MICRO- AND MACRO-ECONOMIC BUSINESS ENVIRONMENT: LOCATIONS AND CLUSTERS IN LITHUANIA

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1 Dainora Grundey Kaunas Faculty of Humanities Vilnius University MICRO- AND MACRO-ECONOMIC BUSINESS ENVIRONMENT: LOCATIONS AND CLUSTERS IN LITHUANIA Abstract The values and the strategic goal of the European Union to create the most competitive and dynamic knowledge-based economy in the world are becoming an inseparable part of Lithuania s strategic development. In year 2002, the Government of the Republic of Lithuania invited the World Bank to cooperate in assessing the level of knowledge economy in Lithuania with the aim to develop an effective strategy and an action plan for the creation of knowledge economy. Therefore, the article aims at presenting the current micro- and macro-economic background of business environment in the following structure: firstly, a theoretical sketch of knowledge science and its relevance to business clusters and country s competitiveness will be demonstrated; secondly, business innovation issues in Lithuania will be reviewed, emphasising on business location and cluster development tendencies in the country; and finally, most productive industries in Lithuania will be pointed out with some statistical evidence. In the conclusions, the author will provide some suggestions for the country to follow its business innovation strategy. Key words: business environment, macro- and micro-levels, business clusters, location, knowledge economy, innovation, Lithuania. The inequity of information and knowledge has become today a central issue in the global development. It penetrates deep and leaves its trace in all areas of our everyday life education, health care, economic competitiveness, environmental protection as well as in democratic development, internal and external stability. Mr. Algirdas M. Brazauskas, Ex-President and Ex-Prime Minister of the Republic of Lithuania Introduction The values and the strategic goal of the European Union to create the most competitive and dynamic knowledge-based economy in the world are becoming an inseparable part of Lithuania s strategic development. One of the main new challenges faced by Lithuania today is to ensure persistent and consistent growth of knowledge economy serving the basis for human development. Our concept consists of the two main components of development: information society development; knowledge economy development. This paper raises the following questions to invite other scholars for an open discussion: Why do some nations succeed and others fail in international competition? Why are firms based in a particular nation able to create and sustain competitive advan-

2 Micro- and Macro-economic Business Environment: Locations and Clusters in Lithuania 125 tage against the world s best competitors in a particular field? Why is one nation often the home for so many of industry world leaders? In year 2002, the Government of the Republic of Lithuania invited the World Bank to cooperate in assessing the level of knowledge economy in Lithuania with the aim to develop an effective strategy and an action plan for the creation of knowledge economy. Therefore, the article aims at presenting the current micro- and macro-economic background of business environment in the following structure: firstly, a theoretical sketch of knowledge science and its relevance to business clusters and country s competitiveness will be demonstrated; secondly, business innovation issues in Lithuania will be reviewed, emphasising on business location and cluster development tendencies in the country; and finally, most productive industries in Lithuania will be pointed out with some statistical evidence. In the conclusions, the author will provide some suggestions for the country to follow its business innovation strategy. The Role of Knowledge Science in the Competitiveness of Business Economics In attempting to develop objective knowledge about the world empiricists face two major problems. First, any such knowledge is based on fallible observations (Camagni, 1991). Second, it is logically impossible to prove any universal statement or theory to be true (Sternberg, 2001). Figure 1. The Pyramid of Knowledge Science KNOWLEDGE SCIENCE Building knowledge science; educating knowledge scientists Educating such knowledge creators project-team leaders, strategic planners, R&D managers, and production managers Fusion of knowledge from the Social Sciences, the Humanities, Engineering and the Natural Sciences Knowledge of Individuals Knowledge of Nature Knowledge of Society Knowledge of Organisations Source: complied and improved by the author. Figure 1 encompasses the perception of knowledge on four major levels, namely a) knowledge of society, b) knowledge of organizations, c) knowledge of individuals, and d) knowledge of nature. The latter model envisages the merge of interdisciplinary approaches of the Social Sciences, the Humanities, Engineering and the Natural Sciences, leading to a holis-

3 126 Dainora Grundey tic understanding of the knowledge science. Innovation policies are based on the knowledge science, fostering the interface between researchers and businesses and embracing the following scope of urgent issues to be solved (Lundvall, 1988, 1992; Getler and Wolfe, 2002; Foray and Lundvall, 1996): gap between enterprises and the R&D community; unsatisfactory R&D output; overemphasis on public-sector-driven R&D; aging of researchers and brain drain; large number of public institutions involved; outdated R&D financing instruments; absence of an innovation policy framework; a focus on basic science, not applied; weak R&D evaluation procedures. Figure 2. The Role of Knowledge in the Society Knowledge use Knowledge development and distribution Government NGO Universities Business O V E R S E A S Public property LEGEND: NGO Non-governmental organizations Private property Source: compiled and improved by the author after Allen (2000), Collins (1974, 2001), Edquist (1997). As Figure 2 indicates knowledge is being utilized on various levels from the government to universities, businesses including. It is also vital that the knowledge is not only being used but also created on these levels as well, considering the property rights public or private. Business and Industry Clusters: The Macro-level Porter (1990) stated that the received development theory sees the economy as factordriven. This famous Diamond Framework consists of four major elements: a) context for firm strategy and rivalry; b) demand conditions; c) factor conditions; and d) related and supportive industries (Porter, 1998). Traditionally, a country s comparative advantage in international trade has been determined by such factor endowments as land, natural resources, labour, and the size of the local population. Under comparative advantage (Hecksher-Ohlin) theory, the basis for export development is factor intensity: the country should export products that use its abundant fac-

4 Micro- and Macro-economic Business Environment: Locations and Clusters in Lithuania 127 tors intensively. Garelli (1997) argued that one of four forces that would dominate the competitiveness environment of any country was the economy of globality and proximity. Globility assumes that production does not necessarily need to be close to the end-user. It benefits from the comparative markets worldwide, especially in operational costs. It is generally competitive and price efficient. On the other hand, the economy of proximity inherent in a cluster provides value-added services close to the end user. With improvements in telecommunications and transportation infrastructures, the world is becoming more of a global village - where physical separation is no longer a barrier to international business relations, and multi-national corporations (MNCs) thrive on tapping international resources (such as cheaper labour, raw material and location) for added competitive advantage (Schoenberger, 1999). Figure 3. Knowledge management and innovation interface on macro- and micro-economic levels Macroeconomic and regulatory context Education and training system Regional Innovation systems Product market conditions Knowledge generation, diffusion & use Firms capabilities & networks Other research bodies Global Innovation Networks Supporting institutions National innovation system Science system Communication Infrastructures Clusters of industries Factor market conditions National innovation capacity COUNTRY PERFORMANCE Growth, job creation, competitiveness Source: compiled by the author. However, Porter (1998) noted that the enduring competitive advantage in a global economy lies increasingly in local things knowledge, relationships, motivation- that distant rivals cannot match. Therefore, it would be appropriate to present a modified and all-inclusive model as presented in Figure 3 for knowledge management and innovation interface on macro- and micro-economic levels with a clear distinction of industrial clusters in it. Clusters are a striking and common feature in today s economy. Nonetheless, this phenomenon has been the object of attention from a wide variety of social scientists for much of the twentieth century. Porter (1998) defines a cluster as a geographic concentration of interconnected com-

5 128 Dainora Grundey panies and institutions in a particular field critical masses-in one place-of unusual competitive success in particular fields (p.78). But, her, in this paper we will define a cluster, the result of improvements in the business environment, is a geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities. As the sum of its parts is of greater value than each individual company or institution, clusters create synergy. We could distinguish the following advantages of clusters: Clusters improve competitiveness (which results in improved productivity) in three ways (Morgen and Henderson, 2002; Stoper, 1997; Braczyk et al, 1998; Cook et al, 1998): 1. Improve productivity through improved access to specialized suppliers, skills and information. 2. Innovation is given more importance as the need for improvement in processes of production is highlighted. And firms working together can satisfy this need. 3. Once established, clusters will grow as a result of the creation of new firms and the entrance of new suppliers. Table 1. Classification of the EU countries according to science-industry relations Description Countries with a very high share of government funding and performance Countries with a moderately high share of government funding and performance Countries with an average share of government funding and performance Countries with a low share of government funding and performance Source: based on OECD, Universitybased system Greece Cyprus Austria Spain UK Belgium Luxembourg Ireland Sweden Broad-based system Italy Poland Portugal Lithuania Latvia Estonia France Netherlands Denmark Finland Germany Slovenia Malta Institute-based system Hungary Slovakia the Czech Republic Competitive advantage grows out of the value a firm is able to create for its buyer and this can be diagnosed through the value chain (Porter, 1985). Innovation is seen to be central in creating a competitive advantage by perceiving or discovering new and better ways to compete in an industry and bringing them to market (Porter, 1990). Competitive advantage grows fundamentally out of improvement, innovation and change. Firms in a cluster will gain advantage over international rivals if they could find new and better means to compete with better linkages, knowledge spillovers and innovation. Table 1 presents a compiled data on the classification of the EU countries according to science-industry relations. It is clear that such European countries as Italy, Poland, Portugal, Lithuania, Latvia and Estonia are based on a broad system, which is highly funded by the government and present high performance. Reasons for the growth in popularity of clusters: The growing number of people involved in economic-development activities. The

6 Micro- and Macro-economic Business Environment: Locations and Clusters in Lithuania 129 decentralization of decision-making processes to the regional and city levels and the renewed importance of international organizations have left many new policy planners with the need to find new tools to define their policies. Use of increasingly frustrating traditional industry policies such as providing subsidies for uncompetitive industries, attempting to build new indsutries from scratch and trying to attract uncompatible foreign investments are unproductive. The globalisation of international markets. With the reduction in the number of barrieres trade, producers can compete freely in any economy at the global level. Given this, regions realize that they must compete internationally in the industries in which they enjoy an advantage. Globalization is thus leading to a specialization of regional economies (Nonaka and Takeuchi, 1995; Maskel et al, 1998). Clusters support this trend by building on local differences, seeking an endogenous growth of regional economies, reinforcing the assets already present in the local economies. Figure 4. Reasons to have Science & Technology Parks Focal point for cluster development Technology transfer Commercialisation of research Diversification of local economy LEGEND: STP - Science & Technology Park STP Favourable environment for existing and new businesses Wealth and job creation Source: compiled by the author. One of the options for business/ industry clusters within a region is a science and technology park (STP) (Figure 4), where new businesses receive a start-up advice, facilities and usually tax-free activities till a determined time. With a definite popularity of STPs in the world, Lithuania stands as a country of fostering this form of business innovations, at the same time encouraging clustering process within dedicated regions in the country. Business Innovation, Location and Cluster Development in Lithuania: Analysis of Trends Long-term goal for business innovation and cluster development in Lithuania is to increase the international competitiveness of Lithuanian business by intensifying the application of new technological solutions and organizational initiatives in enterprises. Innovation here is defined as the commercial application of new technologies, ideas and methods, proposing for the market new or improved products and processes. Objectives of business innovation and cluster development in Lithuania could be summarized in the following statements: 1. Promotion of innovation and raising public awareness. 2. Encouragement of science and business cooperation.

7 130 Dainora Grundey 3. Strengthening of research and technology basis, improvement of its use efficiency. 4. Improvement of financial environment for innovations and development of support infrastructure (direct and indirect support). 5. Strengthening of co-ordination activities and administration capacities of the institutions involved in innovation and R&D policy making. Lithuanian has followed a persistent and well-structured path of identifying major requirements for innovation strategy and policy in the country by adopting various directives and programmes to adhere to the EU standards, even before the country joined it in 2004, and created the Lithuanian-wide national innovation support network (see Figure 5), e.g.: 1. Innovation in Business Programme I ( ) adopted by Government on 8/05/ Innovation in Business Programme II ( ), adopted by Government on 15/07/ Conception for Science and Technology Parks Development, adopted by Government on 18/07/ Recommendations for Science and Technology Parks Statute, adopted by Government on 11/07/ Other strategic documents, which played essential role in creating a positive climate for business innovation in Lithuania, were: Single Programming Document, Long- Term State Development Strategy, Long-Term Economy Development Strategy, Mid- Term Industry Development Policy and etc. reflect Lisbon strategy goals). Innovation infrastructure in Lithuania comprises of the following competitive entities: Innovation centres. Science and technology parks. Other public and private: Business incubators. Business information centres. Associative business structures (sectoral associations, chambers of commerce, etc.). Specialised consultancy. R&D institutions. Figure 5. Lithuanian-wide National Innovation Support Network Regional Innovation Unit 5 Regional Innovation Unit 4 Regional Innovation Unit 1 Regional Innovation Unit 3 LEGEND: LIC (Innovation Support Team) Regional Innovation Unit 2 Network Coordination + Help Desk Vilnius the Capital City Added Value of LIC: A. Infrastructure: To provide know how and to moderate innovative networks To support the development of strategies for special business fields To create a constantly working net of institutional innovation support To promote innovation awareness B. Companies: To provide information and advisory services on Grant Schemes To stimulate project ideas To support the transfer of project ideas into projects To provide training to companies Source: created by the author.

8 Micro- and Macro-economic Business Environment: Locations and Clusters in Lithuania 131 Figure 6. Location and Network of Business Incubators, Science & Technology Parks and Innovation Centres in Lithuania Telsiai County BI Klaipeda STP KTU Regional BI LUA STP Kaunas High-Tech & IT Park Kaunas Regional Innovation Centre Following the scheme of Lithuanian-wide national innovation support network (see Figure 5), business incubators and STPs were successfully located as demonstrated in Figure 6. The quantity of innovation centres prevail in Vilnius the capital city, and in Kaunas the second biggest city of Lithuania (based in the central part of the country). The North-Western part of the country is also catching up with major metropolis, namely Telsiai, Siauliai and Klaipeda mainly around universities. A nation-wide survey was carried out in 2006 by Lithuanian Development Agency, which questioned the efficiency of business incubators (BIs) in Lithuania, major findings of which are indicated in Table 2. Most successful and efficient BIs turned to be based in Vilnius (Vilnija Business Incubator, established in 1998), in Kaunas (KTU Regional Business Incubator, founded in 1998 by Kaunas University of Technology), and in Alytus (Alytus Business Incubator, created in 1998). A special case is with Alytus Business Incubator, as it is outnumbered in various cases by other business incubators in Lithuania, e.g. Siauliai, etc., but it was extremely successful in created the third largest number of new jobs within the region. Table 2. Dynamics of Business incubators in Lithuania, 2006 Name of the incubator Kazlu Ruda BI Alytus BI Date of establishment Siauliaiai BI Siauliai University STP Vilnija BI Vilnius STP Visoriai IT Park North Town STP Lithuanian Innovation Centre Source: created by the author, according to the data of Lithuanian Development Agency. Number of incubated companies Space for rent, sq.m. Number of incubated companies New jobs created 1. KTU Regional June, Business Incubator 2. Alytus Business December, Incubator Siauliai Business January, Incubator 4. Telsiai Business November, Incubator Vilnija Business Incubator November, Kazlu Ruda March, Business Incubator 7. Ignalina NPP December, N/A 950 N/A N/A Region Business 2003 Incubator Total: Source: created by the author, according to the data of Lithuanian Development Agency.

9 132 Dainora Grundey The most competitive sectors of Lithuanian economy in long-term perspective, which could find their assimilation within the regional development of clusters, are as follows: Telecommunications and information technologies. Transportation, construction and logistics. Biotechnology, pharmacy and laser technology. Machinery and electrical equipment production. Foodstuffs and beverages. Textile and clothing. Fertilisers and chemicals. Wood processing and furniture manufacturing. Refined oil production. Lithuanian Innovation Centre takes an active role in the country to assist the development of business innovation and fostering business consulting services region-wide. In 2007, it performed a survey, focusing on customer satisfaction of Lithuanian entrepreneurs (Figure 7). The use of business innovation consultations were taken as regular services in proportion of city population, e.g., in Vilnius 26%, in Kaunas 20%, Panevezys and Utena taking 16%, etc. Figure 7. Customer Satisfaction Survey of Lithuanian Entrepreneurs, 2007 "Regular" service users, by regions (total > 460 out of 600) 15% 26% 12% 11% 16% Vilnius Panevėžys & Utena Šiauliai & Telšiai 20% Kaunas Klaipėda &Tauragė Alytus & Marijampolė Source: created by the author, based on the data by Lithuanian Innovation Centre. Figure 8. Needs for specialised innovation support services in Lithuania, 2007 (% of companies) 66% 75% Assistance in research and technological development Financing of innovation projects 44% 63% 65% 71% 76% 79% Technical-technological consultations Search of international partners for new technologies Marketing of developed technologies Search of new technologies Protection of intelectual property, licencing Information about technological development Source: own compilation based on the Survey data by Lithuanian Innovation Centre,

10 Micro- and Macro-economic Business Environment: Locations and Clusters in Lithuania 133 Another survey by Lithuanian Innovation centre in 2007 investigated the nature of consultation services, in need by Lithuanian entrepreneurs. The three most needed options for the businesses people were the following ones: 1) search of international partners for new technologies (79%); 2) search of new technologies (76%); 3) financing of innovation projects (75%). Conclusions and Recommendations The author of this paper underlines the following challenges for Lithuania in the field of business innovation and business clusters development: Long-term innovation strategy. Better coordination of innovation and R&D policies. More efficient research and stronger science and business cooperation. Innovation and R&D statistics. In order to perform the above-stated challenges for Lithuanian business innovation and cluster development, we recommend a guide for assessing business cluster feasibility study with a dedicated region (see Table 3). Table 3. Recommended Guide for Assessing Business Clusters within a Region Factor Description Typical Measures/Proxies R&D capacity Institutes of public or private research in areas related top cluster s products or processes; expert individual researchers that are available or accessible. R&D expenditures from government and private sources that involve cluster members, products, or processes. Workforce skills and availability Education and training Proximity to suppliers Capital availability Specialised services Machine builders and software designers Degree to which the skills of the labour force are tailored to the needs of the cluster, i.e., technical skills, general knowledge of the industry, and entrepreneurial skills. Education and training for the cluster s major occupations, instruction embedded in context of cluster; instructors with relevant experience; training for technological and organisational changes. Nearby sources of primary and secondary supplies, materials, and services that minimise transaction costs and maximise interaction. Local banks that understand the cluster and know the cluster s key players; availability of working and start-up capital; access to seed and venture capital to exploit new opportunities. Public sector services, such as technology extension services, technology centres, export assistance, or small business centres and private sector services provided by designers, engineering consultants, accountants and lawyers that have special knowledge of the cluster. Access to companies that design and build the machines, tools, and software used by cluster; working relationships between the tool builders and companies to foster collaborative innovations. Number of enrolments in relevant programmes Graduates hired by cluster. Number of credit and non-credit programmes for cluster. Internships/apprentices employed. Input/output analysis of supply chains Number of potential 1 st, 2 nd, 3 rd tier suppliers. Survey of actual suppliers. Value of venture capital, loans made in cluster. Participation of bankers in cluster activities. Number of consultants who specialise in cluster. Services that employ specialists from cluster. Value of local outsourced services. Number of companies that produce and sell capital equipment to the cluster.

11 134 Dainora Grundey Table 3. Recommended Guide for Assessing Business Clusters within a Region (continued) Networks and alliances Social capital Entrepreneurial climate Innovation and imitation Presence of market leaders and innovators External connections Shared vision and leadership Frequency of formal co-operation among cluster members in, for example, joint ventures, production, marketing, training, or problem solving. Scale and degree of activity among local business and civic associations in the region; frequency of interaction; informal networks of personal business related contacts. Continual formation of new business ventures by workers and managers within the cluster based on new, complementary, or competitive products or on core competencies. New and enhanced technologies and products that are conceived, developed and adopted or brought to market; dispersion of innovations to other local firms. Number of acknowledged market leaders and magnet firms Marketing and sales of products or services outside the boundaries of the cluster. Joint ventures, contracts, alliances with firms, contacts/communications with experts in other regions; knowledge of international benchmark practices. Firms that think of themselves as a.system., i.e., plan for and share goals, have vision for future; leaders who take responsibility for collective competitiveness. Number of joint ventures, skill alliances, marketing consortia, etc. Number of professional, business, and trade associations. Membership in each, level of activity. Survey of connections. Number of new start-ups generated by cluster. Number attracted to cluster. Patents and copyrights. Investments in new technologies. New product lines started. Number of headquarter operations. Value of exports of cluster products. Value of sales outside of region. Study or benchmarking tours, travel to trade shows. Alliances that include external members. Collective strategic plan or vision statement. Acceptance of cluster name or brand. Source: proposed by the author. Considering that Lithuania has already established a 5-unit network for innovation and industry clusters network, the following most needed business consultation direction are identified: search of international partners for new technologies; search of new technologies; and financing of innovation projects. References 1. Allen, J (2000). Power/economic knowledge: symbolic and spatial formations, in J. Bryson et al (eds). Knowledge, Space, Economy, Routledge, London, pp Braczyk, H et al (eds). (1998). Regional Innovation Systems, UCL Press, London. 3. Camagni, R (ed) (1991). Innovation Networks: Spatial Perspectives, Belhaven Press, London. 4. Collins, H (1974). The TEA Set: Tacit Knowledge and Scientific Networks, Science Studies, 4, pp Collins, H (2001). Tacit Knowledge, Trust and the Q of Sapphire, Social Studies of Science, Vol 31 (1), pp Cooke, P et al (1998). Regional Systems of Innovation: An Evolutionary Perspective, Environment and Planning A, Vol Edquist, C (ed) (1997). Systems of Innovation: Technologies, Institutions and Organisa-

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