University-Industry-Government linkages in biotech in a small ...

Int. J. Entrepreneurship and Innovation Management, Vol. 9, Nos. 1/2, 2009

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University-Industry-Government linkages in biotech in a small transition country: the Estonian case Tõnis Mets Faculty of Economics and Business Administration, Centre for Entrepreneurship, University of Tartu, Narva Rd.4, EE51009 Tartu, Estonia Fax: +372 737 6363 E-mail: [email protected] Abstract: Estonia, a transition country being ‘catching-up economy’, is complementing its capacity for technology absorption with potential for diffusion and commercialisation of technology. The aim of the paper is to study key issues related to university-industry knowledge transfer within the Estonian biotech sector. Empirical research of the SME sector was carried out in two sample groups: the first were Estonian research based biotech companies with independent strategies and the second were subsidiaries of foreign companies. The gross funding structure proportions of basic research, applied research, and product or service development in the Estonian biotechnology public and private sectors together were calculated as 11 : 5 : 1, which demonstrates the strong imbalance of the sectoral innovation processes. Balancing R&D is seen as an iterative process. Keywords: biotechnology; R&D expenditures; knowledge transfer; national innovation system; University-Industry-Government linkages. Reference to this paper should be made as follows: Mets, T. (2009) ‘University-Industry-Government linkages in biotech in a small transition country: the Estonian case’, Int. J. Entrepreneurship and Innovation Management, Vol. 9, Nos. 1/2, pp.139–156. Biographical notes: Tõnis Mets has been an Associate Professor and Head of the Centre for Entrepreneurship at the University of Tartu, Estonia since 2003. He has worked as a management consultant in his own company ALO OÜ, and as an entrepreneur, engineer and manager in various high-tech companies in Estonia. He holds Degrees from the Tallinn Technical University (Electronics Engineering) and a PhD (Technical Sciences, Diagnostics of Mechanisms) from the St. Petersburg Agricultural University, awarded in 1987. His main research interests are entrepreneurship, technology and knowledge management, organisational learning, and innovation.

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Introduction

After nearly 50 years of Soviet occupation, Estonia, like the other Baltic States, re-established its independence in 1991 and now has a rapidly developing economy with a growth rate of up to 12% during the decade since the mid 1990s. It is generally

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accepted that the major strength of ‘catching-up economies’ has been their low production costs (Varblane et al., 2007). However, rising income levels, a consequence of economic growth, suggest that previous advantages will be lost because of growing labour costs, which indicates a need to build up Estonia’s own innovative industries based on a higher level of added value, and to create more highly qualified and better paid jobs. That leads not only to the need to re-structure industry and foster knowledge-intensive production, but also to a challenge for universities in creating the relevant knowledge and skills, and in preparing human resources. Traditionally, teaching has been considered to be the role of the university since medieval times, with research becoming a legitimate function of the university in the late 19th and early 20th centuries in what was called the first academic revolution. Now, only about 100 years later, the previous missions of universities – teaching and research – have been complemented by a third, economic and social development. The adoption of this third mission by universities is referred to as the second academic revolution. For universities this means descending from the ivory tower and becoming a generator of economic wealth in society. This is mainly achieved by valuing the intellectual products of research as assets, and commercialising the results of research as a way of ‘capitalising’ knowledge assets (Etzkowitz, 2004). One of the most comprehensive frameworks for the commercialisation of university knowledge is summarised by Howard (2005), and consists of the following key concepts or models: •

Knowledge diffusion. Where the industry-wide adoption of the useful economic outcomes of university research is encouraged through communication, education and training, and standard-creation. Usually there are no special legal barriers to using this knowledge.

•

Knowledge production. Which means selling licences to exploit university ‘knowledge products’ in the form (mainly) of protected Intellectual Property (IP).

•

Knowledge relationship. Which includes ways of providing university services, collaboration and partnership in the creation and exploitation of broad IP platforms, trade secrets, know-how and tacit knowledge.

•

Knowledge engagement. Which means the universities becoming involved in order to achieve mutually beneficial outcomes (even transcending university boundaries).

The first two concepts can be defined more or less using the linear model of innovation initiated by basic research (technology push). The third and fourth concepts are based on more complex sequences of interactions (market pull, new market needs) between market players, and the growing market-orientation of the university. Implementing the knowledge commercialisation approach to University-IndustryGovernment (UIG) relations in biotechnology means covering •

the institutional actors of R&D

•

the focus and role of institutional actors in that process

•

the impact of the entrepreneurial environment on technology and knowledge transfer in the sector (based on Kaukonen and Nieminen, 1999).

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Covering these topics means mapping innovation and knowledge transfer processes and the actors of the Estonian biotech public and private sectors, and evaluating the overall business environment of the sector. The roots of Estonian biotechnology come from the University of Tartu, where life sciences have a long history going back to the 19th century, since the times of Estonian-born Karl Ernst von Baer (1792–1876), a ‘Darwin scale scientist’ (Raagmaa and Tamm, 2004). Later, one of the drivers of the creation of new academic skills was the decision of the Soviet government to designate research in biotechnology as a sheltered industry in the 1970s. Several enterprises were established in the field in the 1980s, but they all collapsed after 1991 as they no longer had a market. New biotech companies were established at the beginning of the 1990s, many of them established by university researchers and falling into the spin-off category of Small and Medium-Sized Enterprises (SMEs). Usually, about 75% of biotechnology results are taken as inputs for the pharmacy industry (Bergeron and Chan, 2004), but as there are hardly any of the required types of pharmaceutical plant in Estonia, there is very little demand for industrial outputs from the sector. Therefore, the first method of knowledge transfer seems not to be relevant in Estonia. Despite this, state R&D policy documents identify the high importance of (medical) biotechnology among government priorities (Estonian Research and Development Council, 2002). This priority is questionable for Estonia because of its small population of 1.34 million and its tiny market. Medical biotech innovations are mostly slow and expensive; in the USA the approval process for biotech medicines is estimated to cost between $200 million and $350 million and take from 7 to 12 years (Walker, 1999), so we can conclude that ‘mainstream’ biotech is the business of global markets. This raises the question about related capabilities, how effective can universities be in implementing the second, third and fourth ways of knowledge commercialisation listed above. On the national level this shows how appropriate the education system and R&D policy are for supporting the future economic potential of a small transition country, and whether it is possible to overcome the investment gap between invention and market breakthrough of a new technology known as the ‘valley of death’ (Auerswald and Branscomb, 2003). Most studies in transition countries (Högselius, 2005; Harvey et al., 2002) audit the technological absorption capacity of companies and society as a whole, and as the result, ability to receive the new technology is evaluated. But in the Estonian biotechnology sector, the opposite question arises, about ways of diffusing and commercialising Estonian technology on international markets. This depends partly on the capacity of a small transition country to develop the highly knowledge- and capital-intensive technology sector, which is mainly targeted at the global market and which needs the close collaboration of the public and private sectors in the UIG framework. This paper aims to study more deeply the key issues of UIG linkages within the Estonian biotech sector, including public research institutions and private SMEs, and to shape supportive measures for the knowledge transfer processes and entrepreneurship in the biotechnology sector. To understand how the government facilitates the UIG relationship today, the path-dependency of the system is studied in the next section. This examines the logic of the sectoral and historical background of UIG relations in post-communist transition countries like Estonia and how this is reflected in today’s interactions between the players. Partly, it is about a question of the financial measuring of UIG collaboration.

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General mapping of the institutional actors of the biotechnology sector is given in section three. This includes institutions, human resources and IP. Because of the small size of the sector and the possible different classification of biotech companies in official statistics, there is no ready statistical information. Therefore it was necessary to map current data by surveying the Estonian biotechnology business sector. The results of the empirical study of Estonian biotech sector are also given. Finally, discussion of the results leads to highlighting of the UIG linkages in Estonian biotechnology, and conclusions are articulated.

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The evolution of University-Industry-Government (UIG) linkages in Estonian biotechnology

2.1 Sector-specific aspects of UIG relations in biotechnology The general sectoral environment of biotechnology includes boundaries and demand, knowledge and technology, actors and networks, and various different institutions, together making innovation in biotech products a non-linear process (Nightingale and Martin, 2004). Furthermore, sectoral characteristics affecting innovation include the supply chain and non-firm organisations such as universities and other public and private organisations. Research traditions and supportive infrastructure are especially important during the start-up phase of biotech businesses. Geographical proximity enables start-ups to establish themselves later as the firm grows and moves away, “since its market and field of reference are often international” (Lemarié, et al., 2001). The attributes of biotechnology are science, networks and the division of innovative labour. Universities, venture capital and national health systems play the key role in the biotech sector in Europe. One notable point about European biotech is that university-industry links are less developed than they are in the USA (Malerba, 2004). The importance of the business environment for the growth of technology and knowledge-intensive firms has been analysed by many researchers. According to empirical findings (Clarysse et al., 2003), the types of growth of technology intensive firms are markedly different in the various entrepreneurial environments. There are three different strategic archetypes of biotech companies in Europe (Clarysse et al., 2003): •

technology (or lifestyle) companies

•

prospector companies

•

venture capital packed companies.

The founders of the technology companies are scientists who run the company and do not have any ambition to grow, and they have no outside investors. Prospector companies focus on growth after finding an investor or making a scientific discovery. These are active in the international market and focused on R&D. Venture capital packed companies are focused on growth, have a solid scientific background, have venture capital in the company, and are active in the global market. The first type of technology, or lifestyle, company is characteristic of a poor entrepreneurial climate. In the emerging environment, ‘prospectors’ also start to appear; in a developed business environment all three types of companies, including venture capital packed ones, exist. In transition countries with relatively poorly developed business environments, firms tend to start up with the little capital that is available within the firm itself, while, because the


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entrepreneurial community is poor or of uncertain existence, only very limited sources for experiential or social learning are available. In this environment, the incubation can take several years before growth starts, and the growth itself is usually not as intense as in countries with well developed business environments. The patent protection of IP does not last long enough (up to 25 years, depending on the country) when compared to the three market preparation stages, and it costs too much for SMEs to use the full market potential and benefit from their inventions. However, SMEs such as, for example, pharmaceuticals firms are often more efficient in creating new products than large companies are. This is the source of interest for strategic mergers and acquisitions which seek to obtain technology, competence and market by creating bigger pharmaceutical companies (Lemarié et al., 2001), or alternatively the strategy of SMEs may be to create more goodwill (Matthews et al., 2003). The regional biotech is closely connected with the National Innovation System (NIS), but via supply and market chains, biotech companies extend far across borders, meaning that the business sector is globally open.

2.2 The role of government in creating a knowledge transfer environment It follows from this that a poor business and economic environment which inhibits the commercialisation of output from the biotechnology research sector can be strongly influenced by government policy. Since 1992 the Estonian government has practised a liberal economic policy, sometimes called ‘shock therapy’, and has opened the Estonian market to foreign goods and capital. The liberal policy supported the inflow of Foreign Direct Investment (FDI), reaching 4684 USD per capita (the leading position among transition countries) at the end of 2003 (Varblane, 2005). During the next two years the indicator has nearly tripled (Bank of Estonia, 2007), but unfortunately growing FDI has not so far had a significant positive impact on the use of knowledge created by Estonian universities. Varblane et al. (2007) argue, among other topics, that the Estonian NIS is a reflection of path-dependency, described by an underestimation of the role of the public sector, a dominating role played by the linear innovation model, an overvaluation of the role of FDI, weak innovation diffusion, and low motivation to learn. The situation is partly explained by the rapid growth and short-term financial success of catching-up economies, which do not motivate companies to learn in the long-term or the public sector to systemically develop technology policy. Like some previous investigations (e.g., Kaukonen and Nieminen, 1999), the current study assumes that R&D funding statistics do not tell much about the content of relationships between the actors of the sector. But the funding structure may serve as a ‘map’ for locating the actors and their foci, as well as for demonstrating how serious the actors (including the government) are when declaring their technology development strategies. Funding R&D has been used here as the financial measures for UIG collaboration. The resources of public funding institutions – the Estonian Science Foundation (ESF), the Estonian Ministry of Education and Research (MoE), the Ministry of Economic Affairs and Communications and the national development agency Enterprise Estonia (EE) – come from the state budget, and therefore regardless of the specific agent supplying the resource, the criteria of financing shown below apply. In 2005, R&D spending in the Estonian public-private sector was 57.1 million euros

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totalling 0.49% of GDP (Figure 1). Public funding of life sciences was approximately 8.6 million euros in 2005 (Muuli, 2005). Figure 1

R&D spending in the public-private (basic and applied research, development) and business sector, per cent of GDP (the author’s calculations based on revised data of GDP; Statistical Office of Estonia, 2007) (see online version for colours)

The majority (about 80%) of the 47 million euros spent on R&D by the business sector covers the purchase of new production equipment (Viia et al., 2007), while applied research accounts for 7%. The total R&D spending was 104.1 million euros, totalling 0.94% of GDP in 2005 (Statistical Office of Estonia, 2007). The ratio of basic and applied research, to product/service development in the gross R&D funding structure (R&D ratio) in the Estonian public sector was approximately 3 : 2 : 1. The lack of similar data about Estonian biotechnology indicates both the unavailability of relevant information and the absence of any innovation policy based on it. In comparison, in the USA in 2000, about 60% of the government’s R&D funding was spent on development, the remaining money being split almost evenly between basic and applied research (Bergeron and Chan, 2004). That means that the US governmental R&D-ratio was 1 : 1 : 3. From that we can see that the proportions of financing in Estonia are much more strongly biased towards basic research than in developed countries. A similar situation can be found in another transition country, Hungary, where the government R&D ratio is 6 : 4 : 1 (based on data from Inzelt, 2004). Consequently, the NIS in transition countries is still quite unbalanced.

2.3 Changes in the academic research environment Historically Estonia has been a part of so-called sub-national Soviet innovation system with its academia-industry-state relationship model (Etzkowitz and Leydesdorff, 2000), where the research institutes of the Academy of Sciences played the main role of knowledge production, and university R&D was of only second-rate importance in this process. R&D spending in the Soviet Union came to nearly 4% of the GNP (Freeman, 1995). The Academy of Sciences with its research institutes undertook Soviet military and space programmes, which took an extremely high proportion, more than


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70%, of total R&D spending in the USSR (Freeman, 1995). As the rest of R&D funding was divided between universities and the research institutions of other industries (not related to military R&D) then the share of research funds channelled to universities was comparatively small. Very frequently the research institutes produced the knowledge input for special design bureaus and experimental production plants to manufacture unique equipment for the Soviet space and military research programmes.1 The related industries were highly classified and the technological achievements rarely and slowly reached civil use. As a result, some technological achievements in the space programmes notwithstanding, the average technological gap between the USSR and the USA remained within the range of 11–15 years in the mid 1970s (Gomulka, 1986). Since the 1990s, universities and former research institutions have worked under the new conditions of a small independent economy. The shares of higher education and non-university academic research in Estonia in the 1980s and early 1990s reflect the typical ‘socialist’ science system with smaller university sectors and relatively large shares of non-university academic research. The situation changed dramatically in the second half of the 1990s, and in 2003 the relation between the two sectors in Estonia very much resembled that of Finland. Many of these government and former Academy of Sciences’ research institutes have now been brought under the umbrella of the universities as research centres (Glänzel and Schlemmer, 2007). This process can also be partly understood as finalising the first academic revolution in the universities of Estonia and other post-communist countries. Research funding was changed from an administrative and planning system to a new Science Fund system based on scholarship and academic merits under the peer review process (Allik, 2003). The main criteria of funding became the bibliometric indicators of the applicant. This has had an impact on the structure and target of research in the universities. The University of Tartu came first in the ISI Web of Science publications (total number in 2004: 490 papers, 65% of the total Estonian contribution) and citations, and also in Estonian public funding, getting approximately 48% of research grants and contracts (University of Tartu, 2006). The share of industry contract research remains marginal. Strandburg (2005) calls this phenomenon ‘curiosity-driven research’. In that context the research funding structure of the University of Tartu is quite similar to other (curiosity-driven) research universities in Europe (see Lambert, 2003). In 2000 and 2003 altogether 46 research groups of state funded institutions in the field of biotechnology and life sciences had their R&D activities evaluated by foreign experts, and 41 of them passed the evaluation successfully. More than a hundred specialists in gene technology, molecular and cell biology and other biotech related fields graduate from the University of Tartu and Tallinn University of Technology with bachelor, master or doctoral degrees every year (Muuli, 2005).

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The survey of Estonian biotech

3.1 Methodology and sample of the survey The current empirical study aimed to map the biotech innovation processes from documented knowledge assets to the financial measures of partners in the UIG framework. This means studying the knowledge and financial contributions of private businesses, and of the public sector.

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Research methods applied were general data mining, which was carried out using patent databases, the commercial register, written overviews and an internet search; and a questionnaire designed to collect managers’ opinions and get the data missing from their annual reports. Detailed interviews in SMEs permit us to draw some conclusions about their innovation models and strategies. The institutional membership of the Estonian biotech sector includes about 90 units, 73 of which are registered private businesses, while the rest are universities, their research units, public research centres and other non-governmental organisations. Over 300 researchers are employed in biotechnology or related fields in universities and other institutions. Very traditional biotechnology industries such as yeast production and, for the same reason, other food industries were excluded. The biotechnology sector is not internally homogeneous, with several categorisations of the sector (Bergeron and Chan, 2004); companies are not divided by field or categorisation in this study, most of the selected companies being biomedical businesses. Foreign-owned companies performing simple production and packaging operations for pharmaceuticals in Estonia were excluded, as they were not scientific knowledge-intensive. The total number, 32 (beginning of 2006), of Estonian biotechnology companies was small enough to determine the sample for a study. Those companies that had no sales yet were excluded from the research sample. The rest of the 25 registered firms (Annex) were SMEs, and two-thirds of them work in the biomedical field. All their annual reports were studied for the purposes of the sector’s statistics. Those companies whose businesses only mediate the goods of foreign companies – or carry out clinical trials services for their foreign owners and, therefore, have neither an independent strategy nor direct relations to the Estonian biotech R&D base – were excluded from the sample of further detailed research (group SME2). Altogether 19 more or less research-based biotech SMEs (group SME1) remained, nearly one-third of them spin-offs of the University of Tartu. To map the innovation processes in the companies, their annual reports were studied. The reports revealed data about sales and investments in fixed assets and export markets. However, the annual report usually contains no data about spending on innovation processes. Nor does it provide information about new trends in the business environment and other innovation factors such as IP and knowledge transfer. Therefore, a questionnaire was designed to map managers’ opinions and get the data missing from the annual reports: •

the relative share of spending earmarked for innovation processes in their companies

•

relations with the public innovation support system and the relevance of the support measures to the companies’ needs

•

personnel strategy

•

skills in the field of their technology, product development, marketing and sales, (strategic) management etc.

•

knowledge transfer, including openness of the innovation processes and networking in the above areas

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IP and patent pool.

The data were gathered by half-structured interviewing, which permitted us to get prompt answers to questions and specify exact information about the company. The interviews and part of the data collection were carried out by two Master’s (MBA) students,2 both managers at biotech companies, in 2005.


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3.2 IP and general trends in the Estonian biotech sector The patent search was carried out in the middle of 2006. Identifying published patents and patent families, including those in the process of application, in patent databases, for example esp@cenet, is quite complicated, as in many cases the inventions have been created collaboratively by international teams, and the applicant may be a foreign institution or person. Sometimes the relationships have cross links, and sometimes the Estonian researcher is shown as the representative of the country of application; but in many cases the companies have multiple ownership and holding links which are not shown in databases and homepages. For example, in the case of CeMines Inc. the inventor created businesses abroad first, in the USA, and then moved part of the activities back to his native land.3 Therefore, the ownership of the patent and its holding may sometimes need a more detailed study, and the preliminary results may contain some inaccuracies. At first glance, we can affirm that nine private biotech companies are shown as applicants on 30 patents while six public institutions have 18. In the private group, the leaders are branches of foreign companies: Evotec Biosystems AG with nine and CeMines with eight basic patent families (i.e., nine and eight inventions), followed by FIT Biotech OY and Quattromed AS, each with three patent applications. Only Quattromed among these companies was identified as completely Estonian-owned. But in foreign companies the leading inventors are also Estonian researchers, which points to a dissolution of boundaries between Estonian R&D based activities and simple foreign headquarters’ service function. A good example of that type of movement is the story which appeared in the newspaper Äripäev (Business Daily) of gene researcher, Professor Mart Ustav from the University of Tartu who is reaching the final stage with tests of an HIV vaccine in Africa which has high potential for a market breakthrough. This achievement belongs to the Finnish owned company Fit Biotech, whose investors SITRA, BioFund and others have invested in research and product development. Their investment has been much larger than the investment capacity of the Estonian state and private venture capital today. (Rozental, 2007). Among research institutions, the University of Tartu – together with its research centres – is the applicant for 13 biotech inventions. The strategic and IPR aspects of Estonian biotech firms were particularly closely studied. These companies are mainly of the ‘supplier’ type (Thomas, 2003): laboratory services, diagnostics and small production for a specialised niche in the healthcare or research and academic market. This has been the most common type of business since the beginning of the 1990s. Some of them are based on licenses granted by the university during the start-up phase, and are now developing their own technologies protected by patents. There are no companies of the ‘fully integrated’ type operating from research to final market, but a trend of the last five to six years has seen two or three ‘developers’ emerge, whose activities are focused on some very topical methods of cancer and HIV diagnosis and treatment. As a patent search demonstrates, they work in networks with international partners from the USA, Sweden and Finland, and they account for the biggest number of patent applications, as already mentioned. License sales are still in the initial phase, and Estonian biotechnology research institutions (for example the University of Tartu) have very few license sales, only two to four deals per year, with weak profits compared to expenses. Among ‘developers’ Celecure is a noteworthy example of an Estonian-owned SME.

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3.3 Results of the survey In the economic sense the biotech sector is still very small − the companies employed about 200 people in 2004, but the sector is growing faster than the Estonian economy as a whole. The sales of the research-based sample of biotech companies, SME1, grew at the rate of 11–17% per year, and the sales of SME2 by as much as 14–47% per year in the period 2001−2004. The research-based group accounted for 41.1% of the total sales of 13 million EUR of the sector in 2004 (Figure 2). Figure 2

Sales of the Estonian biotech SMEs, million EUR per year (the author’s calculations based on annual reports) (see online version for colours)

All the Estonian biotech companies in sample SME1 can provisionally be divided into three groups (Talpsep, 2005): the first wave of companies was established 12–15 years ago, the second 5–9 and the third one 1–5 years ago (respectively 3, 10 and 6 companies). The added value per employee of the research-based companies has been growing at the rate over 20% per year, reaching more than 15 700 EUR, and sales reached 38,350 EUR/year per employee in 2004 (Figure 3). Figure 3

Value added, sales and labour costs per employee in Estonian biotech SMEs, thousand EUR per year (the author’s calculations based on annual reports) (see online version for colours)


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The total number of employees in the sample SME1 was about 135 (SME2: 68). Figures 2 and 3 demonstrate that even though they started from nearly the same level of value added productivity (per employee), the growth in the R&D-based SMEs was lower than in the SME2 group. In SME1, relative productivity, value added and sales per employee remained 2.2 and 2.8 times lower than in SME2, and salaries (calculated from labour costs per employee) 2.7 times lower. From Figure 4 we can conclude that the companies in SME2 with foreign financing are more flexible with their spending (losses 2002–2003). The growth of value added in SME2 was much faster than in the research-based group SME1 in last three years. Figure 4

Value added and profit of two groups of Estonian biotech SMEs, million EUR (the author’s calculations based on annual reports) (see online version for colours)

The findings about the Estonian biotech sector from the interviews with managers of the group SME1: •

the companies are mostly profitable, but their own capacity for investing in development is quite limited

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the sales of the Estonian biotech companies are split almost equally between production and services

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the entrepreneurship and marketing experience of the companies formed nearly one third, evaluation marks: 1.4–1.6, of that of research – 4.7 (on a five-point scale: 1 – very weak, …, 5 – very strong)

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attention to market development among the biotech companies is growing: the number of marketing and sales personnel grew from 21 to 29 in the period 2002–2004

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the share of exports in sales went up by nearly 10% in the period 2002–2004

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only a third of the biotech companies have adopted a growth-oriented strategy

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international knowledge transfer and networking is mostly related to research and practically never to commercialisation of the research results

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Estonian partners are more involved in basic and applied research (50–52% of the total R&D-spending financed by SMEs) than foreign partners (5–7%); participation by the companies is higher in product development (more than 75%) and product testing (54%).

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Discussion of the results

The survey demonstrated the growing market-orientation and movement towards the open innovation model of Estonian biotech companies. In order to provide a better picture of R&D and other innovation processes in Estonian biotechnology, the author mapped the system of public funding according to the structure of a general model of technological innovation. The corresponding funding and expenditures by the public and private sectors are shown in Table 1. Besides the above-mentioned Estonian funding institutions, the biotech sector is also financed by European institutions, funding has mainly been targeted to research institutions. Three of the interviewed companies have received support from EU projects as partners. A preliminary evaluation of the innovation expenditure structure of the Estonian biotechnology sector (Table 1) shows the prevailing role of public funding, which is about 80% of the total budget (even more if we take into account all the current EU projects). As Table 1 shows, 4.62 million EUR (Public basic and applied research spending together), or 83.8% of public R&D funding, were channelled into university research, while only 0.19 million EUR went to support private applied research in 2004. From Table 1 we can deduce the ratio of the gross funding structure of basic and applied research, and product/service development in the Estonian biotechnology sector financed by the government as 11 : 4 : 0, which demonstrates a predominance of basic research over the other stages of biotech innovation in Estonia. The R&D-ratio of the public and private sectors together is 11 : 5 : 1. In the business sector, the ratio is approximately 1 : 2 : 2, and together with public support 1 : 3 : 2. As Estonian biotech companies are mostly profitable (see Figure 4), then the budget under the ratio 1 : 3 : 2 will provide for the existence of the firms in the short run. But whether the industrial R&D spending is sufficient for the development of industry on the level of the national strategic goals in the long run is a question about the national innovation strategy as a whole. The gross public R&D spending (5,510,000 EUR) of the biotech sector almost exceeds the sales of the Estonian R&D-based sector (Figure 2, SME1). This is the first sign of a possible imbalance between spending on research (financed by the Estonian tax-payer) and revenue at the national level. The growth of Estonian companies is at the same 15–20% rate as that of American companies (Ernst & Young LLP, 2003b), but the businesses are much (10–100 times) smaller in size. Additionally, there are other characteristics which differentiate Estonian biotechnology from industry in Europe and the USA (Ernst & Young LLP, 2003a, 2003b): •

the low level of R&D expenses in Estonian biotech companies: 15.7% of revenues against 60% in Europe and 45.7% in the USA

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the profitability of Estonian biotech (small) companies

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the low level of Venture Capital (VC) investment in Estonian biotech

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the absence of a national pharmaceutical industry, one of the main target groups of the sector

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weak connections between university research and companies’ R&D.

University-Industry-Government linkages in biotech Table 1

Structure of innovation funding and expenditure in the public and private sectors of biotechnology in Estonia in 2004 (the author’s calculations based on public information and managers’ estimations)

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The main reasons for these differences can derive from several circumstances related to the Estonian economic environment, policy and development so far. As already mentioned, the Estonian government has practised a liberal economic policy, providing only modest support to companies of any business sector, including biotech. The main survival condition of the companies has thus been the balance between costs and revenues. Biotechnology is a sector whose outcome and results mainly feed other bigger industries, like pharmacy and healthcare in the USA. In Estonia, however, these markets are too tiny to form bigger companies without international sales. The low income of Estonian biotech does not ensure enough resources to SMEs for the creation and protection of new IP. The short history of the Estonian market economy has no examples of local business angels, and venture capitalists experienced in the sector and the comparatively modest business environment of the sector does not encourage foreign investors to enter the local businesses. Estonian biotechnology research institutions (for example, the University of Tartu) have very rare license sales – 2–4 deals per year – and the incoming sums are insignificant in comparison with the costs. Biotech research funding by the government does not balance the real business needs, as knowledge transfer is not an indicator of success for university research. At first glance, the motivation of the university as a partner depends on the system of motivating and evaluating researchers and professors. There is very little cooperation between research and the business sector in Estonia, and consequently, the structure of research spending in the public sector mostly reflects the success of Estonian biosciences, not the success of biotech as an economic or business sector. Another negative trend is visible in Figure 3. Salaries at the average level for the country (approx. 525 EUR) in research-based SMEs cannot motivate highly qualified personnel in the long run. This is the reason why subcontractor and mediator firms pay nearly three times more to their Estonian personnel. Salaries of the same level as in SME2 are not possible in poorly-financed Estonian SMEs; as a result, the domestic biotech industry may never catch up with Estonian science and may lose the potential created by the research sector, or may become a mere subcontractor for international companies. The current low level of R&D spending in the SME1 group shows that a similar R&D financing structure to that of the biotech sector of the USA (Ernst & Young LLP, 2003b) in 2003 (45.7% of revenues) could not be achieved with the business structure as it is in Estonia. By the author’s estimation, the R&D ratio of 11 : 5 : 1 in the Estonian biotech sector describes the situation in even more unsatisfactory terms than do the figures in the strategy document about the national innovation processes all together.

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Conclusions

Biotechnology research in Estonian universities and non-profit institutions has had a strong tradition at the international level since the 1980s. The annual number of graduates from the higher education system trained as specialists for the sector has reached more than 100 during last 3–4 years. The biotech industry in Estonia is still at the launching stage, with only about 200 people employed in the business sector and unremarkable economic output. Our study demonstrated that:


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The knowledge diffusion of university R&D in the biotech sector takes place via publications as a world-wide public good, and also as the contribution of Estonian-origin employees to foreign and international research institutions and companies.

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Knowledge production for IP commercialisation purposes in Estonian universities has no significant economic output.

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Knowledge relationship and knowledge engagement as forms of university-industry collaboration still play a modest role in the biotechnology sector in Estonia. The collaboration is based primarily on informal networking rather than on a systemic R&D policy. Estonian biotech companies start by implementing the results of local R&D especially at first, and later the collaboration with the university research remains mostly on the informal personal level and is less based on industrial research.

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National research policy has so far supported curiosity-driven research. Industry needs (market pull) have had low priority in R&D funding.

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The majority of companies in the existing small biotech sector focus on niche markets (‘supplier’ type of business) and very few of them are engaged in the biotech mainstream (pharmacy-oriented) business as ‘developers’.

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The efficiency of foreign owned biotech companies using Estonians’ skills is much higher than that of local SMEs. This is a threat for Estonian academic research based SMEs, which could lose competitiveness on the labour market.

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There are encouraging examples of commercialisation (potential) of the results of Estonian researchers. These rare examples have a weak influence on the Estonian economy.

From our analysis of the key issues leading the Estonian biotech sector it is possible to conclude that the R&D ratio examined describes a clearly unbalanced situation in public research and education spending on the national level. This is quite a normative approach, but it is difficult to establish the right ratio for Estonia. Obviously, the process of balancing R&D and innovation spending and an expedient state budget is an iterative process which needs its own strategy, policy and monitoring system on the national level. There are several good examples of strategy building (Meyer, 2003; Parayil, 2005) that Estonia might follow. This presumes the creation of Estonian skill centres for innovation and technology transfer research, and sectoral development. The conclusion drawn on the basis of the biotech sector is that there is no simple formula for the success of R&D-based businesses in a small economy. The development of universities and industry in Estonia so far has followed different patterns which are not systematically integrated with each other. Estonian universities have successfully modernised their curriculum according to the quality requirements of the Bologna process and achieved a comparatively good position among ‘New Europe’ countries in research. Characteristic of the UIG relationship is that the need to serve society is perceived less, which means quite inactive contribution to technology and knowledge transfer from university to industry, and also to regional development generally. Universities are hardly ready for that

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entrepreneurial role in society, but supporting that role is the challenge of government innovation policy as well.

Acknowledgement This research has been partially financed by the EU’s Sixth Framework Programme project “Knowledge and Competitiveness in the Enlarged EU” and ESF grant 5840.

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Notes 1

From the author’s own experience of employment as an engineer and manager in the Academy of Sciences’ system. 2 Hereby the author expresses his thanks to Indrek Kask, MSc, and Tiit Talpsep, MSc, for their contribution to the empirical data for the paper. 3 From a personal communication with Toomas Neuman – T.M.

Annex: List of companies studied Applied Phenomics, Asper Biotech, Bestenbalt, Bimkemi, Biodata, Bioexpert, Celecure, FIT Biotech, Egeen, Iasgen, Immunotron, Inbio, Kevelt, Labas, Labema, LabExpert, Mikrotaim, Naxo, Prosyntest, Quantum Estonia, Quattromed, Quintiles, Solis Biodyne, Torrosen, Visgenyx.