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ICT as a Key Enabler of Innovative Business: The Baltic Case

Edvns Karntis, Computing Department, University of Latvia

When businesses make use of modern information and communications technologies, they can ensure a substantial return on investment by ensuring real time management of business processes, integration of internal and external processes, as well as support of innovative processes. Enterprises in Latvia and the other Baltic States have not been particularly active in making use of these opportunities. Even more, small and medium enterprises lag far behind larger ones, both for objective and subjective reasons. This creates great risks in terms of the competitiveness of the businesses. This paper sketches out the existing situation and offers a set of recommendations on what the state could do to improve the situation.

As the importance of knowledge and innovation in business increase, the participation of partners and the transfer of technologies are becoming more intensive.  This means a radical increase in the amount of activities that has to be done in relation to processing, collection and disseminating information.  This has everything to do with all business processes, interrelationships among those processes, and co-operation among partners.  To a large extent, these activities are supported by the use of modern information and communications technologies (ICT) by enterprises.  In fact, it is thanks to ICT that knowledge-based developmental processes have become possible.  These today are the strategic cornerstone for growth in all three Baltic States [1].
Back in the 1990s, there were people who almost saw ICT as a fetish, and this led to the belief in many areas that the new economy would not face traditional economic laws.  We need only remember the popular slogan If youre not on the Internet, you dont exist at all.  What followed was the boom and then absolute bust of the so-called dotcom firms.  In the wake of the disaster, it took some time for business people to come to the rational understanding that:
ICT creates a new environment for business processes an information network which can be seen as an expansion of the accustomed environment;
In the network environment, too, business is essentially based on traditional economic rules;
Business in the network environment means adapting traditional business principles to the new environment, the goal being to make use of opportunities for electronic transactions.  This means quick and high-quality business transactions, thus helping to save on costs, to improve work efficiency and productivity, to optimise deliveries, and to improve client services.

That is why public and private investments in ICT are quite logically evident in all countries (Figure 1). The new EU member states, moreover, have spent substantially more money on the modernisation of telecommunications infrastructures throughout their territories (this report is based on statistics from Eurostat and the Central Statistical Bureau of Latvia, unless otherwise noted; data apply to the stated year or the year when data were last available).  A study in 2005 found that EU enterprises were devoting 5-6% of their total expenditures to ICT investments.
The investment of the ICT sector in the EUs GDP figures is substantial at this time around 8%.  In Latvia, the percentage has risen from 3.2% in 1997 to nearly 7% today.  Far more important, however, is the fact that the introduction of ICT has led to GDP growth of 25% in the EU, as well as to a 40% increase in labour productivity.  In the United States, the latter percentage is even higher 60% [2].
Lets look at some ICT applications those which ensure such gains.


There is a clearly positive reciprocal link at any enterprise at all the use of ICT facilitates business processes, greater productivity and, thus, higher income.  That, in turn, can underpin greater investments in technologies and services, thus creating ever new opportunities for growth.  In 2007, the use of technologies at enterprises very clearly showed the logical sequence in which ICT is introduced (Figure 2 shows the situation at enterprises in Latvia, and there are no substantial differences to be found in Estonia or Lithuania):
The first step, of course, is to buy some computers and to do the usual things with them prepare documents and presentations, etc.;
The second step, equally naturally, is to get an Internet connection.  Interactive processes become possible searching for information, engaging in dialogue, shaping links with other enterprises, as well as financial and government institutions, etc.;
As the number and use of computers rise, enterprises establish local networks for the dissemination of information within themselves;
As traffic grows, initial Internet connection capacity proves to be insufficient, and broadband connections are installed; this leads to a substantial improvement in the opportunity to download information.

As understanding, skills and opportunities increase, the enterprise establishes its own Website, appearing on the Internet and offering marketing information about the enterprise and its products.  The first E-sales procedures begin, contacts with partners are strengthened, and new links are developed;
Co-ordination of functions and operations of all employees gradually leads to the integration of information circulation and business processes in a single system.  The Intranet is created for this purpose, exchange of E-documents begins, and E-commerce transactions become possible;
External transactions play a strategically important role in the enterprises overall commercial concept.  The level of co-operation among enterprises demands integration of external partners, suppliers and product distribution channels, and this means creating an Extranet.  This unified network environment creates foundations for business processes.  In addition to improvements to existing situations, client service systems, interactive trade and logistics systems and the like are created.
There are several characteristics to these logical developments, as seen in statistical data analysis:
The logic of this sequence is confirmed by the fact that analogous processes have been occurring in other EU member states and the EU as such.  The differences lie in developmental levels and tempos in the individual member states.  Thus, for example, local networks, broadband Internet connections and Websites are being developed more or less simultaneously throughout the EU;
ICT use is on the rise the amount of time between the purchase of the first computer and the taking of the subsequent steps is becoming shorter and shorter, and enterprises are tending to be far quicker in making full use of the opportunities which ICT afford (Figure 3).  It has to be said, however, that this tempo is not yet blistering enterprises in the Baltic States lag behind the EU average in all relevant indicators.  Clearly this is a fundamental obstacle against increased competitiveness for our enterprises in EU and global markets;

The smaller the enterprise, the less likely it is to be using various aspects of ICT (Figure 2b).  At the same time, the opportunities that are created by ICT and the network environment are particularly important for micro, small and medium enterprises theyre the ones that are most likely to feel the benefits using these technologies.  This basically shows the paradox of the network model a small partner in a network becomes comparatively weaker than the large partner, because the large partner can make use of the new opportunities to a far larger degree;
Progress is seen in all sectors, but levels and dynamics can differ.  Logically, enterprises which offer telecommunications services or computer technologies are the most active ones in all regards.  Financial service providers are also very active in this regard.  Some of the aforementioned aspects are of key importance to certain sectors.  For instance, the intensity of Internet connections among enterprises which supply electricity, gas and water is higher than average, but these enterprises are less interested in putting together a Website.  They are monopolies, and apparently that is why they dont need such a page.  Retailing and the hotel/restaurant sector have been the most passive sectors, as these are the ones in which there is the highest proportion of micro and small enterprises.


Of key importance in the establishment of ICT infrastructure is the goal and effectiveness of using the technologies so that a return on the investments can be ensured.  It has to be said that the goals for using ICT have remained fairly basic in the Baltic States obtaining and exchanging information (Figure 4).  Without at all denigrating the need for these operations in business, it is very clear that the transfer to the even more complete use of the network environment for business transactions and the transfer of various business projects to that environment these are processes which are still in their infancy in the Baltic States.  Even the simplest Internet-based purchase and sale activities are uncommon.  Whats more, large enterprises are far more active than smaller ones in any of the types of technology use.

By supplementing existing marketing and sales operations, the network environment creates extensive opportunities for the improvement and integration of a enterprises internal and external business processes.  This applies to product design, development and manufacturing within the enterprise and in co-operation with partners, as well as with the management of properties (including means of production), finances, human resources, etc.  This means that the new opportunities absolutely pay off.  They can only serve to enhance ongoing benefits.  Enterprises which use such opportunities will find their competitiveness increasing.
These are developments which are seen in many countries of the world, not least in EU member states (Figure 5).  The sequence that is discussed here is in place throughout the world.  First the network environment is used to integrate internal enterprise processes, and then it is expanded to external processes.  The level at which these applications are common, however, differs from place to place.  The use of integrated systems is not all that common in Baltic enterprises.  The Enterprise Resource Planning (ERP) system, for instance, is used only by 10 to 40% of enterprises in various sectors, while the Customer Relationship Management (CRM) system is used in 5 to 25% of enterprises [3].  Fewer than 3% of enterprises have linked their IT systems with those of suppliers or clients for the purpose of trading operations.  Here, again, large enterprises are four to five times more active than small ones are.

The experience of Europes most successful enterprises allows us to make some forecasts about the ability of our own enterprises to improve the effectiveness of business processes and to use the achievements of the network environment (Internet, Intranet, Extranet):
Project management, co-operation and data exchange in the development of produces in real time make processes quicker.  More than 30% of enterprises in the EU say that co-operation in processes and data exchange are of critical importance to their business;
Manufacturing, supply and product distribution chains become shorter -- a network-type co-operation model can integrate markets and exclude unproductive intermediaries, thus enhancing the enterprises capacities and opportunities and allow it to reduce costs;
The significance of vertical integration at enterprises diminishes substantially, because lower-level employees can take decisions, too this is known as subsidiarity.  Favourable conditions emerge for the creativity and initiative of employees;
The model of virtual co-operation in design, manufacturing, sales, payments, etc., makes it possible to seek and find new partners, products, services and clients.  The problem is that fewer than 7% of surveyed enterprises in Latvia have found partners via the Internet direct contacts still dominate;
Optimisation of operations reduces obstacles against a enterprises ability to enter new markets market segments which once seemed unreachable become directly accessible;
Many secondary functions (delivery, billing, sales, design, service and maintenance work, etc.) can be outsourced to external specialists, which means that the enterprise can focus on its basic area of operations.

When these advantages are skilfully transformed into direct business benefits, enterprises improve the indicators which speak to business efficiency (Figure 6).  Maximum benefits, moreover, cannot be achieved with introduction of just one ICT instrument or service (e.g., E-training, ERP, knowledge management, CRM, etc.) the full range of network opportunities must be used.  Figure 7 shows doubled number of enterprises in the EU which have experienced productivity growth (one of the greatest problems for Latvian enterprises which wish to enhance their competitiveness) as the result of using up to seven ICT instruments.

Innovations: ICT as a key process enabler

There is a very clear correlation between ICT use and innovation activities (Figure 8);  that is exactly why the use of ICT instruments is considered to be a key enabler for innovation.  In the 1990s, the World Bank produced a report on the capacity in different countries for innovative economic development, and among the basic criteria which the bank considered were Internet hosts, as well as the spread of computers and fixed and mobile telephones.  A regularly produced report on the development of innovation in Europe lists broadband Internet connections and ICT investments among the key criteria in characterising the level of innovation in a country [4, 5].
The experience of EU member states illustrates the benefits very precisely (Figure 9).  We see that ICT-enabled product innovations (new or significantly improved products or services appeared on the market) and process innovations (new or significantly improved manufacturing or service processes) enable substantial benefits for the enterprises which ensure such innovations.  75% of innovative enterprises say that ICT is directly linked to the processes of innovation.  Turnover is enhanced, new jobs are created (good jobs for qualified employees with better working conditions and higher salaries).  In the Baltic States, it is very important that the number of employees in this development scenario has increased considerably less than turnover has done, which means that productivity has increased and there is no need to talk about any need for the immigration of cheap workforce.

These benefits show that the issue of introducing ICT instruments in the Baltic States is a very important one.  Even if the level of ICT investments (Figure 1) can be seen as high (it has stably been 10 to 20% higher than the average level of such spending in the EU27), the fact is that there are major problems with the use of broadband Internet connections in enterprises (Figure 10).  The total penetration of connections is higher in Estonia than the average in the EU25, and Latvia and Lithuania are quickly catching up, too, as the number of connections increases in households, libraries, educational institutions and institutions of governance.
The situation among enterprises, however, is very different the number of broadband connections at large enterprises has been stagnant for the last four years, although there the situation is more or less satisfactory.  Small and medium enterprises, however, lag far behind the average growth rate in the EU27, and they are losing positions which at one time were quite good.  Without a broadband Internet connection, no enterprise can ensure operative co-operation with scientific institutions and cluster partners.

Clearly the failure of enterprises to appreciate the importance of ICT instruments does nothing to facilitate the emergence of innovative economies in the Baltic States.  Motivations for local enterprises remain insufficient, with business people choosing short term solutions as opposed to investments in technologies.  This shows, in turn, that business support instruments have not been as well targeted and effective as could be hoped.


Innovative processes (and let us remember that the use of ICT is one such process) can basically be successful only as bottom-up processes which are ensured by motivated people who create, hold and possess knowledge and by enterprises which are interested in product manufacturing and market issues.  It is also true, however, that targeted government activities can substantially stimulate and motivate these processes.
Selective business support must be strengthened so as to ensure that innovative businesses are the most profitable ones.  Government support in a network-based business is just as important as it is in traditional business.  That is particularly true when it comes to international co-operation, including the EU common market.  Here are a few issues which require consideration:
Electronic documents must be introduced thoroughly and as complete analogues to traditional documents.  To be sure, this must involved the E-signature, and it must apply to various procedures, including customs services.  There is a need to integrate electronic authentication procedures for participants in trans-border transactions, doing so at least at the regional level (e.g., the Baltic Sea region).  This applies to passwords, biometric information, the E-signature, etc.  Legal systems must be able to evaluate violations of electronic agreements in an adequate way, not forgetting about fraud, computer crimes, etc.   This must be true at the national and at the international level.
Transnational enterprises and the virtual mobility of the labour force create a set of problems which have to do with labour laws, direct and indirect taxes, social security, etc.  There are new types of work telework, mobile employees, etc., and internationally agreed labour and social security norms must be applied to them.  These must be analogous to those that apply to more traditional forms of work.
Intellectual property protections must be harmonised at the international level, striking a balance between the interests of the owners of knowledge-capacious products on the one hand and consumers on the other.  This speaks to product availability, expiration of exclusive rights, etc.
There are issues concerning privacy rights.  The level of protection for personal data differs from one country to another.  This is another area in which there must be harmonisation, striking a balance, again, between data protection requirements on the one hand and the need to authenticate partners and clients so as to reduce commercial risks.  Also involved here is the free flow of necessary information across borders.
There must be co-ordinated activities to protect network infrastructures against unauthorised use and fraud.  As the use of the Internet for economic transactions has expanded, so has the incidence of fraud.  In 2004, more than 70% of enterprises in the United States claimed losses as the result of Internet fraud.  In 2006 and 2007, the biggest problem was credit card fraud.  Britain alone reported losses of 212 million pounds sterling in 2006 a 16% increase over losses incurred in 2005.
Enterprises tend to agree on how ICT affects various business processes (Figure 11).  It is typical that large enterprises expect greater ICT influence in all processes than small enterprises do.  This means that large enterprises expect greater benefits from ICT use.  Here we see more evidence of the rule that is illustrated in Figure 2b it is true with respect to the use of various ICT instruments and services at the EU level, too (Figure 11).

Large enterprises are the most active users of ICT.  They make use of their own financial and intellectual resources or those that are available.  The use of many technologies by such enterprises is close to the saturation point (in the introduction of technologies) or high up in the active stage (introduction of services).
Medium enterprises tend to be in the central or upper part of the active stage close to saturation in basic technologies such as computers and Internet services, but far behind large enterprises in the integration of external processes.
Small enterprises are at a lower level of development in all aspects.  They are at the start of the road even when it comes to the very simplest purchase and sales transactions in the network environment.
Micro enterprises are in their infancy in all indicators.  Even the spread of fundamental technologies has not risen above the average level of the active stage, to say nothing of process integration.
There are several causes for this situation, and these have to do with the scope of business and the capacity of various enterprises:
The use of ICT at any enterprise requires relatively high fixed costs and investments, while small enterprises have limited financial capacities;
The market does not offer E-business solutions that are tailored for micro and small enterprises, at least not in sufficient number and diversity;
Management lacks strategic understanding, and employees lack basic IT skills (here we must remember that employees at small enterprises must have far more universal skills and obligations).  This applies to the use of professional IT instruments such as CAD, CAM, modelling, data processing, business processes, bookkeeping and administration, design, musical and artistic instruments, etc.
Micro and small enterprises lack qualified ICT specialists, and there are inadequate offers for the outsourcing of such services.
There are definite problems with standardising interfaces so that the IT systems of micro and small enterprises can be linked to those of large enterprises.
Large enterprises are more focused on clients in terms of things such as interfacing and compatibility of procedures than they are on micro or small co-operation partners in the network.
This is a situation which is very risky for Baltic enterprises.  Micro and small enterprises may find themselves entirely excluded from the networks of partners and suppliers of large enterprises.  The public E-procurement systems, by the way, are also focused on large suppliers for reasons of cost effectiveness such suppliers can deliver the necessary products or services to large numbers of state and/or local government institutions simultaneously.
This is why micro and small enterprises require specific support, not least from EU funds, so as to help them to make use of ICT in business processes, also helping them in other ways:
Enhancing the IT skills of management and employees, helping them to learn how to make use of professional IT instruments;
Supporting the development and introduction of E-business solutions which are of use to small enterprises;
Facilitating partnerships with large enterprises, bringing small partners into clusters, competence centres, business networks, etc.;
Involving small enterprises in the state and local government E-procurement system.
The potential benefits of all of this for enterprises in Estonia, Latvia and Lithuania can be seen clearly if we look at the achievements of those countries in the EU which have done best in this regard. This is first and foremost true of countries that are close to us Sweden, Finland, Denmark.


1. Latvian National Development Plan 2007.2013.g.
2. i2010 European Information Society for Growth and Employment.
3. The European e-Business Report 2006/07.
4. European Innovation Scoreboard 2006.
5. Networked Readiness Index 2006-2007

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