Innovation, Technology, and Knowledge Management

Innovation, Technology, and Knowledge Management Series Editor Elias G. Carayannis, George Washington University, Washington D.C., USA For further volumes: http://www.springer.com/series/8124

Elias G. Carayannis Tõnu Roolaht Editors Urmas Varblane Innovation Systems in Small Catching-Up Economies New Perspectives on Practice and Policy

Editors Elias G. Carayannis School of Business George Washington University Washington, DC 20052, USA caraye@gwu.edu Tõnu Roolaht Faculty of Economics and Business Administration University of Tartu Tartu, Estonia tonu.roolaht@ut.ee Urmas Varblane Faculty of Economics and Business Administration University of Tartu Tartu, Estonia urmas.varblane@ut.ee ISBN 978-1-4614-1547-3 e-isbn 978-1-4614-1548-0 DOI 10.1007/978-1-4614-1548-0 Springer New York Dordrecht Heidelberg London Library of Congress Control Number: 2011942782 Springer Science+Business Media, LLC 2012 All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, LLC, 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)

Series Foreword The Springer book series Innovation, Technology, and Knowledge Management was launched in March 2008 as a forum and intellectual, scholarly podium for global/ local, transdisciplinary, transsectoral, public private, and leading/ bleeding -edge ideas, theories, and perspectives on these topics. The book series is accompanied by the Springer Journal of the Knowledge Economy, which was launched in 2009 with the same editorial leadership. The series showcases provocative views that diverge from the current conventional wisdom that are properly grounded in theory and practice and that consider the concepts of robust competitiveness,1 sustainable entrepreneurship, 2 and democratic capitalism, 3 central to its philosophy and objectives. More specifically, the aim of this series is to highlight emerging research and practice at the dynamic intersection of these fields, where individuals, organizations, industries, regions, and nations are harnessing creativity and invention to achieve and sustain growth. 1 We define sustainable entrepreneurship as the creation of viable, profitable, and scalable firms. Such firms engender the formation of self-replicating and mutually enhancing innovation networks and knowledge clusters (innovation ecosystems), leading toward robust competitiveness (E.G. Carayannis, International Journal of Innovation and Regional Development 1(3), 235 254, 2009). 2 We understand robust competitiveness to be a state of economic being and becoming that avails systematic and defensible unfair advantages to the entities that are part of the economy. Such competitiveness is built on mutually complementary and reinforcing low-, medium-, and hightechnology and public and private sector entities (government agencies, private firms, universities, and nongovernmental organizations) (E.G. Carayannis, International Journal of Innovation and Regional Development 1(3), 235 254, 2009). 3 The concepts of robust competitiveness and sustainable entrepreneurship are pillars of a regime that we call democratic capitalism (as opposed to popular or casino capitalism ), in which real opportunities for education and economic prosperity are available to all, especially but not only younger people. These are the direct derivative of a collection of top-down policies as well as bottom-up initiatives (including strong research and development policies and funding, but going beyond these to include the development of innovation networks and knowledge clusters across regions and sectors) (E.G. Carayannis and A. Kaloudis, Japan Economic Currents, 6 10, January 2009). v

vi Series Foreword Books that are part of the series explore the impact of innovation at the macro (economies, markets), meso (industries, firms), and micro levels (teams, individuals), drawing from such related disciplines as finance, organizational psychology, research and development, science policy, information systems, and strategy, with the underlying theme that for innovation to be useful it must involve the sharing and application of knowledge. Some of the key anchoring concepts of the series are outlined in the figure below and the definitions that follow (all definitions are from E.G. Carayannis and D.F.J. Campbell, International Journal of Technology Management, 46, 3 4, 2009). Conceptual profile of the series Innovation, Technology, and Knowledge Management The Mode 3 Systems Approach for Knowledge Creation, Diffusion, and Use: Mode 3 is a multilateral, multinodal, multimodal, and multilevel systems approach to the conceptualization, design, and management of real and virtual, knowledge-stock and knowledge-flow, modalities that catalyze, accelerate, and support the creation, diffusion, sharing, absorption, and use of cospecialized knowledge assets. Mode 3 is based on a system-theoretic perspective of socioeconomic, political, technological, and cultural trends and conditions that shape the coevolution of knowledge with the knowledge-based and knowledge-driven, global/local economy and society. Quadruple Helix: Quadruple helix, in this context, means to add to the triple helix of government, university, and industry a fourth helix that we identify as the media-based and culture-based public. This fourth helix associates with media, creative industries, culture, values, life styles, art, and perhaps also the notion of the creative class.

Series Foreword vii Innovation Networks: Innovation networks are real and virtual infrastructures and infratechnologies that serve to nurture creativity, trigger invention, and catalyze innovation in a public and/or private domain context (for instance, government university industry public private research and technology development coopetitive partnerships). Knowledge Clusters: Knowledge clusters are agglomerations of cospecialized, mutually complementary, and reinforcing knowledge assets in the form of knowledge stocks and knowledge flows that exhibit self-organizing, learningdriven, dynamically adaptive competences and trends in the context of an open systems perspective. Twenty-First Century Innovation Ecosystem: A twenty-first century innovation ecosystem is a multilevel, multimodal, multinodal, and multiagent system of systems. The constituent systems consist of innovation metanetworks (networks of innovation networks and knowledge clusters) and knowledge metaclusters (clusters of innovation networks and knowledge clusters) as building blocks and organized in a self-referential or chaotic fractal knowledge and innovation architecture, 4 which in turn constitute agglomerations of human, social, intellectual, and financial capital stocks and flows as well as cultural and technological artifacts and modalities, continually coevolving, cospecializing, and cooperating. These innovation networks and knowledge clusters also form, reform, and dissolve within diverse institutional, political, technological, and socioeconomic domains, including government, university, industry, and nongovernmental organizations and involving information and communication technologies, biotechnologies, advanced materials, nanotechnologies, and next-generation energy technologies. To whom is this book series directed? The book series addresses a diversity of audiences in different settings: 1. Academic communities: Academic communities worldwide represent a core group of readers. This follows from the theoretical/conceptual interest of the book series to influence academic discourses in the fields of knowledge, also carried by the claim of a certain saturation of academia with the current concepts and the postulate of a window of opportunity for new or at least additional concepts. Thus, it represents a key challenge for the series to exercise a certain impact on discourses in academia. In principle, all academic communities that are interested in knowledge (knowledge and innovation) could be tackled by the book series. The interdisciplinary (transdisciplinary) nature of the book series underscores that the scope of the book series is not limited a priori to a specific basket of disciplines. From a radical viewpoint, one could create the hypothesis that there is no discipline where knowledge is of no importance. 2. Decision makers private/academic entrepreneurs and public (governmental, subgovernmental) actors: Two different groups of decision makers are being addressed simultaneously: (1) private entrepreneurs (firms, commercial firms, 4 E.G. Carayannis, Strategic Management of Technological Learning, CRC Press, 2000.

viii Series Foreword academic firms) and academic entrepreneurs (universities) interested in optimizing knowledge management and in developing heterogeneously composed knowledgebased research networks and (2) public (governmental, subgovernmental) actors that are interested in optimizing and further developing their policies and policy strategies that target knowledge and innovation. One purpose of public knowledge and innovation policy is to enhance the performance and competitiveness of advanced economies. 3. Decision makers in general: Decision makers are systematically being supplied with crucial information, for how to optimize knowledge-referring and knowledgeenhancing decision making. The nature of this crucial information is conceptual as well as empirical (case-study-based). Empirical information highlights practical examples and points toward practical solutions (perhaps remedies), conceptual information offers the advantage of further-driving and further-carrying tools of understanding. Different groups of addressed decision makers could be decision makers in private firms and multinational corporations, responsible for the knowledge portfolio of companies; knowledge and knowledge management consultants; globalization experts, focusing on the internationalization of research and development, science and technology, and innovation; experts in university/ business research networks; and political scientists, economists, and business professionals. 4. Interested global readership: Finally, the Springer book series addresses a whole global readership, composed of members who are generally interested in knowledge and innovation. The global readership could partially coincide with the communities as described above ( academic communities and decision makers ), but could also refer to other constituencies and groups. Elias G. Carayannis Series Editor

Preface During the last decade, a lot of attention has been paid to innovation systems at different levels, but there remains little consensus in the literature about which components such a national innovation system should contain. Existing approaches to national innovation systems are predominantly based on the experiences of countries marked by high income levels, a broad knowledge base, lengthy experience of a market economy, well-functioning markets, developed and stable institutional frameworks, and advanced infrastructures for supporting innovation. In the majority of the new EU Member States the situation is very different. They have recently gone through the systemic change from a command economy to a market economy, their income levels are considerably lower, knowledge base narrower, infrastructure weaker, and their institutional frameworks for innovation support are still emerging. Thus, in comparison to well-developed economies, these countries are at a different stage along the development path. Due to these differences, the national innovation systems developed elsewhere cannot be applied in these countries. Research into innovation systems has to a great extent focused on large economies, while several of the new EU Member States are relatively small in terms of population and GDP. Thus, it is important to study how these countries could overcome the problems caused by their smallness which is a serious disadvantage from the perspective of market attractiveness or in terms of resource endowments and succeed in using their latecomer advantages. For example, developing human capital and executing the institutional changes are necessary for adapting new Western technologies. This should be studied not only at the country level but also at the company level. The studies of national innovation systems provide the most meaningful results in the comparative perspective. Therefore, it is more beneficial to study several countries rather than a single country. The wider view of national innovation systems suggests that in addition to studying research organizations and institutions closely related to the creation of new knowledge, it is also important to examine how the innovation system is linked to the economic system and the community. For example, the links to production and the system for financing should be investigated. The knowledge generation processes, related support services (financing, labor, education), ix

x Preface and potential changes the new knowledge induces in all spheres of the community are also elements of this wider view. The combination of innovation system, smallness, and catching-up latecomer status is an important issue, especially in, but not limited to, the context of the enlarged EU. These countries have an economic impact on larger countries and their experience could be useful for other catching-up economies in Latin America and Asia. These issues are especially important in the current economic situation of increasing global competition, where countries and companies need ideas about how to develop from low-cost producers to providers of more knowledge-intensive products and services. The purpose of this collection is to develop a complex and systematic empirical view of innovation system development in small catching-up economies. To that end, the following research tasks were set: To establish a theoretical framework of the innovation system focusing on the specific characteristics of a small, path-dependent, latecomer economy and its learning processes. To explain the issue of innovation success and failure along with its causes and measurement problems. To investigate organizational innovation capabilities and internationalization at company level. To pinpoint the role of human capital development and social factors in the innovation process. To develop an integrated view of innovation policies in the context of a small catching-up economy along with policy suggestions and implications. The book offers the first comprehensive view of innovation system development in the context of small catching-up economies. The smallness, path dependency, and latecomer status of such economies create some inherent limitations for their innovation systems, but these special characteristics can offer advantages as well. Smallness is often related to increased flexibility and shorter reaction times, while latecomers can also benefit from earlier experiences and fine-tune certain arrangements accordingly. Path dependency highlights the fact that the innovation system development processes are considerably influenced by the past of a particular country or region. By incorporating these three features into one complex analysis, this collection intends to provide a unique viewpoint of innovation systems, including aspects of learning, innovation success measurement, organizational innovation capabilities, internationalization, human and social capital in the innovation process, and policy implications. The book is predominantly an empirical contribution, except for first Part, which is somewhat more theoretical by nature, building the background. The primary research questions are as follows: What special features characterize the development of innovation systems in small catching-up economies? How is this development influenced by the path dependency phenomenon?

Preface xi These two questions form the leading motivation for the analysis and discussion. Some chapters address one or both questions directly, while others relate to them more implicitly. Perhaps smallness is a slightly more prominent determinant than path dependency, but both help to establish a novel and relevant research framework for the analysis of innovation systems. The following more detailed research questions are raised in order to pinpoint the major elements of the complex study in detail: What are the causes for innovation success/failure? How should we measure innovation performance? How do organizational capabilities and internationalization tendencies relate to company-level innovations? What is the role of human capital and social factors in the innovation process? How can various policies support innovation in an integrated manner? What are the policy suggestions and implications based on the analysis? The answers to these questions should provide readers with a systemic view of the peculiarities of innovation system development in small catching-up economies. It should help provide an in-depth understanding of various determinants and their impacts on innovation processes. The policy implications offer a set of normative guidelines for enhancing innovation system development in the context of small catching-up economies. The book has five larger parts. The first part establishes the theoretical background and research context. It explains the systemic view of innovation, outlines the specifics of small-scale innovation systems, discusses the nature of path dependency and latecomer status, reflects on characteristics of catching-up economies, and outlines the roles of creativity and learning in innovation processes. These more general topics lay the foundation for the following four parts that deal with various detailed elements of the innovation system. Chapter 1 in the first part provides an overview of the systemic approach to innovation. The authors discuss the historical development of the approach as well as different types of innovation systems. In the second part of the chapter, they present theories influencing the innovation system approach and a critique of the approach. The first chapter concludes with a development of the system failure framework as a basis for public sector interventions. Chapter 2 aims to outline the specific characteristics of small-scale national innovation systems. This discussion is predominantly based on a fragmented body of empirical works about various elements of innovation systems and policies. The chapter not only outlines several aspects common to small economies but also indicates that even small economies can be heterogeneous. Various development aspects, such as the role of foreign direct investment (FDI), knowledge, and networking are brought into focus along with policy considerations. Chapter 3 examines the concepts of path dependency and latecomer countries within the framework of national innovation systems. It intends to identify major

xii Preface lessons for Central and Eastern European countries in building up their national innovation systems based on the experience of Asian and Latin American countries. On the basis of this analysis, the authors draw several important conclusions and make relevant recommendations. In Chapter 4, the authors seek to show the importance of the role of sectoral decomposition in knowledge creation across countries with different levels of development. They make use of microdata from the fourth European Community Innovation Survey (CIS 4) from 16 European countries, including data on 104,717 firms. As a result, the authors argue that innovation and knowledge creation varies mostly due to country-specific factors, and that industry-specific factors play a minor role. Chapter 5 conceptualizes creativity and learning processes. The authors show the connections between creativity and innovation by offering a systematic discussion of individual and organizational-level determinants. These aspects include expertise, task motivation, and creative thinking skills as well as resources, managerial practices, and organizational culture. The second part offers contributions dealing with the success and measurement of innovation. After discussing measurement, the analysis investigates the connection between innovation and productivity levels. The part concludes with two contributions about the various causes for innovation failure or success. Chapter 6 deals with innovation measurement problems. This chapter bridges two approaches to assessing national innovation performance based on the composite indicators of the European Innovation Scoreboard (EIS) and the analysis of factors that may be behind these indicators. The chapter aims to explore what factors have been most influential in the innovation performance of different countries, and whether innovation measurement indicators capture these differences. In Chapter 7, the authors investigate how the innovation productivity relationship varies across subbranches of the service sector. For this analysis, they employ the CDM structural model of the innovation process, which consists of equations for innovation expenditures, innovation output, and productivity. The authors rely on panel data from three of the community innovation surveys for Estonia. The results show how product and process innovations are associated with the total factor productivity of firms in the service sector. Chapter 8 analyzes a situation where a company from a small country with innovative technology attempts to invest in a larger emerging market country. It concludes that innovative partnerships supported by international financial institutions can make projects possible that otherwise would not materialize. These institutions need to provide more innovative risk mitigation instruments that are flexible and more cost effective for the private sector and with shorter processing time. The discussion in the chapter is based on a review of theoretical literature, secondary data, interviews, and the author s experience of working for the World Bank Group for 12 years on three continents. Chapter 9 presents the notion that innovations are often associated with substantial risks, and failure is not rare. Thus, it is important to study what causes innovation

Preface xiii failure, how to reduce the risk of failure and increase the chance of innovation success. This analysis aims to investigate how the nature of network relationships and capabilities lead to innovation failure or success in Estonian firms. Based on survey results from 95 firms and evidence from 48 interviews, it concludes that the lack of sufficient capabilities and networks may indeed lead to innovation failure. The third part includes empirical contributions dealing with innovation capabilities, where the first two contributions focus on organizational and process aspects. The following two studies discuss innovation capabilities in SMEs and the internationalization of innovations. Chapter 10 sets out to present the patterns of transformation in the organizational culture of Estonian information and communication technology (ICT) organizations, and find connections between the culture of those organizations and their innovation activities. The authors do not focus on the question of why, but rather how. They analyze how the organizational culture of ICT companies has changed over the last two decades and discuss whether and how the transformation of their culture is reflected in their innovation activities. Chapter 11 concerns cultural influences on innovation based on a comparative investigation of biotechnology companies. The chapter starts with a brief review of the literature on innovation and organizational culture and then focuses on cultural characteristics that have been associated with a firm s capability to engage in successful innovation. In this study, interviews were conducted in 15 Estonian and 26 Danish biotechnology firms. Based on the findings, the authors identify several factors that might explain the difference in innovation capacity between these countries. Chapter 12 provides the results of a study of the innovation capabilities of SMEs in Estonia, Latvia, and two catching-up regions in Poland and Germany. The authors distinguish between various capabilities, including a company s basic assets and competencies. The chapter aims to identify the relationship between these capabilities and the company s past and planned innovations and performance, and to also compare results across countries. In this analysis, they interviewed 245 top managers from SMEs involved in tourism and food production. In Chapter 13, the authors analyze the relationship between inward and outward FDI at either company or industry level and the innovation behavior of companies in Estonia. They use company-level data from three waves of the Community Innovation Surveys combined with financial data from the Estonian Business Register and FDI data from Balance of Payments statistics. The authors use the propensity score matching method for their analysis. The fourth part offers an analysis of human and social capital in the context of innovation. It also contributes to the discussion of the relationships between innovation and various transfers between markets (knowledge transfers, FDI, labor mobility). The exploratory Chapter 14 investigates the relationship between innovative activities and human and social capital in the context of catching-up countries facing both latecomer advantages and path dependency. Data on 30 European countries

xiv Preface are analyzed, including ten transition countries with communist backgrounds that are considered catching-up countries in this study. Among other interesting results, authors show that catching-up economies, which tend to have poorer performance in innovative activities, also tend to have lower levels of human and social capital. Chapter 15 aims to estimate how technological change affects demand for skills based on data from Estonia, a CEE country. The main research question is whether technological change has augmented skills in a midtransition country. The study seeks to uncover whether such demand has been magnified by trade activities or by FDI. In terms of trade activities, the author delves deep into details to see whether the effects of technological change on skills vary according to the level of technological development in the export destination. Chapter 16 looks at the relationships between interfirm labor mobility and technological innovation at firm level. The authors use a novel Estonian database from an online job search portal that includes detailed data on occupations and education. The employee-level data is matched with Community Innovation Survey 2006 data covering 2004 2006 on business enterprises. The research team estimates various specifications of the knowledge production functions augmented using mobility indicators. The results indicate that product innovations and total factor productivity are associated with subsequent higher worker flows especially from innovative firms, whereas the flows of professionals and technicians are more important. Finally, the fifth part is about policy. It deals with the role of the public sector in small innovation systems characterized by path dependency. The next study provides policy suggestions and the final discussion focuses on policy implications concerning education. Chapter 17 analyzes the structure and role of public sector inputs on a country s innovativeness. It discusses the literature on the structure of public sector inputs and the role such inputs play in innovativeness, and offers an empirical analysis concerning the structure of public sector inputs for innovativeness and the impact on business sector innovation processes in EU Member States, Croatia, Turkey, Iceland, and Norway. The data are from the Eurostat database, and additional data originate from the European Innovation Scoreboard database. The authors conduct a component analysis to find the structure of public sector inputs for innovativeness. Thereafter, the influence of factors is assessed using multiple regression models to explain the public sector s role in formatting business sector innovation processes. In Chapter 18, the authors discuss the public innovation conditions prevailing in and policy measures available to a small country such as Estonia, as well as the effectiveness of such measures. The suggestions include multiple strategies and measures, such as the instruments for promoting innovation among private Estonian companies, demand-side instruments (e.g., public procurement), sales of public property, and participation in ownership to assist innovative firms. Private and public innovations concern the innovative activities of public companies, while other targeted strategies should deal with public research and the supply of infrastructure services. Public sector-oriented innovation also refers to strategies concerning education and infrastructure as well as legislation and public management.

Preface xv Chapter 19 proposes policy implications for improving the education sector s innovation in schools through introducing ideas for leadership advancement, and shaping organizational culture and performance management principles. School performance is viewed in terms of creating citizens for society individuals who are active, capable of developing, thinking, and learning. Schools need to create the fundamentals for the successful subsistence of their pupils in society and sustainable input for universities and the labor market. The variety of studies and discussions in this book should provide readers with a unique multidimensional understanding of innovation systems in small path-dependent economies that, in the European and global context, have some catching-up to do. Tartu, Estonia Tõnu Roolaht

Contents Part I The General Context of Small and Path-Dependent National Innovation Systems 1 The Development of the Systemic Approach to Innovation... 3 Urmas Varblane and Dorel Tamm 2 The Characteristics of Small Country National Innovation Systems... 21 Tõnu Roolaht 3 Path Dependency Factors Affecting the Innovation Systems of Latecomer Countries: Comparison of Central and Eastern Europe, Asia, and Latin America... 39 Urmas Varblane, Kadri Ukrainski, and Oliver Lillestik 4 Knowledge Creation in Central and Eastern Europe: The Role of Sectoral Composition... 59 J. Meriküll, R. Eamets, and U. Varblane 5 Creativity and Learning in Innovation Processes... 79 Maaja Vadi and Harald Lepisk Part II The Contingency Approach to Success in Innovation Systems 6 Innovation Measurement Problems: An Illustrative Case of the Baltic Countries... 99 Tiiu Paas and Helen Poltimäe 7 Innovation and Firm Performance in the Services Sector in Estonia... 121 Jaan Masso and Priit Vahter xvii

xviii Contents 8 Small States and Large Private Sector Investments in Infrastructure in Emerging Market Economies in Partnership with International Financial Institutions... 139 Hilmar Þór Hilmarsson 9 The Capability-Related and Network-Related Causes for Innovation Failure and Success... 159 Tiia Vissak Part III The Innovation Capabilities in a Small and Path-Dependent Innovation System 10 Transformation of Organizational Culture and the Effects on Innovative Activities: The Case of Estonian ICT Companies... 179 Anne Reino, Triin Kask, Karin Sakowski, and Anton Neidre 11 Investigating Cultural Influences on Innovation: A Comparison of Estonian and Danish Biotechnology Organizations... 197 Krista Jaakson, Frances Jørgensen, Dorel Tamm, and Gerli Hämmal 12 Innovation Capabilities in Small Catching-Up Economies: Evidence from Food Production and Tourism Sector SMEs... 215 Rebekka Vedina and Ilona Baumane 13 Links Between Foreign Direct Investment and Innovation Activities in Estonia... 235 Jaan Masso, Tõnu Roolaht, and Urmas Varblane Part IV The Relationships of Human and Social Factors with Innovation 14 The Role of Human and Social Capital for Innovation in Catching-Up Economies... 259 Anneli Kaasa, Eve Parts, and Helje Kaldaru 15 The Effect of Innovation on Skill Upgrading in Midtransition: Microeconometric Evidence from Estonia... 277 Jaanika Meriküll 16 The Impact of Interfirm Labor Mobility on Innovation: Evidence from Job Search Portal Data... 297 Jaan Masso, Raul Eamets, Pille Mõtsmees, and Kaia Philips

Contents xix Part V The Innovation Policies in a Context of Small and Path-Dependent Country 17 Public Sector Inputs to the Innovativeness of the Country... 325 Janno Reiljan, Peter Friedrich, and Ingra Paltser 18 Policy Suggestions for Integrated Public Innovation Policies in a Small Country... 343 Peter Friedrich, Janno Reiljan, and Ingra Paltser 19 Creating Innovation in the Education Sector: Policy Implications... 371 Anne Aidla, Reelika Irs, and Kulno Türk Index... 389

List of Figures Fig. 1.1 Broad and narrow definitions of the national innovation system (composed by the authors)... 5 Fig. 1.2 The geographical coverage of different types of innovation systems and their linkages to each other (composed by the authors)... 7 Fig. 1.3 Overview of innovation systems approach (composed by the authors)... 8 Fig. 1.4 Framework of the system failure concept (composed by the authors)... 15 Fig. 5.1 Framework for analysis of creativity and learning (modification of Amabile s approach)... 81 Fig. 5.2 Influence of culture on creativity, learning, and innovation... 91 Fig. 5.3 Influence of economic and political issues on creativity, learning, and innovation... 92 Fig. 5.4 Influence of education on creativity, learning, and innovation... 93 Fig. 6.1 Country groups according to the EIS in 2003 2008. Source : Innometrics (2008, 2009)... 104 Fig. 6.2 The Summary Innovation Index by dimensions of the European Innovation Scoreboard for the Baltic States and EU27 average in 2008... 106 Fig. 8.1 A PPP BOT contractual structure where the IFI guarantees the loans from a private investment bank. Among the risks associated with private sector lending (including, for example, from private investment banks) to a power project company operating in an emerging market economy is that the company may not have a secure revenue stream to service its debts... 144 xxi

xxii List of Figures Fig. 8.2 A PPP BOT contractual structure where the IFI guarantees the offtake purchaser (the government provides a counter guarantee). The specific risk in this case is that the power project company is selling electricity to an offtaker who is an emerging market government that may not be creditworthy... 145 Fig. 9.1 The interconnections between capabilities, networks, and innovation success or failure... 163 Fig. 9.2 Factors hindering innovation (1 = completely unimportant 5 = very important)... 164 Fig. 9.3 The decision-making freedom in foreign-owned firms (1: this is the decision of the foreign owner alone 5: this is the decision of the Estonian subsidiary)... 166 Fig. 9.4 Transfers of technology and know-how between the foreign parent firm and the Estonian subsidiary (1: no transfer 5: a very large transfer)... 169 Fig. 10.1 Knowledge-based typology of innovation (compiled by the authors, based on Henderson and Clark 1990)... 182 Fig. 10.2 Determinants of innovation from the organizational culture perspective (authors figure based on Martins and Terblanche 2003; Kanter 1988; Tesluk et al. 1997; Angle 1989; Jaskyte and Dressler 2005; Tellis et al. 2009 )... 187 Fig. 10.3 Development of organizational culture of the companies (compiled by the authors on the basis of interviews)... 189 Fig. 11.1 Path-dependent aspects affecting organizational innovativeness in Estonian biotechnology organizations... 209 Fig. 13.1 Typology of innovating firms by their modes of internationalization... 237 Fig. 13.2 Difference in innovativeness between foreign and domestic firms across different countries. Source : own calculations using CIS4 anonymized micro-data Note: innovative companies are those with either product or process innovation. All numbers were calculated with sample weights... 240 Fig. 14.1 Mean values for patent applications, enterprises with innovative activities, R&D expenditures, and general indicators of human and social capital in four country groups... 268

List of Figures xxiii Fig. 16.1 Labor market flows 2000 2009. Notes: E employment, e.g., EE flow means job-to-job flow, noe nonemployment, in our data we cannot differentiate between unemployment and inactivity this flow includes both. Source : CV-Keskus database, authors calculations... 304 Fig. 16.2 Innovativeness and knowledge spillovers through mobility across two-digit industries, 2004 2006. Note: Industries with less than ten firms in the sample have been left out... 308 Fig. 18.1 Innovation policy tools by Edler and Georghiou (2007: 953)... 356

List of Tables Table 2.1 Population, GDP, and R&D expenditures in selected small economies... 23 Table 2.2 Global Innovation Scoreboard ranks of selected small countries in 2005... 25 Table 3.1 Industrial policies of latecomer countries of CEE, East Asian, and Latin America... 45 Table 4.1 Descriptive statistics: 2004 (%)... 62 Table 4.2 Descriptive statistics: 2004 (%)... 66 Table 4.3 Decomposition of R&D share in turnover: 2004... 67 Table 4.4 Decomposition of innovation share in turnover: 2004... 69 Table 4.5 Innovation production function estimation: CEE and EU15 2002 2004; marginal effects... 70 Table 4.6 Decomposition of differences in technological innovation activity in CEE and EU15 countries: 2002 2004... 72 Table 6.1 The indicators values of the Baltic States in EIS 2008, category Enablers... 108 Table 6.2 Total public expenditure on education and financial aid to pupils and students, 2007... 109 Table 6.3 The indicators values of the Baltic States in EIS 2008, category Firm activities... 110 Table 6.4 Business R&D expenditure in 2004 2008 (% of GDP)... 111 Table 6.5 Non-R&D expenditure in the Baltic States, 2004 and 2006 (thousand EUR)... 112 Table 6.6 The indicators values of the Baltic States in EIS 2008, category Outputs... 114 xxv

xxvi List of Tables Table 7.1 Innovation output indicators in various service industries... 126 Table 7.2 Engagement in R&D activities... 127 Table 7.3 Innovation input indicators in various service industries... 127 Table 7.4 Average labor productivity by firm innovativeness (thousands of euros)... 128 Table 7.5 Innovation investment equation... 131 Table 7.6 Knowledge production functions estimated as bivariate probit models... 132 Table 7.7 Output production function (productivity equation)... 133 Table 9.1 Factors and actors leading to innovation failure and success... 170 Table 9.2 Suggestions for avoiding innovation failure and increasing chances of innovation success... 172 Table 10.1 Relationships between organizational culture characteristics and innovation... 184 Table 10.2 Study sample and methods... 188 Table 11.1 Summary of literature review... 200 Table 11.2 Sample characteristics... 203 Table 12.1 Study sample across countries and sectors... 223 Table 12.2 Innovators and laggards by country and sector... 225 Table 12.3 Means of evaluations on single competencies among innovators and laggards... 226 Table 12.4 Differences of mean estimations of competencies and of the presence of innovations across countries by sectors... 228 Table 13.1 Innovation output indicators by type of company in Estonia... 241 Table 13.2 Innovation input indicators by different types of companies in Estonia... 243 Table 13.3 Probit models for the probability of a company being foreign versus domestically owned, and domestic multinational versus foreign-owned... 244 Table 13.4 Matching quality... 245 Table 13.5 Propensity score matching results for innovation output indicators (treatment group: foreign firms, control group: domestic firms)... 246 Table 13.6 Propensity score matching results for innovation output indicators: domestic multinationals versus foreign firms... 249

List of Tables xxvii Table 14.1 Innovative activity and its factors in different country groups: mean (standardized) values and their differences... 266 Table 15.1 Description of introduced variables... 282 Table 15.2 Descriptive statistics by innovativeness of firm (Inno)... 283 Table 15.3 Share of tertiary-educated workers in relation to innovativeness of firm, OLS estimation... 285 Table 15.4 Description of the instruments for innovativeness... 287 Table 15.5 Pearson correlation coefficients between dependent and explanatory variables and instruments... 288 Table 15.6 Share of tertiary-educated workers in relation to innovativeness of firm, 2SLS estimation... 289 Table 15.7 Share of tertiary-educated workers in relation to a firm s innovation expenditures, OLS vs. 2SLS estimation... 291 Table 15.8 Share of tertiary-educated workers in relation to a firm s product and process innovation, OLS vs. 2SLS estimation... 291 Table 15.9 Share of tertiary-educated workers in relation to innovativeness, foreign ownership and export growth, OLS estimation... 294 Table 16.1 Comparison of CV-Keskus database structure and other representative datasets according to different personal characteristics... 303 Table 16.2 The share of job-to-job flows in the recipient firm s total employment... 307 Table 16.3 Estimated impact of mobility on innovation expenditure... 309 Table 16.4 Knowledge production function estimates for product innovation... 310 Table 16.5 Knowledge production function estimates for process innovation... 311 Table 16.6 Regressions for knowledge sourcing from various sources... 313 Table 16.7 The impact of labor flows on product innovation according to different occupations... 314 Table 16.8 Productivity equations... 314 Table 17.1 Synthetic independent components of public sector inputs to innovativeness of European Union 27 member states, Croatia, Turkey, Iceland, and Norway... 335 Table 17.2 Values of the components of public sector inputs to innovativeness in European Union 27 member states, Croatia, Turkey, Iceland, and Norway, in standard deviation from arithmetic mean value... 337

xxviii List of Tables Table 17.3 Regression models of business sector innovation processes in European Union, Croatia, Turkey, Iceland, and Norway... 339 Table 18.1 Public innovation policy results (compiled by authors)... 359 Table 19.1 Principal and head teacher attitudes about school performance areas according to respondent s age, work experience, gender, occupation, school location, and school size... 378 Table 19.2 Average estimations of organizational culture according to age and occupation of participants... 380 Table 19.3 Correlation matrix of relationships between school leader attitudes and organizational culture estimations... 380 Table 19.4 Respondent s average estimations about performance appraisal and pay-for-performance according to gender, school size, and curricular language in schools... 381 Table 19.5 Respondent average estimations of performance appraisal and pay-for-performance according to the age, pedagogical experience, and work experience of participants... 382

List of Appendices Appendix 4.A Average Share of Expenditure on R&D and Innovation Across Industries, at Firm Level: 2004 (%)... 74 Appendix 4.B Average Share of Expenditure on R&D Across West European Countries and Industries, at Firm Level: 2004 (%)... 75 Appendix 4.C Average Share of Expenditure on R&D Across South and East European Countries and Industries, at Firm Level: 2004 (%)... 76 Appendix 10.A Examples of the Interview Questions... 193 Appendix 11.A Results for Interview Questions (Scale 1 Unsupportive of Innovation to 7 Supportive of Innovation)... 210 Appendix 11.B Indices for Power Distance and Uncertainty Avoidance in Estonia and Denmark... 211 Appendix 12.A Correlations Between Capacities, Competencies, Innovations, Turnover, and Profit of Smalland Medium-Sized Enterprises... 231 Appendix 13.A Definitions and Summary Statistics of Variables Used in Descriptive Tables and Regression Analysis... 253 Appendix 14.A Initial Indicators Used in the Analysis... 270 Appendix 14.B Results of Factor Analysis... 272 Appendix 14.C Indicators of Innovative Activity, R&D, Human and Social Capital for European Countries (Standardized Values) and Their Population (Millions)... 273 xxix

xxx List of Appendices Appendix 16.A Overview of Selected Studies on the Links Between Labor Mobility and Firm Innovativeness... 317 Appendix 16.B Definitions and Summary Statistics of Variables Used in Descriptive Tables and Regression Analysis... 319

Contributors Anne Aidla University of Tartu, Tartu, Estonia Ilona Baumane University of Latvia, Riga, Latvia Elias G. Carayannis George Washington University, Washington, DC, USA Raul Eamets University of Tartu, Tartu, Estonia Peter Friedrich University of Tartu, Tartu, Estonia Gerli Hämmal University of Tartu, Tartu, Estonia Hilmar Þór Hilmarsson University of Akureyri, Akureyri, Iceland Reelika Irs University of Tartu, Tartu, Estonia Krista Jaakson University of Tartu, Tartu, Estonia Frances Jørgensen Aarhus University, Aarhus, Denmark Anneli Kaasa University of Tartu, Tartu, Estonia Helje Kaldaru University of Tartu, Tartu, Estonia Triin Kask University of Tartu, Tartu, Estonia Harald Lepisk University of Tartu, Tartu, Estonia Victory Trainings, Tartumaa, Estonia Oliver Lillestik Faculty of Economics and Business Administration, University of Tartu, Tartu, Estonia Jaan Masso University of Tartu, Tartu, Estonia Jaanika Meriküll University of Tartu, Tartu, Estonia Pille Mõtsmees University of Tartu, Tartu, Estonia xxxi

xxxii Contributors Anton Neidre University of Tartu, Tartu, Estonia Tiiu Paas University of Tartu, Tartu, Estonia Ingra Paltser University of Tartu, Tartu, Estonia Eve Parts University of Tartu, Tartu, Estonia Kaia Philips University of Tartu, Tartu, Estonia Helen Poltimäe University of Tartu, Tartu, Estonia SEI Tallinn Centre, Tallinn, Estonia Janno Reiljan University of Tartu, Tartu, Estonia Anne Reino University of Tartu, Tartu, Estonia Tõnu Roolaht Faculty of Economics and Business Administration, University of Tartu, Tartu, Estonia Karin Sakowski University of Tartu, Tartu, Estonia Dorel Tamm University of Tartu, Tartu, Estonia Kulno Türk University of Tartu, Tartu, Estonia Kadri Ukrainski University of Tartu, Tartu, Estonia Maaja Vadi University of Tartu, Tartu, Estonia Priit Vahter University of Tartu, Tartu, Estonia Birmingham Business School, University of Birmingham, Birmingham, UK Urmas Varblane University of Tartu, Tartu, Estonia Rebekka Vedina University of Tartu, Tartu, Estonia ESADE, Ramon Llull University, Barcelona, Spain Tiia Vissak University of Tartu, Tartu, Estonia