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.
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.
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.
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.