Boosting Productivity to Strengthen Lithuania’s Competitive Edge | White Paper

Boosting Productivity to Strengthen Lithuania’s Competitive Edge | White Paper

Issue. Labor efficiency (productivity) is among the key indicators of the national economic progress, it is below the EU average in Lithuania, however. Besides, even 22% of managers have inadequate executive skills (OECD average is 15%), and only 10% of employees in Lithuania are highly motivated (EU average is 17%). Management, leadership and executive competencies in Lithuania are low[1]. The level of productivity in Lithuania is also determined by insufficient spending on research and development (R&D). The country currently spends only 1.02% of GDP on it, which is about 2.5 times less than the OECD average[2]. The level of digitalization in Lithuania is medium and not fast-paced enough compared to the level of the country’s economic development. When assessing progress in digitalization, Lithuania’s progress compared to the EU average is practically not visible[3].

Solution. Labor efficiency (productivity) is driven by better education, expertise, and competencies [4], innovation, and level of digitalization. It is therefore necessary to increase investment in R&D and talent development. According to this indicator, the leaders are the USA and Scandinavian countries (in 2023, the USA ranked the 3^rd, Denmark – the 4^th, Finland – the 6^th, Norway – the 7^th, Sweden – the 9^th, whereas Lithuania – only the 31^st among 134 countries).[5] According to the Innovation Scoreboard 2023, Lithuania is still among the moderate innovators, whereas Scandinavian countries: Denmark, Sweden, and Finland are innovation leaders[6].

Good practice. Denmark and Finland have implemented education reforms and policies to increase productivity. Actions focused on lifelong learning, vocational training, and strong public education systems[7]. Denmark and Sweden[8]^,[9] offer free university education to EU/EEA students. Sweden has implemented reforms for early education, vocational training, higher education, and lifelong learning. In Finland[10]^,[11], a strong focus has been placed on leadership development, which is a part of education and workforce training systems.

Proposal. In order to increase the productivity of the country, it is proposed to strengthen three areas: the development of executive competencies, investment in R&D activities, and increasing public sector efficiency through digitalization. These measures will stimulate innovation, optimize processes, and improve the quality of public services.

DEVELOPMENT OF EXECUTIVE COMPETENCES

It is proposed:

• To develop a unified long-term leadership development strategy at the national level – to invest in the education and training of managers-leaders of various levels[1] (including, for example, according to structured manager mentoring programs, etc.)
• To facilitate the granting of low-interest loans or grants for investments into manager training by small and medium-sized enterprises (SMEs)
• Promotion tool: organizing national awards for innovative managers
• To develop tools to attract and retain the best global talented managers in Lithuania (through the migration policy improvement)
• To tap EU funding for improving best management practices that increase productivity

Managers need the following skills and competencies: performance management (setting goals, providing regular feedback, coaching and encouragement)[2]; effective communication (effective communication improves productivity by up to 25% when team members feel connected and aligned)[3]; leadership skills and strategic thinking that help managers motivate employees; conflict resolution; task delegation. Letting go helps to train subordinates to work better independently as opposed to micromanagement and failure to let go[4]; time planning and prioritization; public speaking; and financial literacy.

INVESTMENTS INTO R&D

Innovation is a key factor for economic growth and competitiveness, it contributes to productivity growth, technological breakthroughs and job creation.

Issue. The low level of productivity in Lithuania is determined by insufficient spending on R&D. Lithuania currently spends 1.02%[5] of GDP on developing the innovation ecosystem, which is about 2.5 times less than the OECD average and almost 3 times less than Finland’s spending. As for the R&D talent, only 4.6% of the workforce in Lithuania represents the high-tech sector[6], and the share of R&D researchers is only 8 out of 1,000 employees[7], which is twice less than in Sweden or Finland. Problem areas of Lithuania’s innovation policy are state support for business R&D activities, business sector spending on R&D, and export of high-tech goods and services.

Solution. We propose placing further focus on and assigning resources to the following areas:

Reinforcing academic institutions: Regular cooperation between Lithuania and leading foreign educational institutions, centers and accelerators in R&D areas with the most potential, increased focus on attracting scientists, and researchers, and creation of research-friendly infrastructure.

An example of success in attracting top-level Lithuanian and foreign researchers: the Presidential Young Professorship initiative of the National University of Singapore (offering a position of Associate Professor, attractive salary, big research subsidies, etc.). Examples of successful cooperation: the Singapore-MIT Alliance for Research and Technology (SMART), MIT Portugal Program, the Irish High Potential Start-up (HPSU) Founders Forum (access to networks, consulting and research centers, support for international activities and strengthening management teams). Danish universities also promote international cooperation, attract global talent and promote knowledge exchange[1].

• Activating synergies between the public sector, the research community and businesses: Encouraging private sector high-tech talent development initiatives – internal academies and internships, supporting the development of specialized incubators and research accelerators, introducing a system of micro-credentials, expanding SME innovation promotion programs (e.g., Austrian Innovation Voucher program, with up to 80% funding intensity, promotes feasibility studies, creation of prototypes and cooperation with more than 500 universities and R&D centers).
• Forming systemic funding and access to capital: The high-tech sector needs long-term, stable financial support from acceleration and venture capital funds. It is worth considering a separate high-tech fund for priority areas – aimed at the growth and success of businesses in various stages, as well as greater involvement of institutions in attracting foreign venture funds to the Lithuanian market. It is important to provide additional tax incentives for businesses reinvesting in high-tech such as artificial intelligence, cloud solutions, big data analytics, biotechnology, etc.

INCREASING PUBLIC SECTOR EFFICIENCY THROUGH DIGITALIZATION

The efficiency of the public sector is a key factor in the country’s economic growth and productivity. Digital technologies not only improve the quality of public services but also increase administrative efficiency, reduce red tape, and stimulate innovation.

Issue. The level of digitalization in Lithuania is medium and not fast-paced enough compared to the level of the country’s economic development. When assessing progress in digitalization, Lithuania’s progress compared to the EU average is practically not visible.

One of the weakest aspects of Lithuania’s digitalization is the digitalization of businesses. It is only the development of e-commerce that tangible progress is observed. The use of advanced digital technologies (big data analytics, social media, cloud computing, artificial intelligence) remains relatively low[2].

According to the Digital Economy and Society Index (DESI)[3], the leading countries are Finland, Sweden, Denmark and the Netherlands. The biggest weakness in Lithuania is the integration of digital technologies (or digitalization of the business sector – the infrastructural part). In the business context, only 57% of SMEs in Lithuania have a basic level of digital intensity. The EU target for 2030 is 90% of Union SMEs to have at least a basic level of digital intensity.

According to the DESI, in terms of digital public services the country performs better than the EU average, however, in the human capital dimension, the progress is moderate[4].

The OECD Digital Government Index (DGI) is used to assess countries’ efforts to develop and implement digital transformation strategies in the public sector. South Korea, Denmark, the United Kingdom, Norway, Australia, Estonia, and Ireland are the leaders with balanced results across all dimensions of the index.

Lithuania is lagging behind and ranks 18^{th [1]}. The highest-rated countries are distinguished by strong national digitalization strategies, political support and an efficient data management system.

Norway, which is an example of success, stands out for its advanced digital infrastructure, institutional cooperation and seamless data sharing, while artificial intelligence is integrated into the optimization of social service processes. Cooperation between the public sector and start-ups is also actively promoted through the StartOff program[2].

Proposal. In order to improve the digital government indicators, Lithuania should focus on the following aspects:

• Promoting innovation and cooperation: To introduce public-private partnership programs intended for developing digital solutions and innovation. To invest in cloud services, artificial intelligence (AI) and big data analytics, as these areas in Lithuania are still lagging behind the EU average (cloud adoption – 33.6% in Lithuania, 38.9% in the EU, AI adoption – 4.9% in Lithuania, 8% in the EU). To develop experimental technology programs, including artificial intelligence and big data solutions, based on the Finnish AI Finland initiative[3].
• Improving the digital talent development: To create a digital talent development strategy (to promote talent movement and cross-sectoral cooperation), including state-supported programs such as, for example, Irish Skillnet Ireland and Singapore SkillsFuture[4].
• Systemizing data use: To introduce the “only-once principle” where citizens and businesses are to provide information only once and such information is then effectively shared among institutions. To improve the one-stop-shop platform “E-Government Gateway”. For example, the Danish platform Borger.dk allows citizens to conveniently access all public services in one place.

GENERAL PROPOSALS AND WHAT LITHUANIA NEEDS:

1. “The Silver Bullet Policy”. It is important to establish and implement reforms that would increase productivity through three priorities: manager training, investment in R&D and progress in digitalization. Multiple policies are needed, especially to promote the increase of productivity at the company level. In taking new policy steps, it is important for each reform to be aligned with the uniform policy strategy of the country and complement others in order to create a coherent and effective common policy framework.
2. To prioritize manager training (both in business and in the public sector). To develop a leadership competencies development strategy at the national level.
3. The R&D policy requires a coherent strategy, which includes increasing research funding, promoting the high-tech sector, and measures for training and attracting talent.
4. To improve access for businesses to funding for manager training and R&D activities in SMEs.
5. To promote R&D spending in the business sector in order to reach the EU average.
6. To develop tools for the international trade in high-tech products and services.
7. To develop tools to attract and retain the best global talented managers in Lithuania; to tap the EU funding to improve the best management practices that increase productivity.
8. To develop a long-term strategy for activating synergies between the public sector, the research community and businesses.
9. To provide incentives to strengthen academic institutions in order to promote cooperation among Lithuanian and leading foreign educational institutions, centers and accelerators aimed at priority R&D areas in Lithuania, attracting scientists and researchers.
10. To form a system for funding and access to capital for the high-tech sector (maybe to set up a fund for the development of businesses at various stages).
11. To introduce incentives for public-private partnerships for developing digital solutions and innovation. To develop a digital talent development strategy. To improve data management through the “only-once principle”.