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Latvia - RIO Country Report

RIO Country Report Latvia 2015

The annual RIO Country Report offers an analysis of the R&I system in Latvia, including relevant policies and funding, with particular focus on topics critical for EU policies. The report identifies the main challenges of the Latvian research and innovation system and assesses the policy response.

R&I Challenges
Continuing the reform in the public research system and strengthening public R&D capacity
Challenge description: 

A small country like Latvia until recently used to have a total of 150 registered research institutions. The practice of registering any qualifying, self-defined small group of researchers as a research unit results in a structure that is fragmented and duplicative across all areas of research. None of the country’s universities is among the top universities in Europe. Various reports state that the main challenges in the Latvian public research system are an inadequate public funding system, low levels of internationalisation, insufficient human resources and a lack of internationally-approved accreditation. Public expenditure per student is among the lowest in the EU, and the financing model until recently lacked performance-based components.

The Council CSR 2014 included a recommendation worded as follows: “Step up implementation of the higher education reform, in particular through the establishment of an independent accreditation agency and a financing model that rewards quality. Take steps for a more integrated and comprehensive research system also by concentrating financing towards internationally competitive research institutions.”

Inadequate public funding in a fragmented research and innovation system (fragmentation makes an increase in public financing ineffective) is naturally leading to a lack of scientific excellence (for example, the share of scientific publications in the top 10% of the most cited is 4% and falling and the licence and patent revenues are very low). An adequate quality of the science base is a necessary precondition for improving knowledge transfer and for addressing the needs of local industry (see challenge 1). In that context, the fact that public R&D intensity reached only 0.44% of GDP in 2014 and remains excessively dependent on EU structural funds signals the existence of a clear challenge.

The scientific excellence challenge is exacerbated by the lack of human capital and low level of internationalisation. The number of new doctoral graduates per thousand population aged 25–34 in Latvia is among the lowest in the EU (0.95 in 2012, EU average: 1.81). The proportion of foreign university students and professors in Latvia is also low and the national requirement that most teaching and research must be done in Latvian (“Official Language Law") is a further obstacle.

Policy Response: 

Large-scale reforms of HEIs and PROs are currently under way to improve the quality and relevance of public R&D. As part of this process, research institutions have been assessed by international experts (in co-operation with the Nordic Council of Ministers and NordForsk, undertaken by Technopolis) and the results came out in 2014. According to the assessment, only 15 out of 150 evaluated research institutes and research groups in HEIs received the highest evaluation and were recognized as international players.

As a result, the first step after amendments in the Regulation on “Order of calculation and allocation of institutional funding to research institutes” was to reduce the number of registered research groups to 90. The reform is currently continuing with further consolidation by merging the weaker institutions with excellent ones, by consolidating similar research structures and by limiting financial support only to PROs which after the consolidation process will have more than 25 FTE of research personnel (in several specific sectors 10 or 5). In addition, the government provided (on limited competition basis) additional €9.9 m of funds to support excellent institutes to develop their strategy and to integrate weaker institutions until November 2015. The reform also entails an increase by 10% of the calculated basic infrastructure grant to those research institutions which received an evaluation score 4 or 5 (i.e. are among excellent science organisations) since 1 January 2015 and excludes those whose evaluation marks are 1 or 2 (starting from 1 January 2016).

In addition, a reform of the way universities are financed is taking place. A new quality-targeting financing model has been developed, based on the recommendations from a recent World Bank study, and some performance-oriented funding will be piloted in 2015-2016. The WB recommendations suggest a three pillar model which foresees a combination of stable financing (basic funding – pillar 1) with performance based component using a formula with performance indicators (pillar 2), and an innovation component based on three mission target agreements with the Ministry of Education and Science (pillar 3). The legal acts regarding the above-described model have been adopted by the end of 2015.

In terms of relevant policy measures aimed at increasing the scientific excellence, in the 2014-2020 programming period some of the programs are: Strengthening the institutional capacity of scientific institutions (€15.25 m), Grants for post-doctoral research (€64 m), Practically oriented research (€76.5 m), Development of the R&D infrastructure (€100 m).

Policy assessment: 

Latvia has embarked on ambitious and large-scale reforms to address the problems in the public research system. It's currently on track to finalize the process of consolidation of research institutions although the pace could be faster. The country has also made gradual progress in setting up an internationally approved accreditation system and the plans to introduce a new financing model are indicatively foreseen for 2016. The financing and the consolidation processes are slowed down by a lot of vested interests – a reluctant big part of the research community whose funding would be cut as a result of the reforms.

Notwithstanding the ambitious reforms, the most fundamental problems of the Latvian public research remain the very low level of research funding across the whole system and the lack of orientation of research objectives towards the needs of industry. Demographic trends of migration and brain drain exacerbate the issue further although the number of PhD graduates has been steadily rising in the recent years.

Last but not least, the entrepreneurial culture is still underdeveloped in Latvian universities and thus requires more effective incentive systems, e.g. modifications to the career criteria for researchers, university IPR policies, critical evaluation of the effectiveness of the existing knowledge transfer offices, and entrepreneurial training. Instead of encouragement for researchers to spin off and convert their knowledge into products, there is a tendency to unnecessarily complicate such activities, for example by requiring all research costs to be covered upfront, before the attempt to convert research into product shows any signs of commercial viability.

Encouraging private sector innovation capacity, investment and collaboration with science
Challenge description: 

BERD in Latvia is very low. In 2013 it was just 0.17% of GDP compared to the 1.29% EU-28 average. Even taking into account the growth of BERD in 2014 (to 0.24% of GDP), the level of BERD remains low compared to the benchmark. Moreover, the Innovation Union Scoreboard output indicators for Exports of medium and high-technology products as a share of total product exports as well as Sales of new-to-market and new-to-firm innovations as percentage of turnover are at the bottom, which signals very low innovation capacity of local companies. Another indicator of low innovation performance of the private sector is the share of innovative companies in Latvia - just 29.9% (for comparison, in Lithuania it is 34.5%, in Estonia – 56.8%, EU average - 52.9%). The Council Country Specific Recommendations for Latvia in the framework of the European Semester 2015 include an R&I recommendation connected to this challenge: "Better target research financing and incentivise private investment in innovation on the basis of the Smart Specialisation Framework".

The low innovation capacity both in terms of low technology absorption and investment readiness is rooted in several reasons. The first one is the industrial structure itself: the competitiveness of the Latvian economy is based on cheap labour force and processing of natural resources. The most prominent sectors in the Latvian economy are still the traditional ones (e.g. food, wood and timber) accounting for the largest share in value added and employment. The export structure is dominated by low or medium technology segments (more than 82% of total processing industries) and the share of manufacturing industry sectors is low.

In addition, competitiveness of the private sector is hampered due to a lack of collaboration with research institutes and universities. Evidence for weak knowledge transfer could be inferred by the low level of privately-funded public R&D expenditure (0.046% of GDP in 2014), by the low number of public-private co-publications per million of population (in 2013 Latvia had only 6.4 compared to 29 for the EU-28) and by the low number of researchers employed in business (the 0.09% value in 2014 locates it among the bottom in EU-28).

Finally, the 5 sectors that the RIS3 Strategy and the Industrial policy guidelines identify as future growth sectors are: (1) knowledge-based bio-economics), (2) bio-medicine, medical technologies, bio-pharmacy and biotechnologies, (3) advanced materials, technologies and engineering systems; (4) smart energy; (5) information and communication technologies (ICT).  These sectors could be viewed as "guidelines" that have the potential to lead towards structural changes in Latvia’s economy under proper conditions. These specific areas were identified as they possess not only observable export value gaps, but also have the potential for knowledge and competence development that could close the gap. However, solely focusing financing and development activities in these fields might not be enough as improvement in the absorptive capacity of the industry requires a big enough pool of qualified R&D specialists. Thus, the RIS3 in Latvia is focusing more on the development of human capital, and the strategy’s success in the priority development areas will be measured by the increase in the total number of R&D jobs (especially in the business sector) as well as investment as a percentage of GDP.

Policy Response: 

Latvia has introduced policy initiatives aimed at addressing the challenge of low business innovation capacity. The Council gave Latvia a CSR on the issue for the first time in 2012: "Design and implement an effective research and innovation policy encouraging companies to innovate, including via tax incentives and upgrading infrastructure". As a result, some policy instruments geared towards the industrial sector were launched in the end of 2012 and carried out in 2013 - 2015 (funded to a significant extent by the SFs):

  • Development of New Products and Technologies – implementation of 116 projects for the total financing of €37.6 m;
  • High Value-Added Investments - 107 supported projects with total financing of €134.4 m;
  • Introducing New Products and Technologies in Production – 107 projects for the total amount of €32.9 m were completed by the end of 2013;
  • New Product and Technology Development Programme in SMEs – innovation vouchers, total SF financing €2.85 m;
  • Competence Centres – 6 competence centres, acting as platforms for collaborative projects, are supported with total public financing in the amount of €53.2 m by 2015.

In addition, the Innovation Motivation programme ("Measures to Encourage Innovations and Business Start-ups") was also launched and as a result several educational, training and information measures have been implemented (e.g. a training course "Become an Entrepreneur in 5 days", the innovative business idea competition "Idea Cup 2014", etc.).

The Innovation vouchers and the Motivation programmes will be continued in the new programming period 2014-2020 and new ones are being planned, e.g. Conquering external markets (budget: €31.8 m) and a set of measures to increase the number high-growth enterprises (total budget €75 m). The Cluster programme will also be continued with a budget of €6.2 m with the aim to promote the collaboration between so far unconnected enterprises and research institutions, to improve the competitiveness of enterprises, to boost export volumes, and to promote the development of new products. As of 2014, the programme supports 11 cluster projects which involve at least 300 enterprises, more than 20 educational and research institutions, as well as several non-governmental organisations and local governments.

Last but not least, in 2013 the Saeima (Parliament) adopted amendments to the Law on Corporate Income Tax, which stipulates that from 1 July 2014 a new tax incentive is in force with the aim to encourage the investment of private sector in R&D, providing that certain corporate R&D costs are written off the year in which they arise with the application of value-enhancing coefficient of 3. Eligible costs are compensation of scientific and technical personnel, costs of services received from research institutions, costs of certification, testing and calibration services.

As regards knowledge transfer, relevant measures that have been implemented (and will be continued in the next programming period) include:

Technology Transfer Programme – two-tier program: first tier is focused on local HEIs/PROs and 8 TTOs were established in the main universities, the other is centralized and aims at commercialization in international markets; total budget in the new programming period is €24.5m.

Policy assessment: 

The 2007 – 2014 policy mix consisted of a plethora of measures, some of them too fragmented and small-scale to effectively tackle the challenge. The key shortcomings remain the low level of government financing for R&D&I, the overreliance on structural funds and the lack of strategic focus. Moreover, the majority of projects described in the previous section were implemented mostly by firms with only few cases of collaborative research with PROs. From the intended two-tier Technology transfer program only the first tier was implemented in the previous programming period, cutting off international competence building and grants for IPR portfolio building. Even the first tier hasn’t been very successful because it takes a very long time and a quite good university to build up a portfolio that is good enough to be profitable (on the quality of Latvian science base see Challenge 1). As regards the recent tax incentive scheme, it’s still too early to evaluate its effectiveness. The first impact evaluation of the tax incentive was scheduled in the second half of 2015.

Public procurement for innovation and other demand-led policy instruments are largely absent in Latvia. According to the results of the Global Competitiveness Report 2014-2015 government procurement of advanced tech products in Latvia with the evaluation of 3.2 points takes the 92nd place in the total evaluation of 144 countries.

International markets tend to be more demanding of innovation than domestic ones, so as a small open economy (with exports contributing nearly a third of GDP) Latvia should orient its policy towards them (the new programme Conquering external markets is a step in this direction). However, according to the Latvian Innovation System Review and Research Assessment Exercise by Technopolis Group (2014) raising the level of absorptive capacity in individual firms is a precondition for them to be able to recognise and respond to (external) market signals demanding innovation. The report mentions two kinds of interventions that can be undertaken in this respect: helping companies to understand improvement opportunities through awareness raising, training and pilot-testing, and “injecting” additional qualified human resources into firms. However, human resource availability has been a long-standing problem for Latvia due to ageing of the STI workforce, uncompetitive wages, and brain drain.

The key for structural reforms is based on Latvia's capability of restructuring traditional sectors and supporting emerging new innovating companies on the way to become mature innovators. To that end, Latvia should take advantage of its smart specialisation strategy and use it as a basis to steer investments into those sub-areas with the highest economic potential and to leverage private investment. RIS3 was taken as an economic transformation agenda where building up R&I human capital across the spectrum to gain critical mass was identified as a precondition. The selected areas were based on the needs of the industries with biggest value gaps based on export volume prices. It is expected that the build-up of critical mass of R&I human capital will allow for firms to exploit their existing production factors and move gradually up on the product ladder to more complex and value added products. Given the current stage of economic development and economic structure (multiple niches with room for improvement), many improvements in the business sector innovation capacity do not necessarily require narrow, specific frontier research for the next several years and a broad focus could be justified. However, there is also a risk that the identified S3 priorities are too broad. In any case, the implementation of RIS3 should avoid spreading resources too thinly across all areas of identified needs, risking a continuation of the policy fragmentation characterizing the 2007-2014 period.

Chapters
1. Overview of the R&I system

The R&I system of Latvia is characterised by very low R&D intensity (low figures of gross expenditure on R&D (GERD) as percentage of GDP in comparison to other EU member states), both in the public and in the private sector, and a strong dependence on European funding. Public R&D spending was 0.44% of GDP in 2014 and private R&D expenditure (BERD) was 0.24% of GDP (Central Statistical Bureau of Latvia) – both among the lowest in the EU-28. Public R&D budgets suffered significant cuts after the crisis due to austerity measures and GERD (in absolute numbers) has stagnated in the recent years. The current R&I policy mix in Latvia is mainly funded by the European Regional Development Fund (ERDF) and the European Social Fund (ESF). Data for 2014 shows significant improvement in overall R&D intensity. Overall GERD improved by 13.3% compared to 2013 from 0.6% of GDP in 2013 to 0.68% of GDP in 2014. BERD also increased from 0.17% to 0.24%.

According to the Innovation Union Scoreboard 2015 (IUS) Latvia belongs to the group of "modest innovators" together with Bulgaria and Romania and its relative performance is about 50% of the EU average.

2. Recent developments in research and innovation policy and systems

Key developments in the R&I system in 2015 included:

• The Ministry of Education and Science introduced a new approach to higher education financing -  financing of HEIs is tied to their institutional evaluation score and is expected to stimulate attraction of external financing to research and signals to institutions that research is important part of the education process;

• Paying taxes was made easier for companies by simplifying the VAT return, enhancing the electronic system for filing corporate income tax returns and reducing employers’ social security contribution rate;

• Changes in the Law of Public Procurement regarding innovation and research projects started to be discussed with the aim to simplify procurement procedures and to make it easier to purchase services of external experts for evaluation of research projects.

3. Public and private funding of R&I and expenditure

The economic crisis hit Latvia very hard and it was under extreme pressure to pursue fiscal austerity measures. Those measures were implemented across the board, including R&D allocations (cut by almost a half). The public R&D expenditure started recovering after 2010 but overall R&D spending (both public and private) remains one of the lowest in the EU. It is largely thanks to the EU Structural funds that Latvia continued to fund its R&I policy mix in the post-crisis period.

Private R&D expenditure (BERD) was 0.24% of GDP in 2014 (Central Statistical Bureau of Latvia) which is among the lowest in the EU-28.

4. Quality of science base and priorities of the European Research Area

The national policy mix is, to various degrees, aligned with the ERA pillars. Most of the ERA objectives are addressed, though with variable rates of performance. Almost all national policy measures to support research are targeted to research organisations registered in Latvia and foreign partners could be involved only on a subcontract basis. While research grants are portable to another national research institution, the current law does not regulate the portability of grants to another country. National grants are open to non-residents if they are employees of a contracting institution.

5. Framework conditions for R&I and science-business cooperation

With the aim to promote cooperation between academia and industry in the recent years a plethora of measures have been continued or introduced. However, support for new innovative companies is sparse, with underdeveloped financial instruments. Demand-side instruments are also not developed which significantly influences innovation performance of both public and private sectors. The main supporting measures providing incentives for businesses to invest in R&D are direct support schemes and tax incentives are very recent. The country scores poorly in IUS rankings, but is on the path of important reforms which are expected to bring more efficiency in the system.

6. Conclusions

The two identified broad challenges put forward in the executive summary are summarised in the conclusions. The chapter lists relevant policy actions, assesses their appropriateness, efficiency and effectiveness, and provides links to relevant evidence (based on evaluations or empirical analyses).

Geo coverage
Report year
2015
Country Report file
Official publication date
Friday, 13 May, 2016
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