CHANGE AND GROWTH, INNOVATION AND ELECTRONICS
Gundar J. King, Pacific Lutheran University; Ilze Barga, University of Idaho;
Jevgenijs Kovalcuks, Riga Technical University
Introduction to a World of Change
Today, the Baltic States are past the halfway point in the successful transition to market economies and democratic civil societies. Rates of current growth are high. By some measures, the Estonian economic activity in now matches that of the highest Soviet level. With growth rates well above those of the European West, Lithuania and Latvia are expected to do the same in the very near future. Still, all three countries are considered to be poor when compared to others in the European Union (EU). They need to grow economically. Fortunately, progress and the end of the change processes is not in sight. The next two decades will be decisive for the Baltics to establish their ranks and roles on a higher level in a fast changing world.
Individual actions, organizational practices and government policies will determine the value of Baltic products and services, the nature of employment in all three states, and the standards of living in Estonia, Latvia and Lithuania. Issues related to the advances in electronic technologies are discussed here primarily in terms of American concepts and Latvian developments. We use the developments in electronics, especially the recently introduced E-commerce (electronic marketing services) for our main focus. We are convinced, however, that the present differences between the three economies, important as they may be in some aspects, are not yet critically different. What is important is the way the three countries will respond, for better or for worse, to the challenge of unremitting global changes.
Further progress requires novel and unaccustomed, careful and prudent plans, progressive policies and practices. A Niccolo Machiavelli poster in one of Pacific Lutheran University’s classrooms reminds us that nothing is more difficult and risky than a new system. It is likely to be opposed by those who gain from the present. Changes get little from the few supporters who are not sure of promised advantages. Great opportunities are always matched by high risks.
All imperatives for economic growth in the Baltics have international dimensions. Usually, all economically advanced small countries, are very active in their participation in the international division of labor. Most trade is between economically advanced nations. Exports assure the optimum engagement of well developed human resources; imports raise the standards of living. In comparison, countries that rely on the sale of raw materials and depend on the exploitation of natural resources, face increasing international competition and have poor prospects for profitable sales or full employment. In short, the Baltic states cannot expect to do well with labor engaged mostly in simple, labor intensive industries, forestry, agriculture, oil and oil shale deposits, and local services. Sales of land and other national and private assets to international investors are made to meet immediate needs for cash. They indicate that these buyers expect to use these assets more profitably than the present owners.
Ways must be found to high productivity and full employment with exports of high value. This imperative requires a rapid development of what we have chosen to call intellectual industries. They include maximal adoption of information technologies.
Within two decades, the Baltic economic growth will be shaped by the following:
Innovative technological developments and applications of rational knowledge to economic tasks can succeed best when integrated with individual and social considerations, interdisciplinary discussions, and collegial teamwork. This observation suggests that one nation or another cannot be made into a race of electronic wizards in short order.
A dominant aspect of the value systems we have observed in all three Baltic States, is a passive, rather conservative mentality. We already know that the Baltic agricultural practices have deep roots in the traditions of family farming. They relate well to the knowledge of local conditions and practices proven over time. Innovations here are not bold strikes into future. They tend to be cautious adoptions of many ideas already tested. This pattern often suggests a follower strategy in innovation. What with the paucity of accumulated traditional capital and the risks, this is a wise policy for many Baltic entrepreneurs.
Technical innovations in Baltic industries tend to follow more the industrial engineering principles established by Frederick Taylor and Henry Gantt, and less the psychologically enriched methods of Frank and Lillian Gilbreths. They correspond to the industrial patterns characteristic of the early 20th century. These are fixed capital man-machine systems dominated by massive investments of traditional capital and are reinforced by fixed procedures and standard orders. Ideally matched with centralized political practices and centralized decision making, they still provide useful models for conditions of unlimited demand. A typical example is the proposed Baltic Pulp complex in Latvia that calls for a very large investment in manufacturing facilities, the commitment of immense forest resources for raw materials, new public roads, all with a minimal employment impact. Uncertain demands for the products of such giants make them exceptional, but not uncommon in the Baltic future. Still, we expect that such capital-intensive industries will continue to make their limited economic contributions to telecommunications and transportation, extractive and processing industries. Industries operating on low cost labor basis, making clothing or writing simple code programs for export are necessarily part of economic structures today. They do, however, have only limited long term potential.
More predictable successes in manufacturing are the new, very profitable companies with substantial of retained earnings, starting small and expanding rapidly in response to changes in regional and global demands. They respond to new domestic needs and markets abroad; these firms may be Estonian contractors in manufacturing electronic components, Latvian makers of complex computer programs or advanced optical fiber products, or Lithuanian TV sets. Everywhere, the real successes are measured by pride in quality, disciplined economic performance, and wages well above average.
We do not expect to change the basic human nature and the genetic inheritance we and others have. We do, however, propose that in the future human resources be developed and deployed much more effectively to serve new, emerging markets.
A family member born to work and life on the family farm adapts as best as he can to the circumstances given. He learns by observation and practice to do his best with hard work, and hopes that market prices for his products will favor him.
The industrial worker, perhaps a former farmer, brings many of his habits to the factory. Again, he learns mostly by observing, doing, and by following orders from the top. In the Soviet, as well as in the early American industrial systems, he and others are trained to perform very specific tasks. For advancement, he learns to respect and use his political and social skills in working as smoothly as possible with his superiors in narrowly defined hierarchies.
In a more advanced civil society, now emerging in the Baltics, the former farmers and he industrial workers and the technical personnel now adjust again to middle class values. Their essence is trust and cooperation (Gundar J. King and J. Thad Barnowe, EBS Review Nr. 12). We emphasize this point, because change and innovation are stressful. It requires and consumes a great deal of this social capital. Therefore, trust and cooperation must be cultivated and reinforced. Thus, it is important to increase the opportunities in those economic activities where intellectual abilities and interests are logically linked to education and training (Hallett, 1987). Success in intellectual industries depends on their abilities to adjust to changing opportunities in the market. Characteristically, the work is of high value done in a more social, more collegial, and more interdisciplinary environment. We see a great diversity of various engagements, in an unprecedented variety of organizations, and different, economically more effective, relationships at work. Where creation of high value takes place, there is a shift to professional, more cooperative teamwork. It is marked by high individual responsibility and joint productivity. There is an emphasis on finding better solutions for old and new problems, and the improvement of performance on a lower, much more decentralized and personal level. These latter patterns are typical of the new, collegial enterprise often started with close friends. This closely-knit environment permits and encourages the use of new interdisciplinary, technical, and business knowledge. The expected benefits are usually related to developments beyond the domestic market. The most profitable opportunities are found in working with international partners.
These are new demands. They are so novel and unusual that cognitive dissonance slows down adoption of new values, work patterns, and social relationships. Their strength is their excellent fit to new realities and related rewards. They do fit patterns of a new social order expected by Francis Fukuyama (1999). The value systems required in this international, intellectual industry are different from what was expected on the farms, in traditional factories, and in rigid bureaucracies. The adoption of such values takes place only gradually, best among the young. Therefore, most participants in the Baltic economies will for many years work in organizations governed by more traditional values. They will change in their own fashion, at their own rates. They may actually perform reasonably well in the roles chosen. On the whole, this emerging multiplicity of value clusters and organizational arrangements does not offer more employment uniformity and stability of an industrial army. It offers more choice. It does provide the potential to make all work much more personally rewarding and valuable.
With such choices made, the expected changes involve directly a relatively small number of well educated and professionally oriented innovators. They cannot change everyone’s mentality or eliminate all evil, but they are critically important in providing a leading edge for social and economic development in the Baltics. Indeed, recent reports of the World Bank show that impressive loans, grants and other funding are most effective where there is a growth of social capital, a resource needed in even the most traditional enterprise.
As noted earlier, the innovators help the constant rebuilding of the social capital essential to intellectual industries. They also require and assist in the creation and accumulation of the intellectual capital. These processes, still undervalued in the Baltic States, require vast expansion of reformed and integrated education and training urged by Hallett, they should be well above present public funding and continuing training budgets of two weeks annually for everyone or in excess of three percent of payroll costs. The menu of Pacific Lutheran University’s (or other) executive and seminar programs (www.cedplu.com) shows a range from electronic commerce, and environmental issues, to negotiations and project management skills to value creation with information system. Very possibly, such combinations of academic education, practical training and joint research with industry may result in such institutions as the interdisciplinary, project oriented Tauber Manufacturing Institute at the University of Michigan. This joint industry and university organization serves new kinds of manufacturing leaders capable of guiding companies through globalization, technological innovation and other diverse business changes.
Technology is already a dynamic factor in the development of Baltic economies and entrepreneurship. In terms of real potential achievement and employment, it is still only an emergent factor. As a factor in raising productivity, it is beginning to have a role in reducing the costs of production and distribution, and in increasing the value of goods and services. Regional success, as well as success in a given place, depends on the ability of business to join currently established linkages among communities and world-class companies.
Information technologies (IT), including electronic commerce, represent a wide range of designs, applications, and market exploitations. In one extreme, they involve very major investments in carefully managed multi-disciplinary skills for the creation of new systems (Cortada et al., 1999). On other, there is very quick, flexible exploitation of market opportunities that may occur unexpectedly. In either case, the relatively low investment of traditional capital, and the low production and distribution costs, make information technologies dynamic and unstable, always risky and frequently very profitable. The economics of information technologies work best in large, therefore international, markets (Shapiro and Varian, 1999).
Electronic commerce is a summation of commercial activities where computers and software are widely used. It is not so much a substitute for selected functions, as it is a new way of doing business. Information technology is a strategically important means that can give a company a competitive advantage to gain new markets or to reduce transaction costs in the era of information. It is an key ingredient of advanced economic development; it presents remarkable new opportunities (Korper and Ellis, 2000) for entrepreneurs aspiring to successful international roles.
It is not realistic to think that new concepts of information technology and ingenious applications of electronic commerce can immediately emerge in the Baltic environments that are still characterized by meager resources of traditional capital, inadequately funded national education and research, and relatively low levels of cooperation and mutual trust. Such necessary investments lag behind those of the Nordic countries. In a sense, quick development of high technologies in the Baltics depends on the adoption of international business patterns and friendly foreign investments.
Fortunately, there are proven, simple rather than comprehensive, approaches available. In her observations of world class business, Professor Rosabeth Moss Kanter (1997) of Harvard University suggests the formation of networked communities that offer limited expertise. Moss Kanter distinguishes between thinkers (found in concentrations of intellectual activity as found in the Boston and Silicone Valley areas), traders (in international centers of finance and trade, such as London, New York, and Singapore), and makers (Silicon Valley, Singapore, Taipei, and, perhaps surprisingly, in South Carolina. In the latter, over 200 international world class manufacturers are established in the Greenville Spartanburg area. Organizations in these triads are interconnected for mutually benefits. More importantly for Baltics where most entrepreneurs who perceive their companies as makers, the manufacturing communities in the Carolinas take the production function very seriously. They strive to gain and to maintain their internationally competitive positions. New manufacturing methods are developed and are spread throughout the community. New skills are learned and polished in local universities and technical schools. Foremost in these processes are formal alliances and informal exchanges of information and personnel within the networked communities of makers. Indeed, the world class makers do not function in the manner of Soviet electronic factories or schools that are traditionally almost fixed, stable, highly vertical, and very specialized bureaucratized organizations isolated from each other. The makers in Spartanburg (and in Taipei) are, large or small, above all entrepreneurial. They place emphasis on their core capabilities and their improvement in global terms.
To become a part of a larger network, companies have to meet technological creativity and intellectual superiority standards to join the thinkers, excellent production skills and superior infrastructure to become part of the recognized makers or established high quality connections to join with the traders.
The thinkers are competent in concept development (ideas, designs, or formulations for new products and services that create value for customers). They are responsible for absolute the highest new standards of technological advances, creativity and outstanding innovations. They have leading roles in the global economy. The makers realize ideas in a real life and create the production standards of excellence. They invest in the best infrastructure and production skills of employees and assure high value and cost effective production process. In Makers have to become famous for being a world class manufacturer to attract the best clients. The traders specialize in establishing alliances among businesses and form valuable connections on the international level, provide qualitative services across borders, transport goods and create more value for their customers. Resources should always be updated and continuous innovations realized in order to meet the rising world standards and to ensure a position in the market. Very often they are located in points where different economic and social cultures meet, a century ago in Riga, today in Hong Kong.
Writing of specialized communities, Moss Kanter stresses the concept of place. This emphasis suggests the importance she attaches to communities where individuals and organizations are in close and frequent, formal and informal contacts with each other. World class excellence is cultivated publicly, but the linkages make it personal and persuasive. There is a need to have a friendly innovation policy environment to implement new strategies. Innovation policy promotes basic changes, all at the same time. They are new products and services, new technologies and new ways of working together. In addition, innovations help improving existing operations. Baltic companies cannot support all necessary infrastructure for innovation. Innovation requires both private and public support.
World class makers are already at work in the Baltics. In Estonia, three companies make IT products that are representative of the latest technological demands.
Elcoteq, a global Finnish firm, with operations in Tallinn, now extends them beyond a line of mobile telephones to a full line of mobile telecommunications network equipment, electronics for base stations, and antenna products. The potential of Elcoteq in Tallinn is enhanced by highly qualified personnel. It includes an unusually large number of employees with college degrees. It is reinforced by close relationships with the two leading Estonian universities and other schools. The list of global industry leaders among the firm’s customers (ABB, Andrew, Ericsson, Nokia, Phillips) reduces the risks of dependence on any one major buyer.
The hottest line in electronic commerce is wireless technology. Often called mobile or m-commerce, it allows to conduct online translations, to make purchases, and to send other messages. Two Estonian companies, Eesti Mobiiltelefon (EMT) and QW-GSM, are deeply involved in the development of the wireless application protocol (WAP), the standard for this industry. The wireless application protocol is the first service opening the Internet to the mobile communication environment. The technology is still in an early phase, but the price of using a WAP connection is less expensive. Moreover, the volume of data transferred is basically unlimited. The EMT WAP portal includes a telephone directory of clients, and other linkages.
Together, the three companies mentioned here, represent demonstrated Estonian excellence as makers of world class high technology products in the broadest sense of the word. The presence of these companies is a powerful argument for attracting other international clients to Estonia. A larger number of such investors and customers is likely to help establish a whole networked community of manufacturers. A few more steps forward, and we can expect the emergence of Estonian firms that will make products of their own invention. Indeed, we are reminded of President Lennart Meri’s call: “Where is the Estonian Nokia?”
Latvian world class makers are found in several intellectual industries. We suspect that for this reason, there is a larger, more solid base of interdisciplinary cooperation and what may be a stronger tendency to explore unusual technological frontiers. As a place, the Riga area offers a concentration of leading Latvian universities, several other model schools and several research establishments. With an orientation to applications, it provides good beginnings for further advances, especially as networking and cooperation develops among the young professionals.
Amerilat, a new IT player, combined knowledge of medicine, communications, and economics to create telemedical solutions and export knowledge based products. A global maker, Amerilat is very closely tied to Latvian thinkers.
Tehprojekts, a Riga company of industrial tools, dies and fixtures is a maker that combines fine craftsmanship with the latest technologies to serve the world wide automobile industry. It is a supplier to Audi, Moskvich, Toshiba, Toyota, TRW, and Volvo. With related strength of the Riga Technical University, the company may well become a magnet to companies looking for partners that make capital equipment for manufacturers.
A company that may be considered a maker and trader, Siemens, arriving in Latvia by way of Finland, is heavily involved with telecommunications, energy, health care and other industrial applications. With a vast international experience and global contacts, Siemens is able to meet the most demanding customer needs in both, the private and the public sectors. Sales are expanding very rapidly.
Finally, there is Latvian maker, Anda Optic, located 160 kilometers to the East of Riga, that challenges the concept of a physical place as the location of an intellectual community. A maker of specialized optical fiber bundles, it is a small company that strives to maintain ties to research in Riga, and is obviously in close touch with the parent company in Germany. The physical separation from partners and customers is minimized with modern communications and a management that is very oriented to highest quality production combined with continuous technological improvement.
Summing up, this small sample of high technology ventures in the Baltics, suggests that these countries are in the process of establishing maker platforms for a future in high technologies. Although the Estonian examples suggest a closer affinity to hardware manufacturing, all Baltic experience suggests increasingly closer relationships with application oriented thinkers across traditional disciplinary lines.
Electronic Commerce in Latvia
The domestic IT market on Latvia is currently about $150 million. Computer software has 12% of the IT market with a value of approximately $18 million. There are now over 100 software development companies in Latvia. Software professionals are engaged in a wide variety of systems ranging from financial and corporate management systems to database and library systems. IT will be one of the key development areas in the future. The number of Internet users will grow considerably as well because now only 6% of population is using Internet every day.
The technologies of E-commerce play an increasingly important role in sustaining business networks among partners and customers in different parts of the world. In Latvia it makes possible to use business to business (B2B) technologies. It is one of the key factors that raises the ability of businesses in Latvia to join global networks.
More and more promising IT and electronic commerce applications projects are realized in the Baltic States, which form prerequisites for productive further developments. Successful cases of how companies adapt innovations, join global market or become a top player at home are reviewed. In all the following cases, not necessarily in the largest IT companies in Latvia, previous experience, high intellectual capital and cooperation are the keys to success. Here are successful examples of recent Latvian experience with the highest technologies:
At present, Tilde is the font localization and distribution center in the Baltic States. Its focus is on designing localized versions of Roman fonts for Eastern and Central European, Baltic, Cyrillic and Turkish language groups. Tilde also works in the field of multimedia technologies, including a digital encyclopedia of Latvian history. Fruitful cooperation with IBM and Microsoft is known as the principal factor in gaining such important new customers as Berlitz, Ericsson, Hewlett-Packard, L&L, Navision, Xerox, and others. In following modern trends Tilde is exploring opportunities in government applications. It has allied with Age Com, one of the largest marketing communications companies in Baltic States.
SWH Technology plans to merge with Exigen Group, a multinational corporation sharing dual headquarters between San Francisco and Amsterdam. Among the software products developed for international markets by SWHT are: a workflow system, an imaging system for integration with the workflow system, the universal serial bus driver for OS/2, and various IBM mainframe applications. SWHT is now an integral part of the Exigen Group operational backbone. Further, the existing Exigen operations in Eastern Europe, most notably in Russia, will now report directly to the Riga office.
Education and Training for IT
Technology changes rapidly. Even a well prepared American engineer's knowledge is said to have a life of five years. It is about three years in IT. Present demands on higher education in developed countries are repeatedly expressed in terms of the need to keep ahead in the new global economy. The new competitiveness in the international economy calls for competition in every field. It embraces the institutions that deliver knowledge academically as well as those that provide more applied training for industry. The basic education has to be in depth and well rounded, including the knowledge and experience in working with other people. The existing educational system in Latvia today stimulates learning with team and project assignments. Indirectly it fosters unconscious competence in cooperation among students.
Students in the Baltic States are now accessing information from world wide sources over the Internet. Some are designing online materials. Other schools lag behind, and many lack more traditional equipment, like books and furniture. Estonia leads the way in school Internet access and IT development. At least two thirds of primary and secondary schools have permanent Internet connections, while 13 percent have telephone access. In Latvia only 20 percent of schools have permanent radio-link Internet access. Internet access is lowest in Lithuanian schools.
In Latvia, the universities work hard to improve networking across disciplines and research institutions. This is difficult due to established traditions, but visible successes of joint projects are becoming attractive models to follow. There are growing demands for postgraduate adult education to meet the increased skills needed by industry, as well as a healthy demand for IT graduates. Quality of instruction should be a key factor in attracting students and employer support to programs with good employment opportunities.
At present, there is an unmet need for more experiential postgraduate education programs in IT. Knowledge in this field must be constantly renewed, enriched, and extended into future. In postgraduate studies, we expect that the formal boundaries between public and private higher education and other providers of knowledge will be eroded by networking across the board, timely joint projects, and flexible approaches to training. Such patterns are similar to developments in American universities where cooperation between academic and industrial leaders is remarkably responsive to emerging needs. We agree with Professor Sir Douglas Hague of the Manchester Business School that university monopolies to grant degrees should give way to a wider sharing of teaching and learning.
The existing environment already prepares select few open-minded specialists that can join experienced professional teams in a very short time period. Recent university graduates in Latvia generally understand the dynamics of a transition society quite well. They like to work on specific projects. They are successful at work, and they want to continue learning.
Education and training of technical personnel usually requires a special balance of technical and business skills. The chart below shown is based on observations in America and Latvia. The balancing of skills shown provides a remarkable flexibility in making adjustments. They are especially important in situations of rapid change.
The increased adoption of IT increases both, the supply of IT workers as well as the demand for them. The chart 1 shows that a great variety of IT workers and IT enabled workers will be required in various occupations throughout a modern economy. This presents a very large task, and points to public and private obligations. There already is a world wide shortage of IT experts. There are reported difficulties in recruiting highly skilled IT workers in the fields of computer science, electrical engineering, software development and systems analysis. According to Latvian software company Dati (a large employer of programmers), this trend is very evident also in Latvia.
What is commonly called the Danish Latvian IT college represents a major step forward. Established by the Riga Technical University and the University of Latvia , it is intended to provide the most modern professional IT education. The college is to design, develop, improve and implement new IT programs. These programs are in part targeted to the preparation and improvement of IT teaching staffs. The Danish support for these programs extends to the provision of new teaching materials and technical support systems. This new institution joins an array of model schools, including the Riga Business School and the Stockholm School of Economics in Riga with international academic programs in English as the language of instruction, and a new law school. Under these circumstances, it is clear that the Danish IT college will be new and different in many ways. There will be cooperation with IT organizations and experts from Denmark and other EU countries. It is anticipated that there will be partnerships and joint projects with industry to define and to promote common activities and useful interactions to make the new institution truly dynamic. The magnitude of the potential is indicated by plans to graduate up to 2 000 IT workers annually.
In the next decade, the higher education sector in Latvia will be subject to greater competition for funds and students. Higher technical education will become more efficient with a clearer focus on the needs of business and industry, as well as on more flexible approaches to meet them as they change. Students should demand better education and require training designed to enhance their careers. The high education institutions of the future should integrate their plans and programs with local and regional communities, usually with an international dimension. Therefore, the next decade will be a period of great change internally and in terms of external linkages. Change demands clear targets and much flexibility to reach them.
Decade of Decisions
There are good, although limited, foundations for technological development and growth in the Baltic States. The best examples already show excellence and efficiency in IT work. The reputation of Baltic intellectual industries is improving. In the next decade we’ll begin to see the future of Baltic economies unfold.
At this point, it is premature to make firm predictions of actions that will be taken in the Baltic States to advance technological innovation. It is even more inappropriate to forecast the expected progress in each country, region, or a major city. There are three possible scenarios:
Dynamic changes, with uncertain benefits and losses for everyone, will continue in the Baltic States. They are now part of our changing world.
Fukuyama, Francis (1999): “The Great Disruption: Human Nature and the Reconstitution of Social Order”. New York: The Free Press.
Hallett, Jeffrey J. (1987): “Worklife Visions: Redefining Work for the Information Economy”. Alexandria: American Society for Personnel Administration.
Cortada, James W., and Thomas Hargraves with Edward Wakin and the IBM Team of Consultants (1999): “Into the Networked Age: How IBM and Other Firms Are Getting There Now”. New York: Oxford University Press.
Korper, Steffano, and Juanita Ellis (2000): “The E-Commerce Book: Building the E-Empire”. San Diego: Academic Press.
Moss Kanter, Rosabeth (1997): “Rosabeth Moss Kanter on the Frontiers of Management”. Boston: Harvard Business School Press.
Shapiro, Carl, and Hal R.Varian (1999): “Information Rules: A Strategy Guide to the New Network Economy”. Boston: Harvard Business School Press.
About the Authors
Ilze Barga is a researcher at the University of Idaho and a computer engineer licensed in Latvia. She has the M.S. degree in IT (electronic commerce) from the Riga Technical University. Her M.S. in Geography (geographical information systems) is from the University of Idaho, where she does research on IT regional development and teaches related courses. IlzeBarga@nestscape.net
Gundar J. King is Professor and Dean Emeritus of the School of Business at Pacific Lutheran University. His academic work includes organizing the Samantha Smith Memorial Exchange of American and Baltic students. He is also the founding President of the Association for the Advancement of Baltic Studies. His M.B.A. and Ph.D. degrees are from Stanford University. firstname.lastname@example.org
Jevgenijs Kovalcuks is a doctoral candidate at the Riga Technical University , with two M.S. degrees (economics and mechanical engineering) granted earlier; he plans to receive his doctoral degree in management early in 2002. His experience is that of a business consultant at the Latvian Technological Center and with international projects funded by EC. Kovalcuk@netscape.net
Submitted to the editors of EBS Review, No. 13.
November 1, 2001