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Innovation and Entrepreneurship in Lithuania

As findings suggest, Lithuania is one of the countries where innovation needs better support. Although the Lithuanian State Patent Bureau reports a high number of new patents each year; measuring on a global scale country’s competitiveness remains unfavorable. Of course, one has to take into account positive developments, such as a relatively high number of foreign direct investment (FDI), projects oriented towards the promotion of innovation, and the presence of a highly innovative science industry. Despite that, certain circumstances do not permit Lithuania to catch up with highly innovative countries in Western Europe and North America. Although the labor market is highly competitive, structural issues prevent the small firms in rural areas to benefit from knowledge workers. In addition, commercial bank lending for the private sector has to continue increasing. One of the biggest stumbling blocks, which prevents Lithuania from joining the Red Queen Game with the rest of the world are large scale disincentives to innovate. The property rights and the rule of law remain inefficient; market concentration is relatively high while the overall country’s competitiveness is ranked unfavorably. If there is no effective competition the innovators are not rewarded by so-called mega – prizes. To make matters worse, Lithuanians themselves are not – risk-averse as concluded by various researches. Entrepreneurs are not able to calculate the cost-benefit effects of undertaking a radical innovative strategy. Consequently, it calls for new strategies in management drawing special attention towards knowledge management. All in all, there has been some progress in Lithuania regarding innovation; however full benefits cannot be realized due to cultural attitudes, unqualified labor force, and unfavorable institutional setting.

Who are the entrepreneurs in Lithuania?

For the purpose of this study, it is important to define the entrepreneurs in Lithuania. According to Baumol and others, only those who produce radical innovations have a right to call themselves the real entrepreneurs since they are a driving force of economic growth. Joseph Schumpeter calls the process of creative destruction. Consequently, one has to analyze not only trends in entrepreneurial start-ups but rather their very nature. To be more specific, entrepreneurial businesses in Lithuania are more replicating. However, the statistics of the Lithuanian State Patent Bureau are rather promising in certain industries.
To begin with, a typical Lithuanian entrepreneurial business is understood as having your own company. According to the Lithuanian Department of Statistics, the number of small to medium enterprises has been increasing in the past years. For instance, the number of private companies has increased from 21 146 in 2002 to 39 420 in 2008 (Lithuanian Department of Statistics, 2008). In addition, the majority of businesses are concentrated in retail trade. Although these businesses do not produce radical innovations, they are certainly necessary for economic development in general. The statistics of the Lithuanian State Patent Bureau can tell who the real innovators are. In the list of granted patents, one can find anything from innovative cheese cutters to x-ray absorbing materials. However, the majority of innovations registered are highly scientific coming from university and private laboratories. For example, many inventions are pharmaceutical compositions or formulas, medical devices, and even alternative sources of energy, such as wind-power generating units (Lithuania State Patent Bureau, 2008). The number of national patent applications in Lithuania is much higher than in other countries. However, in other countries entities are obtaining more international patents. Finally, one of the most successful and competitive industries is lasers – “a bright spot in countries high-tech industry” (Vainilavicius, 2008). Around 10 private companies are exporting their lasers mainly to the United States, Japan, and other countries specializing in highly innovative devices used for research. In addition, the products being successfully developed by Lithuanian enterprises are biotechnology, IT, and telecommunication related services (Radzeviciene, 2008). Consequently, some of the entrepreneurs have clearly found a competitive advantage in the competitive market.

Labor flexibility and Availability of Capital

According to the Doing Business 2008 index, Lithuania was ranked 28th/181st in terms of how easy it is to do business. Emerging Business Monitor is right commenting that: “government reforms have helped to strengthen the business environment and encourage entrepreneurship across the Baltic states” (2006). However, certain areas, which are crucial for the sustainability of an innovative environment, should not be overlooked. For instance, flexible and efficient labor markets are one of the factors promoting innovation. However, Lithuania was ranked just 131st/181st in terms of employing workers. Consequently, it is relatively hard to hire and fire workers resulting in inflexible labor markets and high costs for the employers.
In addition to unfavorable results by Doing Business Report, a study by Lithuanian Bank also described the aspects of Lithuanian labor inflexibility: “relatively low level of computer literacy, a high share of employment in the agricultural sector, persistent unemployment rate differences across regions, and the weak cross-region relationship between wage level and migration flows”(Vetlov & Virbickas, 2006). The aspects of Lithuanian labor market inflexibility described above have a negative influence on the promotion of innovation since the labor force is highly concentrated in bigger cities. Small businesses in rural areas are left with unqualified labor force and are disadvantaged. It is important to recognize that the ratio of small and medium-sized businesses is higher in rural than in urban areas. This observation can explain a paradox in innovation activity in Lithuania and in other EU countries. To be more specific, large firms are more innovative than the small and middle-size ones, a rather different conclusion drawn by Good Capitalism, Bad Capitalism, and Economics of Growth and Prosperity (Krisciunas & Greblikaite, 2007). Consequently, as a qualified labor force is concentrated in large companies it is reasonable to expect that the interest in promoting innovation is higher there due to education and available resources. However, innovators in large-enterprises are not motivated by so-called “mega-prizes”, where only a company bonus can be expected. Good Capitalism, Bad Capitalism, and Economics of Growth and Prosperity distinguish those “mega-prizes” as the main source of incentives for radical innovation.  All in all, although in small Lithuanian towns there are plenty of small businesses; radical innovations are not likely to occur due to unqualified labor force and labor concentration in big companies.  

Presence of disincentives to innovate

One of the strongest arguments that Lithuania is not an innovation-friendly country is large scale- disincentives, such as low competitiveness, ineffective anti-trust laws, and corruption making the country look more or less as an oligarchic society. It is crucial to emphasize that in Good Capitalism, Bad Capitalism, and Economics of Growth and Prosperity oligarchic capitalism is described as the worst form of capitalism. In oligarchic capitalism, power is held by a small group of individuals. Economic growth is not a central objective. Such capitalism is said to produce high-income inequality, informal economic activities, and corruption.  
One of the best arguments that support the claim is the World Economic Forum’s annual report evaluating the overall country’s competitiveness, also including an innovation pillar. It uses: “Global Competitiveness Index (GCI), a highly comprehensive index for measuring national competitiveness, which captures the microeconomic and macroeconomic foundations of national competitiveness” (World Economic Forum, 2008). The methodology is based on an executive opinion survey and their informed judgment of the economies in countries examined. As it is based on actual participants, it can be more accurate than other secondary indicators since the data is received from the experts actually involved in the process. In 2008-2009 Global Competitiveness report Lithuania was ranked 44th/100 with a decrease in six positions compared to the previous year. In addition, World Economic Forum includes 7 criteria in their analysis of propensity to innovation. 6 out of 7 criteria were attributed as Lithuania’s disadvantage including the capacity for innovation, quality of scientific research institutions, company spending on research and development, university-industry research collaboration, government procurement of advanced tech products and availability of scientists and engineers. The only criterion which was viewed favorably in terms of innovation was utility patents. However, the overall country’s competitiveness was ranked negatively. The following factors which reduce a country’s innovation are distinguished in the report: market concentration and dominance, ineffective anti-monopoly policies, perverse taxation system, the prevalence of trade barriers, business impact rules on foreign direct investment, and brain drain. Baumol, Litan, and Schramm recognize these factors to be crucial to create an innovation-friendly environment.
The new law on competition was passed in 1999 by Seimas in order to ally with EC treaties and regulate anti-competitive agreements, concentration control, and unfair competition (Doing Business in Lithuania, 1999). However, market concentration in Lithuania has not decreased substantially and big enterprises, such as Maxima, gained the monopolies in the market. For instance, Maxima’s market share in 2005 was 38% in Lithuania while the rest of the market share belonged to large retail chains, such as IKI and Rimi (Graham, 2007). The retail sector is not the only one with high market concentration rates including energy and banking ones.  The wealthy and powerful lobbyists are thus able to influence government policy and legislation. Lobbyist power is one of the reasons for ineffective anti-monopoly policies. All in all, Lithuania has many tendencies of oligarchic capitalism with huge market concentration, unfair competition, huge lobbyist power, which is partially a cause for low capacity for innovation as concluded by the World Economic Forum.
Moreover, Lithuania has additional characteristics of oligarchic capitalism, such as uncontrollable corruption, and ineffective property rights. Transparency International has developed a corruption perception index, which measures: “the degree to which corruption in the public sector is perceived by business people and country analysts” (Crain, 2007). Experts are surveyed focusing on: “corruption, conflicts of interest, diversion of funds as well as anti-corruption, efforts and achievements” (Transparency International, 2007). CPI relies on secondary data. The scale of measurement is from 0 (highly corrupt) and 10 (clean). Lithuania’s score is 4.8 and has not been changing over the years. Consequently, the conclusion can be drawn that anti-corruption policies are ineffective, whereas in highly innovative economies, such as the United States the corruption index amounts to 7.2. Furthermore, property rights are not effectively assured in Lithuania, which is the basis of a safe business environment. Index of Economic Freedom, which measures trade freedom, business freedom, investment freedom, and property rights, ranks Lithuania 26th while being 70.8% free. Unfortunately, the poorest aspect of the Lithuanian economy is property rights (50%) Effective property rights are the basis of efficient institutions and Heritage Foundation calls to fight for author rights protection. It is natural if property rights are not assured people have fewer incentives to innovate, especially if their author's rights cannot be effectively assured in the future.
Society’s attitude towards innovation
Furthermore, in Lithuania potential innovators do not know how to do a cost-benefit analysis of introducing innovation and do not prize innovative behavior while being less risk-averse. Consequently, it is the main obstacle that prevents from catching up with the innovation leaders. Good capitalism, Bad Capitalism, and Economics of Growth and Prosperity also recognize the psychological factor to be very important. If the society does not hold a positive outlook towards innovation the likelihood that something truly radical will be introduced is very small. To begin with, there are numerous studies in Lithuania addressing the issue of innovation and how it is viewed by different members of society. As Lithuania is facing increasing competition after entering the EU in 2004, the main issue became how to remain competitive, which is having good quality products at a low price. Innovation thus is a factor of success for many companies. However, people seem not to know how to evaluate risk while implementing innovation, which includes the usage of resources and time. The methodology of the decision –making while undertaking innovative activity constitutes is discounting future flows of income to present value and comparing it to the present cost of investment, including opportunity cost and risk.
To begin with, attitudes towards risk are partially cultural. The pioneer researcher in the field is Hofstede, who identified 5 different cultural dimensions. One of them is uncertainty avoidance, which can be well paraphrased as “risk – avoidance”. There are several studies, which explored uncertainty avoidance in Lithuania. In general, the Baltic countries score moderately or high for uncertainty avoidance. For instance, a study by Huettinger and Mockaitis concluded that Lithuanians have moderate uncertainty avoidance whereas Bajoriene concluded that uncertainty avoidance is relatively high (Huettinger, 2008). It means that Lithuanians prefer stability and assurance rather than engagement in events with unclear outcomes. Consequently, cultural differences play an important role, as far as attitudes towards innovation are concerned.  In addition, a study was undertaken in Lithuania while giving out surveys to Lithuanian entrepreneurs in order to evaluate their perceptions about risk. It also aimed to know whether a cost-benefit analysis of implementing an innovation could be performed. The findings concluded that 68.42% of respondents viewed innovation as a moderately risky activity and 21.05% viewed it as an extremely risky activity (Levanas & Ramanauskiene, 2008). The study revealed that the biggest disadvantage was the unqualified labor force, which is not able to perform a cost-benefit analysis. Another similar study also concluded that: “the entrepreneurship and the absorption of good experience from other companies are less important to Lithuania’s companies” (Bruneckiene & Pukenas, 2008). Finally, a case study in Lithuania concerning knowledge management in small to medium enterprises helps to discover the major issue in the field. The research was undertaken by using questionnaires and individual case studies of Lithuanian SME’s. According to its findings, “there appears to be a strong awareness of KM already. However, the development of adequate methods to make information management (IM) and KM fully effective appears to be lacking or only partially realized. There is some evidence to suggest that Lithuanian SME managers are becoming more psychologically prepared to work within KM but there is much less evidence to show that this is leading to effective innovation in practice at present” (Radzeviciene, 2008). It is a big challenge in Lithuania to develop effective knowledge management in order to benefit from highly – educated individuals. There is still a huge number of old-line thinkers or those who are structurally unemployed. The Baltic States certainly face an issue of management concerning all types of entrepreneurs for the appropriate need for training.
Consequently, the main problem in Lithuania is people’s attitudes and the lack of adequate qualifications. Many researches confirm a straightforward relationship between education and entrepreneurship: “the findings of this review highlight the general consensus across research education and entrepreneurial performance” (Dicson, Solomon & Weaver, 2008). All in all, Lithuanian society seems to recognize the importance of innovation as a means to reach a competitive advantage, which in turn leads to economic growth. Consequently, the major obstacles that prevent Lithuanian companies from being innovative are unfavorable attitudes towards innovation due to the inability to calculate the risk of performing it and unwillingness to rely on a knowledge-based economy.

Finally, the European Innovation Scoreboard of 2007 compares EU countries in terms of 5 innovation dimensions, such as innovation drivers, knowledge creation, innovation and entrepreneurship, application measures, and intellectual property by producing an aggregate Innovation Index. According to the report, Lithuania has above EU average innovation drivers, which are the structural conditions, such as previously discussed projects. However, intellectual property and application, which measures: “the performance expressed in terms of labor and business activities and their value-added in innovative sectors” needs further support (Pro Inno Europe, 2007). This report confirms the idea that the structural basis for innovation in Lithuania is relatively high, including various projects or pro-innovation legal entities, such as Free Economic Zones. However, the major disadvantages lie in ineffective intellectual property rights and actual innovation applications. The report concludes that there is a general convergence process and countries showing below EU average innovation performance are closing the gap. Consequently, they are labeled as “catching up countries”. The predictions are made that Lithuania together with Estonia and the Czech Republic can close the gap just in 10 years. However, we will see whether it is really going to happen.

Conclusion

In conclusion, the promotion of innovation and entrepreneurial activities are one of the most important factors leading to long-term economic growth. Lithuania is in an unfavorable position in terms of promoting entrepreneurial activities and innovation due to the institutional environment including structurally inflexible labor force and capital unavailability. Oligarchic features of capitalism and society’s unwillingness to take risks are also limiting the scope of innovation and entrepreneurial activities. The major problem seems to be in disadvantaged rural areas due to large differences in qualification, availability of labor, and the lack of knowledge-based businesses. Although the number of patent applications has been relatively high in recent years, the social attitude towards innovation has to be changed to achieve the optimal effect. Of course, there have been some possible developments, as far as innovation is concerned. The projects, such as Sunrise Valley have attracted the society’s attention towards the issue and should become a benchmark in order to promote innovation in Lithuania. Consequently, the structural basis is developed rather well. In addition, some of the entrepreneurs have found a competitive niche in highly scientific industries, such as lasers. All in all, there seems to be a bright light, as far as the future of innovation is concerned. The major reforms should be done in education and labor laws in order to meet the “Agenda for Growing Europe” while it is an important issue in the whole EU. In addition, an effective venture capital market has to be created to help to finance innovative businesses. Finally, a clear distinction has to be made between old and new – knowledge-based economy while introducing appropriate training both to managers and employees and trying to diminish the effects of the dual labor market in Lithuania. Lithuania is a relatively small country; consequently, integration in the world market is the major issue. Besides that, it would seem quite a realistic  Lithuania catching up with the EU average in 10 years.