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Lithuania - RIO Country Report

RIO Country Report Lithuania 2015

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

R&I Challenges
Building private sector R&I capacity
Challenge description: 

All R&D and innovation performance indicators related to the business sector (e.g. BERD), as noted throughout the report, remain well below the EU-28 average. The private sector, in its current specialisation, does not perceive innovation as a critical factor for long-term competitiveness. This leads to limited capacities to absorb public R&D investments indicating the need for capacity building in the private sector. Export and competitiveness in Lithuania are highly dependent on relatively large (total share in value added and employment — up to 40% in 2013) traditional sectors such as transport and logistics, retail, agriculture, construction, manufacture of food products, beverages and tobacco products and manufacture of furniture. The number of existing research and innovation performers is rather limited. Therefore it is logical to focus on newcomers (start-ups, spin-offs, knowledge-based foreign investments) and to encourage previously non-innovative companies to transform their businesses towards higher value added activities.

Policy Response: 

The 2007-2014 innovation policy mix mainly focused on two routes: strengthening mature high-tech firms and public sector research competencies and commercialisation. There is no evidence that any of it has been very successful. For example, it is unlikely that ERDF policies had a significant effect on the development of high technology sectors in Lithuania. Direct support for business R&D over 2007-2015 reached merely 157 high/medium high technology firms. It is also unlikely that direct support for business R&D had a significant effect on overall business R&D indicators, partly because of the high administrative load. Policy additionality has been achieved in about only 30-40% of the funded projects. Finally, there is no evidence of significant economic impact of the clusterisation promotion or the investments in the innovation promotion infrastructures. Innovation promotion intermediaries had limited effect on the collaborative behaviour of SMEs due to the focus on investment in “hard” infrastructure. A warning sign is that as a direct response to the policy instruments there are now more than 40 clusters in a country as small as Lithuania. Thus the next period’s challenge is to create incentives for merging the clusters working in similar sub-sectors and/or technology fields. A positive development is that public procurement for innovation and other demand-led policy instruments have started to be discussed and pre-commercial procurement was approved in 2015.

Policy assessment: 

In Lithuania, the “low-hanging fruit” is starting to disappear. During the last decade, there has been a strong appreciation of the real effective exchange rate (35%, compared to 21% in the EU27) indicating a loss in cost and price competitiveness. Nominal unit labour costs have increased by 26% between 2000 and 2010, compared to an increase of 14% in the EU27 and 20% in the Euro area. While labour productivity per hour worked has gradually increased over the last decade, it is still about 45 percentage points below the EU27 average. This indicates the need to increase productivity further and to find new sources for competitiveness and growth. It’s not anymore so easy to do business based on low cost and operating in the least profitable parts of the value chain. The labour costs are rising and competition is going up. The challenge is moving up the value chain - either by upgrading the position in the international value chain, or by starting to invest more in R&D and developing own products, becoming a brand owner and investing in marketing and sales. This requires not only technological, but also managerial skills.

The key challenge for Lithuania, thus, instead of focusing on the few existing R&D based innovators, is to promote the structural change of the economy by providing a transformation agenda for diversification of existing (incl. traditional) sectors and transition to new knowledge based activities.  It would help upgrading the role of the Lithuanian industry in the global value chains. Importantly, a more tailor-made approach to the R&I capacity building is needed taking into account that the current capacity levels and the potential to move up in the ‘competence ladder’ largely differ within the target groups (mature, new and potential innovators). The country should take maximum advantage of its Smart specialisation strategy and use it as a basis to create a favourable environment for supporting entrepreneurship and fostering emerging technologies in export-oriented and high value added market segments where Lithuania has the capacity to attain a potential competitive advantage.

Skills supply and demand mismatches
Challenge description: 

A key emerging bottleneck for the development of a knowledge intensive business sector is the availability of skilled human resources for innovation creation. High outward migration and low quality of education (from basic education to lifelong learning) lead to mismatches in skills demand and supply as well as general shortage of skilled labour. This problem has a number of dimensions.

First, negative demographic tendencies with an increase by more than 67% since 1990 of the share of the population aged above 64 years and high economic migration steadily reduce the supply of labour. This puts future economic growth at risk. Second, since joining the EU, Lithuania has lost a substantial part of its labour force which has migrated to work in other EU Member States. According to Eurostat, the majority of Lithuanian economic migrants (73%) are 15–44 years old. If the current trends are not reversed, according to the European Commission's Ageing Report (2012), in 2030 Lithuania will have 384,000 less people of working age (15-64 years) compared to 2010, the labour force (in the 20-64 years group) will reduce to 1.376m, and the number of pensioners will increase to almost 1m.

Third, the current education system has a number of flaws. Despite a large number of higher education institutions in the country, none of the Lithuanian universities are in the top 500 world universities according to QS World University Rankings 2015/2016. Lifelong learning is also comparatively low in Lithuania. In 2014, only 5% of persons aged 25 to 64 received education or training in the four weeks preceding the corresponding Eurostat survey. The EU28 average was 10.7% in the same year. These factors lead to lower level of skills compared to other EU countries and low acquiring of skills at later age.

Studies confirm the increasing mismatch between supply and demand of specialists in technology fields. For example, a survey of manufacturing companies revealed that one third of the surveyed firms lacked engineers, technology designers, technologists and technology project managers for pursuing their innovative ideas. This bottleneck was perceived as more critical than the lack of technology development related innovation services provided by public R&D infrastructures.

Policy Response: 

To address this issue, the Ministry of Education and Science increased funding of higher education in technology fields in 2014. More than one third of total funding allocated for university and college education for first year students is channelled to technology fields (€2.78m of the total of €8.02m allocated per one study year), hoping to increase the attractiveness of technology education. However, this measure is clearly not sufficient to address the emerging challenge of ageing society and skills mismatches.

Policy assessment: 

It is important to ensure that there will be no shortage of skilled workers that are needed for carrying out R&D activities and other knowledge based activities, for initiating innovation ideas and creating innovative start-ups. A key challenge here is to substantially improve education and training of skilled specialists, and to design smart talent attraction policies. Based on Scandinavian examples, the education system needs to integrate the critical, entrepreneurial, creative thinking and social capital skills from early age.

Also, as foreign students and researchers might be a considerable source for knowledge transfer from abroad and bring in diversity, the internationalisation policy of higher education and R&I should also be linked with the smart specialisation. This, at least at the policy document level, is addressed in Lithuania’s smart specialisation strategy. In addition, public R&D and higher education systems need to open up more. This means they should adjust their staffing policies and dismantle language barriers to attract talent from abroad and ensure equal opportunities to foreign researchers not only in theory but in practice as well.

Commercialisation of public research results
Challenge description: 

The majority of the overall modest R&D efforts in Lithuania are funded by the public sector, i.e. national budget and EU funds, and performed by public research institutions. Despite the huge potential, weak capacity to commercialise and exploit public research for economic benefits becomes more evident after heavier investments in research production (€400m invested in RIs alone). The research output achieved is substantially weaker than in most EU Member States regardless of the heavy investments. For example, in terms of international co-publications, Lithuania is 24th in the EU (324 international co-publications per million, according to the Innovation Union Scoreboard 2015). In terms of scientific publications among the top 10% of the most cited publications worldwide as percentage of total scientific publications of the country, Lithuania was 22nd in the EU28 over 2000-2013. Moreover, in 2013 Lithuania had only 5.7 public-private co-publications per million of population compared to 29 for the EU-28. The number of EPO patent applications per million of inhabitants (6.09) was almost 18 times below the EU28 average (108.05) in 2012. Furthermore, according to WIPO, in 2013 Lithuania was 22nd in the EU28 by the PCT patent applications per million of inhabitants (46.1). Moreover, according to the innovation output indicator scores in 2010 and 2011, Lithuania has a second lowest score in EU-27 and is just above Bulgaria. It is unlikely that Lithuania will bridge this gap in the short or medium term. Thus, there remains a need for subsequent efforts to encourage research commercialisation. This could be achieved through spin-offs and knowledge transfer to the private sector through dedicated R&D services, and ensuring productive cross-sectoral (including science-industry) collaboration.

Policy Response: 

The policy makers are trying to address these issues in the new programming period. The OP for 2014-2020 plans to finance "joint initiatives", i.e. two or more complementary collaboration projects which involve R&D activities and have the aim of creating market-oriented commercially viable prototypes of technologies and products with high value added. In addition, the newly proposed Law on Higher Education and Research introduces the concept of "industrial doctorate" which would be another step forward in strengthening the ties between science and industry. The degree of success of these initiatives is to be seen in the next few years.

Clusters could also provide arenas for related cross-sector links internally (in the region) and externally. However, the cluster formation is in its early phase in Lithuania and few of the first results of the respective support programmes are encouraging. The way the clusters were initiated didn’t support effectively enough the cross-sectoral approach and connections with the local knowledge sources (institutes and universities at the so-called ‘valleys’) and with the ones outside Lithuania. As a result, clusters are rather sector based, inward looking, operating as ‘private clubs’ with 5-7 members and with limited inter-regional connections.

Policy assessment: 

An increasing concern in Lithuania is how to deal with the issue of funding public research as an opportunity to strengthen ‘demand steering’, putting more focus on the industry capabilities and needs and the economic return on investments. So far, the policy results have been positive but weak (see Chapter 5.7). Universities and their research institutes are mainly dedicated to the roles of teaching. Applied research accounts only for approximately half of R&D performed in the higher education sector in 2013. Experimental development only made 12% of all R&D activities in this sector in the same year. In order to achieve better results of innovation performance, Lithuania needs to shift the focus of the national R&I system from basic science to innovation. From this perspective there remain several issues.

First, the entrepreneurial culture in the Lithuanian universities needs to be urgently developed. It requires a change of the mind-set at the universities via incentive systems, e.g. modifications in the research funding rules (e.g. more focus on the outcomes of R&D) and researchers’ career criteria, university IPR policies, development of the knowledge transfer offices, and entrepreneurial training. Substantial factors limiting the collaboration of public sector researchers with companies are the researcher's career rules (overdependence on academic publications, and little attention to R&D results) and the lack of motivation at the institutional level.

Second, a related objective is to exploit the already created R&D infrastructures for commercialisation and technology transfer. There is extensive fragmentation of various innovation support institutions. The State should review the current existing innovation promotion structures. Attention should be placed on solving “soft” issues such as exploitation of the open access centres, science and technology parks, clusters and their infrastructures, and creation of related capacities and human resources.  A virtual R&D infrastructure network could allow for developing innovation from idea to pilot manufacturing. In addition, all public research institutes and research centres with a mandate to engage with industry, and especially the open access centres in the ‘valleys’, should develop a distinctive industry-focused culture. They have to become better at marketing their research to the business sector.

Reducing fragmentation and improving policy capacities
Challenge description: 

Fragmentation is a keyword to describe the current situation in R&I governance in Lithuania. There is fragmentation of policy priorities, programmes, funds and institutions, and insufficient leverage of different funds as well as few synergies between measures. Efforts to concentrate funds and create connections have so far been able to deliver only very limited effect. Governance failures result in lack of efficiency and missed opportunities. One example of limited synergies and high fragmentation is the failure to re-align the science “valleys”, science and technology parks (STP) and industry clusters.  As a result, Lithuania has 40+ clusters, 20+ ‘open access centres’, 9 science and technology parks, and several agencies with overlapping functions. Links between agents remain the weakest part of the innovation system, making it difficult to transform innovation inputs into outputs efficiently.

Policy fragmentation between the Ministry of Education and Science (covering higher education and public R&D policies) and the Ministry of Economy (responsible for private R&D and innovation policies) is often reinforced by discord between these two ministries. Although there is a background for cooperation in the process of implementation of smart specialisation, this remains a critical issue, considering the planned policy mixes of the two ministries. Collaboration across all the relevant funding and development agencies and funding sources has to be ensured to facilitate a streamlined implementation of RIS3 and to implement the holistic “whole of government” approach by integrating innovation policy into other policies.

Policy Response: 

The smart specialisation process has shown that policy-makers have limited understanding of how regions in principle diversify into new growth paths, and to what extent public policy may affect (or has affected) this process. Monitoring and evaluation of smart specialisation strategy by MOSTA and the Ministry of Economy should partially fill this gap. Nonetheless, it should be noted that access to business data may be difficult to get.

The new programming period has provided government agencies with a window of opportunity to review their approaches. It remains to be seen if this opportunity will be exploited. The Ministry of Economy (and LVPA) intends to adopt a more flexible approach in applying the R&D concept by acknowledging the “D” (development) part when selecting the projects.

Policy assessment: 

At the strategic level, the lack of systematic (ex post and ex ante) evaluation hinders policy learning and does not allow improvements in the design and implementation of policies.

At the operational level, there is a relatively high administrative load (formal, technical and lengthy procedures, excessive bureaucracy, limited flexibility) for the applicant companies. For example, the “paper-based” application procedure provides an incentive for firms to hire consulting companies to draft grant applications that appeal to the reviewers but favour form over substance. In addition, the public support system has developed a culture of risk-aversion, biased against early-stage and high risk innovation ventures. Moreover, the staff of implementation agencies faces a set of constraints stemming from the overly legalistic approach to programme management. Emphasising on the EU’s legal framework, the Lithuanian administrative law and procurement regulations often make civil servants reluctant to allocate public resources to projects that may not immediately result in commercially viable products and services. In so doing, they are avoiding risk in an industry which by definition must be focused on stimulating risk-taking among innovative enterprises.

Chapters
1. Overview of the R&I system

Lithuania ranks 25th in the Innovation Union Scoreboard with no clear catching up with more advanced members of the EU. It can be considered a lower income country with specialisation in labour intensive traditional industries, facing the need for upgrading. The R&D effort is predominantly ensured by the public sector. At the same time there have been serious obstacles for public R&D commercialization and systemic collaboration (reflecting some path-dependencies): overdependence on basic science, outdated public R&D base and unattractive research careers, lack of social capital and network failures, weak innovation diffusion system, and low motivation to learn.

Changes in R&D spending were not significant in the previous years, however in 2014 GERD increased to 1.01% of GDP (from 0.95%), and the long-stagnating business funded R&D increased to 0.32% (from 0.26%). Despite this increase, achieved partly due to significant efforts to improve business R&D data collection, there is little chance that GERD and BERD targets set in Europe 2020 and national policy documents will be met.

2. Recent developments in research and innovation policy and systems

There has been limited change in the structure of the national R&I system and its governance since 2012. The Ministry of Education and Science and the Ministry of Economy remain the two main bodies responsible for R&I policy, while several agencies distribute funding. The system as a whole is dominated by R&I funded and performed by public agents. The structure of funding flows remains rather similar to that of the previous years, and is dominated by the EU structural and investment funds (ESIF). Expectations for change are triggered by several recent initiatives:

  • The smart specialisation strategy development over 2013-2015 provided a cooperation framework for stakeholders from different institutions. Since both the Ministry of Education and Science and the Ministry of Economy will implement this strategy, a more collaborative approach is expected. Moreover, the monitoring and evaluation system was being developed in 2015 and involved both sides of the policymakers.
  • Two initiatives of law making were started. The heavily revised Law on Higher Education and Science has been approved by the Government and is pending approval of the Parliament. The Ministry of Economy initiated a Law on Innovation Promotion. It was assessed externally in 2015, but further steps for its governmental approval were not taken.
  • The years 2014-2015 have seen several evaluations and a benchmarking exercise, which is a positive sign. It indicates that there is more and more willingness to adopt evidence-based approach to policy making. One of the key evaluation initiatives in 2015 was the R&I system review carried out by the OECD, to be published in 2016.
3. Public and private funding of R&I and expenditure

As the 2008-09 economic crisis hit Lithuania very hard the country was under extreme pressure to pursue fiscal austerity measures. Those measures were implemented across the board, including R&D allocations. During the post-crisis fiscal consolidation in 2011-12 both GBAORD and government funded GERD stagnated nominally and as a share of total government expenditures, but decreased as a share of GDP. The post-crisis fiscal consolidation process had a negative impact on public support to the Lithuanian R&D expenditures but the evidence is not strong enough to conclude that it came at the expense of it. It was mainly due to the high share of EU funding that the country kept its R&D budget growing in the post-crisis years.

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

Lithuania still has to make progress in aligning with some ERA policies. The country has made some progress in creating open labour market for researchers, but there is still considerable room for improvement. As a general rule, competition-based national research grants and research fellowships are open to non-residents from the EU and third countries but funding is not portable outside Lithuania. The level of transnational co-operation in joint activities with EU member states is rather low and the country is not very active in developing R&I cooperation with third countries. In general, the research system suffers from insufficient internationalisation.

5. Framework conditions for R&I and Science-Business cooperation

The Lithuanian R&I policies have been focused in the recent years on technology upgrading and creation of public R&D infrastructure. Business access to venture capital markets have increased dramatically during 2011-2014. Although there were measures targeting innovative and young companies, this has not been enough to promote higher business involvement in R&D. Furthermore, the direct financial support for collaboration of science and business in joint R&D projects has been relatively low, compared to other policy instruments, but there are new policy measures in the pipeline (such as Joint initiatives) that aim to address this issue.

6. Conclusions

The four identified 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
Wednesday, 25 May, 2016
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