No. 33




Insights into innovation and export: current situation and background

08 June 2016


RiTo No. 33, 2016

Studies have shown that while many indicators qualify Estonian businesses as innovative, they seem unable to convert this innovation into money. This article argues that the main reason why process innovation dominates and product innovation is low in the Estonian businesses is that meeting orders is the predominant business model among them. This means that the businesses have no contact with the end product, while their development methods mainly involve diversification of production opportunities and increase in quality and volumes. The issues of product development, supply chain management, marketing, and sales are largely ignored.

As the marketing margin of the business model of production orders tends to be lower than that of the business model of original products, Estonian businesses mainly suffer from low profitability. This in turn means that they are low on funds that could be invested into growth or innovation projects. In addition to money, studies have identified other obstacles to innovation that are at least of equal important: low ability to detect and test market signals, insufficient design and development competences, and no direct contacts with the end consumer, etc. Estonia’s export price index has been falling instead of growing over the past three years, and concessions in export prices have exceeded the EU average. This shows a lack of competitive advantages that could justify raising the consumer prices.

From the point of view of innovation policy, it is important to understand that making funding for product development accessible to businesses who follow the business model of production orders is usually not enough for them to make the shift towards developing and selling original products. This type of businesses are not in a condition to launch or carry out product development or, eventually, to trade independently at foreign markets. We must first help them to get into this condition.

The conclusions for the Estonian innovation policy are that by directing the bulk of measures at the businesses that take part in research and development – by launching support programmes that require high innovative capabilities from the participants – the group of beneficiaries remains small, excluding the majority of the actors in the Estonian economy. For the economy as a whole, it would be more efficient to help the businesses who follow the business model of production orders to move towards the business model of original products. The benefits of this would be twofold: the businesses would increase their potential marketing margin, while the economy would see increased demand for other, so-called accompanying sectors.

Studies and feedback from businesses both show that good advice or the opening of a door at the right moment are often much more beneficial than financial aid. The private sector either does not offer services to solve the bottlenecks to innovation in businesses, or offers these at a price that an average business cannot afford. Access to high quality services that help the businesses along in their development must be the key focus of the government support policy.

Full article in Estonian