2010/2011

1.5. From state-owned enterprises to
innovation-based entrepreneurship: a
comparison of the Baltic states
Erik Terk, Alasdair Reid
Transition is a complicated body of processes, which consists
of political, economic and other reforms, social adaptation,
changes of mentality, etc. The previous subchapter
attempted in a holistic manner to view the transition process
as a combined effect of various factors, and thereby
find explanations as to why the developments in one Baltic
state or another were more or less successful or why they
moved in specific directions. This subchapter will also
attempt to find and explain the differences and “branching
out”, but it also concentrates on one of the main issues,
namely the development of a new, preferably efficient
structure of ownership and entrepreneurship.
The present text will not be limited to the general
treatment of ownership reform as one of the components
in creating a market economy environment; instead, we
shall specifically study the aspects of the transformation
of the ownership and entrepreneurship system in Estonia,
Latvia and Lithuania. This choice of study focus is
based on the idea that the development of the macroeconomic
and business environment in the Baltic states has
been affected by generally similar factors and its dynamics
have been relatively analogous (see The Baltic states…
2000) 14 . The economic declines related to the disentangling
from the USSR began roughly at the same time and
the magnitudes of the declines were also comparable, as
were the macroeconomic stabilization patterns. While the
currency reforms were carried out in a technically different
manner, the three countries’ monetary policies, however,
could be considered rather similar. Over the course
of development, the common motive of joining the European
Union worked as an incentive for corresponding
economic patterns. The general level of the tax burden has
also been comparable, but it differs from that of the Central
European transition economies. True, certain differences
can be observed in the forming of the market economy
environment; some of them have been outlined in the
previous subchapter, but in their case it was mostly about
differences in the speed of implementing the reforms or
the larger or smaller consistency of the reforms rather
than principal differences regarding the strategic issues
of economic transition. Judging from the latter aspect, all
three Baltic states are considered as orientated towards the
liberal economy and are faithful followers of the so-called
Washington consensus developed by the IMF and the
World Bank. Yet, the development of the ownership and
entrepreneurship structures in the three countries has
occurred in a rather different manner and, accordingly,
this could be considered, at least hypothetically, a body
of crucially important questions, which could show why
the transition process in Estonia has been more successful
than in Latvia or Lithuania. This experience would be difficult
to explain based on the dynamics of macroeconomic
parameters. For instance, the level of inflation, which is
considered to be one of the most significant success-creating
parameters of the macroeconomic environment,
was lower in Latvia than in Estonia for many years in the
1990s, yet Estonia’s economy began to grow at a faster rate
than that of Latvia.
The initial point in the forming of the new economic
structures is ownership reform (privatization). However,
as several authors have pointed out (see Bornstein 2001),
it is not sufficient to merely analyse the ownership and
entrepreneurship structures that emerge in the process
of privatization; it is also necessary to study the developments
of the post-privatization period (post-privatization
restructuring).
However, the specific elements of the entrepreneurship
structures, which emerged from the ownership reform,
explain the developments of the 1990s rather than those of
the later period. The critical parameters of efficient entrepreneurship
structure are not the same at various development
periods of countries’ economies. Our logic is based
on the treatment of Michael Porter (1990), according to
which the countries’ economies pass the resource-based,
investment-based and innovation-based stages in their
development. The first of the listed stages, where the Baltic
states were at the beginning of the 1990s, is characterized
by the concentration of a large number of enterprises on
the export of raw materials, in our case, for instance, the
export of unprocessed or nearly unprocessed timber. During
the next stage, the launching of somewhat more complicated
production systems emerges, requiring a more
reliable business environment and discipline among business
partners in order to attract investments. A gradual
increasing of efficiency and reducing costs, by using scale
economy, becomes of central importance. Countries that
leave behind state socialism are expected to increase their
production efficiency, if they introduce adequate policies,
and narrow the gap between them and developed economies.
However, wages would increase during this process
and the cost of other production input would grow as well.
The country would no longer remain competitive in the
niches of the investment-based economy and would inevitably
have to rely on more expensive and sophisticated
products and services, modernize its products and business
models – develop an innovation-based economy.
In the following text, we shall presume that the challenges
of the innovation-based economy became relevant
for all the Baltic states in the first decade of this century,
although at somewhat different moments in time. While
the central issue of the previous decade had been the
development of business structure based on private own-
14 It is true that Estonia’s opening to foreign trade was somewhat more radical than that of the other Baltic states through waiving import
tariffs altogether.
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