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ICT

Sector-specific smart specialisation report on the growth area of information and communications technology

Sector-specific smart specialisation report on the growth area of information and communications technology

Introduction

The introductory document to sector-specific reports is provided here. This document describes the process of smart specialisation to date and presents the reasoning behind the choice of growth areas and their domains. Furthermore, it gives an overview of the structure of sector-specific reports, sector-specific objectives and indicators, smart specialisation measures and the methodology for determining necessary activities.

The following analysis will explain which economic areas of the information and communications technology (ICT) growth area could have the greatest potential in terms of increasing economic added value, and which areas of activity could be developed as a priority, it also suggests measures that would further increase added value.

Summary

Description of the sector

Information and communications technology (ICT) enables users to access, store, transmit and manipulate information with the help of integrated telecommunications devices, computers, incl. enterprise software, middleware, storage and audio-visual equipment, and unified communications.

Globally, ICT has become one of the key technologies in most other leading sectors and the implementation of ICT in business processes is an important tool for increasing the efficiency of companies.

The ICT sector is estimated to be growing seven times faster than other economic sectors. The European Commission has included the development of the ICT sector (digital technologies) among the top seven strategic directions (digital agenda for Europe) to help ensure the smart and sustainable growth of the European economy.

ICT as a smart specialisation growth area covers other sectors horizontally.


Description of the current situation

Worldwide, Estonia rightfully enjoys the reputation of a successful e-country. Estonia has been able to carry out wide ranging activities to develop an innovative information society, supported initially by strong decision-making and, on the other hand, unencumbered by the number obstacles that exist in larger developed countries. The NATO Cooperative Cyber Defence Centre of Excellence and the EU Agency for large-scale IT systems have been established in Estonia and the country has an opportunity to become the become the European information security and cyber defence centre of excellence. Many technologic solutions and services, such as the ID card and its applications, i.e. e-identity in a broader sense, X-road, e-Tax Board, digital prescriptions, etc., set great examples for both Europe and the world. Several Estonian companies, such as Skype, Transferwise, GrabCAD, and many others are successful at the international level. While the public sector has been an important information society developer and innovator, many other sectors make rather little use of ICT solutions: as of 2013, about 50% of companies utilised ICT in only one process, and about 30% used ICT solutions in four processes.

There are few companies in the ICT sector whose principal activity is directed to providing scalable products or services and, consequently, the average added value in this sector has begun to decrease. In the period from 2011 to 2012, less than 10% of companies in this sector exceeded the average added value per employee of the European or Finnish ICT sector. 64% of the sector’s export is covered by the electronics sector and is in the main part attributable to one company.


Sector-specific problems in Estonia

The greatest problem is the limited capability of the companies in other sectors to implement ICT to increase the efficiency of business processes. There is a lack of knowledge on the part of company managers and employees, a shortage of staff in the research, development and innovation (RDI) domain, as well as a lack of financial resources.

One of the reasons for the lack of research and development, as well as innovation and product development activities in the ICT companies, is the general attitude of company managers that product development is very risky, or an overall lack of interest in it. Another important reason is the scarcity or lack of skills in product management, international sales and marketing on the part of managers, specialists as well as new employees who have acquired the necessary education. The very limited cooperation between local companies and universities in research, development and innovation is also a big problem.

The availability of capital for start-up companies is currently limited. Start-ups lack capital in the early as well as in their growth phase. The number of experienced local investors is also small, as is the flow of new high-quality projects.

The shortage of highly qualified ICT specialists and those with higher ICT skills in other fields also puts a strain on the entire situation.


Sector-specific objectives

There are three principal objectives in the sector’s development scenario:

  • Movement of the ICT sector from a service-based business model to a product-based business model;
  • Broader implementation of ICT in other sectors;
  • Raising the quality of skills of ICT specialists and increasing their number.


Solutions (activities) that would help alleviate the problems and achieve these objectives

In order to increase product development, it is necessary to improve the knowledge and motivation of managers and specialists. At the same time, cooperation between companies and universities should be increased by intensifying technology transfer, changing the motivational models of universities and developing a functional activity space that supports cooperation. In the context of start-ups, it is necessary to focus on the preparation of a high-quality project flow (incl. through a broader involvement of foreign mentors) and increasing the availability of local capital.

For a broader implementation of ICT in other sectors, it is necessary to increase the knowledge of superior ICT skills through the mentorship of managers and continuing education of specialists. At the same time, the ICT implementation projects of SMEs should be supported by consultations as well as financial measures.

In order to improve the quality and quantity of ICT resources, the preconditions for teaching superior ICT skills must be created for degree studies in all professions (transferring supplementary skills to the faculty members of other specialities; greater involvement of foreign faculty members). To ensure a sufficient level of admissions for undergraduate studies, the popularisation of engineering should be continued. To increase admissions at the master’s and doctorate level, greater recognition of postgraduate degrees must be achieved, and the active recruitment of students from foreign countries should be continued. The financing of doctoral studies should be increased, larger scholarships and resources for additional activities should be ensured, and the admission of those who wish to pursue their academic knowledge in other fields should be promoted.


1. Overview of the sector

The concept of ICT (information and communications technology) and the respective sector can be defined as follows:

  • information and communications technology (ICT) enables users to access, store, transmit and manipulate information with the help of integrated telecommunications devices, computers, incl. enterprise software, middleware, storage and audio-visual equipment, and unified communications; 1
  • the manufacturing of office, accounting and computing equipment, wires and cables, electronic valves and tubes and other components, television and radio transmitters, apparatus for line telephony and telegraphy and receivers, sound and video recording or reproducing apparatus and associated equipment, instruments and appliances for measuring, checking, testing, navigating and other purposes, industrial process equipment;
  • services related to the wholesale of computers, computer peripherals and equipment and software, electronic and telecommunications parts and equipment, telecommunications, renting of office machinery and equipment, incl. computers and related activities 2
  • ICT goods intended for data processing or communication by electronic means, incl. transmission and display functions, or goods which use electronic processing to detect, measure or record physical phenomena, or to control physical processes. 3

As in most sectors, ICT involves both sector-specific products as well as services. It is often difficult to distinguish whether a product or a service is being provided, as there are also symbiotic solutions of products and services on the market – a product can be offered only in conjunction with a service, or vice versa, and it is not easy to establish whether the product or the service provided is relatively more important.

In this analysis, the decisive criterion in scalability – a product is scalable, a service usually is not (when dealing with a scalable service, it is referred to as a product in this report). This approach is important, as the scalability of products enables a company to create more added value as compared to selling un-scalable products and services.

(Scalability is taken to mean the ability to increase sales and production volume in such a way that the company maintains or improves its profitability – production and selling expenses per unit produced grow at a significantly slower pace than the increase of sales volume.) 4


1.1 General data on the sector
1.1.1 Overview of the global ict sector

The global trends in the ICT sector are characterised by a sharp increase in the use of smart devices and the possibilities offered by the Internet and, in connection with that, the development of supporting technologies (sensors, Internet of Things, smart devices and intelligent networks, embedded computing, low power systems, etc.) (see Figure 1 7 and 2 8 and Annex 3, Figures 16 and 17). The share of PCs in use is decreasing and smaller smart devices, such as phones and tablet computers, are increasingly being used both for work purposes. There is now also a trend to “bring your own device”, BYOD, for watching videos, listening to music, etc

Many other devices are also getting more intelligent: cameras, home appliances and equipment used in production, i.e. machine tools, automation devices and apparatus that communicate with each other.

In many areas, such as education, medicine, the manufacturing industry, the transport and construction sector there is a growing uptake of ICT, such as real-time economy, flexible learning via the Internet, telemedicine and personalised medicine, bioinformatics and biomedical technology, flexible operating of industrial equipment and communication between systems and their ability to make independent decisions (Industry 4.0 5), a flexibility and sustainable organisation of transport, e.g. vehicle to vehicle (V2V) and vehicle to infrastructure (V2I) communication, NFC, real time simulation, optimising traffic flows, etc. 6 as well as the automation of processes (wider implementation of robots, unmanned systems and digitalisation) and the uptake of new technologies, e.g. 3D printing or solutions, e.g. smart houses in the construction sector.

Since the amount of devices, sensors and the data volumes created by them is significantly increasing, the need for content technologies and information management is growing in a similar manner, incl. the need for information security solutions in all sectors and areas and, more generally, for all devices and systems. (See Annex 3, Figures 12–15 and Table 2.)


Figure 1. Changes in the number and type of consumer ICT devices over time



Figure 2. Increase of machine-to-machine traffic


1.1.2 Overview of the estonian ict sector

Internationally, Estonia has the reputation of being a successful e-country. Estonia has been able to carry out wide-ranging activities to develop an innovative information society, supported on the one hand by bold and right decisions and on the other hand the by lack of many obstacles that unlike in Estonia exist in larger developed countries. The NATO Cooperative Cyber Defence Centre of Excellence and the EU Agency for large-scale IT systems have been established in Estonia and the country has an opportunity to become the centre for the European information security and cyber defence competence. Many solutions and services, such as the ID-card (and its applications, i.e. e-identity in a broader sense), X-road, e-Tax Board, digital prescriptions, etc., set great examples for both Europe and the world. Several internationally successful companies or those with great potential have come from Estonia, such as Skype, Transferwise, GrabCAD, and others.

Estonian ICT companies have developed several e-government solutions, including substantial information security solutions, for example X-road, e-identity (ID-card, mobile-ID), e-health solutions, etc. As a contracting entity for information systems, the state has made a major contribution to developing the information security knowledge of companies in the ICT sector. In 2009, the Cyber Security Council was established at the Security Committee of the Government of the Republic, whose main task is to support cooperation between various institutions on a strategic level and monitor the implementation of the Cyber Security Strategy goals. In 2010, the State Information Systems Development Centre was given the status of a governmental authority by a decision of the Government of the Republic. Renamed the Information System Authority (RIA), this body was given additional powers and resources to organise the protection of the state information and communications technology (ICT) infrastructure and monitor the security of information systems.

In 2009, an international master’s programme on cyber security was launched in cooperation between the Tallinn University of Technology (TTÜ) and the University of Tartu (TÜ), with 60 students admitted every year. The NATO Cooperative Cyber Defence Centre of Excellence and the EU Agency for large-scale IT systems have been established in Estonia. The country is participating in new emerging forms of cooperation, such as the Internet Freedom Coalition, the United Nations Group of Governmental Experts, and the OSCE working group on developing confidence building measures for cyberspace, etc. 9

While Estonia as an e-state can be considered a success story, the situation in the corporate sector tends to be mediocre. The majority of the electronics and telecommunications sector is made up of Estonian branches of large international corporations (Ericsson Eesti, Enics, Eesti Telekom, Elisa, etc.). The software sector is primarily comprised of domestic companies, but their main area of activity is providing services that have internationally a relatively low added value.

There are about 20,000 people employed in the Estonian ICT sector, which constitutes 3% of total employment. Three-quarters are employed in services, the remainder in manufacture.

In 2013, there were around 3,000 companies active in the field of information and communications, 2.4% of them in the manufacturing industry and the rest in the service sector. 10  Mostly, these are micro-enterprises employing less than ten people and operating in the field of information technology (programming, consultation and similar activities). Over half of the information and communications companies were involved in programming, 15% in information related activities and a tenth each in the production of motion pictures, videos and sound recordings and publishing. Six per cent of these companies were active in the field of telecommunications.

In 2013, the total sales revenue of the information and communications sector companies remained at the same level as in 2012, totalling 1.51 billion euros. In parallel with the slowing down of the growth of sales revenues, productivity figures have declined. In 2013 total productivity on the basis of added value decreased by almost 14% and productivity of labour costs by 10%. The added value produced by the companies on the sector started to decline in 2013, falling below the pre-economic crisis level. Concurrently with the decrease of added value, labour costs in the sector have increased. 11

Growth has been the greatest in the electronics sector, attributable to Ericsson Eesti (see Figure 3 13). When in 2009 the sales revenue of the electronics sector was around 300 million euros, then in 2012 it totalled nearly 1.6 billion euros. The sales revenue of Ericsson Eesti accounted for almost 86% of the entire sales revenue in the field of electronics and 42% of the sales revenue of the sector as a whole. (Sales revenue of software companies accounted for only 11% of the entire sector’s sales income; however, the number of software companies is the largest in this sector.) 12

There are only a few companies in this sector (see Figures 4–5) that can produce high added value. This sector is characterised by a focus on the service economy rather than the area of product development. The added value of very many companies is between 20,000 to 30,000 euros per employee, while product development companies are able to produce added value in the range of 50,000 to 100,000 euros per employee.

According to the 2012 data, the share of companies creating added value in excess of 50,000 euros is ca. 7% of the sector’s total volume (for determining this share companies in the sector with at least 3 employees were taken into account; EMTAK (Classification of Economic Activities) codes: 26111, 26201, 27111, 27121, 27401, 33131, 46511, 46521, 47411, 58211, 62011, 62021, 62031, 85592, 95111; source: Ministry of Economic Affairs and Communications, see Figure 4; according to EMTAK, 34% of the companies fulfilling the criteria are engaged in programming, and 20% in the wholesale of electronics and telecommunications equipment and their parts).

Figure 3. Sales revenue of the ICT sector during the period from 2009 to 2012


In 2012, around 64% of the export revenue of the entire ICT sector was earned in Sweden, mainly thanks to Ericsson Eesti (electronics). As a result, the share of exports in the ICT sector has increased, accounting for 60% of total sales revenue. At the same time, when not taking into account Ericsson Eesti, the growth in the rest of the sector is minimal (see Figure 6). Other major export partners are Finland (6%), the UK (4%), Russia (4%) and Lithuania (2%). Revenue from exports to these countries made up 80% of all export revenue; in all, ICT sector companies exported products and services into 93 countries. 14

The share of the ICT sector’s exports in the total exports of the Estonian economy has been constantly growing in the period from 2009 to 2012. When in 2009 exports of the ICT sector made up 4% of the Estonian economy’s total exports, then in 2012 this figure was 12%.

As regards the increase in exports, the share of the public sector in the ICT sector’s sales has somewhat diminished, but public sector orders still make up a significant part of the ICT sector’s sales volume: During the period from 2012 to 2014, the amount of ICT (investments and management costs) in the state budget has been around 58 million euros 15. This accounts for about 0.88% of the national budget. The majority of the public sector investments, in turn, are made up of financial resources from Structural and other funds, while management costs are predominantly covered from state budget funds.

In terms of global trends in technology, company advances in the field of technological and product development capacity tends to be modest. The strengths lie in the implementation of technical ICT solutions and methods, the lack of corresponding knowledge by the customer poses a problem, and weaknesses are likely to persist in the development of new interdisciplinary solutions (the exceptions here are, for instance, the e-government and financial sector solutions) or implementing technologies. Capacity is growing in the area of novel data analysis technologies (big data and open data), product development is carried out in the context of embedded computing, micro-electronic technologies and robotics as well as bio-informatics and medical informatics and technology. Skills are also developed in the field of production automation, especially in connection with the implementation and integration of different solutions and systems. Rapid growth is perceived in the area of information security and cyber defence, where the public sector is at the forefront of this technology. However, the development in several areas is held back by the lack of demand. The implementation of ICT requires investments, skills and determination.


Figure 4. Average added value per employee during the period from 2011 to 2012; source: Ministry of Economic Affairs and Communications, calculations by the author of the report


Figure 5. Added value per employee of companies in the ICT services sub-sector. To give a better overview, the some large enterprises have been excluded from the data (Ericsson Eesti AS and TeliaSonera EMT-Elion)


Figure 6. Export revenues of ICT sub-sectors (left) and their share in the export revenues of the entire ICT sector during the period from 2009 to 2012

The umbrella organisation of this sector is the Estonian Association of Information Technology and Telecommunications (ITL) that has more than 80 member organisations and whose main activities include popularising information and communications technology (ICT), promoting vocational education and improving legislation. 16 There is an ICT Cluster with nearly 30 members operating within the ITL, the key activities of which are conducting research and analyses, supporting ICT education and organising cooperation seminars and the joint marketing of this sector.

ITL- and ICT Cluster-led cooperation is mainly focussed on shaping the environment; there is less cooperation in the areas of product development and export promotion. A good example here is the Enlife solution, which is based on the industry cluster model, comprises various ICT companies and aims to provide comprehensive solutions. 17

Various incubators and accelerators are becoming cooperation centres that target start-ups: Garage48, StartUp Wise Guys, Prototron, TTÜ Mectory, etc. The aim of incubators and idea labs is, one the one hand, to provide start-ups with infrastructure (from desk rentals to the use of laboratories and expert help), and, on the other hand, to give advice with regard to entrepreneurship, product development and market placement.

Within this sector, cooperation between companies is relatively small. There are very few examples of cooperation between companies in the areas of both technology development and sales. Cooperation is directed more toward developing the environment (ITL), getting acquainted with export markets (ICT Cluster) and advancing start-ups. There is little cooperation in the framework of joint product or service development projects. In the context of domestic competition this is understandable, but considering international competition, cooperation is essential as it helps to achieve a lower share of sales costs in the final price of the service or product and to offer customers products or services that cover the majority of the customer’s value chain, or to compete with large-scale tenders for which Estonian companies on their own would not qualify due to their small size, nor would they be able to meet the required production volumes.

Overall, the following factors characteristic of the companies in the sector can be highlighted:

  • The public sector is an important promoter and innovator of the information society. Many other sectors implement ICT to a relatively small extent;
  • There are only a few companies in this sector whose main activity is directed to providing scalable products or services:
    • The sector is focussed on a “simpler” service based economy;
    • The sector is professional, in a technical sense, but rather in a developing phase as regards the implementation of various innovative inter-disciplinary technologies in other areas of the economy.
    • Companies producing high added value are rare; the average added value of this sector has begun to decrease, whilst the average wage level continues to rise primarily as a result of labour shortages;
  • Electronics (mainly Ericsson Eesti AS) accounts for 64% of the sector’s export.

1.1.3 Position of the growth area in the value chain

The use of ICT on a global scale is on the increase in the entire value chain and in most sectors. ICT has become a basic or key technology 18  in improving the productivity and efficiency of companies. ICT solutions are introduced in a wide range of sectors and stages of the value chain.

Whilst thus far, the emphasis has been on the automation of production processes, for example, then more and more attention is now being paid to the development of communication and decision making solutions between various devices, systems and companies (smart machines and networks, grids) that allow companies to integrate their production or sales systems with the corresponding systems of other companies or, within the context of a single company, enable systems comprising several sub-systems (equipment, machines, apparatus) to independently analyse the working environment (inventory, orders, disturbances, need for maintenance, etc.), make decisions and, based on that, change the functioning of the system as a whole. In the industrial sector, a new concept of industrial revolution – Industry 4.0 – was presented in this context in 2013 in Germany. 19

This trend can be also regarded as a result of combining value chains, or creating a value network (see Figure 7 22). In this case, it is important for a company to be positioned at the intersection of various value chains, to be able to provide added value to several companies. 20 ICT as a basic technology has been able to fulfil this role quite broadly (e.g. operational system of a PC). It can be argued that the amount of such ICT-based components or solutions (e.g. the widespread cloud computing technology, XaaS or data analysis and information security solutions) and the implementation of ICT to create value networks are constantly increasing.

The position of the Estonian ICT sector in the value chain will be analysed below by the following areas: electronics, telecommunications and software development.

The majority of the electronics sector is made up by the Estonian branches of large international corporations (Ericsson Eesti, Enics Eesti AS). Over 90% of the sales volume comes from exports 21 and this sector is primarily engaged in production (manufacturing industry), with a few companies also active in product development.

The telecommunications sector is also characterised by the prevalence of large international groups (TeliaSonera, Tele2, Elisa), the difference being a higher share of domestic consumption.

The largest number of companies are active in the field of software development, most of them micro or small enterprises (less than 10 employees) providing software development services. A growing trend can be observed in the establishment of start-ups, but today, they still make up a relatively small part of the sector.


Figure 7. The shift from value chains to value networks


Thus, the majority of companies are positioned at the bottom of the value chain, and provide cheaper services. About 10% of the companies in this sector are active in product development, most of them in the area of software development and acting in cooperation with another sector. There are only a few specialised product development companies focussing on the ICT sector itself, such as ZeroTurnoraund, Plumbr, Browserbite.

The Estonian ICT sector is also characterised by the fact that apart from the public sector, there are no other large sectors or development centres that the ICT sector would be manifestly concentrated around and that would provide the necessary impetus for innovation and growth.


1.2 The role of education, research, development and innovation in the ict sector
1.2.1 Globally

According to Eurostat, the ICT sector made up 4.38% of the European Union GDP in 2010 23 , and in 2009, the companies’ research and development investments in the ICT sector accounted for up to 17% of total investments. Several countries and regions contribute a large part of their research and development funds to the ICT sector (see Annex 3, Figure 17).

The U.S. ICT sector is clearly surpassing Europe in all sub-sectors of ICT (see Annex 3, Figure 19) and in such a way, that while employing less workers than in Europe (3.4 million people in the U.S. vs. 5.3 million people in Europe), it can create up to twice as much added value both in absolute terms as well as per employee. The reason for this is the difference in the internal structure of the ICT sector – in Europe, services are predominant, but in the U.S., the share of manufacturing is higher (18% in the U.S., 9% in the EU).  24


Figure 8. Research and development investments in the ICT sector by Member State (2008, 2009)


When comparing the EU and the U.S., there is also a difference in the amount of research and development (R&D) investments: top companies in the U.S. invest almost twice as much in R&D as EU companies. 26 In 2009, the public sector in the EU invested 5.3 billion euros in R&D, which accounted for 6% of the total budget allocated for investments. The share of ICT research and development personnel (researchers and support staff) in the entire ICT workforce was 4.7%. In 2009, 10% of the personnel in manufacturing were employed in the R&D field. The respective figure for services was 3.7%. The number of patents in the ICT sector in the period from 2009 to 2011 was 40 in Estonia, 4 in Latvia, 4 in Lithuania, 1,200 in Finland, 2,200 in Sweden, 3,900 in the UK and 24,500 in the U.S.


Figure 9. Companies’ investments in the ICT sector in 2009 by country


In the EU, the countries investing the most public funds in the ICT sector R&D are Sweden, Finland, Denmark, Belgium, Austria and Slovenia (see Figure 8  25). As regards companies’ investments in R&D, the frontrunners are Germany, France, Finland, Sweden, Italy and the UK (see Figure 9  27).


1.2.2 In Estonia

In 2011, Estonia’s total expenditure on RDI was 2.37% of GDP. The average expenditure of the 17 euro area countries was 2.12%, with the largest investors in R&D being Germany (2.89%), Denmark (2.98%) and Austria (2.77%). 28

In Estonia, ICT is taught in three universities: the Tallinn University of Technology offers four bachelor’s degree programmes, seven master’s degree programmes and one PhD programme. The University of Tartu offers two bachelor’s degrees and a master’s degree programme and one PhD programme. Tallinn University offers one bachelor’s degree programme and four master’s degree programmes. In addition to that Tallinn University of Technology has several other study programmes that are strongly connected with ICT, such as mecha-tronics, logistics, integrated technologies (bachelor’s degree programmes, English language programmes), etc.

The 2013 Praxis study on the need for a workforce with ICT competence does not forecast a significant shortage of employees who have received professional training in ICT in higher or vocational educational institutions for the period 2014–2020 29  and the increase to 8,500 people is sufficient (different scenarios were compared). It was noted, though, that software development specialists are somewhat scarce. According to the ITL estimates, however, the situation is rather the opposite. There is a constant labour shortage in the ICT sector which is also indicated by the wage level in the ICT sector and which has been very high since 2006. There is intense competition between companies for employees and the number of graduating ICT students to be doubled 30 in order to increase the number of employees with professional ICT skills from the current 35,000 to 50,000. 31 It is also often stressed that workforce planning should not be based only on present day trends. A better supply of specialists creates new opportunities, i.e. the demand today does not reflect the additional possibilities in the future.

A study by the University of Latvia indicates that RDI activities in the area of ICT are at a relatively modest level in Estonia .The number of scientific publications is lower than in several other areas biotechnology, clinical medicine, psychology, ecology, physics, etc., see Figure 10 33. According to Eurostat, the total number of patents in the Estonian ICT sector was 18 in 2009 and 15 in 2010. The number of patents in Estonia is the highest in the Baltic States and also larger than in Slovakia and Slovenia, for instance, but clearly smaller than in the Nordic countries.

There are three technology development centres (TDCs) connected with this sector: STACC, Eliko and Imecc. The first two mainly target RDI activities in the ICT field, Imecc is more focussed on mechanical engineering, but also has connections with the area of ICT (e.g. ICT has an important role in industrial automation). As regards TDCs, the actual model of cooperation tends to be TDC to company (not company to company to TDC): the TDC develops the necessary technologies and companies implement them to develop their own products or services.

There are also two centres of excellence active in the field of ICT: the Centre for Integrated Electronic Systems and Biomedical Engineering (CEBE) and the Estonian eXcellence in Computer Science (EXCS). The aim of CEBE is to be the leading Estonian centre in the areas of electronic components, electronic systems and embedded computing, as well as computer and biomedical engineering. EXCS’s field of research covers programming languages and systems, information security, software programming, computations for research, bio-informatics and language technologies.

The R&D investments of the ICT sector in 2012 exceeded 50 million euros, accounting for nearly a quarter of the total R&D expenses in the business sector (see Figure 11 34).

During the period 2010–2012, there were around 900 people involved in research and development activities in the business sector, over 60% of whom were scientists and engineers (this trend is on the increase). The number of R&D employees in the business sector during the same period was, on average, 3000 people, thus the share of ICT is relatively large – 30% (see also Annex 3, Figure 18).

However, in the public sector, the number of people working in the area of R&D in the ICT sector is rather small: during the years from 2010 to 2012, they accounted for about 2%. As a comparison, this figure is 5–6% in chemistry and physics, 1.3% in electrical engineering and electronics, 2.3% in social sciences and 1.5% in economics. 32

The number of students in the ICT bachelor’s degree programmes in universities grew significantly in the period 2010–2012, parallel to the increase in the overall number of students. Probably resulting from the engineering popularisation programmes by the state and ITL as well as the continually high wage level in the ICT sector, the share of ICT students has increased: in 2007, it was 29%, in 2012 already 36% and in 2013 32%.


Figure 10. Number of scientific publications in the Baltic States by the field of research (Estonia depicted by the blue line, Latvia by the red line and Lithuania by the green line)



Figure 11. R&D expenses of the ICT sector (foreign investments not included)<a href="#ref34" class="reference-tooltip has-tooltip">34</a>

The number of students obtaining a master’s degree in ICT has grown rapidly, from 632 students in 2008 to 893 in 2013. This does not, however, reflect the increased number of doctoral students.

During the period from 2006 to 2013, the number of ICT doctoral students has been fluctuating over the years, but the number of students admitted to the PhD programme in 2006 and in 2013 was generally the same35.

The number of foreign students has increased mainly in master’s degree programmes (understandably so, since there are only a few English language bachelor’s degree programmes). As regards master’s degree programmes, the greatest changes occurred in 2010 and 2013 (see also Annex 3, Figures 7–11).


1.3 Strengths, weaknesses, opportunities and threats

The SWOT analysis of the Estonian ICT sector is based on the following two perspectives35:

  • Implementation of ICT in other sectors i.e. automation of business processes. The target groups are companies in all other sectors, mainly in Estonia, but also elsewhere.
  • The RDI capacity of companies in the field of ICT i.e. product development. The target groups are mainly export markets, via global sales.

Since ICT as a growth area covers other sectors horizontally, it makes sense to base the SWOT analysis on these grounds. The implementation of ICT and RDI capacity are examined separately, because ICT implementation is not always accompanied by genuine RDI activities. The following analysis presents the most important factors.

Implementation of ICT in other sectors

Strengths

The most important strength is the environment, which is generally conducive to business activities – sophisticated e-government solutions, good ICT infrastructure, relatively low corruption and, largely owing to Estonia’s small size and historical reasons (as a result of which there are also no big legacy systems, for example), the speed of making and executing decisions (both in the private and public sectors, compared to, for instance, several Western European countries). Another strength of the ICT sector is the capacity to integrate systems and manage information as well as the momentum achieved in the activities of ICT-based start-ups.


Weaknesses

The greatest weakness is the poor motivation, knowledge and experience of managers, specialists and young people with higher education about the implementation of ICT for the improvement of (production) process efficiency or for product development. At times, this is reflected in “partial investments” (strategic IT planning is often lacking), which aggravates the attitude that ICT investments are expensive and do not yield the expected results. An additional weakness is the high cost of labour (there could be an upper limit on social tax) and the involvement of foreign specialists. Companies gave examples that sometimes it would be cheaper to hire a specialist from another country. The lack of other supporting infrastructure is also a problem.

Another downside is the limited cooperation within the sector as a result of competition-related risks. At the same time, due to the small size of Estonian companies, cooperation would be necessary in order to improve export capacity. For example, at the moment there is the ICT Cluster 36, which indirectly supports export. However, more companies could form industrial clusters, and encompass a larger part of the value chain with various products. This sort of solution would be more competitive than products covering just one part of the value chain).

Another weakness is the lack of funding for start-ups and for product development. Supported incubation period for start-ups should be longer (e.g. up to two years) and pilot projects abroad, which are necessary for product development, should also be encouraged since the Estonian market is too small to test new products with a global potential.


Opportunities

The most important opportunity is to significantly increase the efficiency of other sectors through the implementation of ICT. Since the level of using ICT is currently rather low in many sectors (it is high in the financial and public sectors, for example), relatively little investments could bring about significant changes. In order to achieve this, the widely recognised current problem of predominantly low productivity and ICT implementation in many sectors should specifically be raised in society. Achieving a much higher added value than at present is not considered that important by entrepreneurs, There is also a relatively widespread uneasiness about implementing technology. As the problem concerns mainly SMEs, government measures that help mitigate risks, i.e. financial support, training, consultancy programmes and government supported centres of excellence e.g. aimed at Industry 4.0, supporting product testing abroad. Due to Estonia’s small size it is often not reasonable to do it here and offer free or inexpensive tools e.g. the tool for companies to calculate the cost-efficiency of implementing ICT. Standard solutions provided by the state, such as the management software for small-scale production would have a huge impact and would not require big investments from the state.

Significant improvement of knowledge in the field of sophisticated ICT skills would be the basis for a wider implementation of ICT. Teaching sophisticated ICT skills and ICT implementation should be swiftly introduced in all higher education programmes. Otherwise, it will be impossible to substantially improve people’s skills in implementing technology in other areas of life. To do that, it is important to analyse which study programmes should be prioritised and which ICT skills should be taught. Here, the smart specialisation growth areas (study programmes) and sub-sectors (technologies, fields, skills) should also be a point of reference. Since there is not enough teaching staff for that, efforts should be made to employ foreign teaching staff and students and develop the activities necessary for the continuing education of existing teaching staff. A good example is TTÜ where certain subjects are taught by a pair of teachers (an ICT teacher is involved) which enables to quickly bring technology implementation skills into other study programmes and pass on knowledge to ensure the sustainability and efficiency of teaching.


Threats

The increasingly broader implementation of ICT brings along completely new threats as human labour is replaced by machines and the disengaged people need to be provided with alternative employment (which implies an additional analysis of the need for continuing education and re-training as well as the related financial resources). Another source of risk in the financial sector is the limited share of domestic capital available, influenced by certain events or decisions abroad. The provision of money in Estonia may significantly and suddenly drop, reducing companies’ investment, RDI and export capacities.


Companies’ research, development and innovation capacity in the field of ICT

Strengths

The universities’ world-class capacity in certain specialities and their success in raising external funds should be highlighted as their strengths. The flexible nature of Estonians is another strength that makes it possible for Estonians to use their limited resources and excellent technology to their best advantage. The good reputation of Estonia and the local ICT sector also helps increase the attractiveness of the country to foreign experts.


Weaknesses

The biggest weakness is the development and technology transfer capacity of the universities and the RDI capacity of the companies. Besides that, many companies have adopted a rather short-term perspective on RDI activities (1 to 2 years), making it impossible to carry out major changes.

The other weakness is the rather limited interaction between the RDI activities of universities and local companies – activities are carried out alone, without involving other parties (universities tend to cooperate more with foreign companies. One of the reasons behind that is the small size of Estonian companies, their lack of resources i.e. people, and capital needed for RDI.

There is a shortage of teaching staff and researchers in universities, both as regards recruitment and the people needed to support companies. State funding of doctoral studies, attaching doctoral students to universities and research teams, and the volume of state commissioned education is limited. 37


Opportunities

Various state measures should be implemented to address the aforementioned shortcomings, for example: a. The terminated innovation voucher scheme, which was very popular among companies; b. The process of technology transfer needs to be better developed at universities; c. The possibilities of increasing the common grounds in the RDI activities of universities and companies should be analysed and motivated, e.g. submitting joint applications by universities and local companies for RDI support programmes should be increased.

Changing the underlying principles of doctoral studies is worth analysing, in order to achieve a larger number of doctoral students in the industrial sector38 , i.e. people who would want to apply the knowledge gained during doctoral studies outside their academic field. Doctoral studies aimed at the needs of industry would enable to improve the professional knowledge of employed specialists (not only in the ICT sector) in implementing technology. Such people would start doctoral studies to improve their knowledge in a certain field of engineering connected to their work; the studies would last longer than four years and would otherwise accommodate studying simultaneously with working (the doctoral students would not be occupied only in universities).

Establishing start-ups should be encouraged in universities among doctoral students – this allows connecting science with development activities faster and increasing the competence for such cooperation in universities.

The number of state commissioned places should be increased for master’s and doctoral programmes. In addition, the academic career should be promoted to ensure a sufficient number of new scientists for the universities, and a supply of people educated in the field of R&D for the companies. Estonia’s reputation as an e-state would also help attract foreign students and teaching staff to study and work in Estonia.

An analysis should be conducted and a strategy drawn up about which other state measures would enable to support companies’ long-term RDI activities.


Threats

The ICT sector stays in a “comfort zone” – since demand is high and constantly growing, provision of relatively cheap services persists. Products and services with a higher added value are not being developed and state measures are not being implemented.

Smart specialisation may become a replacing, not an additional money flow. This means, for example, that there will be no positive change in the overall budgets of universities.

Due to the recovery, there might be another wave of departures from the universities to the business sector. If the recruitment base is small, there will be few people left in the universities (the first such exodus of teaching staff and scientists was in the beginning of the 1990s). The decline in the number of students because of demographic changes might also add to that.


2 Sector-specific objectives and indicators

There are three principal objectives in the ICT sector’s development scenario:

  • Movement of the ICT sector from a service-based business to a product-based business;
  • Broader implementation of ICT in other sectors;
  • Raising the quality of skills of ICT specialists and increasing their number.

Upon establishing objectives and indicators, we made the following assumptions. The analyses of the profiles of start-ups established to date and the ICT-based products (services) they have created revealed that the vast majority (90%) of start-ups or their products are related to or developed in cooperation with some other area of business (e.g. GrabCad for engineers, TransferWise for the financial sector, etc.). It means that we are talking about implementing ICT in other sectors. Therefore, setting objectives and measuring results (indicators) through the ICT sector start-ups or product development illustrates the changes necessary in the economy in a broader sense.


2.1 Movement from a service-based business to a product-based business

The Estonian ICT sector is currently characterised by the predominant focus on a service-based business. There is only a small group of companies in the sector that can create high added value (see Chapter 2.1.2). As explained above, higher added value is created by companies that can offer scalable products and services on the global market.

Indicator No 1: the share of companies creating higher added value in the sector.

The share of ICT sector companies that will create more than 76,000 euros added value per employee (in current value) will be 20% by 2021.

Since measuring the number of products is statistically complicated (it might be statistically impossible to distinguish products in companies that also offer services), it is still possible to measure indirectly the volume of product development based on the added value created by a company. We can assume that starting from a certain level of added value, the company is very likely to engage in product development. The EUR 76,000 level of added value is chosen as a threshold that represents twice the amount of the sector’s current average and is very close to the average added value of Europe or Finland, for example.

In the period from 2011 to 2012, about 7% of ICT sector companies created added value that exceeded 76,000 euros per employee. 39


Figure 12. Added value produced by the Estonian ICT sector (according to different methods of calculation and different sources)


The future value of 76,000 euros in 2021 will be 95,000 euros (according to the Ministry of Finance forecast of changes in consumer prices).

Since it is necessary to analyse detailed information of individual companies in order to calculate the indicator, we used a simplified method to calculate the sector’s average added value on the basis of detailed data of the Commercial Register, according to which the average added value in 2012 was 38,000 euros per employee. (According to Eurostat data, the sector’s average added value in 2013 was 42,000 euros per employee; see Figure 12.)


Indicator No 2: capital raised by start-ups

During the period from 2015 to 2021, start-ups implementing ICT technologies will raise capital to the total amount of 310 million euros.

Even though raising capital is an indirect indicator of changes occurring in an economy, it serves as a litmus test – a company’s ability to raise more capital demonstrates its strength. Product development or service providing companies unable to raise capital are generally not sustainable and/or are oriented only towards the local market. Such companies, however, do not bring along important changes in the economy as a whole.

According to the EVCA 40 estimates, it is possible to increase the supply of private and venture capital in the Central and Eastern Europe region, because the competition in capital supply is rather limited in this region and investment volumes have not yet reached the optimal level.

Currently, the availability of local capital for start-ups is limited. A common trend in the market is that business accelerators offer capital for three months (up to 20,000 euros). Funding is also available for prototyping in the early phase (up to 10,000 euros per project, up to 8 projects a year). There is much more need for local seed and growth capital which would allow financing the preparations for companies’ growth and expansion phase (from 25,000 to 3,000,000 euros) than is currently available. Testing minimum viable product in Estonia and product development financed by local capital would connect the start-up with the country for a longer period.


Figure 13. Financing of technology-based start-ups from 2006 to 2014

SmartCap estimates that in the past five years (2006–2014), on average, Estonian start-ups have raised capital to the amount of 28 million euros per year (see Figure 1341). The share of local capital in that amount has been 23%, on average, and the majority of the volume consists of funding the growth phase42 from foreign capital.

Primarily, by virtue of the activities of the Startup Estonia programme and the KredEx fund of funds we can observe an increase in both the number of high-quality projects and the availability of Estonian capital. The supply of domestic capital in the years 2015–2021 will grow by 20 million euros with the help of the Startup Estonia programme (of which 50% private capital) and by 90 million euros through the KredEx fund of funds (of which approx. 27% to 45% is private capital). As concerns the volume of foreign capital, no substantial changes can be predicted.

It also has to be assumed that because of the limited supply of domestic capital, the availability of capital is highly dependent on the moods of the global markets – a decline of the financial markets worsens the availability of capital, and vice versa. Therefore, it is important to observe the volume of capital raised on a yearly basis while measuring it for the whole period.

It is justified to use the raising of capital by technology-based start-ups as an indicator because:

  • the opportunity to get loans, raise equity, etc. makes it more difficult to directly establish whether the company is doing it mainly to develop international scalable business;
  • the common business model is for medium-sized and large enterprises to create spin-off companies, i.e. technology-based start-ups to develop scalable services or products intended for the global market;
  • as a rule, investors do not invest in local market oriented companies creating low added value;
  • start-ups generally raise venture capital. Loan capital is commonly not available to start-ups and only a small number of start-ups expand over the long term via organic growth;
  • the analyses of the profiles of start-ups established to date reveals that the vast majority (according to estimates more than 90%) of start-ups that have raised capital, are established in cooperation with some other business area. Overall, the capital raised by start-ups indicator gives a good overview of the development of other sectors and the increase in the ICT knowledge and in implementing technology in these sectors.

2.2 Broader implementation of ict in other sectors

ICT is one of the key technologies that enables companies to improve efficiency either through the automation of production or service provision or through efficient information management. As of 2013, over 50% of companies utilised ICT in only one process and over 30% in four processes: financial management and accounting, preparing sales offers and orders, providing services and managing inventory. 43 Overall, it seems that the use of ICT in improving the efficiency of companies’ activities is limited, and the increase in the implementation of ICT has a major effect on creating added value in the economy as a whole (see Figure 14).

Indicator No 3: implementation of ICT in business processes

Utilisation of ICT in all processes (to a large or a certain extent) in at least 30% of companies.

The aim of this indicator is to measure how companies in various sectors increase efficiency through the utilisation of ICT in different business processes. In order to monitor this indicator, a respective study among companies has to be carried out every two years. Besides quantitative data, this sort of monitoring also provides valuable qualitative information about the diverse barriers and changes in the economic environment.

Figure 14. Utilisation of ICT in business processes as an indicator


2.3 Increasing the number of ict specialists and improving the quality of their skills

Currently, there is a lack of ICT specialists at several levels and in several areas:

  • There has been a constant shortage of several ICT specialists (developers, senior testers, product, sales and development managers44) already since 2006.
  • ICT doctoral students in universities are scarce – the number of new researchers and teaching staff is limited and there is a lack of faculty members to teach inter-disciplinary subjects; there are also not enough people to carry out RDI projects in companies.
  • Finding ICT specialists in other sectors is complicated by both the high wage level resulting from the great demand for labour in the ICT area and the shortage of specialists.
  • Specialists in other areas lack sophisticated skills (in ICT implementation) (shortage of labour with inter-disciplinary skills).
  • The larger number of ICT specialists would allow the ICT sector to realise the great potential for growth.

According to studies carried out among employers,45 46 the problems with the quality of skills of university educated ICT specialists are related to the scarcity of practical skills (connecting the practical and the theoretical part) and general skills (communication, team work and self-management, as well as an attitude conducive of constant professional development). The main problem with specialists in other areas is the lack of sophisticated ICT skills that would enable them to understand the possibilities of implementing ICT in their profession and field of activity.


Indicator No 4: employment of staff involved in ICT

The number of employees involved in ICT in 2021: 37,000 people.

Data compiled by Statistics Estonia show that there are currently 19,000 people employed in the area of information and communications (see Figure 15 49).

A 2012 calculation based on a study by Praxis estimates the number of people employed in the information and communications sector to be in the range of 17,000 people. According to estimates, other areas of activity (incl. the manufacturing industry) employ a further 9,000 47 people in the field of ICT.

According to a study by Praxis 48 , the demand for labour in ICT will increase by around 7,000 people by the year 2021. Statistics Estonia recommends to take also into account the future radical changes in the area of continuing education and retraining. Here, we can observe a potential additional increase by at least 2,000 people.


Figure 15. Employment in the information and communications sector and prognosis (in the opinion of the Estonian Development Fund, the exponential growth strategy should be taken as the basis to illustrate the increase of employment growth in the information and communications sector).


Indicator No 5: satisfaction of employers with ICT specialists

As at the moment there is no quantitative assessment about employer satisfaction, there is a need to carry out a respective study, create a relevant indicator, and monitor its changes over time.


3 Explanation of the choice of domains

3.1 The process of choosing domains

The over-arching principles underlying the methodology of choosing segments are described in the general part of the reports.

The following methodology was used in the analysis of choosing domains in the ICT growth area.

  • Description of ICT sub-sectors (technological directions) with a potential in the European context.
    The basis here was the guide to planning ICT-related activities during the period 2014–2015 within the framework of Horizon 2020, developed by the European Commission 50. This document gives a good overview of the structural division of the ICT sector, taking into account the trends in the European economy now and in the near future. One argument supporting the use of the framework programme Horizon 2020 structure is the fact that the Estonian economy is likely to grow in the areas that are also thriving in Europe (Estonia’s main export partners are the EU Member States 51).
  • Existence of, and potential for, considerable entrepreneurship in the sector and related areas (implementing ICT) in Estonia.
    The assessment of the number of companies and whether their main activities cover the sub-sector was carried out.
  • Research and development capacity in Estonia.
    R&D capacity in universities and other research institutions (e.g. TDCs, centres of excellence) was assessed. See also Annex.
  • Interests or needs of the state.
    It was assessed whether the state has an increased interest in, or need for, the particular sub-sector.
  • Consolidation, harmonisation and specification of domains.
    Alternative sources and materials and the input from the smart specialisation focus group were used. (Described below.)

The analysis was conducted by the Development Fund and the field experts involved through the crowd sourcing model. As regards to the choice of domains in the ICT growth area, the domains chosen and described in other growth area reports (e.g. eHealth, automation of construction, etc.) have not been described in detail.

In addition, the following sources were used in the analysis of the ICT sector domains: “Digital Agenda 2020 for Estonia” 52, “The information and communications sector vision of information society in Estonia in 2020” 53, annual overview of Internet trends by Mary Meeker, “Internet trends 2014” 54 , the 2013 Gartner analysis of emerging technologies (“Gartner’s 2013 Hype Cycle”) 55,, the Estonian research and development and innovation strategy 2014–2020 “Knowledge-based Estonia” 56.

Another important source was the TTÜ study “ICT in the degree studies at TTÜ” 57, one of the aims of which was to find the areas with potential in the Estonian ICT sector. In the findings of the TTÜ study, the following priorities were highlighted: production management related IT solutions in industry, implementation of communications systems (smart networks, Internet of Things) in transport and utilisation of information security solutions in healthcare.

The sector-specific focus group involved by the Development Fund and interviews with various companies, governmental and educational authorities, as well as representatives of professional associations also gave a major input for the choice and specification of domains.

Based on the analysis, the following domains were chosen:

  • content technologies and information management;
  • information security and cyber defence;
  • embedded computing, robotics and production automation;
  • tools and methodologies in software development.
R&D capacity and entrepreneurship in these fields is clearly existing or developing. At the same time, these areas support the state’s priorities thus far (e-government: content technologies, information management and information security), or allow other economic sectors to benefit the most (content technologies, embedded computing, electronic systems and robotics are the basis for automating processes and increasing production; information management and security is an area that all companies have an increasing demand for and that has become an integral part of competitiveness; improving the quality and efficiency of software development enables the Estonian software sector to become competitive at a global level and a smarter contracting entity on a national level). These are also areas that directly promote export capacity – technologies related to these domains form the basis for product and service development.


3.2 Domains
3.2.1 Content technologies and information management

Content technologies and information management are taken to mean, inter alia, the following key technologies or areas: big data, open data, linked data, data mining, real-time economy and e-government solutions (e-services, interoperable databases).

According to the OECD, the implementation of new content technologies and information technologies help achieve a remarkably efficient growth, for example, the 23 largest European countries could obtain cost savings up to 20% and the energy and transport sector could reduce CO2 emissions by 2 gigatonnes and 380 megatonnes, respectively 58.

Estonia has the potential to further enhance the capacity in this field (in universities, technology development centres, centres of excellence) and implement it in very different areas: in the public sector in terms of saving costs and developing information society (e-government) by offering better and more convenient services for citizens and real-time economy, as well as in the private sector, for instance, in the logistics, financial and energy sectors, the manufacturing industry, etc., to increase efficiency and develop novel solutions and products.

Both the scientific potential (this area is developed by the TTÜ, TÜ and the technology development centre STACC) as well as the companies (Nortal AS, TripleDev OÜ, PlanetOS, Xpressomics, Campalyst.com, Quretec OÜ, Ericsson, Guardtime, Positium LBS) already exist in the segment.


3.2.2 Information security and cyber defence

Information security and cyber defence entail technologies and methodologies to ensure the security of information (data) and computer systems (systems comprising information technology components) as well as networks.

According to an EY study, 43% of companies are increasing their information security related investments; 68% confirm that the current information security measures and strategies need improving and 59% insist that Internet threats have increased 59. Alongside the constant evolution of malware, there is a growing need for even more proactive security programmes for different devices 60.

Currently there is a strong information security and cyber defence potential in the Estonian public sector. It is important to continue developing it and expand this capacity in the ICT sector more broadly. For example, Estonia could strengthen the role of the Cyber Defence Centre of Excellence in Europe and build up a greater capacity for the implementation and development of different information security solutions and novel methods in the private sector.

Both the scientific potential (this area is developed by the TTÜ, TÜ, the technology development centre STACC and the centre of excellence EXCS) as well as the companies (Cybernetica, Signwise.me, BHC Laboratory, Guardtime, Certification Centre, DigiFlak, Agileworks, Biometry, Clarified Security, BCS, Focus IT, ASA Quality Services) already exist in the segment.


3.2.3 Embedded computing, robotics and production automation

Among others, the following technologies or areas are closely connected with the fields of embedded systems and robotics: cyber physical systems, smart machines and smart grids, Internet of Things and microelectronic technologies.

In the context of production automation, we think about activities that contribute to the automation of production processes in industry, development of mechanical engineering, the uptake of systems and the flexible operating of industrial equipment and production control and that are also supported by the corresponding information systems and software devices.

Generally, these are technologies and methodologies that help construct smarter systems, machines and grids, which enable people to ensure improved security, reduce the use of energy and make production more flexible, replace human work with machines and improve communication between different systems or machines. Embedded computing and robotics form the technological basis for production automation.

As an important innovative technological path, the concept of Industry 4.0 that takes industry to the next level should be highlighted here: smart factories, where individual production modules communicate with each other through global and local networks and are able to independently make the necessary decisions. 61

Developing embedded computing and robotics strengthens Estonia’s product development and export capacities. This area needs more support, so that a greater number of companies would specialise in it, that start-ups would be created, that companies would get more involved in product development and that the existing companies would reach the global market with their products.

Production automation is one of the major challenges facing Estonia’s manufacturing industry and, more generally, all economic areas. Compared to the European average, the share of the high tech and medium-high tech sector in the total economy is relatively low in Estonia, which considerably affects the Estonian companies’ export capacity 62.

Successful and extensive production automation and implementation of robotics in production may significantly contribute to the growth of efficiency in the Estonian economy and, through that, a notable improvement in export capacity. Implementation of the Industry 4.0 concept in production automation will considerably increase the flexibility of companies to react to changes in export demand and, therefore, enable Estonia to boost its international competitiveness. 63 Due to the small size of the Estonian economy it is not realistic to develop comprehensive solutions for large-scale industry, but it is possible to achieve the competence to utilise these solutions, as well as a competence for RDI joint projects and the development and production of the so-called small-scale equipment.

Both the scientific potential (this area is developed by the TTÜ, TÜ, the technology development centres Eliko and Imecc and the centre of excellence CEBE) as well as the companies (Tehnolabor, Cybernetica, Evocon, Hedgehog, Artec Design, Defendec, Liewenthal Electronics, Fits.me, ABB, Enics, Testonica, Yoga, selfdiagnostics.com, Sportlyzer.com, Hedgehog, Ericsson, ICD, Cognuse, Yoga, Inskpin) already exist in the segment.


3.2.4 Tools and methodologies in software development

This segment covers technological (products and services) and methodological (methods, process descriptions, technical models, standards) means that help upgrade and enhance software development, improve the quality of software (incl. through the implementation of contemporary methodologies or principles) and make the production process more efficient (also via automation), and promote the introduction and use of information systems (incl. administration).

The predominant problem in Estonia and worldwide is the relatively low level of success of software projects – over half of the software projects are unsuccessful.64 In general terms, the reason behind this is both the limited knowledge about contemporary methodologies and working methods on the part of both people who order and design software (flexible development process methodologies (agile, lean) and engineering practices, applicability analysis and design, service design, etc.). Besides domestic benefits, the broader implementation of such contemporary methods also increases Estonia’s export potential – we are talking about the so-called smart areas, which do not require substantial investments in order to launch global sales and which Estonia can thus afford.

Regardless of the increasing popularity of freeware, the development or acquisition of information systems or other software still requires relatively considerable investment.65 As a rule, software projects also entail changes in the organisation’s business processes which significantly influences the success of a project.

In Estonia, the area of software development has great potential as regards both business and research and development activities, which creates a solid basis to develop tools and methodologies in order to increase the efficiency of the software sector and the profitability of software investments in other sectors.

This segment affects both the ICT sector (improving the efficiency of software production) and all other sectors (improving the skills concerning the acquisition of software projects (incl. making changes in business processes) and increasing the cost-effectiveness of software investments).

Both the scientific potential (this area is developed by the TTÜ, TÜ, the technology development centre STACC) as well as the companies (all major software producers to a larger or smaller extent, and in addition ZeroTurnaround, Plumbr, testlio.com, Scrum OÜ, DevTraining OÜ, IB Krates, ICD, Browserbite) already exist in the segment.


3.3 Connections between domains and with other growth areas

The content technologies and information management segment is tightly connected with the embedded computing, robotics and production automation segment – in the context of the latter, a large amount of data of different types and forms is created (sensorics, smart machines and grids), which needs to be analysed and processed in order to make decisions and control the work of the systems accordingly (Industry 4.0).

Production automation is an integrated area of activity that uses various possibilities offered by content technologies, information management and contemporary devices. Industry 4.0 is the next level in production automation, where the integration of smart machines allows making the whole production process flexible and self-regulating.

Information management and information security, which form a part of the first segment, create the overall environment for the functioning of contemporary highly integrated online systems: it enables to securely create, manage and store data in different systems and devices and exchange it between such systems or devices via the Internet or other innovative means of communication (e.g. NFC).

The tools and methodologies in software development enable to change the implementation and development of ICT solutions, make the development of complex sets of systems and data-intensive applications more efficient, shorten development cycles, accelerate innovation, improve the availability, usability and quality of products and services and raise the profitability of software investments (see also Figure 16).

With regard to other growth areas, the following connections should be emphasised.

  • Health care technology is an area where sensorics, embedded computing, data analysis and information security are increasingly important components in e-health, bio-informatics and personalised medicine solutions and in (bio)medical devices. There is a vast number of health-related data – on the one hand, people themselves create and collect these data more and more (e.g. pulse watches, mobile apps in recreational sport), on the other hand, spheres of medicine are developing (genetic engineering, biotechnology) where the analysis of substantial volumes of data is becoming increasingly necessary.
  • In the growth area concerning the enhancement of resources, the connection is two-fold. As regards the construction sector, production automation (both the digitalisation of processes and the increasing utilisation of machinery) is a major goal. Similarly to health care technology, the number of data to be analysed is constantly growing in the field of materials technology, as is the implementation of robotics.
  • Improving the efficiency of software development and the quality, security and manageability of software products and accelerating the software innovation cycles will also promote, amplify and strengthen innovation in other growth areas.


Figure 16. Connections between domains

Figure 16. Connections between domains

4 Sector-specific barriers and activities

Sector-specific barriers cover the main impediments to achieving sector-specific objectives, based on sector-specific problems and the weaknesses pointed out in the SWOT analysis. Activities (measures) are devised to remove these barriers and/or to take advantage of the sector-specific opportunities. Barriers and activities are related to the ICT sector, but more broadly, also to other sectors, since above all, the objectives of the growth area concern all other economic sectors. Generally, cooperation between ICT companies and companies in other sectors is required for both the implementation of ICT as well as for ICT-based product development.

Activities (measures) can be divided in two: smart specialisation (S3) measures 66 and measures with a broader scope. Within each group of measures, this report briefly explains the possibilities to implement S3 measures in the ICT growth area. To make it easier to distinguish the S3 measures from among the numerous activities, the focal points of S3 measures are repeated at the end of each group of activities. A more detailed description of smart specialisation measures is provided in the general part of the reports.

The logic behind implementing the objectives of the ICT growth area is the following: 

  • The growth area domains have a potential to create, through the S3 measures, the technological capacity and skills in the ICT sector that are necessary to achieve the objectives of the growth area (product development, production automation, better-qualified ICT specialists).
  • The rest of the activities in the growth area help obtain the objectives of the growth area more broadly in the entire economy.

The measures most directly connected to the domains are: the technology development centre (TDC), the applied research measure and partially also measures pertaining to university grants related to the areas of smart specialisation and the demand-side policy. Clusters and the Startup Estonia programme are directed more at the growth area as a whole.


4.1 Movement of the ict sector from a service-based business to a product-based business



Figure 17. Reasons underlying barriers related to ICT product development, and overview of activities (the stop sign symbolises a problem or a barrier, the bulb sign an activity or a measure)


Barrier: limited motivation and limited skills for product development

The reason behind the limited RDI and development activities of companies (especially companies based on local capital) is the general attitude of company managers that product development is very risky, or an overall lack of interest in it. Another impediment is the scarcity or lack of skills in product management, international sales and marketing on the part of managers, specialists as well as new employees with higher education. In the case of international companies, the main barrier is the lack of either product development units in Estonia (strategic management decisions by the parent company) or the lack of necessary competence in the Estonian labour market.


Activities

Target group: mainly companies in the ICT sector or companies in other sectors cooperating with the ICT sector companies in the field of product development. 

  • Company managers and specialists can be motivated through overall awareness raising (creating higher added value via product development and moving to the global market).
  • Promotion of success stories, mentoring programmes for managers (incl. in the field of ICT) and continuing education and retraining programmes (product development and product management, international sales and marketing). In addition, national incubation measures (for example, the Startup Estonia programme) should include appropriate support provided by foreign mentors.
  • Degree studies should include teaching product development and product management; teaching international sales and marketing within the framework of degree studies should be made more efficient (quality and quantity).


Smart specialisation measures 

  • TDC, applied research: boosting cooperation between universities and companies and increasing their common ground in RDI activities; development of domains-related technological and product development competences in universities and companies.
  • Clusters: promoting product development through increasing export capacity with the help of joint sales and marketing activities.
  • Demand-side policy: the state is in a position to change the conditions of certain ICT-related procurements, commissioning solutions that have the properties of a product, the proprietary copyright of which remains with the developer and that the developer can sell globally; also, product development could be further promoted through product-based procurements.

Barrier: limited cooperation and limited availability of capital

Cooperation can be examined from two aspects: cooperation between companies and universities, and cooperation between companies.

One of the barriers impeding companies’ product development and RDI activities is limited cooperation between universities and companies as well as limited common ground in RDI activities. The reason behind this is the lack of resources in companies and universities (incl. a functional space conducive of cooperation in universities) (and/or their poor management) and the short-term perspective of companies’ RDI activities. The attitude of managers, mentioned above, is another obstruction. On top of that, competition-related reasons should be emphasised in the case of cooperation between companies – they tend to forego cooperation for the fear of losing market share (especially in the domestic market).

Currently, the availability of local capital for start-ups is also limited. A common trend in the market is that business accelerators offer early phase capital for three months (up to 20,000 euros), as well as financing of prototyping (up to 10,000 euros per project and only up to 8 projects a year). Growth phase capital and local investors are also scarce. Today, there is a bigger need for local early and growth phase capital, which would allow financing the preparations for a company’s global growth (capital needs in the amount of 25,000 to 3,000,000 euros per a company’s financing phase). It is important to finance the testing of projects and fundamental business hypotheses as well as product development by local capital, as it would connect the start-up with Estonia for a longer period.

Activities

Target group: companies in the ICT sector, universities, technology-based start-ups. 

  • Cooperation between companies and universities can be strengthened by technology development centres (TDCs) and the applied research, clusters and technology transfer measures.
    • In the case of TDCs and the applied research measures, the focus has to be on sector-specific domains, which helps to reinforce the technological basis (capacity) for product development.
    • Efficient technology transfer helps universities to develop applicable ideas and find partners among companies to implement these ideas.
      • A better protection of intellectual property rights has to be ensured in universities and intellectual property should also be shared with the respective researchers – this creates the motivation to engage with the applicable side of research.
    • The cluster measure should be used to improve cooperation between companies and support the growth of exports through joint sales and marketing activities.
  • A motivational model should be created for universities in order to involve more local companies than, at the moment, in projects for which financing is applied from international funds.
  • Also, a functional space coinciding with the area of business should be developed for universities, which would allow them to train a sufficient number of ICT students, making use of competence-based teaching and cooperation between universities, companies in the sector, science and technology parks and incubators.
  • In order to remove barriers to capital availability, financial support necessary for product development (e.g. Enterprise Estonia measures) should be foreseen, such as:
    • support for product testing abroad; and
    • a measure similar to the now terminated innovation voucher scheme (should the terminated measure be continued, it should first be improved, based on feedback from universities and companies).
  • In the context of start-ups, attention should be paid to the preparation of a high-quality project flow (e.g. the Development Fund project “Founders Institute”) and investing in early phase companies (incl. the Startup Estonia programme). The synergy between activities will create a high-quality project flow for business accelerators as well as other funds and market players (e.g. the KredEx fund of funds). There is a need to bring to the market professional teams investing in the early phase (e.g. the Development Fund business accelerators), whose activities will pass on knowledge to related local investors; this, in turn, will enable start-ups to obtain large investments from local investors (in the growth phase).


Smart specialisation measures

  • Clusters: promotion of cooperation between companies (development of solutions and products covering a larger part of the value chain, i.e. supporting the industrial cluster format; also the re-focussing of export clusters more specifically towards sales and promoting joint bids in case of larger procurements).
  • Startup Estonia programme: increasing the supply of local venture capital to start-ups and the harmonisation of capital supply in the start-ups’ growth phase.

4.2 Broader implementation of ict in other sectors



Figure 18. Reasons underlying barriers related to ICT implementation, and overview of activities


Barrier: limited skills and capital

Companies’ capacity in implementing ICT to improve production efficiency is limited. There is a lack of both, knowledge on the part of managers and employees (what and how to implement, what are the options, how to order the implementation of ICT and carry out the project, how to calculate cost-effectiveness) and financial mean as SMEs are short of capital to invest and the involvement of ICT specialists on a project basis is complicated as the related costs are very high).

Activities

Target group: companies in other sectors (in cooperation with the ICT sector companies).

  • There are several possibilities to remove this barrier: general increase in awareness about the need and possibilities of creating higher added value (awareness raising campaigns, promotion of success stories, organising competitions with thematic prizes).
  • Offering companies the necessary tools (for example, tools to calculate the cost-effectiveness of implementing ICT and training in the respective methodology).
  • As a part of the demand-side policy measure, public procurements from local software companies of standard software or technological solutions suitable for SMEs (this type of procurements carried out in the framework of the demand-side policy measure must reinforce and expand the private sector’s technological competence in the relevant domains), which the rest of the companies would be able to subsequently use free of charge or on favourable terms (the open licence principle).
  • Supporting the implementation of ICT through TDCs (joint projects with companies in other sectors to develop competences related to the domains).
  • Establishment of an Industry 4.0 centre of excellence in Estonia (which could, in a broader sense, become a centre of excellence for the implementation of ICT and a platform of common discussions for both companies and specialists in this field).
  • Improving the consultancy measured aimed at SMEs (involving consultants through a state measure).
  • Financial support to SMEs for implementing ICT.
  • It is also very important to launch a comprehensive continuing education and retraining programme, which would help raise the level of skills of company managers and specialists in order to automate their business processes through ICT implementation.

Smart specialisation measures

  • Demand-side policy: procurements in order to develop technological and product development competencies related to the domains; procuring open-licensed standard solutions.
  • TDC – to develop technological and product development competencies related to the domains in technology development centres, universities and companies.

4.3 Raising the quality and quantity of ict specialists


Figure 19. Reasons underlying barriers related to raising the quality of skills of ICT specialists and increasing their number, and overview of activities


Barrier: universities’ limited capacity in teaching the knowledge needed

The problem is twofold: the lack of ICT specialists and the lack of specialists with sophisticated ICT skills in other sectors. The problem of the lack of ICT specialists can, in turn, be divided in two. First, there is a lack of specialists with a doctoral degree, which inhibits the recruitment of teaching and research staff in universities; secondly, there is also a lack of highly qualified employees in the companies, who would lead product development. The other side of the problem is the lack of “regular” ICT specialists in the labour market (the shortage is greatest for various software development specialists67), which constrains growth in the sector and has also driven the wage level very high (as explained above, this in turn restricts other sectors from engaging ICT specialists), as well as the quality of skills of university graduates. The companies’ biggest criticism in this area is related to the lack of practical and general skills of students.

The shortage of specialists with sophisticated ICT skills in other sectors means that graduates in other fields lack advanced knowledge about how to implement ICT for production automation and product development in their area of activity. Thus, the problem is both quantitative as well as qualitative.

Here, the following root problems can be emphasised in particular: the limited admissions at the master’s and doctorate levels, lack of necessary professional teaching staff in universities (both in the field of ICT as well as in other fields as concerns ICT implementation), students’ limited possibilities to cooperate with companies as regards implementation projects (especially interdisciplinary projects) and the lack of motivation (partially due to limited possibilities). This is also tied to the lack of a functional learning environment that would support efficient cooperation with companies. Another reason are the rapid structural changes in economy, which make it necessary for a significant part of employees to gain new knowledge (skills related to the implementation and use of ICT).


Activities

Target group: companies in the ICT sector and other sectors, universities.

  • In the ICT specialities, admissions at the master’s and doctorate levels should be increased (the number of potential doctoral students partially depends on the number of graduate master’s students).
    • In order to ensure a sufficient level of admissions at the bachelor’s level, the popularisation of engineering specialities must continue.
    • To increase admissions at the master’s and doctorate levels, a wider recognition of master’s and doctor’s degrees must be achieved and an active recruitment of potential students from foreign countries must continue.
    • The financing of doctoral studies must be increased and larger grants and more resources for additional activities must be ensured.68
    • The sustainable, more widespread and more intensive activities of the IT Academy must be ensured to guarantee the evolvement of curricula, the quality of teaching and the involvement of foreign teaching staff in universities.
    • It is also important to motivate young people to choose ICT studied by means of university grants related to the area of specialisation, these also help motivate students to participate in implementation projects (in cooperation with companies) and interdisciplinary projects. This allows to efficiently improve students’ practical and general skills.
  • The possibility of a systematic utilisation of the industrial doctorate model is worth analysing, as it helps also direct people working in companies to engage in research, therefore raising the companies’ RD capacity (the industrial doctorate would last longer, the theme of the doctoral thesis would be directly connected to the daily work of the company, doctoral studies could be carried out in parallel to working, and they should be partially funded by the company).
  • Preconditions for teaching sophisticated ICT skills should be established in other areas of higher education:
    • providing additional ICT implementation skills to the teaching staff of other specialities, ensuring that vocational schools and universities have the necessary motivation for that (e.g. via supplementary budgets or performance contracts);
    • analysing and changing curricula in such a way that they would include teaching sophisticated ICT skills (and particularly in the context of the smart specialisation domains);
    • drawing up an action plan to involve more foreign faculty members to offset the lack of teaching staff, and allocating resources to engage a larger number teaching staff or experts in the field with entrepreneurial expertise (the wage level necessary to keep teaching staff of the ICT specialities in universities is higher than for most other specialities, which the current financing model of universities does not take into account).


Smart specialisation measures

University grants related to the area of specialisation: popularising the ICT specialities; motivating students’ and tutors’ joint interdisciplinary projects.


The Annexes to the report are provided here.