OECD Reviews of Innovation Policy: LithuaniaAssessment and Recommendations

Gernot Hutschenreiter

Giulia Ajmone Marsan, Alistair Nolan, Pluvia Zuniga

Science and Technology Policy Division

OECD Directorate for Science,Technology and Innovation

Vilnius, 28/29 June 2016

OVERVIEW

• The Review of Lithuania’s Innovation Policy

• The review process

• Strengths and weaknesses

• Assessment and recommendations

Framework conditions for innovation

Business innovation

Human resources

Public research

Governance of the innovation system

International linkages

The OECD Reviews of Innovation Policy

• In 2005, the OECD/CSTP decided to launch a demand-driven programme of Country Reviews with three main objectives:

“Additional service”: help individual countries to derive more benefits from OECD work in their concrete context

“Learning tool”: deepen our understanding of key issues of science and innovation by analysing them in concrete national contexts

“Outreach tool”: facilitate the participation of selected partner countries in mainstream OECD work and help disseminate OECD work

• Scope: Comprehensive analysis of the respective national innovation system, with a focus on the role of government

policy

• Completed:

Luxembourg (1), Switzerland, New Zealand, South Africa, Chile, Norway, China, Greece, Hungary, Korea, Mexico, Russian Federation, Peru, Slovenia, Sweden (1), Croatia, Colombia, the Netherlands, France, Viet Nam, Luxembourg (2), Sweden (2), Malaysia

• Today’s launch:

Lithuania

• Ongoing:

Costa Rica, Kazakhstan, Finland, Norway

• Expression of interest from OECD Members, incl. innovation leaders, and Partners

Country-specific Policy Reviews

Regional Reviews / Platforms

Follow-up

Past, present and upcoming Reviews

• Bilateral:

Luxembourg, Chile, New Zealand, South Africa, Sweden, Norway

• Collective:

Roundtable in Beijing (2011), following up on the China Review

• Innovation in Southeast Asia (SEA) regional innovation review, Viet Nam and Malaysia reviews. OECD SEA Regional Programme –Innovation pillar

• Latin America and Caribbean Innovation Initiative

• Other world regions under discussion

The review process

• Request by the Lithuanian authorities (2014)

• Preparation of a Background Report by a team of nationalExperts (1st half of 2015)

• Fact-finding mission of the OECD Review team in Lithuania(September 2015)

• Presentation and Peer Review at the OECD Working Party forTechnology and Innovation Policy (December 2015)

• Drafting of final report by the OECD Secretariat

• Consultations on draft final report

• Presentation in Vilnius, 28-29 June 2016

• Final publication

Background Report

Fact-finding mission

Draft report

Consultations

Peer-review

Publication

OECDReviewed

country

Peers

Reviewed

country

OECD Experts

Terms of Reference

OECD

OECD

OECDReviewed

country

OECD

OECDHigh level

launch event

Experts

Experts

Reviewed

country

Reviewed

country

Procedure for a standard review

Peers

Note: GDP at constant prices, constant US PPPs. Index, 2000 = 100

Source: OECD National Accounts Statistics, December 2015.

GDP growth performance before and after the crisis

100

110

120

130

140

150

160

170

180

190

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

LTU LVA EST HUN CZE SVN EU28

Note: GDP at constant prices, constant US PPPs. Index, 2000 = 100

Source: OECD National Accounts Statistics, December 2015.

Productivity is still lagging

Note: “Within” measures the contribution to total labour productivity growth from productivity growth within sectors. “Shift” measures the contribution resulting from the movement of labour between sectors. “Cross” indicates whether the within-sector and between-sector effects are complementary. A negative value for the latter indicates that productivity growth is particularly strong in sectors that have a contracting labour share.

•Source: OECD (2016a), OECD Economic Surveys: Lithuania. Economic Assessment, based on data from Eurostat database, http://dx.doi.org/10.1787/888933338632.

Productivity growth has declined after the crisis

+ -• Strong macroeconomic performance, leading

to convergence

• Largely favourable framework conditions for innovation and entrepreneurship – and the establishment and development of start-ups

• High share of tertiary graduates, incl. in S&T

• New research infrastructures

• Pockets of research and innovation strength in some areas, e.g. photonics (lasers, photoelectronics, LEDs) and biotechnologies

• Improved research system governance

• Increased transparency and stakeholder involvement in STI policy formulation

• Improved regulatory framework for commercialisation of public research

• Growing small and medium-sized SME participation in the EU’s 7th Framework Programme and Horizon 2020

• Specialisation in low/medium tech industries

• Very low business activity/investment in R&D and innovation

• Low absorptive capabilities of many businesses

• Few links between research institutions and businesses

• Fragmentation and lack of co-ordination in STI policy making and implementation, cumbersome legal procedures

• Weak evaluation culture and strategic intelligence on innovation policy

• Demand-side policies are under-utilised

• Too many sub-critical actors in the HEI sector striving for excellence of fundamental research, while paying less attention to applied research

• Technology transfer and research commercialisation unconnected to university/PRO culture

• Weak international STI linkages

Main strengths and weaknesses of the innovation system

+ -• Increased attention on research& innovation• Focus on strengthening innovation

capabilities in a wider range of firms• Improve horizontal policy coherence and co-

ordination • Make business participation a permanent

feature of STI policy making• Improved support for business innovation • Reform the research sector to increase

international competitiveness (e.g. more competitive funding, international peer review, streamlining)

• Strengthen the contribution of universities & public research organisations to innovation

• Pay more attention to societal challenges• Make effective use of research infrastructure

and the research potential created by the “Valley” programme and open access centres

• Unfavourable demographic trends

• Continued difficulty in attracting and retaining highly-skilled workers in the face of mounting global competition

• Decreasing numbers of graduates and PhDs

• Stagnation of business investment in R&D and innovation

• Decline of EU funding for STI and limited ability of Lithuania to support innovation programmes from the national budget

• Failure to adapt STI governance to evolving needs

Opportunities and threats

Lithuania, GERD and its components, in EUR million

Source: Eurostat

R&D expenditure on the rise … but to a large part due to the higher education sector

50

100

150

200

250

300

350

400

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

GERD BERD GOVERD HERD

Lagging innovation outputCitable documents per million population

Source: Scimago Research Group

Patent applications to EPO by priority year per

thousand HRST

(persons with tertiary education (ISCED) and/or

employed in science and technology)

Source: Eurostat and background report

0,0

0,2

0,4

0,6

0,8

1,0

1,2

2003

2012

0 500 1000 1500 2000 2500 3000 3500 4000

Latvia

Hungary

Poland

Lithuania

Slovak Republic

Czech Republic

Estonia

Slovenia

Finland

Sweden

Denmark

2014 2005

Innovation expenditure mainly consists of acquisition of machinery and equipment

0

10

20

30

40

50

60

70

80

90

100

LVA LTU SVK EST CZE HUN SWE FIN DNK

Other external knowledge Acquisition of machinery, equipment and software Extramural R&D Intramural R&D

Source: Eurostat.

Innovation exenditure by type, 2012

Overall supportive framework conditions for innovation … with some exceptions

Since independence and accession to the EU (2004), Lithuania has made muchprogress in providing good framework conditions for innovation:

• Improving of competition through eased product market regulation --PMR index inline with OECD average

• Good business environment -- In the top-20 of the WB Doing Business Indicators.Recent reforms facilitating new business creation (number of days and cost to start abusiness have decreased considerably over the past decade)

Some areas require attention, however:

• Firms experience difficulties in accessing finance. 91th out of 140 countries in the easeof access to loans (WEF Competitiveness). The VC sector shows improvement recently(Baltic Innovation Fund; JEREMIE fund)

• Restrictions on employing non-EU workers

• Relatively large informal economy – affecting competitiveness of the formal sector

• State of implementation of recent regulatory reforms (OECD Regulatory Policy Review)

Improving framework conditions for innovation

Recommendations:

• Strengthen finance for high-potential growth firms through the developmentof equity markets and debt finance, and explore possibilities to develop thebusiness angels sector

• Consider mentoring and content support to increase quality of proposals

• Continue to make bankruptcy procedures more rapid and less costly

• Monitor the impact of current corporate tax regime and ensure it does notcreate obstacles to the growth of young firms

• Continue improving the regulatory framework, paying attention to theefficiency of government institutions

Recommendations:

• Strong emphasis on research and science-driven innovation in businessinnovation policy. More than 80% of firms are in low and medium lowtechnology industries, in which incremental innovation and technologyadoption (including managerial and international standards) are key to catchingup.

Innovation expenditure per company is low and most of it is related to acquisition ofmachinery and software (70%) against 5-15% in innovation leaders;

Most of its export activity concerns traditional industries, with the exception of afew high-technology products. In 2007-13, Lithuania achieved comparativeadvantages in trade in: food, drink and tobacco products, raw materials, mineralfuels and related materials, and other manufactured goods.

• “Missing” SMEs and incremental innovation in the policy mix. Business R&Dand innovation have so far been focusing mainly on two target groups:companies already active in innovation and R&D and potential high-growthstart-ups.

• Enhancing knowledge transfer through FDI and linkages to GVCs. Innovationwould benefit from greater international spillovers from FDI and improvementsin firms’ absorption capacity and upgrading.

Foster innovation in the wider business sector

Business R&D expenditure remains low

BERD as a percentage of GDP in selected countries, 2003 and 2014

Source: Eurostat

0,0

0,5

1,0

1,5

2,0

2,5

3,0

Latvia Lithuania SlovakRepublic

Poland Estonia Hungary CzechRepublic

EU 28 OECD Slovenia Denmark Sweden Finland

%

2003 2014

Source: Eurostat.

Average innovation expenditure per innovating company, 2012

In 1 000 EUR, percentage of turnover in brackets

2.63% 0.79%1.38% 1.79% 1.10% 2.27%

2.79%

3.20% 3.64%

0

200

400

600

800

1000

1200

Latvia Lithuania Estonia Czech Republic Hungary Slovak Republic Finland Denmark Sweden

0

5

10

15

20

25

30

35

Product innovativeenterprises

Process innovativeenterprises

Organisational innovativeenterprises

Marketing innovativeenterprises

Lithuania EU28

%

Share of innovators in total firms, 2010-12

Low investment in broader

innovation activities

(relative to sales)..

..which results in a weaker

propensity to introduce

innovations (particularly

product and process), but

this rate is improving :

• 32.9% of firms introduced

some type of innovation,

compared with 49% average in

EU28

• The share of innovating firms

increased by almost 11%

between 2010-12 and 2012-14,

reaching 40% of total firms

Broader innovation investments are also low compared to peers

Difficulties to innovate are accentuated in SMEs

0

5

10

15

20

25

30

35

40

45

Hungary Lithuania SlovakRepublic

Latvia Slovenia CzechRepublic

EU28 Estonia Denmark Finland Sweden

Percentage of SMEs introducing technological innovation Percentage of SMEs introducing marketing innovation

%

• Only 16.1% of SMEs introduced product or process innovations, which is half the

EU28 average (32%).

• Some 25.2% of Lithuanian SMEs introduced marketing or organisational innovations, a

figure near to the EU28 average (34%) (Figure 4.8).

• Only 14% of SMEs innovate in-house while the EU28 average is twice as high (29%).

• Lithuanian SMEs rely mostly on external sources of knowledge to innovate.

Recommendations:

• Put more emphasis on industry-needs driven, low-barrier schemes to attract more companies to launch innovation activities beyond R&D.

• Increase participation of new entrants (firms) in R&D and innovation.

Introduce or strengthen competence-building schemes targeted to firms not yet engaged in R&D and innovation; provide assistance in the preparation of proposals

Facilitate SMEs’ connectivity, especially in the acquisition of human resources, e.g. facilitating links with the education system and supporting hiring of qualified personnel

• Improve the policy mix both in terms of types of innovation and demand instruments: Increase attention to support to incremental forms of innovation and non-technological

innovation such as managerial and organisational innovation, and service-sector innovation

Continue developing demand-side policy measures. The most promising might be public procurement of innovation. This mechanism, however, requires careful design and implementation

• Develop a long-term strategy for the support of collaborative networking arrangements among firms. Support only those that have real industry

involvement/commitment and a joint agenda for collaborative research, innovation and/or education and where business shows commitment to invest.

Foster innovation in the business sector

Foster the quality of human resources for innovation (1)

• High share of 20-29 year old in tertiary education (well above EU average)… but significant skills mismatch and low returns of university education

• Below OECD average performance in PISA

• Exacerbated by “brain drain” and weak inflows of skilled workers andstudents (number of foreign students among the lowest in Europe, almostno non-EU doctoral students)

• => The Lithuanian authorities launched a series of measures

Foster the quality of human resources for innovation (2)

Recommendations:

• Strengthen the human resource base for innovation in order to supplybusinesses with the skills they need to become more innovative. Map the skillsneeded by companies and encourage dialogue between HEIs and business in thedevelopment of tertiary education curricula and programmes.

• Strengthen and extend measures promoting the development of the VETsystem.

• Address the relatively low performance of students in secondary education

• Continue addressing the problem of brain drain and lower barriers to attractand retain talent from abroad, including non-EU citizens.

• Foster linkages between Lithuanian researchers and research units abroad(e.g. through sabbaticals, visiting periods abroad (exchanges), or jointresearch programs). These measures should target both young researchersand senior research staff.

• Lithuania has a large number of HEIs (22 universities and 24 colleges) and state researchinstitutes (13, as a result of a 2010 merger).

• HE sector recently reformed (in 2009); introduction of competitive funding (now at 50%of total) and new rules on IP to facilitate commercialisation.

• LTM has grown well into his role as funder of competitive grants. However, it manages avery high number of programmes often of small size. Need for more investments inmobility programmes and support for early-stage researchers. Need for more co-operation with MITA on applied research programmes.

• Lithuanian universities and research institutes overall perform below EU average withrespect to scientific production and collaboration, with some pockets of excellence.

• Weak collaboration with the business sector. Example of the Valleys programmes.Initially started to facilitate public research - business co-operation (with co-ordinationbetween MES and ME) but resulting in a programme to support public researchinfrastructure, with little business sector involvement.

Enhance the performance of the higher education sector (1)

High number of HEIs for a small country

0

5

10

15

20

25

30

Number of HEIs per million inhabitants

Source: OECD elaboration of the ETER database.

Lithuania has moved towards a university-centered but not yet firm-centered innovation system

30

40

50

60

70

80

90

100

20 30 40 50 60 70 80 90

% s

har

e o

f H

ERD

in p

ub

lic R

&D

sp

end

ing

% share of BERD in total R&D spending

Lithuania

Sweden

Poland

Slovenia

SlovakiaHungary

Finland

Estonia

Latvia

Czech Republic

Denmark

Public research-centered

innovation system

Firm-centeredinnovation

system

University-centered

publicresearch

Public lab-centered

publicresearch

Source: Eurostat and OECD.

Enhance the performance of the higher education sector (2)

Recommendations:• Consider consolidating the higher education institutional landscape, including through

possible mergers. Currently, there are (too) many universities of sub-critical size, which preventsthem from becoming visible and strong actors in international research and innovationnetworks.

• Foster the research management capabilities of research institutions and units to preparethem for international co-operation and collaboration with business.

• Provide HEIs with incentives to collaborate more closely in education and research.

• Turn the international research assessment of Lithuanian research units into a systematic,built-in feature of the research system and apply a broad set of performance indicators.

• Provide stronger incentives for research organisations to develop more systematic andprofessional technology transfer structures and activities. Require universities and otherresearch organisations to develop technology transfer strategies and action plans withsufficiently ambitious objectives and indicators focusing on relevance and impact. Allocate partof basic funding, or part of funding from selected schemes (including infrastructure funding), onthe basis of the quality of technology transfer strategies and action plans, and later based onachieved results.

• Define the objectives, and ascertain the feasibility and long-term viability of the portfolio ofS&T Parks more clearly, in the context of the more professional and business-oriented servicesthat universities need to develop and in line with the thematic specialisation defined in RIS3.

• Steer the valleys and open access centers towards better meeting industrial needs.

• The internationalisation of Lithuania’s STI activities has made progress butremains weak (e.g. international publications and patents).

• Participation in European programmes has picked up, including for SMEs.

• Need to further strengthen international linkages in STI.

• To be effective, support for internationalisation needs to go hand in handwith the improvement of the domestic research base.

Supporting international knowledge linkages (1)

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2012

2005

Source: Background Report.

International scientific co-publications per million population

Supporting international knowledge linkages (2)

Recommendations:

• Further promote participation in European and other international STI programmes by allocating more resources, targeting both public sector research institutions and firms.

• Consider developing an overarching national internationalisation strategy involving all relevant ministries and stakeholders to promote alignment of the internationalisation strategies of individual STI actors.

• Support opportunities and introduce incentives for international collaboration and engagement in selected R&D and innovation support schemes, in particular aimed at R&D and innovation performers in the business sector.

• Continue the support measures for internationalisation of the public research system. Based on lessons from the previous EU Structural Funds programming period from evaluations of past internationalisation support measures, decide what type of measures should be continued, which measures did not have an impact and what gaps still need to be addressed.

• Support institutional capacity building at universities and research centres to enhance internationalisation as a core element of institutions’ strategies. RIS3 can help decide which domains offer the best opportunities for linkages with international R&D and business communities.

Improve public governance of the innovation system (1)

• Recent improvements in governance for STI thanks to the smartspecialisation strategy process (interactive, involving all key stakeholders,including industry)

• Several strategies for innovation, in some cases overly ambitious targets

• Lack of horizontal co-ordination evident in the development of someinitiatives (i.e. Valleys and S&T parks); proliferation of some programmes STIpolicy remains fragmented, implemented by many different agencies

• Evidence-based policy making for innovation is emergent but there is scopefor improvement

Improve public governance of the innovation system (2)

Recommendations:

Strengthen agenda setting and strategic policy coherence

• Consider launching a review of all STI-related programmes, possibly under the aegis of a reinforced strategic council. Purpose: better alignment of high-level strategies, appropriate balances in objectives, targets, policy mix etc.

• Draw on recent experience (RIS3) and adopt an open, transparent, participative and evidence-based approach involving in industry.

Improve horizontal policy co-ordination

• Strengthening the strategic council’s role – e.g. with regard to optimising the policy mix and the set of innovation agencies – could help to sharpen the strategic orientation of Lithuania’s innovation policy and improve coherence.

Improve public governance of the innovation system (3)

Recommendations (ctd):

Reduce the fragmentation of institutions and support schemes

• Launch an institutional reform of STI policy implementation, with a view consolidate agencies and programmes, towards professionalised, multi-purpose agencies and larger programmes.

• Consider establishing a common information platform for following up support users (applicants and beneficiaries) and monitoring R&D and innovation support across agencies and schemes.

Improve strategic intelligence and evaluation

• Explore the strengths and weaknesses of different options for strengthening the development and use of high-quality strategic intelligence on STI.

• Follow principles of good practice in policy evaluation:

– making explicit a commitment to policy evaluation at the highest level,

– mandating evaluations when public funding is provided,

– insisting on developing data and evaluation strategies as a pre-requisite for the start of programmes,

– using a mix of evaluation methods (according to the nature of the policy or programme concerned, including evaluation by external and international experts), and

– committing to public diffusion of evaluation findings of publicly-funded programmes.

Thank you for your attention

If you need further information, please contact

Gernot.Hutschenreiter@oecd.org

Giulia.AjmoneMarsan@oecd.org

Pluvia.Zuniga@oecd,org

Web resource

www.oecd.org/sti/innovation/reviews