Description
In the course of preparing this report, information, insights and comments have been provided from the following individuals in Lithuania.
Lithuania
Aiming for a Knowledge Economy
March 2003
The World Bank
Europe and Central Asia Region
This report was prepared by Messrs./Mmes: Severin Kodderitzsch (Team Leader); Lars Jeurling (Co-Team
Leader, Private Sector Development); Lorenzo Costantino (Information Society); Ramin Shojai and Dan
Crisafulli (IFC) (Private Sector Innovations); David Fretwell (Education); Erlendas Grigorovic (Civil Society,
Anti-Corruption); Deborah Knight, Nora Kaoues, Arsela Dean (Knowledge Management, e-Government);
Misrak Leta (Benchmarking and Statistics); Tarmo Lemola (Research & Development) Gareth Locksely
(Telecommunications), Jeffrey Balkind (Municipalities and Digital Divide), Vladimir Hrkac (Research
Assistant) and Sophia Cox (Formatting)
In the course of preparing this report, information, insights and comments have been provided from the
following individuals in Lithuania and are gratefully acknowledged: Messrs./Mmes. R.Gudauskas, Advisor to
Prime Minister, Government Office; V.Salauskas, Secretary of the Ministry, Ministry of Transport and
Communications; A.Matulis, Director, Information Policy Department, Ministry of Interior; G.Steponaviciene,
Vice President, Lithuanian Free Market Institute; J.Zalatorius, Director, Committee of the Development of
Information Society, Government Office; M.Wolf, Consultant, Committee of the Development of Information
Society, Government Office; V.Snitka, Kaunas University of Technology; B.Rope, President, Association of
Municipalities; V.Lepeška, Director, Organizations Development Center; A.Targamadze, Dean, Information
faculty, KTU; D.Maikštenas, Strategy Coordinator, Omnitel; V. Dienys, Director, Methodological Center for
Vocational Education & Training, National Observatory; R.Vilimiene, Director, National Association of Adult
Education; V.Budiene, Open Society Fund of Lithuania; T.Jovaisa, Head of Lithuanian Labor Market Training
Authority; V.Vitkauskas, President, INFOBALT Association; R.Tamulevicius, Director, INFOBALT
Association; K.Juškevicius, Open Society Fund Lithuania; R.Morkunaite, Head of Economic Research Center;
E.Vilkas, Science Academy of Lithuania; A.Žalys, Director, Science and Education Department, Ministry of
Higher Education and Science; A.Milinaviciene, Adult Education Sector, Ministry of Higher Education and
Science; A.Bartusevicius, Director, Sonex; V.Šleinota, Director, Vilniaus Vingis; A.Kubilius, Member of
Parliament; L.Mogeniene, Chairperson, Association of SME of Kaunas region; T.Milaknis, Director, ALNA;
G.Babravicius, Deputy Chairman; R.Pavilionis, Member of the Parliament; D.Bardauskiene, Advisor to Mayor,
Vilnius Municipality; R.Krišciunas, Director, Financial Support Department, Ministry of Finance;
R.Grineviciute, Vilnius University; and K.Sabaliauskas, Director, Cadastre Registre, State Company.
Cover photographs by ELTA, Lithuania.
List of Abbreviations
ALL - Adult Literacy and Life Skills
BEEPS - Business Environment and Enterprise
Performance Survey
CES - Citizenship and Education Study
CRA - Communications Regulatory Authority
EU - European Union
FDI - Foreign Direct Investment
FIAS - Foreign Investment Advisory Service
GDP - Gross Domestic Product
IALS - International Adult Literacy Survey
ICT - Information and Communications Technologies
IEA - International Association for Evaluation of
Educational Achievement
ISP - Internet Service Provider
NGOs - Nongovernmental Organizations
INFOBALT - Information and Communications Technology
Association in Lithuania
OECD - Organisation for Economic Co-operation and
Development
PISA - Program of International Student Assessment
R&D - Research and Development
SBIR - Small Business Innovation Research
SMEDA - Lithuanian Development Agency for Small and
Medium-Size Enterprises
TIMSS - Third International Mathematics and Science
Study
Lithuania
Aiming for a Knowledge Economy
Contents
Preface ............................................................................................................................................. i
Summary: An Strategy for the Emerging Knowledge Economy Strategy..............................ii
Challenges for Lithuania in Achieving the Knowledge Economy .............................................1
Challenges—Old and New ........................................................................................................1
Lithuania’s Competitiveness .....................................................................................................2
Progress Toward a Knowledge Economy..................................................................................3
Where to Start—and When?......................................................................................................5
Lifelong Learning for the Knowledge Economy: Challenges for Education and Training...7
Defining and Assessing Key Competencies ..............................................................................8
Addressing Governance and Management Challenges .............................................................9
Financing Education..................................................................................................................9
Opening Pathways Within and Between Learning Systems ....................................................10
Improving Equity, Access, Motivation....................................................................................10
Lithuania’s Innovation System: Connecting Researchers and Businesses ...........................12
Formulating and Coordinating Innovation Policy ..................................................................13
Increasing the Relevance, Efficiency, Accountability of Research and Development ...........14
Consolidating Research Capacity............................................................................................15
Adjusting Funding for University Research............................................................................15
Improving Data to Support Innovation....................................................................................16
Fostering a More Supportive Business and Regulatory Environment .....................................16
Strengthening Business Support Programs..............................................................................16
Improving Access to Equity Funding......................................................................................17
Increasing the Private Sector’s Role in Public Services ..........................................................17
Mobilizing the Private Sector to Foster Competition and Cooperation..................................18
Building an Information Society ...............................................................................................19
Building Regulatory Capacity in Telecommunication ...........................................................19
Providing Universal Access to Telephones and the Internet ...................................................19
Unbundling Local Loops .........................................................................................................20
Addressing the Authorization Concept....................................................................................21
Ensuring Efficient Interconnection..........................................................................................21
Consolidating Responsibilities for the Information Society....................................................21
Implementing Strategies and Action Plans ..............................................................................22
Promoting Knowledge Management, e-Government, and e-Business ....................................23
Conclusions: Implementing the Knowledge Economy ............................................................25
Annex 1: Challenges for Lithuania in Achieving a Knowledge Economy ............................27
A Changing World...................................................................................................................27
Lithuania’s Competitiveness ...................................................................................................29
Gradual Progress on the Knowledge Economy Agenda..........................................................31
Benchmarking the Knowledge Economy ................................................................................32
When to Start? .........................................................................................................................34
Annex 2: Lifelong Learning for the Knowledge Economy – Challenges for
Education and Training ..............................................................................................................35
Learner Perspective .................................................................................................................36
Economic and Labor Market Perspective ................................................................................37
Thematic Education Policy Perspective ..................................................................................40
Defining and Assessing Key Competencies ............................................................................42
Governance and Management Challenges...............................................................................49
Financing .................................................................................................................................51
Opening Pathways within and between Learning Systems .....................................................55
Equity and Access....................................................................................................................57
Research and Knowledge Generation......................................................................................60
Annex 3: Lithuanian’s Innovation System: Connecting Researchers and
Businesses .....................................................................................................................................61
Introduction..............................................................................................................................61
Challenges................................................................................................................................63
• Defining Innovation Policy in Lithuania .......................................................................87
• Research & Development : Relevance, Efficiency, Accountability...............................90
• Business and Regulatory Environment...........................................................................96
• Policy Proposals..............................................................................................................96
• Private Sector Interaction with Public Services..............................................................98
• Mobilizing the Private Sector .........................................................................................99
Annex 4: Building an Information Society in Lithuania.......................................................101
Information Infrastructure and Telecommunications Sector.................................................102
Policy Issues and Proposals ..................................................................................................110
Background Papers and References ........................................................................................128
List of Figures
Figure 1: Scores on the knowledge economy index scores for various countries
and regions 1995 and 2000-02.................................................................................4
Figure 2: Lithuania’s performance in developing knowledge economy, 1995
and 2000-02 .............................................................................................................5
Figure A1.1: Knowledge economy index: scores for various countries, 1995 and
2000-02..................................................................................................................32
Figure A1.2: Lithuania’s performance in developing a knowledge economy, 1995
and 2000-02 ...........................................................................................................33
Figure A3.1: Institutional Setting for R & D in Lithuania..........................................................66
Figure A3.2: Foreign Direct Investment Inflows in Lithuania, 1997-2001................................79
Figure A4.1: Total Teledensity (Fixed and Mobile) and GDP Per Capita................................104
Figure A4.2: Internet Users and GDP per Capita .....................................................................104
Figure A4.3: Urban-Rural Teledensity Ratio (Fixed Access) and GDP per Capita .................105
Figure A4.4: Road Map to E-Government................................................................................124
List of Tables
Table A1.1: Current Competitiveness Index and Growth Competitiveness Index....................29
Table A1.2: Current Competitiveness Index.............................................................................30
Table A1.3: Growth Competitiveness Index.............................................................................31
Table A2.1: Composition of Employment (percent) .................................................................38
Table A2.2: Unemployment and Employment by Education Level, 2000 (percent) ................40
Table A2.3: Selected Knowledge Economy Indicators related to Human Development..........41
Table A2.4: Citizenship and Education in Selected Countries ..................................................44
Table A2.5: Percentage of Student s Reaching Median in Math and Science............................54
Table A2.6: Students in Vocational and Total Upper Secondary School, 1996-2001 ..............46
Table A2.7: Options of Financing Lifelong Learning...............................................................52
Table A3.1: Europe Innovation Scoreboard 2002 – Candidate Countries ................................63
Table A3.2: Structure of Lithuanian Imports, Selected Years, 1996-2001 ...............................79
Table A3.3: Financing Growth Companies—By Stage of Investment .....................................82
Table A3.4: Legal Constraints to Growth Investing in Lithuania .............................................84
Table A4.1: Readiness of the Networked World.....................................................................102
Table A4.2: International Internet Bandwidth and Internet Hosts, 2001.................................106
Table A4.3: Peak Tariffs for 30 Hours a Month of Dial- up Internet Access, 2001 ................107
Table A4.4: International Telephone Traffic, 2000.................................................................107
Table A4.5: Telephone Access in the Capital City and the Rest of the Country, 2000...........108
Table A4.6: Fixed, Mobile and Total Telephone Penetration, 2001 .......................................108
Table A4.7: Network Growth, 2000-01...................................................................................109
Table A4.8: Telecommunication Revenues, 2000...................................................................109
List of Boxes
Box A1.1: EU Structural Funds ..............................................................................................34
Box A2.1: Korea’s Credit Banking System—promoting lifelong learning opportunities ......56
Box A2.2: Recognizing nonformal, informal, and nontraditional learning—approaches
around the world ....................................................................................................56
Box A3.1: Vilnius—a Knowledge Economy City..................................................................71
Box A3.2: Vilniaus Vingis—Using Subcontracting to Integrate into Global Networks ........72
Box A3.3: Moving Up the Value Chain in the Apparel Industry............................................76
Box A3.4: Vilniaus Baldu Kombinatas—Working Closely with a Multinational..................77
Box A3.5: Ireland—Innovation through Foreign Direct Investment ......................................78
Box A3.6: Policy Coordination to Improve Governance of the Innovation System...............89
Box A3.7: National Technology Programs in Finland—Increasing Flexibility and
Cooperation............................................................................................................91
Box A3.8: The Hungarian Experience—Fostering Links between Industry and Research...91
Box A3.9: Benchmarking National Research Policies in Europe ...........................................92
Box A3.10: Specialized Technology Research Institutes—a Device to Renew State Research
Institutes.................................................................................................................94
Box A3.11: The Small Business Innovation Research Program...............................................95
Box A4.1: The “Smart Subsidy” Approach to Universal Access ........................................113
Box A4.2: Building an Information Society in EU Candidate Countries through
e-Europe + ...........................................................................................................117
Box A4.3: Ireland—Public Sector Institutions at the Heart of the Information Society.......118
Box A4.4: Slovenia—a Ministry for Information Society....................................................118
Box A4.5: Singapore—Clear Action Plans to Pave the Way for an Information Society and
Knowledge Economy...........................................................................................119
Box A4.6: Popular Government Web Sites in Lithuania ......................................................122
Box A4.7: E-Development in Estonia...................................................................................123
Box A4.8: Addressing the Digital Divide in Lithuania .........................................................126
Preface
The ability to acquire and use knowledge is increasingly important for countries’
economic competitiveness. Moreover, the importance of knowledge for development will likely
continue to grow—possibly making the difference between prosperity and poverty, both between
and within countries. Acquiring and using knowledge require access to and the ability to use
information and communications technology. But they also require efficient education systems
that provide opportunities for life- long learning, new approaches to innovation that bring
together researchers and entrepreneurs, and an economic and institutional framework that
supports the use of knowledge to provide new and competitive products and services.
The knowledge-based economy—in a broad sense, embracing but going beyond
information and communications technology—has been the subject of much discussion among
international entities such as the World Bank, the European Commission, the Organisation for
Economic Co-operation and the Development, and World Economic Forum. The
implementation of concepts associated with the knowledge economy has also been part of policy
debates at the national level, including in Lithuania.
European Union (EU) candidate countries have had varying success in adopting elements
of a knowledge economy. Many have reformed policies and institutions to support national
innovation systems and are striving to integrate with the European Research Area. Others are
reviewing approaches to education, including tertiary education and training. All have agreed to
implement a common “e-Europe+” action plan and are developing national strategies to address
key areas of the knowledge economy. But in most EU candidate countries, including Lithuania,
there remains scope for broadening the agenda for discussion and action from a knowledge
economy perspective.
This report is intended to stimulate the ongoing debate in Lithuania on economic
development from a knowledge perspective, and to help build consensus on how best to design,
prioritize, and implement an agenda for modernization. In its efforts to develop a knowledge
economy strategy and action plan, the Government of Lithuania requested World Bank support
in performing a knowledge economy assessment. This report reflects work carried out by a
World Bank team in collaboration with a Lithuanian Knowledge Economy Team coordinated by
the Prime Minister’s Office. It also reflects numerous comments and insights provided by
various institutions, groups, and individuals in Lithuania in the course of reviewing a series of
working papers and an earlier version of this report, covering the period from the first visit by the
World Bank team in May 2002 through November 2002—including comments from a seminar
on September 26, 2002 and final comments provided during discussions on November 26-28,
2002.
- ii -
Summary: A Strategy for the Emerging Knowledge Economy
I. Knowledge is increasingly crucial for productivity, competitiveness, and growth. While
Lithuania has a well-established culture of valuing knowledge, it is using its knowledge assets—
human resources, education systems, researchers and entrepreneurs, and so on—below capacity,
and so forgoing opportunities to compete internationally as well as potential growth and income.
II. In recent years Lithuania has made progress in a few areas of the knowledge-based
economy, particularly in terms of improving the economic and institutional regime and
developing infrastructure for information and communications technology. But less progress has
been made on improving education systems, and Lithuania has performed poorly in advancing its
systems for innovation.
III. The challenge for Lithuania is to develop new engines of growth and to diversify
economic activities. Key to improving competitiveness are the systematic generation, use, and
communication of knowledge throughout the economy and society—not just in high-tech sectors
but also in areas such as textiles, wood processing, and agribusiness. And not just among the
educated elite, but among the general population. The ability to network within and outside
Lithuania, supported by Internet access, will become increasingly important to accessing and
using knowledge.
IV. Given the time it takes to build consensus and implement policy changes, the time to start
is now. Other countries are moving ahead with revised approaches to education, tele-
communications regulation, and science and technology policies. Yet Lithuania is struggling
with significant blockages to implementing the changes required for a knowledge economy.
Mistrust between the public sector and businesses, poor communications between public
institutions, and insufficient cooperation persist. Increasing partnerships among different social
partners will be crucial for Lithuania to move ahead.
V. In addition to a sound macroeconomic framework, flexible labor markets, and effective
social protection policies, a knowledge economy requires effective integration of education
systems, innovation systems, and information and communications infrastructure. The proposals
presented in this report form the core of an agenda that aims to support Lithuania’s efforts to
achieve a knowledge economy. These proposals can be grouped in six categories involving both
policy measures and private initiatives.
Ø I mprove collaboration between the business community and the public sector
(including the research community and education institutions) by:
o Linking the research and business communities more closely in developing and
commercializing technical innovations.
o Providing the business community with a significantly increased role in
formulating future innovation policies and programs.
o Increasing collaboration between the business community and the education
sector through shared governance at the higher education level and participation
in formulating education policies (among others, vocational training).
- iii -
o Increasing the sophistication with which the private sector represents Lithuania’s
long-term business interests.
o Expanding the private sector’s ability to compete and cooperate.
Ø Reform and support public institutions that are critically associated with a
knowledge economy, including:
o Establishing a ministry of the information society to consolidate strategy, policy,
and monitoring functions currently spread across a number of public institutions.
Coordination of the Government’s knowledge management plans and e-
government activities should be part of the ministry’s mandate.
o Strengthening the capacity of the Communications Regulatory Agency.
o Strengthening innovation policy coordination through a Science and Technology
Policy Council, with meaningful business sector participation in policymaking
and a permanent secretariat.
o Establishing a Lithuania Technology Agency to support the business community
in technology research and development, dissemination, and commercialization;
establishing this agency should involve merging a number of existing
organizations with similar functions.
o Consolidating state research institutions into a Lithuanian Institute of Technology
with a mandate to undertake technology development on a research contract basis.
o Identifying an institution able to establish and certify education equivalencies
between formal education institutions in Lithuania and the European Union, and
to address equivalencies between nonformal learning opportunities and formal
education institutions.
o Strengthening statistical systems for education, innovation and the information
society, including benchmarking Lithuania against countries of key interest.
Ø Provide incentives for innovation, learning, and networking within the information
societyby reviewing old and introducing new fiscal support measures, including:
o Reviewing the full range of education financing mechanisms (of which only a few
are currently applied), particularly for tertiary education, with the aim of
increasing efficiency, equity, and access.
o Providing tax credits, learning vouchers, and the like to motivate enterprises and
employees to invest in training.
o Moving from institution-based funding of public research and development to
program and project funding, thereby improving the relevance, efficiency, and
accountability of resources spend on research and development while ensuring
long-term funding for research activities.
o Reassessing and possibly consolidating the broad range of support measures for
small and medium-size enterprises (for example, under the above- mentioned
Lithuania Technology Agency).
o Introducing “smart subsidies” to support universal access to telephone and
Internet services.
- iv -
Ø Support labor market development, thereby reducing unemployment in the medium
term by reducing current and future skill gaps, by:
o Defining and assessing the key competencies required for a knowledge economy.
o Reviewing content for primary and secondary education and for vocational
training.
o Improving monitoring of labor market conditions.
o Defining occupational standards as a basis for formulating training curriculums.
Ø Strengthen the regulatory framework in terms of:
o The business environment (in particular, access to equity markets).
o The telecommunications sector (local loop unbundling, authorization, inter-
connection).
o The information society (electronic transactions).
VI. The proposals outlined above and discussed in more detail in the report provide the core
of an action program that would allow Lithuania to make progress in aiming for a knowledge
economy. Implementation of such a program will require consensus and joint action among key
actors:
• The Government, which will need to facilitate actions and integrate the aspirations of
many stakeholders.
• The business community, which is the driver of innovation in the economy and will
need to play a more substantive role in working with the Government to develop and
implement policies for a knowledge economy, as well as direct activities in
networking and promotion.
• The education and research communities, which will increasingly become the
providers of demand-driven learning and research services.
• Civil society, as both a participant in and source of demand for products and services
in the knowledge economy.
Lithuania
Aiming for a Knowledge Economy
Challenges for Lithuania in Achieving a Knowledge Economy
1. Research and the recent economic success of many (often small) countries suggest
increasingly strong links between knowledge and productivity, competitiveness, and economic
growth. In Lithuania, strengthening these links and moving toward a knowledge-based economy
require simultaneous progress on:
• Developing education systems and human resources to ensure that citizens are
equipped to acquire, apply, and share knowledge.
• Establishing innovation systems that bring together networks of researchers and
businesses to improve commercial applications of science and technology.
• Building an information society infrastructure that gives all people access to
affordable and effective information and communications technology—supporting
education, innovation, and networking.
• Providing an economic and institutional framework that ensures a stable
macroeconomic environment as well as increased competition, flexible labor markets,
and adequate social protection.
2. Since the early 1990s Lithuania—along with Estonia and Latvia, which have similar
income levels—has experienced a remarkable economic turnaround relative to other countries
that were part of the former Soviet Union, such as Belarus and Ukraine. Lithuania has
completed the transition from a planned to a market economy and has largely adopted the acquis
communautaire (the body of legislation of the European Communities and European Union),
bringing it to the threshold of EU accession. In recent years economic growth has been strong,
averaging 4-5 percent a year (except in 1999, due to the Russian Federation’s financial crisis),
and the macroeconomic environment has been stable. Strong growth has been driven by diverse
and growing small and medium-size enterprises and by increasing exports of manufactured
goods, facilitated by Lithuania’s labor cost advantages.
3. Lithuania has also started to make progress on many of the elements required for a
knowledge-based economy. For example, it has participated in EU research programs, prepared
a white paper on science and technology, agreed to implement the e-Europe+ action plan,
adopted various information society and e-government strategies, and signed a memorandum of
understanding on information society development between the private sector and the
Government.
Challenges—Old and New
4. Yet Lithuania continues to face challenges associated with transition. Unemployment,
which stood at 17 percent in 2001, is highest among lower-skilled workers. Poverty, which
ranged from 10-25 percent of the population in 2000 (depending on the measure used), is
concentrated in rural areas. And agriculture lags behind other sectors in terms of performance
and growth. Agricultural activities need to be modernized, and the potential social costs of this
- 2 -
modernization can be eased by developing the rural business environment and supporting
alternatives to farming. Many Lithuanians will measure the success of EU membership in terms
of the economy’s ability to achieve convergence between incomes in Lithuania and other EU
member countries—convergence that is still many years away (World Bank 2002).
5. Lithuania will also face new challenges in the next few years. Competitive pressures will
increase as Lithuania joins the EU and faces increased competition on the Single Market.
Moreover, Lithuania’s ability to compete based on the production of labor- intensive goods
requiring few skills will become more difficult as wages rise with economic growth. Finally, the
phase-out of the Multifiber Agreement in 2005 will lower the prices of textile and clothing
exports from developing countries—putting pressure on Lithuanian manufacturers because
textiles and clothing account for one-third of their exports to EU markets.
6. Lithuania has evolved enormously since achieving independence in the early 1990s. But
the world has also changed considerably, creating opportunities as well as challenges. A new
world economy is in the making, reflecting a technological revolution and an economic one
(Rischard 2002). The technological revolution, driven by plummeting costs of information and
communications technology and increased codification of knowledge, has spurred technological
developments in many fields, including biology, energy, nanotechnology, and new materials.
Business and science have developed closer links—increasing innovation, shortening product
life-cycles, and making education, worker skills, and lifelong learning more important than ever.
7. The economic revolution is being driven by powerful growth in world trade and
international investment. Alliances between enterprises (including but going beyond joint
ventures and mergers and acquisitions) have become crucial. In addition, value chains—the
division of production and marketing functions among cooperating firms working across national
boundaries—have become longer. More services are being supplied over greater distances,
businesses are being reshaped from the ground up, and new product and service ideas are being
generated.
8. Creativity and knowledge have become important factors of production in the new world
economy, similar to capital, labor, land, and natural resources. Thus Lithuania must implement
knowledge-supporting policies to increase its competitiveness and raise productivity.
Lithuania’s Competitiveness
9. According to the Global Competitiveness Report 2002/2003 recently issued by the World
Economic Forum, Lithuania’s current ability to compete internationally ranks 49
th
among 75
countries—well ahead of the Russian Federation and Ukraine yet placing Lithuania among the
less competitive countries soon to join the EU. In terms of likely future competitiveness,
Lithuania ranks 43
rd
, suggesting that current policies will slightly improve matters. Still, these
rankings indicate that considerable improvements are needed if Lithuania’s income convergence
with current EU members is to accelerate.
11. According to the World Economic Forum, a country’s current competitiveness is driven
by two factors:
- 3 -
• The sophistication with which a country’s companies compete—in terms of using
sophisticated business strategies and moving away from advantages based on natural
resources or low-cost labor (or both) to more distinctive products made using more
productive methods.
• The quality of the business environment—in terms of the quality of input and factor
markets, the competitiveness of the business environment, the extent of demand (in
both domestic and export markets), and the presence of local support industries.
Lithuania’s relatively low ranking based on these two elements points to the challenges ahead.
12. A country’s future competitiveness, again according to the World Economic Forum, is
largely a function of its ability to innovate (as indicated by a technology subindex, on which
Lithuania ranks 41
st
—among the lowest of EU accession countries) and the quality of its public
institutions (where Lithuania ranks 34
th
) and macroeconomic environment (where Lithuania’s
relatively low ranking – 56
th
– may have been influenced by the Russian Federation’s financial
crisis).
Progress toward a Knowledge Economy
13. Lithuania’s relative progress in developing a knowledge economy was assessed using a
benchmarking methodology developed by the World Bank Institute (for more information on the
methodology, see www1.worldbank.org/gdln/kam.htm). Indicators were collected for 100
countries on three variables for each of the four main dimensions of a knowledge economy:
education, innovation, information society (infrastructure), and economic and institutional
framework. Countries were ranked on a scale of 0 (lowest) to 10 (highest) for each variable,
then the 12 variables were averaged to produce a summary measure—the knowledge economy
index.
14. Using this index, Lithuania made progress between 1995 and the most recent period
(ranging from 2000 to 2002 depending on data availability), moving from a score of 5.6 to 6.7
(figure 1). This higher score places Lithuania ahead of the average score for EU candidate
countries (6.6) and ahead of Latvia, Romania, Turkey and Bulgaria. Based on this index,
Lithuania ranks behind the Visigrad Countries and Estonia, as well as the average score for EU
member countries (8.12) and the G7 countries (8.17).
- 4 -
Figure 1: Scores on the knowledge economy index - various countries, 1995 and 2000-02
Source: World Bank Institute data
15. In terms of the four dimensions of a knowledge economy, Lithuania made the most
progress in developing its information and communications infrastructure and improving its
economic and institutional framework (figure 2). Less progress was made in improving
education systems, though literacy and enrollment rates were already high in 1995. And when it
came to fostering innovation systems, Lithuania’s performance was poor.
Knowledge Economy Index
4.00
5.00
6.00
7.00
8.00
9.00
10.00
4.00 5.00 6.00 7.00 8.00 9.00 10.00
1995
M
o
s
t
r
e
c
e
n
t
Turkey
Romania
Ukraine
Latvia
Lithuania
Russia
Bulgaria
Cyprus
EUCC12
Greece
Slovak Rep.
Hungary
Portugal
Poland
Slovenia
Czech Rep.
Italy
Estonia
France
EU15
G7 Germany
Ireland
UK
Finland
Sweden
Denmark
Netherlands
Knowledge Economy Index
4.00
5.00
6.00
7.00
8.00
9.00
10.00
4.00 5.00 6.00 7.00 8.00 9.00 10.00
1995
M
o
s
t
r
e
c
e
n
t
Turkey
Romania
Ukraine
Latvia
Lithuania
Russia
Bulgaria
Cyprus
EUCC12
Greece
Slovak Rep.
Hungary
Portugal
Poland
Slovenia
Czech Rep.
Italy
Estonia
France
EU15
G7 Germany
Ireland
UK
Finland
Sweden
Denmark
Netherlands
- 5 -
Figure 2: Lithuania’s performance in developing a knowledge economy, 1995 and 2000-02
Source: World Bank Institute data
16. Although Lithuania has a long-established culture of valuing knowledge, its actual and
potential knowledge assets—human resources, education systems, researchers and entrepreneurs,
and so on—are being underused in generating economic benefits. Thus opportunities are being
lost in terms of boosting growth, incomes, and international competitiveness.
Where to Start—and When?
17. Lithuania has a small population (about 3.5 million people) and economy ($11.3 billion
GDP in 2000), resulting in a gross national income per capita of $2,930. Moreover, it covers a
small area (65,000 square kilometers) and has a narrow natural resource base. The country’s
main challenge is to diversify economic activities and develop new engines of growth. Key to
improving competitiveness are the systematic generation, use, and transfer of knowledge
throughout the economy and society—not just in high-tech sectors but also in traditional sectors
such as textiles, wood processing, and agribusiness. And not just among the educated elite, but
among the entire population.
18. With EU accession and significant amounts of EU structural financing becoming
available in 2004, Lithuania has an opportunity to fund a broad range of public investments and
programs to support a knowledge-based economy. This opportunity should be used to build
broad consensus on the vision and steps to be taken in moving toward a knowledge economy—
and on how to translate this vision into an action plan of well-defined, achievable programs and
0
5
10
Econ. Incentive
Regime
Innovation
Education
Information
Infrastructure
most recent 1995
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projects supported by the EU. Given the time it takes to build consensus, implement policies,
and achieve change, the time to start is now. Other countries, both in the region and elsewhere,
are revising their approaches to and policies for education, telecommunications, and science and
technology. The following sections describe areas and offer concrete proposals that Lithuania
may want to consider in developing its action plan for a knowledge economy.
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Lifelong Learning for the Knowledge Economy:
Challenges for Education and Training
19. A knowledge economy requires as its foundation an educated, skilled population able to
create, use, and share knowledge. Lifelong learning—from ages 4–80, in formal, nonformal
(enterprise training), and informal (life experience) learning environments—is essential to this
foundation. Learning in a knowledge economy can be seen from at least four perspectives:
• A learner perspective—as opposed to an education institution perspective.
• An economic and labor market perspective—but not in isolation from social and
cultural factors.
• An education policy perspective—including reviewing key competencies required for
the knowledge economy, fostering good governance of education institutions,
financing human resource development, creating learning pathways and
opportunities, and promoting equity and access across life stages and learning
systems (formal, nonformal, informal).
• A broader knowledge economy perspective—linking education and human resource
development to innovation systems and the information society.
20. Lithuania’s education systems are at a crossroads. Though they face growing demands,
they have limited capacity to respond to changing cir cumstances and enable lifelong learning.
Moreover, resources to improve education access and quality are scarce. Governments at
various levels and economic actors must transform formal education systems and link them with
nonformal systems, improving overall performance. Responsibility for managing learning in the
knowledge economy needs to be increasingly demand driven and based on individual needs,
particularly as individuals move up the learning continuum. There is also a need to empower
individuals to manage their learning, rather than placing full responsibility in the hands of
education and training institutions.
21. Growth and decline in different sectors directly affects overall labor demand as well as
demand for specific knowledge. Lithuania’s transition years have seen a sharp shift in
employment from the public to the private sector. In addition, employment has increased in
services and decreased in agriculture, industry, and construction. As noted, much of Lithuania’s
high unemployment is due to workers’ low or inadequate skills. If skills were improved, more
people could get jobs and economic growth could accelerate. Education and training systems
play a critical role in curbing the problem of low, narrow, and inadequate skills, including by
changing the nature of vocational training in secondary education, increasing the effectiveness of
tertiary education, and motivating individuals and enterprises to support nonformal training.
22. The following sections summarize key issues that need to be addressed and offer policy
proposals that would facilitate lifelong learning and help overcome obstacles to the development
of a knowledge economy—allowing all Lithuanians to fully participate in the knowledge
economy in their country, in Europe, and in the global community. A full description of the
issues and policy proposals is provided in annex 2.
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Defining and Assessing Key Competencies
23. The content and delivery of Lithuania’s education and training systems are being
modified, particularly at the basic and secondary levels, to reflect emerging demands for skills
and knowledge. But additional work is needed to identify the needs and assess the skills of
students and workers.
Refining content
24. To refine the content and delivery of national programs, Lithuania’s basic and secondary
education policymakers and program designers should review international research on key
competencies. An example is the “Defining and Selecting Key Competencies” project recently
sponsored by the Organisation for Economic Co-operation and Development (OECD).
Increasing participation in international assessments
25. Lithuania should participate in additional international achievement assessments,
specifically the OECD’s Program of International Student Assessment (PISA) and the
International Adult Literacy Survey (IALS). Doing so would provide benchmarks for youth and
adult education and determine the degree to which Lithuanians have the core competencies
required to function in a knowledge economy.
Restructuring vocational secondary schools
26. The 100 specialized programs in stage 3 and 4 vocational secondary schools should be
cut to 15-20 broader career orientation programs that provide entry- level job skills, sufficient
preparation for specialized postsecondary education and training, and a stronger foundation for
lifelong learning in a changing labor market.
Responding to labor market demands
27. Monitoring of labor market demands should be expanded in two key areas. First,
Lithuania should perform regular, qualitative, short-term economic and enterprise surveys like
those done in Hungary and Sweden. Second, long-term human resource requirements should be
modeled for various sectors based on national priorities for innovation and research.
Setting training and occupational standards and performing assessments
28. Efforts to set training and occupational standards and to perform assessments should be
rapidly accelerated to strengthen links between training and the labor market and between formal
and nonformal training. Training standards should cover high-priority occupations across the
education spectrum—vocational, technical, and professional. Occupational standards should be
established with input from the business and research communities.
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Surveying graduates
29. All formal and nonformal education and training institutions—secondary schools,
colleges and universities, labor training centers—that receive public funding should be required
to perform annual surveys of a sample of graduates. Such surveys would help in evaluating the
effectiveness of education and training programs, particularly in terms of their links to the labor
market.
Addressing Governance and Management Challenges
30. Government education policies and programs should be more closely linked to the needs
of businesses, particularly at the tertiary level of education and in the training system. Moreover,
intellectual property rights in research and tertiary education should be more clearly defined.
Strengthening links between businesses and education and training efforts
31. Businesses should play a stronger role in governing tertiary education, with the authority
to influence the actions and policies of boards of governors of tertiary education institutions—
including the hiring of managers, the development of government education policies, and the
creation of programs (for example, defining curriculums and operating joint programs such as
internships, cooperative education, and research programs).
Improving intellectual property rights
32. Intellectual property rights should be clarified for faculty at higher education institutions
to provide incentives to engage in applied and developmental research.
Financing Education
33. Given the rising demand for learning—and so for spending—several principles should
guide the planning of future education financing. First, the acquisition of basic competencies,
which increasingly means universal upper secondary education, should be publicly financed.
Second, learning beyond basic competencies should increasingly be paid for by students and
employers. Third, the Government should work to promote equity in education. Finally,
education should be delivered more efficiently, particularly for the labor market.
34. Government financing of formal education and training in Lithuania is comparable to
levels in countries with similar per-capita income, and appears to be functioning adequately. The
new decentralized approach to financing basic education works on a per capita basis, is sensitive
to differences between rural and urban areas, and makes provisions for special allocations (such
as teacher in-service training). Still, several financing issues need to be addressed to increase
efficiency, access, and equity in the face of rising demand.
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Boosting efficiency
35. School mapping should be undertaken in primary, secondary, and higher education to
examine the impact of the 40 percent decline in birth rate that occurred in the 1990s. This
decline is starting to affect primary schools and will affect tertiary education in about 2009,
requiring institutional consolidation. School construction should also be made more efficient, as
Lithuania spends about twice as much on utilities as do Western schools in similar climates.
Adjusting tertiary education financing
36. Policymakers and the tertiary education community should consider implementing
options to mobilize more resources per student, enhancing professional expertise in tertiary
education management, reviewing policies aiming at phasing out and retaining academic staff,
and increasing the financial power of higher education institutions.
Reviewing nonformal education financing
37. Alternative financing schemes—tax incentives, training levies, learning accounts, and so
on—should be reviewed and selected options implemented to encourage enterprises to support
and individuals to engage in adult and continuing education. Potential financial disincentives
(such as taxes on training investments by individuals and enterprises) should be removed.
Opening Pathways Within and Between Learning Systems
38. Serious blockages in Lithuania’s education and training systems inhibit the mobility of
learners within the formal system and between the formal and nonformal systems, and block
economic and social mobility and interdisciplinary learning.
Addressing blockages between formal education institutions
39. A third-party institution in Lithuania should evaluate and certify equivalencies between
courses and programs in different institutions, and facilitate the mobility of learners within and
between institutions of the formal education system.
Addressing blockages between formal and nonformal learning
40. There is a need to continue rapidly developing occupational standards and assessment
instruments (see also above) to promote recognition of nonformal and informal learning,
including by formal institutions such as colleges and universities.
Improving Equity, Access, and Motivation
41. Disincentives—and a lack of incentives—for individuals and enterprises to invest in
education and training need to be addressed. (Some have already been cited above.)
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Strengthening career guidance and counseling
42. Career services need to be further developed, particularly at the basic and secondary
levels and in labor offices. In addition, there is a need to develop staff training at higher
education institutions to prepare career guidance and counseling staff for education, training, and
employment institutions, and for work in the personnel departments of private enterprises.
Motivating enterprises and employees to invest in training
43. To help overcome the low recognition and demand for adult continuing education, and to
promote individual and enterprise investments in education and training, public information
programs (such as adult learning weeks) should be enhanced. Financial incentives (tax credits,
training levies, learning vouchers), better targeting of loan and scholarship funds, and increased
recognition of informal and nonformal education and training, as discussed, would help improve
equity, access, and motivation in education.
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Lithuania’s Innovation System:
Connecting Researchers and Businesses
44. Innovation has a significant effect on productivity in firms, industries, and countries and
so is essential to economic growth. But Lithuania’s ability to innovate—that is, its ability to
systematically generate, acquire, disseminate, and apply knowledge in new ways to solve
problems and satisfy the needs of individuals and of society at large—is constrained. Lithuania
has important elements of an innovation system, including universities, state research
institutions, a business community, and a set of institutions aiming to support technology
applications. But it has not managed to bring together these elements in a systematic way, in a
coherent and coordinated framework able to link the research and development (R&D)
community with the enterprise community. Many organizational structures follow and even
reinforce old practices of separating rather than unifying the partners for innovation. Interaction
among companies, research institutes, and universities is modest and occasional.
45. Though innovation occurs at the enterprise level, including some high-tech industries
(laser technology, biotechnology), this has taken place in relatively few, isolated cases. The few
success stories reflect Lithuania’s potential for innovation rather than systematic use of
knowledge assets. While some changes have been introduced to the national innovation system
in recent years, partly driven by the consensus building associated with the science and
technology white paper, much more needs to be done in terms of defining coherent innovation
policies and establishing a supportive institutional framework that allows potential partners in
innovation to join efforts in generating and applying knowledge for their benefit and that of the
economy.
46. Small and medium-size enterprises play a crucial role in the Lithuanian economy. But
medium-size and large firms, particularly those backed by foreign investors, have an advantage
over small firms because they often have strong links to sources of knowledge and access to
commercial banks and equity financing. In addition, subcontracting (between large international
firms and smaller domestic firms) has important potential for firms in countries such as
Lithuania. Small upstart companies that have trouble accessing finance and that lack access to
networks need to rely on government technical assistance and financing as well as private equity
financing with embedded technical assistance and management talent.
47. Small companies and foreign investors are particularly sensitive to the business
environment. While foreign investors have a wide choice of countries to invest in, small and
medium-size enterprises can remain in the informal sector in the absence of an adequate business
environment. Several surveys of the business environment in Lithuania in recent years indicate
that access to capital has become less of a constraint, while access to knowledge and to a skilled
workforce is a growing concern.
1
1
Foreign Investment Advisory Service (FIAS) – “Lithuanian Administrative Barriers” (1999); the World Bank &
the EBRD - Business Environment and Enterprise Performance Survey (BEEPS) (1999); the World Bank –
Lithuania, Country Economic Memorandum (2002)
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48. As EU membership approaches, Lithuanian businesses face major challenges in adapting
to EU regulations and standards. This adaptation will require significant investments in retooling
and in process and management change to meet environmental, health, safety, and other
standards. But adaptation also provides an opportunity to introduce innovative and more
competitive technologies, processes, and management practices. Government polices and
programs need to support this retooling as well as knowledge transfer and networking among
firms and the research and education communities.
49. Today the R&D community operates largely in isolation from the private sector. Its
output—in terms of publications, citations, patents, and licenses—is modest. There is an
overemphasis on government- funded R&D, carried out and supported by a vast array of public
institutions. Moreover, the research community is growing old and suffering from brain drain.
In addition, funding instruments are outdated, focusing largely on institutional funding rather
than more modern program funding. Too much funding goes to basic research, while too little is
devoted to technology development and transfer. And modern R&D evaluation procedures are
largely absent. Overall, innovation in Lithuania is hampered by the absence of a consistent
innovation policy framework. The following sections outline key issues and proposals that are
detailed in annex 3.
Formulating and Coordinating Innovation Policy
50. Current Lithuanian policies and institutions do not reflect the importance of innovation as
a primary source of competitiveness in the global market. Though a white paper on science and
technology has been issued, few actions have been taken—and those that have are not fully
consistent with the paper. It is too early to evaluate the recently established Commission on
Science and Technology, but without permanent staff and only occasional meetings the
commission does not appear equipped to address the challenges ahead. The recently adopted
Law on Higher Education and Science introduces some positive changes, but in general
Lithuania’s innovation systems are marked by an absence of meaningful goals, priorities for
financial support (beyond the enumeration of selected themes), instruments that explicitly
support R&D, and a long-term vision for a national innovation system. As a result much of the
research undertaken to date is irrelevant to the business community.
51. The Commission for Science and Technology should develop into a Science and
Technology Policy Council. This council should:
• Link the interests of businesses, researchers, and academic institutions.
• Ensure that research and education feed into the innovation process.
• Help improve Lithuania’s competitiveness.
52. Council members would be nominated by the Government and include significant
representation from the business and research communities. It would be chaired by the prime
minister and include ministers from ministries with a major stake in R&D and innovations
(Ministry of Higher Education and Science, Ministry of Economy, Ministry of Finance, Ministry
of Interior). Building on the science and technology white paper, the Science and Technology
Policy Council would:
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• Prepare and agree on the vision, goals, and policies for long-term development of the
national R&D and innovation system.
• Define specific policy instruments.
• Assess the implementation of the council’s innovation strategies and policies on a
regular basis.
53. These efforts would include analysis of the developments, needs, and objectives of the
national innovation system, spell out policy instruments and funding tools (including sources and
targets for R&D funding) for public sector research and technology development, and include
recommendations for action by the private sector. To play this role, the council needs a
secretariat with a full- time professional staff. The council would build consensus on basic
guidelines for innovation policy, enhance business-research partnerships, and increase awareness
about and visibility of the role of innovation. Experiences with this model in Estonia, Finland,
and Ireland should guide the establishment of this high- level government institution.
Increasing the Relevance, Efficiency, and Accountability of Research and Development
54. The main challenge for the public R&D system is to increase its relevance, efficiency,
and accountability. To do so, efforts must be made to:
• Significantly increase the flexibility of R&D financing.
• Improve the efficiency of R&D organizations.
• Upgrade professionalism in the management of funding.
• Increase demand for the research output of universities and research institutes.
• Promote cooperation between industry and research and academic institutions.
55. The Government should consider establishing a Lithuania Technology Agency to develop
and implement new R&D funding instruments associated with revised innovation policies and
priorities and working principles and processes for public R&D administration. In establishing
such an agency, the Government should consider merging many of the public institutions
currently supporting innovation and business activities, including the Lithuanian Center for
Innovation and the Lithuanian Development Agency for Small and Medium Sized Enterprises.
56. The agency’s main tasks should be to organize, finance, and evaluate new R&D in
nationally significant fields of science and technology, serve as a contact point for EU-related
R&D (including national management of EUREKA - Europe-Wide Network for Industrial R&D,
COST - European Cooperation in the field of Scientific and Technical Research, and so on), and
provide grants and loans to firms for innovation projects. Many of the agency’s tasks will be
new and will provide new thinking and orientation. But viable existing operations and resources
should also be moved to the agency from the Ministry of Higher Education and Science and
other places. The agency could be part of the Ministry of Economy or the Ministry of Higher
Education and Science, but other approaches that provide more independence and credibility
should also be considered. The experiences of countries such as Estonia, Finland, Ireland, and
Sweden are relevant in this respect.
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Consolidating Research Capacity
57. Lithuania has 26 state research institutes covering a broad range of specialized fields of
research, from humanities to technology. This fragmentation of institutions is inefficient because
each institution requires administrative support, aggravating the problem of scare budgetary
resources. Thus state research institutes should be reorganized. Recently some institutes have
been integrated with Vilnius University.
58. The relevance of the research being performed is also in question. The institutes should
consider shifting from basic to applied research, from budget- financed to contract and other
externally financed research, and from ivory towers to institutions oriented toward supporting
innovation for businesses.
59. To that end, the reorganization of state research institutes should be accelerated. One
option would be to merge several institutes specialized in areas with potential for applied
research and commercialization into a Lithuanian Institute of Technology. This institute would
focus on applied technological research and contract research. The private sector should be
invited to engage with the institute—not only as users of its expertise and services but also as
owners, financiers, and contributors to the research.
60. Regardless of the new organizational arrangements, new funding mechanisms for state
research institutes should be developed, with competitive contract research figuring prominently
among sources of financing. The growth and development of the Lithuanian Institute of
Technology would be driven by external financing (EU funds, funds from the National
Technology Agency, contracts with firms) rather than by budget allocations. Similar
arrangements exist in other European countries, as with Germany’s Frauenhofer Institute.
Adjusting Funding for University Research
61. Nearly all university research is financed by the state budget, with resources allocated to
universities in lump sums. Universities allocate these funds to departments largely based on
established norms (based on the number of students and past allocations). This setup makes
university research unresponsive to industry demand, because industry has no influence on
university funding decisions.
62. To increase the relevance and accountability of university research, new funding
mechanisms should be introduced that are incentive based, transparent, and flexible, with
growing reliance on nonbudget financing. The mechanisms should clearly distinguish funds for
education from funds for research. They should also allow for flexible use of external financing,
including contract research and training. Finally, the mechanisms should allocate an increasing
share of state budget funding based on performance—and eventually all funding should be
allocated on this basis, with bonuses for exceptional performance.
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Improving Data to Support Innovation
63. The poor quality of data on the Lithuanian innovation system means that there is no
reliable database for long-term policy planning and decision- making or for ongoing monitoring
and evaluation of performance. Thus R&D statistics should be upgraded to OECD standards
(Frascati Manual), and innovation statistics should be developed to fulfill the requirements of the
European Community Innovation Survey. R&D evaluation methods and mechanisms could be
developed along the lines of those in countries such as Finland, Ireland, Norway, and Sweden.
To support the accumulation of knowledge and experience on R&D and innovation-related
analysis and studies, the Government should consider establishing a dedicated unit specialized in
technology and innovation studies. This unit could be placed in the new Lithuania Technology
Agency.
Fostering a More Supportive Business and Regulatory Environment
64. The business environment is not sufficiently supportive of innovation. In a recent survey
firms reported increasing flows of foreign knowledge, and 27 percent indicated that access to the
markets and technology embodied in foreign direct investment is critical. Only 16 percent cited
a need for more capital as a primary concern. Ineffective, intrusive business regulations and
licensing and tax regulations and enforcement are still major concerns, as are deficiencies in the
legal system.
65. Steps should be taken to simplify business registration procedures, improve the legal
framework, and streamline tax administration. Norms not required by the EU should be
critically reviewed, questioning their necessity and value for public policy. More emphasis
should be put on implementation to increase speed, transparency, and information flows.
Strengthening Business Support Programs
66. Many government programs and agencies provide business support—pursuing multiple
objectives and often not effectively coordinated and administered. It is not clear that these
programs boost innovation or further the knowledge economy.
67. Lithuania should undertake a systematic review of best practices used in other countries
to design, operate, and coordinate business support programs aimed at fostering competitiveness,
innovation, and growth. It is particularly important to review the multitude of dispersed subsidy
programs such as loan, grant, and guarantee schemes, business innovation centers, technology
parks and clusters, and industrial parks. Understanding the market failures that such programs
are supposed to address, the business needs and management challenges they face, and the
conditions under which they work well are critical to ensuring that they are sustainable in the
long term. Enterprises participating in these programs require technical and managerial know-
how to develop and commercialize their innovations. Lithuania should also consider merging
some or all of its business support schemes under an umbrella organization such as the Lithuania
Technology Agency.
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Improving Access to Equity Funding
68. The legal framework for investment in Lithuania is geared toward equity finance for
large, publicly listed companies and debt finance from commercial banks. Neither instrument is
optimal for high- growth, early-stage, knowledge-based companies. Such companies are too
risky for commercial banks because their cash flow is not predictable enough, and security
against fixed assets is often not practical. In addition, the legal framework for private equity is
not adequately developed, undermining the ability of outside investors and company managers
and owners to provide incentives that align the interests of both parties. The instruments
available for private equity investing are severely limited. Among other things, the legal
infrastructure needs to allow provisions that facilitate investor exit from a company.
69. The forms of equity and quasi-equity possible under Lithuanian law should be brought in
line with international best practices. Demand for these more sophisticated instruments appears
to be growing as Lithuania’s private equity industry matures. But faster legal reform could
facilitate early-stage investments and catch the attention of international investors.
70. Local venture capitalists do not see shortcomings in the legal framework as a major
constraint. But if Lithuania’s investment industry is to mature and attract additional capital,
international legal norms for private equity investing (and the corresponding regulatory and
supervisory framework) will need to be introduced. A major provision used in other markets to
help ensure an investor’s ability to exit is the “liquidation preference,” where investors have the
right to the proceeds from a sale before managers and owners. This provision does not exist in
Lithuania. Other provisions that can facilitate exit, such as those allowing majority investors to
force other shareholders to participate in the sale of the company, are allowed.
Increasing the Private Sector’s Role in Public Services
71. In industrial countries private organizations such as industry and employer associations
have the capacity to formulate strategic proposals for the development of their industry and to
review government proposals. Although these organizations represent the interests of their
members, they often focus on long-term broad interests rather than the interests of individual
firms. To do so, private organizations and their members must cooperate in developing policies
and activities conducive to all businesses. Taking a broader, more strategic view allows the
private sector to have more effective input to government policies and to launch initiatives of
their own. Lithuania’s private sector is far from developing such organization, cooperation, and
outlook.
72. The Government, municipalities, and the private sector cooperate on specific projects
such as business innovation centers, technology parks and clusters, and industrial parks. While
in principle all serve as vehicles for the transfer of knowledge and technology and spur
innovation, their success depends on how they are designed and managed. Many are developed
without necessary preparation work to identify market needs and without adequate operating
procedures and staffing. At best such entities provide education functions and survive mainly on
state and international funds because enterprises are not willing or able to pay for the services
provided.
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73. Lithuania’s private sector should adopt a higher profile in developing its vision and
strategy for the knowledge-based economy—and in taking concrete steps to make that vision a
reality. To do so, the private sector should develop organizations that gather information,
analyze policy issues, and communicate with their members. It should also develop forums
where representatives from all parts of the private sector can meet and formulate positions on
policy issues. Doing so would improve the effectiveness of private sector partnerships with the
Government that formulate visions, strategies, and policies for policymaking and of coordinating
bodies for the information society and for innovation and education systems.
Mobilizing the Private Sector to Foster Competition and Cooperation
74. Entrepreneurship in Lithuania is struggling because networks to mentor and fund early-
stage companies are still in early stages of development. Firms remain wary of outside
investment, both local and foreign. Private investors often have little to offer beyond funding,
and strategic investors (large companies) typically want complete control—leaving little role for
the original management teams. In addition, cross-firm collaboration in areas such as marketing,
promotion, and networking is scarce. Efforts by private associations and networking groups to
address these problems remain limited—in terms of both sector coverage and depth of
activities—particularly beyond the information technology and telecommunications sectors.
75. Private associations and networking groups should deepen their activities in support of
members and extend their coverage across the knowledge economy in areas such as mentoring
and networking for early-stage, high- growth businesses. Organized mentoring networks can
help firms gain advice and support from experienced entrepreneurs. Private associations and
groups should also engage in international promotion and marketing. To grow and compete,
firms need strong ties to foreign markets and investors—and their knowledge. Private
associations can play a key role in promoting and marketing Lithuanian companies and
investment opportunities abroad.
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Building an Information Society
76. The knowledge economy is a networked economy in which information and
communications technology is crucial for economic growth, knowledge-based activities, and
social inclusion and cohesion. Enterprises involved in information and communications
technology are among the most innovative and dynamic in Lithuania, contributing to the
development of a knowledge economy. Lithuania is a signatory of the e-Europe + program for
EU candidate countries. The program aims to promote the development of an information
society in EU member and candidate countries. The most recent progress report (June 2002)
indicates a need for Lithuania to intensify efforts to achieve the agreed targets for the
information society.
77. Lithuania is relatively rich in electronic and information networks, but these resources
have not achieved their full potential. About 30 in 100 people have access to the fixed telephone
network. In terms of total teledensity (fixed plus mobile), Lithuania lags behind its Baltic
neighbors—a lag that becomes more pronounced when sector performance is disaggregated.
Building Regulatory Capacity in Telecommunications
78. The Lithuanian Communications Regulatory Authority (CRA) was established in the
spring of 2001. Like all the new regulatory authorities in the region, it is at an embryonic stage,
with little experience with a fully competitive market. Moreover, the EU recently adopted a new
acquis communautaire that has not yet been applied extensively. The Lithuanian CRA faces the
challenges of changing from a largely technical regulator to more of an economic regulator,
acquiring the appropriate skills for these tasks, drafting the secondary legislation required by the
new acquis communautaire, and implementing the new acquis communautaire in a relatively
short period.
79. The CRA’s ability to become an effective regulator will depend on the new
telecommunications law, the duties assigned to it and other agencies, and the powers provided to
it by the law. Its effectiveness will also be determined by the number of staff it hires, their skills,
and the agency’s ability to retain qualified staff. As with many other regulatory agencies in the
region, there is a well-recognized need for technical assistance with building capacity and
drafting secondary legislation.
Providing Universal Access to Telephones and the Internet
80. The development of Lithuania’s information society is hindered by limited Internet
access in general and by inadequate telecommunications access in rural areas. There are two
main reasons for these access gaps. The first is a market gap—the inability of the market to
provide access on a commercial basis, where private investment plays a key role. The second is
a pure access gap—customers who cannot be supplied by the market for reasons of location or
affordability, where public policy plays a key role. Lithuania’s telecommunications market was
liberalized in January 2003, which will enable it to start providing more complete access to
commercial customers. But without changes in policy, the pure access gap will persist.
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81. The pure access gap could be closed by designating operators to provide universal service
in exchange for compensation from other market players or from the state budget for any
financial losses. Alternatively, universal access to information and communications services—
including the Internet—could be provided at public access points and telecenters in targeted
communities. This approach could include “smart subsidies” and allow for local private or
municipal participation in the operation of public telecenters.
82. Smart subsidies are a market-based solution that recognizes that such telecenters are not
financially viable. When providing these one-time subsidies, the CRA and other relevant public
institutions (such as community-based organizations) would solicit bids. The bidder seeking the
smallest subsidy would then be obliged to provide a defined level of service over a specified
period (say, 10 years). The subsidy would simply make each telecenter commercially viable: it
would not be a 100 percent subsidy. When structured appropriately, such contracts can induce
substantial private investment, and can even result in a higher level of service than the basic
obligation.
83. Although disbursements of these one-time subsidies should be linked to performance
criteria for the public access points, bidders should be allowed to make their own technological
choices. Moreover, bidders may find that once the public access points are in place, additional
commercially attractive customers can be reached in the territory for a small incremental cost.
Bidders should take these potential commercial opportunities into account when calculating the
required subsidy—further minimizing it.
84. These local solutions could be implemented through community-based service providers
established by local authorities, businesses, banks, nongovernmental organizations (NGOs), or
some combination of these. For instance, rural communities, entrepreneurs, and authorities
could join forces to establish local telecommunications providers to bridge the access gap. These
providers could then bid on subsidies in competition with other providers.
85. To test their viability and sustainability, such initiatives could be supported in their early
stages by national or local governments. If community-based providers are to compete for
subsidies with other providers, they should not be given other subsidies that would distort
competition. Thus local government and community contributions should be expected to be
recovered and earn a return in the long run. Furthermore, such initiatives could be linked to a
broader agenda for local economic development, including efforts to promote education,
training, health, e-government, and knowledge-based small and medium-size enterprises.
Unbundling Local Loops
86. Unbundled access to the local loop allows competing service providers to lease or rent
the 'final mile' (local loop) to the premises of the customer and in this way to acquire additional
customers. Unbundling of the local loop is provided for by Directive 2002/19/EC (the “Access”
Directive). A question that needs to be addressed is whether unbundling provides sufficient
financial incentives to the entity designated for unbundling its local loop.
- 21 -
87. The application of the unbundled local loop concept should be considered in the context
of the policy goal of expanding access and achieving universal service over the next two or three
years.
Addressing the Authorization Concept
88. The “authorization” concept of the EU acquis communautaire loosens the connection
between a license and a territory. Licenses are usually awarded for distinct geographic areas, but
in the authorization process a service provider chooses its territory—and may not serve what are
perceived as unprofitable universal service customers. Thus Lithuania’s CRA needs to develop
an innovative strategy to ensure universal service.
89. The regulatory challenge will be to provide sufficient incentives for telephone and
Internet service providers to reach those currently not served. One approach would be to foster
community-based service provision and partnerships between communities and service
providers. This approach should be supported by technical assistance (to deal with the
technological aspects) and assistance with the development of sustainable business plans. As
part of these efforts, the CRA should undertake a study of the population lacking telephone
services and issue licenses for the provision of universal service, with the licenses tied to specific
locations and bidding for subsidies as described above.
Ensuring Efficient Interconnection
90. The interconnection of networks—of which there are many in Lithuania—is among the
most important factors for competition in telecommunications. It is also an area characterized by
frequent disputes. Interconnection involves commercial, technical, and operational
arrangements. The disputes largely arise over commercial aspects: the fees that operators pay
each other to termination or carry messages. Lithuania has a functioning interconnection market,
but it will need to develop with the entry of new players.
91. For the market to fill the “market gap” and for the universal access approach to fill the
“pure access gap,” close attention needs to be paid to resolving interconnection issues. It is
proposed that the CRA provide for interim solutions, that where possible international
benchmarks be used to determine interconnection fees, and that special consideration be given to
Internet-related interconnection fees.
Consolidating Responsibilities for the Information Society
92. As with the innovation system, dispersed institutional responsibilities constrain effective
leadership in formulating policies and planning, coordinating, monitoring, and evaluating
activities related to the information society. Four public institutions share responsibilities for
defining information society strategies and for making and implementing related policies. None
of these institutions has the authority to coordinate and monitor policy implementation. As a
result strategies and action plans for developing the information society largely remain at the
design stage. Experiences from other countries that are successfully developing an information
- 22 -
society—such as Ireland and Slovenia—show that consolidating policy and implementation
authority and technical capacity increases the effectiveness of policy actions.
93. Lithuania should consider consolidating into a new ministry the strategy, policy, and
monitoring functions currently assigned to the Ministry of Transport and Communications,
Ministry of Interior and Public Administration, Information Society Development Commission,
Information Society Development Committee, and other institutions. This new ministry for the
information society (a precursor of which existed until 1997) would be responsible for setting
priorities for the development of an information society, formulating policies, planning actions,
coordinating activities, and managing budgeting, financing, and procurement.
94. While line ministries would continue to be responsible for implementing programs and
activities associated with the Government’s Information Society Strategy, the new ministry
would be empowered to coordinate, monitor, and evaluate implementation. It would also build
consensus on policies for the information society, enhance government-business partnerships,
and increase awareness and visibility of information society issues. The ministry would work
closely with the proposed Lithuania Technology Agency. The staff and functions of the
Information Society Development Commission would be moved into the proposed ministry. This
model follows the approach taken in Slovenia.
Implementing Strategies and Action Plans
95. The absence of a coordinated, clear institutional framework hinders the implementation
of strategies and action plans, including those for e-Europe + and other initiatives. The main
policy document on the development of an information society is the “Lithuanian Information
Society Development Strategy” prepared in 2000 by the Department of Information and
Informatics of the Ministry of Public Administration Reforms and Local Authorities. That
strategy defined the main goals of information society development over a three-year period:
• To use the opportunities offered by information and communications technology to
support management of information, with the aim of improving people’s quality of
life, learning, and working and leisure conditions.
• To create information and communications technology infrastructure in compliance
with EU standards.
• To create conditions for Lithuanians to learn and exploit the possibilities of modern
information and communications technology.
96. The Information Society Development Committee has developed detailed action plans to
complement the strategy, but implementation has been pending.
97. Lithuania should adopt a detailed consensus strategy for developing an information
society, agreed with the main stakeholders at the policy and implementation levels. This strategy
should go beyond a political vision and be backed by detailed action plans.
- 23 -
Promoting Knowledge Management, e-Government, and e-Business
98. Public and private sector knowledge management, supported by information and
communications technology, is an important element of a knowledge economy. For an
institution or company to manage knowledge well, there needs to be a systematic alignment of
overall management and information management policies and processes, mindsets and cultures,
organizational structures, technologies, budgets, and worker skills.
Coordinating public knowledge management
99. Lithuania’s public sector is facing several challenges in implementing its knowledge
management and e-government strategy. By far the most pressing concern is the need for
credible, organized leadership to set priorities, develop action plans and monitor their
implement ation, and tackle cultural issues for knowledge sharing. Several stakeholders have
emerged in the planning phase, but their roles are unclear and overlapping.
To address these issues, the Government should:
• Assign responsibilities for knowledge management and e- government policy,
strategy, and monitoring to the proposed ministry for the information society (see
above).
• Develop a knowledge management strategy and action plan to accelerate the
integration of information systems within and among ministries, and to implement
knowledge management systems within public institutions, with top- level political
support.
• Encourage knowledge sharing in organizations and provide the incentives and
environment for employees to do so. This recommendation is relevant not only
within the public administration, but also for many businesses.
Enhancing knowledge management
100. There is a shortage of skilled technical and managerial staff to undertake knowledge
management tasks. The education system does not produce the needed practical and theoretical
skills. And because of low salaries, it is difficult to retain highly skilled technical staff in
government institutions.
101. Links between the public administration and the education system should be created to
provide formal and nonformal training on knowledge management. In addition, curriculums
should be developed for training in knowledge management.
Strengthening the legal framework for electronic transactions
102. The absence of an adequate legal framework for electronic transactions hampers the
provision of e-government and e-business services. Despite initial steps to harmonize domestic
legislation with international standards for electronic transactions, Lithuania lags behind in
passing relevant regulations.
- 24 -
103. The legal framework should be fully aligned with international standards to ensure that
digital transactions (such as e-signatures) are possible and fully protected (for example, through
e-commerce regulation). Lithuania seems to have fulfilled only a few of the formal
requirements, and more efforts are needed to ensure full implementation of legislation governing
Internet and electronic transactions.
- 25 -
Conclusion: Implementing the Knowledge Economy
104. Moving the frontier of Lithuania’s knowledge economy across its four main dimensions
will require consensus and joint action among key actors:
• The Government, which will need to facilitate actions and integrate the aspirations of
many stakeholders.
• The business community, which is the driver of innovation in the economy and will
need to play a more substantive role in working with the Government to develop and
implement policies for a knowledge economy, as well as direct activities in
networking and promotion.
• The education and research communities, which will increasingly become the
providers of demand-driven learning and research services.
• Civil society, as both a participant in and source of demand for products and services
in the knowledge economy.
105. In recent years the private sector has been instrumental in advancing the development of
a knowledge economy. For instance, the importance of an information society has been brought
to the fore by, among others, INFOBALT (an information and communications technology
association in Lithuania) and, more recently, by two banks and two telecommunications service
providers joining efforts in the Window to the Future initiative, which aims to improve access to
information and communications technology by establishing telecenters. On the innovation
policy side, the city of Vilnius, the Technical University of Vilnius, and the Knowledge
Economy Forum (an association that includes high- tech companies) are aiming to develop a
technology cluster in Vilnius. Other initiatives are being pursued by NGOs working at the
regional level. These are promising steps and approaches that the Government should consider
leveraging and scaling up.
106. Still, significant obstacles exist in the interactions among the key actors for Lithuania’s
knowledge economy. A legacy of mistrust, poor communication, and lack of cooperation
persists. Many past and current initiatives have often stalled at the discussion stage, with little
concrete action undertaken and few resources mobilized.
107. The proposals offered in this report are not necessarily new to many Lithuanians engaged
in ongoing discussions on how to move forward. Indeed, many Lithuanian experts have in-depth
knowledge of the issues at hand and an understanding of the available policy options. But what
seems to be missing is consensus and leadership—whether from the Government or the business
community—to move forward on the four main dimensions of a knowledge economy. The
dispersion of responsibilities for the knowledge economy across ministries, agencies, and
committees makes it very difficult to achieve such consensus. The resulting implementation of
knowledge-related policies is slower than need be the case.
108. To succeed, a knowledge economy strategy needs to be implemented in an environment
of:
- 26 -
• Inclusiveness and partnerships. A crucial first step is to build trust among a broad
coalition of stakeholders, including the disadvantaged, the rural population, the
business community, and education and research institutions—with the Government
setting an example of good governance and taking leadership. As individuals become
increasingly responsible for their lifelong learning, learners at all levels and from
different income groups should have a voice in defining their learning demands and
accessing learning opportunities. And as businesses become the main clients for
science and research work, they will be key in shaping the science and technology
agenda, supported by public resources.
• Networking. Much joint action will be required in moving forward. Fully inclusive
networks involving diverse communities at all levels will increasingly become the
drivers of a knowledge economy. Networking, supported by effective access to
information and communications technology, will need to take place within and
between municipalities but also with cities outside Lithuania, between research
centers and enterprises, and between learning communities in Lithuania and abroad.
Networking will need to develop at both the local and national levels, reaching across
the Baltic states, the Nordic countries, the European Union, the Russian Federation
and other members of the Commonwealth of Independent States, and beyond. As
networks expand, driven by communities of interest and supported by ever- improving
access to information and communications technology, old boundaries (physical,
political, psychological) will dissolve.
• Changing mindsets. Moving toward a knowledge economy also requires a change in
mindsets. For individuals, a knowledge economy requires becoming increasingly
independent, adaptable, and responsible for one’s actions. For businesses it requires
the ability to systematically transform knowledge into products and services—and
profits. For governments, it requires creating and supporting opportunities by
challenging conventional policies and integrating partners to increase
competitiveness. It also requires greater willingness and ability to share information
with the public, emphasizing public services over public control, and supporting a
national and inclusive dialogue that builds social cohesion and trust. Finally, the
biggest challenge may be for the academic and research community—the harbor of
knowledge in Lithuania—to rethink its role and approaches as it moves toward
becoming a provider of knowledge services in response to demand, particularly from
learners and from the business sector.
109. As noted, stronger data collections in education (participation in international
assessments, labor market surveys), innovation (using OECD methodologies), and the
information society (using the e-Europe approach) would improve policy analysis and
formulation. Benchmarking Lithuania with countries of key interest would also aid
policymaking. Benchmarking should include indicators that proxy change across the four
dimensions of a knowledge economy and calls for a government commitment to publish and
publicly discuss an annual knowledge economy progress report. In addition to greatly benefiting
policymaking, a regular progress report o the knowledge economy would reflect a spirit of
partnership in moving forward in Lithuania.
- 27 -
Annex 1: Challenges for Lithuania in Achieving a Knowledge Economy
1. Research and the recent economic success of many (often small) countries suggest
increasingly strong links between knowledge and productivity, competitiveness, and economic
growth. In Lithuania strengthening these links and moving toward a knowledge-based economy
require simultaneous progress on:
• Developing education systems and human resources to ensure that citizens are
equipped to acquire, apply, and share knowledge.
• Establishing innovation systems that bring together networks of researchers and
businesses to improve commercial applications of science and technology.
• Building an information society infrastructure that gives all people access to affordable
and effective information and communications technology—supporting education,
innovation, and networking.
• Providing an economic and institutional framework that ensures a stable
macroeconomic environment as well as increased competition, flexible labor markets,
and adequate social protection.
A Changing World
2. Lithuania is a small country in terms of population (3.5 million people), size (65,000
square kilometers), and economy ($11.3 billion in 2000), generating a gross national income per
capita of $2,930 in 2000. It also has a small natural resource base. Still, since the early 1990s
Lithuania—along with Estonia and Latvia, which have similar income levels—has experienced a
remarkable economic turnaround relative to other count ries that were part of the former Soviet
Union, such as Belarus and Ukraine. Lithuania has completed the transition from a planned to a
market economy and has largely adopted the acquis communautaire (the body of legislation of the
European Communities and European Union), bringing it to the threshold of EU accession. In
recent years economic growth has been strong, averaging 4-5 percent a year (except in 1999, due
to the Russian Federation’s financial crisis), and the macroeconomic environment has been stable.
Strong growth has been driven by diverse and growing small and medium-size enterprises and by
increasing exports of manufactured goods, facilitated by Lithuania’s labor cost advantages.
3. Lithuania has also started to make progress on many of the elements required for a
knowledge-based economy. For example, it has participated in EU research programs, prepared a
white paper on science and technology, agreed to implement the e-Europe+ action plan, adopted
various information society and e-government strategies, and signed a memorandum of
understanding on information society development between the private sector and the
Government.
4. Against this positive backdrop, Lithuania faces a number of challenges. Competitive
pressures will increase as Lithuania joins the EU and faces increased competition on the single
market. The phaseout of the Multifiber Agreement in 2005 will reduce the price of textiles and
clothing exports from developing countries to the European Union; because one-third of
Lithuanian manufacturing exports to the European Union comprise textiles and apparels,
Lithuanian exporters will face increasing competitive pressures. Finally, competing on the basis
- 28 -
of unskilled- labor- intensive goods will become increasingly difficult as wage levels in Lithuania
rise with economic growth.
5. The economy is also faced with high unemployment (17 percent in 2001), concentrated
among less-skilled workers. Poverty, ranging from 10-25 percent of the population in 2000
(depending on the measure used), remains widespread in rural areas. And modernizing the
agriculture sector remains an important and unfinished agenda. The success of Lithuania’s
membership in the European Union will be perceived by many Lithuanians in terms of the
economy’s ability to converge Lithuanian incomes with those of other EU members—a
convergence that is still many years away. Improving competitiveness and raising productivity
through knowledge-supporting policies are thus key for Lithuania’s future.
6. In addition, while Lithuania has evolved enormously since independence, the world has
also changed over the past decade—often in unprecedented ways. A new world economy is in the
making, driven by two forces: a technological revolution and an economic revolution. The
technological revolution, driven by plummeting costs of information and communications
technology and increased codification of knowledge has spurred the development of technologies
in many other fields (such as biology, energy, nanotechnology, and new materials). This has been
associated with closer links between enterprises and researchers, increased rates of innovation,
and shorter product life cycles. This in turn has increased the importance of education, worker
skills, and lifelong learning. Finally, investments in intangibles (in R&D, education, and software)
in OECD countries are greater than investments in fixed capital.
7. The economic revolution is driven by a powerful expansion of world trade and cross-
country investment. The economic revolution has lead to faster, leaner production processes in
which speed is key, driving shorter design and production cycles, shorter marketing loops, and
shorter price cycles. Alliances between enterprises (including but going beyond joint ventures
and mergers and acquisitions) have taken on central import, while value chains (the division of
functions in production and marketing among cooperating firms working across national
boundaries) have become longer. More services are being supplied over longer distances,
businesses are being reshaped from the ground up, and new product and service ideas are being
generated.
8. The new world economy (a concept going well beyond the new economy based on
information and communications technology) provides for unprecedented opportunities as well as
unprecedented stress. Opportunities are arising through new products, markets, and ways of
doing things—and hold the promise of higher productivity growth and catch-up opportunities,
particularly for smaller countries (which find it easier to reach a consensus to modernize). The
flipside of this is the considerable stress for companies, governments, countries, regions, and
individual citizens that will result from having to adapt to new rules that emphasize speed,
networking, knowledge, and competitiveness. Given varying abilities to adjust, disparities are
likely to grow both among and within countries.
9. With the advent of the new world economy, three new realities have also emerged with
far-reaching implications for how economies will be managed in the future. First, with
increasingly open economies and cross-border business venues, the ability of governments to
- 29 -
Country Rank Country Rank
Finland 1 Finland 1
Ireland 22 Ireland 11
Hungary 26 Portugal 25
Estonia 27 Hungary 28
Portugal 31 Estonia 29
Slovenia 32 Slovenia 31
Turkey 33 Costa Rica 35
Czech R. 35 Greece 36
Slovak R. 39 Czech R. 37
Poland 41 Slovak R. 40
Latvia 42 Poland 41
Greece 43 Lithuania 43
Lithuania 49 Latvia 47
Costa Rica 50 Turkey 54
Russia 58 Romania 56
Ukaine 60 Bulgaria 59
Romania 61 Russia 63
Bulgaria 68 Ukraine 69
guide economic outcomes has been greatly reduced. Second, boundaries have become
increasingly blurred between the roles of the public sector, the business community, and civil
society in creating wealth and ensuring welfare. Finally, traditional top-down hierarchies are
increasingly being challenged by networks of communities of interest, partly driven by the
revolution in information and communications technology.
10. Within the new world economy, creativity and knowledge have become important factors
of production, similar to capital, labor, and land and natural resources. An economy’s ability to
create, acquire, use, and distribute knowledge is becoming the key factor in determining its
competitiveness. The importance of knowledge for development is likely to grow and could well
come to mean the difference between prosperity and poverty.
Lithuania’s Competitiveness
11. According to the Global Competitiveness Report 2002/2003 recently issued by the World
Economic Forum, Lithuania’s current ability to compete internationally ranks 49
th
among 75
countries—well ahead of the Russian Federation and Ukraine yet placing Lithuania among the
less competitive countries soon to join the European Union. In terms of likely future
competitiveness, Lithuania ranks 43
rd
, suggesting that current policies will slightly improve
matters. Still, these rankings indicate that considerable improvements are needed if Lithuania’s
income convergence with current EU members is to accelerate.
Table A1.1: Current Competitiveness Index Growth Competitiveness Index
Source: WEF, Global Competitiveness Report 2001/02
12. According to the World Economic Forum, a country’s current competitiveness is driven by
two factors:
- 30 -
Country Rank Country Rank
Finland 2 Finland 1
Ireland 17 Ireland 22
Slovenia 28 Hungary 25
Estonia 32 Estonia 26
Hungary 33 Portugal 29
Costa Rica 34 Turkey 31
Latvia 35 Czech R. 33
Portugal 38 Slovenia 35
Czech R. 41 Slovak R. 36
Turkey 44 Poland 40
Lithuania 47 Greece 42
Greece 51 Latvia 43
Russia 54 Lithuania 48
Poland 55 Costa Rica 52
Slovak R. 57 Russia 56
Ukraine 62 Ukraine 60
Romania 63 Romania 61
Bulgaria 70 Bulgaria 65
Strategy Subindex Subindex
Company Operations & Quality of Business Environment
• The sophistication with which a country’s companies compete—in terms of using
sophisticated business strategies and moving away from advantages based on natural
resources or low-cost labor (or both) to more distinctive products made using more
productive methods.
• The quality of the business environment—in terms of the quality of input and factor
markets, the competitiveness of the business environment, the extent of demand (in
both domestic and export markets), and the presence of local support industries.
Lithuania’s relatively low ranking based on these two elements points to the challenges ahead.
Table A1.2: Current Competitiveness Index
Source: WEF, Global Competitiveness Report 2001/02
13. A country’s future competitiveness, again according to the World Economic Forum, is
largely a function of its ability to innovate (as indicated by a technology subindex, on which
Lithuania ranks 41
st
—among the lowest of EU accession countries) and the quality of its public
institutions (where Lithuania ranks 34
th
) and macroeconomic environment (where Lithuania’s
relatively low ranking – 56
th
– may have been influenced by the Russian Federation’s financial
crisis).
- 31 -
Table A1.3: Growth Competitiveness Index
Source: WEF, Global Competitiveness Report 2001/02
Gradual Progress on the Knowledge Economy Agenda
14. How will Lithuania—the government, the private sector, and civil society—address the
challenges of moving toward a knowledge-based economy? This report suggests that Lithuania
consider pursuing policies (and policy reforms) and take actions in a broad range of areas that
foster the creation, acquisition, use, and distribution of knowledge throughout the economy. The
report also suggests that efforts be made at integrating and coordinating policy efforts more
closely with the aim of supporting a knowledge economy. The areas for policy reform and
integration touch on the four key dimensions of the knowledge economy:
• Education systems that ensure an educated, skilled population able to create, acquire,
use, and share knowledge.
• An innovation system comprising firms, research centers, universities, consultants, and
other organizations capable of tapping into the growing stock of global knowledge and
of assimilating and adapting this knowledge to local business needs—thereby creating
new products and services.
• An information society that provides for dynamic information and communications
infrastructure to facilitate the effective communication, dissemination, and processing
of information.
• An economic and institutional regime that provides incentives for the efficient use of
existing and new knowledge and the flourishing of entrepreneurship. Good governance
in both the public and private sectors is key to establishing such a regime.
Country Rank Country Rank Country Rank
Finland 1 Finland 1 Finland 1
Estonia 8 Ireland 18 Ireland 2
Czech R. 20 Portugal 25 Greece 32
Hungary 21 Hungary 26 Portugal 35
Portugal 25 Estonia 29 Hungary 38
Ireland 28 Slovenia 30 Slovenia 39
Slovak R. 29 Lithuania 34 Costa Rica 42
Slovenia 30 Costa Rica 37 Estonia 43
Costa Rica 32 Slovak R. 38 Czech R. 49
Latvia 34 Greece 40 Poland 50
Poland 35 Poland 41 Lithuania 56
Greece 38 Turkey 46 Russia 57
Lithuania 41 Latvia 48 Latvia 59
Romania 47 Bulgaria 51 Slovak R. 64
Bulgaria 50 Romania 52 Romania 67
Turkey 51 Czech R. 53 Turkey 68
Russia 60 Russia 61 Bulgaria 69
Ukraine 63 Ukaine 71 Ukraine 73
Subindex Subindex Subindex
Technology Public Institutions Macroeconomic Environment
- 32 -
Benchmarking the Knowledge Economy
16. Lithuania’s relative progress in developing a knowledge economy can be assessed using a
benchmarking methodology developed by the World Bank Institute (for more information on the
methodology, see www1.worldbank.org/gdln/kam.htm). Indicators were collected for 100
countries on three variables for each of the four main dimensions of a knowledge economy:
education, innovation, information society (infrastructure), and economic and institutional
framework. Countries were ranked on a scale of 0 (lowest) to 10 (highest) for each variable, then
the 12 variables were averaged to produce a summary measure—the knowledge economy index.
17. Using this index, Lithuania made progress between 1995 and the most recent period
(ranging from 2000 to 2002 depending on data availability), moving from a score of 5.6 to 6.7
(figure 1). This higher score places Lithuania ahead of the average score for EU candidate
countries (6.6) and ahead of Latvia, Romania, Turkey and Bulgaria. Based on this index,
Lithuania ranks behind the Visigrad Countries and Estonia, as well as the average score for EU
member countries (8.12) and G7 (8.17).
Figure A1.1: Knowledge economy index: scores for various countries,
1995 and 2000-02
Source: World Bank Institute data
18. In terms of the four dimensions of a knowledge economy, Lithuania made the most
progress in developing its information and communications infrastructure and improving its
economic and institutional framework (figure A1.2). Less progress was made in improving
Knowledge Economy Index
4.00
5.00
6.00
7.00
8.00
9.00
10.00
4.00 5.00 6.00 7.00 8.00 9.00 10.00
1995
M
o
s
t
r
e
c
e
n
t
Turkey
Romania
Ukraine
Latvia
Lithuania
Russia
Bulgaria
Cyprus
EUCC12
Greece
Slovak Rep.
Hungary
Portugal
Poland
Slovenia
Czech Rep.
Italy
Estonia
France
EU15
G7 Germany
Ireland
UK
Finland
Sweden
Denmark
Netherlands
Knowledge Economy Index
4.00
5.00
6.00
7.00
8.00
9.00
10.00
4.00 5.00 6.00 7.00 8.00 9.00 10.00
1995
M
o
s
t
r
e
c
e
n
t
Turkey
Romania
Ukraine
Latvia
Lithuania
Russia
Bulgaria
Cyprus
EUCC12
Greece
Slovak Rep.
Hungary
Portugal
Poland
Slovenia
Czech Rep.
Italy
Estonia
France
EU15
G7 Germany
Ireland
UK
Finland
Sweden
Denmark
Netherlands
- 33 -
education systems, though literacy and enrollment rates were already high in 1995. And when it
came to fostering innovation systems, Lithuania’s performance was poor.
Figure A1.2: Lithuania’s performance in developing a knowledge economy,
1995 and 2000-02
Source: World Bank Institute data
19. So, despite significant progress, considerable challenges—new and old—will mark the
way for Lithuania’s ability to achieve a knowledge economy able to compete with other EU
candidate countries and current members, and to find its place in the global economy.
20. To support formulation and integration of policies that foster a knowledge-based economy,
this report suggests that Lithuania develop within its Statistical Office a system of indicators that
allows it to monitor progress on the four key dimensions of the knowledge economy (see above)
and that allows Lithuania to benchmark its progress against relevant comparator countries.
Benchmarking Lithuania with countries of key interest would also help guide policy.
Benchmarking includes:
• Designing indicators that proxy changes across the four dimensions of the knowledge
economy, allow for comparisons with key countries of interest, and are aligned with
major EU and OECD tracking tools.
• Establishing relevant data collection procedures and databases within the Statistical
Office.
0
5
10
Econ. Incentive
Regime
Innovation
Education
Information
Infrastructure
most recent 1995
- 34 -
• Securing the Government’s commitment to publish and publicly discuss an annual
progress report on the knowledge economy. This Report could be issued under the
aegis of the prime minister.
When to Start?
21. With EU accession and significant amounts of EU structural financing becoming available
in 2004, Lithuania has an opportunity to fund a broad range of public investments and programs to
support a knowledge economy (box A1.1). This opportunity should be used to build broad
consensus on the vision and steps to be taken in moving toward a knowledge economy—and on
how to translate this vision into an action plan of well-defined, achievable programs and projects
supported by the European Union. Other countries, both in the region and elsewhere, are revising
their approaches to and policies for education, telecommunications, and science and technology.
Given the time it takes to build consensus, implement policies, and achieve change, Lithuania
must start now in developing its action plan for a knowledge economy.
Box A1.1. EU structural funds
To secure funding for a broad range of public investments under forthcoming EU structural funds,
Lithuania is preparing a draft of its Single Program Document, to be negotiated with the EU
Commission in the course of 2003. The document will outline guidelines and criteria for
investments eligible for funding under the EU funds across a broad set of themes. The drafting of
the document is being coordinated by the Ministry of Finance with the support of 12 government
committees. More than half of these committees work on areas directly relevant to the development
of a knowledge economy (information society, professional training, employment, education,
science and technology, telecommunications, local infrastructure, social affairs). Thus EU structural
funds could become an important funding instrument for the knowledge economy—provided that
programs can be identified and properly designed and implemented. An important task for
policymakers and implementing institutions will be to guide the formulation and implementation of
such programs. In addition, developing the Single Program Document with a knowledge perspective
in mind could lead to the design of a broader action plan for Lithuania’s knowledge economy.
http://europa.eu.int/public-
services/european_union/enterprises/funding_opportunities/structural_funds_(esf)_en.htm
- 35 -
Annex 2: Lifelong Learning for the Knowledge Economy:
Challenges for Education and Training
1. Key issues need to be addressed to facilitate lifelong learning that allows Lithuanians to
participate more fully in the knowledge economy in their country, in Europe, and in the global
community. This annex does not include a detailed narrative and statistical description of
Lithuania’s education sector, as those have already been documented in many other publications.
Rather, the intent here is to add value by focusing on the linkages within and between lifelong
learning and the knowledge economy, and to identify areas where Lithuania may want to
consider implementing learning policies that help overcome obstacles to development.
2. This annex considers the linkages between learning and the knowledge economy from
three perspectives:
• A learner perspective, as opposed to an education institution perspective.
• An economic and labor market perspective, though not in isolation from social and
cultural factors.
• A thematic education policy perspective, which examines learning and knowledge
issues across different life stages—from early childhood to retirement—and learning
systems—formal, nonformal (that is, training in enterprises), and informal (that is,
life experiences).
3. Globalization and the knowledge economy have created monumental economic and
technical changes, posing enormous challenges to formal and nonformal education systems
worldwide—particularly if they are to respond to enable lifelong learning. Knowledge has
become a fundamental driver of progress. The resulting urgency to generate, use, and
disseminate knowledge requires adjusting the systems and processes that create and use it.
4. In many countries, including Lithuania, education systems are at a crossroads—facing
increasing demand but with limited capacity and resources to improve access and quality. The
increasing economic importance of knowledge and innovation, growing reliance on technology,
and rising demand for traditional as well as new skills signal that globalization is not just a
means of production but also a means of education. Recent research indicates a need to broaden
the base of basic skills to include information, communication, and language competencies.
Such research also points to the need to introduce new skills and knowledge, including those that
allow individuals to evaluate and use knowledge, to act autonomously in increasingly complex
social and work environments, and to join and function in socially heterogeneous groups
(OECD 2001 b). All individuals need access to learning on a lifelong basis, which requires
policies that facilitate more responsive learning systems.
5. With the global economy increasingly driven by knowledge, countries need educated
populations able to create, adapt, use, and disseminate it. Thus governments and economies
must transform formal education systems and link them with nonformal systems, with the goal of
creating an overall high-performance learning system. The key challenge for education is to
provide individuals with access to necessary knowledge and skills. But other questions also
arise. How should knowledge be imparted if the kind of knowledge in demand is constantly
- 36 -
changing? How should the new demands on the education sector be managed? And how can
countries mobilize the financial resources necessary to confront these enormous challenges?
6. Education systems in OECD countries have been adjusting to these changes more quickly
than systems in developing countries, yet developing countries face even greater challenges.
First, they must overcome long-standing problems: expanding coverage to achieve universal
access to basic education (a necessary but insufficient first step in providing skills for the
knowledge economy), expanding secondary and tertiary education, and implementing
institutional reforms to strengthen the linkages between formal and nonformal education and the
labor market. Second, developing countries need to raise the quality of education through
changes to content, pedagogy, and the use of modern technologies, as well as cost-effectively
expand access to postschool learning for adult learners. How developing countries respond to
these challenges will affect economic growth, human capital development, and social cohesion.
Learner Perspective
7. The responsibility for managing learning in the knowledge economy needs to be
increasingly demand driven and based on individual needs, particularly as individuals move up
the learning continuum. There is a need to empower individuals to manage their own learning,
rather than placing full responsibility in the hands of education and training institutions. This
paradigm shift reflects the need for individuals to have basic knowledge as well as knowledge of
how to access, select, and evaluate specialized knowledge—and to use it autonomously in the
context of lifelong learning in a knowledge economy.
8. This trend is increasingly reflected in the literature from both industrial and developing
countries as well as multilateral and bilateral discussion papers. The World Bank’s Human
Development Network recently completed a systematic review of the implications for
developing countries of lifelong learning and the knowledge economy. The review cites research
that an educated, skilled population capable of creating, using, and sharing knowledge is one of
the four pillars of a knowledge economy (World Bank 2002).
9. In a discussion of the transition from education to working life, OECD (2000) portrays
the process as involving two types of approaches. First, structural approaches that focus on the
institutional frameworks of education and training systems. Second, approaches that focus on
learner-centered activities, concentrating on teaching and learning processes. The two are not
seen as mutually exclusive but rather as complementary—and needing to be developed in
tandem.
10. The EU indicates that the principles that increasingly underpin learning and guide its
effectiveness must emphasize the centrality of the learner (Commission of the European
Communities 2001). The International Labour Organization describes the paradigm shift in a
similar way as involving a move from training and focus on the teacher to self- learning and focus
on the learner; from one-time learning to recurrent lifelong learning; and from supply-to
demand-driven approaches (ILO 2002).
- 37 -
11. If one agrees with the basic premise that individuals need to be increasingly responsible
for managing their learning, particularly as they advance through different life stages, then a
number of challenges emerge.
• What key competencies does an individual need to operate in a modern knowledge
economy, and how should they be measured, benchmarked, and assessed?
• What challenges do education and training institutions face in shifting the
management of learning to individuals?
• How can individuals be motivated to take increased responsibility for learning?
• What information do individuals need to facilitate an increased role in planning their
learning?
• What challenges do formal education and training institutions face in supporting
demand-driven training?
• What are the difficulties in recognizing nonformal learning?
• What unique challenges do developing countries encounter when facilitating
demand-driven learning?
These questions are addressed in this annex from the perspective of helping individuals manage
learning throughout their lifetime.
Economic and Labor Market Perspective
12. The economic literature affirms the importance for economic growth of investment in
human capital. Growth (or decline) in specific sectors directly affects labor demand as well as
demand for specific knowledge. As a knowledge economy develops, shifts in employment
occur, including increased employment in knowledge- intensive sectors and increased use of
information and communications technology. These shifts are apparent in Lithuania, causing
structural changes in labor demand—with ramifications for education and training systems.
Employment by sector
13. As elsewhere in Central and Eastern Europe, Lithuania’s transition years have seen a
sharp shift in employment from the public to the private sector. In 1991 the private sector
employed less than 30 percent of Lithuanian workers; by 2000 it employed nearly 70 percent.
Much of this growth occurred in small and medium-size enterprises, which in 1998 accounted
for more than 55 percent of the workforce—twice the level just five years earlier.
14. In addition, since the early 1990s there has been an increase in services jobs and a decline
in industrial and construction jobs, with agriculture playing a buffer role (table A2.1). Many
workers laid off in industry had trouble finding new jobs in urban areas and so moved to rural
areas to take up farming. Many of these migrants were elderly, low-skilled workers. This urban-
rural migration increased agricultural employment from 18 percent of the workforce in 1991 to
23 percent in 1994. Since 1994 employment has continued to shift from industry to services, but
agricultural employment has fallen as well, to 21 percent of the workforce in 2000. During the
same period the share of industry fell to 20 percent—while the share of services rose to 54
percent in 2000.
- 38 -
Table A2.1: Composition of Employment (percent)
Sector 1993 2000 Change
Industry
25
20
5
Construction 7 6 -1
Agriculture 23 21 -2
Services 45 54 9
Source: Lithuanian Dept. of Statistics.
Level of employment
15. Despite positive GDP growth and strong export performance, employment has remained
largely stagnant, with employment in 2000 slightly lower than in 1995. This phenomenon of
“jobless growth” is not specific to Lithuania; but typical of most transition economies in Central
and Eastern Europe. The primary reason for economic growth not coupled with employment
growth are productivity improvements associated with intensive restructuring. Growth in labor
productivity (measured as GDP per worker) has been quite strong since 1996, averaging 4
percent per year. Thus economic growth in Lithuania has been achieved through more efficient
use of labor resources rather than through increased use of labor inputs.
16. A deeper reason for the jobless growth in Lithuania, and in transition economies
generally, is the process of overcoming the legacy of overstaffing inherited from the previous
system. Many companies entered the transition with employment far above that justified by
production requirements. Growing exposure to domestic and international competition coupled
with an influx of new and more capital- intensive technology has led companies to rationalize
employment and shed labor. This process has been spread over time. Although the destruction
of unproductive jobs has been accompanied by the creation of new and more productive jobs, job
losses have exceeded job gains, causing a net fall in employment.
Nature of unemployment
17. An analysis of the relationship between unemployment and job turnover suggests that
intensive restructuring may have contributed to high unemployment, but it has done so indirectly
through the emergence of frictional unemployment (that is, workers have the right skills but are
in the wrong location or do not know where the jobs are) and structural mismatches (that is,
workers do not have appropriate skills) in the labor market. High job reallocation need not be
associated with high unemployment, because high turnover usually means that the unemployed
have a good chance of finding a new job, and hence unemployment spells are short. It is thus
possible to have a high job destruction rate and low and short unemployment rates (as in the
United States). The requirement for this to happen is a high degree of labor mobility (in terms of
geography and skills).
18. But in Lithuania there appear to be severe limitations in mobility from old to new jobs.
The jobs being destroyed differ in salient ways (especially in terms of geography and skills) from
those being created. As a result many workers that have lost jobs do not have the right
- 39 -
knowledge to take up new ones. This leads to longer unemployment and has contributed to the
buildup of a pool of long-term unemployed. Since long unemployment is often associated with
loss of skills and motivation, many of the long-term unemployed may have become marginalized
and even less able to benefit from the high job creation rate.
Skills gap
19. The skills gap seems to partly account for the limited transitions from unemployment into
jobs. On average, the unemployed, and especially the long-term unemployed, have lower
education attainment and lower skills than the employed. Half of the workforce has a secondary
or less education and an unemployment rate twice that of postsecondary graduates. The
unemployment rate among workers with less than upper secondary education is around 25
percent, compared with 6 percent among workers with university education (table A2.2).
20. The skill mix is of some concern to Lithuanian employers, especially as the size of an
enterprise increases, as indicated in the 1994, 1997, and 2001 Private Enterprise Surveys.
Employers indicated a moderate but increasing concern about the availability of skilled workers
and technicians, and the impact this has on the operation and expansion of businesses. If the
skills gap could be reduced, economic growth could accelerate and more people could be put to
work. The skill mismatch problem has two policy implications:
• First, it indicates the need for greater wage flexibility, especially at the lower end of
the wage distribution, to encourage the creation of low-skilled jobs and improve the
employment prospects of poorly educated unemployed.
• Second, it points to the role of education and training systems in curbing the problem
of low, narrow, and inadequate skills—including changing the nature of vocational
training in secondary education, examining the proportions of enrollments between
colleges and universities, and motivating individuals and enterprises to support
nonformal training.
- 40 -
Table A2.2: Unemployment and Employment by Education Level, 2000 (percent)
Level of Education Unemployment
Rate
Share in
Unemployment
Share in
Employment
University 5.9 7.2 20.9
College 13.6 21.7 25.0
Upper Secondary
General
17.3 23.1 20.0
Upper Secondary
Vocational
18.6 22.2 17.7
Lower Secondary
General
26.2 14.9 7.6
Lower Secondary
Vocational
24.0 8.7 5.0
Primary or less
9.3 2.1 3.8
15.4 100.0 100.0
Source: Labor Force Survey Data, Lithuania Dept. of Statistics, and World Bank staff calculations.
Thematic Education Policy Perspective
21. Several indicators set the stage for a discussion of key education policy themes. The
indicators show that in a number of areas Lithuania generally follows trends in transition and
developing countries (as in terms of public spending on education, primary and secondary
education enrollments, and adult literacy). But there are several areas where Lithuania deviates
from the norm: for example, unemployment is significantly higher, mathematics and science
scores for 8
th
graders are lower, and management training and adult continuing education are less
widely available (table A2.3). These deviations indicate shortfalls in basic and tertiary education
as well as potential problems in adult continuing education for the current workforce. The latter
deficiency contributes to long-term structural unemployment and a shortage of human capital to
support development of the knowledge economy.
- 41 -
Table A2.3: Selected Knowledge Economy Indicators related to Human Development
Indicator Lithuania Europe and
Central Asia
United
States
Western
Europe
G7
Unemployment
Rate (percent)
13.50 9.80 4.50 7.75 8.11
Human
Development
Index
0.80 0.79 0.93 0.93 0.93
Public
Spending as %
of GDP
5.20 4.86 4.70 6.08 4.99
Primary Student-
teacher Ratio
15.00 17.23 16.00 14.00 16.83
Secondary
School
Enrollment (percent)
90.00 83.33 97.00 116.00 109.14
8
th
Grade
Mathematics
Achievement
482.00 510.89 502.00 530.00 517.40
8
th
Grade Science
Achievement
488.00 519.67 515.00 545.00 525.80
Gross Tertiary
Enrollment
1995 (percent)
41.00 39.06 81.00 56.75 59.57
Adult Literacy
(percent)
99.50 97.56 99.00 98.83 99.00
Availability of
Management
Training
4.00 4.15 6.70 5.70 5.74
Prof/Technical %
of workforce
21.37 20.86 28.50 27.34 24.86
Extent of Staff
Training
3.40 3.65 5.90 5.65 5.47
Computers per
1,000 people
4.09 4.09 6.24 5.87 5.69
Telephones per
1,000 people
5.77 5.52 6.55 6.39 6.40
Source: World Bank Institute, World Bank.
- 42 -
22. The rest of this annex examines six cross-cutting education policy themes:
• Defining and assessing key competencies. What competencies are needed to function
effectively in a modern democratic knowledge economy? How should they be
addressed by different components of the education system? What changes in
educational pedagogy are needed? And how should these competencies be measured
and benchmarked?
• Governance and management challenges. What role should be played by key
stakeholders (civil society, the public sector, the private sector)? What impact does
decentralization have on governance and management, and how can national
regulatory roles be balanced with local autonomy?
• Financing. What should be the guiding principles for allocation of funds within and
between learning systems (formal and nonformal)? What is the role of public and
private financing at different levels of education and in different learning systems,
and how can resources be reallocated and used more efficiently in different parts of
the education system?
• Opening pathways within and between learning systems. What are the constraints to
mobility within and between different learning systems (formal, nonformal, and
informal) ? What incentives and mechanisms can be used to help overcome
constraints and improve access to learning at different life stages? What existing and
new institutional arrangements are most effective in facilitating access to learning
services?
• Equity and access. How can equity, access, and affordability of lifelong learning for
the poor and vulnerable be improved? What mechanisms should be used to facilitate
“second and expanded chance” learning for those who do not receive sufficient initial
education to function in the knowledge society or who want to move up a career
ladder? How can the motivation for learners to engage in lifelong learning be
increased? How can Lithuania attract and retain more and better people into
education and training sector, including addressing issues of brain drain?
• Research and knowledge generation. How can education, science, technology, and
research be linked more effectively?
23. These themes are discussed with respect to two aspects of lifelong learning. First,
learning that occurs from early childhood, to youth, to adulthood and retirement. Second,
learning that occurs in three different, and sometimes overlapping, education systems—the
formal system (primary, secondary, tertiary), the nonformal system (enterprise training, short-
term labor market training), and the informal system (sometimes provided by civil society, life
experience).
Defining and Assessing Key Competencies
24. The key question is, what competencies are needed to function effectively in a modern
democratic knowledge economy? Moreover, how should they be reflected in the content of the
learning system, and how and when should they be transmitted? While the content and delivery
- 43 -
of education and training systems in Lithuania, particularly at the basic and secondary levels, are
being modified to reflect emerging skill and knowledge demands, additional work is needed.
25. Lithuanian stakeholders discussed these during the consultation on lifelong learning,
which was completed in cooperation with the EU (Ministry of Education and Science 2001).
This and other consultations have resulted in a significant reworking of the basic education
curriculums (grades 1-10), which is now supported by a World Bank project; initial work on
revamping secondary education, including vocational training, supported by PHARE; a
significant infusion of information and communications technology into basic and secondary
schools along with related in-service teacher training; and initiation of structural changes in
tertiary education (for example, the creation of private colleges and universities and of new
departments in existing public universities).
26. The primary focus of change, however, has been the basic formal education system. This
is required but insufficient to ensure that citizens can fully participate in the knowledge
economy. Efforts have been made to change pedagogical methods in schools from rote learning
to problem solving and teamwork, with the assistance of bilateral and multilateral funds. A
major achievement has been the development of secondary school leaving examinations
(Matura) and the elimination of the university entrance exam.
27. In addition, the third cycle of the International Mathematics and Science Study (TIMSS)
is being implemented. Work is also being initiated on school assessment by grade and subject,
and pilot work is being started on defining standards for vocational and professional training
(with the assistance of PHARE). But no parallel work has been initiated on standardized
assessments of occupational competencies. This is significant progress, but a number of issues
emerge surrounding this reform of education, including systematically examining the quality of
learning processes and providing a policy framework to support nonformal and informal
systems. Quality assurance can be addressed by institutions participating in formal quality
assurance programs such as ISO 9000.
Key competencies in basic and secondary education
28. In some quarters there is concern that the Matura exams focus curriculums and teaching
on narrow factual learning at the expense of softer and broader competencies. The results of the
Citizenship and TIMSS studies indicate shortfalls in selected skill areas (tables A2.4 and A2.5).
To ensure that a broad view of competencies is maintained during curriculum reform, Lithuanian
educators may want to make use of extensive research just completed on key competencies by
the OECD Defining and Selecting Key Competencies project. Three broad areas of competence
were identified (Rychen and Salganik 2002), and the research found that countries are at
different levels on different competencies:
• Capacity to act autonomously and reflectively (having an orientation to the future,
awareness oaf the environment, understanding how one fits, building a sense of self,
participation in a social field).
• Capacity to use tools effectively and interactively (basic skills, instruments for
dialogue, awareness of new tools, accommodation to potential of new tools, use of
- 44 -
information and communications technology, effective use of information and
language).
• Capacity to join and function in socially heterogeneous groups (social embeddedness
of individuals, creating social capital, living in pluralistic societies, managing and
responding to others, resolving conflict, participation in groups).
Table A2.4: Citizenship and Education in Selected Countries
Civic
Knowledge
Civic Engagement Civic Attitudes
Country Total Conventional
Citizenship
Expected
Participation
in Political
Activities
Trust in
Government
Institutions
Positive
Attitudes
about
Immigrants
Support for
Women’s
Political
Rights
Australia M - - + M +
Belgium(Fr) - - - M M M
Chile - + + + -
Czech + - - + + +
England M - - M - +
Estonia - - M - - -
Finland + - - M M +
Greece + + M + + M
Lithuania - + - - - -
Poland + + + M + M
Russia M - M - M -
Slovak + + - + - -
United States + + + + + +
Source: Citizenship and Education in Twenty-Eight Countries, IEA, 2110
M = Mean, - significantly lower than mean, + significantly higher that mean score
Table A2.5: Percentage of Students Reaching Median in Math and Science
Science Scores Math Scores
Country 1995 1999
Difference 1995 1999 Difference
Hungary 75 79 4 73 74 1
Belgium
(Fl)
76 76 0 83 85 2
Australia 69 74 6 70 73 3
Czech 81 74 -7 81 69 -11
Slovak 72 74 2 77 78 1
England 70 72 2 59 58 -1
Russia 66 68 1 72 72 0
United
States
64 62 -1 59 61 2
Lithuania 38 51 13 48 52 4
Romania 46 45 -1 51 49 -2
Source : TIMSS 1999 International Report, IEA.
29. A parallel and supporting conceptual framework indicates that there is recognition of the
need to develop competencies for and at different life stages, that competencies fit different life
roles, and that lifelong learning is of critical importance (Kegan 1994). Kegan has
conceptualized five orders of development and consciousness including, from simple to
complex:
- 45 -
• Simple social perceptions and impulses.
• Point of view (role concept and simple reciprocity).
• Traditionalism (role consciousness and mutual reciprocity).
• Modernism (relationship regulating and multiple role consciousness).
• Post-modernism.
30. Related research indicates that almost two-thirds of adults in some industrial countries
operate at less than the modernism level, which is required for full functioning in a modern
knowledge economy (Tobert 1987).
Secondary vocational education
31. Vocational education is provided at the secondary level in four programs. Stage 1
provides three-year professional qualifications for youth without lower secondary education.
Stage 2 provides two-year professional qualifications for youth with a lower secondary
certificate. Stage 3 provides three- year professional qualifications and a general secondary
education leading to a Matura certificate. Stage 4 provides one or two professional qualifications
for those who have completed secondary school (Ministry of Education and Science and
Ministry of Social Security and Labor, White Paper on Vocational Education and Training
1999). Table A2.6 summarizes enrollment in these schools, along with overall upper secondary
school enrollment (including general education).
32. Most of the approximately 100,000 upper secondary students are in general, not
vocational schools. The number enrolled in stage 2 vocational schools is decreasing, while the
number in stage 3 is increasing. This is a positive trend, as stage 3 provides graduates with a
secondary school leaving certificate (Matura) that helps ready them for lifelong learning. A
more worrisome issue is the level of specialization in secondary vocational schools, which
currently prepare youth for 1 of about 100 specialized occupations (down from more than 300 in
earlier years). This level of specialization does not prepare youth well for lifelong learning or
provide them with flexibility in later years in the labor market. Such specialized programs are
being phased out of secondary education in most upper- income countries, and being replaced by
more general vocational programs that provide skills common to a family of related occupations
(mechanical, marketing, information and communications technology) and prepare students for
initial job entry or further specialized education at the postsecondary level.
33. To ensure a broad view of competencies, Lithuanian educators may want to use the
results of OECD research in curriculum reform, particularly in basic education. The 100
specialized programs in stage 3 and 4 vocational secondary schools should be reduced to 15-20
broader career orientation programs that provide youth with a combination of entry- level job
skills, an education that allows a transition to specialized postsecondary training, and preparation
for lifelong learning in a changing labor market.
- 46 -
Table A2.6: Students in Vocational and Total Upper Secondary School, 1996-2001
1996 1998 1999 2000 2001
Stage 1 Voc.
6598 6927 7999 7525 7704
Stage 2 Voc. 18574 15371 11440 7456 4333
Stage 3 Voc.
22100 26742 31918 31430 28248
Stage 4 Voc.
4379 4630 5085 5551 6720
Total upper
secondary education 122941 126079 133546 98235 100957
Source: Ministry of Education, Lithuania.
Benchmarking and assessment of key competencies
34. Lithuania has been directly involved in the 1999 Third International Mathematics and
Science Study (TIMSS) of grade eight students and the International Association for Evaluation
of Educational Achievement (IEA) Citizenship and Education Study (CES). However, it has not
been involved in the Program of International Student Assessment (PISA) and International
Adult Literacy Study (IALS) or the new Adult Literacy and Life skills (ALL). These studies
could provide additional benchmarking on the previously mentioned competencies, and
supplement internal assessments. The OECD Defining and Selecting Key Competencies
initiative intends to use these assessments in its work.
35. Lithuania should participate in additional international achievement assessments,
specifically the PISA and ALL surveys, to benchmark youth and adult education and determine
to what degree Lithuanian youth and adults have the necessary core competencies to function in
the knowledge economy.
Labor market demand
36. Broad sector employment data is available in Lithuania (see table A2.1). But information
on emerging or declining sectors, and on the demand for specific skills, are fragmented and often
based on single surveys, picked up from tangential studies, or based on data with limited
penetration (such as labor exchange data). There is evidence from some employer surveys that
technical and managerial shortages are constraints to development, and is of greater concern the
larger the company gets.
37. Labor market monitoring should be expanded in two key areas: implementation of
regular short-term, qualitative economic and enterprise surveys like those done in Hungary and
Sweden; and development of long-term scenarios of human resource requirements in selected
sectors based on national priorities in innovation and research.
38. Another method of determining labor market demand is regular sample follow- up of
graduates of both formal and nonformal education and training programs. Formal education
institutions do not appear to be doing this on a regular basis. Informal training at labor market
- 47 -
training centers is evaluated, but only on a gross impact basis. This does not provide the
necessary evaluation, and quasi-experimental design studies should be done every few years to
determine if the programs have an net impact—and if so, which clients receive the greatest
benefit (Fretwell, Benus, and O’Leary 1999).
39. All formal and nonformal education and training institutions (secondary schools,
colleges, universities, labor training centers) should be required by their public funding agencies
to implement annual sample follow-up surveys of graduates to evaluate program impact and
linkages with the labor market.
Occupational standards and assessment
40. Occupational standards are essential to ensure that training matches enterprise needs and
to facilitate assessments of nonformal and informal training. Although initial work has begun,
with support from PHARE, there are questions about whether the standards define occupational
competencies (what people do in occupations) or only training standards (curriculum learning
objectives); if the methodology for defining standards is sufficiently well defined; if the
standards are enterprise driven or educator driven; and if the effort is sustainable. Progress is
slow (only 36 standards have been developed, and 50 are planned in the next phase).
Government Resolution 624 also defines regulations for assessment and regulation of selected
professional qualifications. However, there is a potential need for 300-500 standards, and no
work is under way to develop a systematic and standardized approach to assessing skills and
knowledge across the occupational spectrum.
41. One of the main challenges in promoting lifelong learning for the knowledge economy is
recognition of nonformal learning. This is particularly true in developing countries and is linked
to the concept of key competencies, assessment, and increased flexibility in the lifelong learning
system. The main arguments for recognition of nonformal and informal learning are that it
motivates individual learners, facilitates recognition of alternative learning methods, promotes
lifelong learning in general, and facilitates individual mobility. Lithuania needs to examine ways
of formally assessing and recognizing nonformal learning; there are two basic approaches:
• Key competency standards and assessment systems. The existence of such systems or
“common languages” is a prerequisite for embarking on a program to recognize
nonformal and informal learning, as this sets up a universally recognized set of
indicators against which all learning can be evaluated.
• Recognizing nonformal learning in the context of formal learning. An alternative
approach to evaluating learning based on key competencies is to recognize nonformal
and informal learning within the context of formal learning (for example, by having
an individual demonstrate that his or her informal learning is equal to formal learning;
then he or she can be issued a certificate from a formal learning institution). The
problem with this approach is that it is often not enterprise driven but rather leaves
traditional “supply side” institutions—which may or may not reflect the needs of the
knowledge economy—in charge of certification.
- 48 -
42. Some formal institutions, particularly in higher education, may have difficulty accepting
that an individual can learn without engaging in academic life. These institutions, and related
ministries of education, may also see nonformal learning approaches as undermining their
business and authority. Similarly, enterprises may resist efforts to regulate and recognize their
internal training.
43. Work on defining occupational standards, assessments, and training standards should be
accelerated to improve links between training and the labor market, and between formal and
nonformal training. Standards development should include high-priority occupations across the
full spectrum (that is, those requiring vocational, technical, and professional training), and
priorities for development should be established with the business and research communities.
New pedagogy and e-learning
44. Lithuania is aware of the need for new pedagogy and e-learning and is taking steps to
address them in the formal education sector and in community settings. This is exemplified by
the major effort that has been made to provide information and communications technology to all
basic schools: by October 2002, 70 percent of these schools had dial up access and 10 were
online. A number of approaches are cited for moving to individual-centered learning, including
using different methods of instruction, including use of information and communications
technology and e- learning techniques; spending more time on experiential and group learning
and on recurrent (not one-time) learning; merging education and training, with an emphasis on a
diversity of perspectives; making changes in assessments from measuring knowledge to
evaluating performance; and increasing interdisciplinary work (McGinn 1999; ILO 2002).
45. The need to include information and communications technology skills in curriculums is
generally accepted. But, there is less agreement on the role of information and communications
technology in new pedagogical processes and the actual teaching and learning process.
However, the advantages of information and communications technology in supporting changes
in pedagogy and improvements in student learning do not come merely from the purchase and
introduction of computers in the classroom. OECD (2002) concludes that the effect of
information and communications technology on learning has at least as much to do with factors
independent of the technology as it has to do with the technology. A policy for information and
communications technology in education should foremost be an education policy. The
introduction of information and communications technology must therefore be supported by, and
supportive of, complementary reforms of the education system.
46. Many developing countries are looking at information and communications technology
and e- learning as key ways to promote learning for the knowledge economy. But to date there is
little scientific proof of what computers can accomplish in the classroom. Before investing large
amounts of scarce resources in information and communications technology, countries should
examine the costs, the net impact on learning, the availability of supportive learning policies
(such as flexible assessment and credit arrangements), and the infrastructure (such as Internet
access in remote and poor communities)—which may in the end primarily benefit already
favored groups of citizens. A more detailed discussion on the use of information and
communications technology in education can be found in World Bank (2002).
- 49 -
Governance and Management Challenges
Involving stakeholders
47. Meetings with representatives of civil society, labor and enterprises, government, and
academics in Lithuania indicate that the Government is acting as a “convener” and that key
stakeholders are consulted on policy issues—though some complain consultations occur
somewhat after the fact. Tripartite organizations at the national and local levels provide input
into labor and vocational and professional education training issues, including the National
Employment Council and the Board of Experts of the Lithuanian Labor Market Training
Authority. At the local level it is sometimes too difficult to secure representation from all
partners.
48. However, higher education institutions have a great degree of autonomy, perhaps to the
extent that priorities in some areas (such as research) may address local professional priorities
and not national priorities. This problem is exacerbated by the fact that the managers of these
institutions are essentially elected by the members of these institutions. The business sector is
not sufficiently involved in government and institutional policymaking.
49. Businesses should play a stronger governance role in tertiary education, including serving
on boards of governors with policy authority in selected areas (including the hiring of
management staff), and be more involved in government education policy development and
institutional program development (defining curriculums, operating joint programs including
internships, cooperative education, and research programs).
Decentralization
50. In both the industrial and the developing world, a transfer of responsibilities from central
ministries of education to local education authorities, communities, postsecondary institutions,
and schools has become common. There are indications that decentralization and school
autonomy increase enrollments, education coverage, and local capacity. By making government
more accessible and accountable to people through increased participation, easier access to
information, and greater communication, democratization and political stability are also
enhanced. But decentralization needs to occur within a regulatory framework that ensures
minimum standards of quality and content are maintained to help ensure equity, labor force
mobility, and adequate financing.
Openness and the international dimension
51. Stronger international linkages, increased mobility, and better access to information have
allowed countries that open up to international markets to reap the benefits of the knowledge
economy. This has created opportunities to learn from international experiences and to build
partnerships across countries, making the cost of not opening up even greater. Openness also
invites greater influences from abroad, such as foreign provision of tertiary education and
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international education assessments, and can stimulate the development of lifelong learning by
increasing competition.
52. Lithuania’s Government could make internationally driven innovation a central part of
their policies while taking into account the pitfalls of internationalization—such as accelerated
brain drain. Examples are increasing where the state fosters innovation by building international
partnerships between ministries, between the public and private sectors, between private sector
agents, and between universities to incorporate global best practices in education—from
sponsoring exchanges of ideas and people to conducting joint R&D (World Bank Institute 2001).
Intellectual property rights
53. Intellectual property rights are discussed in more detail in other parts of this report. But
they are of considerable concern in the Lithuanian environment in the context of lifelong
learning and the encouragement of the creation of knowledge. It is vital to protect intellectual
property rights. While intellectual property rights are sometimes seen as a mainly economic or
legal issue, their implications for the learning system should not be overlooked.
54. Human capital and support for technical change and innovation are among the conditions
facilitating intellectual property rights. If there are few incentives and opportunities to create,
use, and transfer knowledge during learning, the education system will not be well equipped to
prepare people for the knowledge economy. Strong intellectual property rights encourage
international learning providers to enter developing countries, providing access to global
knowledge. But the design and application of intellectual property regimes need to promote the
creation and use of knowledge—and recognize the costs and uses of intellectual property rights.
This is a particular concern in Lithuania, where intellectual property rights in tertiary education
are not well defined. Thus the roles of staff and higher education institutions regarding
intellectual property rights need to be clarified to provide incentives for faculty to engage in
applied and developmental research.
Accountability and transparency
55. Accountability aims at making the state more responsive to its people by responding
effectively and transparent ly to its needs, ensuring that people’s voices are heard. A knowledge
economy subjects policymakers and public servants to greater pressure to deliver results. This
results-driven approach often leads to a shift from input-oriented to output-oriented management,
increasing the accountability of government at all levels. Nevertheless, promoting accountability
remains a major challenge for many countries, and ways need to be explored on how the
mechanisms of the knowledge economy can be used to enhance accountability—such as through
e-government and more participatory approaches.
56. Research indicates that a change from the worst rule of law (0.0) to the best (1.0) would
contribute an enormous 3 percent of economic growth per year across all developing countries
(Barro 2000). Good governance has a direct correlation with a number of human development
indicators, including literacy, per capita income, and life expectancy (Kaufmann, Kraay, and
Zoido-Lobaton 1996, 2000; seehttp:///www.imf.org/). For example, providing better
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information, education and training opportunities, career choices, and resources to learners helps
orient learners and inform policymakers of actual needs—while also strengthening the dialogue
between institutions and individuals. At the same time, greater accountability and transparency
ensure a greater focus on equity, with the potential of reducing social and economic inequalities.
Financing
57. Given the rising demand for learning, and rising expenditures, several principles should
guide future education financing:
• The acquisition of basic competencies, which increasingly means universal upper
secondary education, should be financed from public funds.
• Learning beyond the basic competencies should increasingly be the responsibility of
learners and employers.
• The Government should promote equity.
• The system should promote efficiency in delivery and delivery for the labor market.
Some of the available financing options are summarized in table A2.7.
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Table A2.7: Options for Financing Lifelong Learning
Who
Ultimately
Pays
Who
Finances
Collection Financing
Mechanism
Instrument
Student
N/A
N/A
Education Savings
Account
Fixed Private Loan
Combined Private Income Contingent
Loan
Private
Variable Human Capital Contract
Fixed
Combined
Institutional Income-
Contingent Loan
Private
Public
Variable Institutional Human
Capital Contract
Fixed Private Collected Public
Loan
Combined
Private
Variable
Fixed Public Loan
Combined Public Income-Contingent
Loan
Public
Variable Graduate Tax
Student
Public
Community
Variable
Individual Development
Account
Private N/A Variable On-the-job training
Employer Public Public Variable Training Levy/Payroll Tax
N/A Direct Funding
N/A Vouchers and entitlements
N/A Grants
N/A Interest subsidy on loans
Government
(taxpayer)
N/A
N/A
N/A Tax Credit
Source: World Bank 2002, p. 63.
58. State financing of formal education and training in Lithuania is comparable to that in
similar countries (see Table 2.3). The new decentralized approach to financing basic education
is on a per capita basis, is sensitive to rural- urban differences, and makes provisions for special
allocations (such as in-service teacher training, which is minimal but important to continue).
However, several financing issues need to be addressed, particularly given rising demand, to
increase efficiency, access, and equity of tertiary as well as of nonformal adult and continuing
education.
59. Efficiency. One-way to free up revenue for new purposes is to become more efficient in
the use of existing revenue. The first place to look is student-teacher ratios, since staff costs
represent the largest portion of education budgets. Student-teacher ratios in Lithuania, at least in
basic education, are slightly lower than the international average (in the range of 11:1).
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60. School mapping should be undertaken in primary, secondary, and higher education to
examine the impact of the 40 percent decline in Lithuania’s birth rate in the 1990s—which is
starting to affect primary schools and will impact tertiary education in about 2009, and will
require institutional consolidation in tertiary education. Other areas to consider include better
construction, as Lithuania spends about twice as much on utilities as Western schools in similar
climates.
61. Tertiary education. Tertiary education is a critical element of lifelong learning.
Although tertiary education provides skills beyond basic competencies, continued government
support for it is justified because tertiary education provides major benefits for economic and
social development and helps sustain basic education (Ministry of Education and Science,
Higher Education in Lithuania White Paper 1999). There are two types of tertiary education
institutions in Lithuania: universities and colleges. In 2001 there were 35 such institutions,
including 22 state (15 universities and 7 colleges) and 13 nonstate (4 universities and 9 colleges;
Ministry of Education and Science 2002).
62. The gross enrollment rate in tertiary education was about 41 percent in the mid-1990s but
climbed to about 80 percent in 2001 (three-quarters in universities and one-quarter in colleges).
That overall rate is similar to the 81 percent in the United States and above the 57 percent in
Western Europe and 60 percent in the G-7. But questions have been raised about the mix of
enrollments between universities and colleges, as there is a growing need for college-educated
technicians. Several other issues emerge from an analysis of the financing of tertiary education
(Sheehan 2002). The following policy options should be considered:
• Mobilizing more resources per student. University resources are relatively low, at
just over 4,000 litas ($1,150) per student. Given the high intake rate (nearly 60
percent of the university-age cohort), there are strong arguments for increasing
student financing for higher education, because the Government will soon have to
choose between increasing per student financing while maintaining the overall budget
allocation to the sector, or keeping student financing constant while reducing the
overall budget allocation. Four options should be examined. First, tertiary tuition
fees could be increased in real terms to, say, 2,000 litas per student per year and made
universal, to mitigate the effects of the loss of fee revenue that will occur if recent
policy changes are fully implemented. Second, a grant scheme to cover students’
subsistence costs (similar to the present one) could be retained, with social criteria
determining eligibility. This should be integrated with the scheme for fee rebates.
Third, loan funds should be targeted more to high-ability students rather than poor
students. That approach should reduce risks for lenders and increase recovery rates,
providing more funds for future lending. Loans would still be effectively subsidized,
at least for bachelor’s- level students. Fourth, a more radical move might be to
concentrate student grants of all forms (fee rebates, grants for living expenses, an so
on) on level 1 (bachelor’s) programs and to make loan finance the main instrument at
the master’s level, with a much greater emphasis on cost recovery than at present—on
the grounds that master’s- level students are closer to commencing employment and
less likely to be at risk of failure or dropout. More resources are a necessary but
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insufficient condition for quality. They in no way lessen the need for quality
assurance procedures.
• Enhancing professional expertise in tertiary education management. Managing
higher education systems requires a significant skill base. For example, devising a
suitable formula for allocating grants to higher education institutions based on unit
costs requires an understanding of education and cost accounting principles in the
ministries of finance and education, the Council of Rectors, and the institutions
themselves. Some of these may be underresourced. Although this report has not
investigated this issue in depth, the case for any increase in resources for the higher
education system will be stronger if management capabilities within the system are
considered adequate.
• Replacing and retaining academic staff. Approximately 55 percent of university
academic staff are over 50, which implies a very high replacement requirement
between 2002 and 2017. The number of doctoral degrees being awarded (on average
slightly over 200 per year) is well below the number required to meet replacement
needs. There is also an acute problem of retaining high-quality staff, because
university salaries are low. Salaries are determined by government and civil
procedures, and universities have limited scope to supplement salaries with research
grants and the like. One way of increasing flexibility would be to move academics
(on a voluntary basis) to nine- month employment contracts while paying them the
same annual salary. Replacing all the staff due to retire with staff concentrated in a
15-year age group (say, ages 25 to 40) would perpetuate imbalances in the age-
structure. It might also lead to an excess supply of permanent staff in the years
following 2009 (when the demographic downturn kicks in). Greater use of contract
staff and selective re-employment of staff age 65-70 on annual contracts could help
alleviate potential adjustment problems.
• Increasing the financial power of higher education institutions. In general, the
buildings used by state universities and colleges are state property and are not owned
by the institutions themselves. Institutions are in the position of having to maintain
property they do not own and are unable to change their property portfolios through
sales and acquisitions. In addition, some institutions want to carry out major
refurbishments to buildings but do not have sufficient financing to do so—and cannot
borrow because the buildings are not theirs to pledge as security. A transfer of state
property to higher education institutions could unlock some funding through the
banking system, as well as allow for greater flexibility in property use and
management.
63. Nonformal adult and continuing education and training. There is a void in government
financing for nonformal adult and continuing education and training, except for limited resources
for training for the unemployed. Given the changing economy, increasing demand for skilled
over semi-skilled workers, and high unemployment among low-skill workers, financing for this
aspect of lifelong learning should not be overlooked. There is growing empirical evidence that
the inability of low-and semi-skilled workers to stay in the labor force is directly linked to their
skill levels (OECD 2001 a).
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64. One could argue that direct state financing is inappropriate given that the returns to such
education and training accrue to individuals and the private sector—and thus that these
beneficiaries, not the state, should pay. On the other hand, investment in adult continuing
education and training is good for the nation and the economy, so some public support, direct or
indirect, may be appropriate. The latter argument prevails in many countries. A number of
individual-based schemes are available, including cost recovery (loans, graduate taxes) and
subsidies (learning accounts, vouchers; see table A2.7). Other approaches include tax credits and
payroll taxes. Payroll taxes for training have been used successfully in Brazil, France, and
Malaysia, and can be partly or fully forgiven if employers provide recognized training to
employees. Such taxes have the disadvantage of increasing wage costs, but in discussions
Lithuanian employers did not voice resistance to the concept.
65. Alternative financing schemes (tax incentives, training levies, learning accounts, and so
on) should be examined and implemented to encourage enterprises to support and individuals to
engage in adult and continuing education. In addition, any potential financial disincentives (such
as taxes on training investments by individuals and enterprises) should be eliminated.
Opening Pathways within and between Learning Systems
66. Serious blockages in Lithuania’s education and training systems inhibit vertical and
horizontal movements of learners within the formal learning system and between the formal and
nonformal systems, block economic and social mobility, and impede interdisciplinary learning.
Agreements are needed to promote alternative pathways within and between different types and
levels of institutions.
Blockages between formal education institutions
67. There are blockages in Lithuania between colleges and other higher education
institutions. There are no standard procedures for transferring credits between parallel
institutions or from lower- to upper- level institutions. Students at lower- level education
institutions are at the mercy of upper- level institutions, and a lack of transparent third-party
assessments complicates the issue. When credits are transferred, evaluations are based more on
inputs (hours completed and courses taken) than outputs (competencies demonstrated). Examples
of blockages include the fact that in some cases students at institutions (such as colleges) can
transfer credits more easily—under EU Barcelona Agreements—to institutions outside, rather
than inside, Lithuania. It is sometimes even difficult to transfer credits between parts of the same
higher education institution.
68. There is a need for a third party to act as an honest broker and assessment agent for
learners to define equivalencies between programs and courses in different institutions, and to
facilitate the mobility of learners within and between institutions in the formal education system
(box A2.1).
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Blockages between formal and nonformal learning
69. Blockages between formal and nonformal (and informal) learning are similar but even
more pronounced than those in the formal education system because nonformal learning often
provides no academic credit equivalent. Thus the only way to move forward is to assess
competencies. But there is no nationally recognized system for occupational standards and
assessments, which blocks the granting of credits based on assessments of competencies.
Moreover, individual institutions are often unwilling to perform assessments for individual
citizens.
70. There is a need to continue rapid development of occupational standards and assessment
instruments, to promote recognition of nonformal and informal learning, and to facilitate
recognition of nonformal and informal learning in formal education institutions (box A2.2).
Box A2.1 Korea’s Credit Bank System—promoting lifelong learning opportunities
Korea’s Credit Bank System provides citizens with a variety of education opportunities. The
system, established in 1995, helps achieve lifelong learning by diversifying and maximizing
education opportunities for both youth and adults. The system recognizes diverse learning
experiences gained both in and out of school. When learners accumulate the necessary credits,
they can be awarded a degree from the Credit Bank that accredits a variety of education
programs—guaranteeing open, flexible access to high-quality continuing education.
Source: Seehttp://www.unescobkk.org/education/appeal/clc/pdf/effective/KOREA.pdf
Box A2.2 Recognizing nonformal, informal, and nontraditional learning—approaches around
the world
Many traditional education institutions in North America have considerable flexibility in granting
academic credit for learning achieved in nontraditional ways. In contrast, Europe has no unified
approach (CEDEFOP, 2002), although a European Skill Card has been proposed that could help lead
in that direction. In Austria and Germany only 5 percent of training examinations evaluate nonformal
training, and the results are calibrated in the context of the formal system. In the Mediterranean
region, which has a weaker tradition of formal training, recognition of nonformal training is more
important. Italy recently introduced a skills audit system, and Portugal and Spain are working on
similar initiatives. In Greece such recognition is held back by a lack of defined occupational
standards. In Nordic countries, particularly Finland and Norway, recognition of nonformal training
has moved to the fore of public debates on education training policy, and national systems are being
developed. France has an assessment system called the Bilan de Competence.
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Equity and Access
71. Lithuania needs to address disincentives—and a lack of incentives—for individuals and
enterprises to invest in education and training. (Several of these issues have already been
discussed in previous sections.)
Career guidance and counseling
72. The need to enhance career guidance and counseling services is recognized in a 2002
review completed by Lithuania in cooperation with the EU European Training Foundation. Some
such initiatives are under way at labor offices and in higher education institutions. The review,
however, indicates that more work is needed. If youth and adults are to be motivated and
increasingly take responsibility for managing their learning, it is essential that they have
information about themselves and about the society and economy in which they must function.
73. Career guidance and counseling policies and services are essential to this process. These
services focus on two aspects of learning. First, they help individuals understand their aptitudes
and interests. Second, they provide individuals with information on the labor market to facilitate
career planning. Policies for career information, guidance, and counseling services can support
both social and economic development objectives, and provide key support to facilitate and
promote lifelong learning.
74. Career guidance and counseling promote social equality and inclusion and access to
education and employment opportunities. Such guidance can perform a valuable role in raising
the aspirations of disadvantaged and poor individuals by making them aware of opportunities
and supporting them in securing entry to such opportunities. These services promote individual
liberty and emphasize the “active individual”—affirming the value attached in democratic
societies to people’s rights to make free choices about their lives.
75. These services also support economic efficiency, as they are a means of making the labor
market operate more effectively. Attempting to deal with economic efficiency and social equality
through structural reforms alone is not enough. In a sense, career guidance can be viewed as a
kind of brokerage between individual and social needs. It addresses both individual rights and
responsibilities in a social context. It is a means of encouraging individuals to participate in
determining their role in—and contribution to—the society of which they are a part. In this sense
career guidance is a vital tool of civil society.
76. Lithuania needs to address a number of questions in this regard, including:
• What is the setting and starting point for career development policy? This is affected
by geopolitical, economic, cultural, and leadership issues.
• Who are the key stakeholders, how will they be involved in governance, and what
approaches will be taken to finance the development and delivery of services?
• Will policies reflect preventative, reactive, or remedial approaches?
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• How will policies address and affect access by different target groups?
• Do policies need to be adjusted in decentralized relative to centralized settings?
• How will standards and staff training be developed and maintained?
• What type of evaluation and research should be undertaken to determine the impact
of these policies and services and to refine them? There is some evidence on the net
impact of career guidance services (Fretwell, Benus, and O’Leary 1999), and this
topic is of critical importance in developing countries—which have constrained
resources and multiple priorities.
77. Career services need to be developed further, particularly at the basic and secondary
school levels and in labor offices. There is a need to develop training programs at higher
education institutions to prepare career guidance and counseling staff for education, training, and
employment institutions, and for work in the personnel departments of private enterprises.
Motivating enterprises and workers to invest in training
78. Surveys in the region and in Lithuania indicate that workers are not very interested in
upgrading their skills (65 percent said they did not need training in a recent Lithuanian survey).
And while some large information and communications technology enterprises and those
involved with multinational corporations indicate an interest in providing or financing training
(or both), the general situation is not good—for example, one recent survey of some 300
employers found that only 7-8 percent were interested in providing or financing training. A
recent management survey found that only 30 of 300 private enterprises budgeted for employee
training.
79. Other than a lack of appreciation of the importance of employee training, enterprise
representatives cited the poor quality of training in some formal ins titutions and the lack of tax
incentives. In addition, there may be negative tax incentives for employees who receive training,
as they have to report training financing as income and pay taxes on it.
80. These issues call for government review, including consideration of payroll training
taxes, tax credits, and other mechanisms to promote enterprise training. Employer efforts mainly
involves occupational training. But employer-based literacy foundations, and civics programs
exist in some countries, such as Brazil. Worldwide, employer involvement in adult continuing
education is difficult to quantify. Information tends to be better when payroll training taxes are
in place, but there is a considerable body of other research on employer-based adult continuing
education. Many workers receive some training from their employers with or without training
taxes. Employers tend to invest most extensively in training their best-educated and best-trained
employees, while low- income employees are more poorly educated and receive little training
from employers (OECD and Human Resources Canada 1997).
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81. Employers tend to invest in younger but experienced workers, and more training occurs
in growing sectors. Small firms invest less in training than larger firms, and trained workers are
less likely to be laid off or to quit their jobs. In some countries employers are outsourcing
training in the same way they outsource other services, so they do not have to maintain internal
training departments and staff. This is increasing the demand for training provided by public and
private training agencies, and it is not unusual—from Hungary to the United States—to find
public, quasi-public, and private training agencies that provide contracted, customized education
and training services to enterprises.
Related issues
82. Financing is key to motivation. This issue has been addressed in previous sections. At
the basic school level, the financing basket should take into account the additional needs of rural
schools. At the higher education level, the possibilities of built- in inequities in the new student
financing scheme and student loan scheme have already been noted.
83. Access to Internet services. There is concern about social and economic exclusion in
rural and depressed areas, particularly with regard to Internet access, and initiatives are under
way to overcome lack of connectivity (including telecommunications reform and private
initiatives to provide rural communities with Internet access). Actions have been taken within
the education sector and by civil society organizations, with considerable participation by the
private sector.
84. Supply of education and training services. The opening of private basic schools, colleges,
and universities has expanded access—but not necessarily increased equity at the tertiary level
because of the high costs involved. The design of financing schemes for low-income families
will be critical to ensure that supply and demand can meet on equitable ground.
85. Services for the disabled. Information and communications technology and the
knowledge economy provide opportunities for the disabled and handicapped to become involved
in social and economic life. While some initiatives are under way (such as special Ministry of
Education funding for adults), additional activities and improvements are needed. For example,
one training program for the disabled in Kaunas was on the second floor of a building, requiring
participants to be carried up the stairs. Many public education facilitates have limited access for
the disabled.
86. Motivation of staff in education and training institutions. The low salaries of education
staff at the higher education level are a growing problem for the recruitment and retention of
young staff and threaten the quality of teaching as existing staff tend to have multiple jobs and
may put minimal effort into their primary job at a university or college. The emergence of
private institutions, which can pay market rates, will tend to draw good staff away—while state
institutions are restricted by state salary rules. Staff remuneration policies need examination.
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Research and Knowledge Generation
87. The linkages between basic and applied research and the learning process are critical to
the development of the knowledge economy. This issue is of particular importance at the upper
levels of the higher education system, including both public and private universities and colleges.
This issue is addressed in more detail in the main report, but several issues need to be addressed:
Priorities
88. There is a need to focus limited state resources on high-priority areas for the development
of the knowledge economy in Lithuania. Institutional and academic autonomy is laudable, but
Lithuania is a small country with limited resources—and should focus these resources on topics
with high rates of return.
Linkages
89. There is a need to build mechanisms that facilitate cooperative agreements between
different parts of the learning system and research institutions—something that was not always
encouraged in socialist times—and between the private sector and tertiary education. One
impediment to the latter is the rigid time requirement for undergraduate and graduate degrees,
which does not facilitate the development of formal cooperation and internships between
university students and enterprises, which can be key to developing research linkages.
Competition
90. The simple allocation of state funds to research institutes and higher education
institutions based on formulas and without formal competitive processes does not facilitate
research that is responsive to priorities or of the best quality. More competitive forces should be
introduced in the financing of research in higher education.
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Annex 3: Lithuania’s Innovation System:
Connecting Researchers and Businesses
Introduction
1. Innovation has a significant effect on productivity at the level of the firm, the industry,
and the country and is thus a key factor in economic growth. Lithuania’s ability to
systematically generate, acquire, diffuse, and apply knowledge in new ways to solve problems
and satisfy the needs of individuals and of society at large—that is, to innovate—is constrained,
however. Innovation can take place through technical change, such as product and service
development, and through process and organizational change, such as organizational,
managerial, and marketing innovations and process renewal.
2. The major stakeholders in an innovation system include universities and research
institutions, private enterprises (including foreign enterprises) and their organizations, venture
capitalists and other providers of funds, and government and associated agencies. They also
include partners in research, business, and finance abroad. An innovation system depends on
establishing the proper division of functions and processes between government, the research
community, and the private sector. Lithuania offers important elements of an innovation system,
including universities, state research institutions, a business community, and a set of institutions
aiming to support technology applications. But so far Lithuania has not managed to bring the
various elements of its innovation infrastructure to interact effectively and systematically within
a coherent and coordinated framework able to link the research and development (R&D)
community with the enterprise community. It is thus forgoing considerable potential to translate
knowledge into commercial activities that generate wealth.
3. Innovation occurs at the enterprise level in Lithuania, including in some high-tech
industries (laser technology, biotechnology), but it has taken place in a relatively few, isolated
cases. The few success stories reflect Lithuania’s potential for innovation rather than a
systematic use of the country’s knowledge assets. Some changes have been introduced in the
national innovation system in recent years, driven in part by the consensus building effort
associated with the issuance of the Lithuanian Science and Technology White Paper. Yet much
more needs to be done in defining a coherent innovation policy and in establishing policy
instruments and a supportive institutional framework that allows potential partners in innovation
to join efforts in generating and applying knowledge for their own benefit and that of the
economy.
4. In the early years of independence Lithuania was left with a legacy of a centralized and
closed science system that provided substantial funding in narrowly specialized fields, and a
research community largely isolated from the rest of the world. Much former enterprise- level
R&D capacity was lost in the course of privatization. Despite considerable progress in recent
years in restructuring and modernizing the national innovation system, which has helped retain
significant talent and research capacity in Lithuania, many of the current organizational
structures tend to follow and even reinforce the old practices of separating rather than unifying
the basic partners for innovation. Compared with R&D systems in Western European countries,
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the Lithuanian system is inflexible in the sense that nearly all public resources are fixed with
existing institutes. This kind of system is naturally inclined to resist any changes in priorities,
division of resources, and ways of working. Cooperation and interaction of companies with
research institutes and universities is modest and occasional. The same is true of cooperation
and interaction between research institutes and universities and among research institutes, as well
as in programs where companies, universities, and research institutes join their resources and
competencies.
5. Many analytical reports have been written by national and foreign experts on science,
technology, and innovation in Lithuania and the need to strengthen these basic elements of a
knowledge-based economy. The reports and their recommendations led to the Lithuanian
Science and Technology White Paper and associated action plans, which have received positive
and almost unanimous support among politicians, civil servants, and members of the research
establishment and business community. But only a few of the recommendations have been
implemented, and these only partly. This annex highlights key issues and policy proposals for
implementation. Unless policymakers take the lead in addressing the issues, Lithuania risks
further forgoing its potential for innovation and increased competitiveness as well as missing out
on the important opportunities for innovation arising from membership in the EU.
No time to lose
6. While the importance of an effective innovation system is gradually coming to the
forefront of policy thinking in Lithuania, member countries of the European Union (including
candidate countries such as Estonia and Hungary) and the OECD have been undertaking wide-
ranging reforms across a broad spectrum of innovation policies to gear up and improve
competitiveness.
Opportunities
7. Lithuania is gearing up for the European Research Area, but there is a real likelihood that
the current innovation system will be unable to make good use of networking opportunities and
resources available.
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Challenges
8. Lithuania’s low ranking on the World Economic Forum’s Technology Subindex (41st out
of 75 countries) is also reflected in the European Innovation Scorecard 2002 developed by the
European Commission to benchmark strength and weaknesses of national innovation
performances at the aggregate level (table A3.1).
Table A3.1: European Innovation Scoreboard 2002 – Candidate Countries
9. The effective functioning of Lithuania’s innovation system is constrained by a large
disconnect between enterprises and the R&D community, unsatisfactory R&D output (in terms
of patents and publications), an overemphasis on public-sector-driven R&D, the aging of the
Lithuanian research population and associated brain drain, a large number of R&D-related
institutions, and low levels of funding and outdated funding approaches.
Disconnect between enterprises and the R&D community
10. Enterprises, worldwide, are the drivers of innovation. Overall, however, Lithuanian
enterprises spend little on R&D. Lithuania’s business expenditure on R&D amounts to only 0.07
percent of GDP (or 12 percent of Lithuania’s total expenditures on R&D), compared with 1.28
Indicator EU CC
Mean
1
BG CY CZ EE HU LT LV MT PL RO SI SK TR
New S&E grads 10.26 6.60
4.73
-- 4.00
6.83 4.49 9.35 5.52 6.12
5.90 -- 13.10 --
5.47
Population with tertiary education 21.22 17.50 21.29 26.76 11.59 29.42 13.96 45.03 18.15
7.00
11.73 9.97 14.12 10.66 8.00
Participation in life-long learning 8.50 5.40 -- 3.10 -- 5.30 3.00 3.70
16.30 9.70
5.2 1.10 3.70 --
3.20
Employment in med/high-tech
manufacturing
7.57 5.40 5.50 1.03 9.16 4.79 8.80 3.18 1.72
7.14 7.54
4.91 8.74 6.75
1.19
Employment in high-tech services 3.61 2.60 2.71 1.83 3.22 3.38 3.24 2.10 2.19
3.06
-- 1.43 2.71 3.03 --
Public R&D/GDP 0.67 0.41
0.41
0.20
0.54 0.53 0.45 0.53 0.29
-- 0.45 0.10 0.68 0.24
0.53
Business R&D/GDP 1.28 0.32
0.11
0.05
0.81
0.15 0.36
0.07 0.20
-- 0.25 0.30 0.83 0.45
0.27
All EPO patents/population 152.7 7.10 3.2 6.00 12.10 6.90 16.10 1.10 2.50 -- 2.30 0.90 20.60 5.90 --
EPO high-tech patents/population 27.80 -- -- -- -- --
1.51
-- -- -- -- -- -- --
0.06
USPTO high-tech patents/population 12.40 0.50 0.12 -- 0.58 -- 0.30 0.54 -- 2.60 0.05 0.04 0.50 0.19 0.02
SMEs innovation in-house 44.00 -- -- -- --
33.20
--
51.00
--
15.40
4.10 -- 16.90 --
24.6
SMEs innovation co-op 11.20 -- -- -- --
13.00
--
12.00
--
4.90
-- -- -- --
18.0
Innovation expenditure 3.70 -- -- -- --
2.40
-- -- -- -- 4.10 -- 3.90 -- --
High-tech venture capital/GDP 0.24 0.27 -- -- 0.02 --
0.04 0.90 0.62
-- 0.05 -- 0.15 -- 0.13
New capital 1.73 -- -- -- -- -- -- -- -- 3.68 0.23 -- -- -- 0.69
New-to-market prod 6.50 -- -- -- --
6.00
-- -- --
37.8
-- -- -- --
9.40
Home internet access/household 37.70 -- -- -- --
9.80 2.60
3.00
2.00
-- 8.00 -- 24.00 -- --
Home internet access/population 31.40 14.80 7.50 22.10 13.60 30.10 14.80 6.80 7.20 25.40 9.80 4.50 30.0 16.70 3.80
ICT expenditures/GDP 8.00 6.0 3.80 -- 9.50 9.60 8.90 5.90 7.90
4.10
5.90 2.20 4.70 7.50 3.60
Manufacturing hi-tech value-added share 10.10 --
5.90
-- -- --
14.85 22.35
--
22.44
-- -- -- --
6.55
Inward FDI/GDP 30.30 31.3 26.4 23.7 42.60 53.20 43.40 20.60 29.10 84.70 21.30 17.70 15.50 24.20 4.70
Source: European Commission. Commission Staff Working Paper SEC(2002) 1349 9.12.2002. See also:
www.cordis.lu/trendchart
Data in
italics
are national estimates collected from the Group of Senior Officials in Innovation Policy.
EU: European Union; CC: Candidate Countries; BG: Bulgaria; CY: Cyprus; CZ: Czech Republic; EE:
Estonia; HU: Hungary; LT: Lithuania; LV:Latvia; MT: Malta; PL: Poland; RO: Romania; SI: Slovenia;
SK: Slovak Republic; TR: Turkey
S&E: Science and Engineering; EPO: European Patent Office; USPTO: United States Patent and
Trademark Office; ICT: Information and Communication Technology; FDI: Foreign Direct Investment; “- -
“: not available
1
Unweighted average for countries for which data are available. Available data are
insufficient for calculating weighted means.
- 64 -
percent of GDP for the European Union and 0.32 percent for EU candidate countries on average
in 2000.
2
11. Demand for R&D services and innovation seems low, in part, because companies are
struggling to survive in the current business environment. Only 4 percent of Lithuania’s R&D
personnel are employed in the private sector. Nor do enterprises interact much with the national
science system. According to a survey carried out by the Department of Statistics in 1999, less
than 4 percent of enterprises develop new technologies in cooperation with public research
institutions; the vast majority develop new technology in-house (54 percent), with other
enterprises (9 percent), or with foreign specialists (23 percent) or acquire it through licenses (10
percent).
12. The prevailing view held by Lithuanian business representatives is that the country’s
R&D institutions provide little commercially relevant output (which contrasts with their positive
assessment of individual researchers, who are often hired by enterprises to apply new
technologies). The almost complete disconnect between the research and business communities,
compounded by low demand from enterprises for innovation, does not augur well for Lithuania’s
future innovation performance and competitiveness.
Unsatisfactory R&D output
13. Publications, citations, patents, and licenses are commonly used indicators of R&D
output in most OECD and other industrial countries. But only anecdotal information is available
on Lithuanian output indicators. The number of articles published in scientific periodicals per
researcher in highly developed countries usually comes to 0.5 a year; according to data available
for 2000, this indicator in Lithuania was as low as 0.05, which, roughly speaking, implies that in
Lithuania the “productivity” of researchers is a tenth of the average in highly developed
countries. The Lithuanian patent office received 86 patent applications in 1999 (134 in 1998)
from Lithuania and 71 from other countries. In 1999 it granted 93 patents to Lithuanians and 67
to foreigners.
Overemphasis on public-sector-driven R&D
14. Gross domestic expenditure on R&D in Lithuania has been growing continually since
1997
3
. Total funding for R&D was LTL 224.9 million in 1997, LTL 250.7 million in 1998,
2
European Commission, 2002 European Innovation Scorecard.
3
Gross domestic expenditure on R&D is the conventional input measure for R&D. Used in the OECD countries
since the late 1960s, the indicator measures investment in R&D, covering public and private expenditures and their
financing. Financing can be used for basic and applied research and direct product and process development.
Human capital investments can also be estimated by the number of researchers engaged in R&D activities.
The main source of information on R&D inputs in Lithuania is R&D statistics compiled by Statistics Lithuania. The
Lithuanian Science and Technology White Paper draws attention to the fact that statistical data on R&D in Lithuania
are rather poor. Available statistics on Lithuanian R&D activities are often incompatible from one institution to the
next as well as for purposes of international comparison. In principle, in compiling data on R&D statistics,
Lithuania applies the OECD Frascati Manual, which has been in use in OECD countries for decades. But in fact
- 65 -
LTL 224.6 million in 1999, and LTL 277.6 million (or around $70 million) in 2000. This
amounts to about $17 per capita, compared with $681 in the United States and $222 in Italy.
4
Lithuania’s gross domestic expenditure on R&D amounted to around 0.6 percent of GDP in 2000
(up slightly from 0.57 percent in 1997). This compares with 2.3 percent of GDP for the OECD,
1.9 percent for the European Union, and 0.7 percent for the EU candidate countries on average.
Even if the actual resources devoted to R&D in Lithuania are greater than the official data
suggest, the country’s R&D expenditure is much lower than the EU or OECD average.
15. In Lithuania the state budget provides the bulk of the funding for R&D, around 88
percent, for research performed almost exclusively by public institutions (universities and state
research institutes). By comparison, the share for the OECD is 29 percent, for the EU, 34
percent, and for the EU candidate countries, 56 percent on average.
16. In 2000 a total of 14,592 people were involved in R&D in Lithuania, of which 8,841 (61
percent) were in the higher education sector; 5,077 (35 percent) were in the government sector,
mainly in state research institutes; and 674 (4 percent) were in the business enterprise sector.
The share of researchers in total R&D personnel was 69 percent, and more than half hold a PhD.
Only 44 (0.8 percent) of researchers with a PhD worked in the business enterprise sector.
17. The major part of Lithuanian R&D capacity is concentrated in higher education and other
government institutions. In 2002 there were three types of public research institutes in
Lithuania:
• University research institutes, established to carry out research of high international
quality. They focus mainly on basic research and provide the research basis for
university education, for doctoral studies, and for improving university personnel’s
scientific qualifications.
• State research institutes, established to carry out long-term research of international
quality important for the Lithuanian economy and culture and for international
cooperation—research involving groups of specialized scientists and requiring data
collection and specialized experimental instruments. State research institutes together
with higher education institutions help to train specialists. Guidelines for research by
state research are provided by the Ministry of Higher Education and Science.
• State research establishments, which aim to carry out applied research and
experimental development activities important for the Lithuanian economy and
culture and for the development of industry, state government, and other institutions.
• The higher education sector comprises 10 universities, 5 academies, 7 state colleges,
9 nonstate colleges, and 5 state research establishments. Other government
there are still several differences in basic definitions and classifications. Therefore, the data are not necessarily
reliable, particularly for international comparisons.
4
Lithuanian Science and Technology White Paper (p. 56).
- 66 -
institutions include 26 state research institutes, 18 state research establishments, and
25 other R&D entities. Nearly all research institutions are concentrated in the five
largest cities: Vilnius, Kaunas, Klaipeda, Siauliai, and Panevezys. By comparison,
only some 60 enterprises in Lithuania carry out R&D activities.
Aging of researchers and brain drain
18. Among the acute problems in the state research and higher education institutions is the
age of researchers. More than 60 percent of scientists are over 50 years old, and 25 percent are
over 60. To satisfy minimal regeneration needs, it has been estimated that 300-400 young
scientists need to become researchers working in R&D. But only 150 doctoral degrees are
granted each year. In addition, younger scientists and even more senior ones go to the West,
because salaries in Lithuania are very low, scientific careers are arduous, and the gap in salaries
between academia and industry is large. A researcher often has to have several income sources
to pursue research in public institutions.
Large number of public institutions involved in R&D
19. The large number of public institutions involved in R&D results in too little decision-
making and policy implementation. Figure A3.1 categorizes some of the major players in the
Lithuanian innovation system into three groups according to the role they play: policy decision-
makers, policy support and implementation agencies, and the target organizations.
Figure A3.1: Institutional Setting for R&D in Lithuania
Seimas (Parliament)
Government
Science
Council of
Lithuania
Ministry of
Education and
Science
Ministry of
Economy
Other
ministries
Higher
Education
Council
Business
Development
Council
Universities
Research
Institutes
Innovation
centers and
science parks
Lithuanian
Development
Agency
Business Enterprises
Policy
Decision
Makers
Policy Financing
and
Supporting
Organizations
Target
Organization
Local
Government
- 67 -
• The Ministry of Higher Education and Science is in charge of preparing and
executing government R&D policy. It analyzes the application of laws and
government decrees related to higher education and R&D, prepares drafts of by-laws,
coordinates and implements international programs in education and R&D, and
makes proposals for the establishment, reorganization, and cessation of higher
education and research institutions.
• The Ministry of Economy is in charge of preparing and executing government policy
for industry, energy, foreign and int ernal trade, and ecology and waste management.
The Lithuanian state budget funds for industrial policy implementation are allocated
among three major programs: a program to strengthen industrial competitiveness
(including subprograms such as the Innovation in Business Program, National Quality
Program, and Sustainable Industrial Development Program), the Export Promotion
and Development Strategy Implementation Program, and the Small and Medium-Size
Business Development Implementation Program. The priorities of these programs
are set out in the National Development Plan. This plan and the national programs
form the basis for industrial policy implementation.
• The Science and Technology Council was recently established under the prime
minister to coordinate innovation policies among government ministries and the
research community. There is limited private sector representation. The council
meets irregularly and has no secretariat to support its policy formulation and
coordination role.
• The Science Council of Lithuania serves as a scientific adviser and consultant to the
Seimas (Parliament) and the Government in solving strategic issues of research and
higher education. It analyzes the situation in the research and higher education
system in Lithuania, makes proposals and drafts decrees for the Department of
Science and Higher Education, puts forth proposals about the right of institutions to
confer doctoral degrees, supervises the award of research degrees and academic titles,
and provides notification of doctoral degrees issued for Lithuanian citizens abroad.
• The Higher Education Council advises the Ministry of Higher Education and Science
on issues of strategic development in higher education. The main tasks and functions
of the council are to analyze and evaluate the development strategy for higher
education in Lithuania, advise the Ministry of Higher Education and Science, develop
proposals for the ministry, and draw conclusions on issues relating to the
development and enhancement of higher education.
• The Lithuanian Academy of Sciences is an autonomous, state-subsidized scientific
establishment bringing together distinguished Lithuanian scientists as well as foreign
scholars whose activities are related to Lithuania. The academy serves as an
independent advisory body to the government on scientific, educational, cultural,
economic, technical, and social advancement.
- 68 -
• The Lithuanian Center for Quality Assessment in Higher Education was founded to
maintain a high level of higher education. The center evaluates new study programs,
analyzes data received after self-evaluations by institutions, analyzes the situation in
particular institutions, and makes proposals for the Department of Science and Higher
Education.
• In addition to these entities, several other public or semipublic authorities play a role
in shaping the Lithuanian R&D and innovation system. These include the Lithuanian
University Rectors’ Conference, the Directors’ Conference of Lithuanian Colleges,
the Conference of the Chairmen of the Senates (Councils) of Institutions of Higher
Education and Science in Lithuania, and the State Research Institute Directors’
Conference.
• The Lithuanian Innovation Center is a nonprofit organization whose main purpose is
to encourage and develop the scientific potential of Lithuania, preserve scientific
traditions, increase the economic competitiveness of the country, create new
workplaces in innovative enterprises, and ensure the successful integration of
Lithuania into international markets. The Science and Technology Park is a nonprofit
organization formed by three scientific institutions to manage the establishment of
innovative new companies based on promising technology and to provide an interface
between academia, research work, and the commercial development of products and
processes. The Institute of National Development is a nongovernmental, nonprofit
organization whose purpose is to seek the most appropriate solutions in key areas of
state development, building proposed solutions around political willingness,
practicability, and scientific competence. The Northern Technology Park in Vilnius,
created by the city and by Vilnius University, is an example of a technology park with
biotechnology companies.
Promising steps in international research cooperation
20. In 1992, in pursuit of integration into international science and technology development
programs, Lithuania joined the European research and development cooperation program,
EUREKA, and the European cooperation in science and technical research program, COST,
enjoying the same rights as an EU member state. Between 1992 and mid-1999 Lithuanian
research and higher education institutions and enterprises participated in only four EUREKA
projects. But over the last two years Lithuanian institutions began implementation of 12 other
research projects, including three that they are co-coordinating. The most active participants
among research and higher education institutions are the Institute of Physics and the Kaunas
University of Technology. Since 2000 Lithuanian research and higher education institutions
have become actively involved and have participated in 24 activities under the COST program.
21. On October 1, 1999 Lithuania was admitted as a participant in the European Union’s
Fifth Framework Program for research and development. This was the first international
cooperation program in which Lithuanian scientists took part on an equal basis with colleagues
from the European Union. Lithuanian scientists took an active part in submitting projects in
biotechnology, information technology, and environmental protection. A few small and
- 69 -
medium-size enterprises and organizations involved in innovation activity have also taken their
first steps in EU cooperation. As of April 2002 Lithuanian institutions had submitted 470 project
proposals, of which 131 had been approved. The gross success rate of participation in the
program is 28 percent, a high rate compared with that for other EU candidate countries
participating in the Fifth Framework Program.
22. Lithuania has signed intergovernmental agreements on cooperation in education, science,
technology, and culture with many European and Asian countries as well as with the United
States. Cooperation contacts have been established on the basis of intergovernmental
agreements and agreements among institutions that coordinate education and science. Such
contacts provide good possibilities for becoming acquainted with the education and R&D
systems in other countries.
Outdated R&D financing instruments
23. Besides low levels of R&D funding, numerous other funding issues persist. The quality
of spending has not adjusted to the requirements of a market economy. A major part of
government financing consists of institutional funding for R&D institutions—lump-sum budget
transfers provided to institutions on a per capita (employee or student) basis—designed to
maintain existing staff, facilities, and equipment. Only a small fraction of government financing
has been allocated to support what the Government itself has defined as its priority objectives for
research. Moreover, R&D funding on the basis of competitive grant selection procedures has
been modest by any standards. Program or project funding is close to zero in Lithuania; this
compares with a share of program/project funding of R&D spending in EU member countries of
22 percent on average, and, for example, 41 percent in Finland, 40 percent in Denmark, 33
percent in Sweden, and 31 percent in Germany.
5
Absence of an innovation policy framework
24. Not only the institutions that perform R&D are fragmented and isolated in Lithuania; so
is the public administration that deals with R&D and innovation. In government R&D the
dominant player in Lithuania is the Ministry of Higher Education and Science. It controls a
major part of the financial and other resources and is responsible for most or all of the policies
for R&D and for the implementation of these policies. The Ministry of Economy and some other
ministries have played a growing role in relation to innovation and particularly to industrial
innovation, but so far this has been reflected in interministerial cooperation and decision- making.
25. The important lesson to learn from the experience of more advanced countries is that the
number of policy issues with strong links to innovation is increasing and that the boundaries
between policies aimed at promoting innovation are becoming—and must become—unclear.
That is why in many countries the old term science and technology policy or research policy has
been replaced with innovation policy.
26. Thus Lithuania has a growing need to redefine and clarify the division of existing tasks
and responsibilities between the key ministries with a stake in R&D and to increase the links
5
European Commission, Benchmarking of National Policies, 2002.
- 70 -
among different actors. The policy framework for innovation should complement broader
structural reforms in many fields by focusing on several key objectives: building an innovation
culture, enhancing technology diffusion, promoting networking and clustering, leveraging
research and development, and responding to globalization.
A focus on basic science, not applied
27. In recent years governments in most EU countries have shifted their attention toward
funding more application-oriented activities. In Lithuania the focus of science and education
should unquestionably be shifted from basic research (keeping in mind that not all "basic"
science in Lithuania is basic science as that term is defined in OECD countries) toward
economically relevant applied research. But in small countries like Lithuania there is also a need
for public investment in basic research and in industrial technologies. The development of basic
research can and must be goal oriented, targeting economically and socially beneficial fields of
technology, building up creative research capabilities, and securing the basis for technology
innovation. (This is also true in larger countries.) This requires linking investments in basic
science with stricter conditions and more concrete performance measures, as is now done in
larger OECD countries.
Weak R&D evaluation procedures
28. As resources grow and individual policies, organizations, programs, and structures have
increasing impacts, a natural consequence is that governments see an increasing need to more
clearly evaluate the effectiveness of these mechanisms. In Lithuania until now, R&D evaluation
has been minor, and the country has been dependent on foreign evaluators. R&D evaluation
should be raised as an important issue, and more permanent evaluation practices developed. In
addition, the increased complexity and the dynamics of the innovation system require a better
understanding of major developments and trends in the national innovation system and in its
environment. This requires focused attention from policymakers, and a sufficient number of
specialists studying national innovation systems and producing information and data on such
systems for use in policymaking.
Regional dimension
29. Regions and localities within countries have become increasingly important platforms for
innovation policy. This is true of Lithuania as well. The main idea, an idea that has already been
applied, for example, in the Vilnius and Kaunas regions, is that measures should be adapted to
the structures and potential of individual regions (box A3.1). The concepts of clustering, science
parks, technology centers, and incubators are good examples of regional development
approaches, though they can also be developed at the national level, as has been done in Finland.
- 71 -
Box A3.1: Vilnius—a Knowledge Economy City
The local government in Vilnius is supporting knowledge-based initiatives and increasing the city’s
attractiveness by providing tax incentives and increasing land availability. Currently the city is
proposing a reduction in the tax on commercial buildings to support high-tech companies and to
encourage them to relocate in the technology parks rather than the center of the city. Vilnius is
determined to overcome such threats as brain drain, lack of adequate intellectual property
protection, and a growing digital divide by continuing with aggressive reforms aimed at effecting a
transition in Lithuania from a labor-based economy to a more progressive, knowledge-based one.
Vilnius provides a good example of a clear strategic vision for a knowledge economy and a plan for
information technology development, one that could be used as a model for other major cities in
Lithuania. Under the Vilnius City Strategic Action Plan for 2002-04, there is much interest in
developing cluster-based economic growth activities. The priorities of the plan include increasing
competitiveness, improving the marketing of the city (at the international level) , developing a
modern, knowledge-based economy, and fostering a closer relationship between the city and the
university.
To ensure successful implementation of the knowledge economy strategy, a civil society forum—
the Knowledge Economy Forum—was established in 2001 to ensure that all major stakeholders are
included in the decisionmaking process. The forum, which addresses major issues and challenges in
the Lithuanian economy, brings together politicians and representatives from universities, a few
NGOs, and prominent businesses in high-technology and biotechnology industries. In addition, the
Knowledge Economy Forum, the local government, and Vilnius University have signed a
memorandum of understanding to promote the development of Vilnius’s knowledge economy. This
has produced such projects as Sunrise Valley (based on the Silicon Valley model), aimed at
increasing the transfer of technology between universities, industries, and municipalities in the
technology parks.
To increase civic engagement and strengthen the monitoring of the quality of the business
environment in Vilnius, the government is improving access to the Internet, making weekly
broadcasts on local television, submitting articles to the Lithuanian national newspaper on
knowledge economy initiatives, and organizing monthly breakfasts between the mayor and local
business owners.
Source:http://www.vilnius.lt/.
- 72 -
Challenges in the business sector
30. Small and medium-size enterprises play a crucial role in the Lithuanian economy. At the
end of 2000, 99.4 percent of Lithuanian enterprises had fewer than 250 employees, and 95.6
percent had fewer than 50. Successful innovation systems depend critically on networking
among the domestic and foreign business and academic communities and on cooperation with
and support from the government in the form of a conducive business environment and legal
framework, tax and other incentives, and participation by the private sector in formulating
policies and strategies. To turn ideas, research, and technology into commercial applications
also requires entrepreneurs, management talent, and financing. Medium-size and larger firms,
particularly those backed by foreign investors, have an advantage over small firms because they
often have strong links to sources of knowledge and access to commercial banks and the equity
market for financing.
31. Both large, well-established firms and small firms have a role to play in developing and
commercializing new technologies. Firms like Intel, CISCO, Microsoft, and Nokia have
pioneered new technologies, but their success has led to market dominance, which can have a
negative impact on small "go it alone" firms. Thus subcontracting (between large international
firms and smaller domestic firms) has important potential for firms in countries like Lithuania—
and has played an important role in Ireland and Israel. Box A3.2 describes a good example of
subcontracting, between Vilniaus, Vingis and Samsung.
Box A3.2: Vilniaus Vingis—Using Subcontracting
to Integrate into Global Networks
Vilniaus Vingis is a Lithuanian company that has successfully integrated into global production and
distribution networks through subcontracting. The company is one of the largest manufacturers of
electronic components in Central and Eastern Europe. Its main products include deflection yokes for
color picture tubes and flyback transformers for television sets and monitors. Yokes account for about
85 percent of its total output.
Samsung purchases about 37 percent of the yokes produced by Vilniaus Vingis. It uses the yokes in
producing television tubes that then become part of the television sets assembled by Samsung and
Philips. Another 30 percent of the yokes are sold to a Lithuanian company, Ekranas, where they
become part of assembled television sets sold abroad. Ekranas itself accounts for 4 percent of
Lithuania’s total exports to Western Europe. Ten percent of Vilniaus Vingis’s output is exported to
Philips, Barcelona, and 7 percent to Philips, England. Another 10 percent is shipped to Thomson
Polkolor in Poland, where it becomes part of television tubes sold all over the world through
Thomson’s distribution network.
Source:http://www.vingis.lt/.
- 73 -
32. Innovations also take place in small start-up companies that find it difficult or impossible
to access financing and that lack access to networks that can provide management and
entrepreneurial knowledge and talent. Such companies therefore need to rely on government-
backed financing and technical assistance programs (often supported by international donors)
and private equity financing with embedded technical assistance and management talent.
33. Small companies and foreign investors in particular depend on a favorable business
environment to grow and innovate. Several surveys of the business environment have been done
in recent years by the Foreign Investment Advisory Service,
6
by the World Bank, and by the
European Bank for Reconstruction and Development and World Bank together.
7
These surveys
indicate that access to capital is now less of a constraint, while access to knowledge and a skilled
workforce is becoming an increasing concern. In the most recent World Bank survey, in 2001,
firms reported increasing flows of foreign knowledge, and a large share of firms (27 percent)
indicated that access to markets and technology embodied in foreign investments was the most
important need. Only 16 percent put the need for more capital first. Ineffective and intrusive
business regulations and licensing, tax regulations and enforcement, and deficiencies in the legal
system are still major concerns.
34. As EU accession approaches, the Lithuanian business community faces major challenges
in adapting to EU regulations and standards. This adaptation will require significant investments
in retooling and process and management change to meet health, safety, environmental, and
other standards. But it also provides an opportunity to introduce innovative and more
competitive technologies, processes, and management practices. Government polices and
programs need to support this retooling as well as knowledge transfer and networking among
firms and the research and education communities.
Innovation in the enterprise sector
35. All enterprises innovate to stay competitive and to grow. In most countries technology
enterprises are the most innovative. Lithuania is no exception. The largest and fastest-growing
companies in Lithuania’s technology sector are in telecommunications and information
technology, despite the downturn experienced elsewhere in these industries. Beyond these two
key sectors, Lithuania has developed important capabilities in areas with potential for higher
growth, including biotechnology, pharmaceuticals, and lasers, optics, and other medical devices.
36. Telecommunications. A critical platform for the economic and social development of the
country, telecommunications represents the largest technology-based sector of the economy.
This market grew by an estimated 26 percent during 2001, reaching total revenues of around 836
million euros.
8
Four major players are active in this market, although the incumbent Lithuanian
Telecom (privatized in 1998) remains the largest, with nearly half the total revenues.
6
Foreign Investment Advisory Service, “Lithuanian Administrative Barriers,” 1999.
7
World Bank, “Lithuania Country Economic Memorandum,” 7 October 2002.
8
Estimates of telecommunications and information technology markets are from InfoBalt.
- 74 -
37. Mobile telephony has experienced rapid growth in recent years, with revenues increasing
45 percent in 2001, to around 226 million euros. Strong growth in the mobile segment is
expected to continue for several more years as penetration begins to plateau.
38. Revenues from Internet services increased by an estimated 65 percent in 2001, to around
40 million euros.
39. Information technology. Hardware and software companies have also experienced strong
growth in recent years. Total revenues of the information technology sector grew by an
estimated 30 percent in 2001, to around 260 million euros—despite the global downturn in the
sector. One indicator of information technology penetration is the rising use of personal
computers, whose sales grew by more than 50 percent during both 2000 and 2001. The installed
base of personal computers is now estimated at 280,000, a level of penetration that should permit
continued strong growth over the medium term as the country converges with higher- income
countries in the region.
40. The Lithuanian information technology sector is following a pattern similar to that in
other countries: local firms start out as resellers for international companies and then begin to
export services to industrial country markets and to expand their core business to other
developing country markets. In Lithuania local firms are beginning to record success in
exporting programming services to the Nordic countries—reflecting a high skill base and
competitive local wages. In addition, international information technology firms are considering
Lithuania as a base for offshore services to the Nordic region, following the example of Estonia.
41. Although not endowed with information technology on a scale of other countries (such as
India), Lithuania has the potential to develop a modest information technology services industry
for offshore clients.
42. Pharmaceuticals and biotechnology. Beyond information technology and
telecommunications, pharmaceuticals and biotechnology are the most dynamic and active of
Lithuania’s technology-based industries. Two leading firms account for most of the revenues
and exports. Total revenues for the sector are estimated at 20-25 million euros, with annual
growth of 15-20 percent reported.
43. Lasers and optics. Lithuania has developed a small cluster of firms in lasers and optics,
the product of military-related enterprises from the Soviet era. Around 15 firms are currently
active in this sector, with 3 larger firms accounting for the largest share of revenue. Total
revenues for the sector are estimated at 15-20 million euros.
44. Information-technology-enabled services. A new category of business known as
information-technology-enabled or remote services has begun to develop in Lithuania. This
sector has large growth potential in economies with skilled workers—particularly where
populations have strong English and other foreign language skills. Customer service centers are
typically the first area to develop, followed by a variety of back office operations (accounting,
finance, benefits). Lithuania has a small but growing presence in this market. A promising
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indicator has been the recent acquisition of a small local call center by an international
technology company. Following acquisition, the new owner plans to expand the center rapidly.
Global value chains
45. Lithuania is increasingly participating in global value chains—the division of functions in
production and marketing among cooperating firms working across national boundaries (boxes
A3.3 and A3.4).
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Box A3.3: Moving Up the Value Chain in the Apparel Industry
Competition from cheap producers in developing countries in the textile and apparel industry has been
increasing the pressures facing firms in industrial countries. While relatively low wages now ensure
the competitiveness of transition economies in this industry, preserving the competitive edge may
become increasingly difficult as wages continue to rise. Thus rather than fighting an uphill battle of
competing purely on costs, transition economies would benefit from repositioning themselves into a
higher value added segment of the industry.
The apparel industry can be thought of as having three tiers: the lowest value added segment—
standard products such as generic white dress shirts; the middle value added segment—time-sensitive
products with some fashion content; and the highest value added segment—top fashion designer
clothing.
The highest profits are to be made in designing and marketing rather than in apparel production. But
it may take time for producers in transition economies to build a reputation that will allow them to
supply the second tier of the market under their own brand names. An alternative strategy for these
producers is to move from supplying the lowest value added segment to supplying foreign retailers in
the middle tier.
Among the recent developments in the middle tier of the apparel industry are product proliferation and
shorter product cycles, which are reflected in quickly changing styles and product differentiation.
These developments have contributed to general demand uncertainty for both retailers and
manufacturers, making demand forecasting and production planning more difficult.
In a world where producers must supply an increasing number of products containing time-sensitive
fashion elements, speed and flexibility have become crucial. Rather than making planning and
production decisions based on forecasts and guesses made months in advance of a selling season,
firms now receive ongoing orders reflecting actual consumer purchases. Thus suppliers must be able
to provide frequent deliveries, in smaller quantities and with diverse products. Moreover, suppliers
are expected to do so with far greater accuracy in filling orders and meeting delivery standards than in
the past. In short, the retail revolution has altered the basic rules of global competition for the apparel
and textile industry.
To participate in this new system, a supplier must be able to:
• Label, track, and respond to product orders in real time on the basis of style, color,
fabric, and size.
• Exchange (send and receive) information electronically on the current status of a
retailer’s products.
• Provide goods to a retailer’s distribution center that can be efficiently moved to
stores—that is, containers marked with bar codes indicating the contents and
shipments of products ready for display in retail stores.
Proximity to the European Union gives transition economies a great advantage and makes them
primary candidates for becoming suppliers to middle-tier apparel retailers. Moving up requires some
investment in both physical and human capital. Yet as the example of the furniture producer Vilniaus
Baldu Kombinatas indicates (see box A3.4), this is not beyond the reach of Lithuanian companies.
While following this route carries some risks, not doing so may be an even more uncertain path.
Source: World Bank, “Lithuania Country Economic Memorandum” (2002), based on Abernathy and others
(1999).
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Box A3.4: Vilniaus Baldu Kombinatas—Working Closely with a Multinational
As the case of Vilniaus Baldu Kombinatas (VBK) demonstrates, establishing commercial ties with a
multinational corporation may be a successful strategy for integrating into a global distribution network.
Established as a small workshop more than a hundred years ago, VBK has since become one of the
largest furniture producers in Lithuania. The company produces both home and office furniture and has a
retail network that sells about 7 percent of its output. Since the Lithuanian furniture market is too small to
support a company the size of VBK, the firm has to rely on exports. It exports about 93 percent of its
production to Sweden, Germany, Belgium, the United Kingdom, Canada, the United States, and France.
And it sells about 90 percent of its output to the Swedish company IKEA, which in 1999 named the VBK
its best supplier in the Baltics.
The relationship between VBK and IKEA began in 1998, and the cooperation between the two companies
has been close ever since. IKEA has provided support to VBK in technology, production organization,
and personnel training. VBK is linked to IKEA’s computer system through which invoices as well as
payment and delivery information are processed. VBK is upgrading its computer system so that in the
future it will be able to receive daily information on the sales of its products in IKEA stores abroad.
Thanks to the upgraded system, orders will be placed daily rather than every few weeks as is now the
case.
While relying so strongly on one customer might be perceived as a risky strategy, VBK is not concerned
because it is one of the top 25 IKEA suppliers (among the 2,000 companies producing for the Swedish
concern). Moreover, closer technological integration with IKEA will make VBK more competitive
relative to other IKEA suppliers. VBK is the only company in Lithuania to be so closely integrated into
the IKEA system.
Source: World Bank, “Lithuania Country Economic Memorandum” (2000, vol. 2, ch. 3);http://www.vbk.lt/en/.
46. For a small country, foreign direct investment (FDI) is critical to establish a place in the
global value chain and is often an important source of technology and knowledge. A significant
share of FDI inflows into Lithuania can be attributed to the privatization of large state-owned
entities that began in 1998, and it is not known whether FDI will stay at the current levels after
the privatization programs end. Even with the privatization inflows, Lithuania has received less
FDI than most other EU accession countries. Lithuania ranks eighth (above Bulgaria and
Romania) in cumulative FDI inflows per capita during 1993-2000, with $658.
47. FDI has been clearly focused in the Vilnius region because of its modern infrastructure,
technology park, and services support structure (figure A3.2). In 2001 the Vilnius region
attracted $556 million in FDI, 53 percent of the country’s total FDI of $1.04 billion.
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Box A3.5: Ireland—Innovation through Foreign Direct Investment
Ireland has a long history of openness to FDI, dating from the 1960s. Policies for FDI have
played a major part in the country’s industrial and trading performance. In 1995, for example,
foreign-owned companies accounted for 70 percent of Irish exports. Current FDI policies are
aimed at maintaining Ireland’s position as a strategically attractive location for FDI in an
increasingly competitive and globalized environment but also at building up the capabilities of
Irish companies in such areas as technology and marketing.
The largest share of FDI has continued to go to greenfield investments or expansions rather
than mergers and acquisitions, the area of most rapid growth in other EU and OECD countries.
Investments have been attracted by a range of incentives and favorable factors in the business
environment, such as low corporate taxes and a young, well-educated workforce. FDI tends to
be concentrated in knowledge sectors such as electronics, software, and pharmaceuticals, with
the companies involved usually selling little or nothing on the Irish market.
In the last few years there has also been rapid growth in outward FDI, with the inward and
outward flows beginning to come into balance. Outward investment is undertaken for many
purposes, such as gaining access to markets and benefiting from local research capabilities and
knowledge spillovers.
FDI has made an enormous contribution to Irish exports and employment and has brought
much-needed technology and expertise to an economy with a relatively small research base.
But most multinationals have set up and operated Irish subsidiaries that receive the bulk of their
technology from their parent corporations. The net effect of this is that the Irish economy
continues to suffer from serious weaknesses in R&D and innovation despite the inflow of many
world-class firms in nominally high-tech sectors. Whatever their deficiencies, however, the
approximately 1,000 overseas firms in Ireland still fund and perform more than 75 percent of
business R&D. By contrast, many domestic manufacturing companies continue to operate in
the vulnerable, low-tech, traditional sectors.
The government-sponsored National Competitiveness Council has recently stressed that the
fundamental drivers of the technologically advanced sectors of the economy—the core
knowledge assets in human capital, R&D and innovation, and global management expertise—
reside abroad. Thus it strongly recommends that Ireland now seek a competitive advantage by
building up its own capabilities in core knowledge assets. It notes that recent international
competitiveness benchmarking and national analysis have revealed serious gaps in Ireland’s
technological capabilities. The key aims of Irish science and technology policy are to
encourage companies to develop their own research activities, to develop a world-class research
environment in higher education and state research institutions, and to ensure a pool of high-
quality, technically literate graduates to serve the needs of these companies and to start their
own enterprises.
Source: European Commission, DG Research, Benchmarking National Research Policies: The Impact
of RTD on Competitiveness and Employment (Brussels, 2002); Ireland, National Competitiveness
Council, National Competitiveness Challenge 2001 (Dublin, 2001).
- 79 -
Figure A3.2: Foreign Direct Investment Inflows in Lithuania, 1997-2001
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
(
m
i
l
l
i
o
n
l
i
t
a
s
)
2001 2000 1999 1998 1997
Vilnius Region
Total Lithuania
Source:http://www.vilniusregion.com/research.phtml.
48. As Lithuania takes its place in global value chains, manufactured goods, machinery, and
transport equipment have increased rapidly as a share of Lithuanian imports (table A3.2). This
growth is an indication of significant investment activity and of embodied technology and
knowledge being brought into the country.
Table A3.2: Structure of Lithuanian Imports, Selected Years, 1996-2001
(percent, except where otherwise specified)
Item
1996
1998
2001
Total value (millions of
dollars)
4,558.6 5,793.7 6,281.5
Prepared foodstuffs 5.9 4.8 3.9
Animal and vegetable
products
7.3 6.1 5.8
Minerals 19.3 15.6 21.2
Base metals 6.8 6.2 5.2
Wood 0.7 1.1 1.3
Manufactured goods 57.3 64.5 60.6
Chemical products 9.4 9.2 9.2
Other manufactured
goods
29 24.6 23.2
Machinery and transport
equipment
18.9 30.7 28.2
Other 2.8 1.7 2.1
Source: Department of Statistics
- 80 -
Business environment and regulatory framework
49. Entry, operations, and innovation in Lithuania are hampered by business regulations and
administrative barriers. Business surveys have concluded that the business environment is not
conducive to innovation and that in several respects the business environment is less favorable
than that in other EU accession countries. The unpredictability of regulations, frequent changes
in regulations, and insufficient information and consultation with business are considered key
problems.
50. International surveys of corruption put the level of corruption in Lithuania among the
lowest in the EU accession countries. The World Bank and European Bank for Reconstruction
and Development conducted a Business Environment and Enterprise Performance Survey
(BEEPS) in 1999, asking enterprises to evaluate economic governance and state institutions and
to assess the extent to which the business environment creates obstacles to the growth of their
business. While the survey identified a relatively low level of state capture in the Lithuanian
economy, the level of administrative corruption—or bribes to public officials to distort the
prescribed implementation of laws, rules, and regulations—was evaluated as high. The results of
the second BEEPS (in 2002) represent a significant improvement in the business environment in
Europe and Central Asia as a whole. At the time of writing, Lithuania-specific results were not
available.
Government programs to support business innovation and small enterprise
51. The Lithuanian government’s policy for support of small and medium-size enterprises is
based on the “Small and Medium-Size Business Development Strategy until 2003,” enacted in
mid-2000, which identifies 27 actions to upgrade the legal and economic environment, facilitate
access to finance, further develop the business support infrastructure, and improve access to
advisory and training services. The main channels for this support are:
• Lithuanian Development Agency for Small and Medium-Size Enterprises (SMEDA).
SMEDA was established in 1996 as a nonprofit organization and in July 1997
reorganized into a public institution. The agency operates under the management and
supervision of the Ministry of Economy. SMEDA’s primary goal is to support small
and medium-size enterprises in increasing competitiveness and start-up business
creation.
• National Regional Development Agency. The National Regional Development
Agency is a public nonprofit institution established in 1999 and partly funded by the
state. Its shareholders also include the Lithuanian Association of Chambers of
Commerce, Industry, and Crafts; and the Kaunas, Klaipeda, Panevezys, Siauliai, and
Vilnius Chambers of Commerce, Industry, and Crafts.
• Lithuanian Development Agency. The Lithuanian Development Agency was created
to facilitate economic development through import and export promotion.
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• Regional Development Agencies. The regional development agencies function at
local level with the same responsibilities as the National Regional Development
Agency. Their integration with the local community allows greater and deeper
understanding of rural areas.
• Business Advisory Centers under PHARE. Under the EU-funded program PHARE,
many business advisory centers have been established in Lithuania. These business
support centers provide entrepreneurs with access to a wide range of services:
business consultation, training, seminars, business plan drafting, marketing, partner
research, and international projects. In addition to those supported by PHARE there
are currently five business advisory services in Lithuania.
52. As in many OECD countries, the Lithuanian government (and international donor)
programs cover support mostly for small and medium-size enterprises, ranging from technical
assistance and training to grant, loan, and guarantee schemes for investment. The worldwide
experience of such programs is mixed. Their success depends very much on the macroeconomic,
policy, and institutional environment in which they are carried out and on the effectiveness of
state and regional administrations and the level of corruption.
Finance for entrepreneurship and innovation
53. The best source of support for early-stage, high- growth firms is often investors, which
typically provide more than pure capital investment. True value-added investors provide
guidance on a range of business issues, such as marketing and strategic partners, financial
management, and general operations.
54. Given the scarcity of resources at the seed and growth stages, equity investment can
provide a good alignment of incentives between investors and management. The classic
principal-agent problem, in which the incentives facing management can conflict with the
owner’s interests, is addressed by the investors becoming actively involved in the operations of
the firm. A close relationship between investors and the company offers potential benefits to
both sides, transferring much- needed mentoring and advice while helping to reduce the risk
profile of the investment. Without a close relationship, the risks of early-stage investing escalate
rapidly. Achieving a mutually beneficial relationship between investors and firm managers is
often difficult, and works only if both sides understand the rules of the game.
55. The role of external finance changes with the stage of the company’s growth, with the
most proactive support needed early on (table A3.3). In the early stages of a company’s life,
proactive investors can add significant value by becoming directly involved in key management
decisions, providing links to markets and strategic partners, and helping to guide expansion of
the business. As the firm grows, the sophistication of the financial advice required increases and
the need for linkages to larger markets grows.
56. For the relationship between investor and entrepreneur to work well, expectations must
be aligned carefully and the legal provisions of the investment must work in tandem with the
business relations. The legal framework should support the contracting arrangements needed for
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early-stage investment relationships. In developed markets a variety of flexible and enforceable
instruments are generally used for early-stage investing. Preferred equity is the classic
instrument, as it can be tailored to give investors the required management control and ability to
exit while preserving an “upside” in equity appreciation for management. This structure works
to align the incentives of both sides to work together. Other instruments, including convertible
debt (a loan that can be converted into equity), warrants, and options (the right to purchase shares
at a future date), are also used to tailor the incentives and rights of investors and management or
employees.
57. The Lithuanian investment management industry has developed rapidly from a low base
in recent years. Though the industry was funded originally from bilateral and multilateral
institutions, the country has increasingly attracted private investors, primarily from the Nordic
countries. Eight to 10 venture funds are currently active in Lithuania, with more than $130
million in uncommitted funds.
9
These funds have approximately $55 million in committed
investments in the country.
Table A3.3: Financing Growth Companies—By Stage of Investment
Stage Typical
investment
size
Funding source Characteristics
Seed $10,000-
$500,000
“Angel”
investors
(experienced
entrepreneurs);
family and
friends
Experienced
entrepreneurs with
strong business
contacts can be the
best source of funding
at this stage
Early $500,000-
$5 million
Venture capital
funds
Mentoring and
business contacts
provided by funding
source continue to be
important
Expansion More than
$5 million
Venture capital
funds, other
private equity
funds, banks
International business
relationships become
more critical
Exit Strategic partner,
initial public
offering on stock
market
Without successful
exits, no new
investments will be
made
9
All funds identified were pan-Baltic funds, with the exception of Vilnius Bank Risk Capital.
- 83 -
58. Seed stage. The angel investor community, which provides the largest source of seed-
stage financing in industrial countries, is poorly developed in Lithuania. Seed-stage investors are
often viewed as predators by managers, who prefer to “bootstrap” their operations through use of
retained earnings or family funds. Bootstrapping not only can slow the expansion of the firm,
but also forces it to forgo the business relationships and mentoring that angel investors can bring.
The most important step in increasing the availability of seed-stage investment in Lithuania
would be to improve the mutual trust between angel investors and companies—through
networking opportunities and wider awareness of international investment practices.
59. Early stage. The financing of early-stage growth capital in Lithuania suffers from a set
of problems similar to those facing seed-stage investment. Following the seed stage, funding
from more formal channels such as venture capital funds is required. But the owner- managers of
early-stage companies in Lithuania are often reluctant to dilute their control and typically do not
perceive the potential value addition of investment groups. This perception is likely to stem
from the entrepreneurs’ lack of experience with the investment community as well as a low level
of value addition by some funds.
60. The legal framework for venture investing in Lithuania has major gaps that undermine
the ability of investors and management to create an incentive system that aligns the interests of
both parties. The legal framework for investment in early-stage companies remains
underdeveloped, allowing a very restricted set of instruments. Common equity is the only
instrument typically used in the country. The limited variety of financial instruments forces
investors to create second-best solutions that have not proved to be legally enforceable (table
A3.4).
61. At present, the local venture capital community does not see these shortcomings in the
legal framework as a major constraint. But if the Lithuanian investment industry is to mature
and attract additional capital, international legal norms for private equity investing (and the
corresponding regulatory and supervisory framework) will need to be introduced.
62. Expansion stage and exit. Only a small number of Lithuanian firms have reached the
expansion stage, in which more sophisticated financial structuring and other services are
required. Experienced service providers for this stage of a company’s growth are scarce in
Lithuania, and supplemental services may be required from international firms for a specific
transaction. In any case, many exit transactions (such as the sale of a company to a strategic
partner or an initial public offering on a stock exchange) are likely to engage international
partners—to increase exposure to export markets and the ability to build scale.
63. The legal framework also needs to allow provisions that facilitate investor exit from a
company. A major provision used in other markets to help ensure an investor’s ability to exit—
the “liquidation preference,” in which investors have rights to the proceeds of a sale prior to
management—is not possible in Lithuania. Other provisions that can facilitate exit, such as
those allowing investors to “drag along” other shareholders in the sale of the company are
allowed.
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Table A3.4: Legal Constraints to Growth Investing in Lithuania
Constraint Issue Relevance
Preference shares
(equity with a
dividend) are highly
restricted.
Preference shares lack voting
rights, have no preference in
liquidation of the firm, lose
their preferred status if the
dividend is not paid for two
years, have a dividend
capped at the government
bond rate, may constitute a
maximum of one-third of the
total shares of the company,
and cannot be issued by
companies with fewer than
100 shareholders.
This classic instrument of
venture capital investing needs
to be given great flexibility in
structuring to facilitate
contracting on issues of
compensation and risk
mitigation for investors as well
as defining provisions for
corporate governance.
Convertible debt (loan
that may be converted
into equity by the
holder) is not legally
enforceable.
This instrument is not
provided for under the
current legal framework.
This instrument is commonly
used in investing in emerging
markets and in other situations
where an exit through a
strategic sale or initial public
offering cannot be assured. It is
a basic component of the
investment framework for
growth companies,
Options for future
purchase of shares by
individuals
(employees,
management) may not
be issued by a
company.
A company cannot issue
options for future purchase
of shares.
Options form a key component
of compensation packages for
key employees in many growth
companies and could benefit
Lithuanian companies,
Warrants for future
purchase of shares by
investors (such as in
the context of a loan
agreement) are not
possible for private
companies.
Warrants for publicly listed
companies may not be
exercised beyond 12 months
of issue.
Warrants give added flexibility
to loan agreements and can
have an effect similar to
convertible debt.
Company debt
issuance is restricted.
Bonds or other forms of debt
may not be issued by a
closed joint stock company;
loans may be extended only
by a bank.
Privately issued debt can be
appropriate for an expansion-
stage company. Although
early-stage companies will
seldom meet the criteria for
debt financing (beyond a
secured credit line), the
prohibition on company-issued
debt precludes an important
instrument: convertible debt.
- 85 -
64. Successful exits drive interest in the market from all sides—and are necessary to the
health of the country’s economy and its ability to attract ongoing investment. The number of
successful exits from private equity investments in Lithuania has been small, prompting concern
from fund managers. A stronger track record in exits would clearly provide a major boost for the
investment industry; however, the relatively small number of exits is more a symptom than a
cause of the weakness of the local “ecosystem” for entrepreneurship.
Networking groups and “clusters”
65. Innovation does not occur in a vacuum. For good ideas to become viable businesses,
technologists must find ways to work with business managers and investors. Companies need to
work with one another, locally and across borders. Many countries have not yet developed
strong local networks for entrepreneurship—and remain isolated from critical international
networks. But in a growing number of countries the private sector has mobilized to create
formal and informal networking groups with great potential for impact over time. The successful
examples are led by small groups of forward- looking, dynamic individuals with ties to both the
private sector and the government (and often with academia).
66. Networking groups can undertake a variety of activities ranging from basic functions—
such as convening local and international events and gathering and disseminating information—
to more sophisticated services—such as screening company proposals for investors and
providing links to foreign and local business partners. In some cases networking groups provide
training and coaching for angel investors and entrepreneurs on how to interact with one another,
including on legal contracting issues. The main thrust of these initiatives is to build networks
and connections between individuals for mutually beneficial relationships.
67. “Clusters,” or groups of firms engaged in a similar activity or sharing a common interest,
sometimes take the networking activities a step further and pursue joint projects (incubators,
policy reform, joint marketing projects). The interest in clusters is driven by empirical evidence
that success in a given industry requires a critical mass of activity. Groups of firms in successful
industries simultaneously compete and cooperate with one another. Small, isolated firms have a
greatly reduced chance of success. The concept has received a great deal of attention in recent
years; however, attempts to build formal cluster initiatives have often been derailed by
organizational issues, overly ambitious goals, and lack of focus.
68. The international dimension to network building is central to ensuring that local firms are
“plugged in” to key relationships abroad. One route to building relationships with international
firms is through partnerships in the local market (such as with value-added resellers) that build
the capabilities and contacts of local firms. Another is to use diaspora groups. Often criticized
as “brain drain,” the emigration of skilled workers has a second face: a rich base of potential
business contacts in international target markets. In the well-known case of India, ties with
diaspora groups have proved critical to the success of the information technology industry. So
emigration is not necessarily a bad thing: talented emigrants can become customers, mentors,
and partners. But these links do not happen automatically. They can be effectively cultivated by
private groups working with government (for example, consulates).
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69. Lithuania has made important efforts in building local and international networks in
support of entrepreneurship, particularly in the information technology sector. InfoBalt is
undertaking some of these tasks for the information technology industry, organizing conferences
and expositions and input to regulations and public policy. In addition, several cluster projects
are under way to link universities with the business community in Vilnius and Kaunas. The
Knowledge Economy Forum serves as a talking shop for the established technology companies
in the country, with representation from the laser, telecommunications, information technology,
biotechnology and pharmaceutical, and other sectors.
70. A major gap in the local environment is the lack of strong angel networks for mentoring
and investing in seed- and early- stage companies. The country’s relatively brief experience with
a market economy has produced only a small pool of potential (and actual) angels. Moreover,
firms remain suspicious of outside investment—because of the firms’ own lack of sophistication
and the poor reputation of many investors. Business managers in the country are often drawn
from scientific or academic backgrounds and thus lack deep business experience. And firms
often develop mentoring relationships with academics rather than experienced businesspeople.
71. Angel networking groups can help to jump-start relationships between firms and
investors by clarifying the appropriate roles for both sides. Inclusion of diaspora groups in angel
networks is another dimension that should not be overlooked.
72. The limited interaction of early-stage firms with experienced entrepreneurs is also
evidenced by several of the university incubation programs. Without a base of experienced
advisers from the business world to provide guidance to client firms, these incubators run the risk
of becoming pure real estate operations with little value addition.
Intellectual capital
73. Intellectual property forms a key source of competitive advantage for firms in the
technology sector. For a few select firms at the high end of the technological spectrum, “hard”
intellectual property (formally documented intellectual property such as patents and copyrights)
is critically important. For a far broader group of firms, however, “soft” intellectual property
(trade secrets, proprietary business processes) is the primary value-driver.
74. A firm’s initial stock of intellectual capital needs to be continually refreshed and
upgraded to maintain its value in the marketplace. In- house research and development,
outsourcing to contract research organizations, and collaboration with universities are potential
sources of intellectual capital for a firm. But the more common sources of intellectual capital for
a broader range of firms include learning by doing (for example, developing a proprietary
solution for one client and producing variations for others), continual innovation through internal
knowledge management and quality programs, and ongoing training and education of
employees.
75. The framework for protecting formal or “hard” intellectual property in Lithuania is weak
but improving. Copyright enforcement has posted the strongest gains. According to industry
sources, software piracy has declined from 95 percent of all software utilized to 75 percent in
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recent years. Although the gains are due in large part to increased enforcement by the
Government, software vendors have made progress through partnerships with local hardware
vendors.
76. The legal framework and enforcement are not viewed as sufficiently strong, serving as a
barrier to foreign investment and growth of local firms.
Policy Issues and Proposals
Defining innovation policy in Lithuania
77. Issues. Current policies and institutions do not sufficiently reflect the importance and
role of innovation as a primary source of competitiveness on the world market. A White Paper
on Science and Technology has been prepared, but little action has been taken and the actions
that have been are not fully consistent with the paper. It is too early to evaluate the work of the
recently established Commission on Science and Technology, but without a permanent staff and
with only occasional meetings, this commission does not appear equipped to address the
challenges ahead. The recently adopted Law on Higher Education and Science introduces some
positive changes; overall, however, Lithuania’s innovation system is marked by an absence of
meaningful goals, priorities for financial support (beyond the enumeration of selected themes),
provision of instruments that explicitly support R&D activities, and a longer-term vision of a
national innovation system. As a result, much of the research undertaken to date is irrelevant to
the business community.
78. Policy proposal. The recently established Commission for Science and Technology
should develop into a Lithuanian Science and Technology Policy Council modeled on the policy
councils in Estonia and Finland. The key role of such a council would be to link the interests of
business with those of the research and academic communities, ensure that research and
education feed into the innovation process, and contribute to improvement in Lithuania’s
competitiveness. Council members would be nominated by the Government and include
significant representation from the business and research communities. The council would be
chaired by the prime minister alongside ministers from ministries with a major stake in R&D and
innovation (Ministry of Higher Education and Science, Ministry of Economy, Ministry of
Finance, Ministry of Interior).
79. Building on the Lithuanian Science and Technology White Paper, the central task of the
council would be to prepare and agree on the vision, goals, and policies for longer-term
development of the national R&D and innovation system; define specific policy instruments; and
regularly assess the implementation of the council’s innovation strategy and policies. This
would include an analysis of developments, needs, and objectives of the national innovation
system; the analysis would spell out policy instruments and funding tools (including R&D
funding sources and targets) for public sector research and technology development and include
recommendations for action by the private sector. To play this role, the council would need a
secretariat with full-time professional staff support.
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80. The council would build a common understanding and consensus on basic guidelines for
innovation policy, aim to enhance partnerships between the business and research communities,
and increase awareness and visibility of the role of innovation. The positive experiences with
this model—such as in Estonia, Finland, and Ireland—could guide establishment of this high-
level government institution.
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Box A3.6: Policy Coordination to Improve Governance of the Innovation System
Most European countries have a national science and technology council to provide advice to
the prime minister, the government as whole, or the parliament on strategic issues relating to
the development of R&D or, more generally, the national innovation system. For example,
Austria has the Council for Research and Technological Development; Belgium, the Federal
Council for Science Policy; Denmark, the Council for Research Policy; Finland, the Science
and Technology Policy Council; France, the High Council for Research and Technology;
Germany, the Science Council; Ireland, the Irish Council for Science, Technology, and
Innovation; the Netherlands, the Dutch Advisory Council for Science and Technology; and the
United Kingdom, the British Council for Science and Technology.
In most countries the science and technology councils have proved to be effective instruments
in preparing plans, proposals, and statements at the highest political level for the overall
development of science and technology and for innovation policy issues. The operations of the
councils have been further developed, and many countries plan changes aimed at strengthening
the councils’ position in the construction of the national innovation system.
Finland has had very good experiences with its Science and Technology Policy Council. The
council, established in the 1960s, was reorganized in the late 1980s. Chaired by the prime
minister, the council advises the government and its ministries on questions relating to science
and technology. The council is responsible for the strategic development and coordination of
Finnish science and technology policy and for the development of the national innovation
system as a whole. The membership consists of seven ministers and 10 other members well
versed in science and technology. The members are appointed by the Council of the State for a
three-year term. The Science and Technology Policy Council has a secretariat consisting of
two full-time chief planning officers.
The council has raised the status of R&D and innovation on political agendas, guaranteed
continued attention to R&D issues (even during periods of changing government), and helped
to achieve consensus on strategic guidelines relating to the growth and use of R&D resources. It
has ensured a broad commitment to the implementation of the strategic decisions. And in a
significant act after the economic recession in Finland in the early 1990s, the council initiated a
program in 1996 to increase government investments in R&D in 1997-99 by $250 million, an
increase of about 25 percent in the state’s annual research appropriations. The funds necessary
for these additional appropriations were obtained mainly from the partial privatization of state-
owned companies.
In Estonia the Research and Development Council was recently reorganized, with the idea
being to link the council firmly with the Ministry of Economic Affairs and the Ministry of
Education, just as in Finland. In addition to the council, both the central ministries in R&D
have an advisory body of their own. The council, chaired by the prime minister, consists of
ministers and high-level experts. In December 2001 the Estonian Parliament approved the
Estonian R&D strategy for 2002-06. The principles of the strategy will be reviewed and
updated by the government every three years, on the basis of proposals submitted by the
Research and Development Council. This means that the council has become a central actor in
the construction of the Estonian innovation system.
Source:http://www.minedu.fi/minedu/research/organisation/sci_tech_council/sci_tech_council.html;http://www.tan.ee/.
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Research and development: relevance, efficiency, accountability
81. Issues. The overriding challenge for the public R&D system in Lithuania is to increase
its relevance, efficiency, and accountability. This entails significantly increasing the flexibility
of R&D financing instruments, improving the efficiency of R&D organizations, upgrading the
level of expertise (professionalism) in the management of public R&D funding, increasing the
demand and need orientation among universities and research institutes, and promoting
cooperation between industry and the research and academic communities.
82. Policy proposal. The Government should consider establishing a Lithuania Technology
Agency to develop and implement new R&D funding instruments associated with revised
innovation policies and priorities (see above), and working principles and processes for public
R&D administration in Lithuania. In establishing such an agency, the Government should
consider merging many of the public institutions now supporting innovation and business
activities (the Lithuanian Center for Innovation, the Lithuanian Development Agency for Small
and Medium-Size Enterprises, and others).
83. The main tasks of the agency would be to organize, finance, and evaluate new types of
R&D programs in nationally significant fields of science and technology; to act as a national
contact point for EU-related R&D activities (including national management of EUREKA and
COST); and to provide grants and loans to firms for innovation projects. Many of the tasks of
the agency would be new and would provide new thinking and orientation. In addition, however,
viable existing operations and resources could be moved to the agency from their current homes
in the Ministry of Higher Education and Science and elsewhere.
84. The agency could be placed under the Ministry of Economy or the Ministry of Higher
Education and Science, but other solutions allowing more independence and credibility should
also be elaborated. The experiences of such countries as Estonia, Finland, Ireland, and Sweden
are relevant in this respect.
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Box A3.7: National Technology Programs in Finland—
Increasing Flexibility and Cooperation
Box A3.8: The Hungarian Experience—Fostering Links between Industry and Research
In Finland technology programs are used to promote development in specific sectors of technology
or industry and to pass on research results to business in an efficient way. These programs have
proved to be an effective form of cooperation and networking for companies and the research
sector. In 2002 about 45 extensive national technology programs were being implemented. In 2000
TEKES provided $160 million in financing for technology programs. Thanks to such programs,
many new successful products and processes have been developed.
The planning of the technology programs takes place in working groups and open preparatory
seminars involving companies, research institutes, universities, and TEKES, and the decision to
launch a program is made by the board of TEKES. Each technology program has a steering group,
a coordinator, and a responsible person at TEKES. The programs range in duration from three to
five years, and in volume from $6 million to hundreds of millions of dollars. Tekes usually
finances about half the costs of the programs, with the other half coming from the participating
companies. Most of the programs are evaluated by foreign evaluators.
The main benefits of the programs lie in the close cooperation among research institutes,
universities, and industry; the broad involvement of small and medium-size companies; and the
high level of international cooperation.
Source :http://www.tekes.fi/.
To foster links between industry and research, Hungary establishes structures offering a stable
platform for players involved in this cooperation: the Cooperative Research Centers, launched in
1999. These centers aim to stimulate long-term cooperative links between higher education
institutions, R&D centers, and businesses. Their broad mandate includes fostering entrepreneurial
attitudes in higher education institutions and incorporating a business orientation into their curricula,
undertaking joint development of R&D activities for new products and processes to promote the
competitiveness of firms, generating technological breakthroughs with commercial applications, and
creating appropriate jobs for graduates and postgraduates. The centers can thus be seen as
multifaceted instruments able to act on many aspects of the links between industry and research. By
2001 five Cooperative Research Centers were in operation in Hungary.
Source:http://geoweb.cslm.hu/vhost/geoinfo/idrisi/default.htm.
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Box A3.9: Benchmarking National Research Policies in Europe
In endorsing the European Research Area initiative in March 2000, the Lisbon European Council
called on the member states and the European Commission to develop benchmarking as a means
of evaluating the performance of national research policies. As a core activity, the first
benchmarking exercise for R&D policies in EU countries was launched to compare processes
and performances and identify best practices.
The exercise concluded that there is a need to establish a stronger science base in Europe to
ensure that the region is a global player. This implies coordinating national science and
technology policies and national systems for higher education and moving toward a more open
European labor market for researchers.
The second group of actions relates to national labor markets and education and training systems
at large. The movement toward a European innovation and competence building system can take
place only through a gradual renewal and a convergence of labor market practices and education.
To build the European Research Area, with its emphasis on Europe-wide networks of excellence,
special attention will be required for the regional level. It is at this level, too, that policies
supporting the absorptive capacity of small and medium-size firms will be needed, to strengthen
and anchor local R&D and innovation clusters.
The EU governments are committed to boosting R&D and innovation in the EU by increasing
expenditure in this area. The aim is to approach 3 percent of GDP by 2010, with two-thirds of
the funding provided by the business sector. Among EU countries, only Finland and Sweden
exceed this target at present, while the EU average is just below 2 percent. The current level of
business expenditure on R&D, at 1.1 percent of GDP, also indicates the size of the challenge that
EU countries need to address during this decade. Long-term cooperation among R&D and
innovation actors—between public and private actors but also among private actors—appears
increasingly critical for raising R&D investment and improving its effectiveness.
Source: European Commission, DG Research, Benchmarking National Research Policies: The Impact of
RTD on Competitiveness and Employment (Brussels, 2002), and Final Report of the Expert Group on
“Public and Private Investments in R&D” (Brussels, 2002);http://www.tip.ac.at/workshops/presentation_borchard.pdf;http://www.edis.sk/ekes/kneldok/dokument/bench_irce_0802.pdf;
ftp://ftp.cordis.lu/pub/rtd2002/docs/bench_ppi_0602.pdf.
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85. Issue. Lithuania has 26 state research institutes covering a broad range of specialized
fields of research, from humanities to technology. This fragmentation of institutions is
inefficient: each institution requires administrative support, exacerbating the problem of scare
budgetary resources. The state research institutes should therefore reorganize themselves. Some
of the institutes were recently integrated with Vilnius University. The relevance of the research
undertaken is also in question. The state research institutes should consider shifting their
orientation from basic research to applied research, from budget-financed research to research
funded under contract and other external sources, and from an “ivory tower” orientation to one
focused on supporting innovation for the business community.
86. Policy proposal. The reorganization of the state research institutes should be accelerated.
One option would be to merge several institutes specializing in areas with potential for applied
research and commercialization into a Lithuanian Institute of Technology focusing on applied
(technological) research and contract research. The private sector should be invited to join this
institute not only as users of its expertise and services but also as owners, financiers, and
contributors to the research.
87. Regardless of the organizational arrangements, new funding mechanisms for the state
research institutes should be developed, with (competitive) contract research figuring
prominently among the financing sources. The growth and development of the Lithuanian
Institute of Technology would be driven by external financing (EU funds, funds from the
National Technology Agency, contracts with firms) rather than by budgetary allocations. Similar
arrangements exist in other European countries—for example, the Frauenhofer Gesellschaft in
Germany.
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Box A3.10: Specialized Technology Research Institutes—
a Device to Renew State Research Institutes
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
121.
122.
123.
124.
125.
126.
127.
The history of large as well as small economies in Western Europe teaches that technologically
oriented public or publicly supported private research institutes are an important element of a
successful R&D and innovation policy. These institutes are typically involved in a wide spectrum
of activities, including strategic basic research, applied technical research, contract research, and
testing and inspection. But their focus is clearly on commercially relevant applied R&D, carried
out in close cooperation with firms and universities. Normally, a large share of the budget of
these institutes is based on contract research with companies, with other financing coming from
external sources.
Well-known examples of specialized technology research institutes are Fraunhofer-Gesellshaft in
Germany, the Foundation for Scientific and Industrial Research (Sintef) at the Norwegian Institute
of Technology, (TNO) in the Netherlands, the Danish Technological Institute, and the Technical
Research Center of Finland. All of these have long experience, and all have played a significant
role in their country in technology transfer and diffusion. And in recent years these research
institutes have been significant actors in the EU research programs, particularly in industrial
consortiums.
The Fraunhofer-Gesellschaft, founded in 1949, is the leading organization for institutes of applied
research i n Germany. At present the organization maintains 56 research establishments at
locations throughout Germany. A staff of some 11,000, most of whom are qualified scientists and
engineers, generate an annual research volume of around 900 million euros. Of this amount, more
than 750 million euros are derived from contract research. Companies of all sizes and from all
sectors of industry use the Fraunhofer Gesellschaft as external high-tech laboratories for all kinds
of development work, for special services, and as expert consultants on organizational and
strategic questions.
The Danish Technological Institute is an independent, not-for-profit institution approved by the
Danish authorities to provide technological services to businesses and communities. Founded as
an independent institution in 1906, the institute is one of the oldest of its type in the world. The
institute has almost 900 employees and a turnover of some 90 million euros. The Danish Ministry
of Trade and Industry invests some 16.8 million euros a year in the institute’s R&D activities and
dissemination of R&D results. The institute employs experts from different fields at 40 centers
organized under the auspices of the six organizational units (energy, industry, environment,
building technology, industrial development, and information technology).
The Technical Research Center of Finland (VTT) was established in 1942 as a government
research institute. From the very beginning it has been a significant actor in the Finnish
innovation system. The role of VTT, working under the auspices of the Ministry of Trade and
Industry, has been to strengthen the competitiveness of Finnish commerce and industry through its
technological expertise. While the universities focus on basic research, VTT concentrates on
applied technical research aimed at commercial applications and active cooperation with
enterprises. VTT employs 3,000 people and covers a large share of the fields of technology
relevant to the Finnish economy. The basic government funding makes up no more than a third of
its total budget. Much of VTT’s financing comes from external sources—enterprises, government
agencies, and the European Union.
Source:http://www.fraunhofer.de/german/index.html;http://www.teknologisk.dk/;http://www.vtt.fi/.
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128. Issue. Practically all research in universities is financed by state budget resources that are
allocated to universities as lump sums on an institutional basis. Universities further allocate
these funds to established departments, largely in accordance with historically established norms
(based on the number of students and past allocations). This allocation system contributes to the
unresponsiveness of university research to industry demand, since industry demand has no
influence on university funding decisions.
129. Policy proposal. To increase the relevance and accountability of research undertaken at
universities, new, incentive-based, transparent, and flexible funding mechanisms for university
research should be introduced, with increasing reliance on nonbudgetary sources of financing.
The mechanisms should establish a clear division of funding allocations between educational
purposes and research activities; establish procedures for flexible use of external financing,
including contract research and training (budgeting, accounting, auditing, increased peer review);
and allocate an increasing share of the current state budget funding and all of the future
increments in such funding on a performance basis, with bonuses for excellent performance.
130. Issue. Because of the poor quality of statistics on the Lithuanian innovation system, there
is no reliable database for longer-term policy planning and decision- making or for ongoing
monitoring and evaluation of the system’s performance.
131. Policy proposal. Urgent action should be taken to upgrade the quality of Lithuanian
R&D statistics to the average OECD level on the basis of OECD recommendations (Frascati
Manual). Correspondingly, innovation statistics should be developed to fulfill the requirements
of the Community Innovation Survey. R&D evaluation methods and mechanisms could be
developed along the lines of those in other countries, such as Finland, Ireland, Norway, and
Sweden. To support the accumulation of knowledge on and experience with R&D and
innovation-related analysis and studies, the establishment of a dedicated unit specializing in
technology and innovation studies should be considered. This unit could be placed in the new
Lithuanian Technology Agency.
Box A3.11: The Small Business Innovation Research Program
The Small Business Innovation Research (SBIR) program, sponsored by the U.S. Small Business
Administration (SBA), is an interesting approach to bridging the innovation barrier. Established by the
U.S. Congress in 1984, the SBIR program has several major objectives. It provides high-tech
entrepreneurs with the startup capital they need to explore the commercial feasibility of high-risk
research ideas, early-stage financing that venture capitalists traditionally have little interest in providing.
It fosters the commercialization of government-funded R&D. It establishes productive, commercial
links between high-tech small and medium-size enterprises and government-funded research priorities.
And through its “graduates,” it provides an excellent source of deal flow for venture capitalists.
Source:http://www.reeusda.gov/sbir/.
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Business and regulatory environment
132. Issue. The business environment is not sufficiently supportive of innovation. Firms
reported increasing flows of foreign knowledge, and a large share of firms (27 percent) indicated
that access to markets and technology embodied in foreign direct investment is a critical factor.
Only 16 percent put the need for more capital as a first concern. Ineffective and intrusive
business regulations and licensing, tax regulations and enforcement, and deficiencies in the legal
system are still major concerns.
133. Policy proposals. Work to simplify business registration procedures should continue,
improving the legal framework and streamlining tax administration. Norms not required by the
European Union should be critically reviewed, questioning their necessity and value for public
policy purposes. More emphasis should be put on implementation to increase speed,
transparency, and information flows.
134. Issues. Labor regulations are perceived as a more serious obstacle to business operations
in Lithuania than in other Central and Eastern European countries. According to the Business
Environment and Enterprise Performance Survey (1999), Lithuania ranked as the second worst
among 10 EU accession countries in this respect. A more efficient and flexible labor market is
also critical to reducing Lithuania’s long-term unemployment and allowing labor markets to
adjust to changing economic conditions. Lithuania today is marked by high unemployment and
high job turnover, with the vast majority of new jobs (more than 70 percent) created by start-ups
and small firms and mostly in the export sector. The labor market is segmented between the
employed (with high job turnover and frequent moves from job to job) and the long-term
unemployed. A similar duality exists, in terms of flexibility and working conditions, between
small firms (high job turnover, high flexibility) and large ones (low flexibility). The minimum
wage as established today limits the options for low-skilled workers. A number of labor market
policies could be considered.
Policy proposals.
• Enhancing wage flexibility by reducing minimum wages as a percentage of
average wages or by differentiating the minimum wage (for example, by
introducing a youth subminimum).
• Promoting flexible forms of employment, including fixed-term contracts, to
stimulate labor supply (for example, part-time work by women) and labor
demand.
• Liberalizing the use of fixed-term contracts by removing the limit on the number
of successive renewals while keeping the existing limit on total duration.
• Adopting the practice of annualizing working hours—that is, calculating weekly
working hours on a yearly basis—and lowering the cost of overtime work.
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• Allowing the social partners to “negotiate flexibly,” consistent with the
worldwide trend. This would imply deregulating labor relations and devolving
responsibility for determining them to the social partners, while the Government
would be responsible for setting and enforcing only basic norms (including basic
workers’ rights) and standards (World Bank, Country Economic Memorandum,
2002).
95. Issue. The multitude of government programs and agencies for business support pursue
multiple objectives and often are not effectively coordinated and administered. It is not clear that
these programs have a significant positive impact on innovation and in furthering the knowledge
economy.
96. Policy proposals. Lithuania should undertake a systematic review of best practices
employed in other countries on the design, operation, and coordination of business support
programs aimed at fostering competitiveness, innovation, and growth. It is particularly
important to review the multitude of dispersed subsidy programs, such as clusters, incubators,
technology parks, industrial parks, business innovation centers, and loan, grant, and guarantee
schemes. Ensuring that such programs are sustainable in the long term requires an understanding
of the market failures they are assumed to address, the business needs and management
challenges they face, and the conditions under which they can work well. Enterprises
participating in these programs need technical and managerial know-how to develop and
commercialize their innovations.
97. Lithuania should also consider merging all or some of its business support schemes under
an umbrella organization, such as the Lithuania Technology Agency (proposed above).
98. Issue. The legal framework for investment in Lithuania is geared toward equity finance
for larger, publicly listed companies and debt finance through commercial banks. Neither
instrument is optimal for high- growth, early- stage knowledge-based companies. Companies at
this stage are too risky for commercial banks because their cash flow is not sufficiently
predictable—and security against fixed assets is often not practical. But the legal framework for
private equity is not adequately developed, undermining the ability of outside investors and
company managers or owners to create an incentive system that aligns the interests of both
parties. The set of instruments available for private equity investing is severely limited. Among
other things, the legal framework needs to allow provisions facilitating investor exit from a
company.
99. Policy proposals. The forms of equity and quasi-equity possible under Lithuanian law
should be brought into accordance with international best practices. Demand for these more
sophisticated instruments appears to be growing as the Lithuanian private equity industry
matures. But more rapid legal reform could facilitate early-stage investment and attract the
attention of international investors.
100. At present, shortcomings in the legal framework are not seen as a major constraint by the
local venture capital community. But if the Lithuanian investment industry is to mature and
attract additional capital, international legal norms for private equity investing (and the
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corresponding regulatory and supervisory framework) will need to be introduced. A major
provision used in other markets to help ensure an investor’s ability to exit—the “liquidation
preference,” in which investors have rights to the proceeds of a sale prior to managers and
owners—is not possible in Lithuania. Other provisions that can facilitate exit, such as those
allowing majority investors to force other shareholders to participate in the sale of the company,
are allowed.
Private sector interaction with public services
101. Issue. In industrial countries private sector organizations such as industry and employers
associations have the capacity to formulate their own strategic proposals for the development of
their industry as well as to review proposals made by the government. Although these
organizations represent the interests of their members, they often look to broad, long-term
interests rather than those of individual firms. To do so requires that private sector organizations
and their members cooperate with one another in the interest of developing policies and joint
activities conducive to all businesses. Taking a broader, more strategic view allows the private
sector to provide more effective input to government policies and to launch initiatives of its own.
The Lithuanian private sector is still far from developing such an organization, cooperation, and
outlook.
102. The Government, municipalities, and the private sector cooperate on specific projects,
such as clusters, incubators, technology parks, industrial parks, and business innovation centers.
While in principle all these serve as vehicles for the effective transfer of knowledge and
technology and spur innovation, their success depends on how they are designed and managed.
Many are developed without necessary preparatory work to identify market needs and without
adequate operating procedures and staffing. At best such entities provide some educational
functions. They survive mainly on the state budget and international funds, since enterprises are
unwilling or unable to pay for the services provided.
103. Policy proposal. Lithuania’s private sector should take on a higher profile in developing
its vision and strategy for the country’s knowledge-based economy and in taking concrete steps
to make this vision a reality. To do this, the private sector needs to develop its own
organizations with the capacity to gather information, analyze policy issues, and communicate
with their members. The private sector also needs to develop forums in which representatives
from all parts of the private sector can meet and formulate positions on policy issues. This
would help to improve the effectiveness of the private sector’s partnering with the Government
in formulating visions, strategies, and policies in policymaking and policy coordinating bodies
for the information society and the innovation and education systems.
104. Issue. Accounting practices and information systems are still poor in the business sector,
preventing the buildup of trust, the sharing of information, and cooperation. Good accounting
practices contribute to the development of the knowledge economy in three ways. First, sound
accounting practices support transparency and good governance, which facilitate business
cooperation and networking. Second, they improve access to finance, especially equity and
loans for early-stage innovation investments. And third, accounting standards aligned with
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international practice improve the confidence of foreign investors bringing knowledge to
Lithuanian companies.
105. Policy proposals. Lithuania is about to introduce new accounting rules and procedures
that comply with international accounting standards. A new body should be established to
develop accounting standards for limited liability companies, most of which are small and
medium-size enterprises. This body should include representatives from both the private and the
public sector. Moreover, there is a need to enhance the country’s accounting and auditing
capacity, by establishing closer links with universities and other educational actors to reform
curricula and train or retrain accountants in the private sector. Business organizations should
encourage and, if possible, enforce adherence to the newly adopted accounting standards and
encourage their members to improve information systems and share information.
106. Issue. Despite the harmonization of the legal framework relating to the protection of
intellectual property rights, many entrepreneurs and researchers still do not see the value of such
protection. Ambiguities remain about who owns the intellectual property rights for government-
funded research and development projects. Despite the Employee Agreement used by state
research institutes and universities—according to which innovations by an employee are the
intellectual property of the employer—many representatives of research institutes are unclear
about the possibility of patenting innovations and their potential commercial uses. This
ambiguous ownership status hampers commercialization and deters potential foreign investment
in Lithuanian’s intellectual resources.
107. P Po ol li ic cy y p pr ro op po os sa al ls s. . The Government (through the Patent Bureau) and the private sector
(through the Association of Entrepreneurs) should develop information and training material
about intellectual property rights. The ownership of state research should be clarified and
incentives put in place for researchers to bring research results to the market.
108. Issue. Lithuanian exports are still based predominantly on low-skilled labor inputs with
low technology content and quality. The drive for higher quality to attain ISO certification has
fostered innovation in firms in more developed EU candidate countries. Few Lithuanian
companies have obtained ISO certification. Lithuanian entrepreneurs seem to lack a general
understanding of the need to certify their production processes according to international
standards.
109. Policy proposal. Lithuanian enterprises and the Government should cooperate in raising
awareness of the need for ISO certification and in training to help attain ISO certification
standards.
Mobilizing the private sector
110. Issue. With networks for mentoring and funding early-stage companies still in the early
stages of development, entrepreneurship in Lithuania is struggling. Firms remain wary of
outside involvement, whether by local or international investors. Private investors often have
little to offer beyond funding; strategic investors (larger companies) typically want complete
control, leaving little role for the original management team. Cross-firm collaboration in such
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areas as marketing, promotion, and networking also remains limited. The activities of private
sector associations and networking groups to address these problems remain limited—in both
sector coverage and depth of activities—particularly beyond the information technology and
telecommunications sector.
111. Policy proposal. Private sector associations and networking groups should seek to
deepen their activities in support of members and to extend coverage across the breadth of the
knowledge economy in such areas as mentoring and networking for early-stage and high- growth
businesses and international promotion and marketing. Organized mentoring networks can help
firms obtain advice and support from experienced entrepreneurs. And private associations can
play a key role in promoting and marketing Lithuanian companies and investment opportunities
abroad.
112. To grow and compete, Lithuanian firms need strong ties to international markets and
investors and the knowledge they harbor.
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Annex 4: Building an Information Society
1. A knowledge economy is a networked economy in which information and
communications technologies (ICT) are a key part. Access to electronic communications
networks and ICT is decisive for economic growth, knowledge-based activities, and social
inclusion and cohesiveness. Enterprises operating in the ICT sector are among the most
innovative and dynamic in Lithuania, contributing to the development of a knowledge-based
economy. Lithuania is a signatory of the e-Europe + Action Plan aimed at promoting an
information society in countries that are candidates for accession to the EU. The most recent
progress report (June 2002) indicates a need to intensify efforts to achieve the agreed targets for
an information society in Lithuania.
2. The World Economic Forum, in its Global Information Technology Report 2001/02,
ranks 75 countries on their readiness for a “networked world.” Lithuania ranks 42nd, among the
lowest of the EU candidate countries (table A4.1). This ranking is driven in part by current
network use (or the current state of ICT adoption), on which Lithuania ranks 46th. The ranking
is also driven in part by enabling factors likely to influence future development of an information
society, on which Lithuania ranks 43rd. The enabling factors consist of network access
(information infrastructure, hardware, software, support), network policy (ICT policy, business
and economic environment), networked society (networked learning, ICT opportunities, social
capital), and networked economy (e-commerce, e-government, general infrastructure). Lithuania
does best on network access (31st) and worst on network policy (62nd). The results of the e-
Europe + benchmarking exercise show that Lithuania is lagging behind in building an
information society; for example, Lithuania has one of the lowest Internet use rates (around 15
percent) among the EU candidate countries.
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Country Rank Country Rank Country Rank
United States 1 Iceland 1 Finland 1
Iceland 2 United States 2 United States 2
Finland 3 Finland 3 Sweden 3
Ireland 19 Ireland 20 Ireland 18
Estonia 23 Estonia 21 Estonia 24
Portugal 27 Portugal 25 Czech R. 27
Czech R. 28 Czech R. 28 Portugal 28
Slovenia 29 Slovenia 29 Hungary 29
Hungary 30 Greece 30 Slovak R. 31
Greece 31 Hungary 32 Slovenia 32
Slovak R. 33 Slovak R. 33 Poland 33
Poland 35 Poland 36 Greece 35
Latvia 39 Latvia 38 Latvia 37
Turkey 41 Turkey 39 Lithuania 43
Lithuania 42 Bulgaria 45 Turkey 44
Costa Rica 45
Lithuania 46
Costa Rica 45
Bulgaria 53 Costa Rica 48 Bulgaria 61
Russia 61 Romania 57 Russia 63
Romania 65 Russia 59 Ukraine 64
Ukraine 66 Ukraine 66 Romania 65
Networked Readiness Index Network Use Enabling Factors
Subindex
Table A4.1: Readiness for the Networked World
Source: World Economic Forum, The Global Information Technology Report 2001/02. Readiness for the
Networked World
Information Infrastructure and Telecommunications Sector
3. The telecommunications sector is a key component of and contributor to an information
society and knowledge economy. Its performance thus has a broad impact on economic and
social development.
4. The most recent data on ICT in Lithuania suggest that it is slowly catching up with the
other EU accession countries in Central and Eastern Europe. Yet if the data on fixed and mobile
communications are encouraging, Lithuania still lags behind in Internet penetration and use.
This may be mainly because of the high cost of access—the highest among the Baltic states—
and the cost of equipment such as personal computers. Access costs have been declining slowly
in recent years, and the opening of the telecommunications market to competition may support
the trends commonly associated with free competition, such as falling prices and rising quality.
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5. Lithuania faces several challenges relating to the telecommunications sector:
• The expiration of the exclusive rights of Lietuvos Telekomas in January 2003 and the
need to provide the company with a new license.
• Ensuring an orderly transition to a competitive environment in the fixed market (with
appropriate safeguards for customers).
• Expanding Internet access.
• Extending rural access.
• The transposition into Lithuanian laws and regulations of the EU acquis
communautaire.
• Building sufficient capacity in the Communications Regulatory Authority to enable it
to be effective.
Telecommunications sector performance
6. Like all EU candidate countries, Lithuania must both transpose and implement the acquis
communautaire before accession. It also must manage the transition to full competition. These
processes are indivisible from the regulatory environment of the telecommunications sector.
And they are made more complicated because the “Electronic Communications” acquis
communautaire, which evolved in 2002, is untried in the EU candidate countries (and in the EU
member states).
7. With three mobile operators and Lietuvos Telekomas competing for customers,
Lithuania’s telecommunications sector is fairly vibrant, and at first glance its performance
appears satisfactory in the context of the Baltics and Europe and Central Asia (figures A4.1,
A4.2, and A.4.3). When total teledensity (fixed and mobile), the share of the population using
the Internet, and the urban-rural teledensity ratio (the ratio of teledensity for fixed telephones in
the largest city to that in the rest of the country) are plotted against GDP per capita, Lithuania’s
position is:
• Close to that predicted by GDP per capita.
• Close to Latvia’s position.
• Behind Estonia’s position—that is, with lower total teledens ity, lower Internet use,
and a bigger urban-rural gap in access to fixed telephones.
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Albania
Armenia
Azerbaijan
Belarus
Bosnia
Bulgaria
Croatia
Czech Republic
Estonia
Georgia
Hungary
Kazakhstan
Kyrgyzstan
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovak R.
Slovenia
Macedonia
Tajikistan
Turkey
Turkmenistan
Ukraine
Uzbekistan
Yugoslavia
0.01
0.1
1
10
100
100 1000 10000
GDP per capita
I
n
t
e
r
n
e
t
u
s
e
r
s
(
%
o
f
p
o
p
u
l
a
t
i
o
n
)
Yugoslavia
Uzbekistan
Ukraine
Turkmenistan
Turkey
Tajikistan
Macedonia
Slovenia
Slovak R.
Russia
Romania
Poland
Moldova
Lithuania
Latvia
Kyrgyzstan
Kazakhstan
Hungary
Georgia
Estonia
Czech Republic
Croatia
Bulgaria
Bosnia
Belarus
Azerbaijan
Armenia
Albania
0
20
40
60
80
100
120
100 1000 10000
GDP per capita
T
o
t
a
l
t
e
l
e
d
e
n
s
i
t
y
Figure A4.1: Total Teledensity (Fixed and Mobile) and GDP Per Capita
Teledensity: Number of telephones (fixed plus mobile) per 100 population
Source: International Telecommunication Union, World Bank 2001
Figure A4.2: Internet Users and GDP Per Capita
Source: International Telecommunication Union, World Bank 2001
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Albania
Armenia
Azerbaijan
Belarus
Bosnia
Bulgaria
Croatia
Czech Republic
Estonia
Georgia
Hungary
Kazakhstan
Kyrgyzstan
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovak R.
Slovenia
Macedonia
Tajikistan
Turkey
Turkmenistan
Ukraine
Uzbekistan
Yugoslavia
1
10
100
100 1000 10000
GDP per capita
U
r
b
a
n
-
r
u
r
a
l
t
e
l
e
d
e
n
s
i
t
y
r
a
t
i
o
Figure A4.3: Urban-Rural Teledensity Ratio (Fixed Access)
and GDP Per Capita
Source: International Telecommunication Union, World Bank 2001
8. While Lithuania compares reasonably well with the other Baltic states, it could look to
other EU candidate countries, such as the Czech Republic and Slovenia, as appropriate peers.
Lithuania is comparatively rich in information infrastructure. Besides the networks of Lietuvos
Telekomas and the three mobile operators, there are also those of the radio, television,
Lithuanian Post, railways, electricity, cable television, and academic and research institutes. In
the context of liberalization, a key challenge will be to mobilize these national resources to
ensure sufficient access throughout the country.
Disaggregated sector performance
9. A disaggregated analysis of the performance of Lithuania’s telecommunications sector
reveals some serious weaknesses relating to the country’s integration with the global economy,
rural access, and development trends. Table A4.2 presents comparative data on two indicators of
the performance of the Internet and its contribution to the economy—international Internet
bandwidth (which measures the capacity of a country’s connection to the World Wide Web) and
Internet hosts per 10,000 people—for the Baltic states, other EU candidate countries, neighbors
of the Baltics, and the United Kingdom. The results for Lithuania are not impressive.
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Table A4.2: International Internet Bandwidth and Internet Hosts, 2001
Mbps = megabits per second
Source: Telegeography, Packet Geography 2002.
10. Lithuania’s performance on both measures is disappointing compared with that of Latvia
and Estonia. The significant differences in international capacity indicate that Lithuania is less
integrated with the World Wide Web than its neighbors. And the lower density of Internet hosts
points to a relative scarcity of local Web servers.
11. Lithuania’s performance may reflect domestic demand conditions. But compared with
other EU candidate countries, especially the Czech Republic, Lithuania has poor integration, a
state of affairs that could pose particular problems for developing a knowledge-based economy
and employment. It is possible that the expiration of the existing exclusive rights in
telecommunications will provide an opportunity for new entrants to expand international Internet
bandwidth.
12. The tariffs charged for Internet access are an important determinant of demand for
Internet services (table A4.3). Tariffs for dial- up Internet access combine monthly access fees
and usage charges paid to the fixed network provider (both of which are very similar in the three
Baltic states) and the charges of the Internet service provider (ISP). In Estonia ISPs provide
International
Internet
bandwidth
(Mbps)
Internet
hosts
(per 10,000 people)
Lithuania 95 52
Latvia 262 99
Estonia 517 322
Bulgaria 192 130
Czech
Republic
11,467 162
Hungary 2,979 187
Poland 2,337 133
Romania 1,418 20
Slovak
Republic
6,821 74
Slovenia 320 174
Turkey 865 34
Finland 7,820 1,771
Sweden 60,390 1,695
United
Kingdom
238,074 681
- 107 -
unlimited Internet access, and the cost of 30 hours of peak access is therefore substantially lower
than in Lithuania, which has the most expensive Internet access of the three Baltic states. In
2001 the charges for 30 hours of off-peak access were US$49.63 in Lithuania, US$34.26 in
Latvia, and US$5.00 in Estonia.
13. The high charges in Lithuania could prove to be a significant impediment to demand and
an obstacle to the development of a knowledge economy. A new business model for Internet
access is required.
Table A4.3: Peak Tariffs for 30 Hours a Month of Dial-Up Internet Access, 2001
(U.S. dollars)
PSTN
monthly
access
fee
PSTN
usage
charge
ISP
charge
Total
Lithuania 4.30 0.70 63.00 68.00
Latvia 4.90 1.10 40.30 46.30
Estonia 4.40 0.80 Unlimited
access
5.20
PSTN = public switched telephone network
Source: International Telecommunication Union, World Telecommunications Development Report 2002.
14. The low level of integration indicated by the data on international Internet bandwidth and
Internet hosts is also implied by data on international telephone traffic for the three Baltic states
(table A4.4). Although Lithuania has the largest population of the three Baltic states, it generates
the fewest minutes of international telephone traffic and subscribers make substantially fewer
international calls (measured in minutes) than do those in the other two countries. Though
demographics and the nature of the diaspora may explain some of the differences, the data point
to the more outward perspective of Latvia and Estonia—which may have implications for the
development of a knowledge-based economy in Lithuania.
Table A4.4: International Telephone Traffic, 2000
Outgoing telephone
traffic
(millions of
minutes)
Minutes
per
subscriber
Lithuania 34.9 33.2
Latvia 57.7 78.5
Estonia 78.1 149.4
Source: International Telecommunication Union, World Telecommunications Development Report 2002.
15. An important element of the “digital divide” is the distribution of access within countries.
One way to assess this is to look at the size of the largest city relative to the rest of the country,
the share of fixed lines in the largest city, and the teledensity in the largest city, the rest of the
country, and countrywide. A comparison of these measures for the three Baltic states shows that
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Vilnius does not contribute to the same concentration of population in Lithuania as Riga does in
Latvia or Tallinn in Estonia—it accounts for less than half the population share of the other two
capitals (table A4.5). As in Latvia and Estonia, in Lithuania teledensity in the capital is higher
than that in the country overall, and teledensity in the rest of the country is lower than that in the
largest city and in the country overall. By this indicator, Latvia appears to have a more serious
rural access or digital divide problem. As more large cities are added to the capital, teledensity
in the rest of the country is likely to fall dramatically, widening the urban-rural gap in access. It
is suggested that a thorough study be undertaken to determine rural teledensity in Lithuania.
Table A4.5: Telephone Access in the Capital City and the Rest of the Country, 2000
Largest city
a
Population
as %
of total
Telephones
as % of
total
Teledensity
(fixed lines
per 100
people)
Teledensity
in rest of
country
(fixed lines
per 100
people)
b
Teledensity
in entire
country
(fixed lines
per 100
people)
Lithuania 15.8 21.0 42.7 30.7 32.2
Latvia 32.5 56.5 52.6 19.6 30.3
Estonia 36.4 42.3 42.2 32.9 36.3
a. Vilnius in Lithuania, Riga in Latvia, and Tallinn in Estonia.
b. Calculated by subtracting the absolute number of fixed lines in the largest city (Y) from the total number of fixed
lines in the country (X) and then calculating the residual teledensity (X minus Y divided by total population minus
population in the largest city, expressed per 100 people).
Source: International Telecommunication Union, World Telecommunications Development Report 2002.
16. The mobile sector has been particularly active in the Baltic states, making a substantial
contribution to access in a comparatively short time, particularly in Estonia (table A4.6). In
many EU member states total teledensity (fixed and mobile) exceeds 100 (per 100 people)—in
2001, for example, total teledensity in Finland was 132, in the United Kingdom 136, and in
Sweden 151. But for Lithuania the question must be posed whether subscribers to mobile
networks are also subscribers to the fixed network, which would imply lower average access and
a greater digital divide (in terms of the total population having access to telephony) than the data
suggest. Mobile networks can provide Internet access, but this is not yet widely available at
affordable prices. Thus the fixed network has a role to play with respect to the Internet.
Table A4.6: Fixed, Mobile, and Total Telephone Penetration, 2001
Source: International Telecommunication Union, World Telecommunications Development Report 2002.
Mobile
teledensity
(per 100
people)
Mobile phone
subscribers as
% of total
Fixed
teledensity
(per 100
people)
Total
teledensity
(per 100
people)
Lithuania 25.3 47.5 31.2 56.1
Latvia 27.9 44.7 30.8 58.8
Estonia 45.5 56.4 35.2 80.8
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17. On closer examination two opposing trends become apparent. Between 2000 and 2001
the number of fixed lines declined and the number of mobile customers increased in all three
Baltic states (table A4.7). But the changes were most dramatic in Lithuania, where the growth in
mobile customers coincided with the launch of Tele-2, the third mobile operator.
Table A4.7: Network Growth, 2000-01
(thousands)
Source: International Telecommunication Union, World Telecommunications Development Report 2002.
18. These changes could mean that customers are substituting mobile for fixed services, that
businesses are rationalizing their communications requirements, or that some customers are
disconnecting their fixed telephones in response to tariff rebalancing. There would be a particular
concern if the number of rural customers is declining.
19. All these trends manifest themselves in the economic performance of the
telecommunications sector. The data in table A4.8 are indicative of the performance of the
sector, though they are based largely on the turnover of the incumbent and do not reflect the
vibrancy of the mobile sector.
Table A4.8: Telecommunications Revenues, 2000
Note: The data are for the incumbent’s revenue from fixed line services.
Source: International Telecommunication Union, World Telecommunications Development Report 2002.
20. As the largest of the Baltic states by population, Lithuania generates the largest
telecommunications revenues. But the revenues per line and as a share of GDP are the lowest of
the three states. This raises a concern about the ability of the sector to generate sufficient finance
to fund universal service obligations. This issue is discussed below.
Fixed lines added New mobile
customers
Lithuania -36.0 +408.0
Latvia -9.9 +255.6
Estonia -19.3 +94.2
Total
(US$ millions)
Per line
(US$)
As % of GDP
1999
Lithuania 259.8 219 2.3
Latvia 223.8 305 3.5
Estonia 228.9 553 5.2
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Policy Issues and Proposals
Telecommunications sector regulatory capacity
21. Issue. Private investors place high value on a predictable, effective, and independent
regulatory environment, and investments in building a credible, effective regulatory authority
provide benefits stretching over the long term Lithuania’s Communications Regulatory Authority
(RRT) was established in the spring of 2001. Like all the new regulatory authorities in the
region, RRT is at an embryonic stage with little experience with a fully competitive market.
Recently the EU adopted a new acquis communautaire that has not yet been extensively applied.
22. RRT faces several important challenges: adapting to the shift in its role from a largely
technical regulator to more of an economic regulator, acquiring the appropriate skills for
economic regulation, drafting the secondary legislation required of the new acquis
communautaire, and implementing the new acquis communautaire effectively and in a relatively
short period.
23. Policy proposal. The extent to which RRT can become an effective regulator depends on
the new telecommunications law, the duties assigned to it and other agencies, and the powers
provided to it by the law. Its effectiveness will also be determined by its staffing levels, the
skills of its staff, and its ability to retain qualified staff. Like many other regulatory agencies in
the region, RRT has a well- recognized need for technical assistance with capacity building and
drafting of secondary legislation.
Transposition of the acquis communautaire
24. The main proposal in this section relates to universal access. Achieving the proposed
universal access strategy requires addressing the issues of universal service (the long-term policy
goal), local loop unbundling, licensing, and interconnection in the regulatory framework.
A. Universal service
25. Issue. Universal service generally involves a minimum set of telecommunications
services of defined quality, which are provided at an affordable price to all telecommunications
service users irrespective of geographical location. There is no particular problem in achieving
this objective in most EU member states, where teledensity is high. But it is a serious challenge
in Lithuania, where national teledensity is about 30 fixed lines per 100 people. Two forms of
“access gap” can be identified. First, the “market gap”—the ability of the market when allowed
to perform to supply access on a commercial basis—where private investment has a key role to
play. Second, the “pure access gap”—customers who cannot be supplied by the market for
reasons of location or affordability—where innovative policy has a role to play. The market in
Lithuania was liberalized in January 2003 and will start to make its contribution to improving
access to commercial customers. But a “pure access gap” will persist.
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26. One mechanism that has been used to fill the gap is a universal service fund to which
telecommunications service providers contribute around 1-5 percent of turnover and from which
money is distributed to the entity with the universal service obligation. If we assume that total
sector turnover is US$500 million (based on total turnover for the incumbent of around US$260
million in 2000; see table A4.8), a 1 percent levy on the sector would yield US$5 million, and a 5
percent levy US$25 million. These sums are insufficient to significantly improve the teledensity
of Lithuania. In 2000 Lietuvos Telekomas invested nearly US$130 million, equivalent to almost
50 percent of its revenues for the year.
27. If there are insufficient funds in the sector, finance must be found from other sources.
The state budget is one possible source, but debt management needs and competing policy
objectives may mean that extending access will not be a priority for government expenditure.
28. A significant share of Lithuanians lack access to communications networks mostly
because they cannot afford it. This restricted access represents a significant obstacle to the
development of a knowledge economy.
29. Policy proposal 1. The Government should consider pursuing a strategy of universal
access supported by competitive auctions for any required subsidies. Two broad policies can be
used to address the pure access gap: universal service and universal access policies. Both
provide for a defined basket and quality of services at affordable prices. They differ in the
degree of availability of these services. Universal service policies call for service to be provided
to all who request it—a telephone in every home. Universal access policies facilitate the public
availability of services—a public access point or telecenter in every community. The two
policies can be characterized as emphasizing individual access or shared access. Both close the
pure access gap, but at different costs. Providing universal service is generally much costlier
than providing universal access. Normally, the provider of either service may be eligible for
compensation depending on the financial loss incurred in closing the access gap. Both policy
options must address the measurement of the loss and the means of compensation. The policy
can be implemented by regulatory means or market processes.
30. Regulatory option. The EU electronic communications regulatory package allows the
designation of a universal service or access provider, which is then obliged to provide the
required level of service. Lietuvos Telekomas is most likely to be obliged to provide universal
service (overlooking any contractual constraints), and compensation for losses will be paid by
telecommunications service providers (for example, the mobile operators), not by the
Government, according to article 23.3 of the new telecommunications law (5 July 2002). This
could be done through a universal service fund, for example.
31. Market process option. Under the market process option the licensing authority specifies
a defined level of service for a defined geographic territory (ranging from a municipality to the
entire country) where there is a pure access gap (box A4.1). Recognizing that these concessions
are not financially viable, the Communications Regulatory Authority (CRA) and relevant public
institutions (for example, community-based organizations) can issue invitations to bid for one-
time subsidies. The bidder requiring the lowest subsidy would then be obliged to provide the
- 112 -
defined level of service over a specified period (for example, 10 years). Appropriately
structured, such bidding can attract substantial private investment, minimize the subsidy, and
lead to a higher level of service than the basic obligation. The required subsidy is the amount
just sufficient to make the telecenter commercially viable—it is not a 100 percent subsidy.
32. Choice of option. For Lithuania the regulatory option is more problematic and
controversial, especially if it chooses a policy of obligating Lithuanian Telecom to provide
universal services with compensation from the mobile operators, with the cost passed on to their
customers.
33. A universal access policy is therefore proposed, pursued through market processes with
particular attention to the possibility of municipal- or community-based provision of universal
access. Within a targeted territory, bids can be invited for one-time subsidies for providing a
certain number of public access points (for communications including Internet). The
disbursement of the one-time subsidy should be linked to performance criteria relating to the
establishment of the public access points. Bidders should be allowed to make their own
technological choices. Bidders may find that additional commercially attractive individual
customers may be reached in the territory for a small incremental cost once the public access
points are in place. Because bidders will take account of these commercial opportunities when
calculating the required subsidy, the subsidy will be minimized. Such an approach would be
particularly attractive in providing local solutions to the access gap before setting more
ambitious targets.
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Box A4.1: The “Smart Subsidy” Approach to Universal Access
1. Concept
• Aims to mobilize private entrepreneurship and investment to supply services.
• Focuses on providing public access to computers, the Internet, and other ICT services
through telecenters (or cybercafes) in rural and low-income urban areas on a commercial
basis by charging fees for services.
• Provides a wider range of services and ICT than available on an individual basis at home.
• Allows public or quasi-public agencies to become important commercial clients or
partners in the telecenter.
• Encourages local entrepreneurs to manage and have a stake in the telecenter as well as
partnerships with bigger industry players.
• Recognizes that in certain circumstances a telecenter providing universal access may not
be commercially viable and that a subsidy may be required for part of the start-up and
investment costs.
2. Allocating subsidies
• The licensing authority defines a level of service for a defined geographic territory for a
defined period (say, 10 years) and issues an invitation to bid for a one-time subsidy.
• Bidders are allowed to make their own technological choices.
• Bidders calculate their required subsidy on the basis of expected income streams from
fees, capital, and operational expenditure.
• Bidders may find additional commercially attractive individual customers in the territory
who may be reached at a small incremental cost once the public access points are in
place. Bidders will take account of these extra commercial opportunities when calculating
the required subsidy.
• The required subsidy is the amount just sufficient to make the telecenter commercially
viable—it is not a 100 percent subsidy.
• The bidder requiring the lowest subsidy is declared the winner and is obliged to provide
the defined level of service over a specified period on a commercial basis.
• The disbursement of the one-time subsidy is linked to performance criteria relating to the
establishment of the public access points.
• The bidding ensures that the subsidy is minimized and generates substantial private
investment.
- 114 -
34. Policy proposal 2. The Government should intensify its cooperation with the private
sector, municipalities, NGOs, community organizations, and educators to extend affordable
telecommunications access and Internet services. A local solution could be implemented
through “community-based” service operators or providers, established by local authorities,
NGOs, or the business community and local banks. For example, local communities,
entrepreneurs, and authorities might join forces to establish a local telecommunications operator
to bridge the access gap in rural areas. These local operators or providers could then bid on
subsidies in competition with other providers, as described above under policy proposal 1. Such
initiatives could be supported by national or local governments during pilot applications to test
their viability and sustainability. If the intention is for the community-based operator to compete
for subsidies with other operators, it is important not to provide it with other subsidies that would
distort competition. Local governments and communities should therefore expect to recover
their contributions and earn a return in the long run. Three considerations are crucial for the
successful implementation of community-based service providers:
• The financing model. In this case a mixed financing model might combine
contributions from local stakeholders (the public sector, businesses, and society) with
funding (grants or loans) from the national government or international donors.
• The business model. The business model raises issues relating to the operational
sustainability of a community-based operator. The business model must carefully
forecast how operations will be carried out, what revenues will be generated, and
what operational costs will be faced. By reducing costs and relying on an external
subsidy rather than cross-subsidies, the community- and market-based universal
access model allows a more balanced tariff-cost ratio that does not discourage use of
telephone and Internet services for business purposes. To be successful, the business
model needs to be based on clear, fair, and enforced regulations for interconnection.
• The technical solutions. In principle, there are low-cost technical solutions available
(radio links, server connections allowing voice and data services), but the technology
must have a proven ability to provide local communities with a cost-effective network
that can provide telephony, Internet, and even cable television.
B. Local loop unbundling
35. Issue. Unbundled access to the local loop is provided for by EU Directive 2002/19/EC
(the “Access” Directive). A question that needs to be addressed is whether unbundling provides
sufficient financial incentives to the entity designated to unbundle its local loop. The tariffs for
local loop unbundling in the EU are “cost-oriented including a reasonable return on investment.”
When the designated local loop operator considers expanding its local loop, it will calculate the
combined financial returns from the access charge paid by the customer and the usage charges
for service paid by the customer. If the local loop is unbundled, the operator will regard the
combined financial retur n as “a reasonable return on investment.” But the entity requesting the
unbundling will regard only a figure related to the access charge paid by the customer as a
reasonable price. Where the charge for local loop unbundling is less than the combined return, it
- 115 -
is conceivable that the designated operator will not undertake the investment to expand the local
loop.
36. Policy proposal. The application of the unbundled local loop concept in Lithuania should
be considered in the context of the policy objective of expanding access and universal service for
the next two or three years.
C. Licensing
37. Issue. The application of the “authorization” concept of the acquis loosens the link
between a license and a territory; while licenses are normally awarded for a distinct geographic
area, in the authorization process the entity chooses its own territory and might choose not to
serve “universal service customers,” perceived as unprofitable. Under the new acquis
authorizations only entities benefiting from significant market power or scarce resources (such as
radio spectrum) can have special conditions (for example, geographic coverage) imposed on
them. In Lithuania there is no shortage of numbers in the national numbering plan.
Consequently, the only scarce resource is radio spectrum. This implies that only Lietuvos
Telekomas (presumably having significant market power) and the three mobile operators will
have specific conditions imposed on them. CRA needs to develop an innovative approach to
universal service. The first step would be to locate the “unphoned” and to initiate a universal
access strategy.
38. Policy proposal. The regulatory challenge in Lithuania will be to provide sufficient
incentives to attract suppliers of telephone and Internet services to those currently unserved. One
course of action would be to seek ways to allow community-based service provision and
partnerships among communities and other suppliers. These should be supported by technical
assistance (to deal with the technological aspects) and assistance in developing sustainable
business plans. RRT should undertake a study of the “unphoned” and issue licenses for the
provision of universal access, with the licenses tied to specific geographic locations and auctions
for subsidies.
D. Interconnection
39. Issue. The interconnection of networks (of which there are many in Lithuania) is one of
the most important factors in ensuring the viability of competition in the sector. It is also an area
characterized by frequent disputes. Interconnection involves commercial, technical, and
operational arrangements. The disputes arise largely over the commercial aspect—the fee that
operators are to pay one another for the termination or carriage of messages. There is a
functioning interconnection market in Lithuania that will need to be developed through the entry
of new players.
40. Policy proposal. To ensure that the market can fill the “market gap” and that the
universal access approach can fill the “pure access gap,” particular attention needs to be paid to
the resolution of interconnection issues. It is proposed that CRA provide interim solutions (with
“netting out” taking place when agreement is reached), that international benchmarks be used
- 116 -
where possible to guide the determination of interconnection fees, and that particular
consideration be given to interconnection fees related to the Internet.
Policies and institutions for an information society
41. Issue. Much like the institutional situation for innovation policies in Lithuania,
dispersion of institutional responsibilities constrains effective government leadership in policy
formulation, planning, coordination, monitoring, and evaluation for activities relating to an
information society.
42. Four public sector institutions share responsibility for information society strategy, policy
formulation, and implementation. Responsibility for implementation, particularly of e-
government initiatives, rests with individual ministries. None of these institutions has the
authority to coordinate, implement, and monitor policy implementation.
• The Committee of Information Society leads the legislative and regulatory work of the
Seimas (Parliament) that relates to the information society. This parliamentary
committee prepares draft laws and other legal acts and holds hearings with relevant
stakeholders.
• The Council of Knowledge Society advises the president of Lithuania on matters
pertaining to the information society.
• The Information Society Development Commission is chaired by the prime minister
and is composed of ministers and advisers, including from the private sector. This
consultative and advisory commission aims to coordinate key ministries associated
with the information society.
• The Information Society Development Committee, under the Ministry of the Interior
and Public Administration and the Ministry of Transport and Communications, plans
and coordinates initiatives for the information society at the level of implementation.
This committee has a permanent staff with significant capacity but lacks executive
powers and a clear mandate to coordinate and monitor policy implementation.
43. Given these institutional arrangements, strategies and action plans for developing an
information society have remained largely at the design stage. Experience in countries that are
successfully developing an information society, such as Ireland and Singapore, shows that
consolidating policy and implementation authority and technical capacity increases the
effectiveness of policy actions.
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Box A4.2: Building an Information Society in EU Candidate
Countries through e-Europe +
The European Commission has launched the e-Europe 2002 Action Plan, aimed at making
Europe "the most competitive and dynamic knowledge-based economy in the world."
The e-Europe 2002 Action Plan identifies three main priority areas on which activities
should focus in paving the way to an information society in EU member countries:
• A cheaper, faster, more secure Internet.
• Investing in people and skills.
• Stimulating use of the Internet
A parallel initiative has been launched to build an information society in the EU candidate
countries. The e-Europe + Action Plan—prepared by and for the EU candidate countries
with the support of the European Commission—mirrors the actions and priorities identified
by e-Europe 2002. The time frame for the EU candidate countries participating in e-Europe
+ is 2003, the same as for e-Europe, despite the different point of departure.
In drafting the action plan, the EU candidate countries agreed to accelerate actions aimed at
putting in place the basic building blocks for an information society, improving the
provision of affordable communication services for all, and transposing and implementing
the acquis communitaire relevant to an information society.
The e-Europe + Action Plan takes into account the structural differences between EU
member states and candidate countries
Source:http://europa.eu.int/information_society/topics/international/regulatory/
eeuropeplus/index_en.htm.
44. Policy proposal. Lithuania should consider consolidating in a single ministry the strategy,
policy, and implementation monitoring functions now with the Ministry of Transport and
Communications, the Ministry of Interior and Public Administration, the Information Society
Development Commission, the Information Society Development Committee, and other
institutions. This new Ministry for the Information Society (a precursor of which existed until
1997) would be responsible for establishing priorities for the development of an information
society in Lithuania; formulating policy; planning actions; coordinating activities; and carrying
out budgeting, financial management, and procurement. While line ministries would continue to
be responsible for the implementation of programs and activities associated with the
Government’s information society strategy, the new Ministry for the Information Society would
be empowered to coordinate, monitor, and evaluate implementation. The new ministry would
also work to build a common understanding and consensus on the policies for an information
society, enhance partnerships between government and the bus iness community, and increase
awareness and visibility of information society issues. The ministry would also coordinate
closely with the proposed Lithuania Technology Agency. The staff and functions of the
Information Society Development Commission would be integrated into the proposed ministry.
While different countries in Europe have taken different approaches, this model follows the
Slovenian approach (boxes A4.3 and A4.4).
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Box A4.3: Ireland—Public Sector Institutions at the Heart of the Information Society
Ireland established an overarching agency, the Information Society Commission
(http://www.isc.ie), to shape and manage the strategic framework for the Irish information
society and to coordinate e-development activities of different government agencies and
other ICT actors in the country. An advisory body for the prime minister, the commission
includes representatives of the private and public sectors, relevant government departments,
and social partners throughout the country. The commission’s functions include:
• Monitoring the implementation of the major activities by relevant government
departments and other key actors.
• Driving awareness campaigns targeting the enterprise sector and the general public.
• Establishing and monitoring the key benchmarks for the development of an
information society in Ireland.
• Encouraging and supporting local and regional information society initiatives.
• Identifying (and overseeing the establishment of) flagship projects to demonstrate the
benefits of the information society and win support for an Irish information society.
• Establishing advisory groups to further study potential information society benefits
and actions required in individual sectors of the economy.
Box A4.4: Slovenia—a Ministry for Information Society
The Slovenian Ministry for Information Society (http://www2.gov.si/mid/mideng.nsf)
was established in January 2001. Its responsibilities include issues related to
innovation, the informatics and information systems, development of information
technology, promotion of the information society and electronic commerce, and the
development of telecommunications links and systems.
Because it is a ministry, this institution has both policymaking and policy execution
powers and a budget to execute policies and programs.
The ministry’s main interventions in its first years of operation have been targeted at:
• Addressing the digital divide in the country.
• Promoting the knowledge economy and e-business in both the private and the
public sector.
• Promoting education and training for the information society.
• Sustaining the ICT sector in Slovenia with an emphasis on employment.
• Monitoring and implementing regulations in the area of infrastructure and e-
business.
• Harmonizing Slovenia's legislation with the EU standards.
• Evaluating and promoting sector-specific legislation.
45. Issue. The absence of a clear, coordinated institutional framework for an information
society in Lithuania hinders the implementation of strategies and action plans for addressing e-
Europe + and other initiatives. The main policy document on the development of an information
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society in Lithuania is the “Lithuanian Information Society Development Strategy,” prepared in
May 2000 by the Department of Information and Informatics of the Ministry of Public
Administration Reforms and Local Authorities. The main goals of this three- year strategy are to
use the opportunities offered by ICT to support information management with the aim of
improving people’s quality of life, learning, and working and leisure conditions; to create ICT
infrastructure in compliance with EU standards; and to create good conditions for Lithuanian
citizens for learning and using the potential of modern ICT. The Information Society
Development Committee has developed detailed action plans to complement the strategy, but
implementation has been pending.
46. Policy proposal. Lithuania should adopt a detailed “consensus” strategy and action plan
agreed on with the main stakeholders in policy and implementation. This information society
strategy should go beyond a political vision and be backed by detailed action plans.
Box A4.5: Singapore—Clear Action Plans to Pave the Way
for an Information Society and Knowledge Economy
Singapore’s lack of natural resources encouraged its government to invest heavily to turn
the country into “the Intelligent Island.” In doing so, the government paid much attention to
infrastructure, skills, and ICT adoption across government, society, and business.
Singapore's information technology initiatives evolved in three phases, each outlined in
national action plans that clearly identified targets, policies, resources, and actions.
The first phase, in the mid-1980s, launched the establishment of the National Computer
Board to manage and implement the Civil Service Computerization Program, aimed at
digitizing the public administration and supporting skills development for civil servants.
The second phase, guided by a National Information Technology Plan, was aimed at
supporting the creation of local ICT industry and enhancing business productivity through
ICT applications.
The third phase, based on the IT2000 master plan, focused on applying ICT to enhance
national competitiveness and improve the quality of life of Singaporeans.
Singapore provides a good example of the development of targeted and precise action plans
after a careful evaluation of local needs and potential. The action plans were formulated
after an analysis of the country’s 11 major economic sectors and through a consultative
process involving more than 200 senior executives from both the public and the private
sector.
Source:http://choo.fis.utoronto.ca/FIS/ResPub/IT2000.html.
Knowledge management, e-government, and e-business
47. Public and private sector knowledge management, supported by ICT, is an important
element of a knowledge economy. Knowledge management involves defining and managing:
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• Strategies for identifying, creating, and using information to support government and
private sector activities.
• The information life cycle—documenting, organizing, protecting, eliminating,
retaining, and preserving.
• Information integration, integrity, access, and privacy.
• Ownership, control, accountability, and responsibility.
48. For an institution or company to manage knowledge well, there needs to be a systematic
alignment of overall management, information management policies and processes, mindset and
culture, organizational structure, skilled labor, technology, and budgets.
49. E-government refers to the use by government agencies of information technologies—
such as wide area networks, the Internet, and mobile computing—that have the ability to
transform the government’s relations with citizens, businesses, and other arms of government.
E-business refers to the use of ICT to change businesses’ relations with their customers,
suppliers, and competitors.
50. Issues. Lithuania’s public sector faces several challenges in implementing its knowledge
management and e-government strategy. By far the most pressing concern is the need for
credible and organized leadership to set priorities, develop action programs, monitor the
implementation of these programs, and tackle issues of culture for knowledge sharing. Several
stakeholders have emerged in the planning phase, and their roles are unclear and overlapping.
51. The challenge of integrating information management systems and managing knowledge
across government institutions and sectors (for example, education, innovation, and R&D) has
not received sufficient attention. Public institutions often have no clear and documented
workflow process for their business activities, nor do they have a solid document management
process. Within government institutions, scattered and multiple databases (for example, state
registries) flourish with no integration or centralization, resulting in poor data quality and the
duplication of efforts and information. Private sector knowledge management is also poorly
developed (though there are a few exceptions, such as in the banking sector).
52. Government agencies have carried out a modest number of projects defined as e-
government, but most simply end up automating existing work processes. These projects lack
planning for business process reengineering or change management, required to create the
efficiencies associated with e-government. The Government should also consider addressing the
following obstacles:
• E-government initiatives are not aligned with public administrative reform projects.
• Local and national government agencies participate only sporadically in e-
government planning. This has led to confusion; agencies are not informed of
government strategies, and initiatives undertaken in different agencies are sometimes
not known to or understood by higher- level bodies.
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• Many different agencies are competing for ICT funding from international sources.
The lack of overall coordination and oversight for ICT spending, standards, and
projects (including procurement) has resulted in duplicative spending and redundant
efforts and has deterred data sharing and integration between agencies.
53. Although an e-government concept paper exists, competition for authority and
responsibility by different players has resulted in disagreement over the planning and approach
for e-government, paralyzing any real efforts toward implementation.
Policy proposals.
• Assign responsibilities for knowledge management and e-government policy,
strategy, and monitoring to the proposed Ministry for the Information Society (see
above).
• Develop a knowledge management strategy and action plan to accelerate the
integration of information systems within and among ministries and to implement
knowledge management systems within public institutions, systems credibly endorsed
at the highest political levels.
• Encourage knowledge sharing in organizations and provide the incentives and
environment for employees to do so. While this is most relevant for the public
administration, it also applies to many businesses.
54. Issue. There is a shortage of skilled technical and managerial staff to effectively
undertake knowledge management tasks. The education system does not produce the practical
and theoretical skills needed. And government institutions have difficulty retaining highly skilled
technical staff because of low salaries.
55. Policy proposal. Efforts should be made to create links between the public administration
and the education system to provide formal and informal training on knowledge management,
and to develop curricula for training in knowledge management.
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Box A4.6: Popular Government Web Sites in Lithuania
Where content is useful and relevant, Internet channels have been very popular in
Lithuania. The Parliament’s Web site (http://rc.lrs.lt/), which hosts a wealth of content in
Lithuanian, French, Russian, and English, attracts about 390,000 users a month. The
Parliament attributes this traffic to the frequent use of a legal database, accessible free of
charge. The Legal Information System contains about 120,000 documents, including all
laws published in the official gazette since 1999, documents of the Baltic Assembly,
international conventions and bilateral or multilateral agreements, texts of draft legal acts,
and translations of documents in English and Russian. Content is furnished daily, with
about 70 new documents a day and 1,500 a month.
Another frequently searched database is the EU document database ESIS
(http://europa.eu.int/ISPO/esis/default.htm), which provides reports on Lithuania’s
progress toward EU accession, its EU accession program, and EU legal acts. ESIS
contains more than 11,000 documents, half in Lithuanian, and receives about 7,000
searches a month. The Web site also provides content on parliamentary sessions,
members of Parliament, each parliamentary political group, and the work of each
standing commission.
The Ministry of Justice’s Web site (http://www.min.tm.lt/english/) has 6,700 regular
customers who use Infolex, an online legal database containing draft laws. The site
allows public comment, a feature widely used this year because of the new civil code,
which generated 36,000 visits and requests for information. Infolex is used mainly by the
legal community, which also discusses draft laws and provides legal consultations online.
The database is accessible for a fee of 20-80 LTL.
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Box A4.7: E-Development in Estonia
56. E-government typically occurs in a number of stages:
• Presence. Governments begin publishing information online, starting with rules and
regulations, documents, and downloadable forms. This allows citizens and businesses
to easily access government information without having to travel to government
offices, stand in long lines, or pay bribes. By helping governments tackle the problem
of inefficient bureaucracy and corruption, this capability can significantly alter citizen
and government relations.
• Interaction. Two-way communications develop, beginning with simple functions
such as email contact information for government officials or feedback forms that
allow citizens to comment on legislation or policy. This can also involve creating
online forums allowing new channels of citizen-government interaction and increased
political participation.
The remarkable success of e-government programs in Estonia is attributed largely to a political
commitment at the highest level to making the country’s ICT development integral to the growth of its
economy and the achievement of its development goals. In an effort to build broad-based connectivity
and make access to ICT a basic right, Estonia embarked on an ambitious e-readiness program to
promote the reform and growth of its ICT sector, which has been key to the success of Estonia's e-
government strategy. Leading the effort is the Ministry of Transport and Communications, which is
responsible for ICT development. Its mandate includes:
• Working closely with the private sector on initiatives for developing ICT infrastructure.
• Defining policies, standards, and procedures.
• Managing ICT development projects.
• Managing ICT planning and development for the public sector.
• Providing guidance and policy assistance to ICT working groups of ministries and other
government agencies involved in information technology.
To further strengthen its ICT development, Estonia demonopolized its telecommunications sector and
instituted a legal and regulatory framework for telecommunications that is consistent with EU
principles. Estonia's investment in ICT was followed by broad use of ICT applications in public
administration, banking, education, health, and transport. E-government applications in Estonia are
diverse. Cabinet ministers communicate, prepare legislation, and vote online over a portal. All
government documents and both live broadcasts and full -text transcripts of parliamentary sessions are
posted instantly on the government's main Web site. The portal allows citizens, businesses, and NGOs
to submit proposals to the government and comment on government proposals, increasing public access
and voice in decisionmaking. The E-Tax Board application allows citizens to file, view, and correct
their returns in real time. All government business is conducted through a secure, Web-based electronic
information system.
Source:http://www.riik.ee/.
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• Transaction. Web sites provide direct links to government services—such as land
registration or the renewal of identification cards—allowing citizens to access the
services at any time, at home or through kiosks in public places.
• Transformation. Portals and Web sites allow citizens to conduct transactions online,
such as filing taxes, paying fines, and submitting forms and declarations. These
services can result in significant cost savings for public agencies, greater public
accountability, and better service delivery for citizens. Back-end processes are
streamlined to allow businesses, citizens, and government to access government
services and information and to interact with government through a “one-stop shop”
without having to visit several government agencies or navigate through a maze of
Web sites.
57. Lithuania is between the first phase—presence—and the second—interaction (figure
A4.4). The challenge for Lithuania is to move from these phases toward the transaction phase.
For a number of reasons, the Lithuanian government has been unable to move forward.
Figure A4.4: Road Map to E-Government
Source: Gartner Group
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58. Issue. The absence of an adequate legal framework for electronic transactions hampers
the provision of both e- government and e-business services in Lithuania. Despite initial steps
toward harmonizing domestic legislation with international standards for electronic transactions,
Lithuania lags behind in passing relevant regulations.
59. A plausible regulatory framework must be in place to ensure that electronic transactions
can take place effectively and securely. The legal environment for e-business should include
legislation on e-signatures, e-commerce, e-documents, and data and information collection,
sharing, and use, and provide solid ground for protecting consumers’ rights.
60. In drafting and implementing relevant legislation, Lithuania is aligning with EU
directives and standards to ensure consistency with the acquis communautaire in e-commerce.
The Seimas passed an e-Signature Law in July 2001, but lack of supportive secondary
legislation—relating mainly to the establishment of certification agencies—prevents the law
from being fully implemented. A Law on Electronic Commerce is under preparation in the
Seimas.
61. The Lithuanian government passed a law on legal protection of personal data in 1996 and
has amended it in compliance with EU Directive 95/46/EC. The revised law on the Legal
Protection of Personal Data came into force in January 2001. Moreover, in early 2001 the
Seimas ratified the Convention of the Council of Europe for the Protection of Individuals with
Regard to Automatic Processing of Personal Data.
62. Policy proposal. The legal framework should be fully aligned with international
standards to ensure that digital transactions are possible (e-signature legislation) and fully
protected (digital documents, e-commerce regulation). In this area Lithuania seems to have
fulfilled only a few of the formal requirements, while more efforts need to be undertaken to
ensure full implementation of the legislation governing the Internet and electronic transactions.
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Box A4.8: Addressing the Digital Divide in Lithuania
Lithuania has 680 Internet users per 10,000 people, compared with 1,480 in Estonia, 720 in Latvia, and almost
4,000 in the European Union. Only 3.2 percent of households in Lithuania have an Internet connection,
compared with 36 percent in the European Union. And surveys have found that a third of Lithuanians have no
idea what the Internet is or what it can do for society. Thus they remain unaware of the many opportunities
offered by ICT opportunities.
Large differences exist between residents of cities and rural areas. In 2001, 23 percent of citizens in Vilnius
had a computer at home, compared with only 4 percent of the rural population. About 11 percent of the people
in Vilnius had access to the Internet at home, while only 1.3 percent of the rural population did. User
proficiency also varied: about 36 percent of people in Vilnius knew how to use the Internet, compared with only
8 percent of rural dwellers. For people in Kaunas, Klaipeda, Siauliai, Panevezys, and Alytus the figures are
between those in Vilnius and rural areas. A key issue in rural areas is the cost of access.
The potential benefits of extending access and use of ICT to poor people and regions are large. These benefits
include better information flows, better opportunities for job searches and job creation, and communication and
networking (including with governments) that can enhance the democratic process, improve government
services, and permit distance learning. Extending access and use of ICT is a challenge. But it is also a great
opportunity to involve marginalized groups in the move toward a knowledge-based economy and to reduce
social exclusion. A case can be made for properly designed subsidies to improve access to ICT, on grounds
similar to those for subsidies for public education.
Experience has shown that successful efforts to extend access and use of ITC depend on government (including
local government), leadership and funding, public-private partnerships, and strong NGOs and community
organizations. Lithuania is well positioned in all these respects.
In April 2002 the private sector took the lead in launching a new digital program, Window to the Future, on a
pilot basis. Funded by a consortium of four companies (Vilnius Bank, Hansa Bank, Omnitel, and Telekomas),
the program aims to provide Internet centers to people in towns and villages. The program is not intended to
compete with Internet cafes, but to offer free public Internet access points in public facilities.
In June 2002 the Information Society Development Committee, a special government department, announced a
major new initiative to provide public Internet access points throughout the country. This initiative is now
being pursued as a public-private partnership with the Window to the Future program (http://www.ivpk.lt/en/).
The Open Society Foundation (supported by the Soros Foundation) is developing a program for ICT awareness
and development in rural areas, concentrating on small towns and rural villages. Its program sets out several
key objectives: raising awareness about the need to extend use of ICT in local communities and the social
opportunities it offers, developing an environment supporting the use of ICT, evaluating the readiness of
districts in Lithuania for the pilot project “Digital Community,” and initiating pilot projects in selected urban
and rural districts aimed at overcoming the digital divide. The program emphasizes training and content
development. The Open Society Foundation has a solid record and experience in community development work
in many countries in Eastern Europe.
Municipal administrations in the six largest cities (Vilnius, Kaunas, Klaipeda, Panevezys, Siauliai, and Alytus)
seem to be well aware of the digital divide and are keen to help. Each of these cities has fringe communities
living at the periphery and residents facing digital divide problems. In smaller cities and in rural areas local
governments have limited financial and administrative capacity. One way to tackle the problem there would be
to ask the Association of Lithuanian Municipalit ies (ALAL) to devise a mobile outreach program with skilled
users to visit each of the 64 municipalities smaller than the top six cities and consult with them on installing and
maintaining public Internet access points in municipal buildings.
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63. Many locations in Lithuania already have active community centers, multipurpose
organizations that typically focus on solving urgent community problems such as alcoholism and
child abuse. The centers usually depend on one or a few strongly motivated, salaried individuals.
Without such individuals there is no viable community center. Connecting these community
centers with one another and with the international community are about 20 NGO support
centers, umbrella organizations supported by international donors. These support centers could
play a useful role in helping communities design, pilot and implement community support
projects .
64. The Citizens Advisory Union, a Lithuanian NGO, has begun sharing knowledge about
government processes with citizens. The NGO has trained 200 people all over the country to
provide information to citizens about laws and government services, especially in low- income
communities. The group has received 4,000 visits from people inquiring about issues ranging
from labor laws to pension information. With a free phone line provided by Lietuvos
Telekomas, the group also conducts phone consultations. The group has produced a CD-ROM
about different government laws and services and distributed the CD-ROM to its 10 bureaus,
where volunteers use it to provide information to visitors and callers.
65. Issue. The scarcity of content in local language affects the demand for e-services (both e-
government and e-business) and increases the gap between social groups—between the young
and the elderly, and between high- income (and English speaking) and low- income groups.
66. Policy proposal. Support should be given (selectively) to initiatives for creating local
content and converting local knowledge into digital content. There are opportunities for local
companies and organizations to participate in EU programs aimed at creating local content, such
as the e-Content Program.
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doc_800427962.pdf
In the course of preparing this report, information, insights and comments have been provided from the following individuals in Lithuania.
Lithuania
Aiming for a Knowledge Economy
March 2003
The World Bank
Europe and Central Asia Region
This report was prepared by Messrs./Mmes: Severin Kodderitzsch (Team Leader); Lars Jeurling (Co-Team
Leader, Private Sector Development); Lorenzo Costantino (Information Society); Ramin Shojai and Dan
Crisafulli (IFC) (Private Sector Innovations); David Fretwell (Education); Erlendas Grigorovic (Civil Society,
Anti-Corruption); Deborah Knight, Nora Kaoues, Arsela Dean (Knowledge Management, e-Government);
Misrak Leta (Benchmarking and Statistics); Tarmo Lemola (Research & Development) Gareth Locksely
(Telecommunications), Jeffrey Balkind (Municipalities and Digital Divide), Vladimir Hrkac (Research
Assistant) and Sophia Cox (Formatting)
In the course of preparing this report, information, insights and comments have been provided from the
following individuals in Lithuania and are gratefully acknowledged: Messrs./Mmes. R.Gudauskas, Advisor to
Prime Minister, Government Office; V.Salauskas, Secretary of the Ministry, Ministry of Transport and
Communications; A.Matulis, Director, Information Policy Department, Ministry of Interior; G.Steponaviciene,
Vice President, Lithuanian Free Market Institute; J.Zalatorius, Director, Committee of the Development of
Information Society, Government Office; M.Wolf, Consultant, Committee of the Development of Information
Society, Government Office; V.Snitka, Kaunas University of Technology; B.Rope, President, Association of
Municipalities; V.Lepeška, Director, Organizations Development Center; A.Targamadze, Dean, Information
faculty, KTU; D.Maikštenas, Strategy Coordinator, Omnitel; V. Dienys, Director, Methodological Center for
Vocational Education & Training, National Observatory; R.Vilimiene, Director, National Association of Adult
Education; V.Budiene, Open Society Fund of Lithuania; T.Jovaisa, Head of Lithuanian Labor Market Training
Authority; V.Vitkauskas, President, INFOBALT Association; R.Tamulevicius, Director, INFOBALT
Association; K.Juškevicius, Open Society Fund Lithuania; R.Morkunaite, Head of Economic Research Center;
E.Vilkas, Science Academy of Lithuania; A.Žalys, Director, Science and Education Department, Ministry of
Higher Education and Science; A.Milinaviciene, Adult Education Sector, Ministry of Higher Education and
Science; A.Bartusevicius, Director, Sonex; V.Šleinota, Director, Vilniaus Vingis; A.Kubilius, Member of
Parliament; L.Mogeniene, Chairperson, Association of SME of Kaunas region; T.Milaknis, Director, ALNA;
G.Babravicius, Deputy Chairman; R.Pavilionis, Member of the Parliament; D.Bardauskiene, Advisor to Mayor,
Vilnius Municipality; R.Krišciunas, Director, Financial Support Department, Ministry of Finance;
R.Grineviciute, Vilnius University; and K.Sabaliauskas, Director, Cadastre Registre, State Company.
Cover photographs by ELTA, Lithuania.
List of Abbreviations
ALL - Adult Literacy and Life Skills
BEEPS - Business Environment and Enterprise
Performance Survey
CES - Citizenship and Education Study
CRA - Communications Regulatory Authority
EU - European Union
FDI - Foreign Direct Investment
FIAS - Foreign Investment Advisory Service
GDP - Gross Domestic Product
IALS - International Adult Literacy Survey
ICT - Information and Communications Technologies
IEA - International Association for Evaluation of
Educational Achievement
ISP - Internet Service Provider
NGOs - Nongovernmental Organizations
INFOBALT - Information and Communications Technology
Association in Lithuania
OECD - Organisation for Economic Co-operation and
Development
PISA - Program of International Student Assessment
R&D - Research and Development
SBIR - Small Business Innovation Research
SMEDA - Lithuanian Development Agency for Small and
Medium-Size Enterprises
TIMSS - Third International Mathematics and Science
Study
Lithuania
Aiming for a Knowledge Economy
Contents
Preface ............................................................................................................................................. i
Summary: An Strategy for the Emerging Knowledge Economy Strategy..............................ii
Challenges for Lithuania in Achieving the Knowledge Economy .............................................1
Challenges—Old and New ........................................................................................................1
Lithuania’s Competitiveness .....................................................................................................2
Progress Toward a Knowledge Economy..................................................................................3
Where to Start—and When?......................................................................................................5
Lifelong Learning for the Knowledge Economy: Challenges for Education and Training...7
Defining and Assessing Key Competencies ..............................................................................8
Addressing Governance and Management Challenges .............................................................9
Financing Education..................................................................................................................9
Opening Pathways Within and Between Learning Systems ....................................................10
Improving Equity, Access, Motivation....................................................................................10
Lithuania’s Innovation System: Connecting Researchers and Businesses ...........................12
Formulating and Coordinating Innovation Policy ..................................................................13
Increasing the Relevance, Efficiency, Accountability of Research and Development ...........14
Consolidating Research Capacity............................................................................................15
Adjusting Funding for University Research............................................................................15
Improving Data to Support Innovation....................................................................................16
Fostering a More Supportive Business and Regulatory Environment .....................................16
Strengthening Business Support Programs..............................................................................16
Improving Access to Equity Funding......................................................................................17
Increasing the Private Sector’s Role in Public Services ..........................................................17
Mobilizing the Private Sector to Foster Competition and Cooperation..................................18
Building an Information Society ...............................................................................................19
Building Regulatory Capacity in Telecommunication ...........................................................19
Providing Universal Access to Telephones and the Internet ...................................................19
Unbundling Local Loops .........................................................................................................20
Addressing the Authorization Concept....................................................................................21
Ensuring Efficient Interconnection..........................................................................................21
Consolidating Responsibilities for the Information Society....................................................21
Implementing Strategies and Action Plans ..............................................................................22
Promoting Knowledge Management, e-Government, and e-Business ....................................23
Conclusions: Implementing the Knowledge Economy ............................................................25
Annex 1: Challenges for Lithuania in Achieving a Knowledge Economy ............................27
A Changing World...................................................................................................................27
Lithuania’s Competitiveness ...................................................................................................29
Gradual Progress on the Knowledge Economy Agenda..........................................................31
Benchmarking the Knowledge Economy ................................................................................32
When to Start? .........................................................................................................................34
Annex 2: Lifelong Learning for the Knowledge Economy – Challenges for
Education and Training ..............................................................................................................35
Learner Perspective .................................................................................................................36
Economic and Labor Market Perspective ................................................................................37
Thematic Education Policy Perspective ..................................................................................40
Defining and Assessing Key Competencies ............................................................................42
Governance and Management Challenges...............................................................................49
Financing .................................................................................................................................51
Opening Pathways within and between Learning Systems .....................................................55
Equity and Access....................................................................................................................57
Research and Knowledge Generation......................................................................................60
Annex 3: Lithuanian’s Innovation System: Connecting Researchers and
Businesses .....................................................................................................................................61
Introduction..............................................................................................................................61
Challenges................................................................................................................................63
• Defining Innovation Policy in Lithuania .......................................................................87
• Research & Development : Relevance, Efficiency, Accountability...............................90
• Business and Regulatory Environment...........................................................................96
• Policy Proposals..............................................................................................................96
• Private Sector Interaction with Public Services..............................................................98
• Mobilizing the Private Sector .........................................................................................99
Annex 4: Building an Information Society in Lithuania.......................................................101
Information Infrastructure and Telecommunications Sector.................................................102
Policy Issues and Proposals ..................................................................................................110
Background Papers and References ........................................................................................128
List of Figures
Figure 1: Scores on the knowledge economy index scores for various countries
and regions 1995 and 2000-02.................................................................................4
Figure 2: Lithuania’s performance in developing knowledge economy, 1995
and 2000-02 .............................................................................................................5
Figure A1.1: Knowledge economy index: scores for various countries, 1995 and
2000-02..................................................................................................................32
Figure A1.2: Lithuania’s performance in developing a knowledge economy, 1995
and 2000-02 ...........................................................................................................33
Figure A3.1: Institutional Setting for R & D in Lithuania..........................................................66
Figure A3.2: Foreign Direct Investment Inflows in Lithuania, 1997-2001................................79
Figure A4.1: Total Teledensity (Fixed and Mobile) and GDP Per Capita................................104
Figure A4.2: Internet Users and GDP per Capita .....................................................................104
Figure A4.3: Urban-Rural Teledensity Ratio (Fixed Access) and GDP per Capita .................105
Figure A4.4: Road Map to E-Government................................................................................124
List of Tables
Table A1.1: Current Competitiveness Index and Growth Competitiveness Index....................29
Table A1.2: Current Competitiveness Index.............................................................................30
Table A1.3: Growth Competitiveness Index.............................................................................31
Table A2.1: Composition of Employment (percent) .................................................................38
Table A2.2: Unemployment and Employment by Education Level, 2000 (percent) ................40
Table A2.3: Selected Knowledge Economy Indicators related to Human Development..........41
Table A2.4: Citizenship and Education in Selected Countries ..................................................44
Table A2.5: Percentage of Student s Reaching Median in Math and Science............................54
Table A2.6: Students in Vocational and Total Upper Secondary School, 1996-2001 ..............46
Table A2.7: Options of Financing Lifelong Learning...............................................................52
Table A3.1: Europe Innovation Scoreboard 2002 – Candidate Countries ................................63
Table A3.2: Structure of Lithuanian Imports, Selected Years, 1996-2001 ...............................79
Table A3.3: Financing Growth Companies—By Stage of Investment .....................................82
Table A3.4: Legal Constraints to Growth Investing in Lithuania .............................................84
Table A4.1: Readiness of the Networked World.....................................................................102
Table A4.2: International Internet Bandwidth and Internet Hosts, 2001.................................106
Table A4.3: Peak Tariffs for 30 Hours a Month of Dial- up Internet Access, 2001 ................107
Table A4.4: International Telephone Traffic, 2000.................................................................107
Table A4.5: Telephone Access in the Capital City and the Rest of the Country, 2000...........108
Table A4.6: Fixed, Mobile and Total Telephone Penetration, 2001 .......................................108
Table A4.7: Network Growth, 2000-01...................................................................................109
Table A4.8: Telecommunication Revenues, 2000...................................................................109
List of Boxes
Box A1.1: EU Structural Funds ..............................................................................................34
Box A2.1: Korea’s Credit Banking System—promoting lifelong learning opportunities ......56
Box A2.2: Recognizing nonformal, informal, and nontraditional learning—approaches
around the world ....................................................................................................56
Box A3.1: Vilnius—a Knowledge Economy City..................................................................71
Box A3.2: Vilniaus Vingis—Using Subcontracting to Integrate into Global Networks ........72
Box A3.3: Moving Up the Value Chain in the Apparel Industry............................................76
Box A3.4: Vilniaus Baldu Kombinatas—Working Closely with a Multinational..................77
Box A3.5: Ireland—Innovation through Foreign Direct Investment ......................................78
Box A3.6: Policy Coordination to Improve Governance of the Innovation System...............89
Box A3.7: National Technology Programs in Finland—Increasing Flexibility and
Cooperation............................................................................................................91
Box A3.8: The Hungarian Experience—Fostering Links between Industry and Research...91
Box A3.9: Benchmarking National Research Policies in Europe ...........................................92
Box A3.10: Specialized Technology Research Institutes—a Device to Renew State Research
Institutes.................................................................................................................94
Box A3.11: The Small Business Innovation Research Program...............................................95
Box A4.1: The “Smart Subsidy” Approach to Universal Access ........................................113
Box A4.2: Building an Information Society in EU Candidate Countries through
e-Europe + ...........................................................................................................117
Box A4.3: Ireland—Public Sector Institutions at the Heart of the Information Society.......118
Box A4.4: Slovenia—a Ministry for Information Society....................................................118
Box A4.5: Singapore—Clear Action Plans to Pave the Way for an Information Society and
Knowledge Economy...........................................................................................119
Box A4.6: Popular Government Web Sites in Lithuania ......................................................122
Box A4.7: E-Development in Estonia...................................................................................123
Box A4.8: Addressing the Digital Divide in Lithuania .........................................................126
Preface
The ability to acquire and use knowledge is increasingly important for countries’
economic competitiveness. Moreover, the importance of knowledge for development will likely
continue to grow—possibly making the difference between prosperity and poverty, both between
and within countries. Acquiring and using knowledge require access to and the ability to use
information and communications technology. But they also require efficient education systems
that provide opportunities for life- long learning, new approaches to innovation that bring
together researchers and entrepreneurs, and an economic and institutional framework that
supports the use of knowledge to provide new and competitive products and services.
The knowledge-based economy—in a broad sense, embracing but going beyond
information and communications technology—has been the subject of much discussion among
international entities such as the World Bank, the European Commission, the Organisation for
Economic Co-operation and the Development, and World Economic Forum. The
implementation of concepts associated with the knowledge economy has also been part of policy
debates at the national level, including in Lithuania.
European Union (EU) candidate countries have had varying success in adopting elements
of a knowledge economy. Many have reformed policies and institutions to support national
innovation systems and are striving to integrate with the European Research Area. Others are
reviewing approaches to education, including tertiary education and training. All have agreed to
implement a common “e-Europe+” action plan and are developing national strategies to address
key areas of the knowledge economy. But in most EU candidate countries, including Lithuania,
there remains scope for broadening the agenda for discussion and action from a knowledge
economy perspective.
This report is intended to stimulate the ongoing debate in Lithuania on economic
development from a knowledge perspective, and to help build consensus on how best to design,
prioritize, and implement an agenda for modernization. In its efforts to develop a knowledge
economy strategy and action plan, the Government of Lithuania requested World Bank support
in performing a knowledge economy assessment. This report reflects work carried out by a
World Bank team in collaboration with a Lithuanian Knowledge Economy Team coordinated by
the Prime Minister’s Office. It also reflects numerous comments and insights provided by
various institutions, groups, and individuals in Lithuania in the course of reviewing a series of
working papers and an earlier version of this report, covering the period from the first visit by the
World Bank team in May 2002 through November 2002—including comments from a seminar
on September 26, 2002 and final comments provided during discussions on November 26-28,
2002.
- ii -
Summary: A Strategy for the Emerging Knowledge Economy
I. Knowledge is increasingly crucial for productivity, competitiveness, and growth. While
Lithuania has a well-established culture of valuing knowledge, it is using its knowledge assets—
human resources, education systems, researchers and entrepreneurs, and so on—below capacity,
and so forgoing opportunities to compete internationally as well as potential growth and income.
II. In recent years Lithuania has made progress in a few areas of the knowledge-based
economy, particularly in terms of improving the economic and institutional regime and
developing infrastructure for information and communications technology. But less progress has
been made on improving education systems, and Lithuania has performed poorly in advancing its
systems for innovation.
III. The challenge for Lithuania is to develop new engines of growth and to diversify
economic activities. Key to improving competitiveness are the systematic generation, use, and
communication of knowledge throughout the economy and society—not just in high-tech sectors
but also in areas such as textiles, wood processing, and agribusiness. And not just among the
educated elite, but among the general population. The ability to network within and outside
Lithuania, supported by Internet access, will become increasingly important to accessing and
using knowledge.
IV. Given the time it takes to build consensus and implement policy changes, the time to start
is now. Other countries are moving ahead with revised approaches to education, tele-
communications regulation, and science and technology policies. Yet Lithuania is struggling
with significant blockages to implementing the changes required for a knowledge economy.
Mistrust between the public sector and businesses, poor communications between public
institutions, and insufficient cooperation persist. Increasing partnerships among different social
partners will be crucial for Lithuania to move ahead.
V. In addition to a sound macroeconomic framework, flexible labor markets, and effective
social protection policies, a knowledge economy requires effective integration of education
systems, innovation systems, and information and communications infrastructure. The proposals
presented in this report form the core of an agenda that aims to support Lithuania’s efforts to
achieve a knowledge economy. These proposals can be grouped in six categories involving both
policy measures and private initiatives.
Ø I mprove collaboration between the business community and the public sector
(including the research community and education institutions) by:
o Linking the research and business communities more closely in developing and
commercializing technical innovations.
o Providing the business community with a significantly increased role in
formulating future innovation policies and programs.
o Increasing collaboration between the business community and the education
sector through shared governance at the higher education level and participation
in formulating education policies (among others, vocational training).
- iii -
o Increasing the sophistication with which the private sector represents Lithuania’s
long-term business interests.
o Expanding the private sector’s ability to compete and cooperate.
Ø Reform and support public institutions that are critically associated with a
knowledge economy, including:
o Establishing a ministry of the information society to consolidate strategy, policy,
and monitoring functions currently spread across a number of public institutions.
Coordination of the Government’s knowledge management plans and e-
government activities should be part of the ministry’s mandate.
o Strengthening the capacity of the Communications Regulatory Agency.
o Strengthening innovation policy coordination through a Science and Technology
Policy Council, with meaningful business sector participation in policymaking
and a permanent secretariat.
o Establishing a Lithuania Technology Agency to support the business community
in technology research and development, dissemination, and commercialization;
establishing this agency should involve merging a number of existing
organizations with similar functions.
o Consolidating state research institutions into a Lithuanian Institute of Technology
with a mandate to undertake technology development on a research contract basis.
o Identifying an institution able to establish and certify education equivalencies
between formal education institutions in Lithuania and the European Union, and
to address equivalencies between nonformal learning opportunities and formal
education institutions.
o Strengthening statistical systems for education, innovation and the information
society, including benchmarking Lithuania against countries of key interest.
Ø Provide incentives for innovation, learning, and networking within the information
societyby reviewing old and introducing new fiscal support measures, including:
o Reviewing the full range of education financing mechanisms (of which only a few
are currently applied), particularly for tertiary education, with the aim of
increasing efficiency, equity, and access.
o Providing tax credits, learning vouchers, and the like to motivate enterprises and
employees to invest in training.
o Moving from institution-based funding of public research and development to
program and project funding, thereby improving the relevance, efficiency, and
accountability of resources spend on research and development while ensuring
long-term funding for research activities.
o Reassessing and possibly consolidating the broad range of support measures for
small and medium-size enterprises (for example, under the above- mentioned
Lithuania Technology Agency).
o Introducing “smart subsidies” to support universal access to telephone and
Internet services.
- iv -
Ø Support labor market development, thereby reducing unemployment in the medium
term by reducing current and future skill gaps, by:
o Defining and assessing the key competencies required for a knowledge economy.
o Reviewing content for primary and secondary education and for vocational
training.
o Improving monitoring of labor market conditions.
o Defining occupational standards as a basis for formulating training curriculums.
Ø Strengthen the regulatory framework in terms of:
o The business environment (in particular, access to equity markets).
o The telecommunications sector (local loop unbundling, authorization, inter-
connection).
o The information society (electronic transactions).
VI. The proposals outlined above and discussed in more detail in the report provide the core
of an action program that would allow Lithuania to make progress in aiming for a knowledge
economy. Implementation of such a program will require consensus and joint action among key
actors:
• The Government, which will need to facilitate actions and integrate the aspirations of
many stakeholders.
• The business community, which is the driver of innovation in the economy and will
need to play a more substantive role in working with the Government to develop and
implement policies for a knowledge economy, as well as direct activities in
networking and promotion.
• The education and research communities, which will increasingly become the
providers of demand-driven learning and research services.
• Civil society, as both a participant in and source of demand for products and services
in the knowledge economy.
Lithuania
Aiming for a Knowledge Economy
Challenges for Lithuania in Achieving a Knowledge Economy
1. Research and the recent economic success of many (often small) countries suggest
increasingly strong links between knowledge and productivity, competitiveness, and economic
growth. In Lithuania, strengthening these links and moving toward a knowledge-based economy
require simultaneous progress on:
• Developing education systems and human resources to ensure that citizens are
equipped to acquire, apply, and share knowledge.
• Establishing innovation systems that bring together networks of researchers and
businesses to improve commercial applications of science and technology.
• Building an information society infrastructure that gives all people access to
affordable and effective information and communications technology—supporting
education, innovation, and networking.
• Providing an economic and institutional framework that ensures a stable
macroeconomic environment as well as increased competition, flexible labor markets,
and adequate social protection.
2. Since the early 1990s Lithuania—along with Estonia and Latvia, which have similar
income levels—has experienced a remarkable economic turnaround relative to other countries
that were part of the former Soviet Union, such as Belarus and Ukraine. Lithuania has
completed the transition from a planned to a market economy and has largely adopted the acquis
communautaire (the body of legislation of the European Communities and European Union),
bringing it to the threshold of EU accession. In recent years economic growth has been strong,
averaging 4-5 percent a year (except in 1999, due to the Russian Federation’s financial crisis),
and the macroeconomic environment has been stable. Strong growth has been driven by diverse
and growing small and medium-size enterprises and by increasing exports of manufactured
goods, facilitated by Lithuania’s labor cost advantages.
3. Lithuania has also started to make progress on many of the elements required for a
knowledge-based economy. For example, it has participated in EU research programs, prepared
a white paper on science and technology, agreed to implement the e-Europe+ action plan,
adopted various information society and e-government strategies, and signed a memorandum of
understanding on information society development between the private sector and the
Government.
Challenges—Old and New
4. Yet Lithuania continues to face challenges associated with transition. Unemployment,
which stood at 17 percent in 2001, is highest among lower-skilled workers. Poverty, which
ranged from 10-25 percent of the population in 2000 (depending on the measure used), is
concentrated in rural areas. And agriculture lags behind other sectors in terms of performance
and growth. Agricultural activities need to be modernized, and the potential social costs of this
- 2 -
modernization can be eased by developing the rural business environment and supporting
alternatives to farming. Many Lithuanians will measure the success of EU membership in terms
of the economy’s ability to achieve convergence between incomes in Lithuania and other EU
member countries—convergence that is still many years away (World Bank 2002).
5. Lithuania will also face new challenges in the next few years. Competitive pressures will
increase as Lithuania joins the EU and faces increased competition on the Single Market.
Moreover, Lithuania’s ability to compete based on the production of labor- intensive goods
requiring few skills will become more difficult as wages rise with economic growth. Finally, the
phase-out of the Multifiber Agreement in 2005 will lower the prices of textile and clothing
exports from developing countries—putting pressure on Lithuanian manufacturers because
textiles and clothing account for one-third of their exports to EU markets.
6. Lithuania has evolved enormously since achieving independence in the early 1990s. But
the world has also changed considerably, creating opportunities as well as challenges. A new
world economy is in the making, reflecting a technological revolution and an economic one
(Rischard 2002). The technological revolution, driven by plummeting costs of information and
communications technology and increased codification of knowledge, has spurred technological
developments in many fields, including biology, energy, nanotechnology, and new materials.
Business and science have developed closer links—increasing innovation, shortening product
life-cycles, and making education, worker skills, and lifelong learning more important than ever.
7. The economic revolution is being driven by powerful growth in world trade and
international investment. Alliances between enterprises (including but going beyond joint
ventures and mergers and acquisitions) have become crucial. In addition, value chains—the
division of production and marketing functions among cooperating firms working across national
boundaries—have become longer. More services are being supplied over greater distances,
businesses are being reshaped from the ground up, and new product and service ideas are being
generated.
8. Creativity and knowledge have become important factors of production in the new world
economy, similar to capital, labor, land, and natural resources. Thus Lithuania must implement
knowledge-supporting policies to increase its competitiveness and raise productivity.
Lithuania’s Competitiveness
9. According to the Global Competitiveness Report 2002/2003 recently issued by the World
Economic Forum, Lithuania’s current ability to compete internationally ranks 49
th
among 75
countries—well ahead of the Russian Federation and Ukraine yet placing Lithuania among the
less competitive countries soon to join the EU. In terms of likely future competitiveness,
Lithuania ranks 43
rd
, suggesting that current policies will slightly improve matters. Still, these
rankings indicate that considerable improvements are needed if Lithuania’s income convergence
with current EU members is to accelerate.
11. According to the World Economic Forum, a country’s current competitiveness is driven
by two factors:
- 3 -
• The sophistication with which a country’s companies compete—in terms of using
sophisticated business strategies and moving away from advantages based on natural
resources or low-cost labor (or both) to more distinctive products made using more
productive methods.
• The quality of the business environment—in terms of the quality of input and factor
markets, the competitiveness of the business environment, the extent of demand (in
both domestic and export markets), and the presence of local support industries.
Lithuania’s relatively low ranking based on these two elements points to the challenges ahead.
12. A country’s future competitiveness, again according to the World Economic Forum, is
largely a function of its ability to innovate (as indicated by a technology subindex, on which
Lithuania ranks 41
st
—among the lowest of EU accession countries) and the quality of its public
institutions (where Lithuania ranks 34
th
) and macroeconomic environment (where Lithuania’s
relatively low ranking – 56
th
– may have been influenced by the Russian Federation’s financial
crisis).
Progress toward a Knowledge Economy
13. Lithuania’s relative progress in developing a knowledge economy was assessed using a
benchmarking methodology developed by the World Bank Institute (for more information on the
methodology, see www1.worldbank.org/gdln/kam.htm). Indicators were collected for 100
countries on three variables for each of the four main dimensions of a knowledge economy:
education, innovation, information society (infrastructure), and economic and institutional
framework. Countries were ranked on a scale of 0 (lowest) to 10 (highest) for each variable,
then the 12 variables were averaged to produce a summary measure—the knowledge economy
index.
14. Using this index, Lithuania made progress between 1995 and the most recent period
(ranging from 2000 to 2002 depending on data availability), moving from a score of 5.6 to 6.7
(figure 1). This higher score places Lithuania ahead of the average score for EU candidate
countries (6.6) and ahead of Latvia, Romania, Turkey and Bulgaria. Based on this index,
Lithuania ranks behind the Visigrad Countries and Estonia, as well as the average score for EU
member countries (8.12) and the G7 countries (8.17).
- 4 -
Figure 1: Scores on the knowledge economy index - various countries, 1995 and 2000-02
Source: World Bank Institute data
15. In terms of the four dimensions of a knowledge economy, Lithuania made the most
progress in developing its information and communications infrastructure and improving its
economic and institutional framework (figure 2). Less progress was made in improving
education systems, though literacy and enrollment rates were already high in 1995. And when it
came to fostering innovation systems, Lithuania’s performance was poor.
Knowledge Economy Index
4.00
5.00
6.00
7.00
8.00
9.00
10.00
4.00 5.00 6.00 7.00 8.00 9.00 10.00
1995
M
o
s
t
r
e
c
e
n
t
Turkey
Romania
Ukraine
Latvia
Lithuania
Russia
Bulgaria
Cyprus
EUCC12
Greece
Slovak Rep.
Hungary
Portugal
Poland
Slovenia
Czech Rep.
Italy
Estonia
France
EU15
G7 Germany
Ireland
UK
Finland
Sweden
Denmark
Netherlands
Knowledge Economy Index
4.00
5.00
6.00
7.00
8.00
9.00
10.00
4.00 5.00 6.00 7.00 8.00 9.00 10.00
1995
M
o
s
t
r
e
c
e
n
t
Turkey
Romania
Ukraine
Latvia
Lithuania
Russia
Bulgaria
Cyprus
EUCC12
Greece
Slovak Rep.
Hungary
Portugal
Poland
Slovenia
Czech Rep.
Italy
Estonia
France
EU15
G7 Germany
Ireland
UK
Finland
Sweden
Denmark
Netherlands
- 5 -
Figure 2: Lithuania’s performance in developing a knowledge economy, 1995 and 2000-02
Source: World Bank Institute data
16. Although Lithuania has a long-established culture of valuing knowledge, its actual and
potential knowledge assets—human resources, education systems, researchers and entrepreneurs,
and so on—are being underused in generating economic benefits. Thus opportunities are being
lost in terms of boosting growth, incomes, and international competitiveness.
Where to Start—and When?
17. Lithuania has a small population (about 3.5 million people) and economy ($11.3 billion
GDP in 2000), resulting in a gross national income per capita of $2,930. Moreover, it covers a
small area (65,000 square kilometers) and has a narrow natural resource base. The country’s
main challenge is to diversify economic activities and develop new engines of growth. Key to
improving competitiveness are the systematic generation, use, and transfer of knowledge
throughout the economy and society—not just in high-tech sectors but also in traditional sectors
such as textiles, wood processing, and agribusiness. And not just among the educated elite, but
among the entire population.
18. With EU accession and significant amounts of EU structural financing becoming
available in 2004, Lithuania has an opportunity to fund a broad range of public investments and
programs to support a knowledge-based economy. This opportunity should be used to build
broad consensus on the vision and steps to be taken in moving toward a knowledge economy—
and on how to translate this vision into an action plan of well-defined, achievable programs and
0
5
10
Econ. Incentive
Regime
Innovation
Education
Information
Infrastructure
most recent 1995
- 6 -
projects supported by the EU. Given the time it takes to build consensus, implement policies,
and achieve change, the time to start is now. Other countries, both in the region and elsewhere,
are revising their approaches to and policies for education, telecommunications, and science and
technology. The following sections describe areas and offer concrete proposals that Lithuania
may want to consider in developing its action plan for a knowledge economy.
- 7 -
Lifelong Learning for the Knowledge Economy:
Challenges for Education and Training
19. A knowledge economy requires as its foundation an educated, skilled population able to
create, use, and share knowledge. Lifelong learning—from ages 4–80, in formal, nonformal
(enterprise training), and informal (life experience) learning environments—is essential to this
foundation. Learning in a knowledge economy can be seen from at least four perspectives:
• A learner perspective—as opposed to an education institution perspective.
• An economic and labor market perspective—but not in isolation from social and
cultural factors.
• An education policy perspective—including reviewing key competencies required for
the knowledge economy, fostering good governance of education institutions,
financing human resource development, creating learning pathways and
opportunities, and promoting equity and access across life stages and learning
systems (formal, nonformal, informal).
• A broader knowledge economy perspective—linking education and human resource
development to innovation systems and the information society.
20. Lithuania’s education systems are at a crossroads. Though they face growing demands,
they have limited capacity to respond to changing cir cumstances and enable lifelong learning.
Moreover, resources to improve education access and quality are scarce. Governments at
various levels and economic actors must transform formal education systems and link them with
nonformal systems, improving overall performance. Responsibility for managing learning in the
knowledge economy needs to be increasingly demand driven and based on individual needs,
particularly as individuals move up the learning continuum. There is also a need to empower
individuals to manage their learning, rather than placing full responsibility in the hands of
education and training institutions.
21. Growth and decline in different sectors directly affects overall labor demand as well as
demand for specific knowledge. Lithuania’s transition years have seen a sharp shift in
employment from the public to the private sector. In addition, employment has increased in
services and decreased in agriculture, industry, and construction. As noted, much of Lithuania’s
high unemployment is due to workers’ low or inadequate skills. If skills were improved, more
people could get jobs and economic growth could accelerate. Education and training systems
play a critical role in curbing the problem of low, narrow, and inadequate skills, including by
changing the nature of vocational training in secondary education, increasing the effectiveness of
tertiary education, and motivating individuals and enterprises to support nonformal training.
22. The following sections summarize key issues that need to be addressed and offer policy
proposals that would facilitate lifelong learning and help overcome obstacles to the development
of a knowledge economy—allowing all Lithuanians to fully participate in the knowledge
economy in their country, in Europe, and in the global community. A full description of the
issues and policy proposals is provided in annex 2.
- 8 -
Defining and Assessing Key Competencies
23. The content and delivery of Lithuania’s education and training systems are being
modified, particularly at the basic and secondary levels, to reflect emerging demands for skills
and knowledge. But additional work is needed to identify the needs and assess the skills of
students and workers.
Refining content
24. To refine the content and delivery of national programs, Lithuania’s basic and secondary
education policymakers and program designers should review international research on key
competencies. An example is the “Defining and Selecting Key Competencies” project recently
sponsored by the Organisation for Economic Co-operation and Development (OECD).
Increasing participation in international assessments
25. Lithuania should participate in additional international achievement assessments,
specifically the OECD’s Program of International Student Assessment (PISA) and the
International Adult Literacy Survey (IALS). Doing so would provide benchmarks for youth and
adult education and determine the degree to which Lithuanians have the core competencies
required to function in a knowledge economy.
Restructuring vocational secondary schools
26. The 100 specialized programs in stage 3 and 4 vocational secondary schools should be
cut to 15-20 broader career orientation programs that provide entry- level job skills, sufficient
preparation for specialized postsecondary education and training, and a stronger foundation for
lifelong learning in a changing labor market.
Responding to labor market demands
27. Monitoring of labor market demands should be expanded in two key areas. First,
Lithuania should perform regular, qualitative, short-term economic and enterprise surveys like
those done in Hungary and Sweden. Second, long-term human resource requirements should be
modeled for various sectors based on national priorities for innovation and research.
Setting training and occupational standards and performing assessments
28. Efforts to set training and occupational standards and to perform assessments should be
rapidly accelerated to strengthen links between training and the labor market and between formal
and nonformal training. Training standards should cover high-priority occupations across the
education spectrum—vocational, technical, and professional. Occupational standards should be
established with input from the business and research communities.
- 9 -
Surveying graduates
29. All formal and nonformal education and training institutions—secondary schools,
colleges and universities, labor training centers—that receive public funding should be required
to perform annual surveys of a sample of graduates. Such surveys would help in evaluating the
effectiveness of education and training programs, particularly in terms of their links to the labor
market.
Addressing Governance and Management Challenges
30. Government education policies and programs should be more closely linked to the needs
of businesses, particularly at the tertiary level of education and in the training system. Moreover,
intellectual property rights in research and tertiary education should be more clearly defined.
Strengthening links between businesses and education and training efforts
31. Businesses should play a stronger role in governing tertiary education, with the authority
to influence the actions and policies of boards of governors of tertiary education institutions—
including the hiring of managers, the development of government education policies, and the
creation of programs (for example, defining curriculums and operating joint programs such as
internships, cooperative education, and research programs).
Improving intellectual property rights
32. Intellectual property rights should be clarified for faculty at higher education institutions
to provide incentives to engage in applied and developmental research.
Financing Education
33. Given the rising demand for learning—and so for spending—several principles should
guide the planning of future education financing. First, the acquisition of basic competencies,
which increasingly means universal upper secondary education, should be publicly financed.
Second, learning beyond basic competencies should increasingly be paid for by students and
employers. Third, the Government should work to promote equity in education. Finally,
education should be delivered more efficiently, particularly for the labor market.
34. Government financing of formal education and training in Lithuania is comparable to
levels in countries with similar per-capita income, and appears to be functioning adequately. The
new decentralized approach to financing basic education works on a per capita basis, is sensitive
to differences between rural and urban areas, and makes provisions for special allocations (such
as teacher in-service training). Still, several financing issues need to be addressed to increase
efficiency, access, and equity in the face of rising demand.
- 10 -
Boosting efficiency
35. School mapping should be undertaken in primary, secondary, and higher education to
examine the impact of the 40 percent decline in birth rate that occurred in the 1990s. This
decline is starting to affect primary schools and will affect tertiary education in about 2009,
requiring institutional consolidation. School construction should also be made more efficient, as
Lithuania spends about twice as much on utilities as do Western schools in similar climates.
Adjusting tertiary education financing
36. Policymakers and the tertiary education community should consider implementing
options to mobilize more resources per student, enhancing professional expertise in tertiary
education management, reviewing policies aiming at phasing out and retaining academic staff,
and increasing the financial power of higher education institutions.
Reviewing nonformal education financing
37. Alternative financing schemes—tax incentives, training levies, learning accounts, and so
on—should be reviewed and selected options implemented to encourage enterprises to support
and individuals to engage in adult and continuing education. Potential financial disincentives
(such as taxes on training investments by individuals and enterprises) should be removed.
Opening Pathways Within and Between Learning Systems
38. Serious blockages in Lithuania’s education and training systems inhibit the mobility of
learners within the formal system and between the formal and nonformal systems, and block
economic and social mobility and interdisciplinary learning.
Addressing blockages between formal education institutions
39. A third-party institution in Lithuania should evaluate and certify equivalencies between
courses and programs in different institutions, and facilitate the mobility of learners within and
between institutions of the formal education system.
Addressing blockages between formal and nonformal learning
40. There is a need to continue rapidly developing occupational standards and assessment
instruments (see also above) to promote recognition of nonformal and informal learning,
including by formal institutions such as colleges and universities.
Improving Equity, Access, and Motivation
41. Disincentives—and a lack of incentives—for individuals and enterprises to invest in
education and training need to be addressed. (Some have already been cited above.)
- 11 -
Strengthening career guidance and counseling
42. Career services need to be further developed, particularly at the basic and secondary
levels and in labor offices. In addition, there is a need to develop staff training at higher
education institutions to prepare career guidance and counseling staff for education, training, and
employment institutions, and for work in the personnel departments of private enterprises.
Motivating enterprises and employees to invest in training
43. To help overcome the low recognition and demand for adult continuing education, and to
promote individual and enterprise investments in education and training, public information
programs (such as adult learning weeks) should be enhanced. Financial incentives (tax credits,
training levies, learning vouchers), better targeting of loan and scholarship funds, and increased
recognition of informal and nonformal education and training, as discussed, would help improve
equity, access, and motivation in education.
- 12 -
Lithuania’s Innovation System:
Connecting Researchers and Businesses
44. Innovation has a significant effect on productivity in firms, industries, and countries and
so is essential to economic growth. But Lithuania’s ability to innovate—that is, its ability to
systematically generate, acquire, disseminate, and apply knowledge in new ways to solve
problems and satisfy the needs of individuals and of society at large—is constrained. Lithuania
has important elements of an innovation system, including universities, state research
institutions, a business community, and a set of institutions aiming to support technology
applications. But it has not managed to bring together these elements in a systematic way, in a
coherent and coordinated framework able to link the research and development (R&D)
community with the enterprise community. Many organizational structures follow and even
reinforce old practices of separating rather than unifying the partners for innovation. Interaction
among companies, research institutes, and universities is modest and occasional.
45. Though innovation occurs at the enterprise level, including some high-tech industries
(laser technology, biotechnology), this has taken place in relatively few, isolated cases. The few
success stories reflect Lithuania’s potential for innovation rather than systematic use of
knowledge assets. While some changes have been introduced to the national innovation system
in recent years, partly driven by the consensus building associated with the science and
technology white paper, much more needs to be done in terms of defining coherent innovation
policies and establishing a supportive institutional framework that allows potential partners in
innovation to join efforts in generating and applying knowledge for their benefit and that of the
economy.
46. Small and medium-size enterprises play a crucial role in the Lithuanian economy. But
medium-size and large firms, particularly those backed by foreign investors, have an advantage
over small firms because they often have strong links to sources of knowledge and access to
commercial banks and equity financing. In addition, subcontracting (between large international
firms and smaller domestic firms) has important potential for firms in countries such as
Lithuania. Small upstart companies that have trouble accessing finance and that lack access to
networks need to rely on government technical assistance and financing as well as private equity
financing with embedded technical assistance and management talent.
47. Small companies and foreign investors are particularly sensitive to the business
environment. While foreign investors have a wide choice of countries to invest in, small and
medium-size enterprises can remain in the informal sector in the absence of an adequate business
environment. Several surveys of the business environment in Lithuania in recent years indicate
that access to capital has become less of a constraint, while access to knowledge and to a skilled
workforce is a growing concern.
1
1
Foreign Investment Advisory Service (FIAS) – “Lithuanian Administrative Barriers” (1999); the World Bank &
the EBRD - Business Environment and Enterprise Performance Survey (BEEPS) (1999); the World Bank –
Lithuania, Country Economic Memorandum (2002)
- 13 -
48. As EU membership approaches, Lithuanian businesses face major challenges in adapting
to EU regulations and standards. This adaptation will require significant investments in retooling
and in process and management change to meet environmental, health, safety, and other
standards. But adaptation also provides an opportunity to introduce innovative and more
competitive technologies, processes, and management practices. Government polices and
programs need to support this retooling as well as knowledge transfer and networking among
firms and the research and education communities.
49. Today the R&D community operates largely in isolation from the private sector. Its
output—in terms of publications, citations, patents, and licenses—is modest. There is an
overemphasis on government- funded R&D, carried out and supported by a vast array of public
institutions. Moreover, the research community is growing old and suffering from brain drain.
In addition, funding instruments are outdated, focusing largely on institutional funding rather
than more modern program funding. Too much funding goes to basic research, while too little is
devoted to technology development and transfer. And modern R&D evaluation procedures are
largely absent. Overall, innovation in Lithuania is hampered by the absence of a consistent
innovation policy framework. The following sections outline key issues and proposals that are
detailed in annex 3.
Formulating and Coordinating Innovation Policy
50. Current Lithuanian policies and institutions do not reflect the importance of innovation as
a primary source of competitiveness in the global market. Though a white paper on science and
technology has been issued, few actions have been taken—and those that have are not fully
consistent with the paper. It is too early to evaluate the recently established Commission on
Science and Technology, but without permanent staff and only occasional meetings the
commission does not appear equipped to address the challenges ahead. The recently adopted
Law on Higher Education and Science introduces some positive changes, but in general
Lithuania’s innovation systems are marked by an absence of meaningful goals, priorities for
financial support (beyond the enumeration of selected themes), instruments that explicitly
support R&D, and a long-term vision for a national innovation system. As a result much of the
research undertaken to date is irrelevant to the business community.
51. The Commission for Science and Technology should develop into a Science and
Technology Policy Council. This council should:
• Link the interests of businesses, researchers, and academic institutions.
• Ensure that research and education feed into the innovation process.
• Help improve Lithuania’s competitiveness.
52. Council members would be nominated by the Government and include significant
representation from the business and research communities. It would be chaired by the prime
minister and include ministers from ministries with a major stake in R&D and innovations
(Ministry of Higher Education and Science, Ministry of Economy, Ministry of Finance, Ministry
of Interior). Building on the science and technology white paper, the Science and Technology
Policy Council would:
- 14 -
• Prepare and agree on the vision, goals, and policies for long-term development of the
national R&D and innovation system.
• Define specific policy instruments.
• Assess the implementation of the council’s innovation strategies and policies on a
regular basis.
53. These efforts would include analysis of the developments, needs, and objectives of the
national innovation system, spell out policy instruments and funding tools (including sources and
targets for R&D funding) for public sector research and technology development, and include
recommendations for action by the private sector. To play this role, the council needs a
secretariat with a full- time professional staff. The council would build consensus on basic
guidelines for innovation policy, enhance business-research partnerships, and increase awareness
about and visibility of the role of innovation. Experiences with this model in Estonia, Finland,
and Ireland should guide the establishment of this high- level government institution.
Increasing the Relevance, Efficiency, and Accountability of Research and Development
54. The main challenge for the public R&D system is to increase its relevance, efficiency,
and accountability. To do so, efforts must be made to:
• Significantly increase the flexibility of R&D financing.
• Improve the efficiency of R&D organizations.
• Upgrade professionalism in the management of funding.
• Increase demand for the research output of universities and research institutes.
• Promote cooperation between industry and research and academic institutions.
55. The Government should consider establishing a Lithuania Technology Agency to develop
and implement new R&D funding instruments associated with revised innovation policies and
priorities and working principles and processes for public R&D administration. In establishing
such an agency, the Government should consider merging many of the public institutions
currently supporting innovation and business activities, including the Lithuanian Center for
Innovation and the Lithuanian Development Agency for Small and Medium Sized Enterprises.
56. The agency’s main tasks should be to organize, finance, and evaluate new R&D in
nationally significant fields of science and technology, serve as a contact point for EU-related
R&D (including national management of EUREKA - Europe-Wide Network for Industrial R&D,
COST - European Cooperation in the field of Scientific and Technical Research, and so on), and
provide grants and loans to firms for innovation projects. Many of the agency’s tasks will be
new and will provide new thinking and orientation. But viable existing operations and resources
should also be moved to the agency from the Ministry of Higher Education and Science and
other places. The agency could be part of the Ministry of Economy or the Ministry of Higher
Education and Science, but other approaches that provide more independence and credibility
should also be considered. The experiences of countries such as Estonia, Finland, Ireland, and
Sweden are relevant in this respect.
- 15 -
Consolidating Research Capacity
57. Lithuania has 26 state research institutes covering a broad range of specialized fields of
research, from humanities to technology. This fragmentation of institutions is inefficient because
each institution requires administrative support, aggravating the problem of scare budgetary
resources. Thus state research institutes should be reorganized. Recently some institutes have
been integrated with Vilnius University.
58. The relevance of the research being performed is also in question. The institutes should
consider shifting from basic to applied research, from budget- financed to contract and other
externally financed research, and from ivory towers to institutions oriented toward supporting
innovation for businesses.
59. To that end, the reorganization of state research institutes should be accelerated. One
option would be to merge several institutes specialized in areas with potential for applied
research and commercialization into a Lithuanian Institute of Technology. This institute would
focus on applied technological research and contract research. The private sector should be
invited to engage with the institute—not only as users of its expertise and services but also as
owners, financiers, and contributors to the research.
60. Regardless of the new organizational arrangements, new funding mechanisms for state
research institutes should be developed, with competitive contract research figuring prominently
among sources of financing. The growth and development of the Lithuanian Institute of
Technology would be driven by external financing (EU funds, funds from the National
Technology Agency, contracts with firms) rather than by budget allocations. Similar
arrangements exist in other European countries, as with Germany’s Frauenhofer Institute.
Adjusting Funding for University Research
61. Nearly all university research is financed by the state budget, with resources allocated to
universities in lump sums. Universities allocate these funds to departments largely based on
established norms (based on the number of students and past allocations). This setup makes
university research unresponsive to industry demand, because industry has no influence on
university funding decisions.
62. To increase the relevance and accountability of university research, new funding
mechanisms should be introduced that are incentive based, transparent, and flexible, with
growing reliance on nonbudget financing. The mechanisms should clearly distinguish funds for
education from funds for research. They should also allow for flexible use of external financing,
including contract research and training. Finally, the mechanisms should allocate an increasing
share of state budget funding based on performance—and eventually all funding should be
allocated on this basis, with bonuses for exceptional performance.
- 16 -
Improving Data to Support Innovation
63. The poor quality of data on the Lithuanian innovation system means that there is no
reliable database for long-term policy planning and decision- making or for ongoing monitoring
and evaluation of performance. Thus R&D statistics should be upgraded to OECD standards
(Frascati Manual), and innovation statistics should be developed to fulfill the requirements of the
European Community Innovation Survey. R&D evaluation methods and mechanisms could be
developed along the lines of those in countries such as Finland, Ireland, Norway, and Sweden.
To support the accumulation of knowledge and experience on R&D and innovation-related
analysis and studies, the Government should consider establishing a dedicated unit specialized in
technology and innovation studies. This unit could be placed in the new Lithuania Technology
Agency.
Fostering a More Supportive Business and Regulatory Environment
64. The business environment is not sufficiently supportive of innovation. In a recent survey
firms reported increasing flows of foreign knowledge, and 27 percent indicated that access to the
markets and technology embodied in foreign direct investment is critical. Only 16 percent cited
a need for more capital as a primary concern. Ineffective, intrusive business regulations and
licensing and tax regulations and enforcement are still major concerns, as are deficiencies in the
legal system.
65. Steps should be taken to simplify business registration procedures, improve the legal
framework, and streamline tax administration. Norms not required by the EU should be
critically reviewed, questioning their necessity and value for public policy. More emphasis
should be put on implementation to increase speed, transparency, and information flows.
Strengthening Business Support Programs
66. Many government programs and agencies provide business support—pursuing multiple
objectives and often not effectively coordinated and administered. It is not clear that these
programs boost innovation or further the knowledge economy.
67. Lithuania should undertake a systematic review of best practices used in other countries
to design, operate, and coordinate business support programs aimed at fostering competitiveness,
innovation, and growth. It is particularly important to review the multitude of dispersed subsidy
programs such as loan, grant, and guarantee schemes, business innovation centers, technology
parks and clusters, and industrial parks. Understanding the market failures that such programs
are supposed to address, the business needs and management challenges they face, and the
conditions under which they work well are critical to ensuring that they are sustainable in the
long term. Enterprises participating in these programs require technical and managerial know-
how to develop and commercialize their innovations. Lithuania should also consider merging
some or all of its business support schemes under an umbrella organization such as the Lithuania
Technology Agency.
- 17 -
Improving Access to Equity Funding
68. The legal framework for investment in Lithuania is geared toward equity finance for
large, publicly listed companies and debt finance from commercial banks. Neither instrument is
optimal for high- growth, early-stage, knowledge-based companies. Such companies are too
risky for commercial banks because their cash flow is not predictable enough, and security
against fixed assets is often not practical. In addition, the legal framework for private equity is
not adequately developed, undermining the ability of outside investors and company managers
and owners to provide incentives that align the interests of both parties. The instruments
available for private equity investing are severely limited. Among other things, the legal
infrastructure needs to allow provisions that facilitate investor exit from a company.
69. The forms of equity and quasi-equity possible under Lithuanian law should be brought in
line with international best practices. Demand for these more sophisticated instruments appears
to be growing as Lithuania’s private equity industry matures. But faster legal reform could
facilitate early-stage investments and catch the attention of international investors.
70. Local venture capitalists do not see shortcomings in the legal framework as a major
constraint. But if Lithuania’s investment industry is to mature and attract additional capital,
international legal norms for private equity investing (and the corresponding regulatory and
supervisory framework) will need to be introduced. A major provision used in other markets to
help ensure an investor’s ability to exit is the “liquidation preference,” where investors have the
right to the proceeds from a sale before managers and owners. This provision does not exist in
Lithuania. Other provisions that can facilitate exit, such as those allowing majority investors to
force other shareholders to participate in the sale of the company, are allowed.
Increasing the Private Sector’s Role in Public Services
71. In industrial countries private organizations such as industry and employer associations
have the capacity to formulate strategic proposals for the development of their industry and to
review government proposals. Although these organizations represent the interests of their
members, they often focus on long-term broad interests rather than the interests of individual
firms. To do so, private organizations and their members must cooperate in developing policies
and activities conducive to all businesses. Taking a broader, more strategic view allows the
private sector to have more effective input to government policies and to launch initiatives of
their own. Lithuania’s private sector is far from developing such organization, cooperation, and
outlook.
72. The Government, municipalities, and the private sector cooperate on specific projects
such as business innovation centers, technology parks and clusters, and industrial parks. While
in principle all serve as vehicles for the transfer of knowledge and technology and spur
innovation, their success depends on how they are designed and managed. Many are developed
without necessary preparation work to identify market needs and without adequate operating
procedures and staffing. At best such entities provide education functions and survive mainly on
state and international funds because enterprises are not willing or able to pay for the services
provided.
- 18 -
73. Lithuania’s private sector should adopt a higher profile in developing its vision and
strategy for the knowledge-based economy—and in taking concrete steps to make that vision a
reality. To do so, the private sector should develop organizations that gather information,
analyze policy issues, and communicate with their members. It should also develop forums
where representatives from all parts of the private sector can meet and formulate positions on
policy issues. Doing so would improve the effectiveness of private sector partnerships with the
Government that formulate visions, strategies, and policies for policymaking and of coordinating
bodies for the information society and for innovation and education systems.
Mobilizing the Private Sector to Foster Competition and Cooperation
74. Entrepreneurship in Lithuania is struggling because networks to mentor and fund early-
stage companies are still in early stages of development. Firms remain wary of outside
investment, both local and foreign. Private investors often have little to offer beyond funding,
and strategic investors (large companies) typically want complete control—leaving little role for
the original management teams. In addition, cross-firm collaboration in areas such as marketing,
promotion, and networking is scarce. Efforts by private associations and networking groups to
address these problems remain limited—in terms of both sector coverage and depth of
activities—particularly beyond the information technology and telecommunications sectors.
75. Private associations and networking groups should deepen their activities in support of
members and extend their coverage across the knowledge economy in areas such as mentoring
and networking for early-stage, high- growth businesses. Organized mentoring networks can
help firms gain advice and support from experienced entrepreneurs. Private associations and
groups should also engage in international promotion and marketing. To grow and compete,
firms need strong ties to foreign markets and investors—and their knowledge. Private
associations can play a key role in promoting and marketing Lithuanian companies and
investment opportunities abroad.
- 19 -
Building an Information Society
76. The knowledge economy is a networked economy in which information and
communications technology is crucial for economic growth, knowledge-based activities, and
social inclusion and cohesion. Enterprises involved in information and communications
technology are among the most innovative and dynamic in Lithuania, contributing to the
development of a knowledge economy. Lithuania is a signatory of the e-Europe + program for
EU candidate countries. The program aims to promote the development of an information
society in EU member and candidate countries. The most recent progress report (June 2002)
indicates a need for Lithuania to intensify efforts to achieve the agreed targets for the
information society.
77. Lithuania is relatively rich in electronic and information networks, but these resources
have not achieved their full potential. About 30 in 100 people have access to the fixed telephone
network. In terms of total teledensity (fixed plus mobile), Lithuania lags behind its Baltic
neighbors—a lag that becomes more pronounced when sector performance is disaggregated.
Building Regulatory Capacity in Telecommunications
78. The Lithuanian Communications Regulatory Authority (CRA) was established in the
spring of 2001. Like all the new regulatory authorities in the region, it is at an embryonic stage,
with little experience with a fully competitive market. Moreover, the EU recently adopted a new
acquis communautaire that has not yet been applied extensively. The Lithuanian CRA faces the
challenges of changing from a largely technical regulator to more of an economic regulator,
acquiring the appropriate skills for these tasks, drafting the secondary legislation required by the
new acquis communautaire, and implementing the new acquis communautaire in a relatively
short period.
79. The CRA’s ability to become an effective regulator will depend on the new
telecommunications law, the duties assigned to it and other agencies, and the powers provided to
it by the law. Its effectiveness will also be determined by the number of staff it hires, their skills,
and the agency’s ability to retain qualified staff. As with many other regulatory agencies in the
region, there is a well-recognized need for technical assistance with building capacity and
drafting secondary legislation.
Providing Universal Access to Telephones and the Internet
80. The development of Lithuania’s information society is hindered by limited Internet
access in general and by inadequate telecommunications access in rural areas. There are two
main reasons for these access gaps. The first is a market gap—the inability of the market to
provide access on a commercial basis, where private investment plays a key role. The second is
a pure access gap—customers who cannot be supplied by the market for reasons of location or
affordability, where public policy plays a key role. Lithuania’s telecommunications market was
liberalized in January 2003, which will enable it to start providing more complete access to
commercial customers. But without changes in policy, the pure access gap will persist.
- 20 -
81. The pure access gap could be closed by designating operators to provide universal service
in exchange for compensation from other market players or from the state budget for any
financial losses. Alternatively, universal access to information and communications services—
including the Internet—could be provided at public access points and telecenters in targeted
communities. This approach could include “smart subsidies” and allow for local private or
municipal participation in the operation of public telecenters.
82. Smart subsidies are a market-based solution that recognizes that such telecenters are not
financially viable. When providing these one-time subsidies, the CRA and other relevant public
institutions (such as community-based organizations) would solicit bids. The bidder seeking the
smallest subsidy would then be obliged to provide a defined level of service over a specified
period (say, 10 years). The subsidy would simply make each telecenter commercially viable: it
would not be a 100 percent subsidy. When structured appropriately, such contracts can induce
substantial private investment, and can even result in a higher level of service than the basic
obligation.
83. Although disbursements of these one-time subsidies should be linked to performance
criteria for the public access points, bidders should be allowed to make their own technological
choices. Moreover, bidders may find that once the public access points are in place, additional
commercially attractive customers can be reached in the territory for a small incremental cost.
Bidders should take these potential commercial opportunities into account when calculating the
required subsidy—further minimizing it.
84. These local solutions could be implemented through community-based service providers
established by local authorities, businesses, banks, nongovernmental organizations (NGOs), or
some combination of these. For instance, rural communities, entrepreneurs, and authorities
could join forces to establish local telecommunications providers to bridge the access gap. These
providers could then bid on subsidies in competition with other providers.
85. To test their viability and sustainability, such initiatives could be supported in their early
stages by national or local governments. If community-based providers are to compete for
subsidies with other providers, they should not be given other subsidies that would distort
competition. Thus local government and community contributions should be expected to be
recovered and earn a return in the long run. Furthermore, such initiatives could be linked to a
broader agenda for local economic development, including efforts to promote education,
training, health, e-government, and knowledge-based small and medium-size enterprises.
Unbundling Local Loops
86. Unbundled access to the local loop allows competing service providers to lease or rent
the 'final mile' (local loop) to the premises of the customer and in this way to acquire additional
customers. Unbundling of the local loop is provided for by Directive 2002/19/EC (the “Access”
Directive). A question that needs to be addressed is whether unbundling provides sufficient
financial incentives to the entity designated for unbundling its local loop.
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87. The application of the unbundled local loop concept should be considered in the context
of the policy goal of expanding access and achieving universal service over the next two or three
years.
Addressing the Authorization Concept
88. The “authorization” concept of the EU acquis communautaire loosens the connection
between a license and a territory. Licenses are usually awarded for distinct geographic areas, but
in the authorization process a service provider chooses its territory—and may not serve what are
perceived as unprofitable universal service customers. Thus Lithuania’s CRA needs to develop
an innovative strategy to ensure universal service.
89. The regulatory challenge will be to provide sufficient incentives for telephone and
Internet service providers to reach those currently not served. One approach would be to foster
community-based service provision and partnerships between communities and service
providers. This approach should be supported by technical assistance (to deal with the
technological aspects) and assistance with the development of sustainable business plans. As
part of these efforts, the CRA should undertake a study of the population lacking telephone
services and issue licenses for the provision of universal service, with the licenses tied to specific
locations and bidding for subsidies as described above.
Ensuring Efficient Interconnection
90. The interconnection of networks—of which there are many in Lithuania—is among the
most important factors for competition in telecommunications. It is also an area characterized by
frequent disputes. Interconnection involves commercial, technical, and operational
arrangements. The disputes largely arise over commercial aspects: the fees that operators pay
each other to termination or carry messages. Lithuania has a functioning interconnection market,
but it will need to develop with the entry of new players.
91. For the market to fill the “market gap” and for the universal access approach to fill the
“pure access gap,” close attention needs to be paid to resolving interconnection issues. It is
proposed that the CRA provide for interim solutions, that where possible international
benchmarks be used to determine interconnection fees, and that special consideration be given to
Internet-related interconnection fees.
Consolidating Responsibilities for the Information Society
92. As with the innovation system, dispersed institutional responsibilities constrain effective
leadership in formulating policies and planning, coordinating, monitoring, and evaluating
activities related to the information society. Four public institutions share responsibilities for
defining information society strategies and for making and implementing related policies. None
of these institutions has the authority to coordinate and monitor policy implementation. As a
result strategies and action plans for developing the information society largely remain at the
design stage. Experiences from other countries that are successfully developing an information
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society—such as Ireland and Slovenia—show that consolidating policy and implementation
authority and technical capacity increases the effectiveness of policy actions.
93. Lithuania should consider consolidating into a new ministry the strategy, policy, and
monitoring functions currently assigned to the Ministry of Transport and Communications,
Ministry of Interior and Public Administration, Information Society Development Commission,
Information Society Development Committee, and other institutions. This new ministry for the
information society (a precursor of which existed until 1997) would be responsible for setting
priorities for the development of an information society, formulating policies, planning actions,
coordinating activities, and managing budgeting, financing, and procurement.
94. While line ministries would continue to be responsible for implementing programs and
activities associated with the Government’s Information Society Strategy, the new ministry
would be empowered to coordinate, monitor, and evaluate implementation. It would also build
consensus on policies for the information society, enhance government-business partnerships,
and increase awareness and visibility of information society issues. The ministry would work
closely with the proposed Lithuania Technology Agency. The staff and functions of the
Information Society Development Commission would be moved into the proposed ministry. This
model follows the approach taken in Slovenia.
Implementing Strategies and Action Plans
95. The absence of a coordinated, clear institutional framework hinders the implementation
of strategies and action plans, including those for e-Europe + and other initiatives. The main
policy document on the development of an information society is the “Lithuanian Information
Society Development Strategy” prepared in 2000 by the Department of Information and
Informatics of the Ministry of Public Administration Reforms and Local Authorities. That
strategy defined the main goals of information society development over a three-year period:
• To use the opportunities offered by information and communications technology to
support management of information, with the aim of improving people’s quality of
life, learning, and working and leisure conditions.
• To create information and communications technology infrastructure in compliance
with EU standards.
• To create conditions for Lithuanians to learn and exploit the possibilities of modern
information and communications technology.
96. The Information Society Development Committee has developed detailed action plans to
complement the strategy, but implementation has been pending.
97. Lithuania should adopt a detailed consensus strategy for developing an information
society, agreed with the main stakeholders at the policy and implementation levels. This strategy
should go beyond a political vision and be backed by detailed action plans.
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Promoting Knowledge Management, e-Government, and e-Business
98. Public and private sector knowledge management, supported by information and
communications technology, is an important element of a knowledge economy. For an
institution or company to manage knowledge well, there needs to be a systematic alignment of
overall management and information management policies and processes, mindsets and cultures,
organizational structures, technologies, budgets, and worker skills.
Coordinating public knowledge management
99. Lithuania’s public sector is facing several challenges in implementing its knowledge
management and e-government strategy. By far the most pressing concern is the need for
credible, organized leadership to set priorities, develop action plans and monitor their
implement ation, and tackle cultural issues for knowledge sharing. Several stakeholders have
emerged in the planning phase, but their roles are unclear and overlapping.
To address these issues, the Government should:
• Assign responsibilities for knowledge management and e- government policy,
strategy, and monitoring to the proposed ministry for the information society (see
above).
• Develop a knowledge management strategy and action plan to accelerate the
integration of information systems within and among ministries, and to implement
knowledge management systems within public institutions, with top- level political
support.
• Encourage knowledge sharing in organizations and provide the incentives and
environment for employees to do so. This recommendation is relevant not only
within the public administration, but also for many businesses.
Enhancing knowledge management
100. There is a shortage of skilled technical and managerial staff to undertake knowledge
management tasks. The education system does not produce the needed practical and theoretical
skills. And because of low salaries, it is difficult to retain highly skilled technical staff in
government institutions.
101. Links between the public administration and the education system should be created to
provide formal and nonformal training on knowledge management. In addition, curriculums
should be developed for training in knowledge management.
Strengthening the legal framework for electronic transactions
102. The absence of an adequate legal framework for electronic transactions hampers the
provision of e-government and e-business services. Despite initial steps to harmonize domestic
legislation with international standards for electronic transactions, Lithuania lags behind in
passing relevant regulations.
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103. The legal framework should be fully aligned with international standards to ensure that
digital transactions (such as e-signatures) are possible and fully protected (for example, through
e-commerce regulation). Lithuania seems to have fulfilled only a few of the formal
requirements, and more efforts are needed to ensure full implementation of legislation governing
Internet and electronic transactions.
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Conclusion: Implementing the Knowledge Economy
104. Moving the frontier of Lithuania’s knowledge economy across its four main dimensions
will require consensus and joint action among key actors:
• The Government, which will need to facilitate actions and integrate the aspirations of
many stakeholders.
• The business community, which is the driver of innovation in the economy and will
need to play a more substantive role in working with the Government to develop and
implement policies for a knowledge economy, as well as direct activities in
networking and promotion.
• The education and research communities, which will increasingly become the
providers of demand-driven learning and research services.
• Civil society, as both a participant in and source of demand for products and services
in the knowledge economy.
105. In recent years the private sector has been instrumental in advancing the development of
a knowledge economy. For instance, the importance of an information society has been brought
to the fore by, among others, INFOBALT (an information and communications technology
association in Lithuania) and, more recently, by two banks and two telecommunications service
providers joining efforts in the Window to the Future initiative, which aims to improve access to
information and communications technology by establishing telecenters. On the innovation
policy side, the city of Vilnius, the Technical University of Vilnius, and the Knowledge
Economy Forum (an association that includes high- tech companies) are aiming to develop a
technology cluster in Vilnius. Other initiatives are being pursued by NGOs working at the
regional level. These are promising steps and approaches that the Government should consider
leveraging and scaling up.
106. Still, significant obstacles exist in the interactions among the key actors for Lithuania’s
knowledge economy. A legacy of mistrust, poor communication, and lack of cooperation
persists. Many past and current initiatives have often stalled at the discussion stage, with little
concrete action undertaken and few resources mobilized.
107. The proposals offered in this report are not necessarily new to many Lithuanians engaged
in ongoing discussions on how to move forward. Indeed, many Lithuanian experts have in-depth
knowledge of the issues at hand and an understanding of the available policy options. But what
seems to be missing is consensus and leadership—whether from the Government or the business
community—to move forward on the four main dimensions of a knowledge economy. The
dispersion of responsibilities for the knowledge economy across ministries, agencies, and
committees makes it very difficult to achieve such consensus. The resulting implementation of
knowledge-related policies is slower than need be the case.
108. To succeed, a knowledge economy strategy needs to be implemented in an environment
of:
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• Inclusiveness and partnerships. A crucial first step is to build trust among a broad
coalition of stakeholders, including the disadvantaged, the rural population, the
business community, and education and research institutions—with the Government
setting an example of good governance and taking leadership. As individuals become
increasingly responsible for their lifelong learning, learners at all levels and from
different income groups should have a voice in defining their learning demands and
accessing learning opportunities. And as businesses become the main clients for
science and research work, they will be key in shaping the science and technology
agenda, supported by public resources.
• Networking. Much joint action will be required in moving forward. Fully inclusive
networks involving diverse communities at all levels will increasingly become the
drivers of a knowledge economy. Networking, supported by effective access to
information and communications technology, will need to take place within and
between municipalities but also with cities outside Lithuania, between research
centers and enterprises, and between learning communities in Lithuania and abroad.
Networking will need to develop at both the local and national levels, reaching across
the Baltic states, the Nordic countries, the European Union, the Russian Federation
and other members of the Commonwealth of Independent States, and beyond. As
networks expand, driven by communities of interest and supported by ever- improving
access to information and communications technology, old boundaries (physical,
political, psychological) will dissolve.
• Changing mindsets. Moving toward a knowledge economy also requires a change in
mindsets. For individuals, a knowledge economy requires becoming increasingly
independent, adaptable, and responsible for one’s actions. For businesses it requires
the ability to systematically transform knowledge into products and services—and
profits. For governments, it requires creating and supporting opportunities by
challenging conventional policies and integrating partners to increase
competitiveness. It also requires greater willingness and ability to share information
with the public, emphasizing public services over public control, and supporting a
national and inclusive dialogue that builds social cohesion and trust. Finally, the
biggest challenge may be for the academic and research community—the harbor of
knowledge in Lithuania—to rethink its role and approaches as it moves toward
becoming a provider of knowledge services in response to demand, particularly from
learners and from the business sector.
109. As noted, stronger data collections in education (participation in international
assessments, labor market surveys), innovation (using OECD methodologies), and the
information society (using the e-Europe approach) would improve policy analysis and
formulation. Benchmarking Lithuania with countries of key interest would also aid
policymaking. Benchmarking should include indicators that proxy change across the four
dimensions of a knowledge economy and calls for a government commitment to publish and
publicly discuss an annual knowledge economy progress report. In addition to greatly benefiting
policymaking, a regular progress report o the knowledge economy would reflect a spirit of
partnership in moving forward in Lithuania.
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Annex 1: Challenges for Lithuania in Achieving a Knowledge Economy
1. Research and the recent economic success of many (often small) countries suggest
increasingly strong links between knowledge and productivity, competitiveness, and economic
growth. In Lithuania strengthening these links and moving toward a knowledge-based economy
require simultaneous progress on:
• Developing education systems and human resources to ensure that citizens are
equipped to acquire, apply, and share knowledge.
• Establishing innovation systems that bring together networks of researchers and
businesses to improve commercial applications of science and technology.
• Building an information society infrastructure that gives all people access to affordable
and effective information and communications technology—supporting education,
innovation, and networking.
• Providing an economic and institutional framework that ensures a stable
macroeconomic environment as well as increased competition, flexible labor markets,
and adequate social protection.
A Changing World
2. Lithuania is a small country in terms of population (3.5 million people), size (65,000
square kilometers), and economy ($11.3 billion in 2000), generating a gross national income per
capita of $2,930 in 2000. It also has a small natural resource base. Still, since the early 1990s
Lithuania—along with Estonia and Latvia, which have similar income levels—has experienced a
remarkable economic turnaround relative to other count ries that were part of the former Soviet
Union, such as Belarus and Ukraine. Lithuania has completed the transition from a planned to a
market economy and has largely adopted the acquis communautaire (the body of legislation of the
European Communities and European Union), bringing it to the threshold of EU accession. In
recent years economic growth has been strong, averaging 4-5 percent a year (except in 1999, due
to the Russian Federation’s financial crisis), and the macroeconomic environment has been stable.
Strong growth has been driven by diverse and growing small and medium-size enterprises and by
increasing exports of manufactured goods, facilitated by Lithuania’s labor cost advantages.
3. Lithuania has also started to make progress on many of the elements required for a
knowledge-based economy. For example, it has participated in EU research programs, prepared a
white paper on science and technology, agreed to implement the e-Europe+ action plan, adopted
various information society and e-government strategies, and signed a memorandum of
understanding on information society development between the private sector and the
Government.
4. Against this positive backdrop, Lithuania faces a number of challenges. Competitive
pressures will increase as Lithuania joins the EU and faces increased competition on the single
market. The phaseout of the Multifiber Agreement in 2005 will reduce the price of textiles and
clothing exports from developing countries to the European Union; because one-third of
Lithuanian manufacturing exports to the European Union comprise textiles and apparels,
Lithuanian exporters will face increasing competitive pressures. Finally, competing on the basis
- 28 -
of unskilled- labor- intensive goods will become increasingly difficult as wage levels in Lithuania
rise with economic growth.
5. The economy is also faced with high unemployment (17 percent in 2001), concentrated
among less-skilled workers. Poverty, ranging from 10-25 percent of the population in 2000
(depending on the measure used), remains widespread in rural areas. And modernizing the
agriculture sector remains an important and unfinished agenda. The success of Lithuania’s
membership in the European Union will be perceived by many Lithuanians in terms of the
economy’s ability to converge Lithuanian incomes with those of other EU members—a
convergence that is still many years away. Improving competitiveness and raising productivity
through knowledge-supporting policies are thus key for Lithuania’s future.
6. In addition, while Lithuania has evolved enormously since independence, the world has
also changed over the past decade—often in unprecedented ways. A new world economy is in the
making, driven by two forces: a technological revolution and an economic revolution. The
technological revolution, driven by plummeting costs of information and communications
technology and increased codification of knowledge has spurred the development of technologies
in many other fields (such as biology, energy, nanotechnology, and new materials). This has been
associated with closer links between enterprises and researchers, increased rates of innovation,
and shorter product life cycles. This in turn has increased the importance of education, worker
skills, and lifelong learning. Finally, investments in intangibles (in R&D, education, and software)
in OECD countries are greater than investments in fixed capital.
7. The economic revolution is driven by a powerful expansion of world trade and cross-
country investment. The economic revolution has lead to faster, leaner production processes in
which speed is key, driving shorter design and production cycles, shorter marketing loops, and
shorter price cycles. Alliances between enterprises (including but going beyond joint ventures
and mergers and acquisitions) have taken on central import, while value chains (the division of
functions in production and marketing among cooperating firms working across national
boundaries) have become longer. More services are being supplied over longer distances,
businesses are being reshaped from the ground up, and new product and service ideas are being
generated.
8. The new world economy (a concept going well beyond the new economy based on
information and communications technology) provides for unprecedented opportunities as well as
unprecedented stress. Opportunities are arising through new products, markets, and ways of
doing things—and hold the promise of higher productivity growth and catch-up opportunities,
particularly for smaller countries (which find it easier to reach a consensus to modernize). The
flipside of this is the considerable stress for companies, governments, countries, regions, and
individual citizens that will result from having to adapt to new rules that emphasize speed,
networking, knowledge, and competitiveness. Given varying abilities to adjust, disparities are
likely to grow both among and within countries.
9. With the advent of the new world economy, three new realities have also emerged with
far-reaching implications for how economies will be managed in the future. First, with
increasingly open economies and cross-border business venues, the ability of governments to
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Country Rank Country Rank
Finland 1 Finland 1
Ireland 22 Ireland 11
Hungary 26 Portugal 25
Estonia 27 Hungary 28
Portugal 31 Estonia 29
Slovenia 32 Slovenia 31
Turkey 33 Costa Rica 35
Czech R. 35 Greece 36
Slovak R. 39 Czech R. 37
Poland 41 Slovak R. 40
Latvia 42 Poland 41
Greece 43 Lithuania 43
Lithuania 49 Latvia 47
Costa Rica 50 Turkey 54
Russia 58 Romania 56
Ukaine 60 Bulgaria 59
Romania 61 Russia 63
Bulgaria 68 Ukraine 69
guide economic outcomes has been greatly reduced. Second, boundaries have become
increasingly blurred between the roles of the public sector, the business community, and civil
society in creating wealth and ensuring welfare. Finally, traditional top-down hierarchies are
increasingly being challenged by networks of communities of interest, partly driven by the
revolution in information and communications technology.
10. Within the new world economy, creativity and knowledge have become important factors
of production, similar to capital, labor, and land and natural resources. An economy’s ability to
create, acquire, use, and distribute knowledge is becoming the key factor in determining its
competitiveness. The importance of knowledge for development is likely to grow and could well
come to mean the difference between prosperity and poverty.
Lithuania’s Competitiveness
11. According to the Global Competitiveness Report 2002/2003 recently issued by the World
Economic Forum, Lithuania’s current ability to compete internationally ranks 49
th
among 75
countries—well ahead of the Russian Federation and Ukraine yet placing Lithuania among the
less competitive countries soon to join the European Union. In terms of likely future
competitiveness, Lithuania ranks 43
rd
, suggesting that current policies will slightly improve
matters. Still, these rankings indicate that considerable improvements are needed if Lithuania’s
income convergence with current EU members is to accelerate.
Table A1.1: Current Competitiveness Index Growth Competitiveness Index
Source: WEF, Global Competitiveness Report 2001/02
12. According to the World Economic Forum, a country’s current competitiveness is driven by
two factors:
- 30 -
Country Rank Country Rank
Finland 2 Finland 1
Ireland 17 Ireland 22
Slovenia 28 Hungary 25
Estonia 32 Estonia 26
Hungary 33 Portugal 29
Costa Rica 34 Turkey 31
Latvia 35 Czech R. 33
Portugal 38 Slovenia 35
Czech R. 41 Slovak R. 36
Turkey 44 Poland 40
Lithuania 47 Greece 42
Greece 51 Latvia 43
Russia 54 Lithuania 48
Poland 55 Costa Rica 52
Slovak R. 57 Russia 56
Ukraine 62 Ukraine 60
Romania 63 Romania 61
Bulgaria 70 Bulgaria 65
Strategy Subindex Subindex
Company Operations & Quality of Business Environment
• The sophistication with which a country’s companies compete—in terms of using
sophisticated business strategies and moving away from advantages based on natural
resources or low-cost labor (or both) to more distinctive products made using more
productive methods.
• The quality of the business environment—in terms of the quality of input and factor
markets, the competitiveness of the business environment, the extent of demand (in
both domestic and export markets), and the presence of local support industries.
Lithuania’s relatively low ranking based on these two elements points to the challenges ahead.
Table A1.2: Current Competitiveness Index
Source: WEF, Global Competitiveness Report 2001/02
13. A country’s future competitiveness, again according to the World Economic Forum, is
largely a function of its ability to innovate (as indicated by a technology subindex, on which
Lithuania ranks 41
st
—among the lowest of EU accession countries) and the quality of its public
institutions (where Lithuania ranks 34
th
) and macroeconomic environment (where Lithuania’s
relatively low ranking – 56
th
– may have been influenced by the Russian Federation’s financial
crisis).
- 31 -
Table A1.3: Growth Competitiveness Index
Source: WEF, Global Competitiveness Report 2001/02
Gradual Progress on the Knowledge Economy Agenda
14. How will Lithuania—the government, the private sector, and civil society—address the
challenges of moving toward a knowledge-based economy? This report suggests that Lithuania
consider pursuing policies (and policy reforms) and take actions in a broad range of areas that
foster the creation, acquisition, use, and distribution of knowledge throughout the economy. The
report also suggests that efforts be made at integrating and coordinating policy efforts more
closely with the aim of supporting a knowledge economy. The areas for policy reform and
integration touch on the four key dimensions of the knowledge economy:
• Education systems that ensure an educated, skilled population able to create, acquire,
use, and share knowledge.
• An innovation system comprising firms, research centers, universities, consultants, and
other organizations capable of tapping into the growing stock of global knowledge and
of assimilating and adapting this knowledge to local business needs—thereby creating
new products and services.
• An information society that provides for dynamic information and communications
infrastructure to facilitate the effective communication, dissemination, and processing
of information.
• An economic and institutional regime that provides incentives for the efficient use of
existing and new knowledge and the flourishing of entrepreneurship. Good governance
in both the public and private sectors is key to establishing such a regime.
Country Rank Country Rank Country Rank
Finland 1 Finland 1 Finland 1
Estonia 8 Ireland 18 Ireland 2
Czech R. 20 Portugal 25 Greece 32
Hungary 21 Hungary 26 Portugal 35
Portugal 25 Estonia 29 Hungary 38
Ireland 28 Slovenia 30 Slovenia 39
Slovak R. 29 Lithuania 34 Costa Rica 42
Slovenia 30 Costa Rica 37 Estonia 43
Costa Rica 32 Slovak R. 38 Czech R. 49
Latvia 34 Greece 40 Poland 50
Poland 35 Poland 41 Lithuania 56
Greece 38 Turkey 46 Russia 57
Lithuania 41 Latvia 48 Latvia 59
Romania 47 Bulgaria 51 Slovak R. 64
Bulgaria 50 Romania 52 Romania 67
Turkey 51 Czech R. 53 Turkey 68
Russia 60 Russia 61 Bulgaria 69
Ukraine 63 Ukaine 71 Ukraine 73
Subindex Subindex Subindex
Technology Public Institutions Macroeconomic Environment
- 32 -
Benchmarking the Knowledge Economy
16. Lithuania’s relative progress in developing a knowledge economy can be assessed using a
benchmarking methodology developed by the World Bank Institute (for more information on the
methodology, see www1.worldbank.org/gdln/kam.htm). Indicators were collected for 100
countries on three variables for each of the four main dimensions of a knowledge economy:
education, innovation, information society (infrastructure), and economic and institutional
framework. Countries were ranked on a scale of 0 (lowest) to 10 (highest) for each variable, then
the 12 variables were averaged to produce a summary measure—the knowledge economy index.
17. Using this index, Lithuania made progress between 1995 and the most recent period
(ranging from 2000 to 2002 depending on data availability), moving from a score of 5.6 to 6.7
(figure 1). This higher score places Lithuania ahead of the average score for EU candidate
countries (6.6) and ahead of Latvia, Romania, Turkey and Bulgaria. Based on this index,
Lithuania ranks behind the Visigrad Countries and Estonia, as well as the average score for EU
member countries (8.12) and G7 (8.17).
Figure A1.1: Knowledge economy index: scores for various countries,
1995 and 2000-02
Source: World Bank Institute data
18. In terms of the four dimensions of a knowledge economy, Lithuania made the most
progress in developing its information and communications infrastructure and improving its
economic and institutional framework (figure A1.2). Less progress was made in improving
Knowledge Economy Index
4.00
5.00
6.00
7.00
8.00
9.00
10.00
4.00 5.00 6.00 7.00 8.00 9.00 10.00
1995
M
o
s
t
r
e
c
e
n
t
Turkey
Romania
Ukraine
Latvia
Lithuania
Russia
Bulgaria
Cyprus
EUCC12
Greece
Slovak Rep.
Hungary
Portugal
Poland
Slovenia
Czech Rep.
Italy
Estonia
France
EU15
G7 Germany
Ireland
UK
Finland
Sweden
Denmark
Netherlands
Knowledge Economy Index
4.00
5.00
6.00
7.00
8.00
9.00
10.00
4.00 5.00 6.00 7.00 8.00 9.00 10.00
1995
M
o
s
t
r
e
c
e
n
t
Turkey
Romania
Ukraine
Latvia
Lithuania
Russia
Bulgaria
Cyprus
EUCC12
Greece
Slovak Rep.
Hungary
Portugal
Poland
Slovenia
Czech Rep.
Italy
Estonia
France
EU15
G7 Germany
Ireland
UK
Finland
Sweden
Denmark
Netherlands
- 33 -
education systems, though literacy and enrollment rates were already high in 1995. And when it
came to fostering innovation systems, Lithuania’s performance was poor.
Figure A1.2: Lithuania’s performance in developing a knowledge economy,
1995 and 2000-02
Source: World Bank Institute data
19. So, despite significant progress, considerable challenges—new and old—will mark the
way for Lithuania’s ability to achieve a knowledge economy able to compete with other EU
candidate countries and current members, and to find its place in the global economy.
20. To support formulation and integration of policies that foster a knowledge-based economy,
this report suggests that Lithuania develop within its Statistical Office a system of indicators that
allows it to monitor progress on the four key dimensions of the knowledge economy (see above)
and that allows Lithuania to benchmark its progress against relevant comparator countries.
Benchmarking Lithuania with countries of key interest would also help guide policy.
Benchmarking includes:
• Designing indicators that proxy changes across the four dimensions of the knowledge
economy, allow for comparisons with key countries of interest, and are aligned with
major EU and OECD tracking tools.
• Establishing relevant data collection procedures and databases within the Statistical
Office.
0
5
10
Econ. Incentive
Regime
Innovation
Education
Information
Infrastructure
most recent 1995
- 34 -
• Securing the Government’s commitment to publish and publicly discuss an annual
progress report on the knowledge economy. This Report could be issued under the
aegis of the prime minister.
When to Start?
21. With EU accession and significant amounts of EU structural financing becoming available
in 2004, Lithuania has an opportunity to fund a broad range of public investments and programs to
support a knowledge economy (box A1.1). This opportunity should be used to build broad
consensus on the vision and steps to be taken in moving toward a knowledge economy—and on
how to translate this vision into an action plan of well-defined, achievable programs and projects
supported by the European Union. Other countries, both in the region and elsewhere, are revising
their approaches to and policies for education, telecommunications, and science and technology.
Given the time it takes to build consensus, implement policies, and achieve change, Lithuania
must start now in developing its action plan for a knowledge economy.
Box A1.1. EU structural funds
To secure funding for a broad range of public investments under forthcoming EU structural funds,
Lithuania is preparing a draft of its Single Program Document, to be negotiated with the EU
Commission in the course of 2003. The document will outline guidelines and criteria for
investments eligible for funding under the EU funds across a broad set of themes. The drafting of
the document is being coordinated by the Ministry of Finance with the support of 12 government
committees. More than half of these committees work on areas directly relevant to the development
of a knowledge economy (information society, professional training, employment, education,
science and technology, telecommunications, local infrastructure, social affairs). Thus EU structural
funds could become an important funding instrument for the knowledge economy—provided that
programs can be identified and properly designed and implemented. An important task for
policymakers and implementing institutions will be to guide the formulation and implementation of
such programs. In addition, developing the Single Program Document with a knowledge perspective
in mind could lead to the design of a broader action plan for Lithuania’s knowledge economy.
http://europa.eu.int/public-
services/european_union/enterprises/funding_opportunities/structural_funds_(esf)_en.htm
- 35 -
Annex 2: Lifelong Learning for the Knowledge Economy:
Challenges for Education and Training
1. Key issues need to be addressed to facilitate lifelong learning that allows Lithuanians to
participate more fully in the knowledge economy in their country, in Europe, and in the global
community. This annex does not include a detailed narrative and statistical description of
Lithuania’s education sector, as those have already been documented in many other publications.
Rather, the intent here is to add value by focusing on the linkages within and between lifelong
learning and the knowledge economy, and to identify areas where Lithuania may want to
consider implementing learning policies that help overcome obstacles to development.
2. This annex considers the linkages between learning and the knowledge economy from
three perspectives:
• A learner perspective, as opposed to an education institution perspective.
• An economic and labor market perspective, though not in isolation from social and
cultural factors.
• A thematic education policy perspective, which examines learning and knowledge
issues across different life stages—from early childhood to retirement—and learning
systems—formal, nonformal (that is, training in enterprises), and informal (that is,
life experiences).
3. Globalization and the knowledge economy have created monumental economic and
technical changes, posing enormous challenges to formal and nonformal education systems
worldwide—particularly if they are to respond to enable lifelong learning. Knowledge has
become a fundamental driver of progress. The resulting urgency to generate, use, and
disseminate knowledge requires adjusting the systems and processes that create and use it.
4. In many countries, including Lithuania, education systems are at a crossroads—facing
increasing demand but with limited capacity and resources to improve access and quality. The
increasing economic importance of knowledge and innovation, growing reliance on technology,
and rising demand for traditional as well as new skills signal that globalization is not just a
means of production but also a means of education. Recent research indicates a need to broaden
the base of basic skills to include information, communication, and language competencies.
Such research also points to the need to introduce new skills and knowledge, including those that
allow individuals to evaluate and use knowledge, to act autonomously in increasingly complex
social and work environments, and to join and function in socially heterogeneous groups
(OECD 2001 b). All individuals need access to learning on a lifelong basis, which requires
policies that facilitate more responsive learning systems.
5. With the global economy increasingly driven by knowledge, countries need educated
populations able to create, adapt, use, and disseminate it. Thus governments and economies
must transform formal education systems and link them with nonformal systems, with the goal of
creating an overall high-performance learning system. The key challenge for education is to
provide individuals with access to necessary knowledge and skills. But other questions also
arise. How should knowledge be imparted if the kind of knowledge in demand is constantly
- 36 -
changing? How should the new demands on the education sector be managed? And how can
countries mobilize the financial resources necessary to confront these enormous challenges?
6. Education systems in OECD countries have been adjusting to these changes more quickly
than systems in developing countries, yet developing countries face even greater challenges.
First, they must overcome long-standing problems: expanding coverage to achieve universal
access to basic education (a necessary but insufficient first step in providing skills for the
knowledge economy), expanding secondary and tertiary education, and implementing
institutional reforms to strengthen the linkages between formal and nonformal education and the
labor market. Second, developing countries need to raise the quality of education through
changes to content, pedagogy, and the use of modern technologies, as well as cost-effectively
expand access to postschool learning for adult learners. How developing countries respond to
these challenges will affect economic growth, human capital development, and social cohesion.
Learner Perspective
7. The responsibility for managing learning in the knowledge economy needs to be
increasingly demand driven and based on individual needs, particularly as individuals move up
the learning continuum. There is a need to empower individuals to manage their own learning,
rather than placing full responsibility in the hands of education and training institutions. This
paradigm shift reflects the need for individuals to have basic knowledge as well as knowledge of
how to access, select, and evaluate specialized knowledge—and to use it autonomously in the
context of lifelong learning in a knowledge economy.
8. This trend is increasingly reflected in the literature from both industrial and developing
countries as well as multilateral and bilateral discussion papers. The World Bank’s Human
Development Network recently completed a systematic review of the implications for
developing countries of lifelong learning and the knowledge economy. The review cites research
that an educated, skilled population capable of creating, using, and sharing knowledge is one of
the four pillars of a knowledge economy (World Bank 2002).
9. In a discussion of the transition from education to working life, OECD (2000) portrays
the process as involving two types of approaches. First, structural approaches that focus on the
institutional frameworks of education and training systems. Second, approaches that focus on
learner-centered activities, concentrating on teaching and learning processes. The two are not
seen as mutually exclusive but rather as complementary—and needing to be developed in
tandem.
10. The EU indicates that the principles that increasingly underpin learning and guide its
effectiveness must emphasize the centrality of the learner (Commission of the European
Communities 2001). The International Labour Organization describes the paradigm shift in a
similar way as involving a move from training and focus on the teacher to self- learning and focus
on the learner; from one-time learning to recurrent lifelong learning; and from supply-to
demand-driven approaches (ILO 2002).
- 37 -
11. If one agrees with the basic premise that individuals need to be increasingly responsible
for managing their learning, particularly as they advance through different life stages, then a
number of challenges emerge.
• What key competencies does an individual need to operate in a modern knowledge
economy, and how should they be measured, benchmarked, and assessed?
• What challenges do education and training institutions face in shifting the
management of learning to individuals?
• How can individuals be motivated to take increased responsibility for learning?
• What information do individuals need to facilitate an increased role in planning their
learning?
• What challenges do formal education and training institutions face in supporting
demand-driven training?
• What are the difficulties in recognizing nonformal learning?
• What unique challenges do developing countries encounter when facilitating
demand-driven learning?
These questions are addressed in this annex from the perspective of helping individuals manage
learning throughout their lifetime.
Economic and Labor Market Perspective
12. The economic literature affirms the importance for economic growth of investment in
human capital. Growth (or decline) in specific sectors directly affects labor demand as well as
demand for specific knowledge. As a knowledge economy develops, shifts in employment
occur, including increased employment in knowledge- intensive sectors and increased use of
information and communications technology. These shifts are apparent in Lithuania, causing
structural changes in labor demand—with ramifications for education and training systems.
Employment by sector
13. As elsewhere in Central and Eastern Europe, Lithuania’s transition years have seen a
sharp shift in employment from the public to the private sector. In 1991 the private sector
employed less than 30 percent of Lithuanian workers; by 2000 it employed nearly 70 percent.
Much of this growth occurred in small and medium-size enterprises, which in 1998 accounted
for more than 55 percent of the workforce—twice the level just five years earlier.
14. In addition, since the early 1990s there has been an increase in services jobs and a decline
in industrial and construction jobs, with agriculture playing a buffer role (table A2.1). Many
workers laid off in industry had trouble finding new jobs in urban areas and so moved to rural
areas to take up farming. Many of these migrants were elderly, low-skilled workers. This urban-
rural migration increased agricultural employment from 18 percent of the workforce in 1991 to
23 percent in 1994. Since 1994 employment has continued to shift from industry to services, but
agricultural employment has fallen as well, to 21 percent of the workforce in 2000. During the
same period the share of industry fell to 20 percent—while the share of services rose to 54
percent in 2000.
- 38 -
Table A2.1: Composition of Employment (percent)
Sector 1993 2000 Change
Industry
25
20
5
Construction 7 6 -1
Agriculture 23 21 -2
Services 45 54 9
Source: Lithuanian Dept. of Statistics.
Level of employment
15. Despite positive GDP growth and strong export performance, employment has remained
largely stagnant, with employment in 2000 slightly lower than in 1995. This phenomenon of
“jobless growth” is not specific to Lithuania; but typical of most transition economies in Central
and Eastern Europe. The primary reason for economic growth not coupled with employment
growth are productivity improvements associated with intensive restructuring. Growth in labor
productivity (measured as GDP per worker) has been quite strong since 1996, averaging 4
percent per year. Thus economic growth in Lithuania has been achieved through more efficient
use of labor resources rather than through increased use of labor inputs.
16. A deeper reason for the jobless growth in Lithuania, and in transition economies
generally, is the process of overcoming the legacy of overstaffing inherited from the previous
system. Many companies entered the transition with employment far above that justified by
production requirements. Growing exposure to domestic and international competition coupled
with an influx of new and more capital- intensive technology has led companies to rationalize
employment and shed labor. This process has been spread over time. Although the destruction
of unproductive jobs has been accompanied by the creation of new and more productive jobs, job
losses have exceeded job gains, causing a net fall in employment.
Nature of unemployment
17. An analysis of the relationship between unemployment and job turnover suggests that
intensive restructuring may have contributed to high unemployment, but it has done so indirectly
through the emergence of frictional unemployment (that is, workers have the right skills but are
in the wrong location or do not know where the jobs are) and structural mismatches (that is,
workers do not have appropriate skills) in the labor market. High job reallocation need not be
associated with high unemployment, because high turnover usually means that the unemployed
have a good chance of finding a new job, and hence unemployment spells are short. It is thus
possible to have a high job destruction rate and low and short unemployment rates (as in the
United States). The requirement for this to happen is a high degree of labor mobility (in terms of
geography and skills).
18. But in Lithuania there appear to be severe limitations in mobility from old to new jobs.
The jobs being destroyed differ in salient ways (especially in terms of geography and skills) from
those being created. As a result many workers that have lost jobs do not have the right
- 39 -
knowledge to take up new ones. This leads to longer unemployment and has contributed to the
buildup of a pool of long-term unemployed. Since long unemployment is often associated with
loss of skills and motivation, many of the long-term unemployed may have become marginalized
and even less able to benefit from the high job creation rate.
Skills gap
19. The skills gap seems to partly account for the limited transitions from unemployment into
jobs. On average, the unemployed, and especially the long-term unemployed, have lower
education attainment and lower skills than the employed. Half of the workforce has a secondary
or less education and an unemployment rate twice that of postsecondary graduates. The
unemployment rate among workers with less than upper secondary education is around 25
percent, compared with 6 percent among workers with university education (table A2.2).
20. The skill mix is of some concern to Lithuanian employers, especially as the size of an
enterprise increases, as indicated in the 1994, 1997, and 2001 Private Enterprise Surveys.
Employers indicated a moderate but increasing concern about the availability of skilled workers
and technicians, and the impact this has on the operation and expansion of businesses. If the
skills gap could be reduced, economic growth could accelerate and more people could be put to
work. The skill mismatch problem has two policy implications:
• First, it indicates the need for greater wage flexibility, especially at the lower end of
the wage distribution, to encourage the creation of low-skilled jobs and improve the
employment prospects of poorly educated unemployed.
• Second, it points to the role of education and training systems in curbing the problem
of low, narrow, and inadequate skills—including changing the nature of vocational
training in secondary education, examining the proportions of enrollments between
colleges and universities, and motivating individuals and enterprises to support
nonformal training.
- 40 -
Table A2.2: Unemployment and Employment by Education Level, 2000 (percent)
Level of Education Unemployment
Rate
Share in
Unemployment
Share in
Employment
University 5.9 7.2 20.9
College 13.6 21.7 25.0
Upper Secondary
General
17.3 23.1 20.0
Upper Secondary
Vocational
18.6 22.2 17.7
Lower Secondary
General
26.2 14.9 7.6
Lower Secondary
Vocational
24.0 8.7 5.0
Primary or less
9.3 2.1 3.8
15.4 100.0 100.0
Source: Labor Force Survey Data, Lithuania Dept. of Statistics, and World Bank staff calculations.
Thematic Education Policy Perspective
21. Several indicators set the stage for a discussion of key education policy themes. The
indicators show that in a number of areas Lithuania generally follows trends in transition and
developing countries (as in terms of public spending on education, primary and secondary
education enrollments, and adult literacy). But there are several areas where Lithuania deviates
from the norm: for example, unemployment is significantly higher, mathematics and science
scores for 8
th
graders are lower, and management training and adult continuing education are less
widely available (table A2.3). These deviations indicate shortfalls in basic and tertiary education
as well as potential problems in adult continuing education for the current workforce. The latter
deficiency contributes to long-term structural unemployment and a shortage of human capital to
support development of the knowledge economy.
- 41 -
Table A2.3: Selected Knowledge Economy Indicators related to Human Development
Indicator Lithuania Europe and
Central Asia
United
States
Western
Europe
G7
Unemployment
Rate (percent)
13.50 9.80 4.50 7.75 8.11
Human
Development
Index
0.80 0.79 0.93 0.93 0.93
Public
Spending as %
of GDP
5.20 4.86 4.70 6.08 4.99
Primary Student-
teacher Ratio
15.00 17.23 16.00 14.00 16.83
Secondary
School
Enrollment (percent)
90.00 83.33 97.00 116.00 109.14
8
th
Grade
Mathematics
Achievement
482.00 510.89 502.00 530.00 517.40
8
th
Grade Science
Achievement
488.00 519.67 515.00 545.00 525.80
Gross Tertiary
Enrollment
1995 (percent)
41.00 39.06 81.00 56.75 59.57
Adult Literacy
(percent)
99.50 97.56 99.00 98.83 99.00
Availability of
Management
Training
4.00 4.15 6.70 5.70 5.74
Prof/Technical %
of workforce
21.37 20.86 28.50 27.34 24.86
Extent of Staff
Training
3.40 3.65 5.90 5.65 5.47
Computers per
1,000 people
4.09 4.09 6.24 5.87 5.69
Telephones per
1,000 people
5.77 5.52 6.55 6.39 6.40
Source: World Bank Institute, World Bank.
- 42 -
22. The rest of this annex examines six cross-cutting education policy themes:
• Defining and assessing key competencies. What competencies are needed to function
effectively in a modern democratic knowledge economy? How should they be
addressed by different components of the education system? What changes in
educational pedagogy are needed? And how should these competencies be measured
and benchmarked?
• Governance and management challenges. What role should be played by key
stakeholders (civil society, the public sector, the private sector)? What impact does
decentralization have on governance and management, and how can national
regulatory roles be balanced with local autonomy?
• Financing. What should be the guiding principles for allocation of funds within and
between learning systems (formal and nonformal)? What is the role of public and
private financing at different levels of education and in different learning systems,
and how can resources be reallocated and used more efficiently in different parts of
the education system?
• Opening pathways within and between learning systems. What are the constraints to
mobility within and between different learning systems (formal, nonformal, and
informal) ? What incentives and mechanisms can be used to help overcome
constraints and improve access to learning at different life stages? What existing and
new institutional arrangements are most effective in facilitating access to learning
services?
• Equity and access. How can equity, access, and affordability of lifelong learning for
the poor and vulnerable be improved? What mechanisms should be used to facilitate
“second and expanded chance” learning for those who do not receive sufficient initial
education to function in the knowledge society or who want to move up a career
ladder? How can the motivation for learners to engage in lifelong learning be
increased? How can Lithuania attract and retain more and better people into
education and training sector, including addressing issues of brain drain?
• Research and knowledge generation. How can education, science, technology, and
research be linked more effectively?
23. These themes are discussed with respect to two aspects of lifelong learning. First,
learning that occurs from early childhood, to youth, to adulthood and retirement. Second,
learning that occurs in three different, and sometimes overlapping, education systems—the
formal system (primary, secondary, tertiary), the nonformal system (enterprise training, short-
term labor market training), and the informal system (sometimes provided by civil society, life
experience).
Defining and Assessing Key Competencies
24. The key question is, what competencies are needed to function effectively in a modern
democratic knowledge economy? Moreover, how should they be reflected in the content of the
learning system, and how and when should they be transmitted? While the content and delivery
- 43 -
of education and training systems in Lithuania, particularly at the basic and secondary levels, are
being modified to reflect emerging skill and knowledge demands, additional work is needed.
25. Lithuanian stakeholders discussed these during the consultation on lifelong learning,
which was completed in cooperation with the EU (Ministry of Education and Science 2001).
This and other consultations have resulted in a significant reworking of the basic education
curriculums (grades 1-10), which is now supported by a World Bank project; initial work on
revamping secondary education, including vocational training, supported by PHARE; a
significant infusion of information and communications technology into basic and secondary
schools along with related in-service teacher training; and initiation of structural changes in
tertiary education (for example, the creation of private colleges and universities and of new
departments in existing public universities).
26. The primary focus of change, however, has been the basic formal education system. This
is required but insufficient to ensure that citizens can fully participate in the knowledge
economy. Efforts have been made to change pedagogical methods in schools from rote learning
to problem solving and teamwork, with the assistance of bilateral and multilateral funds. A
major achievement has been the development of secondary school leaving examinations
(Matura) and the elimination of the university entrance exam.
27. In addition, the third cycle of the International Mathematics and Science Study (TIMSS)
is being implemented. Work is also being initiated on school assessment by grade and subject,
and pilot work is being started on defining standards for vocational and professional training
(with the assistance of PHARE). But no parallel work has been initiated on standardized
assessments of occupational competencies. This is significant progress, but a number of issues
emerge surrounding this reform of education, including systematically examining the quality of
learning processes and providing a policy framework to support nonformal and informal
systems. Quality assurance can be addressed by institutions participating in formal quality
assurance programs such as ISO 9000.
Key competencies in basic and secondary education
28. In some quarters there is concern that the Matura exams focus curriculums and teaching
on narrow factual learning at the expense of softer and broader competencies. The results of the
Citizenship and TIMSS studies indicate shortfalls in selected skill areas (tables A2.4 and A2.5).
To ensure that a broad view of competencies is maintained during curriculum reform, Lithuanian
educators may want to make use of extensive research just completed on key competencies by
the OECD Defining and Selecting Key Competencies project. Three broad areas of competence
were identified (Rychen and Salganik 2002), and the research found that countries are at
different levels on different competencies:
• Capacity to act autonomously and reflectively (having an orientation to the future,
awareness oaf the environment, understanding how one fits, building a sense of self,
participation in a social field).
• Capacity to use tools effectively and interactively (basic skills, instruments for
dialogue, awareness of new tools, accommodation to potential of new tools, use of
- 44 -
information and communications technology, effective use of information and
language).
• Capacity to join and function in socially heterogeneous groups (social embeddedness
of individuals, creating social capital, living in pluralistic societies, managing and
responding to others, resolving conflict, participation in groups).
Table A2.4: Citizenship and Education in Selected Countries
Civic
Knowledge
Civic Engagement Civic Attitudes
Country Total Conventional
Citizenship
Expected
Participation
in Political
Activities
Trust in
Government
Institutions
Positive
Attitudes
about
Immigrants
Support for
Women’s
Political
Rights
Australia M - - + M +
Belgium(Fr) - - - M M M
Chile - + + + -
Czech + - - + + +
England M - - M - +
Estonia - - M - - -
Finland + - - M M +
Greece + + M + + M
Lithuania - + - - - -
Poland + + + M + M
Russia M - M - M -
Slovak + + - + - -
United States + + + + + +
Source: Citizenship and Education in Twenty-Eight Countries, IEA, 2110
M = Mean, - significantly lower than mean, + significantly higher that mean score
Table A2.5: Percentage of Students Reaching Median in Math and Science
Science Scores Math Scores
Country 1995 1999
Difference 1995 1999 Difference
Hungary 75 79 4 73 74 1
Belgium
(Fl)
76 76 0 83 85 2
Australia 69 74 6 70 73 3
Czech 81 74 -7 81 69 -11
Slovak 72 74 2 77 78 1
England 70 72 2 59 58 -1
Russia 66 68 1 72 72 0
United
States
64 62 -1 59 61 2
Lithuania 38 51 13 48 52 4
Romania 46 45 -1 51 49 -2
Source : TIMSS 1999 International Report, IEA.
29. A parallel and supporting conceptual framework indicates that there is recognition of the
need to develop competencies for and at different life stages, that competencies fit different life
roles, and that lifelong learning is of critical importance (Kegan 1994). Kegan has
conceptualized five orders of development and consciousness including, from simple to
complex:
- 45 -
• Simple social perceptions and impulses.
• Point of view (role concept and simple reciprocity).
• Traditionalism (role consciousness and mutual reciprocity).
• Modernism (relationship regulating and multiple role consciousness).
• Post-modernism.
30. Related research indicates that almost two-thirds of adults in some industrial countries
operate at less than the modernism level, which is required for full functioning in a modern
knowledge economy (Tobert 1987).
Secondary vocational education
31. Vocational education is provided at the secondary level in four programs. Stage 1
provides three-year professional qualifications for youth without lower secondary education.
Stage 2 provides two-year professional qualifications for youth with a lower secondary
certificate. Stage 3 provides three- year professional qualifications and a general secondary
education leading to a Matura certificate. Stage 4 provides one or two professional qualifications
for those who have completed secondary school (Ministry of Education and Science and
Ministry of Social Security and Labor, White Paper on Vocational Education and Training
1999). Table A2.6 summarizes enrollment in these schools, along with overall upper secondary
school enrollment (including general education).
32. Most of the approximately 100,000 upper secondary students are in general, not
vocational schools. The number enrolled in stage 2 vocational schools is decreasing, while the
number in stage 3 is increasing. This is a positive trend, as stage 3 provides graduates with a
secondary school leaving certificate (Matura) that helps ready them for lifelong learning. A
more worrisome issue is the level of specialization in secondary vocational schools, which
currently prepare youth for 1 of about 100 specialized occupations (down from more than 300 in
earlier years). This level of specialization does not prepare youth well for lifelong learning or
provide them with flexibility in later years in the labor market. Such specialized programs are
being phased out of secondary education in most upper- income countries, and being replaced by
more general vocational programs that provide skills common to a family of related occupations
(mechanical, marketing, information and communications technology) and prepare students for
initial job entry or further specialized education at the postsecondary level.
33. To ensure a broad view of competencies, Lithuanian educators may want to use the
results of OECD research in curriculum reform, particularly in basic education. The 100
specialized programs in stage 3 and 4 vocational secondary schools should be reduced to 15-20
broader career orientation programs that provide youth with a combination of entry- level job
skills, an education that allows a transition to specialized postsecondary training, and preparation
for lifelong learning in a changing labor market.
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Table A2.6: Students in Vocational and Total Upper Secondary School, 1996-2001
1996 1998 1999 2000 2001
Stage 1 Voc.
6598 6927 7999 7525 7704
Stage 2 Voc. 18574 15371 11440 7456 4333
Stage 3 Voc.
22100 26742 31918 31430 28248
Stage 4 Voc.
4379 4630 5085 5551 6720
Total upper
secondary education 122941 126079 133546 98235 100957
Source: Ministry of Education, Lithuania.
Benchmarking and assessment of key competencies
34. Lithuania has been directly involved in the 1999 Third International Mathematics and
Science Study (TIMSS) of grade eight students and the International Association for Evaluation
of Educational Achievement (IEA) Citizenship and Education Study (CES). However, it has not
been involved in the Program of International Student Assessment (PISA) and International
Adult Literacy Study (IALS) or the new Adult Literacy and Life skills (ALL). These studies
could provide additional benchmarking on the previously mentioned competencies, and
supplement internal assessments. The OECD Defining and Selecting Key Competencies
initiative intends to use these assessments in its work.
35. Lithuania should participate in additional international achievement assessments,
specifically the PISA and ALL surveys, to benchmark youth and adult education and determine
to what degree Lithuanian youth and adults have the necessary core competencies to function in
the knowledge economy.
Labor market demand
36. Broad sector employment data is available in Lithuania (see table A2.1). But information
on emerging or declining sectors, and on the demand for specific skills, are fragmented and often
based on single surveys, picked up from tangential studies, or based on data with limited
penetration (such as labor exchange data). There is evidence from some employer surveys that
technical and managerial shortages are constraints to development, and is of greater concern the
larger the company gets.
37. Labor market monitoring should be expanded in two key areas: implementation of
regular short-term, qualitative economic and enterprise surveys like those done in Hungary and
Sweden; and development of long-term scenarios of human resource requirements in selected
sectors based on national priorities in innovation and research.
38. Another method of determining labor market demand is regular sample follow- up of
graduates of both formal and nonformal education and training programs. Formal education
institutions do not appear to be doing this on a regular basis. Informal training at labor market
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training centers is evaluated, but only on a gross impact basis. This does not provide the
necessary evaluation, and quasi-experimental design studies should be done every few years to
determine if the programs have an net impact—and if so, which clients receive the greatest
benefit (Fretwell, Benus, and O’Leary 1999).
39. All formal and nonformal education and training institutions (secondary schools,
colleges, universities, labor training centers) should be required by their public funding agencies
to implement annual sample follow-up surveys of graduates to evaluate program impact and
linkages with the labor market.
Occupational standards and assessment
40. Occupational standards are essential to ensure that training matches enterprise needs and
to facilitate assessments of nonformal and informal training. Although initial work has begun,
with support from PHARE, there are questions about whether the standards define occupational
competencies (what people do in occupations) or only training standards (curriculum learning
objectives); if the methodology for defining standards is sufficiently well defined; if the
standards are enterprise driven or educator driven; and if the effort is sustainable. Progress is
slow (only 36 standards have been developed, and 50 are planned in the next phase).
Government Resolution 624 also defines regulations for assessment and regulation of selected
professional qualifications. However, there is a potential need for 300-500 standards, and no
work is under way to develop a systematic and standardized approach to assessing skills and
knowledge across the occupational spectrum.
41. One of the main challenges in promoting lifelong learning for the knowledge economy is
recognition of nonformal learning. This is particularly true in developing countries and is linked
to the concept of key competencies, assessment, and increased flexibility in the lifelong learning
system. The main arguments for recognition of nonformal and informal learning are that it
motivates individual learners, facilitates recognition of alternative learning methods, promotes
lifelong learning in general, and facilitates individual mobility. Lithuania needs to examine ways
of formally assessing and recognizing nonformal learning; there are two basic approaches:
• Key competency standards and assessment systems. The existence of such systems or
“common languages” is a prerequisite for embarking on a program to recognize
nonformal and informal learning, as this sets up a universally recognized set of
indicators against which all learning can be evaluated.
• Recognizing nonformal learning in the context of formal learning. An alternative
approach to evaluating learning based on key competencies is to recognize nonformal
and informal learning within the context of formal learning (for example, by having
an individual demonstrate that his or her informal learning is equal to formal learning;
then he or she can be issued a certificate from a formal learning institution). The
problem with this approach is that it is often not enterprise driven but rather leaves
traditional “supply side” institutions—which may or may not reflect the needs of the
knowledge economy—in charge of certification.
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42. Some formal institutions, particularly in higher education, may have difficulty accepting
that an individual can learn without engaging in academic life. These institutions, and related
ministries of education, may also see nonformal learning approaches as undermining their
business and authority. Similarly, enterprises may resist efforts to regulate and recognize their
internal training.
43. Work on defining occupational standards, assessments, and training standards should be
accelerated to improve links between training and the labor market, and between formal and
nonformal training. Standards development should include high-priority occupations across the
full spectrum (that is, those requiring vocational, technical, and professional training), and
priorities for development should be established with the business and research communities.
New pedagogy and e-learning
44. Lithuania is aware of the need for new pedagogy and e-learning and is taking steps to
address them in the formal education sector and in community settings. This is exemplified by
the major effort that has been made to provide information and communications technology to all
basic schools: by October 2002, 70 percent of these schools had dial up access and 10 were
online. A number of approaches are cited for moving to individual-centered learning, including
using different methods of instruction, including use of information and communications
technology and e- learning techniques; spending more time on experiential and group learning
and on recurrent (not one-time) learning; merging education and training, with an emphasis on a
diversity of perspectives; making changes in assessments from measuring knowledge to
evaluating performance; and increasing interdisciplinary work (McGinn 1999; ILO 2002).
45. The need to include information and communications technology skills in curriculums is
generally accepted. But, there is less agreement on the role of information and communications
technology in new pedagogical processes and the actual teaching and learning process.
However, the advantages of information and communications technology in supporting changes
in pedagogy and improvements in student learning do not come merely from the purchase and
introduction of computers in the classroom. OECD (2002) concludes that the effect of
information and communications technology on learning has at least as much to do with factors
independent of the technology as it has to do with the technology. A policy for information and
communications technology in education should foremost be an education policy. The
introduction of information and communications technology must therefore be supported by, and
supportive of, complementary reforms of the education system.
46. Many developing countries are looking at information and communications technology
and e- learning as key ways to promote learning for the knowledge economy. But to date there is
little scientific proof of what computers can accomplish in the classroom. Before investing large
amounts of scarce resources in information and communications technology, countries should
examine the costs, the net impact on learning, the availability of supportive learning policies
(such as flexible assessment and credit arrangements), and the infrastructure (such as Internet
access in remote and poor communities)—which may in the end primarily benefit already
favored groups of citizens. A more detailed discussion on the use of information and
communications technology in education can be found in World Bank (2002).
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Governance and Management Challenges
Involving stakeholders
47. Meetings with representatives of civil society, labor and enterprises, government, and
academics in Lithuania indicate that the Government is acting as a “convener” and that key
stakeholders are consulted on policy issues—though some complain consultations occur
somewhat after the fact. Tripartite organizations at the national and local levels provide input
into labor and vocational and professional education training issues, including the National
Employment Council and the Board of Experts of the Lithuanian Labor Market Training
Authority. At the local level it is sometimes too difficult to secure representation from all
partners.
48. However, higher education institutions have a great degree of autonomy, perhaps to the
extent that priorities in some areas (such as research) may address local professional priorities
and not national priorities. This problem is exacerbated by the fact that the managers of these
institutions are essentially elected by the members of these institutions. The business sector is
not sufficiently involved in government and institutional policymaking.
49. Businesses should play a stronger governance role in tertiary education, including serving
on boards of governors with policy authority in selected areas (including the hiring of
management staff), and be more involved in government education policy development and
institutional program development (defining curriculums, operating joint programs including
internships, cooperative education, and research programs).
Decentralization
50. In both the industrial and the developing world, a transfer of responsibilities from central
ministries of education to local education authorities, communities, postsecondary institutions,
and schools has become common. There are indications that decentralization and school
autonomy increase enrollments, education coverage, and local capacity. By making government
more accessible and accountable to people through increased participation, easier access to
information, and greater communication, democratization and political stability are also
enhanced. But decentralization needs to occur within a regulatory framework that ensures
minimum standards of quality and content are maintained to help ensure equity, labor force
mobility, and adequate financing.
Openness and the international dimension
51. Stronger international linkages, increased mobility, and better access to information have
allowed countries that open up to international markets to reap the benefits of the knowledge
economy. This has created opportunities to learn from international experiences and to build
partnerships across countries, making the cost of not opening up even greater. Openness also
invites greater influences from abroad, such as foreign provision of tertiary education and
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international education assessments, and can stimulate the development of lifelong learning by
increasing competition.
52. Lithuania’s Government could make internationally driven innovation a central part of
their policies while taking into account the pitfalls of internationalization—such as accelerated
brain drain. Examples are increasing where the state fosters innovation by building international
partnerships between ministries, between the public and private sectors, between private sector
agents, and between universities to incorporate global best practices in education—from
sponsoring exchanges of ideas and people to conducting joint R&D (World Bank Institute 2001).
Intellectual property rights
53. Intellectual property rights are discussed in more detail in other parts of this report. But
they are of considerable concern in the Lithuanian environment in the context of lifelong
learning and the encouragement of the creation of knowledge. It is vital to protect intellectual
property rights. While intellectual property rights are sometimes seen as a mainly economic or
legal issue, their implications for the learning system should not be overlooked.
54. Human capital and support for technical change and innovation are among the conditions
facilitating intellectual property rights. If there are few incentives and opportunities to create,
use, and transfer knowledge during learning, the education system will not be well equipped to
prepare people for the knowledge economy. Strong intellectual property rights encourage
international learning providers to enter developing countries, providing access to global
knowledge. But the design and application of intellectual property regimes need to promote the
creation and use of knowledge—and recognize the costs and uses of intellectual property rights.
This is a particular concern in Lithuania, where intellectual property rights in tertiary education
are not well defined. Thus the roles of staff and higher education institutions regarding
intellectual property rights need to be clarified to provide incentives for faculty to engage in
applied and developmental research.
Accountability and transparency
55. Accountability aims at making the state more responsive to its people by responding
effectively and transparent ly to its needs, ensuring that people’s voices are heard. A knowledge
economy subjects policymakers and public servants to greater pressure to deliver results. This
results-driven approach often leads to a shift from input-oriented to output-oriented management,
increasing the accountability of government at all levels. Nevertheless, promoting accountability
remains a major challenge for many countries, and ways need to be explored on how the
mechanisms of the knowledge economy can be used to enhance accountability—such as through
e-government and more participatory approaches.
56. Research indicates that a change from the worst rule of law (0.0) to the best (1.0) would
contribute an enormous 3 percent of economic growth per year across all developing countries
(Barro 2000). Good governance has a direct correlation with a number of human development
indicators, including literacy, per capita income, and life expectancy (Kaufmann, Kraay, and
Zoido-Lobaton 1996, 2000; seehttp:///www.imf.org/). For example, providing better
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information, education and training opportunities, career choices, and resources to learners helps
orient learners and inform policymakers of actual needs—while also strengthening the dialogue
between institutions and individuals. At the same time, greater accountability and transparency
ensure a greater focus on equity, with the potential of reducing social and economic inequalities.
Financing
57. Given the rising demand for learning, and rising expenditures, several principles should
guide future education financing:
• The acquisition of basic competencies, which increasingly means universal upper
secondary education, should be financed from public funds.
• Learning beyond the basic competencies should increasingly be the responsibility of
learners and employers.
• The Government should promote equity.
• The system should promote efficiency in delivery and delivery for the labor market.
Some of the available financing options are summarized in table A2.7.
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Table A2.7: Options for Financing Lifelong Learning
Who
Ultimately
Pays
Who
Finances
Collection Financing
Mechanism
Instrument
Student
N/A
N/A
Education Savings
Account
Fixed Private Loan
Combined Private Income Contingent
Loan
Private
Variable Human Capital Contract
Fixed
Combined
Institutional Income-
Contingent Loan
Private
Public
Variable Institutional Human
Capital Contract
Fixed Private Collected Public
Loan
Combined
Private
Variable
Fixed Public Loan
Combined Public Income-Contingent
Loan
Public
Variable Graduate Tax
Student
Public
Community
Variable
Individual Development
Account
Private N/A Variable On-the-job training
Employer Public Public Variable Training Levy/Payroll Tax
N/A Direct Funding
N/A Vouchers and entitlements
N/A Grants
N/A Interest subsidy on loans
Government
(taxpayer)
N/A
N/A
N/A Tax Credit
Source: World Bank 2002, p. 63.
58. State financing of formal education and training in Lithuania is comparable to that in
similar countries (see Table 2.3). The new decentralized approach to financing basic education
is on a per capita basis, is sensitive to rural- urban differences, and makes provisions for special
allocations (such as in-service teacher training, which is minimal but important to continue).
However, several financing issues need to be addressed, particularly given rising demand, to
increase efficiency, access, and equity of tertiary as well as of nonformal adult and continuing
education.
59. Efficiency. One-way to free up revenue for new purposes is to become more efficient in
the use of existing revenue. The first place to look is student-teacher ratios, since staff costs
represent the largest portion of education budgets. Student-teacher ratios in Lithuania, at least in
basic education, are slightly lower than the international average (in the range of 11:1).
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60. School mapping should be undertaken in primary, secondary, and higher education to
examine the impact of the 40 percent decline in Lithuania’s birth rate in the 1990s—which is
starting to affect primary schools and will impact tertiary education in about 2009, and will
require institutional consolidation in tertiary education. Other areas to consider include better
construction, as Lithuania spends about twice as much on utilities as Western schools in similar
climates.
61. Tertiary education. Tertiary education is a critical element of lifelong learning.
Although tertiary education provides skills beyond basic competencies, continued government
support for it is justified because tertiary education provides major benefits for economic and
social development and helps sustain basic education (Ministry of Education and Science,
Higher Education in Lithuania White Paper 1999). There are two types of tertiary education
institutions in Lithuania: universities and colleges. In 2001 there were 35 such institutions,
including 22 state (15 universities and 7 colleges) and 13 nonstate (4 universities and 9 colleges;
Ministry of Education and Science 2002).
62. The gross enrollment rate in tertiary education was about 41 percent in the mid-1990s but
climbed to about 80 percent in 2001 (three-quarters in universities and one-quarter in colleges).
That overall rate is similar to the 81 percent in the United States and above the 57 percent in
Western Europe and 60 percent in the G-7. But questions have been raised about the mix of
enrollments between universities and colleges, as there is a growing need for college-educated
technicians. Several other issues emerge from an analysis of the financing of tertiary education
(Sheehan 2002). The following policy options should be considered:
• Mobilizing more resources per student. University resources are relatively low, at
just over 4,000 litas ($1,150) per student. Given the high intake rate (nearly 60
percent of the university-age cohort), there are strong arguments for increasing
student financing for higher education, because the Government will soon have to
choose between increasing per student financing while maintaining the overall budget
allocation to the sector, or keeping student financing constant while reducing the
overall budget allocation. Four options should be examined. First, tertiary tuition
fees could be increased in real terms to, say, 2,000 litas per student per year and made
universal, to mitigate the effects of the loss of fee revenue that will occur if recent
policy changes are fully implemented. Second, a grant scheme to cover students’
subsistence costs (similar to the present one) could be retained, with social criteria
determining eligibility. This should be integrated with the scheme for fee rebates.
Third, loan funds should be targeted more to high-ability students rather than poor
students. That approach should reduce risks for lenders and increase recovery rates,
providing more funds for future lending. Loans would still be effectively subsidized,
at least for bachelor’s- level students. Fourth, a more radical move might be to
concentrate student grants of all forms (fee rebates, grants for living expenses, an so
on) on level 1 (bachelor’s) programs and to make loan finance the main instrument at
the master’s level, with a much greater emphasis on cost recovery than at present—on
the grounds that master’s- level students are closer to commencing employment and
less likely to be at risk of failure or dropout. More resources are a necessary but
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insufficient condition for quality. They in no way lessen the need for quality
assurance procedures.
• Enhancing professional expertise in tertiary education management. Managing
higher education systems requires a significant skill base. For example, devising a
suitable formula for allocating grants to higher education institutions based on unit
costs requires an understanding of education and cost accounting principles in the
ministries of finance and education, the Council of Rectors, and the institutions
themselves. Some of these may be underresourced. Although this report has not
investigated this issue in depth, the case for any increase in resources for the higher
education system will be stronger if management capabilities within the system are
considered adequate.
• Replacing and retaining academic staff. Approximately 55 percent of university
academic staff are over 50, which implies a very high replacement requirement
between 2002 and 2017. The number of doctoral degrees being awarded (on average
slightly over 200 per year) is well below the number required to meet replacement
needs. There is also an acute problem of retaining high-quality staff, because
university salaries are low. Salaries are determined by government and civil
procedures, and universities have limited scope to supplement salaries with research
grants and the like. One way of increasing flexibility would be to move academics
(on a voluntary basis) to nine- month employment contracts while paying them the
same annual salary. Replacing all the staff due to retire with staff concentrated in a
15-year age group (say, ages 25 to 40) would perpetuate imbalances in the age-
structure. It might also lead to an excess supply of permanent staff in the years
following 2009 (when the demographic downturn kicks in). Greater use of contract
staff and selective re-employment of staff age 65-70 on annual contracts could help
alleviate potential adjustment problems.
• Increasing the financial power of higher education institutions. In general, the
buildings used by state universities and colleges are state property and are not owned
by the institutions themselves. Institutions are in the position of having to maintain
property they do not own and are unable to change their property portfolios through
sales and acquisitions. In addition, some institutions want to carry out major
refurbishments to buildings but do not have sufficient financing to do so—and cannot
borrow because the buildings are not theirs to pledge as security. A transfer of state
property to higher education institutions could unlock some funding through the
banking system, as well as allow for greater flexibility in property use and
management.
63. Nonformal adult and continuing education and training. There is a void in government
financing for nonformal adult and continuing education and training, except for limited resources
for training for the unemployed. Given the changing economy, increasing demand for skilled
over semi-skilled workers, and high unemployment among low-skill workers, financing for this
aspect of lifelong learning should not be overlooked. There is growing empirical evidence that
the inability of low-and semi-skilled workers to stay in the labor force is directly linked to their
skill levels (OECD 2001 a).
- 55 -
64. One could argue that direct state financing is inappropriate given that the returns to such
education and training accrue to individuals and the private sector—and thus that these
beneficiaries, not the state, should pay. On the other hand, investment in adult continuing
education and training is good for the nation and the economy, so some public support, direct or
indirect, may be appropriate. The latter argument prevails in many countries. A number of
individual-based schemes are available, including cost recovery (loans, graduate taxes) and
subsidies (learning accounts, vouchers; see table A2.7). Other approaches include tax credits and
payroll taxes. Payroll taxes for training have been used successfully in Brazil, France, and
Malaysia, and can be partly or fully forgiven if employers provide recognized training to
employees. Such taxes have the disadvantage of increasing wage costs, but in discussions
Lithuanian employers did not voice resistance to the concept.
65. Alternative financing schemes (tax incentives, training levies, learning accounts, and so
on) should be examined and implemented to encourage enterprises to support and individuals to
engage in adult and continuing education. In addition, any potential financial disincentives (such
as taxes on training investments by individuals and enterprises) should be eliminated.
Opening Pathways within and between Learning Systems
66. Serious blockages in Lithuania’s education and training systems inhibit vertical and
horizontal movements of learners within the formal learning system and between the formal and
nonformal systems, block economic and social mobility, and impede interdisciplinary learning.
Agreements are needed to promote alternative pathways within and between different types and
levels of institutions.
Blockages between formal education institutions
67. There are blockages in Lithuania between colleges and other higher education
institutions. There are no standard procedures for transferring credits between parallel
institutions or from lower- to upper- level institutions. Students at lower- level education
institutions are at the mercy of upper- level institutions, and a lack of transparent third-party
assessments complicates the issue. When credits are transferred, evaluations are based more on
inputs (hours completed and courses taken) than outputs (competencies demonstrated). Examples
of blockages include the fact that in some cases students at institutions (such as colleges) can
transfer credits more easily—under EU Barcelona Agreements—to institutions outside, rather
than inside, Lithuania. It is sometimes even difficult to transfer credits between parts of the same
higher education institution.
68. There is a need for a third party to act as an honest broker and assessment agent for
learners to define equivalencies between programs and courses in different institutions, and to
facilitate the mobility of learners within and between institutions in the formal education system
(box A2.1).
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Blockages between formal and nonformal learning
69. Blockages between formal and nonformal (and informal) learning are similar but even
more pronounced than those in the formal education system because nonformal learning often
provides no academic credit equivalent. Thus the only way to move forward is to assess
competencies. But there is no nationally recognized system for occupational standards and
assessments, which blocks the granting of credits based on assessments of competencies.
Moreover, individual institutions are often unwilling to perform assessments for individual
citizens.
70. There is a need to continue rapid development of occupational standards and assessment
instruments, to promote recognition of nonformal and informal learning, and to facilitate
recognition of nonformal and informal learning in formal education institutions (box A2.2).
Box A2.1 Korea’s Credit Bank System—promoting lifelong learning opportunities
Korea’s Credit Bank System provides citizens with a variety of education opportunities. The
system, established in 1995, helps achieve lifelong learning by diversifying and maximizing
education opportunities for both youth and adults. The system recognizes diverse learning
experiences gained both in and out of school. When learners accumulate the necessary credits,
they can be awarded a degree from the Credit Bank that accredits a variety of education
programs—guaranteeing open, flexible access to high-quality continuing education.
Source: Seehttp://www.unescobkk.org/education/appeal/clc/pdf/effective/KOREA.pdf
Box A2.2 Recognizing nonformal, informal, and nontraditional learning—approaches around
the world
Many traditional education institutions in North America have considerable flexibility in granting
academic credit for learning achieved in nontraditional ways. In contrast, Europe has no unified
approach (CEDEFOP, 2002), although a European Skill Card has been proposed that could help lead
in that direction. In Austria and Germany only 5 percent of training examinations evaluate nonformal
training, and the results are calibrated in the context of the formal system. In the Mediterranean
region, which has a weaker tradition of formal training, recognition of nonformal training is more
important. Italy recently introduced a skills audit system, and Portugal and Spain are working on
similar initiatives. In Greece such recognition is held back by a lack of defined occupational
standards. In Nordic countries, particularly Finland and Norway, recognition of nonformal training
has moved to the fore of public debates on education training policy, and national systems are being
developed. France has an assessment system called the Bilan de Competence.
- 57 -
Equity and Access
71. Lithuania needs to address disincentives—and a lack of incentives—for individuals and
enterprises to invest in education and training. (Several of these issues have already been
discussed in previous sections.)
Career guidance and counseling
72. The need to enhance career guidance and counseling services is recognized in a 2002
review completed by Lithuania in cooperation with the EU European Training Foundation. Some
such initiatives are under way at labor offices and in higher education institutions. The review,
however, indicates that more work is needed. If youth and adults are to be motivated and
increasingly take responsibility for managing their learning, it is essential that they have
information about themselves and about the society and economy in which they must function.
73. Career guidance and counseling policies and services are essential to this process. These
services focus on two aspects of learning. First, they help individuals understand their aptitudes
and interests. Second, they provide individuals with information on the labor market to facilitate
career planning. Policies for career information, guidance, and counseling services can support
both social and economic development objectives, and provide key support to facilitate and
promote lifelong learning.
74. Career guidance and counseling promote social equality and inclusion and access to
education and employment opportunities. Such guidance can perform a valuable role in raising
the aspirations of disadvantaged and poor individuals by making them aware of opportunities
and supporting them in securing entry to such opportunities. These services promote individual
liberty and emphasize the “active individual”—affirming the value attached in democratic
societies to people’s rights to make free choices about their lives.
75. These services also support economic efficiency, as they are a means of making the labor
market operate more effectively. Attempting to deal with economic efficiency and social equality
through structural reforms alone is not enough. In a sense, career guidance can be viewed as a
kind of brokerage between individual and social needs. It addresses both individual rights and
responsibilities in a social context. It is a means of encouraging individuals to participate in
determining their role in—and contribution to—the society of which they are a part. In this sense
career guidance is a vital tool of civil society.
76. Lithuania needs to address a number of questions in this regard, including:
• What is the setting and starting point for career development policy? This is affected
by geopolitical, economic, cultural, and leadership issues.
• Who are the key stakeholders, how will they be involved in governance, and what
approaches will be taken to finance the development and delivery of services?
• Will policies reflect preventative, reactive, or remedial approaches?
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• How will policies address and affect access by different target groups?
• Do policies need to be adjusted in decentralized relative to centralized settings?
• How will standards and staff training be developed and maintained?
• What type of evaluation and research should be undertaken to determine the impact
of these policies and services and to refine them? There is some evidence on the net
impact of career guidance services (Fretwell, Benus, and O’Leary 1999), and this
topic is of critical importance in developing countries—which have constrained
resources and multiple priorities.
77. Career services need to be developed further, particularly at the basic and secondary
school levels and in labor offices. There is a need to develop training programs at higher
education institutions to prepare career guidance and counseling staff for education, training, and
employment institutions, and for work in the personnel departments of private enterprises.
Motivating enterprises and workers to invest in training
78. Surveys in the region and in Lithuania indicate that workers are not very interested in
upgrading their skills (65 percent said they did not need training in a recent Lithuanian survey).
And while some large information and communications technology enterprises and those
involved with multinational corporations indicate an interest in providing or financing training
(or both), the general situation is not good—for example, one recent survey of some 300
employers found that only 7-8 percent were interested in providing or financing training. A
recent management survey found that only 30 of 300 private enterprises budgeted for employee
training.
79. Other than a lack of appreciation of the importance of employee training, enterprise
representatives cited the poor quality of training in some formal ins titutions and the lack of tax
incentives. In addition, there may be negative tax incentives for employees who receive training,
as they have to report training financing as income and pay taxes on it.
80. These issues call for government review, including consideration of payroll training
taxes, tax credits, and other mechanisms to promote enterprise training. Employer efforts mainly
involves occupational training. But employer-based literacy foundations, and civics programs
exist in some countries, such as Brazil. Worldwide, employer involvement in adult continuing
education is difficult to quantify. Information tends to be better when payroll training taxes are
in place, but there is a considerable body of other research on employer-based adult continuing
education. Many workers receive some training from their employers with or without training
taxes. Employers tend to invest most extensively in training their best-educated and best-trained
employees, while low- income employees are more poorly educated and receive little training
from employers (OECD and Human Resources Canada 1997).
- 59 -
81. Employers tend to invest in younger but experienced workers, and more training occurs
in growing sectors. Small firms invest less in training than larger firms, and trained workers are
less likely to be laid off or to quit their jobs. In some countries employers are outsourcing
training in the same way they outsource other services, so they do not have to maintain internal
training departments and staff. This is increasing the demand for training provided by public and
private training agencies, and it is not unusual—from Hungary to the United States—to find
public, quasi-public, and private training agencies that provide contracted, customized education
and training services to enterprises.
Related issues
82. Financing is key to motivation. This issue has been addressed in previous sections. At
the basic school level, the financing basket should take into account the additional needs of rural
schools. At the higher education level, the possibilities of built- in inequities in the new student
financing scheme and student loan scheme have already been noted.
83. Access to Internet services. There is concern about social and economic exclusion in
rural and depressed areas, particularly with regard to Internet access, and initiatives are under
way to overcome lack of connectivity (including telecommunications reform and private
initiatives to provide rural communities with Internet access). Actions have been taken within
the education sector and by civil society organizations, with considerable participation by the
private sector.
84. Supply of education and training services. The opening of private basic schools, colleges,
and universities has expanded access—but not necessarily increased equity at the tertiary level
because of the high costs involved. The design of financing schemes for low-income families
will be critical to ensure that supply and demand can meet on equitable ground.
85. Services for the disabled. Information and communications technology and the
knowledge economy provide opportunities for the disabled and handicapped to become involved
in social and economic life. While some initiatives are under way (such as special Ministry of
Education funding for adults), additional activities and improvements are needed. For example,
one training program for the disabled in Kaunas was on the second floor of a building, requiring
participants to be carried up the stairs. Many public education facilitates have limited access for
the disabled.
86. Motivation of staff in education and training institutions. The low salaries of education
staff at the higher education level are a growing problem for the recruitment and retention of
young staff and threaten the quality of teaching as existing staff tend to have multiple jobs and
may put minimal effort into their primary job at a university or college. The emergence of
private institutions, which can pay market rates, will tend to draw good staff away—while state
institutions are restricted by state salary rules. Staff remuneration policies need examination.
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Research and Knowledge Generation
87. The linkages between basic and applied research and the learning process are critical to
the development of the knowledge economy. This issue is of particular importance at the upper
levels of the higher education system, including both public and private universities and colleges.
This issue is addressed in more detail in the main report, but several issues need to be addressed:
Priorities
88. There is a need to focus limited state resources on high-priority areas for the development
of the knowledge economy in Lithuania. Institutional and academic autonomy is laudable, but
Lithuania is a small country with limited resources—and should focus these resources on topics
with high rates of return.
Linkages
89. There is a need to build mechanisms that facilitate cooperative agreements between
different parts of the learning system and research institutions—something that was not always
encouraged in socialist times—and between the private sector and tertiary education. One
impediment to the latter is the rigid time requirement for undergraduate and graduate degrees,
which does not facilitate the development of formal cooperation and internships between
university students and enterprises, which can be key to developing research linkages.
Competition
90. The simple allocation of state funds to research institutes and higher education
institutions based on formulas and without formal competitive processes does not facilitate
research that is responsive to priorities or of the best quality. More competitive forces should be
introduced in the financing of research in higher education.
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Annex 3: Lithuania’s Innovation System:
Connecting Researchers and Businesses
Introduction
1. Innovation has a significant effect on productivity at the level of the firm, the industry,
and the country and is thus a key factor in economic growth. Lithuania’s ability to
systematically generate, acquire, diffuse, and apply knowledge in new ways to solve problems
and satisfy the needs of individuals and of society at large—that is, to innovate—is constrained,
however. Innovation can take place through technical change, such as product and service
development, and through process and organizational change, such as organizational,
managerial, and marketing innovations and process renewal.
2. The major stakeholders in an innovation system include universities and research
institutions, private enterprises (including foreign enterprises) and their organizations, venture
capitalists and other providers of funds, and government and associated agencies. They also
include partners in research, business, and finance abroad. An innovation system depends on
establishing the proper division of functions and processes between government, the research
community, and the private sector. Lithuania offers important elements of an innovation system,
including universities, state research institutions, a business community, and a set of institutions
aiming to support technology applications. But so far Lithuania has not managed to bring the
various elements of its innovation infrastructure to interact effectively and systematically within
a coherent and coordinated framework able to link the research and development (R&D)
community with the enterprise community. It is thus forgoing considerable potential to translate
knowledge into commercial activities that generate wealth.
3. Innovation occurs at the enterprise level in Lithuania, including in some high-tech
industries (laser technology, biotechnology), but it has taken place in a relatively few, isolated
cases. The few success stories reflect Lithuania’s potential for innovation rather than a
systematic use of the country’s knowledge assets. Some changes have been introduced in the
national innovation system in recent years, driven in part by the consensus building effort
associated with the issuance of the Lithuanian Science and Technology White Paper. Yet much
more needs to be done in defining a coherent innovation policy and in establishing policy
instruments and a supportive institutional framework that allows potential partners in innovation
to join efforts in generating and applying knowledge for their own benefit and that of the
economy.
4. In the early years of independence Lithuania was left with a legacy of a centralized and
closed science system that provided substantial funding in narrowly specialized fields, and a
research community largely isolated from the rest of the world. Much former enterprise- level
R&D capacity was lost in the course of privatization. Despite considerable progress in recent
years in restructuring and modernizing the national innovation system, which has helped retain
significant talent and research capacity in Lithuania, many of the current organizational
structures tend to follow and even reinforce the old practices of separating rather than unifying
the basic partners for innovation. Compared with R&D systems in Western European countries,
- 62 -
the Lithuanian system is inflexible in the sense that nearly all public resources are fixed with
existing institutes. This kind of system is naturally inclined to resist any changes in priorities,
division of resources, and ways of working. Cooperation and interaction of companies with
research institutes and universities is modest and occasional. The same is true of cooperation
and interaction between research institutes and universities and among research institutes, as well
as in programs where companies, universities, and research institutes join their resources and
competencies.
5. Many analytical reports have been written by national and foreign experts on science,
technology, and innovation in Lithuania and the need to strengthen these basic elements of a
knowledge-based economy. The reports and their recommendations led to the Lithuanian
Science and Technology White Paper and associated action plans, which have received positive
and almost unanimous support among politicians, civil servants, and members of the research
establishment and business community. But only a few of the recommendations have been
implemented, and these only partly. This annex highlights key issues and policy proposals for
implementation. Unless policymakers take the lead in addressing the issues, Lithuania risks
further forgoing its potential for innovation and increased competitiveness as well as missing out
on the important opportunities for innovation arising from membership in the EU.
No time to lose
6. While the importance of an effective innovation system is gradually coming to the
forefront of policy thinking in Lithuania, member countries of the European Union (including
candidate countries such as Estonia and Hungary) and the OECD have been undertaking wide-
ranging reforms across a broad spectrum of innovation policies to gear up and improve
competitiveness.
Opportunities
7. Lithuania is gearing up for the European Research Area, but there is a real likelihood that
the current innovation system will be unable to make good use of networking opportunities and
resources available.
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Challenges
8. Lithuania’s low ranking on the World Economic Forum’s Technology Subindex (41st out
of 75 countries) is also reflected in the European Innovation Scorecard 2002 developed by the
European Commission to benchmark strength and weaknesses of national innovation
performances at the aggregate level (table A3.1).
Table A3.1: European Innovation Scoreboard 2002 – Candidate Countries
9. The effective functioning of Lithuania’s innovation system is constrained by a large
disconnect between enterprises and the R&D community, unsatisfactory R&D output (in terms
of patents and publications), an overemphasis on public-sector-driven R&D, the aging of the
Lithuanian research population and associated brain drain, a large number of R&D-related
institutions, and low levels of funding and outdated funding approaches.
Disconnect between enterprises and the R&D community
10. Enterprises, worldwide, are the drivers of innovation. Overall, however, Lithuanian
enterprises spend little on R&D. Lithuania’s business expenditure on R&D amounts to only 0.07
percent of GDP (or 12 percent of Lithuania’s total expenditures on R&D), compared with 1.28
Indicator EU CC
Mean
1
BG CY CZ EE HU LT LV MT PL RO SI SK TR
New S&E grads 10.26 6.60
4.73
-- 4.00
6.83 4.49 9.35 5.52 6.12
5.90 -- 13.10 --
5.47
Population with tertiary education 21.22 17.50 21.29 26.76 11.59 29.42 13.96 45.03 18.15
7.00
11.73 9.97 14.12 10.66 8.00
Participation in life-long learning 8.50 5.40 -- 3.10 -- 5.30 3.00 3.70
16.30 9.70
5.2 1.10 3.70 --
3.20
Employment in med/high-tech
manufacturing
7.57 5.40 5.50 1.03 9.16 4.79 8.80 3.18 1.72
7.14 7.54
4.91 8.74 6.75
1.19
Employment in high-tech services 3.61 2.60 2.71 1.83 3.22 3.38 3.24 2.10 2.19
3.06
-- 1.43 2.71 3.03 --
Public R&D/GDP 0.67 0.41
0.41
0.20
0.54 0.53 0.45 0.53 0.29
-- 0.45 0.10 0.68 0.24
0.53
Business R&D/GDP 1.28 0.32
0.11
0.05
0.81
0.15 0.36
0.07 0.20
-- 0.25 0.30 0.83 0.45
0.27
All EPO patents/population 152.7 7.10 3.2 6.00 12.10 6.90 16.10 1.10 2.50 -- 2.30 0.90 20.60 5.90 --
EPO high-tech patents/population 27.80 -- -- -- -- --
1.51
-- -- -- -- -- -- --
0.06
USPTO high-tech patents/population 12.40 0.50 0.12 -- 0.58 -- 0.30 0.54 -- 2.60 0.05 0.04 0.50 0.19 0.02
SMEs innovation in-house 44.00 -- -- -- --
33.20
--
51.00
--
15.40
4.10 -- 16.90 --
24.6
SMEs innovation co-op 11.20 -- -- -- --
13.00
--
12.00
--
4.90
-- -- -- --
18.0
Innovation expenditure 3.70 -- -- -- --
2.40
-- -- -- -- 4.10 -- 3.90 -- --
High-tech venture capital/GDP 0.24 0.27 -- -- 0.02 --
0.04 0.90 0.62
-- 0.05 -- 0.15 -- 0.13
New capital 1.73 -- -- -- -- -- -- -- -- 3.68 0.23 -- -- -- 0.69
New-to-market prod 6.50 -- -- -- --
6.00
-- -- --
37.8
-- -- -- --
9.40
Home internet access/household 37.70 -- -- -- --
9.80 2.60
3.00
2.00
-- 8.00 -- 24.00 -- --
Home internet access/population 31.40 14.80 7.50 22.10 13.60 30.10 14.80 6.80 7.20 25.40 9.80 4.50 30.0 16.70 3.80
ICT expenditures/GDP 8.00 6.0 3.80 -- 9.50 9.60 8.90 5.90 7.90
4.10
5.90 2.20 4.70 7.50 3.60
Manufacturing hi-tech value-added share 10.10 --
5.90
-- -- --
14.85 22.35
--
22.44
-- -- -- --
6.55
Inward FDI/GDP 30.30 31.3 26.4 23.7 42.60 53.20 43.40 20.60 29.10 84.70 21.30 17.70 15.50 24.20 4.70
Source: European Commission. Commission Staff Working Paper SEC(2002) 1349 9.12.2002. See also:
www.cordis.lu/trendchart
Data in
italics
are national estimates collected from the Group of Senior Officials in Innovation Policy.
EU: European Union; CC: Candidate Countries; BG: Bulgaria; CY: Cyprus; CZ: Czech Republic; EE:
Estonia; HU: Hungary; LT: Lithuania; LV:Latvia; MT: Malta; PL: Poland; RO: Romania; SI: Slovenia;
SK: Slovak Republic; TR: Turkey
S&E: Science and Engineering; EPO: European Patent Office; USPTO: United States Patent and
Trademark Office; ICT: Information and Communication Technology; FDI: Foreign Direct Investment; “- -
“: not available
1
Unweighted average for countries for which data are available. Available data are
insufficient for calculating weighted means.
- 64 -
percent of GDP for the European Union and 0.32 percent for EU candidate countries on average
in 2000.
2
11. Demand for R&D services and innovation seems low, in part, because companies are
struggling to survive in the current business environment. Only 4 percent of Lithuania’s R&D
personnel are employed in the private sector. Nor do enterprises interact much with the national
science system. According to a survey carried out by the Department of Statistics in 1999, less
than 4 percent of enterprises develop new technologies in cooperation with public research
institutions; the vast majority develop new technology in-house (54 percent), with other
enterprises (9 percent), or with foreign specialists (23 percent) or acquire it through licenses (10
percent).
12. The prevailing view held by Lithuanian business representatives is that the country’s
R&D institutions provide little commercially relevant output (which contrasts with their positive
assessment of individual researchers, who are often hired by enterprises to apply new
technologies). The almost complete disconnect between the research and business communities,
compounded by low demand from enterprises for innovation, does not augur well for Lithuania’s
future innovation performance and competitiveness.
Unsatisfactory R&D output
13. Publications, citations, patents, and licenses are commonly used indicators of R&D
output in most OECD and other industrial countries. But only anecdotal information is available
on Lithuanian output indicators. The number of articles published in scientific periodicals per
researcher in highly developed countries usually comes to 0.5 a year; according to data available
for 2000, this indicator in Lithuania was as low as 0.05, which, roughly speaking, implies that in
Lithuania the “productivity” of researchers is a tenth of the average in highly developed
countries. The Lithuanian patent office received 86 patent applications in 1999 (134 in 1998)
from Lithuania and 71 from other countries. In 1999 it granted 93 patents to Lithuanians and 67
to foreigners.
Overemphasis on public-sector-driven R&D
14. Gross domestic expenditure on R&D in Lithuania has been growing continually since
1997
3
. Total funding for R&D was LTL 224.9 million in 1997, LTL 250.7 million in 1998,
2
European Commission, 2002 European Innovation Scorecard.
3
Gross domestic expenditure on R&D is the conventional input measure for R&D. Used in the OECD countries
since the late 1960s, the indicator measures investment in R&D, covering public and private expenditures and their
financing. Financing can be used for basic and applied research and direct product and process development.
Human capital investments can also be estimated by the number of researchers engaged in R&D activities.
The main source of information on R&D inputs in Lithuania is R&D statistics compiled by Statistics Lithuania. The
Lithuanian Science and Technology White Paper draws attention to the fact that statistical data on R&D in Lithuania
are rather poor. Available statistics on Lithuanian R&D activities are often incompatible from one institution to the
next as well as for purposes of international comparison. In principle, in compiling data on R&D statistics,
Lithuania applies the OECD Frascati Manual, which has been in use in OECD countries for decades. But in fact
- 65 -
LTL 224.6 million in 1999, and LTL 277.6 million (or around $70 million) in 2000. This
amounts to about $17 per capita, compared with $681 in the United States and $222 in Italy.
4
Lithuania’s gross domestic expenditure on R&D amounted to around 0.6 percent of GDP in 2000
(up slightly from 0.57 percent in 1997). This compares with 2.3 percent of GDP for the OECD,
1.9 percent for the European Union, and 0.7 percent for the EU candidate countries on average.
Even if the actual resources devoted to R&D in Lithuania are greater than the official data
suggest, the country’s R&D expenditure is much lower than the EU or OECD average.
15. In Lithuania the state budget provides the bulk of the funding for R&D, around 88
percent, for research performed almost exclusively by public institutions (universities and state
research institutes). By comparison, the share for the OECD is 29 percent, for the EU, 34
percent, and for the EU candidate countries, 56 percent on average.
16. In 2000 a total of 14,592 people were involved in R&D in Lithuania, of which 8,841 (61
percent) were in the higher education sector; 5,077 (35 percent) were in the government sector,
mainly in state research institutes; and 674 (4 percent) were in the business enterprise sector.
The share of researchers in total R&D personnel was 69 percent, and more than half hold a PhD.
Only 44 (0.8 percent) of researchers with a PhD worked in the business enterprise sector.
17. The major part of Lithuanian R&D capacity is concentrated in higher education and other
government institutions. In 2002 there were three types of public research institutes in
Lithuania:
• University research institutes, established to carry out research of high international
quality. They focus mainly on basic research and provide the research basis for
university education, for doctoral studies, and for improving university personnel’s
scientific qualifications.
• State research institutes, established to carry out long-term research of international
quality important for the Lithuanian economy and culture and for international
cooperation—research involving groups of specialized scientists and requiring data
collection and specialized experimental instruments. State research institutes together
with higher education institutions help to train specialists. Guidelines for research by
state research are provided by the Ministry of Higher Education and Science.
• State research establishments, which aim to carry out applied research and
experimental development activities important for the Lithuanian economy and
culture and for the development of industry, state government, and other institutions.
• The higher education sector comprises 10 universities, 5 academies, 7 state colleges,
9 nonstate colleges, and 5 state research establishments. Other government
there are still several differences in basic definitions and classifications. Therefore, the data are not necessarily
reliable, particularly for international comparisons.
4
Lithuanian Science and Technology White Paper (p. 56).
- 66 -
institutions include 26 state research institutes, 18 state research establishments, and
25 other R&D entities. Nearly all research institutions are concentrated in the five
largest cities: Vilnius, Kaunas, Klaipeda, Siauliai, and Panevezys. By comparison,
only some 60 enterprises in Lithuania carry out R&D activities.
Aging of researchers and brain drain
18. Among the acute problems in the state research and higher education institutions is the
age of researchers. More than 60 percent of scientists are over 50 years old, and 25 percent are
over 60. To satisfy minimal regeneration needs, it has been estimated that 300-400 young
scientists need to become researchers working in R&D. But only 150 doctoral degrees are
granted each year. In addition, younger scientists and even more senior ones go to the West,
because salaries in Lithuania are very low, scientific careers are arduous, and the gap in salaries
between academia and industry is large. A researcher often has to have several income sources
to pursue research in public institutions.
Large number of public institutions involved in R&D
19. The large number of public institutions involved in R&D results in too little decision-
making and policy implementation. Figure A3.1 categorizes some of the major players in the
Lithuanian innovation system into three groups according to the role they play: policy decision-
makers, policy support and implementation agencies, and the target organizations.
Figure A3.1: Institutional Setting for R&D in Lithuania
Seimas (Parliament)
Government
Science
Council of
Lithuania
Ministry of
Education and
Science
Ministry of
Economy
Other
ministries
Higher
Education
Council
Business
Development
Council
Universities
Research
Institutes
Innovation
centers and
science parks
Lithuanian
Development
Agency
Business Enterprises
Policy
Decision
Makers
Policy Financing
and
Supporting
Organizations
Target
Organization
Local
Government
- 67 -
• The Ministry of Higher Education and Science is in charge of preparing and
executing government R&D policy. It analyzes the application of laws and
government decrees related to higher education and R&D, prepares drafts of by-laws,
coordinates and implements international programs in education and R&D, and
makes proposals for the establishment, reorganization, and cessation of higher
education and research institutions.
• The Ministry of Economy is in charge of preparing and executing government policy
for industry, energy, foreign and int ernal trade, and ecology and waste management.
The Lithuanian state budget funds for industrial policy implementation are allocated
among three major programs: a program to strengthen industrial competitiveness
(including subprograms such as the Innovation in Business Program, National Quality
Program, and Sustainable Industrial Development Program), the Export Promotion
and Development Strategy Implementation Program, and the Small and Medium-Size
Business Development Implementation Program. The priorities of these programs
are set out in the National Development Plan. This plan and the national programs
form the basis for industrial policy implementation.
• The Science and Technology Council was recently established under the prime
minister to coordinate innovation policies among government ministries and the
research community. There is limited private sector representation. The council
meets irregularly and has no secretariat to support its policy formulation and
coordination role.
• The Science Council of Lithuania serves as a scientific adviser and consultant to the
Seimas (Parliament) and the Government in solving strategic issues of research and
higher education. It analyzes the situation in the research and higher education
system in Lithuania, makes proposals and drafts decrees for the Department of
Science and Higher Education, puts forth proposals about the right of institutions to
confer doctoral degrees, supervises the award of research degrees and academic titles,
and provides notification of doctoral degrees issued for Lithuanian citizens abroad.
• The Higher Education Council advises the Ministry of Higher Education and Science
on issues of strategic development in higher education. The main tasks and functions
of the council are to analyze and evaluate the development strategy for higher
education in Lithuania, advise the Ministry of Higher Education and Science, develop
proposals for the ministry, and draw conclusions on issues relating to the
development and enhancement of higher education.
• The Lithuanian Academy of Sciences is an autonomous, state-subsidized scientific
establishment bringing together distinguished Lithuanian scientists as well as foreign
scholars whose activities are related to Lithuania. The academy serves as an
independent advisory body to the government on scientific, educational, cultural,
economic, technical, and social advancement.
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• The Lithuanian Center for Quality Assessment in Higher Education was founded to
maintain a high level of higher education. The center evaluates new study programs,
analyzes data received after self-evaluations by institutions, analyzes the situation in
particular institutions, and makes proposals for the Department of Science and Higher
Education.
• In addition to these entities, several other public or semipublic authorities play a role
in shaping the Lithuanian R&D and innovation system. These include the Lithuanian
University Rectors’ Conference, the Directors’ Conference of Lithuanian Colleges,
the Conference of the Chairmen of the Senates (Councils) of Institutions of Higher
Education and Science in Lithuania, and the State Research Institute Directors’
Conference.
• The Lithuanian Innovation Center is a nonprofit organization whose main purpose is
to encourage and develop the scientific potential of Lithuania, preserve scientific
traditions, increase the economic competitiveness of the country, create new
workplaces in innovative enterprises, and ensure the successful integration of
Lithuania into international markets. The Science and Technology Park is a nonprofit
organization formed by three scientific institutions to manage the establishment of
innovative new companies based on promising technology and to provide an interface
between academia, research work, and the commercial development of products and
processes. The Institute of National Development is a nongovernmental, nonprofit
organization whose purpose is to seek the most appropriate solutions in key areas of
state development, building proposed solutions around political willingness,
practicability, and scientific competence. The Northern Technology Park in Vilnius,
created by the city and by Vilnius University, is an example of a technology park with
biotechnology companies.
Promising steps in international research cooperation
20. In 1992, in pursuit of integration into international science and technology development
programs, Lithuania joined the European research and development cooperation program,
EUREKA, and the European cooperation in science and technical research program, COST,
enjoying the same rights as an EU member state. Between 1992 and mid-1999 Lithuanian
research and higher education institutions and enterprises participated in only four EUREKA
projects. But over the last two years Lithuanian institutions began implementation of 12 other
research projects, including three that they are co-coordinating. The most active participants
among research and higher education institutions are the Institute of Physics and the Kaunas
University of Technology. Since 2000 Lithuanian research and higher education institutions
have become actively involved and have participated in 24 activities under the COST program.
21. On October 1, 1999 Lithuania was admitted as a participant in the European Union’s
Fifth Framework Program for research and development. This was the first international
cooperation program in which Lithuanian scientists took part on an equal basis with colleagues
from the European Union. Lithuanian scientists took an active part in submitting projects in
biotechnology, information technology, and environmental protection. A few small and
- 69 -
medium-size enterprises and organizations involved in innovation activity have also taken their
first steps in EU cooperation. As of April 2002 Lithuanian institutions had submitted 470 project
proposals, of which 131 had been approved. The gross success rate of participation in the
program is 28 percent, a high rate compared with that for other EU candidate countries
participating in the Fifth Framework Program.
22. Lithuania has signed intergovernmental agreements on cooperation in education, science,
technology, and culture with many European and Asian countries as well as with the United
States. Cooperation contacts have been established on the basis of intergovernmental
agreements and agreements among institutions that coordinate education and science. Such
contacts provide good possibilities for becoming acquainted with the education and R&D
systems in other countries.
Outdated R&D financing instruments
23. Besides low levels of R&D funding, numerous other funding issues persist. The quality
of spending has not adjusted to the requirements of a market economy. A major part of
government financing consists of institutional funding for R&D institutions—lump-sum budget
transfers provided to institutions on a per capita (employee or student) basis—designed to
maintain existing staff, facilities, and equipment. Only a small fraction of government financing
has been allocated to support what the Government itself has defined as its priority objectives for
research. Moreover, R&D funding on the basis of competitive grant selection procedures has
been modest by any standards. Program or project funding is close to zero in Lithuania; this
compares with a share of program/project funding of R&D spending in EU member countries of
22 percent on average, and, for example, 41 percent in Finland, 40 percent in Denmark, 33
percent in Sweden, and 31 percent in Germany.
5
Absence of an innovation policy framework
24. Not only the institutions that perform R&D are fragmented and isolated in Lithuania; so
is the public administration that deals with R&D and innovation. In government R&D the
dominant player in Lithuania is the Ministry of Higher Education and Science. It controls a
major part of the financial and other resources and is responsible for most or all of the policies
for R&D and for the implementation of these policies. The Ministry of Economy and some other
ministries have played a growing role in relation to innovation and particularly to industrial
innovation, but so far this has been reflected in interministerial cooperation and decision- making.
25. The important lesson to learn from the experience of more advanced countries is that the
number of policy issues with strong links to innovation is increasing and that the boundaries
between policies aimed at promoting innovation are becoming—and must become—unclear.
That is why in many countries the old term science and technology policy or research policy has
been replaced with innovation policy.
26. Thus Lithuania has a growing need to redefine and clarify the division of existing tasks
and responsibilities between the key ministries with a stake in R&D and to increase the links
5
European Commission, Benchmarking of National Policies, 2002.
- 70 -
among different actors. The policy framework for innovation should complement broader
structural reforms in many fields by focusing on several key objectives: building an innovation
culture, enhancing technology diffusion, promoting networking and clustering, leveraging
research and development, and responding to globalization.
A focus on basic science, not applied
27. In recent years governments in most EU countries have shifted their attention toward
funding more application-oriented activities. In Lithuania the focus of science and education
should unquestionably be shifted from basic research (keeping in mind that not all "basic"
science in Lithuania is basic science as that term is defined in OECD countries) toward
economically relevant applied research. But in small countries like Lithuania there is also a need
for public investment in basic research and in industrial technologies. The development of basic
research can and must be goal oriented, targeting economically and socially beneficial fields of
technology, building up creative research capabilities, and securing the basis for technology
innovation. (This is also true in larger countries.) This requires linking investments in basic
science with stricter conditions and more concrete performance measures, as is now done in
larger OECD countries.
Weak R&D evaluation procedures
28. As resources grow and individual policies, organizations, programs, and structures have
increasing impacts, a natural consequence is that governments see an increasing need to more
clearly evaluate the effectiveness of these mechanisms. In Lithuania until now, R&D evaluation
has been minor, and the country has been dependent on foreign evaluators. R&D evaluation
should be raised as an important issue, and more permanent evaluation practices developed. In
addition, the increased complexity and the dynamics of the innovation system require a better
understanding of major developments and trends in the national innovation system and in its
environment. This requires focused attention from policymakers, and a sufficient number of
specialists studying national innovation systems and producing information and data on such
systems for use in policymaking.
Regional dimension
29. Regions and localities within countries have become increasingly important platforms for
innovation policy. This is true of Lithuania as well. The main idea, an idea that has already been
applied, for example, in the Vilnius and Kaunas regions, is that measures should be adapted to
the structures and potential of individual regions (box A3.1). The concepts of clustering, science
parks, technology centers, and incubators are good examples of regional development
approaches, though they can also be developed at the national level, as has been done in Finland.
- 71 -
Box A3.1: Vilnius—a Knowledge Economy City
The local government in Vilnius is supporting knowledge-based initiatives and increasing the city’s
attractiveness by providing tax incentives and increasing land availability. Currently the city is
proposing a reduction in the tax on commercial buildings to support high-tech companies and to
encourage them to relocate in the technology parks rather than the center of the city. Vilnius is
determined to overcome such threats as brain drain, lack of adequate intellectual property
protection, and a growing digital divide by continuing with aggressive reforms aimed at effecting a
transition in Lithuania from a labor-based economy to a more progressive, knowledge-based one.
Vilnius provides a good example of a clear strategic vision for a knowledge economy and a plan for
information technology development, one that could be used as a model for other major cities in
Lithuania. Under the Vilnius City Strategic Action Plan for 2002-04, there is much interest in
developing cluster-based economic growth activities. The priorities of the plan include increasing
competitiveness, improving the marketing of the city (at the international level) , developing a
modern, knowledge-based economy, and fostering a closer relationship between the city and the
university.
To ensure successful implementation of the knowledge economy strategy, a civil society forum—
the Knowledge Economy Forum—was established in 2001 to ensure that all major stakeholders are
included in the decisionmaking process. The forum, which addresses major issues and challenges in
the Lithuanian economy, brings together politicians and representatives from universities, a few
NGOs, and prominent businesses in high-technology and biotechnology industries. In addition, the
Knowledge Economy Forum, the local government, and Vilnius University have signed a
memorandum of understanding to promote the development of Vilnius’s knowledge economy. This
has produced such projects as Sunrise Valley (based on the Silicon Valley model), aimed at
increasing the transfer of technology between universities, industries, and municipalities in the
technology parks.
To increase civic engagement and strengthen the monitoring of the quality of the business
environment in Vilnius, the government is improving access to the Internet, making weekly
broadcasts on local television, submitting articles to the Lithuanian national newspaper on
knowledge economy initiatives, and organizing monthly breakfasts between the mayor and local
business owners.
Source:http://www.vilnius.lt/.
- 72 -
Challenges in the business sector
30. Small and medium-size enterprises play a crucial role in the Lithuanian economy. At the
end of 2000, 99.4 percent of Lithuanian enterprises had fewer than 250 employees, and 95.6
percent had fewer than 50. Successful innovation systems depend critically on networking
among the domestic and foreign business and academic communities and on cooperation with
and support from the government in the form of a conducive business environment and legal
framework, tax and other incentives, and participation by the private sector in formulating
policies and strategies. To turn ideas, research, and technology into commercial applications
also requires entrepreneurs, management talent, and financing. Medium-size and larger firms,
particularly those backed by foreign investors, have an advantage over small firms because they
often have strong links to sources of knowledge and access to commercial banks and the equity
market for financing.
31. Both large, well-established firms and small firms have a role to play in developing and
commercializing new technologies. Firms like Intel, CISCO, Microsoft, and Nokia have
pioneered new technologies, but their success has led to market dominance, which can have a
negative impact on small "go it alone" firms. Thus subcontracting (between large international
firms and smaller domestic firms) has important potential for firms in countries like Lithuania—
and has played an important role in Ireland and Israel. Box A3.2 describes a good example of
subcontracting, between Vilniaus, Vingis and Samsung.
Box A3.2: Vilniaus Vingis—Using Subcontracting
to Integrate into Global Networks
Vilniaus Vingis is a Lithuanian company that has successfully integrated into global production and
distribution networks through subcontracting. The company is one of the largest manufacturers of
electronic components in Central and Eastern Europe. Its main products include deflection yokes for
color picture tubes and flyback transformers for television sets and monitors. Yokes account for about
85 percent of its total output.
Samsung purchases about 37 percent of the yokes produced by Vilniaus Vingis. It uses the yokes in
producing television tubes that then become part of the television sets assembled by Samsung and
Philips. Another 30 percent of the yokes are sold to a Lithuanian company, Ekranas, where they
become part of assembled television sets sold abroad. Ekranas itself accounts for 4 percent of
Lithuania’s total exports to Western Europe. Ten percent of Vilniaus Vingis’s output is exported to
Philips, Barcelona, and 7 percent to Philips, England. Another 10 percent is shipped to Thomson
Polkolor in Poland, where it becomes part of television tubes sold all over the world through
Thomson’s distribution network.
Source:http://www.vingis.lt/.
- 73 -
32. Innovations also take place in small start-up companies that find it difficult or impossible
to access financing and that lack access to networks that can provide management and
entrepreneurial knowledge and talent. Such companies therefore need to rely on government-
backed financing and technical assistance programs (often supported by international donors)
and private equity financing with embedded technical assistance and management talent.
33. Small companies and foreign investors in particular depend on a favorable business
environment to grow and innovate. Several surveys of the business environment have been done
in recent years by the Foreign Investment Advisory Service,
6
by the World Bank, and by the
European Bank for Reconstruction and Development and World Bank together.
7
These surveys
indicate that access to capital is now less of a constraint, while access to knowledge and a skilled
workforce is becoming an increasing concern. In the most recent World Bank survey, in 2001,
firms reported increasing flows of foreign knowledge, and a large share of firms (27 percent)
indicated that access to markets and technology embodied in foreign investments was the most
important need. Only 16 percent put the need for more capital first. Ineffective and intrusive
business regulations and licensing, tax regulations and enforcement, and deficiencies in the legal
system are still major concerns.
34. As EU accession approaches, the Lithuanian business community faces major challenges
in adapting to EU regulations and standards. This adaptation will require significant investments
in retooling and process and management change to meet health, safety, environmental, and
other standards. But it also provides an opportunity to introduce innovative and more
competitive technologies, processes, and management practices. Government polices and
programs need to support this retooling as well as knowledge transfer and networking among
firms and the research and education communities.
Innovation in the enterprise sector
35. All enterprises innovate to stay competitive and to grow. In most countries technology
enterprises are the most innovative. Lithuania is no exception. The largest and fastest-growing
companies in Lithuania’s technology sector are in telecommunications and information
technology, despite the downturn experienced elsewhere in these industries. Beyond these two
key sectors, Lithuania has developed important capabilities in areas with potential for higher
growth, including biotechnology, pharmaceuticals, and lasers, optics, and other medical devices.
36. Telecommunications. A critical platform for the economic and social development of the
country, telecommunications represents the largest technology-based sector of the economy.
This market grew by an estimated 26 percent during 2001, reaching total revenues of around 836
million euros.
8
Four major players are active in this market, although the incumbent Lithuanian
Telecom (privatized in 1998) remains the largest, with nearly half the total revenues.
6
Foreign Investment Advisory Service, “Lithuanian Administrative Barriers,” 1999.
7
World Bank, “Lithuania Country Economic Memorandum,” 7 October 2002.
8
Estimates of telecommunications and information technology markets are from InfoBalt.
- 74 -
37. Mobile telephony has experienced rapid growth in recent years, with revenues increasing
45 percent in 2001, to around 226 million euros. Strong growth in the mobile segment is
expected to continue for several more years as penetration begins to plateau.
38. Revenues from Internet services increased by an estimated 65 percent in 2001, to around
40 million euros.
39. Information technology. Hardware and software companies have also experienced strong
growth in recent years. Total revenues of the information technology sector grew by an
estimated 30 percent in 2001, to around 260 million euros—despite the global downturn in the
sector. One indicator of information technology penetration is the rising use of personal
computers, whose sales grew by more than 50 percent during both 2000 and 2001. The installed
base of personal computers is now estimated at 280,000, a level of penetration that should permit
continued strong growth over the medium term as the country converges with higher- income
countries in the region.
40. The Lithuanian information technology sector is following a pattern similar to that in
other countries: local firms start out as resellers for international companies and then begin to
export services to industrial country markets and to expand their core business to other
developing country markets. In Lithuania local firms are beginning to record success in
exporting programming services to the Nordic countries—reflecting a high skill base and
competitive local wages. In addition, international information technology firms are considering
Lithuania as a base for offshore services to the Nordic region, following the example of Estonia.
41. Although not endowed with information technology on a scale of other countries (such as
India), Lithuania has the potential to develop a modest information technology services industry
for offshore clients.
42. Pharmaceuticals and biotechnology. Beyond information technology and
telecommunications, pharmaceuticals and biotechnology are the most dynamic and active of
Lithuania’s technology-based industries. Two leading firms account for most of the revenues
and exports. Total revenues for the sector are estimated at 20-25 million euros, with annual
growth of 15-20 percent reported.
43. Lasers and optics. Lithuania has developed a small cluster of firms in lasers and optics,
the product of military-related enterprises from the Soviet era. Around 15 firms are currently
active in this sector, with 3 larger firms accounting for the largest share of revenue. Total
revenues for the sector are estimated at 15-20 million euros.
44. Information-technology-enabled services. A new category of business known as
information-technology-enabled or remote services has begun to develop in Lithuania. This
sector has large growth potential in economies with skilled workers—particularly where
populations have strong English and other foreign language skills. Customer service centers are
typically the first area to develop, followed by a variety of back office operations (accounting,
finance, benefits). Lithuania has a small but growing presence in this market. A promising
- 75 -
indicator has been the recent acquisition of a small local call center by an international
technology company. Following acquisition, the new owner plans to expand the center rapidly.
Global value chains
45. Lithuania is increasingly participating in global value chains—the division of functions in
production and marketing among cooperating firms working across national boundaries (boxes
A3.3 and A3.4).
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Box A3.3: Moving Up the Value Chain in the Apparel Industry
Competition from cheap producers in developing countries in the textile and apparel industry has been
increasing the pressures facing firms in industrial countries. While relatively low wages now ensure
the competitiveness of transition economies in this industry, preserving the competitive edge may
become increasingly difficult as wages continue to rise. Thus rather than fighting an uphill battle of
competing purely on costs, transition economies would benefit from repositioning themselves into a
higher value added segment of the industry.
The apparel industry can be thought of as having three tiers: the lowest value added segment—
standard products such as generic white dress shirts; the middle value added segment—time-sensitive
products with some fashion content; and the highest value added segment—top fashion designer
clothing.
The highest profits are to be made in designing and marketing rather than in apparel production. But
it may take time for producers in transition economies to build a reputation that will allow them to
supply the second tier of the market under their own brand names. An alternative strategy for these
producers is to move from supplying the lowest value added segment to supplying foreign retailers in
the middle tier.
Among the recent developments in the middle tier of the apparel industry are product proliferation and
shorter product cycles, which are reflected in quickly changing styles and product differentiation.
These developments have contributed to general demand uncertainty for both retailers and
manufacturers, making demand forecasting and production planning more difficult.
In a world where producers must supply an increasing number of products containing time-sensitive
fashion elements, speed and flexibility have become crucial. Rather than making planning and
production decisions based on forecasts and guesses made months in advance of a selling season,
firms now receive ongoing orders reflecting actual consumer purchases. Thus suppliers must be able
to provide frequent deliveries, in smaller quantities and with diverse products. Moreover, suppliers
are expected to do so with far greater accuracy in filling orders and meeting delivery standards than in
the past. In short, the retail revolution has altered the basic rules of global competition for the apparel
and textile industry.
To participate in this new system, a supplier must be able to:
• Label, track, and respond to product orders in real time on the basis of style, color,
fabric, and size.
• Exchange (send and receive) information electronically on the current status of a
retailer’s products.
• Provide goods to a retailer’s distribution center that can be efficiently moved to
stores—that is, containers marked with bar codes indicating the contents and
shipments of products ready for display in retail stores.
Proximity to the European Union gives transition economies a great advantage and makes them
primary candidates for becoming suppliers to middle-tier apparel retailers. Moving up requires some
investment in both physical and human capital. Yet as the example of the furniture producer Vilniaus
Baldu Kombinatas indicates (see box A3.4), this is not beyond the reach of Lithuanian companies.
While following this route carries some risks, not doing so may be an even more uncertain path.
Source: World Bank, “Lithuania Country Economic Memorandum” (2002), based on Abernathy and others
(1999).
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Box A3.4: Vilniaus Baldu Kombinatas—Working Closely with a Multinational
As the case of Vilniaus Baldu Kombinatas (VBK) demonstrates, establishing commercial ties with a
multinational corporation may be a successful strategy for integrating into a global distribution network.
Established as a small workshop more than a hundred years ago, VBK has since become one of the
largest furniture producers in Lithuania. The company produces both home and office furniture and has a
retail network that sells about 7 percent of its output. Since the Lithuanian furniture market is too small to
support a company the size of VBK, the firm has to rely on exports. It exports about 93 percent of its
production to Sweden, Germany, Belgium, the United Kingdom, Canada, the United States, and France.
And it sells about 90 percent of its output to the Swedish company IKEA, which in 1999 named the VBK
its best supplier in the Baltics.
The relationship between VBK and IKEA began in 1998, and the cooperation between the two companies
has been close ever since. IKEA has provided support to VBK in technology, production organization,
and personnel training. VBK is linked to IKEA’s computer system through which invoices as well as
payment and delivery information are processed. VBK is upgrading its computer system so that in the
future it will be able to receive daily information on the sales of its products in IKEA stores abroad.
Thanks to the upgraded system, orders will be placed daily rather than every few weeks as is now the
case.
While relying so strongly on one customer might be perceived as a risky strategy, VBK is not concerned
because it is one of the top 25 IKEA suppliers (among the 2,000 companies producing for the Swedish
concern). Moreover, closer technological integration with IKEA will make VBK more competitive
relative to other IKEA suppliers. VBK is the only company in Lithuania to be so closely integrated into
the IKEA system.
Source: World Bank, “Lithuania Country Economic Memorandum” (2000, vol. 2, ch. 3);http://www.vbk.lt/en/.
46. For a small country, foreign direct investment (FDI) is critical to establish a place in the
global value chain and is often an important source of technology and knowledge. A significant
share of FDI inflows into Lithuania can be attributed to the privatization of large state-owned
entities that began in 1998, and it is not known whether FDI will stay at the current levels after
the privatization programs end. Even with the privatization inflows, Lithuania has received less
FDI than most other EU accession countries. Lithuania ranks eighth (above Bulgaria and
Romania) in cumulative FDI inflows per capita during 1993-2000, with $658.
47. FDI has been clearly focused in the Vilnius region because of its modern infrastructure,
technology park, and services support structure (figure A3.2). In 2001 the Vilnius region
attracted $556 million in FDI, 53 percent of the country’s total FDI of $1.04 billion.
- 78 -
Box A3.5: Ireland—Innovation through Foreign Direct Investment
Ireland has a long history of openness to FDI, dating from the 1960s. Policies for FDI have
played a major part in the country’s industrial and trading performance. In 1995, for example,
foreign-owned companies accounted for 70 percent of Irish exports. Current FDI policies are
aimed at maintaining Ireland’s position as a strategically attractive location for FDI in an
increasingly competitive and globalized environment but also at building up the capabilities of
Irish companies in such areas as technology and marketing.
The largest share of FDI has continued to go to greenfield investments or expansions rather
than mergers and acquisitions, the area of most rapid growth in other EU and OECD countries.
Investments have been attracted by a range of incentives and favorable factors in the business
environment, such as low corporate taxes and a young, well-educated workforce. FDI tends to
be concentrated in knowledge sectors such as electronics, software, and pharmaceuticals, with
the companies involved usually selling little or nothing on the Irish market.
In the last few years there has also been rapid growth in outward FDI, with the inward and
outward flows beginning to come into balance. Outward investment is undertaken for many
purposes, such as gaining access to markets and benefiting from local research capabilities and
knowledge spillovers.
FDI has made an enormous contribution to Irish exports and employment and has brought
much-needed technology and expertise to an economy with a relatively small research base.
But most multinationals have set up and operated Irish subsidiaries that receive the bulk of their
technology from their parent corporations. The net effect of this is that the Irish economy
continues to suffer from serious weaknesses in R&D and innovation despite the inflow of many
world-class firms in nominally high-tech sectors. Whatever their deficiencies, however, the
approximately 1,000 overseas firms in Ireland still fund and perform more than 75 percent of
business R&D. By contrast, many domestic manufacturing companies continue to operate in
the vulnerable, low-tech, traditional sectors.
The government-sponsored National Competitiveness Council has recently stressed that the
fundamental drivers of the technologically advanced sectors of the economy—the core
knowledge assets in human capital, R&D and innovation, and global management expertise—
reside abroad. Thus it strongly recommends that Ireland now seek a competitive advantage by
building up its own capabilities in core knowledge assets. It notes that recent international
competitiveness benchmarking and national analysis have revealed serious gaps in Ireland’s
technological capabilities. The key aims of Irish science and technology policy are to
encourage companies to develop their own research activities, to develop a world-class research
environment in higher education and state research institutions, and to ensure a pool of high-
quality, technically literate graduates to serve the needs of these companies and to start their
own enterprises.
Source: European Commission, DG Research, Benchmarking National Research Policies: The Impact
of RTD on Competitiveness and Employment (Brussels, 2002); Ireland, National Competitiveness
Council, National Competitiveness Challenge 2001 (Dublin, 2001).
- 79 -
Figure A3.2: Foreign Direct Investment Inflows in Lithuania, 1997-2001
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
(
m
i
l
l
i
o
n
l
i
t
a
s
)
2001 2000 1999 1998 1997
Vilnius Region
Total Lithuania
Source:http://www.vilniusregion.com/research.phtml.
48. As Lithuania takes its place in global value chains, manufactured goods, machinery, and
transport equipment have increased rapidly as a share of Lithuanian imports (table A3.2). This
growth is an indication of significant investment activity and of embodied technology and
knowledge being brought into the country.
Table A3.2: Structure of Lithuanian Imports, Selected Years, 1996-2001
(percent, except where otherwise specified)
Item
1996
1998
2001
Total value (millions of
dollars)
4,558.6 5,793.7 6,281.5
Prepared foodstuffs 5.9 4.8 3.9
Animal and vegetable
products
7.3 6.1 5.8
Minerals 19.3 15.6 21.2
Base metals 6.8 6.2 5.2
Wood 0.7 1.1 1.3
Manufactured goods 57.3 64.5 60.6
Chemical products 9.4 9.2 9.2
Other manufactured
goods
29 24.6 23.2
Machinery and transport
equipment
18.9 30.7 28.2
Other 2.8 1.7 2.1
Source: Department of Statistics
- 80 -
Business environment and regulatory framework
49. Entry, operations, and innovation in Lithuania are hampered by business regulations and
administrative barriers. Business surveys have concluded that the business environment is not
conducive to innovation and that in several respects the business environment is less favorable
than that in other EU accession countries. The unpredictability of regulations, frequent changes
in regulations, and insufficient information and consultation with business are considered key
problems.
50. International surveys of corruption put the level of corruption in Lithuania among the
lowest in the EU accession countries. The World Bank and European Bank for Reconstruction
and Development conducted a Business Environment and Enterprise Performance Survey
(BEEPS) in 1999, asking enterprises to evaluate economic governance and state institutions and
to assess the extent to which the business environment creates obstacles to the growth of their
business. While the survey identified a relatively low level of state capture in the Lithuanian
economy, the level of administrative corruption—or bribes to public officials to distort the
prescribed implementation of laws, rules, and regulations—was evaluated as high. The results of
the second BEEPS (in 2002) represent a significant improvement in the business environment in
Europe and Central Asia as a whole. At the time of writing, Lithuania-specific results were not
available.
Government programs to support business innovation and small enterprise
51. The Lithuanian government’s policy for support of small and medium-size enterprises is
based on the “Small and Medium-Size Business Development Strategy until 2003,” enacted in
mid-2000, which identifies 27 actions to upgrade the legal and economic environment, facilitate
access to finance, further develop the business support infrastructure, and improve access to
advisory and training services. The main channels for this support are:
• Lithuanian Development Agency for Small and Medium-Size Enterprises (SMEDA).
SMEDA was established in 1996 as a nonprofit organization and in July 1997
reorganized into a public institution. The agency operates under the management and
supervision of the Ministry of Economy. SMEDA’s primary goal is to support small
and medium-size enterprises in increasing competitiveness and start-up business
creation.
• National Regional Development Agency. The National Regional Development
Agency is a public nonprofit institution established in 1999 and partly funded by the
state. Its shareholders also include the Lithuanian Association of Chambers of
Commerce, Industry, and Crafts; and the Kaunas, Klaipeda, Panevezys, Siauliai, and
Vilnius Chambers of Commerce, Industry, and Crafts.
• Lithuanian Development Agency. The Lithuanian Development Agency was created
to facilitate economic development through import and export promotion.
- 81 -
• Regional Development Agencies. The regional development agencies function at
local level with the same responsibilities as the National Regional Development
Agency. Their integration with the local community allows greater and deeper
understanding of rural areas.
• Business Advisory Centers under PHARE. Under the EU-funded program PHARE,
many business advisory centers have been established in Lithuania. These business
support centers provide entrepreneurs with access to a wide range of services:
business consultation, training, seminars, business plan drafting, marketing, partner
research, and international projects. In addition to those supported by PHARE there
are currently five business advisory services in Lithuania.
52. As in many OECD countries, the Lithuanian government (and international donor)
programs cover support mostly for small and medium-size enterprises, ranging from technical
assistance and training to grant, loan, and guarantee schemes for investment. The worldwide
experience of such programs is mixed. Their success depends very much on the macroeconomic,
policy, and institutional environment in which they are carried out and on the effectiveness of
state and regional administrations and the level of corruption.
Finance for entrepreneurship and innovation
53. The best source of support for early-stage, high- growth firms is often investors, which
typically provide more than pure capital investment. True value-added investors provide
guidance on a range of business issues, such as marketing and strategic partners, financial
management, and general operations.
54. Given the scarcity of resources at the seed and growth stages, equity investment can
provide a good alignment of incentives between investors and management. The classic
principal-agent problem, in which the incentives facing management can conflict with the
owner’s interests, is addressed by the investors becoming actively involved in the operations of
the firm. A close relationship between investors and the company offers potential benefits to
both sides, transferring much- needed mentoring and advice while helping to reduce the risk
profile of the investment. Without a close relationship, the risks of early-stage investing escalate
rapidly. Achieving a mutually beneficial relationship between investors and firm managers is
often difficult, and works only if both sides understand the rules of the game.
55. The role of external finance changes with the stage of the company’s growth, with the
most proactive support needed early on (table A3.3). In the early stages of a company’s life,
proactive investors can add significant value by becoming directly involved in key management
decisions, providing links to markets and strategic partners, and helping to guide expansion of
the business. As the firm grows, the sophistication of the financial advice required increases and
the need for linkages to larger markets grows.
56. For the relationship between investor and entrepreneur to work well, expectations must
be aligned carefully and the legal provisions of the investment must work in tandem with the
business relations. The legal framework should support the contracting arrangements needed for
- 82 -
early-stage investment relationships. In developed markets a variety of flexible and enforceable
instruments are generally used for early-stage investing. Preferred equity is the classic
instrument, as it can be tailored to give investors the required management control and ability to
exit while preserving an “upside” in equity appreciation for management. This structure works
to align the incentives of both sides to work together. Other instruments, including convertible
debt (a loan that can be converted into equity), warrants, and options (the right to purchase shares
at a future date), are also used to tailor the incentives and rights of investors and management or
employees.
57. The Lithuanian investment management industry has developed rapidly from a low base
in recent years. Though the industry was funded originally from bilateral and multilateral
institutions, the country has increasingly attracted private investors, primarily from the Nordic
countries. Eight to 10 venture funds are currently active in Lithuania, with more than $130
million in uncommitted funds.
9
These funds have approximately $55 million in committed
investments in the country.
Table A3.3: Financing Growth Companies—By Stage of Investment
Stage Typical
investment
size
Funding source Characteristics
Seed $10,000-
$500,000
“Angel”
investors
(experienced
entrepreneurs);
family and
friends
Experienced
entrepreneurs with
strong business
contacts can be the
best source of funding
at this stage
Early $500,000-
$5 million
Venture capital
funds
Mentoring and
business contacts
provided by funding
source continue to be
important
Expansion More than
$5 million
Venture capital
funds, other
private equity
funds, banks
International business
relationships become
more critical
Exit Strategic partner,
initial public
offering on stock
market
Without successful
exits, no new
investments will be
made
9
All funds identified were pan-Baltic funds, with the exception of Vilnius Bank Risk Capital.
- 83 -
58. Seed stage. The angel investor community, which provides the largest source of seed-
stage financing in industrial countries, is poorly developed in Lithuania. Seed-stage investors are
often viewed as predators by managers, who prefer to “bootstrap” their operations through use of
retained earnings or family funds. Bootstrapping not only can slow the expansion of the firm,
but also forces it to forgo the business relationships and mentoring that angel investors can bring.
The most important step in increasing the availability of seed-stage investment in Lithuania
would be to improve the mutual trust between angel investors and companies—through
networking opportunities and wider awareness of international investment practices.
59. Early stage. The financing of early-stage growth capital in Lithuania suffers from a set
of problems similar to those facing seed-stage investment. Following the seed stage, funding
from more formal channels such as venture capital funds is required. But the owner- managers of
early-stage companies in Lithuania are often reluctant to dilute their control and typically do not
perceive the potential value addition of investment groups. This perception is likely to stem
from the entrepreneurs’ lack of experience with the investment community as well as a low level
of value addition by some funds.
60. The legal framework for venture investing in Lithuania has major gaps that undermine
the ability of investors and management to create an incentive system that aligns the interests of
both parties. The legal framework for investment in early-stage companies remains
underdeveloped, allowing a very restricted set of instruments. Common equity is the only
instrument typically used in the country. The limited variety of financial instruments forces
investors to create second-best solutions that have not proved to be legally enforceable (table
A3.4).
61. At present, the local venture capital community does not see these shortcomings in the
legal framework as a major constraint. But if the Lithuanian investment industry is to mature
and attract additional capital, international legal norms for private equity investing (and the
corresponding regulatory and supervisory framework) will need to be introduced.
62. Expansion stage and exit. Only a small number of Lithuanian firms have reached the
expansion stage, in which more sophisticated financial structuring and other services are
required. Experienced service providers for this stage of a company’s growth are scarce in
Lithuania, and supplemental services may be required from international firms for a specific
transaction. In any case, many exit transactions (such as the sale of a company to a strategic
partner or an initial public offering on a stock exchange) are likely to engage international
partners—to increase exposure to export markets and the ability to build scale.
63. The legal framework also needs to allow provisions that facilitate investor exit from a
company. A major provision used in other markets to help ensure an investor’s ability to exit—
the “liquidation preference,” in which investors have rights to the proceeds of a sale prior to
management—is not possible in Lithuania. Other provisions that can facilitate exit, such as
those allowing investors to “drag along” other shareholders in the sale of the company are
allowed.
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Table A3.4: Legal Constraints to Growth Investing in Lithuania
Constraint Issue Relevance
Preference shares
(equity with a
dividend) are highly
restricted.
Preference shares lack voting
rights, have no preference in
liquidation of the firm, lose
their preferred status if the
dividend is not paid for two
years, have a dividend
capped at the government
bond rate, may constitute a
maximum of one-third of the
total shares of the company,
and cannot be issued by
companies with fewer than
100 shareholders.
This classic instrument of
venture capital investing needs
to be given great flexibility in
structuring to facilitate
contracting on issues of
compensation and risk
mitigation for investors as well
as defining provisions for
corporate governance.
Convertible debt (loan
that may be converted
into equity by the
holder) is not legally
enforceable.
This instrument is not
provided for under the
current legal framework.
This instrument is commonly
used in investing in emerging
markets and in other situations
where an exit through a
strategic sale or initial public
offering cannot be assured. It is
a basic component of the
investment framework for
growth companies,
Options for future
purchase of shares by
individuals
(employees,
management) may not
be issued by a
company.
A company cannot issue
options for future purchase
of shares.
Options form a key component
of compensation packages for
key employees in many growth
companies and could benefit
Lithuanian companies,
Warrants for future
purchase of shares by
investors (such as in
the context of a loan
agreement) are not
possible for private
companies.
Warrants for publicly listed
companies may not be
exercised beyond 12 months
of issue.
Warrants give added flexibility
to loan agreements and can
have an effect similar to
convertible debt.
Company debt
issuance is restricted.
Bonds or other forms of debt
may not be issued by a
closed joint stock company;
loans may be extended only
by a bank.
Privately issued debt can be
appropriate for an expansion-
stage company. Although
early-stage companies will
seldom meet the criteria for
debt financing (beyond a
secured credit line), the
prohibition on company-issued
debt precludes an important
instrument: convertible debt.
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64. Successful exits drive interest in the market from all sides—and are necessary to the
health of the country’s economy and its ability to attract ongoing investment. The number of
successful exits from private equity investments in Lithuania has been small, prompting concern
from fund managers. A stronger track record in exits would clearly provide a major boost for the
investment industry; however, the relatively small number of exits is more a symptom than a
cause of the weakness of the local “ecosystem” for entrepreneurship.
Networking groups and “clusters”
65. Innovation does not occur in a vacuum. For good ideas to become viable businesses,
technologists must find ways to work with business managers and investors. Companies need to
work with one another, locally and across borders. Many countries have not yet developed
strong local networks for entrepreneurship—and remain isolated from critical international
networks. But in a growing number of countries the private sector has mobilized to create
formal and informal networking groups with great potential for impact over time. The successful
examples are led by small groups of forward- looking, dynamic individuals with ties to both the
private sector and the government (and often with academia).
66. Networking groups can undertake a variety of activities ranging from basic functions—
such as convening local and international events and gathering and disseminating information—
to more sophisticated services—such as screening company proposals for investors and
providing links to foreign and local business partners. In some cases networking groups provide
training and coaching for angel investors and entrepreneurs on how to interact with one another,
including on legal contracting issues. The main thrust of these initiatives is to build networks
and connections between individuals for mutually beneficial relationships.
67. “Clusters,” or groups of firms engaged in a similar activity or sharing a common interest,
sometimes take the networking activities a step further and pursue joint projects (incubators,
policy reform, joint marketing projects). The interest in clusters is driven by empirical evidence
that success in a given industry requires a critical mass of activity. Groups of firms in successful
industries simultaneously compete and cooperate with one another. Small, isolated firms have a
greatly reduced chance of success. The concept has received a great deal of attention in recent
years; however, attempts to build formal cluster initiatives have often been derailed by
organizational issues, overly ambitious goals, and lack of focus.
68. The international dimension to network building is central to ensuring that local firms are
“plugged in” to key relationships abroad. One route to building relationships with international
firms is through partnerships in the local market (such as with value-added resellers) that build
the capabilities and contacts of local firms. Another is to use diaspora groups. Often criticized
as “brain drain,” the emigration of skilled workers has a second face: a rich base of potential
business contacts in international target markets. In the well-known case of India, ties with
diaspora groups have proved critical to the success of the information technology industry. So
emigration is not necessarily a bad thing: talented emigrants can become customers, mentors,
and partners. But these links do not happen automatically. They can be effectively cultivated by
private groups working with government (for example, consulates).
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69. Lithuania has made important efforts in building local and international networks in
support of entrepreneurship, particularly in the information technology sector. InfoBalt is
undertaking some of these tasks for the information technology industry, organizing conferences
and expositions and input to regulations and public policy. In addition, several cluster projects
are under way to link universities with the business community in Vilnius and Kaunas. The
Knowledge Economy Forum serves as a talking shop for the established technology companies
in the country, with representation from the laser, telecommunications, information technology,
biotechnology and pharmaceutical, and other sectors.
70. A major gap in the local environment is the lack of strong angel networks for mentoring
and investing in seed- and early- stage companies. The country’s relatively brief experience with
a market economy has produced only a small pool of potential (and actual) angels. Moreover,
firms remain suspicious of outside investment—because of the firms’ own lack of sophistication
and the poor reputation of many investors. Business managers in the country are often drawn
from scientific or academic backgrounds and thus lack deep business experience. And firms
often develop mentoring relationships with academics rather than experienced businesspeople.
71. Angel networking groups can help to jump-start relationships between firms and
investors by clarifying the appropriate roles for both sides. Inclusion of diaspora groups in angel
networks is another dimension that should not be overlooked.
72. The limited interaction of early-stage firms with experienced entrepreneurs is also
evidenced by several of the university incubation programs. Without a base of experienced
advisers from the business world to provide guidance to client firms, these incubators run the risk
of becoming pure real estate operations with little value addition.
Intellectual capital
73. Intellectual property forms a key source of competitive advantage for firms in the
technology sector. For a few select firms at the high end of the technological spectrum, “hard”
intellectual property (formally documented intellectual property such as patents and copyrights)
is critically important. For a far broader group of firms, however, “soft” intellectual property
(trade secrets, proprietary business processes) is the primary value-driver.
74. A firm’s initial stock of intellectual capital needs to be continually refreshed and
upgraded to maintain its value in the marketplace. In- house research and development,
outsourcing to contract research organizations, and collaboration with universities are potential
sources of intellectual capital for a firm. But the more common sources of intellectual capital for
a broader range of firms include learning by doing (for example, developing a proprietary
solution for one client and producing variations for others), continual innovation through internal
knowledge management and quality programs, and ongoing training and education of
employees.
75. The framework for protecting formal or “hard” intellectual property in Lithuania is weak
but improving. Copyright enforcement has posted the strongest gains. According to industry
sources, software piracy has declined from 95 percent of all software utilized to 75 percent in
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recent years. Although the gains are due in large part to increased enforcement by the
Government, software vendors have made progress through partnerships with local hardware
vendors.
76. The legal framework and enforcement are not viewed as sufficiently strong, serving as a
barrier to foreign investment and growth of local firms.
Policy Issues and Proposals
Defining innovation policy in Lithuania
77. Issues. Current policies and institutions do not sufficiently reflect the importance and
role of innovation as a primary source of competitiveness on the world market. A White Paper
on Science and Technology has been prepared, but little action has been taken and the actions
that have been are not fully consistent with the paper. It is too early to evaluate the work of the
recently established Commission on Science and Technology, but without a permanent staff and
with only occasional meetings, this commission does not appear equipped to address the
challenges ahead. The recently adopted Law on Higher Education and Science introduces some
positive changes; overall, however, Lithuania’s innovation system is marked by an absence of
meaningful goals, priorities for financial support (beyond the enumeration of selected themes),
provision of instruments that explicitly support R&D activities, and a longer-term vision of a
national innovation system. As a result, much of the research undertaken to date is irrelevant to
the business community.
78. Policy proposal. The recently established Commission for Science and Technology
should develop into a Lithuanian Science and Technology Policy Council modeled on the policy
councils in Estonia and Finland. The key role of such a council would be to link the interests of
business with those of the research and academic communities, ensure that research and
education feed into the innovation process, and contribute to improvement in Lithuania’s
competitiveness. Council members would be nominated by the Government and include
significant representation from the business and research communities. The council would be
chaired by the prime minister alongside ministers from ministries with a major stake in R&D and
innovation (Ministry of Higher Education and Science, Ministry of Economy, Ministry of
Finance, Ministry of Interior).
79. Building on the Lithuanian Science and Technology White Paper, the central task of the
council would be to prepare and agree on the vision, goals, and policies for longer-term
development of the national R&D and innovation system; define specific policy instruments; and
regularly assess the implementation of the council’s innovation strategy and policies. This
would include an analysis of developments, needs, and objectives of the national innovation
system; the analysis would spell out policy instruments and funding tools (including R&D
funding sources and targets) for public sector research and technology development and include
recommendations for action by the private sector. To play this role, the council would need a
secretariat with full-time professional staff support.
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80. The council would build a common understanding and consensus on basic guidelines for
innovation policy, aim to enhance partnerships between the business and research communities,
and increase awareness and visibility of the role of innovation. The positive experiences with
this model—such as in Estonia, Finland, and Ireland—could guide establishment of this high-
level government institution.
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Box A3.6: Policy Coordination to Improve Governance of the Innovation System
Most European countries have a national science and technology council to provide advice to
the prime minister, the government as whole, or the parliament on strategic issues relating to
the development of R&D or, more generally, the national innovation system. For example,
Austria has the Council for Research and Technological Development; Belgium, the Federal
Council for Science Policy; Denmark, the Council for Research Policy; Finland, the Science
and Technology Policy Council; France, the High Council for Research and Technology;
Germany, the Science Council; Ireland, the Irish Council for Science, Technology, and
Innovation; the Netherlands, the Dutch Advisory Council for Science and Technology; and the
United Kingdom, the British Council for Science and Technology.
In most countries the science and technology councils have proved to be effective instruments
in preparing plans, proposals, and statements at the highest political level for the overall
development of science and technology and for innovation policy issues. The operations of the
councils have been further developed, and many countries plan changes aimed at strengthening
the councils’ position in the construction of the national innovation system.
Finland has had very good experiences with its Science and Technology Policy Council. The
council, established in the 1960s, was reorganized in the late 1980s. Chaired by the prime
minister, the council advises the government and its ministries on questions relating to science
and technology. The council is responsible for the strategic development and coordination of
Finnish science and technology policy and for the development of the national innovation
system as a whole. The membership consists of seven ministers and 10 other members well
versed in science and technology. The members are appointed by the Council of the State for a
three-year term. The Science and Technology Policy Council has a secretariat consisting of
two full-time chief planning officers.
The council has raised the status of R&D and innovation on political agendas, guaranteed
continued attention to R&D issues (even during periods of changing government), and helped
to achieve consensus on strategic guidelines relating to the growth and use of R&D resources. It
has ensured a broad commitment to the implementation of the strategic decisions. And in a
significant act after the economic recession in Finland in the early 1990s, the council initiated a
program in 1996 to increase government investments in R&D in 1997-99 by $250 million, an
increase of about 25 percent in the state’s annual research appropriations. The funds necessary
for these additional appropriations were obtained mainly from the partial privatization of state-
owned companies.
In Estonia the Research and Development Council was recently reorganized, with the idea
being to link the council firmly with the Ministry of Economic Affairs and the Ministry of
Education, just as in Finland. In addition to the council, both the central ministries in R&D
have an advisory body of their own. The council, chaired by the prime minister, consists of
ministers and high-level experts. In December 2001 the Estonian Parliament approved the
Estonian R&D strategy for 2002-06. The principles of the strategy will be reviewed and
updated by the government every three years, on the basis of proposals submitted by the
Research and Development Council. This means that the council has become a central actor in
the construction of the Estonian innovation system.
Source:http://www.minedu.fi/minedu/research/organisation/sci_tech_council/sci_tech_council.html;http://www.tan.ee/.
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Research and development: relevance, efficiency, accountability
81. Issues. The overriding challenge for the public R&D system in Lithuania is to increase
its relevance, efficiency, and accountability. This entails significantly increasing the flexibility
of R&D financing instruments, improving the efficiency of R&D organizations, upgrading the
level of expertise (professionalism) in the management of public R&D funding, increasing the
demand and need orientation among universities and research institutes, and promoting
cooperation between industry and the research and academic communities.
82. Policy proposal. The Government should consider establishing a Lithuania Technology
Agency to develop and implement new R&D funding instruments associated with revised
innovation policies and priorities (see above), and working principles and processes for public
R&D administration in Lithuania. In establishing such an agency, the Government should
consider merging many of the public institutions now supporting innovation and business
activities (the Lithuanian Center for Innovation, the Lithuanian Development Agency for Small
and Medium-Size Enterprises, and others).
83. The main tasks of the agency would be to organize, finance, and evaluate new types of
R&D programs in nationally significant fields of science and technology; to act as a national
contact point for EU-related R&D activities (including national management of EUREKA and
COST); and to provide grants and loans to firms for innovation projects. Many of the tasks of
the agency would be new and would provide new thinking and orientation. In addition, however,
viable existing operations and resources could be moved to the agency from their current homes
in the Ministry of Higher Education and Science and elsewhere.
84. The agency could be placed under the Ministry of Economy or the Ministry of Higher
Education and Science, but other solutions allowing more independence and credibility should
also be elaborated. The experiences of such countries as Estonia, Finland, Ireland, and Sweden
are relevant in this respect.
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Box A3.7: National Technology Programs in Finland—
Increasing Flexibility and Cooperation
Box A3.8: The Hungarian Experience—Fostering Links between Industry and Research
In Finland technology programs are used to promote development in specific sectors of technology
or industry and to pass on research results to business in an efficient way. These programs have
proved to be an effective form of cooperation and networking for companies and the research
sector. In 2002 about 45 extensive national technology programs were being implemented. In 2000
TEKES provided $160 million in financing for technology programs. Thanks to such programs,
many new successful products and processes have been developed.
The planning of the technology programs takes place in working groups and open preparatory
seminars involving companies, research institutes, universities, and TEKES, and the decision to
launch a program is made by the board of TEKES. Each technology program has a steering group,
a coordinator, and a responsible person at TEKES. The programs range in duration from three to
five years, and in volume from $6 million to hundreds of millions of dollars. Tekes usually
finances about half the costs of the programs, with the other half coming from the participating
companies. Most of the programs are evaluated by foreign evaluators.
The main benefits of the programs lie in the close cooperation among research institutes,
universities, and industry; the broad involvement of small and medium-size companies; and the
high level of international cooperation.
Source :http://www.tekes.fi/.
To foster links between industry and research, Hungary establishes structures offering a stable
platform for players involved in this cooperation: the Cooperative Research Centers, launched in
1999. These centers aim to stimulate long-term cooperative links between higher education
institutions, R&D centers, and businesses. Their broad mandate includes fostering entrepreneurial
attitudes in higher education institutions and incorporating a business orientation into their curricula,
undertaking joint development of R&D activities for new products and processes to promote the
competitiveness of firms, generating technological breakthroughs with commercial applications, and
creating appropriate jobs for graduates and postgraduates. The centers can thus be seen as
multifaceted instruments able to act on many aspects of the links between industry and research. By
2001 five Cooperative Research Centers were in operation in Hungary.
Source:http://geoweb.cslm.hu/vhost/geoinfo/idrisi/default.htm.
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Box A3.9: Benchmarking National Research Policies in Europe
In endorsing the European Research Area initiative in March 2000, the Lisbon European Council
called on the member states and the European Commission to develop benchmarking as a means
of evaluating the performance of national research policies. As a core activity, the first
benchmarking exercise for R&D policies in EU countries was launched to compare processes
and performances and identify best practices.
The exercise concluded that there is a need to establish a stronger science base in Europe to
ensure that the region is a global player. This implies coordinating national science and
technology policies and national systems for higher education and moving toward a more open
European labor market for researchers.
The second group of actions relates to national labor markets and education and training systems
at large. The movement toward a European innovation and competence building system can take
place only through a gradual renewal and a convergence of labor market practices and education.
To build the European Research Area, with its emphasis on Europe-wide networks of excellence,
special attention will be required for the regional level. It is at this level, too, that policies
supporting the absorptive capacity of small and medium-size firms will be needed, to strengthen
and anchor local R&D and innovation clusters.
The EU governments are committed to boosting R&D and innovation in the EU by increasing
expenditure in this area. The aim is to approach 3 percent of GDP by 2010, with two-thirds of
the funding provided by the business sector. Among EU countries, only Finland and Sweden
exceed this target at present, while the EU average is just below 2 percent. The current level of
business expenditure on R&D, at 1.1 percent of GDP, also indicates the size of the challenge that
EU countries need to address during this decade. Long-term cooperation among R&D and
innovation actors—between public and private actors but also among private actors—appears
increasingly critical for raising R&D investment and improving its effectiveness.
Source: European Commission, DG Research, Benchmarking National Research Policies: The Impact of
RTD on Competitiveness and Employment (Brussels, 2002), and Final Report of the Expert Group on
“Public and Private Investments in R&D” (Brussels, 2002);http://www.tip.ac.at/workshops/presentation_borchard.pdf;http://www.edis.sk/ekes/kneldok/dokument/bench_irce_0802.pdf;
ftp://ftp.cordis.lu/pub/rtd2002/docs/bench_ppi_0602.pdf.
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85. Issue. Lithuania has 26 state research institutes covering a broad range of specialized
fields of research, from humanities to technology. This fragmentation of institutions is
inefficient: each institution requires administrative support, exacerbating the problem of scare
budgetary resources. The state research institutes should therefore reorganize themselves. Some
of the institutes were recently integrated with Vilnius University. The relevance of the research
undertaken is also in question. The state research institutes should consider shifting their
orientation from basic research to applied research, from budget-financed research to research
funded under contract and other external sources, and from an “ivory tower” orientation to one
focused on supporting innovation for the business community.
86. Policy proposal. The reorganization of the state research institutes should be accelerated.
One option would be to merge several institutes specializing in areas with potential for applied
research and commercialization into a Lithuanian Institute of Technology focusing on applied
(technological) research and contract research. The private sector should be invited to join this
institute not only as users of its expertise and services but also as owners, financiers, and
contributors to the research.
87. Regardless of the organizational arrangements, new funding mechanisms for the state
research institutes should be developed, with (competitive) contract research figuring
prominently among the financing sources. The growth and development of the Lithuanian
Institute of Technology would be driven by external financing (EU funds, funds from the
National Technology Agency, contracts with firms) rather than by budgetary allocations. Similar
arrangements exist in other European countries—for example, the Frauenhofer Gesellschaft in
Germany.
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Box A3.10: Specialized Technology Research Institutes—
a Device to Renew State Research Institutes
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
121.
122.
123.
124.
125.
126.
127.
The history of large as well as small economies in Western Europe teaches that technologically
oriented public or publicly supported private research institutes are an important element of a
successful R&D and innovation policy. These institutes are typically involved in a wide spectrum
of activities, including strategic basic research, applied technical research, contract research, and
testing and inspection. But their focus is clearly on commercially relevant applied R&D, carried
out in close cooperation with firms and universities. Normally, a large share of the budget of
these institutes is based on contract research with companies, with other financing coming from
external sources.
Well-known examples of specialized technology research institutes are Fraunhofer-Gesellshaft in
Germany, the Foundation for Scientific and Industrial Research (Sintef) at the Norwegian Institute
of Technology, (TNO) in the Netherlands, the Danish Technological Institute, and the Technical
Research Center of Finland. All of these have long experience, and all have played a significant
role in their country in technology transfer and diffusion. And in recent years these research
institutes have been significant actors in the EU research programs, particularly in industrial
consortiums.
The Fraunhofer-Gesellschaft, founded in 1949, is the leading organization for institutes of applied
research i n Germany. At present the organization maintains 56 research establishments at
locations throughout Germany. A staff of some 11,000, most of whom are qualified scientists and
engineers, generate an annual research volume of around 900 million euros. Of this amount, more
than 750 million euros are derived from contract research. Companies of all sizes and from all
sectors of industry use the Fraunhofer Gesellschaft as external high-tech laboratories for all kinds
of development work, for special services, and as expert consultants on organizational and
strategic questions.
The Danish Technological Institute is an independent, not-for-profit institution approved by the
Danish authorities to provide technological services to businesses and communities. Founded as
an independent institution in 1906, the institute is one of the oldest of its type in the world. The
institute has almost 900 employees and a turnover of some 90 million euros. The Danish Ministry
of Trade and Industry invests some 16.8 million euros a year in the institute’s R&D activities and
dissemination of R&D results. The institute employs experts from different fields at 40 centers
organized under the auspices of the six organizational units (energy, industry, environment,
building technology, industrial development, and information technology).
The Technical Research Center of Finland (VTT) was established in 1942 as a government
research institute. From the very beginning it has been a significant actor in the Finnish
innovation system. The role of VTT, working under the auspices of the Ministry of Trade and
Industry, has been to strengthen the competitiveness of Finnish commerce and industry through its
technological expertise. While the universities focus on basic research, VTT concentrates on
applied technical research aimed at commercial applications and active cooperation with
enterprises. VTT employs 3,000 people and covers a large share of the fields of technology
relevant to the Finnish economy. The basic government funding makes up no more than a third of
its total budget. Much of VTT’s financing comes from external sources—enterprises, government
agencies, and the European Union.
Source:http://www.fraunhofer.de/german/index.html;http://www.teknologisk.dk/;http://www.vtt.fi/.
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128. Issue. Practically all research in universities is financed by state budget resources that are
allocated to universities as lump sums on an institutional basis. Universities further allocate
these funds to established departments, largely in accordance with historically established norms
(based on the number of students and past allocations). This allocation system contributes to the
unresponsiveness of university research to industry demand, since industry demand has no
influence on university funding decisions.
129. Policy proposal. To increase the relevance and accountability of research undertaken at
universities, new, incentive-based, transparent, and flexible funding mechanisms for university
research should be introduced, with increasing reliance on nonbudgetary sources of financing.
The mechanisms should establish a clear division of funding allocations between educational
purposes and research activities; establish procedures for flexible use of external financing,
including contract research and training (budgeting, accounting, auditing, increased peer review);
and allocate an increasing share of the current state budget funding and all of the future
increments in such funding on a performance basis, with bonuses for excellent performance.
130. Issue. Because of the poor quality of statistics on the Lithuanian innovation system, there
is no reliable database for longer-term policy planning and decision- making or for ongoing
monitoring and evaluation of the system’s performance.
131. Policy proposal. Urgent action should be taken to upgrade the quality of Lithuanian
R&D statistics to the average OECD level on the basis of OECD recommendations (Frascati
Manual). Correspondingly, innovation statistics should be developed to fulfill the requirements
of the Community Innovation Survey. R&D evaluation methods and mechanisms could be
developed along the lines of those in other countries, such as Finland, Ireland, Norway, and
Sweden. To support the accumulation of knowledge on and experience with R&D and
innovation-related analysis and studies, the establishment of a dedicated unit specializing in
technology and innovation studies should be considered. This unit could be placed in the new
Lithuanian Technology Agency.
Box A3.11: The Small Business Innovation Research Program
The Small Business Innovation Research (SBIR) program, sponsored by the U.S. Small Business
Administration (SBA), is an interesting approach to bridging the innovation barrier. Established by the
U.S. Congress in 1984, the SBIR program has several major objectives. It provides high-tech
entrepreneurs with the startup capital they need to explore the commercial feasibility of high-risk
research ideas, early-stage financing that venture capitalists traditionally have little interest in providing.
It fosters the commercialization of government-funded R&D. It establishes productive, commercial
links between high-tech small and medium-size enterprises and government-funded research priorities.
And through its “graduates,” it provides an excellent source of deal flow for venture capitalists.
Source:http://www.reeusda.gov/sbir/.
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Business and regulatory environment
132. Issue. The business environment is not sufficiently supportive of innovation. Firms
reported increasing flows of foreign knowledge, and a large share of firms (27 percent) indicated
that access to markets and technology embodied in foreign direct investment is a critical factor.
Only 16 percent put the need for more capital as a first concern. Ineffective and intrusive
business regulations and licensing, tax regulations and enforcement, and deficiencies in the legal
system are still major concerns.
133. Policy proposals. Work to simplify business registration procedures should continue,
improving the legal framework and streamlining tax administration. Norms not required by the
European Union should be critically reviewed, questioning their necessity and value for public
policy purposes. More emphasis should be put on implementation to increase speed,
transparency, and information flows.
134. Issues. Labor regulations are perceived as a more serious obstacle to business operations
in Lithuania than in other Central and Eastern European countries. According to the Business
Environment and Enterprise Performance Survey (1999), Lithuania ranked as the second worst
among 10 EU accession countries in this respect. A more efficient and flexible labor market is
also critical to reducing Lithuania’s long-term unemployment and allowing labor markets to
adjust to changing economic conditions. Lithuania today is marked by high unemployment and
high job turnover, with the vast majority of new jobs (more than 70 percent) created by start-ups
and small firms and mostly in the export sector. The labor market is segmented between the
employed (with high job turnover and frequent moves from job to job) and the long-term
unemployed. A similar duality exists, in terms of flexibility and working conditions, between
small firms (high job turnover, high flexibility) and large ones (low flexibility). The minimum
wage as established today limits the options for low-skilled workers. A number of labor market
policies could be considered.
Policy proposals.
• Enhancing wage flexibility by reducing minimum wages as a percentage of
average wages or by differentiating the minimum wage (for example, by
introducing a youth subminimum).
• Promoting flexible forms of employment, including fixed-term contracts, to
stimulate labor supply (for example, part-time work by women) and labor
demand.
• Liberalizing the use of fixed-term contracts by removing the limit on the number
of successive renewals while keeping the existing limit on total duration.
• Adopting the practice of annualizing working hours—that is, calculating weekly
working hours on a yearly basis—and lowering the cost of overtime work.
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• Allowing the social partners to “negotiate flexibly,” consistent with the
worldwide trend. This would imply deregulating labor relations and devolving
responsibility for determining them to the social partners, while the Government
would be responsible for setting and enforcing only basic norms (including basic
workers’ rights) and standards (World Bank, Country Economic Memorandum,
2002).
95. Issue. The multitude of government programs and agencies for business support pursue
multiple objectives and often are not effectively coordinated and administered. It is not clear that
these programs have a significant positive impact on innovation and in furthering the knowledge
economy.
96. Policy proposals. Lithuania should undertake a systematic review of best practices
employed in other countries on the design, operation, and coordination of business support
programs aimed at fostering competitiveness, innovation, and growth. It is particularly
important to review the multitude of dispersed subsidy programs, such as clusters, incubators,
technology parks, industrial parks, business innovation centers, and loan, grant, and guarantee
schemes. Ensuring that such programs are sustainable in the long term requires an understanding
of the market failures they are assumed to address, the business needs and management
challenges they face, and the conditions under which they can work well. Enterprises
participating in these programs need technical and managerial know-how to develop and
commercialize their innovations.
97. Lithuania should also consider merging all or some of its business support schemes under
an umbrella organization, such as the Lithuania Technology Agency (proposed above).
98. Issue. The legal framework for investment in Lithuania is geared toward equity finance
for larger, publicly listed companies and debt finance through commercial banks. Neither
instrument is optimal for high- growth, early- stage knowledge-based companies. Companies at
this stage are too risky for commercial banks because their cash flow is not sufficiently
predictable—and security against fixed assets is often not practical. But the legal framework for
private equity is not adequately developed, undermining the ability of outside investors and
company managers or owners to create an incentive system that aligns the interests of both
parties. The set of instruments available for private equity investing is severely limited. Among
other things, the legal framework needs to allow provisions facilitating investor exit from a
company.
99. Policy proposals. The forms of equity and quasi-equity possible under Lithuanian law
should be brought into accordance with international best practices. Demand for these more
sophisticated instruments appears to be growing as the Lithuanian private equity industry
matures. But more rapid legal reform could facilitate early-stage investment and attract the
attention of international investors.
100. At present, shortcomings in the legal framework are not seen as a major constraint by the
local venture capital community. But if the Lithuanian investment industry is to mature and
attract additional capital, international legal norms for private equity investing (and the
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corresponding regulatory and supervisory framework) will need to be introduced. A major
provision used in other markets to help ensure an investor’s ability to exit—the “liquidation
preference,” in which investors have rights to the proceeds of a sale prior to managers and
owners—is not possible in Lithuania. Other provisions that can facilitate exit, such as those
allowing majority investors to force other shareholders to participate in the sale of the company,
are allowed.
Private sector interaction with public services
101. Issue. In industrial countries private sector organizations such as industry and employers
associations have the capacity to formulate their own strategic proposals for the development of
their industry as well as to review proposals made by the government. Although these
organizations represent the interests of their members, they often look to broad, long-term
interests rather than those of individual firms. To do so requires that private sector organizations
and their members cooperate with one another in the interest of developing policies and joint
activities conducive to all businesses. Taking a broader, more strategic view allows the private
sector to provide more effective input to government policies and to launch initiatives of its own.
The Lithuanian private sector is still far from developing such an organization, cooperation, and
outlook.
102. The Government, municipalities, and the private sector cooperate on specific projects,
such as clusters, incubators, technology parks, industrial parks, and business innovation centers.
While in principle all these serve as vehicles for the effective transfer of knowledge and
technology and spur innovation, their success depends on how they are designed and managed.
Many are developed without necessary preparatory work to identify market needs and without
adequate operating procedures and staffing. At best such entities provide some educational
functions. They survive mainly on the state budget and international funds, since enterprises are
unwilling or unable to pay for the services provided.
103. Policy proposal. Lithuania’s private sector should take on a higher profile in developing
its vision and strategy for the country’s knowledge-based economy and in taking concrete steps
to make this vision a reality. To do this, the private sector needs to develop its own
organizations with the capacity to gather information, analyze policy issues, and communicate
with their members. The private sector also needs to develop forums in which representatives
from all parts of the private sector can meet and formulate positions on policy issues. This
would help to improve the effectiveness of the private sector’s partnering with the Government
in formulating visions, strategies, and policies in policymaking and policy coordinating bodies
for the information society and the innovation and education systems.
104. Issue. Accounting practices and information systems are still poor in the business sector,
preventing the buildup of trust, the sharing of information, and cooperation. Good accounting
practices contribute to the development of the knowledge economy in three ways. First, sound
accounting practices support transparency and good governance, which facilitate business
cooperation and networking. Second, they improve access to finance, especially equity and
loans for early-stage innovation investments. And third, accounting standards aligned with
- 99 -
international practice improve the confidence of foreign investors bringing knowledge to
Lithuanian companies.
105. Policy proposals. Lithuania is about to introduce new accounting rules and procedures
that comply with international accounting standards. A new body should be established to
develop accounting standards for limited liability companies, most of which are small and
medium-size enterprises. This body should include representatives from both the private and the
public sector. Moreover, there is a need to enhance the country’s accounting and auditing
capacity, by establishing closer links with universities and other educational actors to reform
curricula and train or retrain accountants in the private sector. Business organizations should
encourage and, if possible, enforce adherence to the newly adopted accounting standards and
encourage their members to improve information systems and share information.
106. Issue. Despite the harmonization of the legal framework relating to the protection of
intellectual property rights, many entrepreneurs and researchers still do not see the value of such
protection. Ambiguities remain about who owns the intellectual property rights for government-
funded research and development projects. Despite the Employee Agreement used by state
research institutes and universities—according to which innovations by an employee are the
intellectual property of the employer—many representatives of research institutes are unclear
about the possibility of patenting innovations and their potential commercial uses. This
ambiguous ownership status hampers commercialization and deters potential foreign investment
in Lithuanian’s intellectual resources.
107. P Po ol li ic cy y p pr ro op po os sa al ls s. . The Government (through the Patent Bureau) and the private sector
(through the Association of Entrepreneurs) should develop information and training material
about intellectual property rights. The ownership of state research should be clarified and
incentives put in place for researchers to bring research results to the market.
108. Issue. Lithuanian exports are still based predominantly on low-skilled labor inputs with
low technology content and quality. The drive for higher quality to attain ISO certification has
fostered innovation in firms in more developed EU candidate countries. Few Lithuanian
companies have obtained ISO certification. Lithuanian entrepreneurs seem to lack a general
understanding of the need to certify their production processes according to international
standards.
109. Policy proposal. Lithuanian enterprises and the Government should cooperate in raising
awareness of the need for ISO certification and in training to help attain ISO certification
standards.
Mobilizing the private sector
110. Issue. With networks for mentoring and funding early-stage companies still in the early
stages of development, entrepreneurship in Lithuania is struggling. Firms remain wary of
outside involvement, whether by local or international investors. Private investors often have
little to offer beyond funding; strategic investors (larger companies) typically want complete
control, leaving little role for the original management team. Cross-firm collaboration in such
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areas as marketing, promotion, and networking also remains limited. The activities of private
sector associations and networking groups to address these problems remain limited—in both
sector coverage and depth of activities—particularly beyond the information technology and
telecommunications sector.
111. Policy proposal. Private sector associations and networking groups should seek to
deepen their activities in support of members and to extend coverage across the breadth of the
knowledge economy in such areas as mentoring and networking for early-stage and high- growth
businesses and international promotion and marketing. Organized mentoring networks can help
firms obtain advice and support from experienced entrepreneurs. And private associations can
play a key role in promoting and marketing Lithuanian companies and investment opportunities
abroad.
112. To grow and compete, Lithuanian firms need strong ties to international markets and
investors and the knowledge they harbor.
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Annex 4: Building an Information Society
1. A knowledge economy is a networked economy in which information and
communications technologies (ICT) are a key part. Access to electronic communications
networks and ICT is decisive for economic growth, knowledge-based activities, and social
inclusion and cohesiveness. Enterprises operating in the ICT sector are among the most
innovative and dynamic in Lithuania, contributing to the development of a knowledge-based
economy. Lithuania is a signatory of the e-Europe + Action Plan aimed at promoting an
information society in countries that are candidates for accession to the EU. The most recent
progress report (June 2002) indicates a need to intensify efforts to achieve the agreed targets for
an information society in Lithuania.
2. The World Economic Forum, in its Global Information Technology Report 2001/02,
ranks 75 countries on their readiness for a “networked world.” Lithuania ranks 42nd, among the
lowest of the EU candidate countries (table A4.1). This ranking is driven in part by current
network use (or the current state of ICT adoption), on which Lithuania ranks 46th. The ranking
is also driven in part by enabling factors likely to influence future development of an information
society, on which Lithuania ranks 43rd. The enabling factors consist of network access
(information infrastructure, hardware, software, support), network policy (ICT policy, business
and economic environment), networked society (networked learning, ICT opportunities, social
capital), and networked economy (e-commerce, e-government, general infrastructure). Lithuania
does best on network access (31st) and worst on network policy (62nd). The results of the e-
Europe + benchmarking exercise show that Lithuania is lagging behind in building an
information society; for example, Lithuania has one of the lowest Internet use rates (around 15
percent) among the EU candidate countries.
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Country Rank Country Rank Country Rank
United States 1 Iceland 1 Finland 1
Iceland 2 United States 2 United States 2
Finland 3 Finland 3 Sweden 3
Ireland 19 Ireland 20 Ireland 18
Estonia 23 Estonia 21 Estonia 24
Portugal 27 Portugal 25 Czech R. 27
Czech R. 28 Czech R. 28 Portugal 28
Slovenia 29 Slovenia 29 Hungary 29
Hungary 30 Greece 30 Slovak R. 31
Greece 31 Hungary 32 Slovenia 32
Slovak R. 33 Slovak R. 33 Poland 33
Poland 35 Poland 36 Greece 35
Latvia 39 Latvia 38 Latvia 37
Turkey 41 Turkey 39 Lithuania 43
Lithuania 42 Bulgaria 45 Turkey 44
Costa Rica 45
Lithuania 46
Costa Rica 45
Bulgaria 53 Costa Rica 48 Bulgaria 61
Russia 61 Romania 57 Russia 63
Romania 65 Russia 59 Ukraine 64
Ukraine 66 Ukraine 66 Romania 65
Networked Readiness Index Network Use Enabling Factors
Subindex
Table A4.1: Readiness for the Networked World
Source: World Economic Forum, The Global Information Technology Report 2001/02. Readiness for the
Networked World
Information Infrastructure and Telecommunications Sector
3. The telecommunications sector is a key component of and contributor to an information
society and knowledge economy. Its performance thus has a broad impact on economic and
social development.
4. The most recent data on ICT in Lithuania suggest that it is slowly catching up with the
other EU accession countries in Central and Eastern Europe. Yet if the data on fixed and mobile
communications are encouraging, Lithuania still lags behind in Internet penetration and use.
This may be mainly because of the high cost of access—the highest among the Baltic states—
and the cost of equipment such as personal computers. Access costs have been declining slowly
in recent years, and the opening of the telecommunications market to competition may support
the trends commonly associated with free competition, such as falling prices and rising quality.
- 103 -
5. Lithuania faces several challenges relating to the telecommunications sector:
• The expiration of the exclusive rights of Lietuvos Telekomas in January 2003 and the
need to provide the company with a new license.
• Ensuring an orderly transition to a competitive environment in the fixed market (with
appropriate safeguards for customers).
• Expanding Internet access.
• Extending rural access.
• The transposition into Lithuanian laws and regulations of the EU acquis
communautaire.
• Building sufficient capacity in the Communications Regulatory Authority to enable it
to be effective.
Telecommunications sector performance
6. Like all EU candidate countries, Lithuania must both transpose and implement the acquis
communautaire before accession. It also must manage the transition to full competition. These
processes are indivisible from the regulatory environment of the telecommunications sector.
And they are made more complicated because the “Electronic Communications” acquis
communautaire, which evolved in 2002, is untried in the EU candidate countries (and in the EU
member states).
7. With three mobile operators and Lietuvos Telekomas competing for customers,
Lithuania’s telecommunications sector is fairly vibrant, and at first glance its performance
appears satisfactory in the context of the Baltics and Europe and Central Asia (figures A4.1,
A4.2, and A.4.3). When total teledensity (fixed and mobile), the share of the population using
the Internet, and the urban-rural teledensity ratio (the ratio of teledensity for fixed telephones in
the largest city to that in the rest of the country) are plotted against GDP per capita, Lithuania’s
position is:
• Close to that predicted by GDP per capita.
• Close to Latvia’s position.
• Behind Estonia’s position—that is, with lower total teledens ity, lower Internet use,
and a bigger urban-rural gap in access to fixed telephones.
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Albania
Armenia
Azerbaijan
Belarus
Bosnia
Bulgaria
Croatia
Czech Republic
Estonia
Georgia
Hungary
Kazakhstan
Kyrgyzstan
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovak R.
Slovenia
Macedonia
Tajikistan
Turkey
Turkmenistan
Ukraine
Uzbekistan
Yugoslavia
0.01
0.1
1
10
100
100 1000 10000
GDP per capita
I
n
t
e
r
n
e
t
u
s
e
r
s
(
%
o
f
p
o
p
u
l
a
t
i
o
n
)
Yugoslavia
Uzbekistan
Ukraine
Turkmenistan
Turkey
Tajikistan
Macedonia
Slovenia
Slovak R.
Russia
Romania
Poland
Moldova
Lithuania
Latvia
Kyrgyzstan
Kazakhstan
Hungary
Georgia
Estonia
Czech Republic
Croatia
Bulgaria
Bosnia
Belarus
Azerbaijan
Armenia
Albania
0
20
40
60
80
100
120
100 1000 10000
GDP per capita
T
o
t
a
l
t
e
l
e
d
e
n
s
i
t
y
Figure A4.1: Total Teledensity (Fixed and Mobile) and GDP Per Capita
Teledensity: Number of telephones (fixed plus mobile) per 100 population
Source: International Telecommunication Union, World Bank 2001
Figure A4.2: Internet Users and GDP Per Capita
Source: International Telecommunication Union, World Bank 2001
- 105 -
Albania
Armenia
Azerbaijan
Belarus
Bosnia
Bulgaria
Croatia
Czech Republic
Estonia
Georgia
Hungary
Kazakhstan
Kyrgyzstan
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovak R.
Slovenia
Macedonia
Tajikistan
Turkey
Turkmenistan
Ukraine
Uzbekistan
Yugoslavia
1
10
100
100 1000 10000
GDP per capita
U
r
b
a
n
-
r
u
r
a
l
t
e
l
e
d
e
n
s
i
t
y
r
a
t
i
o
Figure A4.3: Urban-Rural Teledensity Ratio (Fixed Access)
and GDP Per Capita
Source: International Telecommunication Union, World Bank 2001
8. While Lithuania compares reasonably well with the other Baltic states, it could look to
other EU candidate countries, such as the Czech Republic and Slovenia, as appropriate peers.
Lithuania is comparatively rich in information infrastructure. Besides the networks of Lietuvos
Telekomas and the three mobile operators, there are also those of the radio, television,
Lithuanian Post, railways, electricity, cable television, and academic and research institutes. In
the context of liberalization, a key challenge will be to mobilize these national resources to
ensure sufficient access throughout the country.
Disaggregated sector performance
9. A disaggregated analysis of the performance of Lithuania’s telecommunications sector
reveals some serious weaknesses relating to the country’s integration with the global economy,
rural access, and development trends. Table A4.2 presents comparative data on two indicators of
the performance of the Internet and its contribution to the economy—international Internet
bandwidth (which measures the capacity of a country’s connection to the World Wide Web) and
Internet hosts per 10,000 people—for the Baltic states, other EU candidate countries, neighbors
of the Baltics, and the United Kingdom. The results for Lithuania are not impressive.
- 106 -
Table A4.2: International Internet Bandwidth and Internet Hosts, 2001
Mbps = megabits per second
Source: Telegeography, Packet Geography 2002.
10. Lithuania’s performance on both measures is disappointing compared with that of Latvia
and Estonia. The significant differences in international capacity indicate that Lithuania is less
integrated with the World Wide Web than its neighbors. And the lower density of Internet hosts
points to a relative scarcity of local Web servers.
11. Lithuania’s performance may reflect domestic demand conditions. But compared with
other EU candidate countries, especially the Czech Republic, Lithuania has poor integration, a
state of affairs that could pose particular problems for developing a knowledge-based economy
and employment. It is possible that the expiration of the existing exclusive rights in
telecommunications will provide an opportunity for new entrants to expand international Internet
bandwidth.
12. The tariffs charged for Internet access are an important determinant of demand for
Internet services (table A4.3). Tariffs for dial- up Internet access combine monthly access fees
and usage charges paid to the fixed network provider (both of which are very similar in the three
Baltic states) and the charges of the Internet service provider (ISP). In Estonia ISPs provide
International
Internet
bandwidth
(Mbps)
Internet
hosts
(per 10,000 people)
Lithuania 95 52
Latvia 262 99
Estonia 517 322
Bulgaria 192 130
Czech
Republic
11,467 162
Hungary 2,979 187
Poland 2,337 133
Romania 1,418 20
Slovak
Republic
6,821 74
Slovenia 320 174
Turkey 865 34
Finland 7,820 1,771
Sweden 60,390 1,695
United
Kingdom
238,074 681
- 107 -
unlimited Internet access, and the cost of 30 hours of peak access is therefore substantially lower
than in Lithuania, which has the most expensive Internet access of the three Baltic states. In
2001 the charges for 30 hours of off-peak access were US$49.63 in Lithuania, US$34.26 in
Latvia, and US$5.00 in Estonia.
13. The high charges in Lithuania could prove to be a significant impediment to demand and
an obstacle to the development of a knowledge economy. A new business model for Internet
access is required.
Table A4.3: Peak Tariffs for 30 Hours a Month of Dial-Up Internet Access, 2001
(U.S. dollars)
PSTN
monthly
access
fee
PSTN
usage
charge
ISP
charge
Total
Lithuania 4.30 0.70 63.00 68.00
Latvia 4.90 1.10 40.30 46.30
Estonia 4.40 0.80 Unlimited
access
5.20
PSTN = public switched telephone network
Source: International Telecommunication Union, World Telecommunications Development Report 2002.
14. The low level of integration indicated by the data on international Internet bandwidth and
Internet hosts is also implied by data on international telephone traffic for the three Baltic states
(table A4.4). Although Lithuania has the largest population of the three Baltic states, it generates
the fewest minutes of international telephone traffic and subscribers make substantially fewer
international calls (measured in minutes) than do those in the other two countries. Though
demographics and the nature of the diaspora may explain some of the differences, the data point
to the more outward perspective of Latvia and Estonia—which may have implications for the
development of a knowledge-based economy in Lithuania.
Table A4.4: International Telephone Traffic, 2000
Outgoing telephone
traffic
(millions of
minutes)
Minutes
per
subscriber
Lithuania 34.9 33.2
Latvia 57.7 78.5
Estonia 78.1 149.4
Source: International Telecommunication Union, World Telecommunications Development Report 2002.
15. An important element of the “digital divide” is the distribution of access within countries.
One way to assess this is to look at the size of the largest city relative to the rest of the country,
the share of fixed lines in the largest city, and the teledensity in the largest city, the rest of the
country, and countrywide. A comparison of these measures for the three Baltic states shows that
- 108 -
Vilnius does not contribute to the same concentration of population in Lithuania as Riga does in
Latvia or Tallinn in Estonia—it accounts for less than half the population share of the other two
capitals (table A4.5). As in Latvia and Estonia, in Lithuania teledensity in the capital is higher
than that in the country overall, and teledensity in the rest of the country is lower than that in the
largest city and in the country overall. By this indicator, Latvia appears to have a more serious
rural access or digital divide problem. As more large cities are added to the capital, teledensity
in the rest of the country is likely to fall dramatically, widening the urban-rural gap in access. It
is suggested that a thorough study be undertaken to determine rural teledensity in Lithuania.
Table A4.5: Telephone Access in the Capital City and the Rest of the Country, 2000
Largest city
a
Population
as %
of total
Telephones
as % of
total
Teledensity
(fixed lines
per 100
people)
Teledensity
in rest of
country
(fixed lines
per 100
people)
b
Teledensity
in entire
country
(fixed lines
per 100
people)
Lithuania 15.8 21.0 42.7 30.7 32.2
Latvia 32.5 56.5 52.6 19.6 30.3
Estonia 36.4 42.3 42.2 32.9 36.3
a. Vilnius in Lithuania, Riga in Latvia, and Tallinn in Estonia.
b. Calculated by subtracting the absolute number of fixed lines in the largest city (Y) from the total number of fixed
lines in the country (X) and then calculating the residual teledensity (X minus Y divided by total population minus
population in the largest city, expressed per 100 people).
Source: International Telecommunication Union, World Telecommunications Development Report 2002.
16. The mobile sector has been particularly active in the Baltic states, making a substantial
contribution to access in a comparatively short time, particularly in Estonia (table A4.6). In
many EU member states total teledensity (fixed and mobile) exceeds 100 (per 100 people)—in
2001, for example, total teledensity in Finland was 132, in the United Kingdom 136, and in
Sweden 151. But for Lithuania the question must be posed whether subscribers to mobile
networks are also subscribers to the fixed network, which would imply lower average access and
a greater digital divide (in terms of the total population having access to telephony) than the data
suggest. Mobile networks can provide Internet access, but this is not yet widely available at
affordable prices. Thus the fixed network has a role to play with respect to the Internet.
Table A4.6: Fixed, Mobile, and Total Telephone Penetration, 2001
Source: International Telecommunication Union, World Telecommunications Development Report 2002.
Mobile
teledensity
(per 100
people)
Mobile phone
subscribers as
% of total
Fixed
teledensity
(per 100
people)
Total
teledensity
(per 100
people)
Lithuania 25.3 47.5 31.2 56.1
Latvia 27.9 44.7 30.8 58.8
Estonia 45.5 56.4 35.2 80.8
- 109 -
17. On closer examination two opposing trends become apparent. Between 2000 and 2001
the number of fixed lines declined and the number of mobile customers increased in all three
Baltic states (table A4.7). But the changes were most dramatic in Lithuania, where the growth in
mobile customers coincided with the launch of Tele-2, the third mobile operator.
Table A4.7: Network Growth, 2000-01
(thousands)
Source: International Telecommunication Union, World Telecommunications Development Report 2002.
18. These changes could mean that customers are substituting mobile for fixed services, that
businesses are rationalizing their communications requirements, or that some customers are
disconnecting their fixed telephones in response to tariff rebalancing. There would be a particular
concern if the number of rural customers is declining.
19. All these trends manifest themselves in the economic performance of the
telecommunications sector. The data in table A4.8 are indicative of the performance of the
sector, though they are based largely on the turnover of the incumbent and do not reflect the
vibrancy of the mobile sector.
Table A4.8: Telecommunications Revenues, 2000
Note: The data are for the incumbent’s revenue from fixed line services.
Source: International Telecommunication Union, World Telecommunications Development Report 2002.
20. As the largest of the Baltic states by population, Lithuania generates the largest
telecommunications revenues. But the revenues per line and as a share of GDP are the lowest of
the three states. This raises a concern about the ability of the sector to generate sufficient finance
to fund universal service obligations. This issue is discussed below.
Fixed lines added New mobile
customers
Lithuania -36.0 +408.0
Latvia -9.9 +255.6
Estonia -19.3 +94.2
Total
(US$ millions)
Per line
(US$)
As % of GDP
1999
Lithuania 259.8 219 2.3
Latvia 223.8 305 3.5
Estonia 228.9 553 5.2
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Policy Issues and Proposals
Telecommunications sector regulatory capacity
21. Issue. Private investors place high value on a predictable, effective, and independent
regulatory environment, and investments in building a credible, effective regulatory authority
provide benefits stretching over the long term Lithuania’s Communications Regulatory Authority
(RRT) was established in the spring of 2001. Like all the new regulatory authorities in the
region, RRT is at an embryonic stage with little experience with a fully competitive market.
Recently the EU adopted a new acquis communautaire that has not yet been extensively applied.
22. RRT faces several important challenges: adapting to the shift in its role from a largely
technical regulator to more of an economic regulator, acquiring the appropriate skills for
economic regulation, drafting the secondary legislation required of the new acquis
communautaire, and implementing the new acquis communautaire effectively and in a relatively
short period.
23. Policy proposal. The extent to which RRT can become an effective regulator depends on
the new telecommunications law, the duties assigned to it and other agencies, and the powers
provided to it by the law. Its effectiveness will also be determined by its staffing levels, the
skills of its staff, and its ability to retain qualified staff. Like many other regulatory agencies in
the region, RRT has a well- recognized need for technical assistance with capacity building and
drafting of secondary legislation.
Transposition of the acquis communautaire
24. The main proposal in this section relates to universal access. Achieving the proposed
universal access strategy requires addressing the issues of universal service (the long-term policy
goal), local loop unbundling, licensing, and interconnection in the regulatory framework.
A. Universal service
25. Issue. Universal service generally involves a minimum set of telecommunications
services of defined quality, which are provided at an affordable price to all telecommunications
service users irrespective of geographical location. There is no particular problem in achieving
this objective in most EU member states, where teledensity is high. But it is a serious challenge
in Lithuania, where national teledensity is about 30 fixed lines per 100 people. Two forms of
“access gap” can be identified. First, the “market gap”—the ability of the market when allowed
to perform to supply access on a commercial basis—where private investment has a key role to
play. Second, the “pure access gap”—customers who cannot be supplied by the market for
reasons of location or affordability—where innovative policy has a role to play. The market in
Lithuania was liberalized in January 2003 and will start to make its contribution to improving
access to commercial customers. But a “pure access gap” will persist.
- 111 -
26. One mechanism that has been used to fill the gap is a universal service fund to which
telecommunications service providers contribute around 1-5 percent of turnover and from which
money is distributed to the entity with the universal service obligation. If we assume that total
sector turnover is US$500 million (based on total turnover for the incumbent of around US$260
million in 2000; see table A4.8), a 1 percent levy on the sector would yield US$5 million, and a 5
percent levy US$25 million. These sums are insufficient to significantly improve the teledensity
of Lithuania. In 2000 Lietuvos Telekomas invested nearly US$130 million, equivalent to almost
50 percent of its revenues for the year.
27. If there are insufficient funds in the sector, finance must be found from other sources.
The state budget is one possible source, but debt management needs and competing policy
objectives may mean that extending access will not be a priority for government expenditure.
28. A significant share of Lithuanians lack access to communications networks mostly
because they cannot afford it. This restricted access represents a significant obstacle to the
development of a knowledge economy.
29. Policy proposal 1. The Government should consider pursuing a strategy of universal
access supported by competitive auctions for any required subsidies. Two broad policies can be
used to address the pure access gap: universal service and universal access policies. Both
provide for a defined basket and quality of services at affordable prices. They differ in the
degree of availability of these services. Universal service policies call for service to be provided
to all who request it—a telephone in every home. Universal access policies facilitate the public
availability of services—a public access point or telecenter in every community. The two
policies can be characterized as emphasizing individual access or shared access. Both close the
pure access gap, but at different costs. Providing universal service is generally much costlier
than providing universal access. Normally, the provider of either service may be eligible for
compensation depending on the financial loss incurred in closing the access gap. Both policy
options must address the measurement of the loss and the means of compensation. The policy
can be implemented by regulatory means or market processes.
30. Regulatory option. The EU electronic communications regulatory package allows the
designation of a universal service or access provider, which is then obliged to provide the
required level of service. Lietuvos Telekomas is most likely to be obliged to provide universal
service (overlooking any contractual constraints), and compensation for losses will be paid by
telecommunications service providers (for example, the mobile operators), not by the
Government, according to article 23.3 of the new telecommunications law (5 July 2002). This
could be done through a universal service fund, for example.
31. Market process option. Under the market process option the licensing authority specifies
a defined level of service for a defined geographic territory (ranging from a municipality to the
entire country) where there is a pure access gap (box A4.1). Recognizing that these concessions
are not financially viable, the Communications Regulatory Authority (CRA) and relevant public
institutions (for example, community-based organizations) can issue invitations to bid for one-
time subsidies. The bidder requiring the lowest subsidy would then be obliged to provide the
- 112 -
defined level of service over a specified period (for example, 10 years). Appropriately
structured, such bidding can attract substantial private investment, minimize the subsidy, and
lead to a higher level of service than the basic obligation. The required subsidy is the amount
just sufficient to make the telecenter commercially viable—it is not a 100 percent subsidy.
32. Choice of option. For Lithuania the regulatory option is more problematic and
controversial, especially if it chooses a policy of obligating Lithuanian Telecom to provide
universal services with compensation from the mobile operators, with the cost passed on to their
customers.
33. A universal access policy is therefore proposed, pursued through market processes with
particular attention to the possibility of municipal- or community-based provision of universal
access. Within a targeted territory, bids can be invited for one-time subsidies for providing a
certain number of public access points (for communications including Internet). The
disbursement of the one-time subsidy should be linked to performance criteria relating to the
establishment of the public access points. Bidders should be allowed to make their own
technological choices. Bidders may find that additional commercially attractive individual
customers may be reached in the territory for a small incremental cost once the public access
points are in place. Because bidders will take account of these commercial opportunities when
calculating the required subsidy, the subsidy will be minimized. Such an approach would be
particularly attractive in providing local solutions to the access gap before setting more
ambitious targets.
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Box A4.1: The “Smart Subsidy” Approach to Universal Access
1. Concept
• Aims to mobilize private entrepreneurship and investment to supply services.
• Focuses on providing public access to computers, the Internet, and other ICT services
through telecenters (or cybercafes) in rural and low-income urban areas on a commercial
basis by charging fees for services.
• Provides a wider range of services and ICT than available on an individual basis at home.
• Allows public or quasi-public agencies to become important commercial clients or
partners in the telecenter.
• Encourages local entrepreneurs to manage and have a stake in the telecenter as well as
partnerships with bigger industry players.
• Recognizes that in certain circumstances a telecenter providing universal access may not
be commercially viable and that a subsidy may be required for part of the start-up and
investment costs.
2. Allocating subsidies
• The licensing authority defines a level of service for a defined geographic territory for a
defined period (say, 10 years) and issues an invitation to bid for a one-time subsidy.
• Bidders are allowed to make their own technological choices.
• Bidders calculate their required subsidy on the basis of expected income streams from
fees, capital, and operational expenditure.
• Bidders may find additional commercially attractive individual customers in the territory
who may be reached at a small incremental cost once the public access points are in
place. Bidders will take account of these extra commercial opportunities when calculating
the required subsidy.
• The required subsidy is the amount just sufficient to make the telecenter commercially
viable—it is not a 100 percent subsidy.
• The bidder requiring the lowest subsidy is declared the winner and is obliged to provide
the defined level of service over a specified period on a commercial basis.
• The disbursement of the one-time subsidy is linked to performance criteria relating to the
establishment of the public access points.
• The bidding ensures that the subsidy is minimized and generates substantial private
investment.
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34. Policy proposal 2. The Government should intensify its cooperation with the private
sector, municipalities, NGOs, community organizations, and educators to extend affordable
telecommunications access and Internet services. A local solution could be implemented
through “community-based” service operators or providers, established by local authorities,
NGOs, or the business community and local banks. For example, local communities,
entrepreneurs, and authorities might join forces to establish a local telecommunications operator
to bridge the access gap in rural areas. These local operators or providers could then bid on
subsidies in competition with other providers, as described above under policy proposal 1. Such
initiatives could be supported by national or local governments during pilot applications to test
their viability and sustainability. If the intention is for the community-based operator to compete
for subsidies with other operators, it is important not to provide it with other subsidies that would
distort competition. Local governments and communities should therefore expect to recover
their contributions and earn a return in the long run. Three considerations are crucial for the
successful implementation of community-based service providers:
• The financing model. In this case a mixed financing model might combine
contributions from local stakeholders (the public sector, businesses, and society) with
funding (grants or loans) from the national government or international donors.
• The business model. The business model raises issues relating to the operational
sustainability of a community-based operator. The business model must carefully
forecast how operations will be carried out, what revenues will be generated, and
what operational costs will be faced. By reducing costs and relying on an external
subsidy rather than cross-subsidies, the community- and market-based universal
access model allows a more balanced tariff-cost ratio that does not discourage use of
telephone and Internet services for business purposes. To be successful, the business
model needs to be based on clear, fair, and enforced regulations for interconnection.
• The technical solutions. In principle, there are low-cost technical solutions available
(radio links, server connections allowing voice and data services), but the technology
must have a proven ability to provide local communities with a cost-effective network
that can provide telephony, Internet, and even cable television.
B. Local loop unbundling
35. Issue. Unbundled access to the local loop is provided for by EU Directive 2002/19/EC
(the “Access” Directive). A question that needs to be addressed is whether unbundling provides
sufficient financial incentives to the entity designated to unbundle its local loop. The tariffs for
local loop unbundling in the EU are “cost-oriented including a reasonable return on investment.”
When the designated local loop operator considers expanding its local loop, it will calculate the
combined financial returns from the access charge paid by the customer and the usage charges
for service paid by the customer. If the local loop is unbundled, the operator will regard the
combined financial retur n as “a reasonable return on investment.” But the entity requesting the
unbundling will regard only a figure related to the access charge paid by the customer as a
reasonable price. Where the charge for local loop unbundling is less than the combined return, it
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is conceivable that the designated operator will not undertake the investment to expand the local
loop.
36. Policy proposal. The application of the unbundled local loop concept in Lithuania should
be considered in the context of the policy objective of expanding access and universal service for
the next two or three years.
C. Licensing
37. Issue. The application of the “authorization” concept of the acquis loosens the link
between a license and a territory; while licenses are normally awarded for a distinct geographic
area, in the authorization process the entity chooses its own territory and might choose not to
serve “universal service customers,” perceived as unprofitable. Under the new acquis
authorizations only entities benefiting from significant market power or scarce resources (such as
radio spectrum) can have special conditions (for example, geographic coverage) imposed on
them. In Lithuania there is no shortage of numbers in the national numbering plan.
Consequently, the only scarce resource is radio spectrum. This implies that only Lietuvos
Telekomas (presumably having significant market power) and the three mobile operators will
have specific conditions imposed on them. CRA needs to develop an innovative approach to
universal service. The first step would be to locate the “unphoned” and to initiate a universal
access strategy.
38. Policy proposal. The regulatory challenge in Lithuania will be to provide sufficient
incentives to attract suppliers of telephone and Internet services to those currently unserved. One
course of action would be to seek ways to allow community-based service provision and
partnerships among communities and other suppliers. These should be supported by technical
assistance (to deal with the technological aspects) and assistance in developing sustainable
business plans. RRT should undertake a study of the “unphoned” and issue licenses for the
provision of universal access, with the licenses tied to specific geographic locations and auctions
for subsidies.
D. Interconnection
39. Issue. The interconnection of networks (of which there are many in Lithuania) is one of
the most important factors in ensuring the viability of competition in the sector. It is also an area
characterized by frequent disputes. Interconnection involves commercial, technical, and
operational arrangements. The disputes arise largely over the commercial aspect—the fee that
operators are to pay one another for the termination or carriage of messages. There is a
functioning interconnection market in Lithuania that will need to be developed through the entry
of new players.
40. Policy proposal. To ensure that the market can fill the “market gap” and that the
universal access approach can fill the “pure access gap,” particular attention needs to be paid to
the resolution of interconnection issues. It is proposed that CRA provide interim solutions (with
“netting out” taking place when agreement is reached), that international benchmarks be used
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where possible to guide the determination of interconnection fees, and that particular
consideration be given to interconnection fees related to the Internet.
Policies and institutions for an information society
41. Issue. Much like the institutional situation for innovation policies in Lithuania,
dispersion of institutional responsibilities constrains effective government leadership in policy
formulation, planning, coordination, monitoring, and evaluation for activities relating to an
information society.
42. Four public sector institutions share responsibility for information society strategy, policy
formulation, and implementation. Responsibility for implementation, particularly of e-
government initiatives, rests with individual ministries. None of these institutions has the
authority to coordinate, implement, and monitor policy implementation.
• The Committee of Information Society leads the legislative and regulatory work of the
Seimas (Parliament) that relates to the information society. This parliamentary
committee prepares draft laws and other legal acts and holds hearings with relevant
stakeholders.
• The Council of Knowledge Society advises the president of Lithuania on matters
pertaining to the information society.
• The Information Society Development Commission is chaired by the prime minister
and is composed of ministers and advisers, including from the private sector. This
consultative and advisory commission aims to coordinate key ministries associated
with the information society.
• The Information Society Development Committee, under the Ministry of the Interior
and Public Administration and the Ministry of Transport and Communications, plans
and coordinates initiatives for the information society at the level of implementation.
This committee has a permanent staff with significant capacity but lacks executive
powers and a clear mandate to coordinate and monitor policy implementation.
43. Given these institutional arrangements, strategies and action plans for developing an
information society have remained largely at the design stage. Experience in countries that are
successfully developing an information society, such as Ireland and Singapore, shows that
consolidating policy and implementation authority and technical capacity increases the
effectiveness of policy actions.
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Box A4.2: Building an Information Society in EU Candidate
Countries through e-Europe +
The European Commission has launched the e-Europe 2002 Action Plan, aimed at making
Europe "the most competitive and dynamic knowledge-based economy in the world."
The e-Europe 2002 Action Plan identifies three main priority areas on which activities
should focus in paving the way to an information society in EU member countries:
• A cheaper, faster, more secure Internet.
• Investing in people and skills.
• Stimulating use of the Internet
A parallel initiative has been launched to build an information society in the EU candidate
countries. The e-Europe + Action Plan—prepared by and for the EU candidate countries
with the support of the European Commission—mirrors the actions and priorities identified
by e-Europe 2002. The time frame for the EU candidate countries participating in e-Europe
+ is 2003, the same as for e-Europe, despite the different point of departure.
In drafting the action plan, the EU candidate countries agreed to accelerate actions aimed at
putting in place the basic building blocks for an information society, improving the
provision of affordable communication services for all, and transposing and implementing
the acquis communitaire relevant to an information society.
The e-Europe + Action Plan takes into account the structural differences between EU
member states and candidate countries
Source:http://europa.eu.int/information_society/topics/international/regulatory/
eeuropeplus/index_en.htm.
44. Policy proposal. Lithuania should consider consolidating in a single ministry the strategy,
policy, and implementation monitoring functions now with the Ministry of Transport and
Communications, the Ministry of Interior and Public Administration, the Information Society
Development Commission, the Information Society Development Committee, and other
institutions. This new Ministry for the Information Society (a precursor of which existed until
1997) would be responsible for establishing priorities for the development of an information
society in Lithuania; formulating policy; planning actions; coordinating activities; and carrying
out budgeting, financial management, and procurement. While line ministries would continue to
be responsible for the implementation of programs and activities associated with the
Government’s information society strategy, the new Ministry for the Information Society would
be empowered to coordinate, monitor, and evaluate implementation. The new ministry would
also work to build a common understanding and consensus on the policies for an information
society, enhance partnerships between government and the bus iness community, and increase
awareness and visibility of information society issues. The ministry would also coordinate
closely with the proposed Lithuania Technology Agency. The staff and functions of the
Information Society Development Commission would be integrated into the proposed ministry.
While different countries in Europe have taken different approaches, this model follows the
Slovenian approach (boxes A4.3 and A4.4).
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Box A4.3: Ireland—Public Sector Institutions at the Heart of the Information Society
Ireland established an overarching agency, the Information Society Commission
(http://www.isc.ie), to shape and manage the strategic framework for the Irish information
society and to coordinate e-development activities of different government agencies and
other ICT actors in the country. An advisory body for the prime minister, the commission
includes representatives of the private and public sectors, relevant government departments,
and social partners throughout the country. The commission’s functions include:
• Monitoring the implementation of the major activities by relevant government
departments and other key actors.
• Driving awareness campaigns targeting the enterprise sector and the general public.
• Establishing and monitoring the key benchmarks for the development of an
information society in Ireland.
• Encouraging and supporting local and regional information society initiatives.
• Identifying (and overseeing the establishment of) flagship projects to demonstrate the
benefits of the information society and win support for an Irish information society.
• Establishing advisory groups to further study potential information society benefits
and actions required in individual sectors of the economy.
Box A4.4: Slovenia—a Ministry for Information Society
The Slovenian Ministry for Information Society (http://www2.gov.si/mid/mideng.nsf)
was established in January 2001. Its responsibilities include issues related to
innovation, the informatics and information systems, development of information
technology, promotion of the information society and electronic commerce, and the
development of telecommunications links and systems.
Because it is a ministry, this institution has both policymaking and policy execution
powers and a budget to execute policies and programs.
The ministry’s main interventions in its first years of operation have been targeted at:
• Addressing the digital divide in the country.
• Promoting the knowledge economy and e-business in both the private and the
public sector.
• Promoting education and training for the information society.
• Sustaining the ICT sector in Slovenia with an emphasis on employment.
• Monitoring and implementing regulations in the area of infrastructure and e-
business.
• Harmonizing Slovenia's legislation with the EU standards.
• Evaluating and promoting sector-specific legislation.
45. Issue. The absence of a clear, coordinated institutional framework for an information
society in Lithuania hinders the implementation of strategies and action plans for addressing e-
Europe + and other initiatives. The main policy document on the development of an information
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society in Lithuania is the “Lithuanian Information Society Development Strategy,” prepared in
May 2000 by the Department of Information and Informatics of the Ministry of Public
Administration Reforms and Local Authorities. The main goals of this three- year strategy are to
use the opportunities offered by ICT to support information management with the aim of
improving people’s quality of life, learning, and working and leisure conditions; to create ICT
infrastructure in compliance with EU standards; and to create good conditions for Lithuanian
citizens for learning and using the potential of modern ICT. The Information Society
Development Committee has developed detailed action plans to complement the strategy, but
implementation has been pending.
46. Policy proposal. Lithuania should adopt a detailed “consensus” strategy and action plan
agreed on with the main stakeholders in policy and implementation. This information society
strategy should go beyond a political vision and be backed by detailed action plans.
Box A4.5: Singapore—Clear Action Plans to Pave the Way
for an Information Society and Knowledge Economy
Singapore’s lack of natural resources encouraged its government to invest heavily to turn
the country into “the Intelligent Island.” In doing so, the government paid much attention to
infrastructure, skills, and ICT adoption across government, society, and business.
Singapore's information technology initiatives evolved in three phases, each outlined in
national action plans that clearly identified targets, policies, resources, and actions.
The first phase, in the mid-1980s, launched the establishment of the National Computer
Board to manage and implement the Civil Service Computerization Program, aimed at
digitizing the public administration and supporting skills development for civil servants.
The second phase, guided by a National Information Technology Plan, was aimed at
supporting the creation of local ICT industry and enhancing business productivity through
ICT applications.
The third phase, based on the IT2000 master plan, focused on applying ICT to enhance
national competitiveness and improve the quality of life of Singaporeans.
Singapore provides a good example of the development of targeted and precise action plans
after a careful evaluation of local needs and potential. The action plans were formulated
after an analysis of the country’s 11 major economic sectors and through a consultative
process involving more than 200 senior executives from both the public and the private
sector.
Source:http://choo.fis.utoronto.ca/FIS/ResPub/IT2000.html.
Knowledge management, e-government, and e-business
47. Public and private sector knowledge management, supported by ICT, is an important
element of a knowledge economy. Knowledge management involves defining and managing:
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• Strategies for identifying, creating, and using information to support government and
private sector activities.
• The information life cycle—documenting, organizing, protecting, eliminating,
retaining, and preserving.
• Information integration, integrity, access, and privacy.
• Ownership, control, accountability, and responsibility.
48. For an institution or company to manage knowledge well, there needs to be a systematic
alignment of overall management, information management policies and processes, mindset and
culture, organizational structure, skilled labor, technology, and budgets.
49. E-government refers to the use by government agencies of information technologies—
such as wide area networks, the Internet, and mobile computing—that have the ability to
transform the government’s relations with citizens, businesses, and other arms of government.
E-business refers to the use of ICT to change businesses’ relations with their customers,
suppliers, and competitors.
50. Issues. Lithuania’s public sector faces several challenges in implementing its knowledge
management and e-government strategy. By far the most pressing concern is the need for
credible and organized leadership to set priorities, develop action programs, monitor the
implementation of these programs, and tackle issues of culture for knowledge sharing. Several
stakeholders have emerged in the planning phase, and their roles are unclear and overlapping.
51. The challenge of integrating information management systems and managing knowledge
across government institutions and sectors (for example, education, innovation, and R&D) has
not received sufficient attention. Public institutions often have no clear and documented
workflow process for their business activities, nor do they have a solid document management
process. Within government institutions, scattered and multiple databases (for example, state
registries) flourish with no integration or centralization, resulting in poor data quality and the
duplication of efforts and information. Private sector knowledge management is also poorly
developed (though there are a few exceptions, such as in the banking sector).
52. Government agencies have carried out a modest number of projects defined as e-
government, but most simply end up automating existing work processes. These projects lack
planning for business process reengineering or change management, required to create the
efficiencies associated with e-government. The Government should also consider addressing the
following obstacles:
• E-government initiatives are not aligned with public administrative reform projects.
• Local and national government agencies participate only sporadically in e-
government planning. This has led to confusion; agencies are not informed of
government strategies, and initiatives undertaken in different agencies are sometimes
not known to or understood by higher- level bodies.
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• Many different agencies are competing for ICT funding from international sources.
The lack of overall coordination and oversight for ICT spending, standards, and
projects (including procurement) has resulted in duplicative spending and redundant
efforts and has deterred data sharing and integration between agencies.
53. Although an e-government concept paper exists, competition for authority and
responsibility by different players has resulted in disagreement over the planning and approach
for e-government, paralyzing any real efforts toward implementation.
Policy proposals.
• Assign responsibilities for knowledge management and e-government policy,
strategy, and monitoring to the proposed Ministry for the Information Society (see
above).
• Develop a knowledge management strategy and action plan to accelerate the
integration of information systems within and among ministries and to implement
knowledge management systems within public institutions, systems credibly endorsed
at the highest political levels.
• Encourage knowledge sharing in organizations and provide the incentives and
environment for employees to do so. While this is most relevant for the public
administration, it also applies to many businesses.
54. Issue. There is a shortage of skilled technical and managerial staff to effectively
undertake knowledge management tasks. The education system does not produce the practical
and theoretical skills needed. And government institutions have difficulty retaining highly skilled
technical staff because of low salaries.
55. Policy proposal. Efforts should be made to create links between the public administration
and the education system to provide formal and informal training on knowledge management,
and to develop curricula for training in knowledge management.
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Box A4.6: Popular Government Web Sites in Lithuania
Where content is useful and relevant, Internet channels have been very popular in
Lithuania. The Parliament’s Web site (http://rc.lrs.lt/), which hosts a wealth of content in
Lithuanian, French, Russian, and English, attracts about 390,000 users a month. The
Parliament attributes this traffic to the frequent use of a legal database, accessible free of
charge. The Legal Information System contains about 120,000 documents, including all
laws published in the official gazette since 1999, documents of the Baltic Assembly,
international conventions and bilateral or multilateral agreements, texts of draft legal acts,
and translations of documents in English and Russian. Content is furnished daily, with
about 70 new documents a day and 1,500 a month.
Another frequently searched database is the EU document database ESIS
(http://europa.eu.int/ISPO/esis/default.htm), which provides reports on Lithuania’s
progress toward EU accession, its EU accession program, and EU legal acts. ESIS
contains more than 11,000 documents, half in Lithuanian, and receives about 7,000
searches a month. The Web site also provides content on parliamentary sessions,
members of Parliament, each parliamentary political group, and the work of each
standing commission.
The Ministry of Justice’s Web site (http://www.min.tm.lt/english/) has 6,700 regular
customers who use Infolex, an online legal database containing draft laws. The site
allows public comment, a feature widely used this year because of the new civil code,
which generated 36,000 visits and requests for information. Infolex is used mainly by the
legal community, which also discusses draft laws and provides legal consultations online.
The database is accessible for a fee of 20-80 LTL.
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Box A4.7: E-Development in Estonia
56. E-government typically occurs in a number of stages:
• Presence. Governments begin publishing information online, starting with rules and
regulations, documents, and downloadable forms. This allows citizens and businesses
to easily access government information without having to travel to government
offices, stand in long lines, or pay bribes. By helping governments tackle the problem
of inefficient bureaucracy and corruption, this capability can significantly alter citizen
and government relations.
• Interaction. Two-way communications develop, beginning with simple functions
such as email contact information for government officials or feedback forms that
allow citizens to comment on legislation or policy. This can also involve creating
online forums allowing new channels of citizen-government interaction and increased
political participation.
The remarkable success of e-government programs in Estonia is attributed largely to a political
commitment at the highest level to making the country’s ICT development integral to the growth of its
economy and the achievement of its development goals. In an effort to build broad-based connectivity
and make access to ICT a basic right, Estonia embarked on an ambitious e-readiness program to
promote the reform and growth of its ICT sector, which has been key to the success of Estonia's e-
government strategy. Leading the effort is the Ministry of Transport and Communications, which is
responsible for ICT development. Its mandate includes:
• Working closely with the private sector on initiatives for developing ICT infrastructure.
• Defining policies, standards, and procedures.
• Managing ICT development projects.
• Managing ICT planning and development for the public sector.
• Providing guidance and policy assistance to ICT working groups of ministries and other
government agencies involved in information technology.
To further strengthen its ICT development, Estonia demonopolized its telecommunications sector and
instituted a legal and regulatory framework for telecommunications that is consistent with EU
principles. Estonia's investment in ICT was followed by broad use of ICT applications in public
administration, banking, education, health, and transport. E-government applications in Estonia are
diverse. Cabinet ministers communicate, prepare legislation, and vote online over a portal. All
government documents and both live broadcasts and full -text transcripts of parliamentary sessions are
posted instantly on the government's main Web site. The portal allows citizens, businesses, and NGOs
to submit proposals to the government and comment on government proposals, increasing public access
and voice in decisionmaking. The E-Tax Board application allows citizens to file, view, and correct
their returns in real time. All government business is conducted through a secure, Web-based electronic
information system.
Source:http://www.riik.ee/.
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• Transaction. Web sites provide direct links to government services—such as land
registration or the renewal of identification cards—allowing citizens to access the
services at any time, at home or through kiosks in public places.
• Transformation. Portals and Web sites allow citizens to conduct transactions online,
such as filing taxes, paying fines, and submitting forms and declarations. These
services can result in significant cost savings for public agencies, greater public
accountability, and better service delivery for citizens. Back-end processes are
streamlined to allow businesses, citizens, and government to access government
services and information and to interact with government through a “one-stop shop”
without having to visit several government agencies or navigate through a maze of
Web sites.
57. Lithuania is between the first phase—presence—and the second—interaction (figure
A4.4). The challenge for Lithuania is to move from these phases toward the transaction phase.
For a number of reasons, the Lithuanian government has been unable to move forward.
Figure A4.4: Road Map to E-Government
Source: Gartner Group
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58. Issue. The absence of an adequate legal framework for electronic transactions hampers
the provision of both e- government and e-business services in Lithuania. Despite initial steps
toward harmonizing domestic legislation with international standards for electronic transactions,
Lithuania lags behind in passing relevant regulations.
59. A plausible regulatory framework must be in place to ensure that electronic transactions
can take place effectively and securely. The legal environment for e-business should include
legislation on e-signatures, e-commerce, e-documents, and data and information collection,
sharing, and use, and provide solid ground for protecting consumers’ rights.
60. In drafting and implementing relevant legislation, Lithuania is aligning with EU
directives and standards to ensure consistency with the acquis communautaire in e-commerce.
The Seimas passed an e-Signature Law in July 2001, but lack of supportive secondary
legislation—relating mainly to the establishment of certification agencies—prevents the law
from being fully implemented. A Law on Electronic Commerce is under preparation in the
Seimas.
61. The Lithuanian government passed a law on legal protection of personal data in 1996 and
has amended it in compliance with EU Directive 95/46/EC. The revised law on the Legal
Protection of Personal Data came into force in January 2001. Moreover, in early 2001 the
Seimas ratified the Convention of the Council of Europe for the Protection of Individuals with
Regard to Automatic Processing of Personal Data.
62. Policy proposal. The legal framework should be fully aligned with international
standards to ensure that digital transactions are possible (e-signature legislation) and fully
protected (digital documents, e-commerce regulation). In this area Lithuania seems to have
fulfilled only a few of the formal requirements, while more efforts need to be undertaken to
ensure full implementation of the legislation governing the Internet and electronic transactions.
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Box A4.8: Addressing the Digital Divide in Lithuania
Lithuania has 680 Internet users per 10,000 people, compared with 1,480 in Estonia, 720 in Latvia, and almost
4,000 in the European Union. Only 3.2 percent of households in Lithuania have an Internet connection,
compared with 36 percent in the European Union. And surveys have found that a third of Lithuanians have no
idea what the Internet is or what it can do for society. Thus they remain unaware of the many opportunities
offered by ICT opportunities.
Large differences exist between residents of cities and rural areas. In 2001, 23 percent of citizens in Vilnius
had a computer at home, compared with only 4 percent of the rural population. About 11 percent of the people
in Vilnius had access to the Internet at home, while only 1.3 percent of the rural population did. User
proficiency also varied: about 36 percent of people in Vilnius knew how to use the Internet, compared with only
8 percent of rural dwellers. For people in Kaunas, Klaipeda, Siauliai, Panevezys, and Alytus the figures are
between those in Vilnius and rural areas. A key issue in rural areas is the cost of access.
The potential benefits of extending access and use of ICT to poor people and regions are large. These benefits
include better information flows, better opportunities for job searches and job creation, and communication and
networking (including with governments) that can enhance the democratic process, improve government
services, and permit distance learning. Extending access and use of ICT is a challenge. But it is also a great
opportunity to involve marginalized groups in the move toward a knowledge-based economy and to reduce
social exclusion. A case can be made for properly designed subsidies to improve access to ICT, on grounds
similar to those for subsidies for public education.
Experience has shown that successful efforts to extend access and use of ITC depend on government (including
local government), leadership and funding, public-private partnerships, and strong NGOs and community
organizations. Lithuania is well positioned in all these respects.
In April 2002 the private sector took the lead in launching a new digital program, Window to the Future, on a
pilot basis. Funded by a consortium of four companies (Vilnius Bank, Hansa Bank, Omnitel, and Telekomas),
the program aims to provide Internet centers to people in towns and villages. The program is not intended to
compete with Internet cafes, but to offer free public Internet access points in public facilities.
In June 2002 the Information Society Development Committee, a special government department, announced a
major new initiative to provide public Internet access points throughout the country. This initiative is now
being pursued as a public-private partnership with the Window to the Future program (http://www.ivpk.lt/en/).
The Open Society Foundation (supported by the Soros Foundation) is developing a program for ICT awareness
and development in rural areas, concentrating on small towns and rural villages. Its program sets out several
key objectives: raising awareness about the need to extend use of ICT in local communities and the social
opportunities it offers, developing an environment supporting the use of ICT, evaluating the readiness of
districts in Lithuania for the pilot project “Digital Community,” and initiating pilot projects in selected urban
and rural districts aimed at overcoming the digital divide. The program emphasizes training and content
development. The Open Society Foundation has a solid record and experience in community development work
in many countries in Eastern Europe.
Municipal administrations in the six largest cities (Vilnius, Kaunas, Klaipeda, Panevezys, Siauliai, and Alytus)
seem to be well aware of the digital divide and are keen to help. Each of these cities has fringe communities
living at the periphery and residents facing digital divide problems. In smaller cities and in rural areas local
governments have limited financial and administrative capacity. One way to tackle the problem there would be
to ask the Association of Lithuanian Municipalit ies (ALAL) to devise a mobile outreach program with skilled
users to visit each of the 64 municipalities smaller than the top six cities and consult with them on installing and
maintaining public Internet access points in municipal buildings.
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63. Many locations in Lithuania already have active community centers, multipurpose
organizations that typically focus on solving urgent community problems such as alcoholism and
child abuse. The centers usually depend on one or a few strongly motivated, salaried individuals.
Without such individuals there is no viable community center. Connecting these community
centers with one another and with the international community are about 20 NGO support
centers, umbrella organizations supported by international donors. These support centers could
play a useful role in helping communities design, pilot and implement community support
projects .
64. The Citizens Advisory Union, a Lithuanian NGO, has begun sharing knowledge about
government processes with citizens. The NGO has trained 200 people all over the country to
provide information to citizens about laws and government services, especially in low- income
communities. The group has received 4,000 visits from people inquiring about issues ranging
from labor laws to pension information. With a free phone line provided by Lietuvos
Telekomas, the group also conducts phone consultations. The group has produced a CD-ROM
about different government laws and services and distributed the CD-ROM to its 10 bureaus,
where volunteers use it to provide information to visitors and callers.
65. Issue. The scarcity of content in local language affects the demand for e-services (both e-
government and e-business) and increases the gap between social groups—between the young
and the elderly, and between high- income (and English speaking) and low- income groups.
66. Policy proposal. Support should be given (selectively) to initiatives for creating local
content and converting local knowledge into digital content. There are opportunities for local
companies and organizations to participate in EU programs aimed at creating local content, such
as the e-Content Program.
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Background Papers and References
Challenges
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