TRANSITION REPORT 2014 Innovation in Transition

Box 5.1. Knowledge-based Estonia

Back in the early 1990s Estonia had similar conditions to Latvia and Lithuania in terms of innovation and the development of ICT. These countries have since followed separate development paths, and they now differ significantly in these areas. Estonia is currently the highest scoring transition country in terms of innovation potential, while Latvia and Lithuania lag some way behind (see Chart 5.1.1).

Estonia began to develop its ICT infrastructure at an early stage. When it gained independence, only half of the population had a phone line. By 1997, however, 97 per cent of Estonian schools had internet access. The first public Wi-Fi area was created in 2001, and most public locations now have wireless internet access. Indeed, by May 2013, 4G services covered over 95 per cent of the country. Estonian citizens can now use the internet to vote, transfer money and access information that the state holds on them – all using the identity card introduced in 2002.

Estonia’s innovation policy formally began in 2000 with discussions regarding the first Knowledge-Based Estonia (KBE) strategy, which covered the period 2002-06. This strategy drew on the experiences of Finland and Sweden,21 taking account of specific development opportunities, the existing research potential and the country’s economic structure, as well as other Estonian development strategies.22 The two main objectives were updating Estonia’s knowledge pool and increasing the competitiveness of its companies. The three key areas for Estonian research, development and innovation (RDI) were (i) user-friendly information technology and the development of an information society; (ii) biomedicine; and (iii) material technology.23

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In order to achieve these objectives, the KBE strategy established a set of measures spanning four key areas (see Table 5.1.1). These measures sought to increase gross domestic expenditure on R&D (GERD) to 1.5 per cent of GDP by 2006. They also aimed to rebalance expenditure on research and development, seeking to shift the breakdown between the two from 90:10 to 60:40 by 2006. To increase the effectiveness of its RDI system, Estonia adopted location-based policies, creating science parks and regional business incubators. Lastly, Estonia used international cooperation not only as a means of attracting foreign knowledge and technology, but also as a way of building research teams with critical mass and avoiding “brain drain”.

The 2002-06 programme produced mixed results. In terms of R&D financing, GERD accounted for 1.13 per cent of GDP in 2006, below the target level. As a result of this shortfall in financing, national R&D programmes in selected key areas were not launched and financial support for graduate and postgraduate studies did not increase substantially. However, growth in corporate R&D outpaced growth in public-sector R&D. By 2006 the corporate sector accounted for 44 per cent of GERD, exceeding the target by some distance. Estonia was also successful in attracting foreign R&D investment, which grew from 13 to 16 per cent of GERD, higher than the EU average of 7 to 8 per cent. This was evidence of stronger links between Estonian RDI and the rest of the world.24

The KBE strategy for the period 2002-06 has been followed by similar strategies for the periods 2007-13 and 2014-20. A number of governmental and independent bodies have conducted assessments looking at the progress made under the first two strategies.

Each strategy has taken account of the experience and expert recommendations resulting from the preceding period and set more ambitious objectives, with targets increasing in number and scope (see Table 5.1.2). The key areas have been adjusted over time, but the overall priorities have not. The focus continues to be on ICT, health technology and services, and more efficient use of resources.25

This “systemic” approach to innovation policy has produced results. In 2012 Estonia’s GERD stood at 2.2 per cent of GDP (higher than the average across the EU-15). Meanwhile, the percentage of GERD accounted for by the corporate sector had risen further to stand at 57 per cent, approaching the EU-15 average (see Charts 5.1.2 and 5.1.3). Estonia was also one of the few EU countries that broadly maintained the same level of spending on public R&D during the crisis. In both Latvia and Lithuania, on the other hand, government-financed GERD declined as a percentage of GDP during this period.

Improvements can also be seen in terms of scientific and innovation output (see Chart 5.1.4). Estonia still lags some way behind Finland when it comes to patent applications, but it is catching up in terms of published articles. Moreover, in 2010 similar percentages of Estonian and Finnish firms introduced product or process innovations. Meanwhile, Latvia and Lithuania both trail behind Estonia for all indicators of R&D spending and output.

CHART 5.1.1

Source: World Economic Forum (2013) and authors’ calculations.
Note: The scores for each indicator range from 1 to 7, where 1 corresponds to the worst possible outcome and 7 corresponds to the best possible outcome. Scores for “macroeconomic stability” are not shown, given the extraordinary circumstances affecting this broad framework condition in the review period.

TABLE 5.1.1

Major tools of the KBE strategy for the period 2002-06
Key areas Types of programme/initiative

Financing of R&D

Targeted financing

R&D grants and loans for firms and research institutes

Infrastructure of R&D institutions

Risk capital scheme

Development of human capital

In-service training scheme for engineers and specialists

Funding for masters and doctoral studies (including studies abroad)

Funding for university infrastructure

Scheme to involve PhD graduates and post-doctoral students in RDI

Multifaceted courses allowing students and researchers to acquire management and business skills

Increasing the effectiveness of RDI systems

Regular collation, storage and dissemination of scientific information

Innovation awareness programme

Training programme focusing on the management of RDI

Science and technology parks in Tallinn and Tartu and incubators in the regions

Liaison between research and industry, and research-intensive spin-offs

International cooperation

Stronger Estonian participation in international RDI networks

Network of Estonian technological attachés

Source: Reid and Walendowski (2006).

TABLE 5.1.2

Objectives of KBE strategies
Period Objectives


An updated knowledge pool

An increase in the competitiveness of Estonian companies


Competitive and more intensive R&D

Innovative entrepreneurship, creating new value in the global economy

An innovation-friendly society targeting long-term development


A diverse range of high-quality research in Estonia

R&D that acts in the interests of Estonia’s society and economy

R&D that makes the structure of the economy more knowledge-intensive

An active and visible role for Estonia in international RDI cooperation

Source: KBE 2002-06, KBE 2007-13 and KBE 2014-20.

CHART 5.1.2
  EU-15 Estonia Latvia Lithuania Finland
  • Government-financed GERD
  • Other GERD

Source: Eurostat and authors’ calculations.
Note: Other GERD includes business enterprise, higher education and private non-profit GERD.

CHART 5.1.3

Source: Eurostat and authors’ calculations.

CHART 5.1.4
  Estonia Latvia Lithuania Finland  
  • Published articles per million inhabitants
  • Patents per million inhabitants
  • Percentage of innovative firms

Source: Eurostat, Web of Science and authors’ calculations.
Note: Patents per million inhabitants are calculated as patent applications to the European Patent Office by priority year per million inhabitants. The percentage of innovative firms is taken from the Community Innovation Survey and includes product and process innovation, but not organisational or marketing innovation.