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President’s Speech on Innovation

President's opening address

Last week’s [Baltic Dynamics 2008](http://www.teaduspark.ee/?q=/eng/BD) conference was opened by an address by the [President of Estonia Toomas Hendrik Ilves](http://president.ee/en/), speaking on Innovation. As the full text did not make it to the president.ee website’s [speeches section](http://president.ee/en/duties/speeches.php) yet, I pinged his office and they kindly provided me a full copy in a few hours. Transparent government in action, love it.

As I think this is one of the best condensed summaries of the major issues — such as investments, education, attracting labour — Estonia and Europe are facing developing as technology hotbeds, I am re-publishing the whole text for your reading pleasure. Really worth your time.

**Welcome address of the President of Estonia

at the opening of (innovation) conference ‘Baltic Dynamics’

Dorpat SPA Hotel, Tartu, 4 September 2008**

Ladies and Gentlemen, dear friends,

I am glad to speak here at the opening of the 13th ‘Baltic Dynamics’ conference, an increasingly international meeting, as it should be the case in the field of innovation.

This time the conference takes place at amidst a global economic slowdown, a situation that is frankly unfamiliar for many in Estonia. According to some (admittedly somewhat dire) predictions, this may become the most severe global downturn over the last decade. In terms of our domestic economies, all three Baltic countries stand on the threshold of a paradigm shift; the motor of rapid growth — a competitive advantage based on cheap labor seems to be over. As indeed we have all hoped it would be, for a rise in wages and quality of life is, after all what convergence is all about. But this also creates a new challenge: further development of our economies can come only from higher value added products and services. In this sense innovation is naturally the key to shifting from slowdown to growth.

We must ourselves – how did we reach the state of affairs where we are now? Our economic development has been very rapid, but not always enough forward-looking. The recent slowdown in our economy is – at least to a certain extent – caused by overinvestment in sectors that have provided high yields in the short term (such as real estate) and which are prone to move in correlation with fluctuations of domestic demand. That said, it does not mean that some investments are less necessary than the others, but in the longer term a very small economy cannot rely solely on the domestic market. Indeed, even the second and third largest economies in the world, Japan and Germany cannot rely solely on domestic demand either.

Export performance depends crucially on hi-tech (or high value added) products and services, once the initial comparative advantage of cheap labor is gone, as it is here in Estonia, as happened in virtually all the Wirtshaftwünder in Europe and later in Japan. And that has been clear already for some time now.

Hi-tech and higher value added products of course require investment that will bring returns in the future. But how much have we invested into the future? Let us compare R&D expenses as a percentage of GDP in the European Union. Estonia ranks 15th in the EU, positioned between Spain and Italy. However, with the size of expenditures roughly 1,1% of GDP (the figures here and onwards are for the latest year for which they are available: 2006. Eurostat, the source for these figures could itself do a little investment in productivity), the gap with leading EU countries is more than three-fold. The leaders are our neighbors Sweden and Finland, both of which invest over 3,5% (of GDP) in innovation. Among the new EU Member States Estonia ranks third, after Slovenia and the Czech Republic, both of which invest approximately ~1,5% of GDP. There is an additional proviso here: one of the most capital intensive forms of investment in innovation is in pharmaceuticals, i.e. in much of the world R&D in pharmaceuticals represents a significant portion of the percentage of GDP devoted to innovation. In Estonia, there is no pharmaceutical industry, which means that comparison with other EU countries need not be completely to our advantage. On the other hand, that is a technical point and hardly an excuse.

No less important is where these investments come from, i.e. what is the division of labour between the public and private sectors. If we take the best European performers – the Nordic countries – as a benchmark, the picture is as follows, based on the Nordic Statistical Yearbook 2006: The share of government investment ranges from 33% in Iceland to 45% in Denmark. This means that in all Nordic countries the bulk of investments comes from the private sector. In Estonia, which as I mentioned is not at all doing badly even among the EU as a whole, the share of private capital in R&D investments is 45% (2006), which in numbers terms is ‘Denmark in reverse’, as the government share of innovation investment is still larger than the private sector or 50:50 at best. And now we can ask – has our business community done enough? I don’t know the answer, but I should add that one company in Estonia, Skype, has provided 10% of overall investment in innovation. This means that almost a quarter of all private investment in innovation comes from just one company. While this is commendable for Skype, this fact should also be a lesson for the rest of the private sector.

Earlier I said we stand at the threshold of a paradigm shift, and, given the economic slowdown we face today, we are obviously forced to change our mindsets as well as investment priorities in order to make the economy grow again. Meeting business leaders here in Estonia, I have stressed over and over the need to invest into new technologies when times are good, when the economy is strong. Now – after the downturn in the economic cycle – the efforts and indeed costs necessary for transforming the economy are that much greater. It is quite possible, moreover, that a change of ‘the growth paradigm’ will also imply, indeed necessitate even further changes in the business environment, the educational system and in labor market regulation. This could entail facilitation of labor mobility to cover the vacancies we cannot fill today, but may be able to fill tomorrow – if we invest enough into education today. In this sense a transformation the ‘growth paradigm’ might also entail changes in perceptions of the priorities of our present and future society.

The ‘New economy’, as it is sometimes called, does not come overnight. For it to be meaningful, it must develop like any other economy, like the so-called “old economy.” Recall the dot.com bubble in the US at the turn of the century. The hope then, that information technology will lead to an enormous improvement in the productivity of the economy and quality of life itself turned out to be misleading and led to a stock market bust and an economic downturn. Yet there was also something important that remained unnoticed.

As I understand it – it is not only a question of science, information technology or the economy. It is a question of education and – perhaps – of a broader mentality in society. In this sense, the somewhat overused term ‘innovation’ must be approached in a broader context; it needs to be linked also to the improvement of overall quality of life, to the well-being and fundamental assumptions of society. In this regard, it is useful not only for boosting exports, but for the everyday life of the citizens of our countries as well.

Here let me briefly address three issues that normally are not part of discussions on innovation: freedom of movement, education more broadly and quality of life. All are inter-related. First movement. While we in Europe often take the moral high road vis a vis the United States, in one area we in Europe, and locally at the national level as well are closed. Indeed even with the Union, a number of countries still restrict free movement of labour. All of this is understandable and we can list all the reasons why governments restrict immigration, but it does have one major drawback: we reduce the number of smart, creative people available to innovate. The U.S. on the other hand is very open to talent from abroad and thus maintains a lead over Europe. How open the U.S. is also leads to a second point, education. While the figure varies from year to year, for over two decades the percentage of non-native PhDs in the sciences and mathematics in the U.S. has hovered around 80%. I draw two conclusions from this: one, that the U.S. has a very good higher educational system in science and mathematics, which is a surprise to no one, but more importantly, the rest of the world places greater emphasis on primary and secondary education in science and math than the U.S. If you do not have kids who like to programme in high school, kids intrigued by the double helix at an early age, you are not going to get good adult software developers and gene technology experts. Here Estonia does rather well, ranking second in Europe and fifth in the world on the OECD Pisa test in quantitative and logical reasoning. This in turn leads to third problem: with smart, well educated kids at home whom you want to keep here, and smart, well-educated people you wish to attract to your innovative company, how do you do it? Is a high salary enough? Are low corporate and personal income taxes the motor? I recall a lecture by the nobel laureate economist Amaryat Sen I heard several years ago in which he pointed out the highest corporate and personal income taxes in the U.S. were in Massachusetts and California and the lowest in Alabama and Mississippi. But where were the innovative companies? Not in Alabama, not in Mississippi. They were on Route 128 in Massachussetts, they were in Silicon Valley in Palo Alto, California. Why? Certainly not because companies like high taxes. But that’s where the best schools are, the best public schools. Because if you want to attract brains, the sine qua non of successful innovation where everyone is competing to attract that most precious of commodities: smart people, you need to make sure you can offer quality of life.

To make it crystal clear. If you are a bright software developer from India, Pakistan, Turkey, where will you go if the choice is between Tartu, Estonia and Boston, Massachusetts? The weather is more or less equally dismal, the salaries can even be competitive, at least with companies like Skype. But those things being equal, where will you go? This is the broader and more ineffable challenge in promoting innovation.

Thus, it is good to note that the topics of this conference range from Internet security and technology parks to environment and energy, international competitiveness and other relevant issues. No less important is that the topics of this conference are not simply parochial and local but rather of a truly global nature. Therefore there is one more important sub-topic – European cooperation, including interregional cooperation in the Baltic Sea region and beyond. I very much hope that in discussions here particular attention is paid to the opportunities afforded by the latter. Next year during the Swedish Presidency of the EU, we hope to see launched a comprehensive programme with the goal of increasing innovation in the region, and if I have learned anything about successful innovation, it is that it includes a strong regional component. You can incubate in a cocoon but once you are out of the cocoon you need a broader environment.

To conclude, I am glad that the conference takes place in Tartu, and for at least two reasons. First, it is a city with rich intellectual and scientific traditions, thanks to the central role played here by one of the oldest universities in Northern Europe. Secondly, a new era of technology makes productive living and working possible outside metropolitan areas, which is of course very welcome.

I wish success to the conference. Thank you for your attention.

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