Support for business innovation is extensive but results in minor impact on their productivity and competitiveness

The State Audit Office will organize discussion “How to improve business innovation support policy?” on 29 November 2023.

BRIEFLY

• In the programming period 2014-2020, the projects implemented with the support of the public funding of 681 million euros have not succeeded to achieve such results that would contribute to the goal of the National Industrial Policy Guidelines, to improve the competitiveness and productivity of enterprises, significantly.
• The problems identified in the previous period are still not solved systematically and consistently. We risk that the 721 million euros planned for innovation support will not achieve the intended development of the national economy in the programming period 2021-2027 either.
• Latvia implements similar support measures as elsewhere in the European Union, and the “set” of measures is even broader. There are support measures for innovations, but they fail to achieve the goals.
• At the same time, we lag behind the average EU level in international rankings and our neighbouring countries in terms of innovation performance.

Innovation development in Latvia is largely dependent on funding from EU funds. During the previous EU programming period (2014–2020), there were 681 million euros of public co-financing used for innovation support measures in Latvia but to achieve the objectives set in the National Industrial Policy Guidelines 2014-2020 (NIPG2020), to improve the competitiveness and productivity of enterprises, have not been achieved.

The State Audit Office of Latvia has completed an audit in which it assessed how the responsible ministries, the Ministry of Economics and the Ministry of Education and Science, planned and implemented innovation support policy. Those support measures with purpose to develop innovations in enterprises, thus promoting their competitiveness and productivity, were assessed in particular.

It was concluded that (1) activities of the Ministry of Economics and the Ministry of Education an Science when  planning the policy for 2014-2020, have not been sufficient, so that the public funding of 681 million euros for innovation support projects would affect the objectives set by NIPG2020 significantly; (2) although the Ministry of Economics and the Ministry of Education and Science have improved the planning of indicators for innovation support measures in some areas, it has been found that the previously identified problems in policy planning are still not being addressed. This creates a risk that also in the programming period 2021-2027 (721 million euros allocated to innovation support measures), the intended development of the national economy will not be achieved.

Innovation support measures must have a significant impact on the achievement of policy objectives. The auditors point out that the innovation support measures implemented in the country (e.g., support for the cooperation of scientific institutions and economic operators, support for the development of new products (up to the development of prototypes), support for scientific personnel, support for the promotion of technology transfer, support for the promotion of international research, etc.) are a step in the right direction. However, without eliminating the deficiencies (the problems to be solved are not determined in priority order, the planned indicators of support measures are weakly linked to the policy objectives), we risk not achieving the development of innovations in the planned scope and the objectives of national economic development. In other words, the Ministry of Economics and the Ministry of Education and Science identified problems in the previous programming period (2014–2020) and planned specific tasks (measures, funding, distribution of specific responsible parties, etc.) to eliminate them, but the main problems that hinder the development of innovations remain unchanged in the current programming documents (2021–2027). There is also a series of problems that are periodically mentioned in various planning documents or in the assessment of their implementation, but there is no information about how to solve them. For example, NIPG2020 mentions that the financial sector is not ready to finance the investments of enterprises in research and development, but the auditors did not find any measures aimed at solving those problems.

When assessing the policy development planning implemented by the Ministry of Economics and the support measures chosen for it in-depth and separately, we conclude that the planned indicators have been achieved in the implementation of the measures, which indicate the interest and ability of businesses to implement projects and achieve the specified outcome indicators. In the audit, we found that the innovation support measures chosen in Latvia were similar content-wise to the innovation support measures implemented in other EU Member States. In addition, a much broader basket of measures is offered to support the development of innovations in Latvia than in the countries included in the evaluation[1] such as Croatia, Slovakia, Poland, and the Czech Republic. However, it should be mentioned that although innovation performance is improving compared to 2014, Latvia lags behind not only the average EU level, but also Estonia and Lithuania. Statistical data show that Latvian enterprises invest less and less in product and process innovations: expenditures on product and business process innovations continued to decrease in 2020 and they decreased by 39.4 million euros, or approximately 20% compared to 2018 (information from the Central Statistical Office of Latvia).

The Ministry of Economics, Investment and Development Agency of Latvia (LIAA), industry clusters and competence centres representing enterprises participate in the implementation of innovation promotion support measures. The audit assessed separately whether the monitoring of the implementation of measures to support business innovation of the Ministry of Economics was effective. One can conclude that we implement the planned measures and achieve the results of the measures, but we do not assess their impact on policy goals (improved competitiveness and productivity of enterprises). Seven of the 12 outcome indicators of support measures included in the audit describe the number of enterprises that received support, and one outcome indicator – the number of newly created products and technologies. The indicators are clear, measurable and achievable within a specific time frame, but they do not characterize either the goal of the measures or the policy result to be achieved, for instance, increase of 26.6% in the productivity of the manufacturing industry was achieved in 2020 instead of the planned 40% (compared to 2011).

The audit considered the effectiveness of six programs of innovation development support measures under the control of the Ministry of Economics by assessing the changes in the competitiveness and productivity indicators of the enterprises that received support after receiving that support. It was concluded that only the measure that only the support measure “Support for the improvement of the technology transfer system” has contributed to the increase in the productivity of enterprises three years after receiving the support (67 economic operators supported, the average support per economic operator was 14,247 euros) has contributed to the increase in the productivity of companies three years after receiving the support. The positive impact of the three implemented support measures, id est, “Promotion of international competitiveness” (2,107 economic operators, the average support was 7,225 euros), “Regional business incubators and creative industries incubator” (416 economic operators, the average support was 4,457 euros), and “Cluster Program” (445 economic operators, the average support was 4,275 euros) on improving the competitiveness of enterprises is commendable.

It is advisable to reconsider determination of implementation goals and outcome indicators of the support measures “Support for the development of new products and technologies within the framework of competence centres” (232 economic operators, the average support was 142,960 euros) and “Support for the introduction of new products in production” (19 economic operators, the average support was 2,004,303 euros) to facilitate a greater connection of the results of those measures with the achievement of the indicators set in the development policy because there were the worst results in terms of changes in productivity and competitiveness of enterprises after receiving support among the implementers of these measures in particular.

The Ministry of Economics has improved the quality of support measures outcome indicators and policy result indicators for this period (2021-2027). However, the performance indicator is still based on the number of supported enterprises or scientific institutions, rather than the impact on export growth, which is the main objective of NIPG2027. “These may be wrong signals to the beneficiaries of support, for example, that a number of products created or a number of supported enterprises is considered a good project result, rather than an increased volume of exports, an increase in productivity, etc.,” explained Ms Inese Kalvāne, Council Member of the State Audit Office of Latvia.

The responsible ministries should develop regulations for the implementation of measures financed by EU funds timely and qualitatively, so as not to create interruptions in support measures for scientific institutions and enterprises, as well as reduce dependence on EU funding in general. Interruptions pose a series of risks because the development of innovations in Latvia depends on funding from EU funds: it made up 61% or 520 million euros from innovation development support funding between 2014 and 2023. “In the long term, interruptions create a risk of not achieving the objectives of the innovation support policy. It should also be taken into account that interruptions have a negative impact on the human resources involved in the implementation of innovation projects. We risk losing competent and experienced experts who are forced to find other employment opportunities during such “interruptions”,” stated Ms Inese Kalvāne.

“Investments in research and development should increase and should reach 1.5% of GDP in 2027 in Latvia. Yet, without eliminating the deficiencies in the planning and implementation of the innovation development policy detected during the audit, increasing the amount of funding alone will not ensure the achievement of better results, which is an increase in productivity, competitiveness or export capacity and an increase in the welfare of the related population. We have called on the Ministry of Economics and the Ministry of Education and Science to continue working together and improve policy planning by developing and “actually” launching its new implementation monitoring system by considering both improving the process of implementing innovation support measures and evaluating the results of the implemented activities more persistently in order to see the impact of investment on the national economy, population, and the development of the community of innovative enterprises clearly,” indicated Ms Inese Kalvāne.

Facts

• The Organization for Economic Cooperation and Development (hereinafter - OECD) states in the Economic Survey Latvia of March 2022  that the export of Latvia’s industrial sector showed signs of maturity in its development, however, the advantages of Latvia’s competitiveness were still based on low labour costs and innovations played a very crucial role in the development of exports in the long term.
• Latvia has one of the lowest indicators of investment in technological equipment and intellectual property in Europe.
• Similar to other OECD member countries, the high costs of innovations and the lack of internal resources of businesses are indicated as the main problem of innovation development in Latvia. Difficulties in attracting public funding and insecurity caused by unclear prospects of market demand are noted as additional obstacles to the development of innovations in Latvia.

State Audit Office recommendations #PēcRevīzijas

After the audit, there are seven recommendations provided to the Ministry of Economics, the Ministry of Education and Science, and the Investment and Development Agency of Latvia to facilitate a greater impact of the implemented support measures on the achievement of policy results and to minimise the obstacles hindering the development of innovations purposefully.

Additional information

Ms Signe Znotiņa-Znota

Head of PR and Internal Communication Division

Ph. + 371 67017671 | M. + 371 26440185 | E-mail: signe.znotina-znota@lrvk.gov.lv