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Alasdair Reid, Technopolis Group HEI 12(21): A decade can be long time in politics and seem like history in today's fast moving Internet driven information age.  Yet, it was only after 1999 that Estonian policy makers began to focus on innovation faced by the first severe economic crisis since re-gaining independence.  The ‘Russian crisis' spurred a shift in policy thinking and an awakening to the hard reality that ‘free-markets' and trade liberalisation would not suffice to generate the quantity and quality of ‘hea eesti innovation' (good Estonian innovations) to qualify Estonia as a "knowledge-based economy".

A decade later and much has changed in Estonia in economic, social and policy terms.  Yet, as the country faces up to a second major economic crisis, it is an appropriate moment to take stock of the contribution of ‘innovation policy' to Estonia's development. In particular, to what extent have the innovation policy programme, introduced since 2002, improved business competitiveness enabling Estonian firms to ride the global ‘perfect financial storm'?

The first phase of Estonian innovation policy was based on close collaboration and a degree of inspiration from Finland, the neighbouring ‘innovation leader'. Experts from Helsinki assisted in the establishment of the short-lived Estonian technology agency (subsequently integrated into Enterprise Estonia) and produced the first analysis of the strengths and weaknesses of the Estonian ‘innovation system'.  Estonian policy makers were amongst the first, in the then ‘candidate countries', to actively draw inspiration from the experience of Nordic and western European countries. This led notably to the establishment of a programme for the technology development (competence) centres and the launch of the programme to promote a more entrepreneurial management of the research results and know-how in Estonian universities (SPINNO).

After the adoption of the first Knowledge-Based Estonia strategy 2002-06, the perspective of the first round of EU Structural Fund support (2004-06) led to a determined effort to put some ‘flesh on the bones' of the strategy by scaling up the existing small funds for financial support to enterprises seeking to develop new products or services, boost ‘innovation awareness' in enterprises and more generally the population, boosting joint university-industry co-operation but also from the ‘science' perspective and an initial boost for ‘R&D infrastructure' in universities (and notably centres of excellence). By 2004, Estonia was recognised in EU policy circles as being a precursor in the field of innovation policy in the Baltic area but also more widely in the new Member States of Central and Eastern Europe.

Five years on this pioneering role is less obvious. Many of the other 2004 entrants to the EU have also launched a wide range of programmes and initiatives in favour of innovation, fuelled by a growing understanding of the need to compete on more than ‘low-costs and well-educated workforce' and the pressure to mobilise a significant share of Structural Fund money in support of innovation and research, in line with the EU's ‘Lisbon Strategy'. The objectives and rationale of the second ‘Knowledge-based Estonia' (2007-13) strategy did not diverge significantly from the previous one. Perhaps, an acknowledgement that although policy had begun to intervene to support innovation and boost research activity, that the underlying ‘fundamentals' had not yet been influenced in a major way. Equally, the programmes supported during 2007-2013 programmes, with the financial contribution of the Structural Funds, are largely extensions or adaptations of those ‘piloted' during 2004-06.

However, the Estonian policy framework for innovation continues to evolve with notably the creation of the Estonian Development Fund (Arengufond) in 2006.  Through the Fund, Estonia has equipped itself with an instrument unlike that so far developed in any other ‘new' Member State.  The linking of strategic support for early state and venture capital investments with a forward studies (foresight) capacity is unusual even in more advanced economies.  One of the first initiatives of the Arengufond was the development of a report and set of scenarios on the future competitiveness. The report carried the stark warning that "The Estonian economic structure is becoming Greece-like rather than Luxembourg-like".  Hence, the importance of an innovation policy leveraging changes in industrial structure toward branches with higher productivity and knowledge-intensive services. Something easier said than done!  Yet, I remember attending the event organised by the Fund to debate the scenarios in early 2008 and being impressed by how senior people from all sectors (government, business, academia) had come together to debate the scenarios to achieve this ‘structural change'.

Innovation policy has not stood still. Additional programmes have been launched to tackle specific ‘weaknesses' of the Estonian innovation system: most Estonian companies still innovate through embodied technology and productivity remains low and commercial bank loan potential weak (the Technology Investment programme); Estonian firms in both lower and higher tech sectors need to work together to develop new high value added exports and remain competitive (the Clusters programme); and finally, Estonia's potential (good levels of education according to international surveys such as that of the OECD) and limitation (in scale terms) is its people but keeping people in Estonia or encouraging them to return to Estonia and ensuring that there is an exchange of knowledge between business-universities is crucial (the mobility programme)

Considering today's ‘policy-mix' in favour innovation in Estonia and comparing it those of other ‘new' Member States or perhaps better, in inspirational terms, the innovation leaders (Finland, Sweden, Denmark, the Netherlands, etc.), Estonia has clearly developed a relatively sophisticated set of policies and instruments based on an analysis of ‘needs' in the innovation system.  It has done so, in general, through a participatory process of strategy development, good practice ‘policy learning' from other EU countries when designing its programmes, and appropriate application of evaluation and assessment procedures.  In this sense, Estonia has significant comparative strengths.  Maintaining and developing this capacity to design good policy is crucial, it implies attracting and keeping good people in the public administration.

Estonia obviously has weaknesses and these lie more in terms of the difficulty in implementing ‘sophisticated' programmes in a system where both the public, academic and business partners are still ‘learning' how to manage innovation related activities.  Implementation of programmes has sometimes been slower and less "red-tape" free than might be imagined for a country that prides itself in its progress in ‘e-government', etc..  The establishment of the Arengufond raised expectations of an ‘Estonian Nokia'. Yet, international experience suggests that the fruits of the Arengufond will be visible only in the medium term through creating a climate for investment in future ‘lead markets'.  Finally, the potential for Estonia to be a knowledge-driven economy is as much based on how well it can import and adapt technologies developed elsewhere, as it is on expecting Estonian researchers to make a major breakthrough in leading edge technologies.

A decade after 1999, Estonia needs once again to find the right strategy to tackle a second ‘great crisis' and come out on the other side stronger than before. Looking for parallels, one can turn again to neighbouring Finland and consider that when facing the extremely severe crisis in 1991-1994 (the worst any industrial nation had faced since 1945, until then), funding for TEKES (the Finnish technology agency) was actually increased, which contributed to Finland re-emerging even stronger from the crisis.  Hence, the need for a ‘long-term perspective' on competitiveness and requires sustained public investment in business innovation and in current and future potential for knowledge creation and dissemination.

Estonia's ‘limitations' (a ‘small' population' and hence a limited home-market) are also its strengths on which it must build a sustainable and innovative future.  As E.F. Schumacher, once wrote "Small is beautiful".  Estonia's scale makes it possible to test and role-out innovative technologies rapidly.  When I first visited Estonia back in 2002, I was struck by how far ahead the country was in many technologies related to Internet use (free wireless hotspots abounded in Tallinn while in Brussels they could be counted on a couple of hands and were incredibly expensive), mobile telephony applications (m-ticketing, m-parking, m-banking, etc).  During subsequent visits, I have met many of the business-people who have driven forward successful companies in ‘high' and ‘lower' tech sectors.   Yet, like the perception that Estonia is no longer so-far "ahead of the pack" in innovation policy, the full potential of Estonia as an ‘innovative nation' is not yet fulfilled.  In the same way that Estonia took a ‘tiger's leap' towards the Internet era, the next obvious ‘technology wave' to jump on is to be at the forefront of the ‘low-carbon' economy.  Here, Estonia has, for instance, unexploited potential in renewable energy (biomass, etc.) that needs to be reaped.

Taking a bet on the future is what the best Estonian entrepreneurs and innovators do every day. Yet studies shows that this happens best in an environment where the public sector, businesses and academia can build ‘platforms' for developing and testing innovative solutions.  The receptivity of Estonians to such good Estonian ideas and their testing in ‘living labs' where citizens become part of the innovation process is one avenue to follow.  In short, innovation awareness should not be a slogan, but a deeply engrained reality for every Estonian.