Digital transformation and Industry 4.0 in SEE

According to the European Commission´s estimates, in 2021 almost 1 million information and communication technology (ICT) specialists will be in demand in the labor market with the overall value of digital economy amounting to almost EUR 500 billion at the same time.

The European Union recognizes the need to develop, regulate and stimulate a framework for the digital economy in its member states because the digital economy, despite the fact that it is predominantly based on the virtual bits and bytes in cyberspace, is still limited by national legislative barriers, the technological (infrastructure) development of member states, the differences in standards and strategies, digital literacy and low levels of cross-border e-commerce. 

In response to all these challenges, the European Union has developed a range of strategies, legal proposals and financial instruments in the field of digital competitiveness and digital economy to ensure that the European Union remains at the top of global competitiveness, while at the same time its citizens and businesses can reap the benefits of the Digital Single Market and Industry 4.0.

Creating a framework for the functional Digital Single Market is especially important for the countries of Southeast Europe which, despite their leading positions in some segments such as cross-border e-commerce, are still far behind other member states in terms of creating a digital society and economy.

SEE region´s struggle to reach the EU average in the digitalization of the economy and society is partly caused by their exhaustive transition process and political turmoil, but catching up with the rest of the EU in supporting digitalization and innovation can push the region into a new era of economic development and growth.

Croatia

Croatia has retained its status as one of the leading member states in SMEs selling online and cross-border trade. Almost 20% of SMEs are in the online sales with almost 9% of them doing so cross-border. EU average in this indicator is 16% and 7,5% respectively. However, Croatia is still lagging behind when it comes to Internet use and fixed broadband. Around 66% of Croats use Internet regularly (compared to the EU average of 76%) and less than 3% have high-speed connections (30% in the EU). This very low number of connections can be attributed to the fact that high speed networks mostly cover urban areas in Croatia and are considered to be extremely expensive. In comparison Croats on average spend almost 2,5 – 3% of their monthly disposable income on high speed internet compared to the EU average of 1,3%.

In the category of human capital, Croatia’s performance is still below average, but the country is making small progress. Digital skills and STEM18 education remain quite low. Half of the population has basic or above basic digital skills, but less than 2% of Croatian students are in the STEM fields. The problem becomes even more serious when we consider that Croatia is the only EU member state that does not have obligatory ICT education in early stages of elementary education and is lagging behind in e-learning and the digitalization of schools.

On the other hand, the business sector in Croatia appears to be eager to take advantages of the possibilities offered by online commerce with almost every fifth company doing so. Other indicators like the usage of e-invoices and cloud services place Croatia within or higher than the EU average. In digital public services, Croatia´s performance is improving. All indicators show growth – both in the number of users and services, and particularly in the open data benchmark where Croatia is well above the EU average due to the new approach of opening up datasets to the general public and private sector.

Slovenia

Slovenia remains a regional leader in Southeast Europe. Together with Croatia it is a part of the “catching-up” countries, but with a slower growth than its neighbor. Overall the Slovenian business sector is the best performing actor in the DESI index, reaching the EU average and above the average in the integration of digital technologies.

The country has almost the same indicators for basic digital skills (51%) and STEM graduates (2%) as Croatia, but with better numbers when it comes to ICT specialists (4,8% compared to 2,9%). It still has to catch up on the use of Internet benchmark, and its weakest ranking is in digital public services due to the fact that less and less citizens are e-government users and open data is not freely used by SMEs. In terms of connectivity Slovenia is below the EU average, but progress has been made. Slovenia has 84% coverage of rural areas and 95% of overall coverage with almost 21% of Slovenes having fast broadband, which is almost eight times better than in Croatia. Slovenia also has set in motion a new plan to cover 96% of the country with 100 Mbps broadband through a EUR 355 million public-private partnership.

Regarding human capital, Slovenia shares similarities with Croatia – 51% of the population has basic digital skills, around 2% of the graduates are in the STEM area but with slightly more Internet users (71% in Slovenia and 66% in Croatia), and a good position regarding the share of ICT specialists in the workforce that almost doubles the number in Croatia. But just like in Croatia, the specialized ICT labor is highly mobile and recruiting sufficient number of professionals can become a challenge in the near future. The development of digital skills and the importance of ICT education are well embedded in the whole educational system, from kindergarten to universities and through lifelong learning measures and complementary programs, to the formal educational cycle. The country also has a Digital Coalition that brings together stakeholders in the development of the digital economy and digital jobs. Recently, Slovenia announced measures to increase digital skills for the less educated and the less skilled segments of the labor force above 45 years of age.

In terms of the integration of digital technologies, Slovenia is performing better than in 2015 with considerable progress made in online and cross-border sales and e-Invoicing. With the new legislation in place that makes e-Invoicing obligatory when dealing with public administration it is expected that those numbers will rise even more. Also, almost 16% of SMEs are selling online, which is less than in Croatia, but with bigger turnover shares coming from that trade. In the area of digital public service, Slovenia has stagnated with almost no progress since last year. Even more oddly, the number of Slovenes using e-government has fallen by 5%. Therefore, the government has introduced a new portal with more than 30 services hoping that the citizens will pick up the pace. In contrast, e-health solutions like e-prescriptions are in full use in both countries covering almost 100% of the population.

Bulgaria and Romania

The research paper The Past and Future of Manufacturing in Central and Eastern Europe: Ready for Industry 4.0?, published by IZA – Institute of Labor Economics, Germany, in 2019, determines the industry 4.0 (I4.0) readiness of eight Central and Eastern European countries (CEECs): Bulgaria, the Czech Republic, Lithuania, Hungary, Poland, Romania, the Slovak Republic and Slovenia.

The findings laid out in the paper define Bulgaria and Romania as the least ready countries for the coming transformation. The research measures three key dimensions of I4.0 readiness, namely technological, entrepreneurial and governance competencies.

According to the paper all countries seem to be doing least well in terms of entrepreneurial competencies, especially Slovenia and Bulgaria. This indicates that there is no one recipe to improve I4.0 readiness: all will have to focus on the three dimensions of I4.0 readiness.

Furthermore, a concern for Bulgaria is that as the EU already noted, it is falling behind in terms of digitizing its economy (as measured by the EU´s Digital Scoreboard 2016) and hence may find itself diverging from the Central and Eastern European countries in terms of industrialization.

Another factor that was taken into account was how government serves its customers (citizens) through digital services. Given the predominance of the digital economy in the I.40, it is also imperative that government be able to act and interact in the digital domain. In terms of this criterion Romania and Bulgaria are also lagging behind.

Furthermore, the research measures the extent, to which manufacturing is already seeing automation, and workers are getting used to working with robots. Density of industrial robots per 1000 of workers is based on data reported by the IFR. The country with the highest density of industrial robots in the CEECs is Slovenia, while Bulgaria ranks last.
Based on the technological competencies of workers Romania and Bulgaria are among the least Industry 4.0 ready. However, tax rates on digital business in Romania, Slovenia and Bulgaria are lower than the average of 10,2% for the EU.

In terms of opportunity entrepreneurship, which is a measure of the share of early-stage entrepreneurship in countries actively pursuing an opportunity excluding necessity or forced entrepreneurship. Bulgaria and Romania have the smallest shares of opportunity entrepreneurs among the CEECs included in the research.

Industry 4.0 will have significant implications for the global distribution of manufacturing activities, the nature of manufacturing, and the contribution of manufacturing to employment and productivity growth. For instance, given the centrality of computers and data, locations with strong connectivity, ICT software and hardware, large availability of quality data and availability of highly skilled labour, with vibrant entrepreneurial ecosystems will become even more desirable for manufacturing. In the era of I4.0 it is not low labour costs that will primarily attract and sustain manufacturing: it will be how amenable a location is for hosting manufacturing that can be automated and digitized.

To promote the diversification of manufacturing exports towards non-traditional (and non-EU) markets and to keep manufacturing exports to EU markets more competitive, the countries form Southeast Europe need to consider exchange rate policy and focused export promotion (and trade facilitation) as tools to promote I4.0. It would seem that none of the current I4.0 strategies in the region explicitly considers these potential approaches.

The initiatives tend to neglect the entrepreneurial capacity dimension, in particular vital aspects for technology entrepreneurship, such as venture capital provision and the promotion of entrepreneurship to commercialize inventions and to find new opportunities both in the production of products for exporting and new export markets. In the past, it was FDI and trade that brought in technology but in future the local entrepreneurship and innovation systems, focused moreover on export diversification, will need to play a greater role.