Interdisciplinary parts of the smart specialisation report
Interdisciplinary parts of the smart specialisation report
Sector-specific smart specialisation reports have been drawn up in three areas (click on the report to read it).
Interdisciplinary parts of the smart specialisation report
Information and communications technology (ICT)
Health technologies report
Report on the enhancement of resources consists of three parts:
Knowledge-based construction report
Materials technology report
The material technology report covers the issues related to oil shale while the biotechnology report gives an overview of the food that supports health.
1 Overview of the smart specialisation process
Smart specialisation is a pan-European project that aims to increase the level of business innovation in European countries and regions. Smart specialisation is a new section in the European Union Structural funds for the funding period from 2014 to 2020. It is necessary to identify the business sectors with a higher than average growth potential and added value, as well as to define the ways to achieve a competitive advantage by well-targeted investment in research and development.
The process of smart specialisation influences strategic choices made by the Ministry of Education and Research as well as the Ministry of Economic Affairs and Communications when drafting the Estonian Research and Development and Innovation Strategy and the Estonian Entrepreneurship Growth Strategy. The Estonian Development Fund is responsible for monitoring and analysis of smart specialisation in Estonia.
The project of smart specialisation was started in Estonian in 2012. This process can be divided into four stages:
A quantitative analysis was carried out under the guidance of Professor, Urmas Varblane, and with the support of the Ministry of Economic Affairs and Communications, Enterprise Estonia and the Estonian Research Council. Eight areas were identified where Estonia has currently the highest economic potential.
In February 2013 the Estonian Development Fund finalised the qualitative analysis 1, that was a follow-up to the quantitative analysis and complemented it. Future trends, which have been given an important place in the previous work of the Estonian Development Fund, as well as possible areas of co-operation between enterprise and research, were also considered in the qualitative analysis. The Estonian Development Fund analysed the sectors as a matrix, looking at the horizontal and vertical sectors and their crossing points. The aim of the qualitative analysis was to identify the areas with highest economic potential (growth areas) where the use of R&D in business would lead to the largest growth of added value.
In June 2013, the Estonian Development Fund published the analysis on deficiencies and new opportunities 2, that referred to the most serious shortcomings in the growth areas and offered new options for the development of these areas.
In 2014, the ministries concerned started to prepare the necessary measures while the Development Fund supplemented its team with area managers who were responsible for analysing the growth areas in a more detailed manner. This document is an introduction to sector-specific reports that looked for the answer to the question: “What are the possible global trends during the period from 2015 to 2021 and what are the domains of the growth areas where Estonia could be competitive if supported by innovation?“. The analysis highlights the trends in the area of smart specialisation taking into account the capability and needs of Estonia in interaction with global trends.
1.1 Choice of growth areas
On the basis of qualitative analysis (http://www.the Development Fund.ee/nutikas-spetsialiseerumine/tutvustus/) the following growth areas and their sub-sectors were selected in Estonia:
- Information and communications technology (ICT) horizontally through other sectors
- Health technologies and services
- Biotechnology (strong scientific basis);
- e-health (use of IT for the development of medical services and products).
- Enhancement of resources
- Industry related to the enhancement of resources;
- Knowledge-based construction;
- Food that supports health;
- Chemical industry (more effective use of oil-shale).
The choice of growth areas was based on the structure of the Estonian economy as well as on global trends.
Firstly, it is important that Estonia has strong enterprise in the growth area or at least had the potential for its development. Secondly, it is important that the selected growth area is a globally (incl. Europe) increasing sector and that Estonian enterprises had the potential to be globally competitive in it.
Barriers encountered in growth areas and actions to eliminate them
The analysis of growth areas should result in mapping the barriers that hinder the development of research-intensive enterprise and highlight the actions that either eliminate or alleviate these barriers. It is very important to keep in mind the different economic nature of each growth area and take different actions to develop each one of them accordingly. This is the reason why three separate reports have been prepared.
In order to analyse the existing barriers each growth area was studied by a different business stage. Figure 3 presents different business phase as a tube that starts with an idea, and leads, as the project evolves, to a mature business phase. What are the main obstacles encountered on that path?
Figure 3 also shows that the funding of smart specialisation (S3) covers only part of the actions necessary for the development of the area. Much more comprehensive action is needed to give a true impetus to smart specialisation. Therefore, sector-specific reports include, inter alia, the actions that need to be taken outside smart specialisation.
According to the calculations made by the Development Fund smart specialisation actions can have an influence to approximately one third of the Estonian economy.
1.2 The structure of sector-specific reports
The first chapter gives an overview of the sector. It describes the most important global trends in the sector and its domains. When choosing any of the growth areas it is important to keep in mind that it has to be also a growing area at the global level. The first chapter also describes the status of the sector in Estonia and maps the relevant details related to business and research. Before any growth area can become a part of smart specialisation the business as well as research activities in the area have to be strong or have a great potential.
It is important to establish detailed objectives and to see that the growth areas develop in the right direction, as well as establish indicators to measure the development. The indicators for each area are listed in the second chapter. The third chapter covers the choice of domains introducing in a more detailed manner the areas that show the highest potential for higher added value.
The fourth chapter introduces the barriers faced by each growth area and describes the actions that are necessary to eliminate or alleviate them. These actions are described within the framework of smart specialisation as well as in a broader context because it is important to be aware of the full spectre of problems and actions to overcome them to develop any area comprehensively.
2 Objectives and indicators of smart specialisation
The Development Fund has elaborated specific objectives and indicators for every growth area. The aim of it was to establish areas where business and research should co-operate and to determine the best ways of achieving these objectives with the help of smart specialisation measures.
Due to the fact that each growth area has different problems sector-specific sub-objectives and indicators were established besides the main objective which is to create added value. For example, as to the ICT sector, the development of the sector and the implementation of ICT in other sectors are hindered by the lack of skilled labour. Therefore, the increase in the number of ICT specialists is one of the objectives.
The increase in the added value of the Estonian economy and its growth areas is the main indicator of smart specialisation. In a simplified manner the added value can be defined as the sum of the operating profit, calculated depreciation and paid salaries and taxes within the sector. Therefore, the Development Fund is of the opinion that added value is the best indicator for measuring the growth in the knowledge-based economy. The higher added value can be created by increasing the global competitiveness of the Estonian economy i.e. a greater amount of scalable products and services can be offered and exported.
The Smiling Curve that was introduced by Stan Shih,3 the CEO of Acer, is a good example to explain the importance of higher added value. Figure 5 shows that the activities related to R&D, branding and design are the actions that create the largest added value within the whole production chain. Marketing and after services on the right side of the curve also create high added value. It is especially important for Estonia to develop the capacity to create higher added value, as well as the product development capacity in all growth areas. Increasing the share of knowledge-based economy in the structure of the whole economy is the most important factor that could help to trigger the next phase of economic growth in Estonia.
The statistics on funding research could be considered as an indicator of the co-operation between research and business but unfortunately, this information is aggregated. The general numbers of private and public expenditure on research and development are known, but funds given to different fields, such as biotechnology, etc. remain unspecified. On one hand, this is due to the differences in, and non-overlapping of, classifiers, on the other hand, due to the lack of adequate data. For example, the data originating from the Estonian Research Council includes only the funding that comes from the budget of the Ministry of Education and Research. The Estonian Research Information System pools most of the research projects but does not necessarily give the whole picture of the project based research funding as the holders of grants do not have the obligation to enter their project into this system. Therefore, there is a firm basis to believe that a great number of projects and funds allocated to them are left out of the system. There is no data available on projects funded by different ministries. The information concerning projects should be looked at more thoroughly and analysed more comprehensively, especially from the point of view of growth areas covered in this report.
The indicator used widely to measure the level of funding of research – the share of R&D costs in GDP – is not, on our opinion, adequate as R&D costs include investment in fixed assets that, by definition, is used to update the production process or the product (e.g. a new plant or any other large-scale investment). For example, the R&D costs of private processing industry during the period from 2010 to 2012 were mainly related to the investment in fixed assets (more detailed information at stat.ee) and it is known that it has been made by one or two larger players in this field. Therefore, the R&D spending by the rest of the private sector is rather modest and without additional investment in fixed assets it will be very difficult to achieve the target of 3% of the GDP set out for the year 2020. Taking the latter into account, this indicator will be discarded from the present report.
The Enterprise Estonia’s statistics on the number and scope of contracts between universities and private businesses is considered as the most reliable source describing the relations between research and business. It reflects the current level of co-operation between universities and businesses and the monetary contribution of enterprises in research and development. From the point of view of development monitoring it is important to gather information on such contracts and to do it also by growth area.
3 Choice of growth areas and domains of smart specialisation
The basic documents on smart specialisation4 adopted by the European Commission emphasise that in the case of smart specialisation the focus of choice should be on domains and activities and not on sectors. It is important to find a suitable balance between the activities of sectors and micro-levels whose development helps to trigger substantial advancement in a certain sector or within a group of companies.
In the case of Estonia, we also have to consider the fact that while in other European countries smart specialisation has a regional dimension whilst Estonia forms, due to its smallness, only one region. Deriving from that, the selection of domains should be wider than in larger countries as the barriers stemming from domains are nationwide in Estonia.
Domains should not be fixed for the whole period from 2015 to 2021. Due to the fact that choosing domains means that certain trends or activities are favoured, there is always a risk that some of the choices prove to be wrong. Market and technology demand cannot be predicted by 100% accuracy and, therefore, the chosen domains should be reviewed periodically and, if necessary, changed. The Development Fund is of the opinion that the choice of domains should be reviewed after every two years and, if necessary, some of the domains should be added, and some removed.
The more detailed description of domains and their selection process are presented in sector-specific reports.
Figure 2 shows the differences in the use of technology in different growth areas. For example, the ICT as a horizontal technology is used mainly in other sectors. Where it comes across health care sector the focus is mainly on e-health while if it merges with the processing industry the emphasis is on the automation of the industry. As to the knowledge-based construction many other technologies are involved, such as ICT, science of materials and energy technologies).
The domains of smart specialisation have to be selected in a manner that ensures that the selected domains maximise the added value (absolute value) of the Estonian economy by the year 2020. This can only happen as a result of co-operation between business and research. Thus, it is necessary that all the chosen domains have, or are likely to have, business that is ready to use R&D investments. It is equally as important to have a scientific basis that supports businesses by developing the necessary technology or by offering the competence necessary for its implementation.
Growth areas have a different economic nature and, therefore, the activities necessary for achieving higher added value differs by area. Hence, different indicators and objectives are established for each growth area.
Two substantial steps should be taken while choosing domains.
- The analysis of global trends. Domains have to be selected from the areas where the global consumption is likely to increase i.e. it has to be a developing area.
- The analysis of Estonian business and research situation. The domains of growth areas have to be selected in the manner that ensures that both sides are represented and ready for co-operation. In addition to that the business must be globally competitive when using the outcomes of research and development.
The relevant analysis was carried out by the Development Fund and the experts involved on the basis of crowdsourcing model. The domains that were selected and described in other growth area reports (e.g. e-health, automation of construction, etc.) were not described in detail in the choice of domains of the growth area of ITC. The involvement of the sector-specific focus group by the Development Fund, interviews carried out with representatives of companies, state and educational institutions and professional associations contributed substantially to the choice of domains.
The Development Fund makes the proposal for selecting growth areas and their domains. The choice has to be confirmed by the Steering Committee of Smart Specialisation that consists of the representatives of the Ministry of Economic Affairs and Communications (MEAC), the Ministry of Education and Research (MER), the Ministry of Finance, Strategy Unit of the Government Office, the Universities Estonia, the Estonian Chamber of Commerce and Industry and the Estonian Service Industry Association.
4 Measures of smart specialisation
Smart specialisation measures are divided between two ministries – Ministry of Economic Affairs and Communications (MEAC) and the Ministry of Education and Research (MER). The total amount of measures accounts for 142 million euros. The money is divided between five measures.
- Co-operation networks – technology development centres and clusters (MEAC)
- Start-up Estonia programme (MEAC)
- Policies related to demand (MEAC)
- Applied research measure (MER)
- University grants related to the area of specialisation (MER)
Figure 4 introduces the four types of barriers that hinder the development of a knowledge-based economy. The measures to alleviate or terminate the barriers are also added. A more detailed description of the measures and sector-specific differences is presented in the following chapters of this report.
5 Abbreviations and definitions
BIM – Building Information Modelling
BTP – Biotechnology Programme
CLT – cross laminated timber
ERDF – European Regional Development Fund
ETAg – Estonian Research Council
ETIS – The Estonian Research Information System
HCP – health care provider
ICF – Industry Foundation Classes
ICT – information and communications technologies
IFD – International Framework for Dictionaries
IMECC – Innovative Manufacturing Engineering Systems Competence Centre
IPD – Integrated Project Delivery
KBFI – National Institute of Chemical Physics and Biophysics
LG – local government
MA – Ministry of Agriculture
ME – Ministry of the Environment
MER – Ministry of Education and Research
MEAC – Ministry of Economic Affairs and Communications
MSA – Ministry of Social Affairs
NAMUR – nano-materials – research and application
OSCC – Oil Shale Competence Centre
PRD – policies related to demand
RKAS – State Real Estate Ltd
R&D – research and development
RDI – research, development and innovation
SuE – Start-up Estonia
SCC – Scientific Competence Council
S3 – smart specialisation
S3 measures – university grants, applied research, co-operation networks (technology development centres, cluster), policies related to demand, Start-up Estonia 6
TDC – technology development centre
TIPS – The Research and Innovation Policy Monitoring Programme
TT – technology transfer
TU – Tallinn University
TUT – Tallinn University of Technology
UT – University of Tartu
VKG – Viru Keemia Grupp
Development phases of start-ups7 8
The early phase i.e. pre start-up phase (sub-phases: idea, forming of a concept, dedication) when the first actions are taken, a business model is prepared, the market entry is tested, the potential customer group and markets are defined, the amount of capital needed in this phase is usually up to 200,000 euros;
the growth phase i.e. the start-up phase (sub-phases: validation, scaling, expansion), product development and marketing, by the end of this phase customers are found on some markets and the company starts to scale its activities at new markets, the need for capital is usually from 200,000–3,000,000 euros.
Scalability – The capability to increase the volume of sales and production in the manner that keeps the profitability of the company at the same level or increases it. The production and marketing costs per unit increase substantially slower that the volume of sales 9
SME – Small and medium-sized enterprises. According to Article 2(2) of Annex I to Regulation (EC) 800/2008 of the European Commission the medium-sized enterprises are the ones that employ fewer than 250 persons and have an annual turnover not exceeding 50 million euros, and/or whose an annual balance sheet total does not exceed 43 million euros. The enterprises that employ fewer than 50 persons and have an annual turnover that does not exceed 10 million euros are deemed to be small.