In doing so, the original theoretical selection based on a combination of two characteristics – a) growth of companies and b) use of the smart specialisation measures – was abandoned during the research process. There are two main reasons for abandoning the use of smart specialisation measures. Firstly, from the perspective of the companies interviewed, there was no clear distinction between smart specialisation measures and other measures supporting the growth of national or international companies (e.g. Horizon). Secondly, a number of companies that had not used or had not achieved the desired (significant) benefit from public support measures withdrew from the longer interview. The content of such interviews for carrying out a case study task would be questionable as well. Instead, the actual sample of companies formed is distinguished on the basis of the importance of R&D activities of the companies in the business model: a) technology development companies where growth is significantly influenced by R&D volume and technology sales, and b) more traditional production and service companies where the majority of sales and related growth is relatively independent of in-house R&D activities and R&D collaboration. Both groups include five companies (see a more detailed explanation of the grouping under results). Focus group interviews The focus group interviews were carried out in four growth fields – ICT, health technologies (including biotechnology and health-promoting food), knowledge-based construction and materials technologies – to validate the results of the first step of the study and further elaborate on the results of the in-depth interviews. The focus group interviews were carried out between 8 and 16 October 2018. In total, 27 representatives of companies and professional associations and academic experts participated in the focus group interviews. The focus group discussions lasted an average of two hours per growth field. A list of the field experts included in the study is provided in Annex 2 to the report. The main topics discussed during focus group interviews were the timelines of the description of growth areas of the Estonian Development Fund and their possible modifications, the list of characteristics selected to determine the growth areas and identify the companies, the validity of the list of companies, the interpretation of economic performance in the growth field, and the current and potential future measures that would contribute to developing the growth field.
Study on the progress of growth areas Methodology of study 25
Step III – development of proposals for a methodology for determining the structure and sub-fields of growth areas
The aim of the third step was to prepare proposals for further determination of the structure and sub-fields of the areas on the basis of the results of the first two steps and an overview of international practice.
Analysis of international practice The purpose of the international practice analysis was to describe the experiences of other countries in the selection, determination and monitoring systems of the growth areas of smart specialisation. In order to take advantage of earlier smart specialisation surveys and analyses, country selection was based on the 2017 analysis of the Estonian Research Council4, which provided an overview of the smart specialisation monitoring systems in selected countries. Six countries were selected for observation: Ireland, the Netherlands (southern region), Lithuania, Slovenia, Finland (Helsinki- Uusimaa region) and the Czech Republic. Public materials on the national smart specialisation strategies, their development and implementation were used to analyse international practice. In addition, experts from different countries were consulted with if their contacts were publicly available. Step IV – development of proposals for analysis and monitoring methodology for business growth in growth areas
The aim of the fourth step of the study was to formulate proposals for further monitoring and analysis of the progress of business related to growth niches based on the results of previous stages.
The economic indicators proposed for monitoring and analysing the growth areas were linked to the four sub-concepts of smart specialisation, i.e. relevance and coherence, interconnection, connectivity, diversity, highlighted in the analysis by Kitsing (2015) and derived from the European Commission and related literature. Step V – preparation of proposals to policy-makers and other parties to support the development of growth areas
The aim of the fifth step was to prepare, on the basis of previously collected materials and analysis, proposals for policy-makers and other parties to further support the development of growth areas.
The policy recommendations were based on the broader and more strategic objective of smart specialisation of supporting growth and job creation through regional peculiarities and competitive
4 Kert, K., Moosus, M. (2017). Monitoring of smart specialisation growth fields and indicators used in reference countries. SA Eesti Teadusagentuur, Tartu 2017.
Study on the progress of growth areas Methodology of study 26 advantages5. At the same time, smart means the use of regional peculiarities as the engine of growth, specialisation refers to the achievement of economic development primarily through R&D activities and innovation, and strategic indicates a common understanding of the engines of growth in the region and joint action. The fifth steps resulted in proposals for policy-makers and other parties, contributing to the development of growth areas. Preparation of proposals, i.e. the third, fourth and fifth step of the study were carried out in parallel. Proposals for determining, monitoring and analysing growth areas, as well as policy recommendations to further support the development of growth areas, were discussed with sectoral experts at a discussion seminar on 26 November 2018. The proposals were also discussed with the client and the quality expert involved in the study. A summary of the study, together with the proposals, was also sent to the Smart Specialisation Steering Committee for opinion on 6 December 2018.
5 European Commission, Joint Research Centre (2017). What is Smart Specialisation? Smart Specialisation Platform [http://s3platform.jrc.ec.europa.eu/what-is-smart-specialisation-], 9.04.2018.
Study on the progress of growth areas Determination of growth areas and identification of companies 27
1. Determination of growth areas and identification of companies
The growth areas and niches of Estonian smart specialisation have been selected mainly as a result of qualitative analysis (Estonian Development Fund, 2013), therefore they do not match with classifications of standard economic activities (e.g. EMTAK in Estonia and NACE in the EU) or other sectoral breakdowns.
Therefore, as part of the study, a methodology for determining growth niches was developed with the aim of identifying the companies in the growth niches at the time of conducting the study and allowing the lists to be updated at a later date.
A list of growth niches with detailed descriptions is provided in Annex 1 to the report. Characteristics and sources of determination To determine the growth niches, the characteristics that companies in the growth niches should meet were first selected. The list of characteristics and sources developed on the basis of the smart specialisation concept, previous studies and analyses, and data collected was discussed with sectoral experts and agreed with the client. The list of characteristics and sources is selected based on the best available databases at the time of the study. Each characteristic is described below along with the data sources and justification for the selection thereof. CHARACTERISTIC 1. The company is on the list previously compiled by the Ministry of Economic Affairs and Communications The authors of the study proceeded from the principle that work on determining the smart specialisation growth areas will continue where previous research or other activities have been interrupted. Therefore, the list of companies compiled according to different methodologies in some growth niches and fields was used as one input in the Ministry of Economic Affairs and Communications between 2017 and 2018: • information security and cybersecurity (based on the Startup Estonia list and expert knowledge); • e-health (the list was based on expert knowledge of the Connected Health Cluster); • biotechnology (the list included companies that have been listed under the biotechnology- related EMTAK code in the Commercial Register and it was reviewed by a sectoral expert); • materials technology (the list included companies supported by different national programmes in the field of materials technology); • green technology (the list was prepared on the basis of a study commissioned by the Ministry of the Environment “Analysis of the Estonian Green Technology Sector” (2017)). CHARACTERISTIC 2. The company has been given as an example in the reports of the Estonian Development Fund The authors of the study decided to include in the list of growth niches all companies that were given as examples of descriptions of growth niches in the sectoral reports prepared by the Estonian Development Fund, as these most closely reflect the ideas of the experts involved in the selection of the growth niche in regard to the essence of the growth niche. Examples could not be found for all
Study on the progress of growth areas Determination of growth areas and identification of companies 28 niches, as some of the reports of the Estonian Development Fund did not include examples of companies.
CHARACTERISTIC 3. The field of activity of the company corresponds to the EMTAK areas related to smart specialisation Since the logic of no classifications was not directly used in the selection of growth niches, the authors of the study did not initially find a basis for directly linking the growth niches to some. At the same time, the EMTAK classification of economic activities in Estonia is a widely used classification in other fields of economy and it is applied in the national information systems (including the Commercial Register) for the classification of companies. Therefore, for growth niches where sectoral experts considered the linking to be justified, it was decided to link the niche to the EMTAK codes related to the smart specialisation areas and to list the companies operating in these fields based on the data of the Commercial Register (as of 2016). One of the limitations of using EMTAK codes is the subjectivity of selecting and entering them in the Commercial Register, which means that a company can designate a code as an activity without delving into its content. A correlation table between the Estonian Classification of Economic Activities (EMTAK 2008) and growth niches is provided in Annex 3. CHARACTERISTIC 4. The company belongs to a sectoral association Membership of a company in a sectoral union or association was evaluated differently by experts. On the one hand, it was considered that membership in a sectoral association indicates a company’s willingness to cooperate and develop, and, on the other hand, that membership or non-affiliation depends on a variety of reasons, which makes it impossible to distinguish companies within the smart specialisation fields. It was therefore decided to list the members of the respective association in the growth niches, where there is a sectoral professional union, association or cluster, which consists only of companies that are characteristic of the growth niche. Startup Estonia companies were also added to the list under the same characteristic in areas related to growth niches, as the expected growth potential of startups is an important factor in smart specialisation theory. The correlation table between Startup Estonia’s fields and growth niches is provided in Annex 4 to the report. CHARACTERISTIC 5. The company has cooperated with R&D institutions Cooperation between companies and R&D institutions is considered an important indicator of the company’s development and growth potential. The spin-off companies of the University of Tartu and Tallinn University of Technology, the database of the Estonian Research Information System and the client’s lists of partners of the Technology Competence Centres were used to determine the companies that cooperated with R&D institutions. According to the website of the University of Tartu, a spin-off company is a company that, in agreement with the university, wants to highlight its relationship with the university for business development, founded and/or owned by the university and/or its staff/students and which utilizes the university’s intellectual capital and/or infrastructure in its operations. As of 2016, there are a total of 59 university spin-off companies affiliated with the University of Tartu (University of Tartu, 2016), of which 39 belong to one or several growth niches. A correlation table between the University of Tartu spin-off companies and growth niches is provided in Annex 5a. As of 2016, Tallinn University of Technology has 13 spin-off companies, seven of which can be considered as belonging to growth niches (Tallinn University of Technology, 2018). A correlation table between Tallinn University of Technology spin-off companies and growth niches is provided in Annex 5b.
Study on the progress of growth areas Determination of growth areas and identification of companies 29
Another source for identifying companies that have collaborated with R&D institutions was an extract from the Estonian Research Information System of those companies that have participated in R&D cooperation projects since 2007, either as partners or as donors. The starting point for the excerpt was set in 2007 in agreement with the client to identify companies that have participated in collaborative projects during the last two Structural Funds periods (2007–2013 and 2014–2020). The extract from ETIS was submitted to the authors of the study in two parts – projects submitted by the authorities between 2007 and 2018 and projects processed by ETIS between 2007 and 2018. The limitation of the use of the ETIS extract was the fact that the entry of all cooperation projects into the database is not obligatory for the authorities, therefore, some of the cooperation projects in the field of R&D could remain unknown. A correlation table between the ETIS classification of scientific fields and disciplines and growth niches is provided in Annex 6. In addition, the companies that were named as partners of the Technology Competence Centres as at February 2017 were considered as growth niche companies, including AS Toidu- ja Fermentatsioonitehnoloogia Arenduskeskus, OÜ Eliko Tehnoloogia Arenduskeskus, OÜ BioCC, OÜ Tarkvara Tehnoloogia Arenduskeskus, Masinaehituslike Tootmissüsteemide Tehnoloogia Arenduskeskus IMECC OÜ ja AS Tervisetehnoloogiate Arenduskeskus. CHARACTERISTIC 6. The company has participated in international cooperation projects Participation in international projects is also an important indicator of the company’s willingness to cooperate and develop. The Estonian Research Council database, which reflects the participation of Estonian institutions and companies in European cooperation programmes, was used to identify companies that participated in international R&D projects: European Cooperation in Science and Technology (COST) and the EU Framework Programme for Research and Development (5–7 and Horizon 2020). The Estonian Research Council database extraction period was set in agreement with the client for 2007, starting with the 7th Framework Programme of the European Union, to include companies involved in international cooperation projects in the last two Structural Fund periods (2007–2013 and 2014–2020). The division of companies into growth niches was based on the project name. A correlation table between projects and growth niches in the database of the Estonian Research Council is provided in Annex 7. CHARACTERISTIC 7. The company has received support from the smart specialisation support measure Companies that have previously benefited from smart specialisation support measures (establishment of technology competence centres and clusters, Startup Estonia, support for innovation procurement, applied research) are among the growth areas already selected by the respective decision-making committees and were therefore also included in this study. The companies benefiting from the support measures were identified on the basis of a list submitted by the client and the belonging of the companies to the growth niches was not questioned. CHARACTERISTIC 8. The company has submitted a patent application in the fields related to smart specialisation Companies that have filed patent applications in fields related to smart specialisation under the European Patent Office’s Espacenet database have been added to the list of growth niche companies (including companies whose application has been granted, i.e. a patent has been issued, as well as those whose application is still under evaluation). Applying for a patent demonstrates, to a certain extent, the innovativeness of the company and the desire to patent the developed product (device, method or substance) as new and thereby protect its rights. Although some experts in the field believed that holding a patent application in certain areas could not be considered a hallmark of a company with growth potential (e.g. in some areas patents are mostly held by universities and companies buy licenses), the general opinion supported the inclusion of this characteristic. As the
Study on the progress of growth areas Determination of growth areas and identification of companies 30 patent application process is costly and time-consuming, it was decided to analyse the applying companies in the study and not to focus solely on the current patents, as many companies may not be able to complete the application process, however, submitting an application already indicates that the company has considered it important. In the Espacenet database, the country abbreviation “EE” and the International Patent Classification (IPC) code for smart specialisation were used as keywords in the patent application search. A correlation table between the International Patent Classification (IPC) and the growth niches is provided in Annex 8. CHARACTERISTIC 9. The company belongs to the list of companies that cooperate with R&D institutions, prepared by the Ministry of Education and Research The Ministry of Education and Research has compiled a list of companies with which R&D institutions have cooperation agreements in the field of R&D in 2016. The list is based on the basic funding data provided by R&D institutions, which have been positively evaluated. Based on the list of the Ministry of Education and Research, the investigators verified the cooperation of the listed companies with R&D institutions (characteristics 4 to 8). The companies that were on the list of growth niches on the basis of other characteristics, but were also on the list of the Ministry of Education and Research, were added to the list of growth niches with the R&D cooperation characteristic. CHARACTERISTIC 10. The company belongs to a niche according to sectoral experts For the purpose of determining each growth niche and compiling lists of companies, the study also included at least one sectoral expert, who discussed the feasibility of determining areas based on the descriptions of the Estonian Development Fund, characteristics and sources of determination and broader developments in the field based on the smart specialisation targets. Sectoral experts were mostly contacted by email or telephone, with even meeting some. As a result, companies that were considered by niche experts to belong to the growth niches were included in the list. In addition, companies in growth niches or fields were searched for scientific articles in the EBSCO database using the following keywords: growth niche and/or field name, company, Estonia, sector and/or field of activity. Identification of companies in growth areas On the basis of the ten characteristics selected, initial lists of growth niche companies were compiled. The company had to meet at least one of the characteristics to be included in the list. No separate weighting was given to the characteristics, i.e. the order of importance of the characteristics was not established, as according to sectoral experts, some characteristics cannot be given more weight than another, and this is also not supported by the smart specialisation theory. While all sources were analysed for all growth niches, the lists of companies were compiled solely from the sources that included companies in the relevant niche. For example, all international projects were analysed on the basis of the Estonian Research Council database, but not all companies were included in this niche based on this characteristic. Annex 9 provides a summary table of the qualitative characteristics used to compile lists of growth niche companies and the number of niche companies added based on them and a list of sources used to compile a list of each growth niche company with a detailed explanation in Annex 10. 1. Growth area of information and communication technology The first area of growth for smart specialisation is information and communication technology (ICT), with its horizontal reach through other areas. ICT is divided into four growth niches: data analysis and information management, information security and cybersecurity, production automation, robotics and embedded systems, tools and methodologies in software development.
Study on the progress of growth areas Determination of growth areas and identification of companies 31
Although the original documents of the Estonian Development Fund highlighted growth niches as activities or processes that companies in any sector could implement to support their development, in case of a number of smart specialisation related measures (support for clusters and Technology Competence Centres, etc.), this logic has been replaced by the notion that the focus of the measures is on companies whose core business is in the mentioned niches. However, sectoral experts estimate that such a breakdown does not really exist for ICT companies, as companies often provide services that fall under multiple growth niches and it is not possible to firmly classify companies into niches. For example, the Estonian Association of Information and Communication Technologies (ITL), which unites companies and organisations in the field of information and communication technology, groups the activities related to the ICT sector into four areas based on the EMTAK codes:
• telecommunications companies (EMTAK code 61), • software companies (EMTAK codes 62 and 63, except 63991 news agencies), • electronics companies (EMTAK codes 261, 262, 263, 264 and 268), • other ICT companies (EMTAK codes 465, 582 and 951). A similar, but differently titled breakdown of the ICT field was used by the Information Technology Foundation for Education (HITSA) in its analysis of the ICT economy, higher education and R&D capacity, which was completed in March 2018 (HITSA, 2018), when it divided the ICT companies into two groups on the basis of the EMTAK codes: ICT in industry (EMTAK codes 261, 262, 263, 268) and ICT in service consisting of ICT in the service area (without programming) (EMTAK codes 465, 582, 61, 631, 951) and programming (EMTAK code 62). Neither of the previous groupings corresponds to the growth niches described in the sectoral reports of the Estonian Development Fund. As a result, there were many companies in the ICT growth niche that belonged to several ICT growth niches at the same time, as their activities could not be differentiated between the growth niches. According to the Estonian Development Fund (2014a), the growth niche of data analysis and information management includes the following technologies and fields: big data, open data or linked data, data mining, real-time economy and e-government solutions (e-services, cross-usage of databases). Most growth niche companies were added to the list based on the EMTAK code. According to primary sources, the growth niche of data analysis and information management included 463 companies, 30 of which simultaneously belonged to another ICT growth niche. According to the Estonian Development Fund (2014a), the growth niche for information security and cybersecurity involves technologies and methodologies for ensuring the security of information (data) and computer systems (systems containing information technology components) and networks. The field has great potential for growth and although Estonia has a strong information security and cybersecurity capability in the public sector, it is important to expand it to other areas as well (Estonian Development Fund, 2014a). The list of growth niche companies in the field of information security and cybersecurity included 37 companies, 9 of which simultaneously belonged to another ICT growth niche. In the growth niche of production automation, robotics and embedded systems, production automation refers to activities that contribute to the automation of industrial production processes, engineering development, introduction of automated systems, and flexible management of industrial equipment and processes, also supported by relevant information systems and software devices (Estonian Development Fund, 2014a). Smart systems and machines and networks, the Internet of Things and the development of microelectronics are involved in embedded computing systems and robotics (Estonian Development Fund, 2014a). The growth niche of production automation, robotics,
Study on the progress of growth areas Determination of growth areas and identification of companies 32 embedded systems included 59 companies, 23 of which simultaneously belonged to another ICT growth niche. The growth niche of tools and methodologies in software development include technological (products and services) and methodological (methodologies, process descriptions, technical models, standards) tools that help to modernise and enhance software development, improve software quality and make the production process more efficient, as well as to support the introduction and use of information systems (Estonian Development Fund, 2014a). According to the analysis of the Estonian Development Fund, the software development sector in Estonia has great potential to first and foremost increase the capacity of the software sector itself, as well as the profitability of software investments in other fields. Most companies were added to the growth niche based on the EMTAK code. A total of 1898 companies belonged to the niche, 45 of which simultaneously belonged to another ICT growth niche. 2. Growth area of health technology Unlike the ICT growth area, the health technology growth area (especially biotechnology) has clearer sectoral characteristics, i.e. even if the niche focuses on specific activities, both the experts involved and the focus groups estimate that these activities can be carried out by health care companies that understand both the specific focus areas – the e-health and red biotechnology growth niches that belong to the health technology growth area – as well as health field developments in general. Red biotechnology as a growth niche is not listed separately in the reports of the Estonian Development Fund, but is discussed more broadly in the biotechnology chapter of the report on the transformation of resources. However, biotechnology has been highlighted as a separate area of health technologies both in the results of the qualitative analysis of the Estonian Development Fund (Estonian Development Fund, 2013) and in the research conducted by the Estonian Development Fund and the Centre for Applied Research CentAR (2016). Red biotechnology is also identified as a separate niche in the technical specifications of the procurement documents for this study, as the critical mass of high potential in the field of biotechnology as a whole is not yet available in Estonia and among entrepreneurs and, therefore, it was decided to narrow biotechnology to the red biotechnology growth niche (in the growth area of health technologies) and the growth field of biotechnology to the growth niche of transformation of raw material for food, i.e. health-promoting food (in the growth area of transformation of resources). In the e-health growth niche, the Estonian Development Fund (2014b) has identified three components: people-centric data management, decision support solutions for clinicians and people using state-of-the-art data and data mining solutions and remote management and diagnostic services, the most important of which is the human-centred data management platform, which, as a complex solution, is a prerequisite for the development of other activities. The e-health growth niche consists mainly of ICT companies: both those specialising in the provision of services to the healthcare system and more broadly ICT companies that have developed a product or service or collaborated on one or more collaborative projects with medical institutions. As a result, the list of the e-health growth niche companies overlaps with the list of ICT growth niches. In total, there are 66 companies in the e-health growth niche. According to the Annex to the report on transformation of resources of the Estonian Development Fund (2014c), the red biotechnology growth niche involves diagnostics and personal medicine, drug development, implementation of biotechnology-based therapies, manufacture of laboratory equipment, supplies and synthesis of (biological) compounds, identification and forensics. For the latter part of the division, sectoral experts questioned whether personal identification and forensics should fall under the red biotechnology field, however, since the purpose of this step of the study is not to redefine selected growth niches, the determination of the growth niche was based on the interpretations of the Estonian Development Fund.
Study on the progress of growth areas Determination of growth areas and identification of companies 33
Most biotechnology companies in Estonia are precisely active in the field of red biotechnology as the entry barriers are lower than in case of white or green biotechnology. At the same time, recent trends in the field of biotechnology, both white and green, have seen the emergence of more companies. A total of 250 companies belonged to the growth niche of red biotechnology. 3. Growth area of transformation of resources The growth area of transformation of resources is the largest of all other growth areas. The Estonian Development Fund has described three growth fields in this growth area: knowledge-based construction, materials technologies and biotechnologies. These, in turn, are divided into growth niches. Energy and resource efficiency in construction and buildings is the first growth niche in the area of knowledge-based construction in the growth area of transformation of resources. According to the report of the Estonian Development Fund (2014c), this niche includes the digitisation and automation of construction, renewable energy solutions (local and central renewable energy production and storage technologies, consumption management and efficient combined heat and power production, development of energy transmission infrastructure) and energy content of building materials. According to sectoral experts involved in the study, there is a big discrepancy between the name of the growth niche and the description in the report of the Estonian Development Fund – the description itself does not include energy efficiency, which has become the main thing in the field (including the requirement to build only energy class A or near-zero energy houses starting from 2020) and gives the impression that the term “energy efficiency” has been added later and, therefore, should change the content of the entire niche. The imminent requirement to build only energy-class A buildings has led to diverging views among sectoral experts in determining the growth niche. On the one hand, the experts found that due to the requirement, all construction companies are obligated to develop their competence in the field of more energy efficient construction methods, and, therefore, all construction companies should be counted as growth niche companies (based on the EMTAK codes). On the other hand, it was argued that the current requirement would narrow the number of construction companies anyway and should, therefore, not be taken into account in the study. The use of the EMTAK code to define the growth niche was also questioned by sectoral experts, as the EMTAK codes related to smart specialisation were not used to identify growth niche companies. The reason is that based on the Estonian construction sector business and cooperation model (general contractors / subcontractors), it cannot be assumed that all construction companies are currently engaged in the activities described in the description of the growth niche. Therefore, in agreement with the client, the EMTAK codes for the construction sector were omitted from the characteristics of compiling a list of growth niche companies. Based on the selected characteristics, a total of 112 companies belonged to the growth niche. Transformation of wood or wood in construction is another growth niche in the field of knowledge- based construction. In the growth niche of transformation of wood, the Estonian Development Fund (2014c) has chosen to focus on the construction of wooden houses, which includes conceptual design of near-zero energy houses, introduction of new composite materials, marketing and branding. In addition, the reputation of Estonia and the potential for building wooden houses during this century are emphasised in the construction of wooden houses. In cooperation with sectoral experts and the client, it was decided to involve all producers of wood materials and products in addition to wooden house manufacturers in defining the growth niche (manufacturers of wooden windows and doors, sawn timber, wood chips, fibreboard, plywood, etc.) as, according to a sectoral expert, “the simplified operating model of wooden house manufacturers
Study on the progress of growth areas Determination of growth areas and identification of companies 34 consists of building with different types of building materials and components, and engineering solutions as well as the choice of materials and products are important”. Therefore, companies with various activities related to the construction of wooden houses were included in the primary list of the growth niche. A total of 761 companies belonged to the growth niche, most of which were listed on the basis of the associated EMTAK codes. Nanotechnologies and surface coating technologies is the first growth niche in the growth field of materials technologies. The Estonian Development Fund (2014c) emphasises in the report on transformation of resources that the most economically viable field of application of materials technology for the Estonian state is the processing industry, while the application of nanotechnologies in new materials and surface coating technologies for the fabrication of functional surfaces have been selected as focus niches in the development of materials technologies. The close link between this growth field and other growth areas, in particular ICT and biotechnology, is also highlighted, therefore, the introduction of new materials and technologies will foster a competitive advantage in other fields of high growth potential and thereby create the conditions for the emergence of international economic sectors. According to sectoral experts, nanotechnology includes all material manufacturing companies, however, when selecting companies, it is important that they understand the nanostructure aspect of their daily work, which, in turn, complicates the selection of companies based on data sources. For example, this growth niche could include woodworking companies, which sometimes operate at a much more sophisticated level of nanoparticles than some materials technology companies, but given the description of the niche in the report of the Estonian Development Fund, such companies cannot be placed into this growth niche. A total of 135 companies belonged to the growth niche. Transformation of mineral resources or oil shale in chemical industry is another growth niche in the growth field of materials technologies. According to the report of the Estonian Development Fund (2014c), the production of oil shale by-products in the chemical industry has great potential due to technological development and Estonia’s long-term experience in using oil shale. The growth niche of oil shale in chemical industry involves production of products with higher added value from oil shale oil and by-products (waste gas, ash), as well as design and development of relevant technologies. According to sectoral experts, there are very few companies in Estonia that transform oil shale in ways other than for energy production and, therefore, the scope of the determination was not expanded when choosing the companies. During the compilation of the list of growth niche companies, professional unions or associations were not used as a determination characteristic, as due to the narrowness of the growth niche, there is no association limited to companies producing only oil shale by-products. In the opinion of sectoral experts involved in the survey, not all members of the Estonian Mining Industry Association belong to the growth niche and were, therefore, not taken into account (only Eesti Energia AS and Kunda Nordic Tsement AS were placed in the niche among the members of the Estonian Mining Industry Association, but based on other characteristics). A total of 18 companies belonged to the growth niche. Transformation of raw material for food, i.e. health-promoting food is a growth niche selected in the growth area of transformation of resources of the growth field of biotechnology of the Estonian Development Fund (2014c). While the Estonian Development Fund (2014c) reported that biotechnology growth niches were biotechnology in medicine (biomedicine), bioprocessing/plant, bioinformatics and health-promoting food, the previous studies in the field of smart specialisation (qualitative analysis on smart specialisation of the Estonian Development Fund 2013; study carried out by the Estonian Development Fund and the Centre for Applied Research CentAR 2016) show health-promoting food as the only growth niche to remain, since other high-potential fields currently lack a critical mass of R&D institutions and entrepreneurs in Estonia.
Study on the progress of growth areas Determination of growth areas and identification of companies 35
According to the Estonian Development Fund (2014c), the growth niche of health-promoting food includes all food chain activities that increase the added value of the sector and are driven by good quality and healthy food goals. In addition, the niche includes food industry applications that aim to maintain and enhance the health properties of food through the whole food supply chain and the processing industry, through biotechnology, through evaluation of quality and nutritional value and using evidence-based laboratory methods. According to sectoral experts, defining the field of health-promoting food and, therefore, differentiating it from the rest of the food industry is meaningless, as food companies tend to have a broad product nomenclature, resulting in the production of a wide variety of goods, and food that is healthy for one person can be harmful to another and vice versa. For example, people with chronic illnesses need very specific foods that may not be of any use to others. In addition, there are organic products (eco-labelled products), products containing organic ingredients and products with added value (e.g. added vitamins, probiotics, etc.), but it is not possible to directly assess their benefit to all people. Therefore, in this study as well, no boundary has been drawn between health-promoting food and the rest of the food industry, and all food companies have been taken into account in determining the growth niche due to the lack of a common definition of health-promoting food. In total, 724 companies belong to the growth niche, most of which were added to the list under the industry- specific EMTAK code.
Study on the progress of growth areas Development of entrepreneurship in growth areas 36
2. Development of entrepreneurship in growth areas
2.1 Development of economic indicators of growth niches in 2012 and 2016
➢ Companies classified in growth niches have higher sales and more employees than Estonian companies on average. ➢ Growth niche companies generate more added value per employee than the Estonian average, and added value per employee in niches has grown faster than the Estonian average. ➢ The added value is greater in companies that have cooperated with R&D institutions.
SHARE OF ESTONIAN ECONOMY Based on the definition and determination of growth niches described in the previous section, the share of growth niche companies among all Estonian companies6 was 3% in 2012, increasing by one percentage point over four years, i.e. reaching 4% in 2016. The number of employees working in growth niche companies has slightly increased or remained at the same level in 2016 in almost all niches compared to four years ago. Only in the niches concerning oil shale in chemical industry (which includes the largest employers in Estonia) and energy and resource efficiency in construction and buildings (defined relatively broadly and significantly influenced by export dynamics) has the number of employees decreased by more than 10% and in this respect, the proportion of people working in these niches among the employees of all companies has decreased as well. In 2016, the largest share of employees in all Estonian companies was made up of niche companies in health-promoting food (3.6%) and wood in construction (3.3%). In addition to the number of employees, these are also the most widely defined niches in terms of the number of companies. Compared to 2012, the average number of employees in growth niche companies has declined, referring to the fact that the growth of the number of employees in niches is attributable to new companies entering growth niches rather than the growth of existing ones. However, growth niche companies are also larger in terms of average number of employees than Estonian companies on average. The average number of employees in Estonian companies was 8 in 2012 and 7 employees in 2016. The niche tools and methodologies in software development posed an exception as companies therein had on average as many employees as in Estonia as a whole. In 2016, the average number of employees per company was the highest in the following niches: oil shale in chemical industry (689 employees) and energy and resource efficiency in construction and buildings (134
6 When interpreting the economic performance of growth niches, the overall economic environment must also be taken into account. Economic growth slowed down in Estonia between 2012 and 2016. In 2012 the chained value of GDP changed by 4.3%, while in 2013 the same indicator was 2%. In 2016, the chained value of GDP grew by 3.5% (http://statistika.eestipank.ee/#/et/p/MAJANDUSKOOND/r/2053/1902). The period between 2012–2016 was also more challenging for Estonian companies: in 2015 total profit decreased by 8% compared to 2014 and in 2016 total profit of companies decreased by another 10% compared to the previous year (http://pub.stat.ee/px-web.2001/dialog/Saveshow.asp). At the same time, however, there was pressure on wages by employees: the average gross wages increased by 6–8% annually between 2012 and 2016, thus also increasing the labour costs of companies also (https://www.stat.ee/stat-keskmine-brutokuupalk).
Study on the progress of growth areas Development of entrepreneurship in growth areas 37 employees). In 2016, smaller companies belonged to the niches of red biotechnology (13 employees) and transformation of wood (24 employees). The average sales of growth niche companies is higher in almost all niches than the Estonian average. The average sales of Estonian companies was 0.9 million euros in 2012 and 0.8 million euros in 2016. The exception is the niche tools and methodologies in software development, where average sales were 0.46 and 0.5 million euros, respectively. The sales per company are the highest in the following niches: oil shale in chemical industry (88.5 million euros in 2016) and energy and resource efficiency (20 million euros in 2016). In 2016, in addition to the niche of software development tools, the average sales were lower in the niches of red biotechnology (1.3 million) and e-health (2.8 million). In 2016, similarly to the number of employees, the largest share of the sales of all Estonian companies was made up of sales of niches of health-promoting food (3.7%) and wood in construction (3.4%). The export share of growth niche companies in the export of all Estonian companies has grown over four years in niches data analysis and information management, production automation, robotics, embedded systems (except for Ericsson Eesti AS), tools and methodologies in software development, e-health, red biotechnology, wood in construction and health-promoting food. In other niches, the share of export in total Estonian export has decreased. The niches production automation, robotics, embedded systems with Ericsson Eesti AS (9.5%) and wood in construction (6.2%) comprised the largest share in the export of all Estonian companies in 2016 (Table 2).
Table 2. Share of growth niche companies’ employees, sales and exports in the total number of employees, total sales and export of Estonian companies in 2016, % Share of employees Share of sales (%) Share of export Growth niche (%) (%) Data analysis and information management 1.2 1.2 1.2 Information security and cybersecurity 0.2 0.2 0.3 Production automation, robotics, embedded systems 0.9 3.0 9.5 Tools and methodologies in software development 1.6 0.9 1.5 E-health 0.4 0.2 0.4 Red biotechnology 0.3 0.3 0.5 Energy and resource efficiency in construction and 2.4 3.0 1.8 buildings Wood in construction 3.3 3.4 6.2 Nanotechnologies and surface coating technologies 2.0 1.9 4.3 Oil shale in chemical industry 1.7 1.9 1.4 Health-promoting food 3.6 3.7 3.3
Source: Commercial Register, calculations by the authors Added value per employee has grown more in almost all niches than the average in Estonian companies (the average added value in 2016 was 8% higher than in 2012), the only exception is the niche of production automation, robotics, embedded systems, where the added value increased by 6%. Furthermore, the average added value per employee in all niches is higher than the average in Estonian companies. The added value generated in the niches health-promoting food and wood in construction is relatively similar to the Estonian average as in these niches, the added value generated in 2016 exceeded the Estonian average (24,628 euros) by 8% and 18%, respectively. In the niches of oil shale in chemical industry and energy and resource efficiency in construction and buildings, however, the added value generated exceeded the Estonian average by 196% and 165%,
Study on the progress of growth areas Development of entrepreneurship in growth areas 38 respectively (
200 196
150
165
155
148
142 139
100 126
102 Niche added value compared
to the average value added of
77
76 76
50 66 Estonian companies (2012)
57
52
50
50 48
43 Niche added value compared
40
38 38
18 6 27 20 18 22 25 2 8 14
4 to the average value added of 14 0 - Estonian companies (2016) Change in added value
-50 E-health
Nanotechnologies
Red biotechnology Red
management
Wood in construction Wood
Health-promoting food Health-promoting
embeddedsystems
Software development tools Software
Oil shale in chemical industry in shale chemical Oil
Data analysis and information analysis Data
Energy and resource efficiency resource and Energy Production automation, robotics, automation, Production
Information security and cybersecurity security Information Figure 3).
Study on the progress of growth areas Development of entrepreneurship in growth areas 39
200 196
150
165
155
148
142 139
100 126
102 Niche added value compared
to the average value added of
77
76 76
50 66 Estonian companies (2012)
57
52
50
50 48
43 Niche added value compared
40
38 38
18 6 27 20 18 22 25 2 8 14
4 to the average value added of 14 0 - Estonian companies (2016) Change in added value
-50 E-health
Nanotechnologies
Red biotechnology Red
management
Wood in construction Wood
Health-promoting food Health-promoting
embeddedsystems
Software development tools Software
Oil shale in chemical industry in shale chemical Oil
Data analysis and information analysis Data
Energy and resource efficiency resource and Energy Production automation, robotics, automation, Production
Information security and cybersecurity security Information Figure 3. Added value of growth niches per employee compared to average added value per employee of Estonian companies in 2012 and 2016, change in added value, % Source: Commercial Register, calculations by the authors
➢ The share of growth niche companies among Estonian companies has increased compared to 2012. ➢ In most growth niches (except for production automation, robotics, embedded systems and nanotechnologies and surface coating technologies), added value per employee has grown more than the average in Estonian companies compared to 2012. ➢ In most growth niches (except for wood in construction and health-promoting food), the average added value is significantly higher (at least by 48% in 2016) than the Estonian average.
Below is a description of economic performance of the companies selected for growth niches (number of employees, sales, share of export, added value per employee) in 2016 compared to 2012. The rest of the indicators, including volume of tangible and intangible assets and acquisition of tangible and intangible assets, are presented in Annex 11. NUMBER OF COMPANIES AND EMPLOYEES The growth niches included 1700 companies in 2012 and 2409 in 2016 (Figure 5) with at least one employee and sales generated during the reporting period. The number of companies involved in the
Study on the progress of growth areas Development of entrepreneurship in growth areas 40 growth niche analysis grew by about 42% over four years, but the growth in the number of companies varied depending on the niche. However, it is important to note that 106 companies belonged to more than one growth niche and, therefore, the actual number of growth niche companies is slightly lower. The number of companies in growth niches varies. This is mainly related to the characteristics chosen to identify the companies, for example, companies that have indicated niche-related activities in the Commercial Register (as the EMTAK code) were also included in the niches with a higher number of companies – tools and methodologies in software development, wood in construction and health- promoting food –, on the suggestion of experts.
900 800
700 844 600 500
400 542
471 460
300 432
200 348
100
90 184 14 23 41 43 29 38 96 102 56 71 92 9 10 114 2012 0
2016
E-health
industry
efficiency
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Red biotechnology Red
cybersecurity
Oil shale in shale chemical Oil
Energy and resource and Energy
Data analysis and analysis Data
Wood in construction Wood
Health-promoting food Health-promoting
Information security and security Information
information management information
Production automation, Production Software development tools Software robotics, embedded systems embedded robotics, Figure 4. Number of companies belonging to growth niches in 2012 and 2016 Source: Commercial Register, calculations by the authors A total of 611 companies were added to the growth niches between 2013 and 2016. The majority of companies emerged from the growth niche of tools and methodologies in software development (315 in total, or 52% of all startups), however, this growth niche also accounted for 35% of all growth niche companies in 2016. At the same time, these companies should be understood as potential service providers and partners for companies in other sectors who could smartly specialize through developing ICT solutions. In 2016, the added companies in the niche tools and methodologies in software development accounted for the largest share, i.e. 37%, of all companies in the niche. In terms of share, the next largest were the growth niches of data analysis and information management, as well as information security and cybersecurity, with new companies of 2013–2016 accounting for 33% of all niche companies in 2016 in both cases. Compared to the years studied, the number of companies entering each growth niche has rather decreased, indicating that the attractiveness of entering growth niches has not increased over the period under review. Only 2 and 1 companies, respectively, were added to the growth niches of nanotechnologies and surface coating technologies and oil shale in chemical industry during the period under investigation. In terms of the number of employees, the largest niches were wood in construction (13,250 employees in 2016) and health-promoting food (14,249 employees in 2012), which is related to the large number of companies in these niches, 542 and 460, respectively. Based on the number of employees, the niche of information security and cybersecurity is the smallest one, with 23 companies and a total of 868 employees in 2016. The number of employees in companies belonging to the ICT niches has increased
Study on the progress of growth areas Development of entrepreneurship in growth areas 41 the most: production automation, robotics, embedded systems (14%), data analysis and information management (24%) and tools and methodologies in software development (63%). As the number of companies in the data analysis and information management niche grew by 61% and the niche of tools and methodologies in software development increased by 79%, it can be assumed that the increase in the number of employees was due to new companies rather than the expansion of existing ones. The number of employees has decreased significantly in the niches of energy and resource efficiency in construction and buildings (-15%) and oil shale in chemical industry (-24%). The decline in the number of employees in these niches is linked to the decline in the number of employees in individual large companies (e.g. the number of employees of Eesti Energia AS decreased by 21% during this period), which significantly influence the performance of the entire niche, as the number of companies in these niches is rather small. In 2016, employees of growth niche companies accounted for 0.2% (information security and cybersecurity) to 3.6% (health-promoting food), depending on the niche, of all employees of Estonian companies.
900 4 800
700
600 8 500 11 400
300 Numberofcompanies 200 1 100 6 9 7 5 3 10 0 2 0 2000 4000 6000 8000 10000 12000 14000 16000 Number of employees
Figure 5. Number of growth niche companies and employees in 2016 Source: Commercial Register, calculations by the authors Comments: grey refers to niches where no major changes took place in the number of employees (change less than 10%), red refers to niches where the number of employees decreased and green refers to niches where the number of employees increased compared to 2012. 1 – data analysis and information management, 2 – information security and cybersecurity, 3 – production automation, robotics, embedded systems, 4 – tools and methodologies in software development, 5 – e-health, 6 – red biotechnology, 7 – energy and resource efficiency in construction and buildings, 8 – wood in construction, 9 – nanotechnologies and surface coating technologies, 10 – oil shale in chemical industry, 11 – health-promoting food. In 2016, the share of companies that cooperated with R&D institutions in some form varies significantly across niches (figure 6). A total of 3.3% of companies collaborated with R&D institutions in the niche of software development tools in 2016, whereas 76.7% of companies did so in the production automation niche. In most niches (with the exception of information security and cybersecurity and production automation, robotics, embedded systems), the proportion of employees in companies working with R&D institutions in the entire niche is much higher than the proportion of companies in the entire niche,
Study on the progress of growth areas Development of entrepreneurship in growth areas 42 which suggests that companies with a greater number of employees tend to cooperate with R&D institutions. A similar tendency is shown by the data of Statistics Estonia, according to which companies with 250 and more employees and companies with 20–49 employees spent the most on R&D in 2016 in the business sector (external expenditures)7.
20 Data analysis and information management 66 43 Information security and cybersecurity 26 77 Production automation, robotics, embedded systems 71 3 Software development tools 16 37 E-health 61 65 Red biotechnology 81 73 Energy and resource efficiency 99 8 Wood in construction 28 75 Nanotechnologies and surface coating technologies 79 100 Oil shale in chemical industry 100 17 Health-promoting food 22 0 20 40 60 80 100 120
Share of companies that have cooperated with R&D institutions Share of employees in total employees of the niche
Figure 6. Share of companies that have cooperated with R&D institutions among all companies of the niche and share of employees of the companies of the total niche 2016, % Source: Commercial Register, calculations by the authors
➢ In terms of the number of companies and employees, the growth niches in the ICT sector have grown the most. In other fields, the number of employees has remained at the same level or slightly decreased. ➢ So far, the potential for cooperation with R&D institutions has been greater for companies with more employees.
7 TD029: R&D expenditure in the business sector [http://pub.stat.ee/px-web.2001/dialog/Saveshow.asp]
Study on the progress of growth areas Development of entrepreneurship in growth areas 43
SALES The total sales of growth niche companies differ significantly from one niche to another, as the niches are very different in size. The niches with the highest sales were health-promoting food (1366 million euros in 2016) and wood in construction (1610 million euros in 2016), which are also the largest niches in terms of the number of companies (Figure 7). Several niches include some very large companies that significantly influence the performance of the entire niche. The aggregate sales in the niches of production automation, robotics and embedded systems (1430 million euros) and energy and resource efficiency in construction and buildings (1420 million euros) was quite high despite the fact that these are not very large niches in terms of the number of companies (43 and 71, respectively), but the results of which are influenced by large companies (Ericsson Eesti AS and Eesti Energia AS, respectively). Logically, the total sales of companies is lower in smaller niches: 134 million euros in the red biotechnology niche, 107 million euros in the e-health niche and 88 million euros in the information security and cybersecurity niche. The aggregated sales of the tools and methodologies in software development niche increased by 98% compared to 2012, probably due to the increase in the number of companies in this niche. Sales of the niche of wood in construction increased by 49% over the same period. New companies were also added to this niche over four years, but given that the average sales per company in this niche only increased by 20%, it can be expected that the growth in sales derives from the development of existing companies. Sales in the niches of oil shale in chemical industry and nanotechnologies and surface coating technologies have declined over four years. This may be due to a decrease in the sales of larger companies (for example, decrease in sales of Eesti Energia AS in the niche of transformation of mineral resources) and exclusion of Eesti Energia Õlitööstus AS and Estonian Cell AS from the calculations of the niche of nanotechnologies and surface coating technologies8.
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300 Numberofcompanies 200 1 100 6 9 7 5 3 0 2 10 0 200 400 600 800 1000 1200 1400 1600 1800 2000 Sales, million EUR
Figure 7. Total sales of growth niche companies (2016, million EUR) and number of companies
Source: Commercial Register, calculations by the authors
8 Eesti Energia Õlitööstus AS was removed from the register on 10 January 2017 and the number of employees was not reported for Estonian Cell AS in 2016, therefore, this company was excluded from the analysis.
Study on the progress of growth areas Development of entrepreneurship in growth areas 44
Comments: grey refers to niches where no major changes took place in the sales (change less than 10%), red refers to niches where the sales decreased and green refers to niches where the sales increased compared to 2012. 1 – data analysis and information management, 2 – information security and cybersecurity, 3 – production automation, robotics, embedded systems, 4 – tools and methodologies in software development, 5 – e-health, 6 – red biotechnology, 7 – energy and resource efficiency in construction and buildings, 8 – wood in construction, 9 – nanotechnologies and surface coating technologies, 10 – oil shale in chemical industry, 11 – health-promoting food. The following figure (Figure 8) shows that in some growth niches, collaboration with R&D institutions may be positively related to the volume of sales9. In the niche of nanotechnologies and surface coating technologies, the share of companies that have collaborated with R&D institutions is over 70% and, at the same time, the overall sales of the niche is quite high. In the growth niche of tools and methodologies in software development, the share of companies collaborating with R&D institutions among the companies of the entire niche is small (about 3%) and, at the same time, the combined sales of the companies is lower than in most other growth niches. The share of sales of growth niche companies accounted for 0.2% (information security and cybersecurity) to 3.7% (health-promoting food) of the total sales of all Estonian companies in 2016.
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30 with R&D withR&D institutions 20 1 11 10 8 Shareof companies that have cooperated 4 0 0 500 1000 1500 2000 Sales of growth niche
Figure 8. Total sales of growth niches in 2016 (million EUR) and share of companies that have cooperated with R&D institutions, % Source: Commercial Register, calculations by the authors Comments: grey refers to niches where no major changes took place in the sales (change less than 10%), red refers to niches where the sales decreased and green refers to niches where the sales increased compared to 2012. 1 – data analysis and information management, 2 – information security and cybersecurity, 3 – production automation, robotics, embedded systems, 4 – tools and methodologies in software development, 5 – e-health, 6 – red biotechnology, 7 – energy and resource efficiency in construction and buildings, 8 – wood in construction, 9 – nanotechnologies and surface coating technologies, 10 – oil shale in chemical industry, 11 – health-promoting food.
9 The information does not indicate a causal link between cooperation with R&D institutions and the amount of sales. This means that while there is a positive relationship between sales and collaboration with R&D institutions, it is not possible to say if sales are higher, as companies have cooperated with R&D institutions or that companies with higher sales tend to cooperate.
Study on the progress of growth areas Development of entrepreneurship in growth areas 45
➢ Total sales growth was highest in the growth niches of the ICT growth area: data analysis and information management, information security and cybersecurity, tools and methodologies in software development. ➢ In several niches (oil shale in chemical industry, nanotechnologies and surface coating technologies), the decline in sales is related to the results of individual large companies, which have a significant impact on the performance of the entire niche.
EXPORT The export volumes of growth niche companies vary widely across niches. The biggest export volume is exhibited by the growth niche production automation, robotics, embedded systems (1330 million euros), however, it is important to note that the export volume of Ericsson Eesti AS constitutes almost the entire niche export volume. As the export volume of Ericsson Eesti AS decreased in four years, the same was true for the export volume of the entire niche. However, when this niche is analysed without Ericsson Eesti AS (total export volume was 147 million euros in 2016), export volumes have in fact grown by a third. Similarly to the production automation niche, the decrease in export volumes of the niches of energy and resource efficiency in construction and buildings (export volume in 2016 was 252 million euros) and oil shale in chemical industry (183 million euros) is related to the decrease in export volumes of one large company (Eesti Energia AS) as well. In general, it can be seen that the absolute volumes of export are higher in niches, which were also higher in the number of companies and employees in 2016 (Figure 9).
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without EricssonEesti AS informationmanagement
Export volume 2012 Export volume 2016 Share of exporting companies in total niche in 2016
Figure 9. Export of growth niche companies (2012 and 2016, million EUR) and share of exporting companies in total niche (2016, %)
Source: Commercial Register, calculations by the authors Comment. The red arrow shows the decrease in exporting companies and the green arrow shows the increasing share of exporting companies in the entire niche
Study on the progress of growth areas Development of entrepreneurship in growth areas 46
Relatively, export of the information security and cybersecurity niche has grown the most (169%), but considering that it is a very small niche both in terms of the number of companies and sales, export volume of the niche remains modest compared to other niches (Figure 10). Export has increased significantly in the following niches: tools and methodologies in software development (98%), wood in construction (52%) and health-promoting food (29%). At the same time, however, the share of exporting companies among the companies of the entire niche has decreased in more than half of the niches, referring to the fact that the increase in export volume is due to an increase in the export volume of existing companies rather than the export of added companies. This conclusion is also supported by the result that export accounts for a smaller share of the sales of the incoming companies than for the niche as a whole. It follows that, at least for the time being, the added companies have focused their activities on the domestic market. The share of export of growth niche companies in the export of all Estonian companies ranged from 0.07% (information security and cybersecurity) to 9.5% (production automation, robotics, embedded systems) in 2016.
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Export share of sales of share Export 11 10 1 7 20
0 0 20 40 60 80 100 Share of companies that have cooperated with R&D institutions Figure 10. Export of growth niche companies in 2016 (million EUR); share of export as a percentage of total sales, %; share of companies that have cooperated with R&D institutions, %
Source: Commercial Register, calculations by the authors Comments: the size of the bubble indicates the size of export volume; 1 – data analysis and information management, 2 – information security and cybersecurity, 3 – production automation, robotics, embedded systems, 4 – tools and methodologies in software development, 5 – e-health, 6 – red biotechnology, 7 – energy and resource efficiency in construction and buildings, 8 – wood in construction, 9 – nanotechnologies and surface coating technologies, 10 – oil shale in chemical industry, 11 – health- promoting food, 12 – production automation (except for Ericsson Eesti AS).
Study on the progress of growth areas Development of entrepreneurship in growth areas 47
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Export share of sales of share Export 11 10 1 7 20
0 0 20 40 60 80 100 Share of companies that have cooperated with R&D institutions Figure 11. Export of growth niche companies in 2016 (million EUR); share of export as a percentage of total sales, %; share of companies that have cooperated with R&D institutions, % Source: Commercial Register, calculations by the authors Comments: the size of the bubble indicates the size of the export volume; 1 – data analysis and information management, 2 – information security and cybersecurity, 3 – production automation, robotics, embedded systems, 4 – tools and methodologies in software development, 5 – e-health, 6 – red biotechnology, 7 – energy and resource efficiency in construction and buildings, 8 – wood in construction, 9 – nanotechnologies and surface coating technologies, 10 – oil shale in chemical industry, 11 – health- promoting food, 12 – production automation (except for Ericsson Eesti AS). Looking at the share of companies that have collaborated with R&D institutions in the niche and the share of export in the sales of the company (Figure 11), there is a generally positive relationship between collaboration with R&D institutions and the share of export10. The exception includes the niches of tools and methodologies in software development and wood in construction, where the share of export in sales is over 40% but the share of companies cooperating with R&D institutions is relatively modest. The opposite is true for the niches of energy and resource efficiency in construction and buildings and oil shale in chemical industry, where, despite cooperation with R&D institutions, the share of export in sales is modest. However, large companies in these two niches (e.g. Eesti Energia AS), which contribute significantly to the total sales of the niche, but whose export share is relatively modest (14.7% in 2016), should be taken into account and, therefore, the average share of export in sales is also lower in the niche. It is important to take into account that when it comes to export destinations for growth niche companies, export data, like all other indicators, is derived from the annual accounts of companies, meaning that the breakdown of sales by target country is as detailed as companies have reported in their annual reports. This means that many companies have used the breakdowns “other
10 Based on the data, it is impossible to provide a causal link between cooperation with R&D institutions and the share of export in sales. This means that there is a positive relationship between cooperation with R&D institutions and the share of export in sales, but it is not possible to say whether export accounts for a greater share of sales, because companies cooperate with R&D institutions or that companies with greater export potential cooperate with R&D institutions.
Study on the progress of growth areas Development of entrepreneurship in growth areas 48
countries”, “sales outside the EU, other” and “sales to EU countries, other” to determine their target countries. However, it can be said that in 2016, the most common destination countries were the neighbouring countries: Finland (health-promoting food, nanotechnologies and surface coating technologies, production automation, robotics, embedded systems) and Latvia (energy and resource efficiency in construction and building, oil shale in chemical industry). Export to other European countries was also frequent: United Kingdom (red biotechnology), total sales to the European Union countries (wood in construction). Companies in two niches (information security and cybersecurity and e-health) had most often indicated their export destination as “other countries”. In two ICT niches (data analysis and information management and tools and methodologies in software development), the United States of America was the most common destination for export.
➢ In most growth niches, export volumes have increased compared to 2012, but in about half of the niches, the share of exporting companies in total growth niches has decreased. ➢ In general, there is a positive relationship between cooperation with R&D institutions and the share of export in sales.
ADDED VALUE Next, added value per employee by growth area will be under observation. The added value per employee is higher than the Estonian average in all ICT growth area niches ( 70 000
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Figure 12). Also, added value in almost all ICT niches has grown more over four years than in Estonia as a whole (8%), with the exception of the production automation niche, where added value increased by 6%. The companies that have collaborated with R&D institutions had higher added value per employee in each niche than in niches on average. The added value created in the ICT niches was higher than the average in niche companies that were engaged in export.
Study on the progress of growth areas Development of entrepreneurship in growth areas 49
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Figure 12. Added value per employee in ICT niches (2012 and 2016, EUR) Source: Commercial Register, calculations by the authors In the field of health technologies, the added value per employee in all niches is higher than the Estonian average (Figure 13). The added value in both health technology niches has grown more than in Estonia as a whole. In the e-health niche, business added value per employee grew by 52% and in the red biotechnology niche by 38%. The companies that have collaborated with R&D institutions had higher added value per employee in both niches than niches on average In health technology niches, the added value per employee was higher than in the niche as a whole, and this was also the case in companies that export goods or services.
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2012 2016 Cooperation with R&D institutions 2012 Cooperation with R&D institutions 2016 Exporting companies 2012 Exporting companies 2016 Estonian companies 2012 Estonian companies 2016
Study on the progress of growth areas Development of entrepreneurship in growth areas 50
Figure 13. Added value per employee in the niches of health technologies in 2012 and 2016, EUR Source: Commercial Register, calculations by the authors In the area of the transformation of resources, the added value per employee generated by companies differs widely between niches (Figure 14). In all niches, the added value is higher than the Estonian average, but in the niches of wood in construction and health-promoting food, the difference is quite small compared to the Estonian average. However, as these are the two most widely defined niches, they should be viewed as broader value chains within which the added value of companies and activities can fluctuate significantly. The companies that have collaborated with R&D institutions had higher added value per employee in each niche than in niches on average. Exporting companies generated higher added value per employee than the niche average. Added value per employee has increased in almost all niches, with the exception of the niche of nanotechnologies and surface coating technologies, where added value per employee has declined. This may be due to the high added value companies not being included in the analysis (for example, Eesti Energia Õlitööstuse AS was deleted from the register as a separate company and the number of employees was not available for Estonian Cell AS for 2016, so this company was excluded from the analysis).
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0 Energy and resource Wood in construction Nanotechnologies Oil shale in chemical Health-promoting efficiency industry food
2012 2016 Cooperation with R&D institutions 2012 Cooperation with R&D institutions 2016 Exporting companies 2012 Exporting companies 2016 Estonian companies 2012 Estonian companies 2016
Figure 14. Added value per employee within the growth niches of the resources transformation field (2012 and 2016, EUR)
Source: Commercial Register, calculations by the authors
Study on the progress of growth areas Development of entrepreneurship in growth areas 51
3 100
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Figure 15. Added value per employee in EUR, sales (million EUR), export share of sales (2016, %) Source: Commercial Register, calculations by the authors Comments: the size of the bubble indicates the size of sales: 1 – data analysis and information management, 2 – information security and cybersecurity, 3 – production automation, robotics, embedded systems, 4 – tools and methodologies in software development, 5 – e-health, 6 – red biotechnology, 7 – energy and resource efficiency in construction and buildings, 8 – wood in construction, 9 – nanotechnologies and surface coating technologies, 10 – oil shale in chemical industry, 11 – health-promoting food.
Upon concluding the added value per employee in all niches, it may initially appear that there is a negative relationship between export share of sales and added value per employee. It is important to note here that the share of export in sales is low in the niches of energy and resource efficiency in construction and buildings and oil shale in chemical industry, where results are influenced by large companies.
➢ The added value per employee in all growth niches is higher than the Estonian average and compared to 2012, the added value in growth niches has increased (except for the niche of nanotechnologies and surface coating technologies). ➢ In general, the added value per employee is higher in companies that have cooperated with R&D institutions and in exporting companies.
SUMMARY OF THE ECONOMIC DEVELOPMENT OF GROWTH NICHES ➢ In the data analysis and information management niche, the number of companies and employees has grown significantly in four years. Sales have also increased by a third. As the export volume has increased by 6%, the sales have therefore rather been directed towards the domestic market. The added value per employee created by niche companies has increased more (18%) than the average of Estonian companies (8%). ➢ The number of people working in the information security and cybersecurity niche companies remained more or less the same (increased by 3%) over four years. However, sales and export volumes increased by about one third in four years. The added value per employee
Study on the progress of growth areas Development of entrepreneurship in growth areas 52
created by niche companies has increased significantly more (66%) than the average of Estonian companies. ➢ The number of companies in the niche of production automation, robotics, embedded systems increased by two, whereas the number of employees increased by 14%. The sales of the niche remained more or less at the same level (decreased by 3%) and the export volume decreased by 6%. The added value per employee created by niche companies has increased less (6%) than the average of Estonian companies. ➢ The number of companies and employees in the niche of tools and methodologies in software development has increased the most (80% and 63%, respectively). The sales of the niche have almost doubled in four years and export volume has increased by 35%. The added value per employee created by niche companies has increased more (27%) than the average of Estonian companies. ➢ The number of companies in the e-health niche has grown by about one third, but the number of employees has remained at the same level. The niche sales and export volumes have also grown over the last four years (27% and 35%, respectively). The added value per employee created by niche companies has increased significantly more (52%) than the average of Estonian companies. ➢ The number of employees in the red biotechnology niche has remained more or less the same (decreased by 2%) over four years. Niche sales have grown less than the sales of other niches (9%). However, the export volume increased 27% within the niche. The added value per employee created by niche companies has increased significantly more (38%) than the average of Estonian companies. ➢ In the niche energy and resource efficiency in construction and buildings, the number of companies increased by 27%, but the number of employees decreased by 15%. The sales of the niche remained more or less at the same level (increased by 5%), but the export volume decreased by 8%. The added value per employee created by niche companies has increased more (20%) than the average of Estonian companies. ➢ The number of companies and employees in the wood in construction niche has grown significantly over the last four years (26% and 22%, respectively). The sales of the niche has grown by almost half and the export volume by about a quarter. The added value per employee created by niche companies has increased more (22%) than the average of Estonian companies. ➢ The number of companies and employees in the niche of nanotechnologies and surface coating technologies has remained more or less at the same level. The sales and export volume of the niche have decreased by 23% and 19%, respectively, in four years. The added value per employee created by niche companies has decreased in four years, but it is still higher than the average of Estonian companies. ➢ In four years, one company has been added to the niche of oil shale in chemical industry , while the number of employees in the niche had decreased by 24%. The sales of the niche has decreased by 18% and the export volume has decreased by almost half. The added value per employee created by niche companies has increased more (25%) than the average of Estonian companies.
Study on the progress of growth areas Development of entrepreneurship in growth areas 53
➢ The number of companies in the health-promoting food niche grew by 32%, while the number of employees increased by only 8%. The sales of the niche remained more or less at the same level (increased by 3%), whereas the export volume increased by 29%. The added value per employee created by niche companies has increased more (14%) than the average of Estonian companies.
Based on the methodology used in the study, there is no reason to exclude any niches from the proposed growth niches. At the same time, this study did not look at the internal ➢ Achievingdynamics successful of areas collaborationor sectors outside between the growth companies niches. andIn other R&D words, institutions it cannot is difficultbe excluded for variousthat other reasons, growth and niches it is should especially be considered problematic for in the product list of smartdevelopment. specialisation – but such analysis would require study and analysis with a different set of tasks. ➢ Companies often consider R&D to be very risky, as it may require a lot of resources, but it is difficult to predict whether such a result will be achieved that has a significant impact on sales and profitability growth. ➢ According to entrepreneurs, the understanding of business needs and market demand by universities and other research institutions is modest.
2.2 R&D cooperation networks of growth fields
2.2.1 R&D cooperation in growth fields Focus group interviews were mainly used in the study to determine the nature of R&D cooperation in growth fields. The following is a synthesis of the results of the discussions of four focus groups in the smart specialisation growth fields. The synthesis is based primarily on a generalization of the observations of the experts who participated in the focus groups (lists in Annex 2). The conclusions drawn and recommendations made by the research team are clearly distinguished in the text by appropriate references. The representatives of companies are still rather sceptical about the opportunities and potential for cooperation between businesses and R&D institutions – there are concerns regarding finding the content of collaboration (lack of overlaps in R&D specialisations and expectations), negotiating (time horizon differences) and the national approach to promoting collaboration (targeting R&D at universities that may not have the required R&D and product specialisation). Similarly, the challenge is to change the attitudes of the companies themselves – it is believed that most companies still do not want to get out of the routine, therefore, the preference is to proceed the same way. While universities – or individual research teams – may still be suitable partners for companies to carry out applied research, no potential is seen for collaboration in product development. In addition, the cooperation of Estonian companies with foreign universities, which has been neglected in the overall view of smart specialisation and R&D and innovation policy, is a separate topic. The current cooperation with Estonian universities would not be able to address the issues of sales, marketing and entry into foreign markets, where many shortcomings are seen. As entrepreneurs estimate that R&D institutions do not have sufficient sales, marketing and market entry competences, the focus of the universities’ R&D is more product-specific, thus not grasping the broader socio-economic context into which the product or technology will be introduced. Therefore, collaborative projects involving students or specific researchers and research teams, which tend to be more informal and less bureaucratic in entering into contractual relationships, have worked better than in case the university is a partner.
Study on the progress of growth areas Development of entrepreneurship in growth areas 54
As a result, the so-called compulsion of cooperation through different measures may not work in a situation where the measures are primarily aimed at small and medium-sized enterprises (SMEs), but technological innovation and, therefore, innovation potentially based on the collaboration between universities and companies are rather driven by larger companies.11 In many ways, successful cooperation projects to date have been the result of random events and personal contacts, which
In other words, it is expected that a substantial intermediary position will be created between the R&D system and companies, for example, through R&D consortia or Fraunhofer style centres.
cannot be easily amplified by pushing for broader cooperation. One of the major problems is that the research system does not bring the entrepreneur and the researcher together on a substantive level, i.e. there is no interface or link between academia and business or between researcher and industry. Business cooperation has been facilitated by the promotion of cluster activities, with initiatives and research in broader support of the sector. Nonetheless, substantive collaboration retreats between companies that cover different levels of the value chain and complement each other’s activities and products and services rather than direct competitors, where interoperability is prevented in most technologies. For example, it was highlighted that the cluster in the oil shale sector has not been established so far, since all parties are competitors and, therefore, no agreement on joint activities can be reached. Their business profile and ownership, which influence the extent of their collaboration also play an important role in networking companies – in case of affiliation to foreign groups, according to the group policy, R&D may be concentrated in the home country and there is production in Estonia that does not have close contact with surrounding business. In terms of smart specialisation and more broadly the impact assessment of R&D and innovation policy, it was found that, for example, the impact of the cooperation between companies and universities on business should be assessed with some reservations, since the better economic performance of companies cooperating with R&D institutions in terms of smart specialisation growth fields and niches, including added value, sales, export and labour costs, may not be the result of cooperation, but a prerequisite thereof. Cooperating and having a touch point does not mean that cooperation will have a positive outcome. Rather, those companies that are already generating higher added value are interested in making a further qualitative leap and may look for collaborations with R&D institutions.
2.2.2 R&D networking and business growth In-depth interviews were used to analyse the relationship between R&D networking and business growth. The following is a summary of in-depth interviews. Both the understanding of the representatives of the companies of the situation and the comparison of R&D activities and sales figures suggest that the growth of corporate intelligence (R&D development) and the resulting growth potential are not, at least for the population of the sample, in a time-lag and causal relationship with sales growth (but also job growth). There would be a direct causal link between R&D and sales growth if R&D, product development, production and sales were to take place within the same company. Within the small sample of the study, it can be seen that situations where the R&D
11 In the food sector, for example, cooperation between medium-sized and large companies with R&D institutions is also hampered by legislation, including at EU level, which is reflected in the fact that no probiotics have been identified or registered in the EU. This situation discourages companies from taking the next step and investing resources in R&D and collaboration if the resulting higher added value products cannot be realised at a higher price in the world market.
Study on the progress of growth areas Development of entrepreneurship in growth areas 55 products on which the main products are based and the (mass) production of these products operate in the same company are rather exceptional. Business models for companies are far more diverse. Both principal alternatives occurred among the companies interviewed – (a) the most effective R&D is carried out outside the company (often outsourced with technology or equipment), fine tuning of equipment and product within the company or in collaboration, including by means of R&D; (b) the company develops the technology (at the level of tested product and functional prototype) in-house or in collaboration, and the (mass) production and related sales volume takes place outside the company. In any case, there is a delay (different lengths for different companies, products, etc.) between R&D investments and results and production generating sales growth. This relationship is also characterized by uncertainty, at least for the SMEs interviewed. R&D activities may ensure growth in the future, but companies have no confidence in this. Hence, the interest in managing the financial risks of such precarious activities, for example, in Technology Competence Centres or through grants for applied research measures. Therefore, when describing and measuring a company at a stage of development where R&D-based product development has not yet reached production, one can expect both growth to occur and the fear that R&D investments will not be realised in product sales. It follows from the foregoing that the impact of R&D activities on the relative growth of sales for those companies that are selling R&D products and services (research, testing, prototype development, etc.) is most certain and extensive. The problem here is that such companies generally do not grow very rapidly and in significant absolute volumes (themselves), often due to the conscious choice of a particular business model. On the example of the interviewed companies, the opposite causal relationship is at least as likely as previous growth to be a prerequisite for R&D activity and product development based thereon. The development of large-scale R&D products is based on the company’s production and sales capacity, sales and collected resources (capital, staff, sales channels). Conversely, the small size of a company is a key constraint on investing in R&D activities, contributing to product development, co-financing measures and growth based on this potential. Corporate growth, for example, as a result of a merger that could create new capabilities in R&D collaboration, product development and access to foreign markets, is hampered by the value of independence – the fear of losing control of the company and one’s workplace. The shortage of employees with specific knowledge and skills and the weak competition of Estonia as a location to attract them from foreign countries place strong restrictions on the rapid growth of the volume of R&D activities. The conclusion is that designing the sample and describing business growth solely on the basis of sales growth does not provide a sufficiently complete and balanced view, at least at the level of individual companies, about how companies are developing under the concept of smart specialisation and how their contribution to R&D large-scale economy is changing over time. The case of the multinational electronics industry described in the study also points to the possibility that R&D activities (incl. the rapid growth of the knowledge-based product development team and the potential this creates for knowledge production) may occur in parallel with declining sales, and this is due to changes in the division of labour within the group and the evolution of the business model of the company (development of a large product development unit in Estonia, transferring cheaper production to other companies in the group or outsourcing). Therefore, it is more appropriate to interpret the actual sample formed by the importance of R&D activities of the companies in the business model, according to which the selected companies can be divided into two groups of equal numbers:
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(A) spin-off R&D and technology-focused companies where growth is significantly influenced by R&D volume and technology sales, (B) more traditional production and service companies where the majority of sales and related growth is relatively independent of in-house R&D activities and R&D collaboration.
For the latter group of companies, R&D related to basic products is, first and foremost, necessary to stay competitive and (rapid) growth will result from expanding production capacity, sales and markets. The different R&D and R&D collaboration needs of these types of companies also require different generic intervention logics to generate growth.
For Type A companies that already have promising product ideas in their portfolio, the greatest need – especially if they are focused on R&D-based growth within the company – is to have policies that help them survive the costly and risky phase of product development and startup. By focusing on policy measures for Type B companies, the state has lower risks and greater chances of success for companies, since the risks of in-house startup operations are mitigated by their own significant turnover, capitalization, sales capacity in foreign markets, etc. The choice of policy-makers is to consider these two target groups and intervention logics either as alternatives to each other or as complementary.
2.2.3 The role of collaborative relationships in corporate R&D activities In-depth interviews were also used to identify the role of collaborative relationships in R&D activities. The most important distinctions in R&D cooperation between companies are presented in two dimensions: (1) cooperation within the business sector with other companies or with universities; (2) cooperation based either on a commercial basis or on the basis of national support measures. The most permanent and effective form of commercial cooperation within the business sector is intra-group (international) cooperation. The sample of companies identified included three such companies (one Type B and two Type A companies) and the main benefits of intra-group collaboration, in addition to the pooling and sharing of intellectual property, were greater competence and attractiveness in recruiting foreign labour, additional opportunities for involvement of state subsidies from foreign business agencies and a wider circle of cooperation partners among universities (all three group companies cooperated with foreign universities through their partners, while the other sampled companies did not have any systematic R&D cooperation with foreign universities on a commercial basis). The woodworking company in the sample (Type B) is, for instance, in incremental R&D collaboration with a foreign partner in technology and manufacturing equipment, where product development in Estonia (improving product characteristics) serves as an input for further equipment development and vice versa. The same company also prefers to cooperate with a foreign company in the manufacture of inputs in product design, although cooperation with an Estonian university has been
Study on the progress of growth areas Development of entrepreneurship in growth areas 57 attempted, but it “did not go anywhere”. Product development cooperation with manufacturers of goods produced on the basis of company technology is carried out by both Type A and Type B companies, both with local and foreign partners and at various stages (prototyping, manufacturing of the final product). In general, there are three main problems in national business cooperation, for which the state already has measures in place in order to address or alleviate them:
(1) poor willingness and readiness of companies to cooperate, for which the cluster measure has been created (see below); (2) lower competitiveness of production companies at producer prices, resulting from lower production volumes, which can be overcome by setting up cooperative production units; (3) in terms of especially more complicated technologies, there are no national partners with specific competencies, however, various national support measures for export promotion and foreign contacts can be found.
A specific case is cooperation with companies subject to public procurement obligations, for which it was found that “as you go into procurement, there is no more innovation” and “regulatory and innovation do not work together”. The solution is seen here in various organisational forms for the realisation of the common interests of the R&D consortia (e.g. Technology Competence Centres), which would allow one to focus more on innovative solutions without rigid regulation. The commercial cooperation of the sampled companies with universities includes cooperation in the study of basic problems, pre-product R&D cooperation in prototyping, as well as testing of finished products by research institutions. The cooperation between companies and research institutions on a commercial basis in the interest of clients and on request is commonly considered useful and necessary, focusing on testing products to confirm product quality and increasing value. For the Type B woodworking company, research collaboration in sales “to receive a certificate” is the standard practice for “proving to the customer that we have a better product”. For the Type B food production business, this kind of research collaboration is only part of future plans: “We are also thinking of developing new products, including using science to prove a therapeutic effect”, whereas “if a health claim is made, the product is significantly more expensive”. Estonian and foreign universities or other research institutions are suitable for carrying out the tests. More systematic cooperation with foreign universities is usually mediated by intra-group foreign companies or by the international professional association of which they are members. On a commercial basis, there is also longer-term cooperation with Estonian universities using university equipment (the ownership of which is not practical for the company) and competencies. For example, the Type B woodworking company has a 20-year contract with the EEC to assess the impact of wood pests. The Type A energy company engages TalTech in “identifying the root causes of the problems, as well as providing solutions”, and in collaboration, the university has developed an appropriate workbench for the performance of the contract. However, in narrower terms, R&D cooperation with Estonian universities is generally supported by state measures (see below). The willingness of R&D institutions to contribute to product design and product development varies primarily from sector to sector. For example, the Type A energy company interviewed found the oil shale technology competence based on university traditions important and sufficient, for companies
Study on the progress of growth areas Development of entrepreneurship in growth areas 58 in the ICT sector (both Type A and Type B companies), computer science competence in universities is equally sufficient. However, the Type B manufacturing plant using specific wood technology and the Type A energy company based on materials technology solutions rely predominantly on external scientific expertise. Inevitably, the development of the scientific competencies of all more specific technologies in Estonia is not possible. Following the logic of the smart specialisation concept, one might ask whether companies that lack regional or national expertise to develop R&D and lack network-based networking capabilities should at all be part of the smart specialisation policy. Regardless of the classification of the measures (smart specialisation or not), however, due to the scale of Estonia, it is inevitable and necessary that companies with large-scale production of R&D have to find partners (also) from foreign universities and this should also be supported by national measures. The applied research measure has so far not been considered attractive enough by the interviewed companies to involve foreign universities. The selected companies have experienced setbacks in mobilising universities for cooperation. The Type B electronics company talked about general problems with collaborating with universities on larger projects. The Type A energy company, however, has very specific experience with an unsuccessful innovation procurement, due to the varying degree of readiness and interest of the structural units of the university. A special case of cooperation between companies and universities includes university- related spin-off companies. The cooperation of such companies with the so-called parent university is hindered for legal reasons in the framework of national cooperation measures, while due to the small size of the Estonian research landscape, it is likely to be the only research institution in Estonia that has and develops this competence. Intellectual property protection is often a barrier in product development cooperation, which is why companies want to keep their core business in-house and are not interested in cooperation. Interviews also highlighted the most common cultural and motivational constraints on collaboration between businesses and research institutions. In general, universities are more interested in developing theoretical solutions (primary prototype), but there is little interest and capacity for developing a functional prototype. Interesting ideas are valued more than their implementation, which generally requires sharing and collaborating. Universities also have a modest understanding of business needs and market demand.
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2.3 Factors and trends most influencing the development of growth fields
➢ Entrepreneurs believe that more focus should be placed on projects and initiatives rather than on defining growth niches and company characteristics. ➢ The overall framework of smart specialisation should support higher-risk (growth- related) process and technology development companies, regardless of their narrow niche affiliation. ➢ In general, companies value public support measures, but due to the relatively low awareness of the various options and the fears and prejudices regarding the rigidity of public administration, many companies that might benefit from grants do not apply for national support.
2.3.1 (Re)definition and delimitation of growth fields In generalising the feedback from focus groups, it can be stated that in the light of the global and technological developments in recent years, the definitions of the current growth niches are somewhat outdated and no longer correspond to the developments in the smart specialisation growth fields in Estonia. However, the breakdown of growth areas into three main topics – ICT, health technologies and transformation of resources – is still seen as relevant and adequate. In terms of growth niches, the key challenge is to strike a balance between fixing focus and providing flexibility to accommodate potential new trends. In addition, the need to find a middle ground between more general technological developments in the global arena and narrower sub-niches that take into account Estonia’s local capabilities and resources has been highlighted. Consequently, the overall
The current definitions of growth niches are somewhat outdated and do not correspond to developments in the growth fields of smart specialisation in Estonia. At the same time, the breakdown of growth areas into three main topics – ICT, health technologies and transformation of resources – is still seen as relevant and adequate. Entrepreneurs perceive supporting and monitoring growth in growth fields as a more dynamic approach based on technology and business processes, and emphasise the need to focus on projects, initiatives and activities rather than on niche definition or company characteristics. need for a narrow niche definition is questionable, as it is not clear what the purpose of such categorisation is, i.e. what function these niches have served so far and what could be done in the future. Considering niches as formal (eligibility) criteria, which have been recognised by many people who have been exposed to the smart specialisation measures, the current structure has been rather restrictive in terms of smart specialisation, which does not correspond to actual developments in the smart specialisation growth areas of Estonia. On the other hand, reference was also made to the need to pay more attention to demand, i.e. to increase the public willingness to use smart solutions and to monitor the behaviour and influence of consumers and clients. The following is an overview of new trends and challenges in growth fields.
ICT
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Focus group experts estimate that 90% of companies cannot currently classify themselves narrowly under one niche: they are either a symbiosis of different niches or something different altogether. Nonetheless, as a rapidly changing technology industry, ICT sees the need to find sub-niches within today’s niches, incl. new technological trends where Estonia has the prerequisites for gaining an international competitive advantage. As examples of specific areas or niches (assessments of topics that should be discussed within smart specialisation in regard to their importance and potential), artificial intelligence was highlighted, although the big data and data analysis part is currently covered, and also robotics was mentioned, which, in addition to industrial automation and robotization, should include self-driving, autonomous vehicles. Experts considered it important to focus on niche technologies and areas where Estonia could have a privileged position, such as focusing artificial intelligence on the public sector, personal medicine, cybersecurity, etc. On the other hand, the small size of the economy sets boundaries within niches. According to the research team, such sub-niches should therefore be defined and agreed by the business itself (at the level of clusters, etc.) rather than ex ante defined in national measures. In general, the experts found that the definition of niches could have a signalling function, i.e. which ICT niches support horizontal IT implementation. However, the definition of niches sees a need for flexibility, so that potential new areas are not ruled out in the future, as the ICT industry is developing rapidly and new niches may be overlooked due to over-regulation. It was found that fixing certain areas with the possibility to add or modify niches as necessary would provide a sufficient overall picture. In the light of the above, the EMTAK codes cannot be used to monitor the content of ICT in order to understand substantive developments or to classify companies, as ICT can be applied horizontally in the smart specialisation perspective. If one wants to monitor a field or classify and select companies to describe the situation, one is talking about sectors such as ICT in finance, ICT in industry and then different technologies ranging from artificial intelligence to cyber technology. As production companies are mixed with ICT and can no longer be distinguished, projects and analyses should be supported in the future and the success of measures should be measured not by company but by topic. The state should support projects where the beneficiary is a company in one or another of the EMTAK field of activity, but the content of the project corresponds to one or another niche as the field of activity. The niche is estimated on the basis of supported companies, which are compared to the Estonian average.
In summary, ICT in the growth area should leave room for responsiveness to global trends and not go into too much detail and, therefore, focus more on projects and activities rather than on the niches themselves.
HEALTH TECHNOLOGIES Although the isolation of the e-health niche from the ICT growth field has raised questions (whether there is any significant difference between ICT implementation in health and general horizontal ICT application), the experts in the focus group on health technologies still emphasised it as a separate niche, as the implementation of ICT is accompanied by process and technology innovation that will bring about a change in the core business of health, while the implementation of IT will change the whole business, the development and operation of drugs, health management and treatment management in hospitals. However, the definition of the e-health niche was found to be too narrow – it has become apparent by now that treatment data is not the main part of the data, but comprises only about 10% of the overall health data. In addition, there are also genetics, social interaction, digital image or quantified me/self and biographies, and others, therefore, the context of e-health has
Study on the progress of growth areas Development of entrepreneurship in growth areas 61 changed a lot over time. Therefore, the definition of the niche should be broader and focus not only on hospitals and clinics, but also on patients and data collected in connection with them. In addition, experts emphasised that health economics is emerging alongside the pharmaceutical industry, which is not evident from the definition of the e-health niche. Health economics is engaged in supporting people before they become ill, and this is one of the biggest trends that is changing the e-health niche. Among other things, handling of treatment cases should be reviewed: whether the hospital views this as a cost of treatment only from the moment the person enters the hospital until he or she leaves the hospital or the hospital also looks at whether different treatment options affect rehabilitation and how quickly a person returns to the labour market. Such a holistic view is not currently covered by the e-health niche, and this is one of the places suggested to be highlighted in the context of digital health. Consequently, the main criticism of the definition and promotion of health technology niches was related to the low value chain view, which has resulted in few success stories in certain segments, but no scalable complete solutions that would include cluster format business collaboration and business growth. An important topic raised by the focus group was the idea of shifting the emphasis on the health value chain through ICT support, or more B2B (business-to-business, i.e. sales between the companies), among other things, in the niche of health-promoting food, which could also be included in the development of health technologies. As part of the broader global trend influencing the health technology field, increasing protectionism in medicine and health was highlighted, meaning that innovative technological solutions are insufficient for entering foreign markets, but there is a constant need to adapt to the legislation of a particular country or, for example, EU regulations, the development of which Estonia should actively contribute to in order to support its companies. Nutrition genomics, or anything related to biomass research and people with special needs, was also mentioned as a big trend. Several trends can be observed in the health-promoting food niche separately, including the rise of functional foods and healthy foods, which in turn are classified into three main areas – as natural as possible, i.e. “going back to the roots”, organic food and higher value-added products.
In summary, the current scope of the health technology niches has been too narrow in its reach and interpretation according to the participants in the focus group and a health-based approach to value chains (including global ones) has been lacking to make a qualitative shift.
KNOWLEDGE-BASED CONSTRUCTION The definition of niches for the growth field of knowledge-based construction was considered up-to- date by experts, meaning that niche descriptions are all there and the content is rather adequate, however, the titles of sub-topics are contradictory. Focus group members found that there were three distinct sub-niches which may not interact with each other and have different dynamics and challenges. For example, while digitisation can be a stand-alone process, digitisation and automation may also go hand in hand. At the same time, energy efficiency can be considered in its own right, as energy efficiency may not be resource efficient, and resource efficiency is also a separate category where, among other things, wood plays an important role. Nearly zero-energy houses are currently included under transformation of wood, but this field should be included in energy efficiency. According to the focus group, one of the important topics in construction that does not appear in the current description is sustainability. The construction sector uses the most resources and energy
Study on the progress of growth areas Development of entrepreneurship in growth areas 62 compared to other sectors, and the sustainability aspect covers both. It is also a question of quality – the quality of the environment being built, the quality of the exterior and the interior. The digitalisation of construction has also been vigorously emerging – developing and launching digital construction platforms (BIM solutions) that can create a whole new business model in the field of construction. Despite the sufficiently relevant definition of existing niches and the emergence of new trends to be taken into account, similarly to the ICT growth field, the need for flexibility was the key message of the representatives of the focus group. The Estonian construction sector is strongly influenced by export markets, which dictate the behaviour of companies, such as future developments in Scandinavia. As the domestic market companies there respond with a delay, Estonian companies are flexible due to their small size to respond to new requirements and regulations. For example, it is known that requirements for measuring the ecological footprint or stricter energy requirements will become applicable as of 2020 – in order to increase export volumes, Estonian companies could prepare for it in a more agile manner, optimise processes and be innovative.
In summary, it was found that it is not primary to describe niches or to map companies, but to look at technology and business processes and focus on projects and initiatives, as the exporting construction industry is heavily influenced by national regulations and international standards, which increase uncertainty about potential new technologies requiring support.
MATERIALS TECHNOLOGIES AND BIOTECHNOLOGIES Of all growth areas, the current classification of materials technologies was questioned the most. While oil shale is clearly a peculiarity of Estonia, which has justified its place in smart specialisation, it was found that the focus of the nanotechnologies and surface coating technologies niche was too narrow. The focus group proposal is to look at the broader appreciation of all natural resources and focus on what is currently being exported from Estonia. On the other hand, a sufficient buffer must be left for all technologies where Estonia can add value in terms of technology or process. In other words, the materials technology niche definition should be significantly broadened, as too much details have been given so far. It does not reflect the real evolution of the sector in the market – many current value chains fall outside the definition of biotechnology, i.e. health-promoting food, or of materials technologies. In terms of biotechnology, a proposal was made to treat it as process-based rather than resource- or product-centred, as the same raw material, bacterium and process can produce products for different purposes that may not qualify as health-promoting food. The field of biotechnology relates to the ability to develop a process that can produce an intermediate compound or product from a natural raw material or resource that can be realised. However, definitions of resource enhancement niches formally exclude many novel products from the focus. In addition, experts emphasised that, in the light of global developments, climate and environmental technologies and carbon-free economy are not covered as potential growth and specialisation areas. This is where the oil shale industry has the highest CO2 emissions and the challenge would be to capture CO2 and develop it into products, such as natural gas or chemical compounds. By 2030, three
In summary, when the generic name of the growth area is transformation of resources, then in the field of materials technology, the niches could include the transformation of resources in the chemical industry and transformation of resources in the materials industry.
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groups of emissions – CO2, SO2 and NOx – which bring environmental technologies into focus will need to be significantly reduced. In the chemical industry, there is also the issue of substitution of chemicals – some chemicals of very high concern go under restrictions and need to be replaced. Hence the need for R&D, the quality of which is relatively low in the Estonian chemical industry, which leads to taking the easy way out and outsourcing knowledge.
2.3.2 Relationship between policy measures and development of growth fields Generally speaking, stakeholders see the need for the smart specialisation support measures, although the overall lack of high quality project applications is acknowledged. To some extent, this reflects the relatively low capacity of companies, especially when the number of beneficiaries is narrowed, leaving funds unused. As a result, stakeholders recognised the development of some smart specialisation growth fields, regardless of the smart specialisation support measures. Therefore, the focus groups emphasised the need to keep the frames of support measures as wide as possible so that companies with different business profiles can apply for support.
The overall framework of smart specialisation should primarily support higher-risk (growth- related) process and technology development companies, regardless of their narrow niche affiliation. In other words, the focus of support measures should be on technologies and the development of cross-sector value chains.
The following is a synthesis of feedback from focus groups and interviews on current national smart specialisation measures that may warrant consideration for possible solutions. The problems of state support measures were noted by both large and small companies as the bureaucracy and rigidity of applying for support, i.e. the development of a company is governed by different support programmes and their rules rather than the company itself. The design of the measures seeks to minimise the risk of failure of projects, which is why companies tend to refuse to apply for support (and often postpone development projects, move abroad, or abandon them). Instead of strict prescriptions, the measures should focus on credibility, as more than 50% of the company’s self-financing (including in R&D activities carried out in universities) is considered sufficient to ensure that the proposed projects are well designed to achieve the best results. The design and management of measures should be based on key performance indicators (KPI) and greater freedom should be left for refocusing of development activities. The length and complexity of the large and small grants process is worth considering as well: when supporting product development projects, it would be useful to provide SMEs with simplified grants, which form the basis for participating in the following activities. In addition, the measures should consider target-specific differences and impose different requirements on startups and established industrial companies (e.g. on the level of detail of a business plan), and those who develop R&D until the demo phase and those engaged in commercialised product development. For example, startups would be asked for team information and customer needs analysis, but for large manufacturing companies, it would be limited to general economic indicators of the company. Stakeholders criticized the current measures for the inappropriateness of these rules for different target groups. Most R&D support measures focus on SMEs, but in reality most R&D activities are carried out in large companies – to engage in high-impact development, one needs to first become sufficiently large and capable. However, according to various estimates, access to measures for large companies is restricted (a lower level of support, which is not compliant with the size of the risks), but many startup SMEs do not have the resources to apply for funding under the smart specialisation
Study on the progress of growth areas Development of entrepreneurship in growth areas 64 measures. Applicants are also challenged by the fragmentation of information about grants and their providers and the availability of information. Stakeholders stressed the need for a cross-ministerial central platform that brings together a variety of measures and provides a quick and easy tailor-made solution for companies. The smart specialisation applied research measure was found to be too restrictive at the moment (if not at the general level of communication) – it does neither favour cooperation with foreign R&D institutions or cooperation with other organisations, such as hospitals, clinics or general practitioners, for the purpose of conducting clinical trials, nor business collaboration, such as engaging a partner as a third party in the market with the necessary capabilities and expertise. Greater flexibility of the measure is desired to be seen, as all parties operate in the global market. For example, the applied research support measure could more boldly support projects of Estonian companies and joint consortia of foreign and Estonian universities, which would allow Estonian universities to expand and increase their knowledge base. With regard to the cluster support measure, it was found that current funding volumes tend to allow for joint marketing and participation in fairs, but there is a shortage of resources for joint activities on R&D. At the same time, many existing clusters bring together the most alert companies in their field, so they are aware of the issues in the field and the issues that need to be addressed. Individual clusters (ICT, health technologies) have developed a certain capacity to coordinate R&D and applied research, pooling expertise from different actors, but this is limited by lack of funding. Consequently, there are some expectations for further development of the cluster measure, which would provide opportunities to accelerate and amplify the evolutionary development of clusters, for example, by providing support for various collaborative (inter-enterprise and inter-company) development projects. In case of the Technology Competence Centre measure, the views of the experts who do not belong to the Technology Competence Centres and those belonging to the Technology Competence Centres were clearly different. On the one hand, they criticised the design of the Technology Competence Centre measure, which has made the Technology Competence Centres a so-called closed business club, which is difficult to access from the outside. In the wider context of the Technology Competence Centres, there is need for a discussion on the sustainability of the Technology Competence Centres, or how they can do the right thing for the purpose of job creation, not just the right thing. From the point of view of the Technology Competence Centres, the current volume of Technology Competence Centre funding and projects in place did not significantly support the creation of new technologies. The public procurement measure supporting innovation is well received by stakeholders but has failed in terms of content and volume. Continuing innovative public procurement should reduce the required self-financing from 50% to 20–30%. Similarly, the smart specialisation professional scholarships were seen as a means of distributing money under a broad and vague educational policy objective rather than as a targeted measure to support the emergence and development of qualitative change and specialisations. In most growth areas, stakeholders stressed the need for action to enhance entrepreneurial capabilities, including in relation to intellectual property, marketing and sales, strategic management and collaboration. Current smart specialisation measures do not address the lack of skills and interest of entrepreneurs in contributing to R&D or developing products or services. Often the new finished product is not sold or marketed.
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As mentioned, knowledge about intellectual property is not sufficient in Estonia and little is said and taught. One solution is seen as a symbiosis measure, where the support involves the use of an external product development expert (technology or development expert). Export activities should also raise business awareness of growth-specific nuances in foreign markets, such as standards, and increase willingness for change in local business culture and way of thinking. A key issue in the external economy is awareness and knowledge of local practices, regulations, standards related to a specific niche, product and technology.
In summary, according to the focus group participants, the main challenge is to adapt the measures to the needs of smart specialisation areas and to ensure flexibility – every year, something new is emerging in growth areas, therefore, it is not worth locking up the smart specialisation growth niches for too long.
The following are more specific expectations and bottlenecks to existing measures in a couple of growth fields (there was no sector-specific view on ICT growth field in focus group interviews – this is also the field most supported by smart specialisation measures). HEALTH TECHNOLOGIES One of the major obstacles to the development of health technologies is the lack of demand for innovative solutions from patients, healthcare providers, doctors, pharmaceutical companies and insurance companies, therefore, the challenge is not to develop one technology or another, but to educate technology end-users and change societal attitudes. This must be emphasised in the national measure. Knowledge of demand, i.e. the benefits, habits and legal aspects of technology users in export markets requires information to be harvested from likely foreign markets and compliance with local regulations for which government support is expected. In the EU context, this implies a country’s forward-looking role in shaping the European judicial area, for example, through cooperation with health technology clusters. Another challenge facing the industry is the small size of companies. According to focus group experts, the key to niche growth and development lies in providing full solutions through collaboration and bringing together different service offerings, which requires a boost to value chains, clustering and also business growth. The aim should be to help companies grow to such an extent that, in addition to in-house product development, technology companies will have a real demand for knowledge outsourcing from R&D institutions. The smart specialisation package of measures does not pay sufficient attention to R&D in companies, which is quite important for the development of the sector. Corporate R&D teams should be able to apply for public funding in order to use it in the development projects of the company, but that would not force them to cooperate with R&D institutions. The know-how of universities is not of interest to startups specialising in this field, as the applied research measure, by its length and bureaucracy, adds nothing to them and the knowledge does not remain in the company. The current applied research measure is inappropriate for many digital health companies, since in the case of the clinical validation as applied research, the partner is not a university but a medical institution. Red biotechnology sees need for a funding instrument to validate solutions and evaluate concept performance (proof of concept aspect) without which the risks are too high for a private investor. However, existing smart specialisation measures generally do not appeal to e-health and biotechnology companies as their volumes are too small and inappropriate. For example, there is scepticism about the sustainability of Technology Competence Centres, as no outstanding companies have been created around them and previous Technology Competence Centres have not
Study on the progress of growth areas Development of entrepreneurship in growth areas 66 proved their worth. Focus group members found that the gene pool may face similar challenges, and although there is interest and motivation for commercialisation, there is little practical skill and there are fears about technical and legal nuances. KNOWLEDGE-BASED CONSTRUCTION Due to the peculiarities of the knowledge-based construction industry – many regulations and standards influence business models – one of the main challenges of support measures is the lack of awareness of companies about national measures and planned requirements both in Estonia and export markets. Therefore, there is a perceived need for a central source of information, or platform, to forward inquiries and applications. Support is also needed from Estonian foreign representations, as entering a new market in construction is difficult – first of all, one has to learn about the customs, requirements, regulations, standards, etc. of the export market. In addition, local companies have market protection, i.e. they have to comply with the requirements for foreign companies, or to enter with a certificate. In addition, stakeholders expect public financial support, e.g. from a cluster or a professional association in international committees to represent Estonian companies in agreeing standards. As the construction sector provides a significant amount of services to the public sector, strict requirements that SMEs are unable to meet are often a barrier to public procurement (e.g. setting up a small, energy-efficient building with 100,000 euros as collateral in the bank, existence of ISO standards, hiring of project managers, etc.). The introduction of stricter conditions in public procurement makes projects more expensive, which is why many companies with innovative solutions do not qualify for procurement. MATERIALS TECHNOLOGIES There is no specific expectation of specificity of materials technologies for national action. More generally, there is a need to reduce duplication and increase complementarity between national and EU measures. As far as R&D activities are concerned, the question is what national measures are intended to support. New technologies that are being developed to the demo phase, but not yet on the market, will be subject to EU support mechanisms. Therefore, local support measures in Estonia could be targeted at activities that produce more operational results. Perhaps in the risk-taking phase of a death row, where a company has validated its technology and process, and where it is necessary to understand who these companies are and why these companies engage in such activities, 50% of national support plays an important role. In other words, the smart specialisation idea of promoting R&D activities would be to focus on where local business has enough capacity and potential to do something on a global scale, rather than contributing to big (global) trends.
2.3.3 Benefits and problems of support measures from a business perspective Companies that have received grants generally value business support measures. The necessity and benefits of the measures are assessed from the perspective of the development needs of the company itself. Measures to further develop, prototype and test product ideas (Technology Competence Centre, applied research, less cluster action) were evaluated by the interviewed entrepreneurs (central companies in technology development) as an opportunity to mitigate risks and reduce the financial burden of risky activities (for which there is no certainty that it will start generating money later). The supported projects provide an opportunity to develop new products that are not possible with the resources of the company alone. Without state support, at least part of such R&D activities would be left out, as the companies are not large enough to carry out non-governmental R&D activities on a large scale. Type B (manufacturing and sales companies, see description of types on pages 50–51) companies find it reasonable to target measures at companies that already have business models (export capability and sales turnover as a measure of growth potential) in order to take the next step. Production and sales
Study on the progress of growth areas Development of entrepreneurship in growth areas 67 capacity measures (including foreign marketing, production means, labour force), as well as R&D and product development measures are relevant. There was disagreement between experts and stakeholders on the necessity and effectiveness of product development measures. On the one hand, it is considered to be the most risky stage, which many SMEs do not survive, but without which the economic viability of R&D activities is questionable. One of the tactics for Type A companies is to avoid the production phase and focus solely on developing and selling technologies. This, however, limits the growth of the company. For companies that are in this (protracted) stage of product development, obviously the most important thing is to have product development support measures – “additional support would be needed to make the leap”. Others are more sceptical and “dare not recommend for the state to invest in product development”, as “there are also those who move from one startup to the next without creating a product”. In any case, as the product development process generally operates within the company, cooperation measures (alone) would be inappropriate and direct company support is required instead (such opportunities exist under the business development programme measure and companies are aware of them, see below). Various support measures that increase the company’s and/or sector’s ability to compete in foreign markets have been thoroughly assessed. It also sees the main benefit of the cluster action – co- financing joint sales representatives, obtaining grants to attend trade fairs. One company representative interviewed suggested that consideration be given to abolishing direct business subsidies and focusing solely on general sectoral and cooperative measures, but this view is not dominant. Production-intensive type B companies, in particular, tend to value grants for equipment and job creation. The most general problem of using measures and communicating with the state at large is the contradiction between the inevitable coincidence of (innovative) entrepreneurship and the rigidity of public administration. According to the entrepreneurs, the result of R&D activities is never guaranteed and there is a need to change activities and resource allocation during the development of solutions. Due to the rigidity of the terms of the measure and the grant agreements concluded on the basis thereof, it is difficult or impossible to make the necessary changes. Several companies have (had) fears and prejudices about the rigidity of state processes, therefore, they are avoiding interaction with the state and the use of state support measures. In some cases, the use of subsidies is also not economical – the benefits do not outweigh the internal administration costs and the loss of flexibility (up to the rising cost of airline tickets). At the same time, companies with comparative experience appreciate the Estonian bureaucracy considerably easier compared to foreign countries. They consider the smaller amount of grants to be the weakness of the Estonian enterprise policy. Problems have been encountered in combining different types of cooperation due to the rigidity of the legal environment – for example, cooperation within a cluster restricts contractual cooperation with universities (even if different university units are the desired partner); in order to enable contractual cooperation with the Technology Competence Centre, the company has been forced to give up its participation in the same Technology Competence Centre. Measures for SMEs compete with each other for in-house resources. Companies have to make choices about which measures to invest money and people into. Type A electronics company provides a practical example of a company relinquishing its involvement in the Technology Competence Centre and the cluster measure, as the benefits are exhausted and the resources (including administrative resources) are limited in regard to taking the next step in the business development programme measure (hope to develop one or more product ideas further developed through the Technology Competence Centre into real products).
Study on the progress of growth areas Development of entrepreneurship in growth areas 68
Collaboration in the Technology Competence Centres is important for companies to develop new product development ideas “not really up to the end product” – but to prototype and test ideas. The output of this activity into the product is time-consuming and generally involves ideas that would be expensive and risky to develop on their own. It is a place of birth and growth of new ideas, which can grow into new products years later – “we are also testing riskier solutions for which it is not certain whether they work or not”. The main benefit of the Technology Competence Centre measure is seen as leverage and financial risk management, which allows SMEs to engage in the development of new ideas. Among other things, the joint projects of the Technology Competence Centre create opportunities to optimise personnel costs – to involve the specialists of the Technology Competence Centre in the interests of the company, including moving staff to the Technology Competence Centre during the project and re- recruiting specialists with increased competencies already in the company. Significant benefits of participating in the Technology Competence Centre are also seen in reducing bureaucratic burdens and the ability to avoid direct communication with Enterprise Estonia. Collaboration with the Technology Competence Centre provides easier ways (for cooperation with the state) for the use of public data (e.g. Estonian Health Insurance Fund, e-health), which are usually not accessible to private companies. The main proposal for the amendment of the Technology Competence Centre measure was the idea of merging the Technology Competence Centres into one or two applied research centres in Estonia. The purpose of the merger would be to increase the scale of the institutions in order to strengthen their generic competences and to add new functions (development of market awareness of research institutions) and, therefore, to be a stronger partner for companies both nationally and internationally. This should also be accompanied by an increase in the scale of R&D projects carried out through the Technology Competence Centre. The Technology Competence Centres could also play a greater role in developing market awareness in universities. In addition, the main benefit of collaborative cluster action for the representatives of the interviewed companies lies in joint marketing and sales activities in foreign markets, much less in joint R&D or product development activities. Therefore, clusters are of little interest to companies with independent export capabilities. In clusters formed on a sectoral basis, each is perceived, first and foremost, as a competitor in product development, hindering R&D cooperation. The exceptions here are some ICT and health technology clusters, where the clusters are now cooperative in their development activities. The obvious solution here is to encourage the formation of cross-cutting or cross-sectoral clusters, especially those with the so-called horizontal competencies (IT, materials technologies, etc.) of large scale Type A companies and research institutions in different sectoral clusters. Among the representatives of companies interviewed, there were those who saw the cluster’s significant benefits in simply communicating with each other, which is best realised through collaborative projects – “you do not have to look for the necessary services in Scandinavia if there are services available here”. For others, projects within the cluster are “complicated by bureaucracy”, making it “easier to carry out the project in-house”. Five selected companies had come to contact with the applied research measure – three had a positive experience with ongoing projects, one had not received any substantive benefit from a completed project and one had experience where the terms of the measure were unsuitable for specific needs. The overall impact of the applied research measure on R&D activities of the company is similar to the Technology Competence Centre measure, where the most important is the possibility to reduce the financial burden and risks of the company. Even the representative of a B-type IT company with strong sales flow said they would not have “started developing the new product from our own resources, considering our scale”. Collaboration also has positive cultural outcomes – it provides “fresh assessment” and “interesting conclusions”.
Study on the progress of growth areas Development of entrepreneurship in growth areas 69
As a negative example, the woodworking company interviewed sought to develop software for production planning and automation in cooperation with TalTech. The need for such a solution had been felt for quite some time (similar needs and problems faced by other companies in the market) and the opportunity was taken when the measure was opened. However, from the very start, the achievement of the goal established did not seem very hopeful and a usable solution was not reached. Nevertheless, the issue is not so much in the measure as in the nature of the problem itself. A similar negative experience of commercially collaborating to develop a process automation solution, involving a private company’s automation solution developer and universities, was the case with another company interviewed – “the project was kept alive for a year, they tried, they learned, but failed to achieve a result”. A technology company of energy management was considering using an applied research measure to solve an urgent production problem, but due to the slowness of the project application process, the measure could not be used to co-finance collaborative research. It is also noteworthy that companies interviewed do not consider foreign universities as a target group for an applied research measure. The trend of introducing innovation procurement is being assessed, but the companies interviewed lack positive experience. A technology company of energy management tried to use an innovation procurement measure as an alternative and more flexible solution to an applied research measure in cooperation with TalTech, but the university’s inability to mobilise itself adequately (in terms of the consent of various institutes) proved to be an obstacle. The company’s practical conclusion from the experience is to split the procurement and go on a new round. As a necessary and natural component to the smart specialisation measures, companies are considering a business development programme measure that allows them to move beyond R&D and product development activities to enter a productive phase “where collaboration is no longer needed”. There are a number of fears associated with taking the step forward that stem from requirements for growth and success that cannot really be predicted in three years. In summary, in-depth interviews with companies confirmed most of the challenges raised by the focus groups on the use of the smart specialisation measures.
Study on the progress of growth areas Proposals 70
3. Proposals
This chapter provides the main proposals and policy recommendations based on the findings of this study:
• proposals for determination, monitoring and analysis of growth areas, aimed in particular at enhancing the activities of the Ministry of Economic Affairs and Communications and the Ministry of Education and Research concerning smart specialisation; • policy recommendations to support the development of growth areas, addressed to both the Ministry of Economic Affairs and Communications and the Ministry of Education and Research and their area of government as proposals to consider both in adapting today’s smart specialisation measures and more broadly as the guiding principles for R&D and innovation policies in the 2020+ period.
In conclusion, the authors of the study suggest that the smart specialisation process should be driven more by the logic of the entrepreneurial discovery process: (1) the Ministry of Economic Affairs and Communications should establish interactive platforms for continuous monitoring of the development of the smart specialisation growth areas and for the establishment of cross-sectoral agreements; (2) the broader focus of this platform and smart specialisation policies should be flexible definition of growth fields and less regulation at the level of measures (which should simultaneously reduce their administrative costs), where the focus should be on projects, initiatives and development processes that seek to accelerate the growth, added value and export of the growth field companies.
3.1 Proposals for determination, monitoring and analysis of growth areas
1. In determining and monitoring fields of smart specialisation, to use primarily the level of growth fields and view the level of growth niches as a time-adjustable set of guiding activities. There is a three-level division used to determine the fields of smart specialisation in Estonia – the most extensive are the growth areas (in the current wording: ICT, health technologies, transformation of resources), growth fields are medium-sized (current wording: ICT, health technologies, knowledge- based construction, materials technologies, biotechnologies) and the narrowest are the growth niches (in the current wording: data analysis and information management; information security and cybersecurity; production automation, robotics, embedded systems; tools and methodologies in software development; e-health; red biotechnology; energy and resource efficiency in construction and buildings; transformation of wood: wood in construction; nanotechnologies and surface coating technologies; transformation of resources: oil shale in chemical industry; transformation of raw material for food: health-promoting food). Use of the widest distribution, i.e. the level of growth areas, in determining and monitoring smart specialisation companies is extremely general, as in this case growth areas would include both broad- profile and narrow-focus companies, and there would be no clear understanding of the smart specialisation companies. In contrast, the level of growth niches was perceived in smart specialisation discussions as too restrictive and framing, although smart specialisation experts working for the Estonian Development Fund perceived niches as specific policies most likely to add value to companies (for clarity of communication, it is worth describing them as supportive growth activities for smart specialisation), around which companies from
Study on the progress of growth areas Proposals 71 different sectors should gather. In empirical analysis, the use of growth niches or -activities to define growth areas and identify companies is too narrow, because many companies are engaged in different activities at the same time, therefore, it is difficult, if not impossible, to divide them into different niches or activities (especially in the ICT growth area, where a large number of companies are not directly related to one specific niche, but are engaged in technologies or policies in several niches or outside of the current niche). In essence, at the level of growth niches or activities, only the impact of specific projects on a particular company could be assessed, however, it is virtually impossible to link these results to monitoring the development of existing growth areas, fields and more broadly business sectors. In addition, the multi-level division has created a situation where different measures and activities are conceived at different levels according to need and opportunity, which also makes the understanding of smart specialisation different at the level of policy-making. Based on the experience gained in this study in determining growth areas and identifying growth niche/activity companies, the research team recommends that in the future, in particular, the level of growth fields should be used in determining and monitoring smart specialisation. Growth niches or activities can have a significant signalling effect on entrepreneurs, policy-makers and implementers, i.e. they indicate which activities, development projects, development trends and technologies have the greatest potential for developing key performance indicators (KPI) of growth field companies (added value, export, conquering new markets, etc.). In order to ensure flexibility, growth niches should not be embedded in strategies or actions, but in cross-sectoral, regularly renegotiated agreements, which are reached through cooperation between the different parties. At the same time, the study results show that communication problems have been encountered so far in understanding the smart specialisation strategy and growth fields and niches (this is particularly expressed in the misunderstanding and use of fields and niches) and, therefore, such an approach requires stronger communication on the smart specialisation determination, so that the parties clearly understand the meaning and function of niches or activities. Closer cooperation between developers (ministries) and implementers (foundations) is also important to ensure that the objectives of smart specialisation and the agreements or changes in the selection of growth fields and niches or activities are taken into account as much as possible (see also Recommendation No 3).
2. To regularly update descriptions of growth niches or activities to reflect field trends. The current description of growth fields in the reports of the Estonian Development Fund is uneven, defining some growth niches in more detail than others. Furthermore, such vagueness in the description of growth fields contributes to the ambiguity of smart specialisation (e.g. what is meant by horizontal implementation of ICT and how and what activities should be in focus), which makes the development of measures and decision-making on the distribution of grants more opaque and complex. When describing growth fields, the aim should be to draw attention to new trends and directions rather than to fixate the boundaries of the fields. Smart specialisation should continue to propose forward-looking areas in which the public sector, the private sector and R&D institutions collaborate (for risk sharing) to specialise in new technologies and development processes (growth activities) that create higher added value, increase exports, create jobs, etc. For example, focus areas and company interviews described new courses of action that were not sufficiently addressed in current descriptions of growth niches: the implementation of artificial intelligence (AI) in ICT, cybersecurity and robotics; e-solutions for health data and digital health in health technologies; digitisation and sustainability in knowledge-based construction; the transformation of natural resources in materials technologies and the development of climate and environmental technologies. These examples should not be handled as new proposals for growth niches, but as an indication that descriptions of such detail require constant updating, which should take place in collaboration between parties, including companies, R&D institutions, professional associations, Technology Competence Centres and clusters, as well as in a constant dialogue that allows to agree on agile new directions as new trends emerge. The focus of new niches or activities should not be on trends that are already reflected in statistics, but on perceptions and assessments emerging from the experience of entrepreneurs and researchers, supported by a critical mass of parties – this is substantially the essence of the entrepreneurial discovery process. Specific
Study on the progress of growth areas Proposals 72 interventions and measures should be developed and implemented at the level of internal activities and projects in the growth fields (thereby balancing bottom-up business initiatives with top-down growth and supranational agreements, initiatives and priorities). The cooperation platform allows (see Recommendation No 3) to design flagship projects in the growth field, where state leadership and resources are required to develop the sector.
Comment. While Recommendations No 1 and 2 will, at first glance, once again make national policies more horizontal and reduce sectoral focus, there is currently no data and resources at country level to prioritise, monitor and, above all, develop interventions tailored to problems and failures – a more horizontal view and focus, and a more flexible response to the initiatives and proposals formulated by companies and their collaborative platforms (to increase added value), should ensure that smart specialisation policies become more focused on the needs and developments of the growth areas and support them in a more efficient manner. To some extent, the definition of niches or activities as a signalling effect of the growth field allows the vertical dimension to be introduced into horizontal measures. If the state is no longer expected to have sectoral policies, then the demand side, or trade unions, clusters and other umbrella organisations, can themselves influence which measures and policies that better support sector-based projects and initiatives and where experimentation can be sought are preferred in the growth fields of smart specialisation. This is what Recommendation No 2 allows to achieve.
3. To use a multi-step approach to monitor growth trends, combining the results of quantitative and qualitative analysis. Monitoring and analysing growth fields should be based on a common methodology, as this is the only way to collect long-term and comparable data and draw corresponding conclusions. The monitoring of growth fields should be based on the multi-stage analysis proposed in this study, the first step of which provides a consistent qualitative input for interpreting economic indicators and setting new focuses, the second step analyses the development of the quantitative economic indicators of companies and the third step analyses the specialisation of the economy.
3.a To receive a consistent qualitative overview and have a dialogue with the parties, the Ministry of Economic Affairs and Communications should establish a platform for cooperation in each growth field. In order to monitor growth fields, it is important to combine quantitative and qualitative methodologies, which allow to combine economic indicators of growth fields (historical development) with substantive development dynamics (current challenges) and future visions (joint or agreed estimates of the parties). In order to obtain a qualitative overview, it is worth considering establishing a cooperation platform for each growth field at the Ministry of Economic Affairs and Communications (e.g. on the example of the EU smart specialisation platform, which would require the recruitment of three to four smart specialisation experts or coordinators, which is a low cost considering the total size of the smart specialisation activities, and that the smart specialisation model is expected to also remain one of the central principles in the 2020+ period), which would maintain consistent dialogue and cooperation between state representatives and companies to achieve common goals. The task of the platform would be to organise regular roundtables, meetings, interviews with growth field companies, R&D institutions, professional associations and other cooperation forms, involving representatives of more active companies and professional associations, as well as representatives of smaller and less influential companies. In addition, researchers from relevant university research groups and representatives of other R&D institutions should be involved in the platform, as joint projects between companies and R&D institutions can be established only through continuous contact. The Ministry of Economic Affairs and Communications would ensure the functioning of the platform, but different meetings could be chaired by representatives of the state, as well as that of companies and R&D institutions according to the topic. Such a platform would ensure tripartite performance – an input from growth field companies would be provided for planning the strategic activities of smart specialisation (including support measures), information about government activities would reach companies and contacts between scientists, and companies would serve as the basis for developing new project ideas. The experience of the Estonian Development Fund, which essentially created such platforms,
Study on the progress of growth areas Proposals 73 showed that collaborative platforms – especially when these are responsible for cross-sectoral agreements and their constant updating – must be at the ministry level, which is why the research team recommends the establishment of platforms within the Ministry of Economic Affairs and Communications.
3.b In order to obtain a quantitative overview, the economic performance of the companies in the various reference groups should be analysed on a regular basis. 3.b.1 To monitor the progress of entrepreneurship in growth fields in comparison with the Estonian economy as a whole. The progress of growth fields should be monitored based on the list of growth niches compiled in this study, including updating them as necessary (based on annual reports or key performance indicators, relying on data from the Tax and Customs Board (the latter can be used to analyse more recent data and/or forecast the near future, if necessary, based on recent months)). Such a method would make it possible to update the economic characteristics of listed companies and would be more informative, with the aim of consistently comparing developments in growth fields with those of the economy as a whole.
3.b.2 To monitor the financial performance of companies that spend on R&D and compare them with companies that lack R&D expenditure. To analyse the economic performance of companies working with R&D institutions as a reference group, distinguishing them from the aggregate list of the growth field, based on the data of companies contracted to R&D institutions and lists of companies reporting R&D expenditure. The economic performance of these companies should be compared with the results of companies that do not spend on R&D and the results of the entire growth field. Longer-term monitoring of the economic performance of companies that spend on R&D allows to analyse the impact of R&D activities and evaluate their perspective on business performance, including whether to increase or decrease the share of R&D related support measures compared to other innovation and added value support measures.
3.b.3 To monitor the long-term economic performance of companies supported by public support measures and compare them with the growth field as a whole. The aim is to determine the financial well-being of the companies that received the grant. To this end, the economic performance of companies that have benefited from the national support measures (including the smart specialisation measures as well as other public measures) should be monitored as a separate benchmark. Such a comparison provides an opportunity to analyse the economic performance of the supported companies and compare them with the growth field as a whole. In order to monitor supported companies, it is necessary to consolidate the data of the companies supported by all state measures into one database and analyse their business results according to economic indicators.
3.b.4 To monitor the number of growth field companies and the following economic indicators of companies: volume of R&D expenditure, added value per employee, number of employees, sales, export. The monitoring of business growth fields and analysis should be based on the key categories internationally identified in M. Kitsing’s analysis12 and the smart specialisation analyses to evaluate the relevance and coherence, interconnection, connectivity and diversity of the fields. The progress of entrepreneurship in growth fields should be monitored in the socio-economic context and their relevance and coherence should be assessed through the average number of employees (including number of employees with higher education and earning higher than average wages in Estonia), the share of employees in total employment, the added value of the growth field and the share of export in the total added value of Estonian entrepreneurship and total export. In terms of economic performance, the ability of growth fields to be innovate and expand into new fields is best demonstrated by economic added value (assuming higher
12 Kitsing, M. (2015). Smart specialisation analysis. Ministry of Economic Affairs and Communications, Tallinn 2015.
Study on the progress of growth areas Proposals 74 value-added companies have greater potential) and R&D expenditure which exhibits the willingness and experience of companies. The connection with other important knowledge-based institutions is shown by the business R&D cooperation projects with universities and other R&D institutions and other companies, and the connection with foreign countries is shown by export (in particular the intensity of export, i.e. the share in sales). In order to ensure the diversity of growth fields , the number of companies in the growth field, the size of the companies in terms of the number of employees and sales, and the incoming and outgoing companies should be monitored as well. Analysing the growth field concentration allows to ensure that smart specialisation is not focusing too much on specific companies but that the field is multi- faceted and different types of companies are supported (consequently, the determination of fields at the level of growth niches is not justified either).
3.b.5 To substantially improve the quality of the Commercial Register data for high- quality quantitative monitoring without increasing the administrative burden of companies. The e-business register maintained by the Centre of Registers and Information Systems compiles the data of all legal entities registered in Estonia together with the annual economic data provided by them on the basis of the annual reports of companies. Unlike the data collected by the Tax and Customs Board, which are more up-to-date (companies report quarterly) but contain only key figures (turnover, number of employees, national taxes, labour taxes), online Commercial Register allows to extract all economic indicators reported by companies in their annual reports and enable a much broader monitoring of the performance dynamics of companies in growth fields. At the same time, there are significant shortcomings in the online Commercial Register data that prevent high-quality quantitative data analysis. For example, there is a lack of quality in one key indicator, which is the average number of employees – often the data is not provided by companies or a random unrealistic number is given (e.g. a five-digit number, sometimes also an economic activity code). Another economic indicator that needs improvement is “sales by geographical area”, which is an important indicator for analysing export destination countries. For this indicator, the level of detail in the information provided by companies varies greatly, leaving companies free to choose which countries are categorised as “other countries” and which are not. Some companies divide the regions into “Estonia” and “other countries” only. Such an uneven distribution does not allow for reliable analyses. The third obstacle to the analysis is the presentation of labour costs in the annual accounts, which depends on which income statement scheme (Scheme 1 or 2) the company chooses when presenting the annual report. In Scheme 2, costs are broken down by cost, i.e., for example, in the case of production, labour costs for production may be under the cost of sold production. In order to calculate the added value on the basis of e-business register data, it is necessary to include labour costs in the main part of the notes to the annual accounts. All of these shortcomings significantly hinder quantitative analyses and assessments of progress in growth fields, and, therefore, parties in the development of smart specialisation (in particular, the Ministry of Economic Affairs and Communications and the Ministry of Education and Research) should find ways and solutions to improve the data quality of the Commercial Register.
3.c To perform a comprehensive analysis of economic specialisations every 3 to 4 years. The smart specialisation concept and guidelines developed by the European Commission aim to update and revise the smart specialisation fields according to regional needs. This study found that the areas of the Estonian smart specialisation selected in 2014 are outdated at times and in need of modernisation, especially when setting the internal focus of growth areas. However, so little time has passed since the opening of the policy measures that it is not yet possible to identify the impact of policies and the reasons for redefining growth areas and fields. The quantitative and qualitative analyses in the study also failed to reveal the reasons for changes at the level of growth fields (the aim of this study was not to look at the emergence and development of new potential specialisations and growth areas or fields outside the current smart specialisation growth areas). Accordingly, the research team proposes to carry out an analysis of growth fields and specialisations of the economy as a whole, based on quantitative data and qualitative
Study on the progress of growth areas Proposals 75 research methods, every three to four years with the aim of identifying fields that require re-adaptation, emerging development trends, and agreeing on any new focus directions. As growth fields have different rates of development, relevant analyses should be carried out based on the needs of the particular growth field.
3.2 Policy recommendations to support the development of growth areas
4. To follow a flexible definition of growth fields in allocation of grants – the focus should be on projects, initiatives and development processes that seek to accelerate the growth of growth field companies and increase their added value and export. Growth fields, and in particular agreed growth niches and growth activities, should be considered as guidance rather than qualifying selection criteria when designing support measures and allocating support (whether a particular company has previous experience in the same field, etc.). Grants should be distributed on the basis of project content and ambition (aiming to achieve new qualitative leaps in companies or growth fields in general). In growth fields, there should be an option to respond to global trends, therefore, more emphasis should be placed on projects and development activities, less on growth field, and especially on fixing internal niches or activities. Particular attention was paid to this aspect by representatives of companies operating at the forefront of technology, whose development activities can be applied horizontally in a number of fields (e.g. biochemical developments may be applicable from fuels to the food sector, etc., but may not formally be part of today’s growth fields or niches). Another important strength of this approach would be that smart specialisation would also support higher-risk process and technology development companies that are not part of the growth business but have great potential for new ideas. Grant distribution should observe how good ideas can be supported through measures, while reducing the risk of innovation in companies. Such an approach would also simultaneously increase trust between the state and the companies – if there is a good project idea and evaluation experts confirm this, resources will be found to support it.
5. To significantly raise awareness among companies of the different support measures. 5.a To promote all measures more proactively. The results of the study show that one of the main obstacles to the development of growth fields is the lack of awareness among companies of the different types of support (including the rules for qualifying of measures, etc.). Focus group interviews and interviews with business representatives revealed that companies, both large and small, have little knowledge of what the state currently offers through various support measures. Companies expect information to be shared by whoever creates it. Information should also be disseminated to R&D institutions, bringing them closer to companies and, therefore, contributing to the development of mutual interest. Consequently, one of the important activities to support the development of growth fields is to increase the exchange of information between the support measures implementing agencies and companies, which can be promoted through a more informed use of information channels, such as going to companies that could benefit from grants based on data analysis, etc.
5.b To consider establishing a common online platform containing information on all public subsidies and the possibility of applying. In addition to a lack of awareness of the existence of measures, the study shows that companies in general (i.e. not only in the case of smart specialisation) often find it difficult to focus on support measures due to the large number thereof, and it also happens that the same similar activities included in the packages of measures of different institutions are carried out according to different rules (application process, contribution rate, etc.). According to the companies, it is difficult to find the measures that are suitable for them and also meet the requirements. For example, several focus group interviews revealed that many (rather smaller) entrepreneurs are unaware that the Ministry of Education and Research is also providing grants to companies under smart specialisation and that within the Smart Measure of the Ministry of
Study on the progress of growth areas Proposals 76
Education and Research, it is also possible to cooperate with foreign universities. Therefore, it should be considered to gather all state subsidies (subsidies belonging to the Ministry of Economic Affairs and Communications, the Ministry of Education and Research and other ministries) into a single web environment (e.g. as development of X-road and eesti.ee), where companies could more easily find information on different types of support and the application process. Business consulting should also be offered as part of the same smart specialisation online platform. When a company sends out a description of a problem or project idea with additional questions to grant distributors, the online platform administrator will provide the company with an answer to what measures the company would fit into. Such a platform would require administrative capacity on the part of the state, but would motivate entrepreneurs to apply for grants for more ambitious activities.
6. To make grant application and project implementation more flexible and administratively easier in order to increase the effectiveness of support measures. 6.a To carry out a study and analyse the amount of resources companies need for applying for grants and to further administer them. The results of the study show that many companies, despite having an idea, do not submit a project application and, therefore, do not implement the project as both the application process and the subsequent administration of the supported project seem to be too resource intensive. As a result, the research team proposes to carry out an analysis to determine how much resources companies need to complete the project application process and further project administration, and to analyse the merits of applying for grants from the entrepreneur’s perspective. As a result of the analysis, it should be clear what the net amount of the grant (the part of the grant that remains a substantive activity) should be in order for the grant application to be profitable for the company.
6.b To consider offering a tailor-made smart specialisation measure for the period 2020+. Many companies do not find the support available in their current phase of technology, product or process development, which leaves many innovative solutions without development. Consequently, the authors of the study propose to consider the provision of a tailor-made smart specialisation measure, where entrepreneurs have the opportunity to put together an existing development or development project from existing grants that can be tailored to the profile of growth fields and companies or their collaborative platforms (clusters, consortia) and may consist of interrelated or sequenced actions by several organisations (successful completion of one step gives access to funding for the next step). The rates of company contribution at different steps should depend on the degree of risk involved in different activities.
6.c For higher rates of co-financing, to apply more flexible rules for applications and reports in application and follow-up. The results of the study show that one of the biggest obstacles among companies in regard to using public support measures is the fear of bureaucracy in applying for and implementing a project. For larger co- financing (e.g. 50% or more of the company’s own contribution) the use of multiple control mechanisms by the state is incomprehensible to many (self-financing, project application, long-term business plan, etc.). It is believed that the company’s contribution, i.e. self-financing, ensures that the companies control the targeted use of the support and shows that the company is interested in the successful implementation of the project. Particular attention was paid to this aspect by representatives of larger companies, which have also received R&D grants from Horizon 2020 and various loans from the EIB (European Investment Bank) and other similar measures, where administrative activities are significantly smaller. In addition, companies feel that such an approach would increase mutual trust between the state and companies.
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6.d To consider providing a simplified application process for companies with R&D references, e.g. for companies that have declared R&D expenses in the last two years (in annual reports). According to the participants in the focus group interviews and company representatives, the motivation of companies to apply for state grants would also be enhanced if the application process differentiated the thoroughness of the fulfilment of the application according to the work carried out by the company so far. For example, it has remained unclear why a company operating in Estonia has been required for decades to have a company description, a business plan, and other documents, the usefulness of which is doubtful, but preparation is time-consuming. However, it is justifiable to request such information from a startup company. Consequently, the research team proposes to provide a simplified or shortened application process (in terms of business plan, company presentation, etc.) to these companies, which have declared R&D expenses for at least the last two financial years (annual reports), which demonstrates the company’s competence and willingness to carry out R&D projects and also facilitates the declaration of R&D expenditure by companies (the latter is essential for improving the accuracy and reliability of official statistics). In the context of the next Structural Funds period, the focus group representatives have also favoured a uniform differentiation of actions coordinated by different ministries and agencies, for example, into small, medium and large grants, with uniform proportional limits to the length and complexity of application forms and the time of the proceedings.
7. To increase the selection options of partners when applying for implementation and product development grants. The prerequisite for cooperation with Estonian universities, which is far from the requirements and description of the applied research measure, is considered by the representatives of companies to be too restrictive. Companies say they are looking for a comprehensive solution, but often do not find it in Estonian universities only, therefore, the project ideas are not implemented or implemented in cooperation with foreign partners and with the help of foreign grants where such restrictions do not exist. Consequently, it is proposed to increase flexibility in the application process, as well as awareness of partner selection, including the involvement of external partners and other broader consortia. Considering that both companies and universities operate in the global market, the advantage of expanding the partner involvement circle would be to increase the motivation of companies to implement project ideas and increase the competence and competitiveness of Estonian universities and other R&D institutions (including applying for international cooperation projects).
8. To increase the coordination of national activities to support R&D and ensure a demand environment that helps accelerate and guide smart specialisation processes. Those who participated in focus groups and interviews find that better coordination of national activities would make a significant contribution to supporting R&D development. For example, if one measure supports corporate R&D projects, it is important that it is accompanied by coherence with other national activities (this should also be ensured by the cooperation platform of smart specialisation of the Ministry of Economic Affairs and Communications, see Proposal No 3a). Examples included the opportunity to find the first customer for the output of R&D projects funded by the Ministry of Education and Research and the Estonian Research Council through innovative public procurements and to review regulations to bring applications to the market (e.g. smart specialisation measures support the development of health technologies, but regulations may not allow their implementation).
9. To encourage the development of clusters and R&D cooperation of companies. Companies believe that clusters play an important role in reaching innovative solutions and that the state should actively promote their development. Companies see strengths in clusters as collaborative solutions to common problems, setting sectoral goals and opportunities for collaborative projects.
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9.a To provide a range of measures in support of clusters according to the peculiarities and ambitions of the sectors. The existing clusters are at different stages of development and, therefore, also require different support according to the peculiarities of the sector. While most of the current clusters focus on setting up collaborative activities (including participation in fairs, etc.), there are also a few clusters (e.g. in ICT), which aim to launch joint development projects, which are clearly higher risk activities. Consequently, the authors of the study propose different measures to support clusters, depending on the peculiarities and ambition of the sector. Likewise, clusters (NGOs) should not be denied access to different smart specialisation measures and they should be provided a tailor-made approach.
9.b Encourage companies with horizontal competences to belong to sectoral clusters. The overall concept of the cluster is that the different parties (public and private, educational and R&D institutions) are acting for a common purpose. At the same time, companies feel that clusters excessively contain companies in only one sector (i.e. competitors), which makes it more difficult for them to collaborate. Consequently, the distribution of support measures should be more in favour of the integration of companies with horizontal competences and related parties into sectoral clusters, therefore, giving multilateral cooperation a greater chance of solving common problems and reaching successful project ideas.
10. During the new period and as the support measure continues, to review the operating model of the Technology Competence Centres to ensure their sustainability and possible substantive role as an R&D consortium or applied research centre. The current operating model of the Technology Competence Centres, based on the unique international expectation that private organisations similar to the Technology Competence Centres focusing on development activities can exist without government support, is not conducive to the development of the sector as a whole. In essence, the Technology Competence Centres are already an existing network of applied research (centres), which today’s rules of measures force away from the design of a public collaboration platform. Consequently, it is proposed to open up the operation of Technology Competence Centres to different parties in order to promote the role of Technology Competence Centres as applied R&D consortia.
11. To consider developing an in-house product development measure that would allow the product idea to develop into an in-house product. According to some companies, today’s smart specialisation support measures lack a product development measure in which each company can customise its application as needed (capabilities to be developed, volume, period, choice of partners) and which would also allow the product idea developed through other national measures to be developed independently or jointly. As companies claim that product development is difficult to purchase from universities, it is important upon designing grants to also consider in-house R&D activities, which are neglected by current measures, in the case of R&D activities. The advantage of a product development measure would be to meet the needs of companies regardless of the size of the company, stage of development, etc. In such a product development measure, consulting activities aiming at increasing R&D capabilities in companies13 and R&D institutions and equal treatment of large companies with respect to smaller companies in terms of co-financing rates are considered important.
13 Most growth areas emphasise the need to enhance entrepreneurial capabilities, including intellectual property, (foreign) marketing and sales, strategic management and collaboration. In export activities, awareness of growth-specific factors in foreign markets needs to be raised, as awareness of local practices, regulations and standards related to a specific niche, product and technology is a key issue in terms of external economy.
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12. To strengthen Estonia’s image building on foreign markets, taking into account growth fields. The results of the study show that companies and R&D institutions see a clear need for a better awareness of Estonia’s image building in foreign markets, while also taking into account growth fields. According to the smart specialisation concept, the region (in case of Estonia, the area is the state) selects the most potential fields according to their peculiarities and supports their development. As a result, national image building (the Estonian brand platform coordinated by Enterprise Estonia and international sales and foreign investment units) should also take into account selected growth fields and increase awareness of their potential for entering foreign markets.
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References
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Annexes
Annex 1. Description of growth niches
Growth niche1 Description of growth niche Source of description 1. Data analysis Big data, open data, data mining, real-time economics and e- Sectoral report of smart and information government solutions (e-services, cross use of databases). specialisation on information management and communication technology Growth field: - as a growth field, p. 29. Estonian Growth area: ICT Development Fund, 2018 2. Information Technologies and methodologies for ensuring the Sectoral report of smart security and security of information (data) and computer systems specialisation on information cybersecurity (systems containing information technology and communication technology Growth field: - components) and networks. as a growth field, p. 30. Estonian Growth area: ICT Development Fund, 2018 3. Production Production automation: activities that contribute to the Sectoral report of smart automation, automation of industrial production processes, specialisation on information robotics, embedded engineering development, introduction of automated and communication technology systems systems, and flexible management of industrial as a growth field, p. 30. Estonian equipment and processes, also supported by relevant Development Fund, 2018 Growth field: - information systems and software devices. Growth area: ICT Embedded systems and robotics: smart systems and machines and networks, Internet of Things and microelectronics development. 4. Tools and Technological (products and services) and methodological Sectoral report of smart methodologies (methodologies, process descriptions, technical models, specialisation on information in software standards) tools that help to modernise and enhance and communication technology development software development, improve software quality (including as a growth field, p. 31. Estonian through the application of advanced methodologies or Development Fund, 2018 Growth field: - principles) and make the manufacturing process more Growth area: ICT efficient (including through automation), support the introduction and use (including administration) of information systems. 5. E-health 1. Human-centred data management, which has three Report on the growth area Growth field: - important components: of smart specialisation health Growth area: Health 1.1 an integrated platform for two-way data exchange technologies, p. 21. Estonian technologies and services based on big data for both physician and Development Fund, 2014 person (including clinical data; health behavioural data and molecular/genetic data) 1.2 open architecture for people and service providers (including the business sector) to access a variety of services; 1.3. ability of healthcare providers and social services to exchange standardised data; 2. decision support solutions for clinicians as well as for people using modern solutions for big data and data mining (opportunities for both healthcare and welfare system services); 3. remote management and diagnostic services for different target groups (young, elderly, children, hospital or social care and home use and everyday use) and for different indications or purposes (health maintenance, risk screening, treatment, diagnosis, recovery, care, etc.).
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6. Red biotechnology Diagnostics and personal medicine; drug development; Report on the transformation Growth field: - implementation of biotechnology-based therapies; of resources of smart Growth area: Health manufacture of laboratory equipment, supplies and specialisation, report technologies synthesis of (biol.) compounds; identification and forensics. on biotechnologies, Annex, standard distribution of biotechnology applications, p. 1. Estonian Development Fund, 2014 7. Energy and Digitalisation and automation of construction – BIM and fine Report on the transformation resource efficiency construction, increasing factory production, IPD, etc. of resources of smart in construction Renewable energy solutions: local and central renewable specialisation, knowledge-based and buildings energy production and storage technologies (battery construction report, p. 14. Estonian storage, power to gas, etc.), consumption management and Development Fund, 2014 Growth field: efficient co-generation of heat and power; development of Knowledge-based energy transmission infrastructures (including gas, construction electricity, heat and transport fuels) (including peak demand Growth area: coverage, frequency management, etc.). Energy content of Transformation of building materials. resources 8. Transformation Construction of wooden houses – conceptual design of Report on the transformation of wood: wood near-zero energy houses, introduction of new composite of resources of smart in construction materials, marketing and branding. Estonia is the largest specialisation, knowledge-based Growth field: exporter of wooden houses in Europe and has a well- construction report, p. 14. Estonian Knowledge-based deserved reputation in this field. A wooden house, as a Development Fund, 2014 construction low-energy building, has the potential to become one of Growth area: the hallmarks of the new century, including multi-storey Transformation of and office buildings. Extensive development in both resources innovative materials and design is required to unlock the full potential. 9. Nanotechnologies Application of nanotechnologies to new materials: Report on the transformation of and surface coating nanostructured carbon materials; micro- and nanofibres; resources of smart specialisation, technologies composite materials; rare earth metals; energy technology materials technologies report, p. Growth field: Materials materials. Application of surface coating technologies for 34. Estonian Development Fund, technologies the preparation of functional surfaces: corrosion resistant 2014 Growth area: coatings; anti-wear surface technologies; electro-optical Transformation of coatings; multifunctional coatings, including resources biotechnological coatings (antibacterial, biocompatible, etc.). 10. Transformation Oil shale (fine) chemistry – production of products with Report on the transformation of of mineral resources: higher added value from oil shale oil and by-products resources of smart specialisation, oil shale in chemical (waste gas, ash) and design/development of relevant materials technologies report, p. industry technologies. 32. Estonian Development Fund, 2014 Growth field: Materials technologies Growth area: Transformation of resources 11. Transformation Food chain activities that increase the added value of the Report on the transformation of of raw material sector and are driven by good quality and healthy food resources of smart specialisation, for food: health- goals. Food industry applications that aim to maintain and report on biotechnologies, p. 60. promoting food enhance the health properties of food (throughout the Estonian Development Fund, 2014 whole food supply chain and the processing industry) Growth field: through biotechnology, through evaluation of quality and Biotechnologies nutritional value, using evidence-based laboratory Growth area: methods. Transformation of resources 1 Source: procurement document – technical specifications, Table 1, p. 6.