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Transcript of Case Studies
Kristjan Maruste prof. Rainer Kattel Introduction The information put forward in this presentation predominantly draws on the machinery building sector study ordered by the EAS and published last fall.
The study offers a comprehensive overview of the situation in the sector as well as makes solid recommendations for improvements. The Machine Building Sector Sector in the General Context Refrences Basic S.W.O.T. Strengths Weaknesses Opportunities Threats Relatively low production costs (labour, electricity etc.)
Flexibility and ability to react fast
Advantageous geographic location (closeness to developed industrial countries - target markets)
Favourable tax system
Strong institutional framework Weak level of R&D
Shortcomings in educational system (not enough engineers, weak preperation in vocational education, mismatch of financing research and industry needs, etc.)
No state strategy
Weak cooperation links between enterprises and research institutions
Lack of management expertise and strategic planning
Production is mainly low value-added
Limited capabilities to reach foreign markets
Weak umbrella organisations
Limited capabilities to monitor sector and market Future possibilities Sector in the General Context Moving up in production value-chain (precondition is recognising global trends)
Advantageous geographic location (closeness to developed industrial countries – knowledge spill-over)
Increasing importance of environmental consequences
ICT techno-economic paradigm fosters:
* Heterogeneity, diversity, adaptability
* Segmentation of markets/ proliferation of niches
* Economies of scope and specialisation combined with scale
* Globalisation/ interaction between the global and the local
* Inward and outward cooperation/ clusters
* Instant contact and action / instant global communications Knowledge-based innovative production- growth of integration of various research fields that Estonian companies can not keep up with.
Increase of importance of additional services
(can serve also as an opportunity)
More strict environmental regulations (can serve also as an opportunity) Source: Eesti masinatööstuse sektoriuuring (2011, table 67); Perez, C. (2002, 18), authors amendments. Eesti masinatööstuse sektoriuuring (2011) Sotsiaalteaduslike rakendusuuringute keskus (RAKE).
Available: http://www.eas.ee/images/doc/sihtasutusest/uuringud/ettevotlus/masinatoostuse-sektoruuring-loppraport.pdf , April 18, 2012
Johnson, G, Scholes, K, Whittington, R. (2008) Exploring Coroprate Strategy. Harlow: Pearson Education Limited.
Kalvet, T. (2012) Lecture notes, 06.03.2012.
Perez, C. (2002) „Technological Revolutions and Financial Capital: The Dynamics of bubbles and Golden Ages.“ Cheltenham: Elgar Publishing Limited.
Perez, C. (2006) „Re-Specialisation and the deployment of the ICT paradigm.“ Compañó, R., Pascu, C., Bianchi, A., Burgelman, J-C., Barrios, S., Ulbrich, M. and Maghiros, I. (eds). The Future of the Information Society in Europe: Contribution to the Debate. European Commission Technical Report EUR 22353 EN. Available: http://ftp.jrc.es/EURdoc/eur22353en.pdf , April 18, 2012.
Porter, M.E, Kramer, M.R. (2011) "Creating Shared Value." Harvard Business Review, January 2011, 62-77.
Reinert, E. (2011) Lecture notes, 04.10.2011. The case study shows inter alia that in large Estonia has concentrated on perfect competition and less on dynamic imperfect competition which can in long-run become a handicap for their development.
It is important to keep in mind that one of the goals of the policy document Knowledge Based Estonia: Estonian Research and Development and Innovation Strategy 2007-2013 is to increase value added in manufacturing and services.
The outcome of the current techno-economic paradigm (ICT) is about inducing the „positioning and repositioning of each company (and also of each region and country) in those segments where they have advantages of one sort or another (Perez, 2006, 55). The role of the ICT in improving the process/production and increasing value added in machinery industry: Policy recommendation Based on the current sector situation and taking into account the small state conditions as well as the position on the ICT paradigm, our policy recommendation is as follows: Develop targeted policy that concentrates on combining the strengths of Estonian ICT sector and machinery building industry focusing on predominantly fostering „green“innovation. Introduce tax benefits for implementing and developing technologies compatible with the „green“ concept (tax credits, concessions, tax relief). Reinert, E. (2011) Lecture notes, 04.10.2011 ICT systems can create better (incremental innovation) or new (radical innovation) products, giving them a (strategic) advantage in the market.
Process management improvements like resource planning and management, smarter supply management, quality system etc. There is increasing need for high quality data as well as data analysis in order to monitore power consumption, quality of service or reduce energy losses (voltage problems etc.). So the trend is towards the increase of different information management systems. Intelligent transport systems (ITS) cover the service chain (data collection and processing, distribution, route planning and on-line task management and generating necessary reports) and provide necessary information for drivers as well as system operators in order to make decisions based on analyses. Navireci arendustöö käigus saadud teadmisi on võimalik rakendada kõikjal, kus on vaja analüüsida suuri andmevoogusid nii reaalajas kui ajalooliselt, ning teha otsuseid, näiteks:
•Management of large nation-wide sensor networks and data processing (remotely readable electricity, water or gas meters, thermometers, air pollution monitors);
•Internet Advertising (user behavior tracking, targeting ads);
•Commerce and service (customer behavior analysis, special offers, preparation, Decision Support Database)
•Security systems (security cameras in real-time image analysis, facial and Number screening, tracking moving objects);
•Management of autonomous systems (expert systems, robotics, coordinate activities between independent machines). Energy management Manufacturing Transport Thank You ! Please do not ask any questions (just kidding) Main policy measures: Comparatively small, has increased mainly in the last 7 years.
Sales income in the sector in 2009 – ca 1,79 mld EUR (= 27% of this years State Budget).
Dominated by large (foreign) companies.
20 companies of biggest income contributed 47% of total income.
20 biggest exporters 55% of the export of the sector in 2009
A lot of micro-enterprises (average number of employees: 20 in 2011 1st quarter)
Relatively low level of productivity and value added (little increase in productivity, mostly internal growth effect, little static or dynamic effect)
Majority not engaged in R&D
Main export markets are Scandinavian countries (Sweden 31%, Finland 28% etc)
Important role in initiation of upgrades and innovations in other industries Overview of the sector
Sector in general context
Policy recommendations Today we will discuss: Metalworks (EMTAK 25)
Metal production (EMTAK 24)
Production of computers, electornics and optical equipment (EMTAK 26)
Production of electrical equipment, other nonclassified production of machinery and equipment (EMTAK 28)
Production of vehicles, trailers and semi-trailers (EMTAK 29)Production of other means of transport (EMTAK 30) What it is? Characteristics Different stucture than in leading countries The importance of the sector in Estonian economy Source: Eesti masinatööstuse sektoriuuring (2011, 50) % of total economic indicators, 2005-2011 Source: Masinatööstuse sektoriuuring (2011) In case the role of Multinational enterprises (MNE) in the economy is strong, the country risks staying in the “middle income trap” as MNE-s have low incentives to concentrate on R&D activities and might be holding back the development (Kalvet, Lecture notes, 06.03.2012).
Small open economies are strongly dependent on the fluctuating economic situation.
Estonia displays many of the characteristics of a small state that get reflected in the vulnerability index such as openness, limited diversification, limited capacity, small size of economy, limited resources base, narrowness of domestic production etc. Furthermore, the well-being of Estonian machinery building sector illustrates how a small state that is dominated by MNE-s (has locally mostly sub-companies) and has high foreign trade proportions is dependent on the changes and decisions made in the global market. “Heightened environmental awareness and advances in technology are catalyzing new approaches in areas such as utilization of water, raw materials, and packaging, as well as expanding recycling and reuse. [...] Better resource utilization—enabled by improving technology—will permeate all parts of the value chain and will spread to suppliers and channels (p 69).”
“Regulators would accomplish much more by focusing on measuring environmental performance and introducing standards, phase-in periods, and support for technology that would promote innovation, improve the environment, and increase competitiveness simultaneously (p 72).” “Some strategic ideas, by their very nature, are more or less attractive than others. For example, ideas that are altruistic tend to spread and get adopted most. In line with this, complexity theory emphasizes the need for sufficient support or ‘positive feedback’, and some ideas are likely to attract this than others. For example, a new product idea in a science-based company received support because it addressed ‘green’ issues and its potential benefits interested colleagues in other divisions, friends and families of the managers developing it. The new product idea persisted despite strong evidence of its lack of commercial viability (p 38)” "It [globalisation] would be production-centered and -led; pro-growth and pro-development; with dynamic, locally differentiated markets, enhancing national and other identities. But it will not be the creation of any invisible hand; it will work with the market but will require plenty of human imagination, ample participation, intense negotiations, much determination and collective political will" (Perez, 2006, 54). Porter and Kramer (2011) write about creating shared value and how it can give an advantage: Johnson, Scholes and Whittington (2008) highlight how attraction works: Case Studies in Technologies and Industries: Employment higher in branches of lower added-value – structural problem – difficult to highly increase productivity in the future.
More than 1/3 employed in metal works. 1) Demand side 2) Direct incentives 3) Indirect fiscal incentives •In first instance develop and implement measures that reflect the actual need for engineers through adjustments in the educational system (ex. increase in state-commissioned education) as well as immigration laws (Singapore effect).
•Change in the current R & D model – need for a balance between basic research and applied research in order to cater to the actual needs of the machinery sector industries (both in the supply and demand side). •R & D subsidies (grants, vouchers, loans to companies) for product development (for machinery sector being introduced shortly) compatible with the „green“ technology, creating networking opportunities for representatives from both sectors.
•Creation (or restructuring) of sector specific competence centre that primarily works as a innovation incubator and provides competence with possibilities for applied reasearch as well as product development service to the companies (lab-centered research). Tallinn 2012 Department of Machinery, Tallinn University of Technology, 2012. Interview on the machinery building sector in Estonia. Interviewed by Kristjan Maruste, in person. 18. April 2012. In the small state context