Using innovation to escape the trap

13.01.2020

Tanel Rebane Director of Enterprise Estonia Trade Development Agency

In a quarter of a century, Estonia’s economy has reached 80 per cent of the European average per capita. This is quite a good result considering what has happened to some countries in southern Europe, for example. Only ten years ago, for instance, the Greek purchasing power was 94 per cent and the Estonian one 63 per cent of the European average. In 2018, these figures were 81 per cent in Estonia and 68 per cent in Greece. However, it is probably not Greece that defines Estonia’s ambition for the future, and we should aim significantly higher. We have ended up in the average income trap.

What does it mean? In a nutshell, it refers to a situation where the core of our economy relies on companies with their current business model being able to pay EUR 1,000 and slightly more for wages, but not EUR 2,500. At the same time, it is these magnitudes that need to be addressed to sustainably conduct business in Estonia and catch up with the more successful companies in Europe.

By reviewing the work processes, it is possible to solve any bottlenecks in a short term and pay even EUR 1,500 instead of EUR 1,000 for wages, but this is only a temporary solution, and as wage pressures grow, such business models will simply break at one point. When speaking about international competition, the same work is being done in countries with cheaper labour.

To put it simply, we are trapped! And we cannot escape it by merely fine-tuning the situation. We need to think about how to earn more for our products and services. Sounds easy, but, boy, it’s complicated!

No company has been able to change without innovation!

Innovation is the only longstanding option to upgrade or, even better, change the business model. While we compared ourselves to Greece above, Ireland would be a more ambitious landmark for the future. It is virtually the only country in the EU that has become even wealthier in the last ten years (from 129 per cent to 187 per cent among the 28 EU Member States).

It is not the four-leaf clover that is behind the success of the Irish economy, but foreign capital and innovation. We will probably never have as much foreign capital as Ireland, as it is the landing point for US companies in Europe, but there could be room for innovation.

At the corporate level, however, innovation usually entails expenses, meaning that it remains on the liabilities side for a long time. Innovation is often intangible in the development phase, or something that is difficult to demonstrate as attractive to financial institutions. This means that many companies have to finance this mystical innovation at the expense of working capital. However, there is always shortage of working capital and, therefore, the state should also play a certain role in supporting innovation.

So what are these Irish companies doing differently anyway? They use newer technologies, more efficient processes, and better development competencies – yes, probably all of them, and that is what makes it complicated. When we add the fact that an Estonian company has an average of six employees, it means that the abilities of companies to consume innovation is one of the main obstacles to longer-term success.

Viljandi versus Dublin

Fortunately, we can learn from a closer location, Viljandi, for example. The average monthly wages in the county amount to nearly EUR 1,200, however, there is also one successful company that has seen the opportunity to change its whole business model through innovation. Initially, the company was engaged in the furniture business and then the furniture business logistics, which was born of the need for consumer-specific upgrades and the request to order items online. But the company was not happy with the way goods transport was carried out technologically.

They managed to develop a solution for collecting and delivering goods – essentially a lot of tin and a bit of innovation. However, there was one concern, as it took up too much space to be a profitable solution at the price per square metre in trading. Consequently, a smaller space was needed for the increasing amount of goods, and this resulted in a parcel machine, where goods are sorted and placed as economically as possible.


Source: toolbox.estonia.ee

This is Cleveron as we know it today – a bit of tin and a lot of innovation. The average monthly wages of the company have increased to more than EUR 2,500, i.e. to the level we want to achieve. It was just one example of change through innovation, and there are plenty of them, but still too few to escape the trap.

But there is a way out. The perfect recipe for this is, above all, a large number of active and ambitious entrepreneurs and a small proportion of smartly managed national innovation policies. Yes, we also need the latter, otherwise we cannot do anything but only observe the process. We could implement this recipe, couldn’t we?

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