Introduction

The literature on GVCs has been overly positive about the expected micro- and macro-level impacts of GVCs on catching-up economies (see Gereffi & Fernandez-Stark, 2019; Ernst & Kim, 2002; Mudambi & Puck, 2016). It has been proposed that GVCs may provide an opportunity for smaller firms from developing countries to specialize in niche product categories (Baldwin, 2012). Moreover, with the emergence of modern technologies, it is expected that digital transformation and the general movement towards Industry 4.0 — underpinned by broadband connections, electronic payment systems, and e-commerce platforms that decrease distance barriers for firms — will further facilitate the entering of under-represented small firms into GVCs (see Amador & di Mauro, 2016; Ganne & Lundquist, 2019). Similarly, the crucial role of highly skilled people in GVC integration may open new possibilities for micro- and small and medium-sized enterprises (SMEs) (Kulikovskis, 2019).

Despite these expectations, not many of these SMEs from emerging economies have succeeded in establishing GVCs on a global scale, and thereby, not much is known about the ways and methods of catching up by smaller firms that build themselves up with brands of global outreach (see Lee et al., 2015). Hence, one of the key under-researched strategic challenges for smaller firms from catching-up economies is finding the avenues and seizing the opportunities for moving up in the GVCs. This is more arduous for companies from smaller countries trying to enter and compete in the global markets based on limited domestic markets, resources, and capabilities that can inhibit not only the local learning and upgrading potential but also reaping the potential of network-effect-driven digital transformation trends.

In this paper, we analyse in detail this strategic challenge in the context of a nascent GVCs-driven industry — automated mobility and delivery solutions — in a small European catching-up economy, Estonia. There are two specific rationales for taking this particular focus. First, our focus on emerging industries stems from the conceived ‘window of locational opportunity’ (see Boschma, 1997) for catching-up economies and firms, as in these new industries technologies are yet to be standardized, markets are changing, and regulations have not settled (Binz et al., 2020). Second, previous research has found that the specific automated mobility/delivery industry has not benefitted significantly from direct subsidies and sector-specific industrial and innovation policy support in Estonia (see Espenberg et al., 2018, 2021; Karo et al., 2018). That said, over the last decade and against the odds, Estonia has hatched several internationally known technology start-ups in this niche.Footnote 1 Through the detailed case study of three start-up companies in different phases of development — Cleveron AS, Comodule OÜ, and AuveTech — we investigate how these companies fare in the globalized and digitalized economy in terms of how they enter, participate in, and benefit from the GVCs, despite the small domestic markets and lack of targeted policy support.

By adopting the exploratory case study approach (see Yin, 2003), we highlight the nascent strategies, business models, and dynamics in the automated mobility/delivery industry by identifying the crucial factors and by synthesizing insights from three relatively successful start-up companies in their upgrading trajectory and entrance into GVCs. In doing so, we juxtapose the development trajectory of the studied firms with the conceptual perspective of both GVC and the Innovation System approach (see Lema et al., 2018). Our empirical data has been gathered by relying on secondary data (company reports, publications), interviews with the CEOs of the companies, and prior industry and country-level studies and policy evaluations.

The article is organized as follows. We begin by presenting the key attributes of the GVC framework and the critical account of its application for understanding the mechanisms of economic upgrading and innovation in the context of catching-up economies. We then provide the Estonian background and the peculiarities of the sample of start-ups in the studied industry. Next, we highlight the findings from three cases under the analysis. Finally, we discuss how small start-ups from catching-up economies can redefine the traditional pathways for entering and upgrading in GVCs and draw the implications of the findings for the policy landscape.

Conceptual Frames for Understanding Economic Upgrading in GVCs

The paper analyses the business models and upgrading strategies of small companies in light of the GVC concept. The rationale for relying on the GVC approach stems from its applicability for comprehending how industries are arranged by studying structures, dynamics as well as the roles of global actors in a given industry (see Gereffi & Fernandez-Stark, 2019). However, to overcome the ‘relatively weak understanding of the role of the institutional frameworks and support organizations within … [a firm-level learning and innovation] process’ (Lema et al., 2018, p. 347) of the GVC approach, we also follow the research stream on global innovation networks (see Barnard & Chaminade, 2011; Krauss & Gastrow, 2012; Lema et al., 2015; Parrilli et al., 2012) that covers various local actors (local firms, industry associations, policymakers, research institutions); linkages (intra- and inter-firm networks); and institutional (locational) comparative advantages. The above-mentioned perspectives can be translated into a six-dimensional analytical framework with global elements (input–output and governance structures) and local elements (institutional context, stakeholders, and upgrading) that shed light on how individual businesses and entire industries participate in GVCs (see Gereffi & Fernandez-Stark, 2019).

Upgrading, the central notion in this GVC framework, depicts the dynamic movement within the value chain by exploring how producers shift to higher value-added tasks and stages of the chain as well as seek more control and power in order to improve their position in the global economy (see Gereffi, 1999; Humphrey & Schmitz, 2002; Kulikovskis, 2019; Todeva & Rakhmatullin, 2016). Upgrading can not only occur as product, process, functional, or inter-chain (inter-sectoral) upgrading but also as the first-time entry into the value chain, or as end-market upgrading in terms of relocating to more sophisticated or larger markets (see Fernandez-Stark et al., 2011; Humphrey & Schmitz, 2002). The type of upgrading and its trajectory is affected by various factors, including the level of internal competencies and financial resources of businesses, and cooperation within producer groups or with other actors of the value chain (see Gereffi & Fernandez-Stark, 2019). The GVC literature also highlights a direct connection between the governance structure and the upgrading possibilities, whereby the former determines the degree of autonomy of firms in host countries for moving up into higher value-added activities and the ways how they can upgrade within global industries (see Humphrey & Schmitz, 2002; Pananond, 2013; De Marchi et al., 2018; Radocevic & Stancova, 2015). Aside from the types of governance, structure and internal competences that affect the upgrading patterns, there is a variety of other factors at play such as a diverse mix of government policies, institutions, technologies, and stakeholder interactions that are inherent to a GVC framework (see Gereffi, 2005; Hernández & Pedersen, 2017).

Functional Upgrading as Modus Operandi for Catching-up Economies

As noted, upgrading within the GVCs can take various forms and vary along the industry and country dimensions. That said, linearity tends to prevail in various analytical concepts that present possible upgrading trajectories for businesses and industries in developing economies. Catching-up literature (see Hobday, 1994, 1995; Gereffi, 1999; Lee et al., 2015, 2018), for instance, has mostly showcased the functional upgrading of companies in emerging economies with their movement from original equipment manufacturer (OEM) to original design manufacturer (ODM) and, finally, original brand manufacturer (OBM) model. This is related to the ‘in–out-in-again’ hypothesis of the ‘catch-up cycle’ theory, developed for understanding the upgrading path of latecomer firms and industries (Lee & Malerba, 2017; Lee et al., 2018). Lema et al. (2018) proposed a more nuanced framework with three stages and four illustrative trajectories that highlight the co-evolutionary processes between global value chains and innovation systems. However, their stages of GVC–IS co-evolution approach and hypothetical trajectories for developing countries — starting from the preliminary development stage and moving to the expansion and strengthening stage, and finally to the maturity stage, or skipping some of them, oscillating between them, or reverting to the preliminary development stage — have a similar linearity inherent to OEM-ODM-OBM progression either at the country or a firm-level analysis. Similarly, because of the assumed resource constraints in catching-up economies, Keijser and Iizuka (2018) took an analogous linear, incrementalist view on the inter-chain upgrading for domestic businesses in progressing from local to regional, and finally, to global value chains. Therefore, the main challenge for catching-up economies and firms is seen in setting up and upgrading local chains for larger value and knowledge creation to profit from the re-opening or re-integration into GVCs (see Lee et al., 2018, 2020a).

Such conceptualization of an incremental upgrading trajectory for catching-up economies is at odds with the latest findings and an emerging discussion on new alternative learning and technological upgrading paths (see Huang & Intarakumnerd, 2019; Lee et al., 2020b), which we try to advance further in the current article. For instance, the traditional OEM–ODM–OBM route does not fit with the practice of new international businesses called Born Globals. These new ventures — that can be also treated as a unique sub-group of emerging start-ups and SMEs trying to overcome domestic market and structural barriers (e.g. market size, challenges to digitalization) — are actively focusing on technology and knowledge-intensive industries and target global niche markets with innovative products while serving globally dispersed clients from their inception by using internet-enabled distribution methods (Hennart, 2014; Paul & Rosado-Serrano, 2019). By and large, the emergence of Born Globals could be equated with leapfrogging to an OBM model that presupposes the adoption of a distinctive path-creating strategy, framed around a new mix of existing technologies or products, all of which enable businesses to set up entry barriers through the acquisition of quality standards or certificates, and a solid corporate brand (see Lee et al., 2015). Inter alia, all this reflects the availability of technological capabilities in terms of accessible R&D resources, i.e. knowledge base and finances, and R&D efforts by local businesses (Lee & Lim, 2001). From a more systematic view, the possibilities for going ahead with the OBM model from the outset depend on the adopted innovation models (Binz et al., 2020) as well as the technological regimesFootnote 2 that affect the innovative activities of firms (Lee & Lim, 2001). The changes taking place in technological regimes play a major part in reducing the constraints for catching-up firms by opening windows of opportunity to leapfrog and reconfigure market leadership among countries (see Lema et al., 2020; Perez & Soete, 1988). In the context of the 4th industrial revolution, the core activities and values for maintaining control over GVCs are seen to be shifting from R&D and design to ownership of platforms and integrated systems (Lee et al., 2020a). At the same time, international competitiveness for latecomers is deemed to lie in short-cycle technologies in which the specific production competencies tend to alter after a while (Lee et al., 2018). On the other hand, the windows of opportunities for latecomer economies can also emerge as the result of adjustments in market demand or extensive reforms in government policies (see Lee & Malerba, 2017; Lema et al., 2020).

Local Institutional Context and Public Policies

The importance of the local institutional landscape and the role of public policies for economic upgrading in latecomer economies can be debated, in particular, in the context of small states. On the one hand, public investments in strengthening domestic firms’ capabilities and fostering learning are considered to be the key building blocks for successful participation in GVCs, as technological changes and technological uncertainties raise the importance of the quality of innovation systems. As a testimony of that, the disruptive nature of the 4th industrial revolution brings to the fore new forms of entering into the GVCs not at the firm but at an individual level, which makes education and training even more imperative, along with the promotion of start-ups (Lee et al., 2020a). This, in turn, highlights the importance of universities in supplying talent and enhancing creativity, as embarking on a stage-skipping or alternative path requires more inventiveness (Lee & Lim, 2001). Thus, the policies of higher education and technology development through incubation or improving absorptive capacity are found to be more successful in supporting growth for upper-middle-income countries and maximising the benefits from GVC participation (see Lee & Kim, 2009; Lee et al., 2011; Tajoli & Felice, 2018).

On the other hand, the influence of national governments in terms of their ability to make independent decisions and the power to affect actors in their own territory is perceived to be gradually suppressed in an integrated global economy and the present international policy landscape (see Schmidt, 2002; Rhodes, 1996; Berger & Dore, 1996). Particularly, this holds true in the case of small states where international considerations are fundamental and industrial policy is rarely a domestic one. And, in the context of GVCs that are gradually becoming more consolidated,Footnote 3 industrial policies have been found to play only a limited role in industries’ successes (see Pack & Saggi, 2006; Cattaneo et al., 2010; Kulikovskis, 2019). At the same time, there are other GVC trends and changes taking place that need to be factored in for the efficacy of public policies. Namely, the importance of complex GVCs has diminished recently, while the regionalization of GVCs in terms of the slowdown in geographic expansion has been accompanied by a shortening of GVCs (Degain et al., 2017; Gereffi & Fernandez-Stark, 2019). Furthermore, an increasing share of the value creation in industries comes from pre- and post-production services as new types of subscription and other ‘as a service’ business models are more and more used. All these trends make GVCs more knowledge-intensive and reliant on highly skilled labour with increasing investments in intangible assets and innovative property (Lund et al., 2019). In this regard, the states are faced with a persisting challenge to be constantly adaptive to react to changing trends and conditions with policies that provide appropriate institutions, capabilities, and skills (Zysman & Breznitz, 2012). Lee (2024) has also shown that there are several potential pathways for developing countries and its firms that may be different from the often propagated and emulated ‘Silicon Valley’ model, but which commonly rely on targeted specialization into short-cycle technologies with a focus on domestic capabilities building through integration and nurturing of local innovative firms (growing them beyond SMEs) and local ecosystems.

Upgrading in GVCs by the Estonian Technology Companies

Policy Context in Estonia

Since regaining independence in the early 1990s, FDI has played a central role in the economic policies of Estonia. The early integration into the Scandinavian and other European markets has led to the situation where 2/3 of the Estonian exports and imports are comprised of intermediate goods, implying a deep integration into GVCs (see Ali-Yrkkö et al., 2017; Unt et al., 2018; Varblane et al., 2020). At the same time, Estonia has lagged in private sector R&D investments, offered limited relevant public research for local industries, has had weak linkages between academia and companies, and has witnessed modest digitalization of business processes of existing companies despite branding itself as an advanced digital nation with regulatory flexibility for a start-up community (see PSF, 2019).

In this context where structural challenges for building new industrial capabilities persist, we have observed over the last decade and a half the emergence of a nascent automated mobility/delivery industry with several firms building links to GVCs and finding possibilities for upgrading. The industry’s rise has been even more surprising given the absence of targeted policy support. Estonia has lacked explicit sectoral or targeted industrial policies to support the development of new industrial capabilities and even the most recent initiatives, such as the smart specialization strategy for 2014–2020, have focused predominantly on generic support to the software-focused ICT sector (see Karo & Kattel, 2015; Karo et al., 2017). Hence, we seem to witness a rather unique emergence of a nascent industry against the odds of the general GVC development trajectories — automated mobility/delivery industry is by now heavily dominated by global platform companies (see Lang et al., 2019; Simpson et al., 2019) — and despite the local legacies of weak industrial capabilities, and lacking targeted policy support.

Data Collection and Case Selection

Our empirical data gathering has been done in two steps. First, during 2017–2020, we carried out several industry-level and country-level quantitative and qualitative studies and evaluations focusing on the performance of Estonian industries and companies in export markets and GVCs as well as on the effectiveness of national policy support. As part of these studies, we conducted 4 focus groups with policymakers, representatives of industry associations, and business leaders in prioritized smart specialization growth areas in Estonia, such as ICT and electronics. In addition, 18 in-depth semi-structured interviews were conducted with the heads of various industry associations as well as the CEOs of electronics, machinery, and equipment engineering companies. These findings enabled us to gather insights on the industry and policy level dynamics and challenges as well as frame the focus of the company-level case studies. In this paper, we introduce additional original case studies — based on secondary data (e.g. company websites, annual reports) and original three in-depth interviews with the CEOs of companies to provide a more detailed firm-level account and lessons from the unique evolution of the industry. These interviews covered topics such as sources of competitiveness, business models, industry dynamics, internationalization strategies, entrance into GVCs, relations with suppliers and clients, functional integration, upgrading patterns, entrepreneurial discovery, cooperation, and policy context. Focus group discussions and interviews were transcribed and analysed through iterative coding.

The analysed start-up companies are all headquartered in Estonia and are locally owned businesses that are involved in the automated mobility/delivery industry with a focus on the so-called ‘last mile’ solutions for the urban environment and smart cities. The companies have had different starting points and they differ in their current level of growth and integration into GVCs (see Table 1), but, crucially, also have important similarities in their development paths and upgrading, as we aim to unpack in the following section.

Table 1 Economic indicators of three start-ups, selected years between 2007 and 2022
Full size table

Established in 2007, the main activities of Cleveron AS have been the provision of logistics services in the early days and later, the development, production, and sale of technology for the provision of logistics services. The company is considering itself a world leader in innovating robotic parcel vending machines and the last mile ‘click and collect’ solutions for the retail and logistics sector (e.g. it has provided OBM solutions to Walmart Inc. in the USA) (Cleveron, 2020) and has recently collaborated with Mercedes Benz and DHL on developing last-mile delivery solutions. In 2022, it divided its parcel and mobility businesses into two entities.

Established in 2014, Comodule OÜ is an IoT communication platform for vehicles with customers including e-bicycle (e.g. coboc) and e-motorbike (e.g. cake) manufacturers as well as sharing fleet mobility operators (e.g. Lime). Today, Comodule is one of the few OBM telematics companies producing in Europe and in the same country as its headquarters. In addition to IoT equipment, the existing production facilities allow the production of OBM electric bicycles (Ampler) and electric scooters (Äike) that are used for operating its own mobility platform (Tuul) as well as for direct B2B and B2C sales (Comodule, 2019). In 2022, Comodule consolidated these different activities in one company where IoT solutions sales are ca 88% of the annual revenue (see Table 1).

Established in 2019, AuveTech is dedicated to innovative smart city systems and related R&D activities by focusing on the development of an autonomous ‘last mile’ vehicle (the world’s most compact level 4 autonomous shuttle). The original prototype vehicle — Iseauto — was built and launched as a university-industry joint project in 2018 (1 year before the establishment of AuveTech) on an open-source platform to allow for more open innovation practices compared to the competitors. The aim is to develop a reliable integrated solution that includes self-driving vehicles and the surrounding infrastructure (e.g. teleoperations and ordering systems) in larger enclosed areas as well as in low-traffic urban areas (e.g. zoos and suburban areas) (AuveTech, 2020). The company has provided its solutions from mostly piloting in real-life settings in several countries (Estonia, Finland, Greece, Japan). Given its early stage of development, the innovation grants (e.g. Horizon Europe’s REFLECTIVE project) have been in recent years still larger than the direct sales numbers.

Findings

Sources of Competitive Advantage

The interviewed CEOs of three companies envisaged several factors behind their relative success in entering GVCs. One of the common characteristics was the ability to anticipate what would happen in the world in the near future, foresee changes in consumer demand in terms of user preferences, and position themselves at the heart of several global trends such as intensifying (micro) mobility and electrification of vehicles, the penetration of IoT, emerging green economy, growing e-commerce, and increasing urbanization as well as localization, in particular, in the context of the global COVID-19 outbreak. All of them have stated the mission of actively shaping the future and had technologies developed and ready to cater to the global demand already at the early stages of a life cycle, even though their business clients were not entirely convinced at the time or the timing for product launch was not right.Footnote 4

By and large, their value propositions today are at the intersection of major global trends, enabling two companies to be a technological forerunner, and as acknowledged by one respondent, the company is in a situation, where they ‘…do either fine, well or very well, and it all depends on whether [they] make the right strategic decisions [themselves] and whether [they] can make things happen’ (Interview 1, n.d.), and, as seconded by another interviewee, ‘we have to figure it out ourselves and show what the future holds and then sell that idea’ (Interview 2, n.d.). In this respect, they regard themselves as pioneers who have defined or shaped the landscape quite a lot by creating what may have not existed before. Likewise, they have managed to create standards or new rules of the game regionally or even globally, e.g. changing the logistics and e-commerce business from the weight-based to the size-dimensional approach. The COVID-19 outbreak put an extra pressure on companies to be agile, as changing mobility and consumption habits necessitate the adaption of technological solutions to new circumstances.

Rivalry

Fending off global competition has been made possible by finding a niche product and a market, e.g. developing lighter and smaller up to 8-passenger low-speed autonomous buses for remote residential areas in the broader business of self-driving vehicles that have given an advantage through easier manoeuvring, shorter braking distance, improved safety, and easier logistics (smaller buses fit better the car-dependent infrastructure). Due to the anticipation of global trends and the right timing of a product launch as well as pulling through the valley of death phase of a start-up company, where the technology is available, but not yet marketed, all three studied companies have observed a declining competition, implying a market leadership in what they do. Consequently, it is perceived to be very difficult to compete with them, because they have knowledge and technology advantages. Besides, it takes a lot of time to develop similar products, inter alia, due to many certificates needed and legislative requirements to be met.

Innovative Solutions

The last mile technologies and products introduced to the market by the analysed start-ups have not been unprecedented in the world, but their uniqueness is understood to be lying in more effective, complete, and multi-purpose technological solutionsFootnote 5 for a wide range of applications, and filling the gap in the end-market or value proposition, i.e. finding a niche in solving a broader socio-economic problem. At the same time, by specializing, local tech firms have counted on the prospect of benefiting from spillover effects in terms of expensive investments made by global multinational corporations into technology development trickling down to smaller actors who could exploit them as an open source or at much cheaper prices in a few years’ time. Hence, the cost advantage of in-house technological solutions plays an important role in outcompeting substitute goods and services such as manned delivery service, or bus operation. Likewise, respondents emphasized the durability and environmental sustainability (recyclability) of the products and the introduction of enhanced production techniques in order to improve user experience and bring down the costs of marketed products. All this, in turn, has made technological solutions more affordable for various applications and thereby enabled the expansion of a customer base, e.g. using parcel machines in the businesses of car rentals, libraries, food retail, and hospitals. Hence, the main innovations lie rather in the advancement of the production methodology and R&D processes to have the capacity for scaling, or for offering better value propositionsFootnote 6 than in a specific product.

Entering, Positioning, and Upgrading in GVCs

All three start-ups have from the outset set the focus on exporting from Estonia to global markets, even though the argument of close proximity to markets and clients has necessitated the establishment of branches abroad, e.g. for marketing purposes. Yet, all key business operations are run, and decisions are made from Estonia, as there are a few but large customers in the client base of studied companies. One aspect that has supported entering global markets is not offering a common commodity to mass markets but specific niche products to a limited circle of worldwide clients. Here, trade fairs are one of the main avenues to conclude business contracts in the mobility industry and hence, provide access to key global buyers who eventually approach reputable technology providers.

To gain a competitive advantage, the key for all three companies has been a vertical integration of value chain functions. From the outset, all essential activities from R&D and design to production — including software, hardware, and factory engineering on how to manufacture —, as well as marketing and salesFootnote 7 have been conducted in-house in order to be flexible and agile in bringing innovations to markets. External partners have been used on an ad hoc basis and only in case of necessity, or for project-based undertakings. Despite the conscious decision to integrate value chain functions, it is also seen as a double-edged sword. As recognized by an interviewee, ‘the complexity associated with the integration of functions incurs higher costs and risks, but in the end the advantage of knowledge accumulation is greater’ (Interview 1, n.d.). The latter is also reflected in the control of intellectual property through patents. Interestingly, proactive marketing activities have been dealt with to a point when an international reputation with a track record to showcase has been achieved. All this reveals the strategic focus on being able to control intellectual property and having established a recognizable brand without any exposure to or need for subcontracting activities. Other activities kept in Estonia are developing production processes and the related quality as well as technical requirements, while component production and manufacturing assembly are gradually being reallocated to geographically dispersed locations.

Aside from vertical integration, studied start-ups have had an experience with product-related, inter-sectoral, and end-market upgrading to expand the product portfolio and move into higher value-adding business models. To illustrate, Cleveron AS has advanced from parcel robots to autonomous delivery vehicles with accompanying platform solutions, from postal offices to retailers and, finally, to residents in apartment buildings as customers. Or aside from IoT-based communication platforms, Comodule OÜ launched the development of battery technology for business clients before moving to the production of its own brand of electric scooters with an accompanying rental system. Thus, there has been an involvement in both the production (automated pick-up boxes, autonomous buses, and IoT devices as well as electric scooters) and service provision (network of parcel machines and scooter rental) with varying customer base at different periods.

Relationship and Governance Structures

As the studied companies have developed product concepts and controlled the engineering side, this has facilitated the construction and design of products in a way that reduces their dependence on suppliers. Likewise, throughout the years, the client base has increased and broadened — particularly in relation to key buyers — that enabled to reduce the risks and dependence on a few individual customers, but this is contingent on the extent of consolidation of a client’s industry. At the same time, the innovation and development activities of Estonian start-ups are to a large extent affected by their main customers. Even though the orders of large customers have supported the growth and expansion of business activities of studied entities, companies see some danger in the transformation from a product company to a product development company that must accommodate varying requests of clients. As put by one interviewee, ‘by doing different things to all customers, at some point you reach a point where the customer is not really happy, because by doing different things, you cannot guarantee good quality’ (Interview 1, n.d.). Another challenge stems from the born global approach of Estonian start-ups, i.e. their high exposure to a volatile foreign demand, notably, during times of high uncertainty (e.g. COVID-19 pandemic, impact of central bank’s interest rates and monetary policy changes on venture financing), when investment decisions are postponed.

Capability Building and Networking at the Local Level

Due to the focus on export markets, local technology companies have managed to get customer feedback from different socio-political and cultural contexts that are perceived as important for local learning. And, despite a relatively high autonomy and independence from suppliers, there is a consensus on the important role of local partners and having close relationships with them for the production of mobility solutions and capability building. For instance, in case of electronic scooter production, components have been procured from local suppliers all over Estonia. As emphasized by one CEO, ‘it is very important to us that we have local input and we consciously do [procure] it locally’ (Interview 1, n.d.). Still, while the convenience and speed arguments support local procurement, the higher costs due to lower technological levels and less automation prompt technology companies to look also for foreign partners.

Considering the role of research institutions in capability building, technology companies have shown readiness and sought to cooperate with universities, even though this partnership is considered rather costly and weak due to differing time frames and strategic orientations of their operations. Nevertheless, the importance of research institutions could not be underestimated in the development and capability building of studied start-up companies, as all have a direct affiliation with universities in the form of either a co-financed spin-off, student project competition, or establishment of its own academy with an applied higher education curriculum. As it was stated, ‘the project with university was very helpful, because we were able to legally operate vehicles on the street for a year and get a picture what has to be done differently in product development, in the product itself and on the business side’ (Interview 3, n.d.).

Moreover, aside from project-based R&D contracts with universities, the direct channels with researchers or graduate students have been used for either talent recruitment or short-term cooperation. One of the peculiarities revealed in the mobility industry is the vast and dense network of people associated with the student team participating in the global Formula Student competition, where students of the TTK University of Applied Sciences and Tallinn University of Technology have developed different models of student formula racing cars since 2006. Today, all Estonian hardware-related start-ups that deal with mobility have employees who have been involved in building a student formula at one point or another. As a result, developers at mobility start-ups know each other and hence, a lot of sharing of experience has taken place and information is exchanged fast. One interviewee even claimed that ‘this student formula project should last at least a few hundred years, because the amount of knowledge and capabilities, the network of contacts, and the very self-belief of people who develop there, is enormous, and they do things at the world class level’ (Interview 1, n.d.).

Such close contacts have contributed to cross-business cooperation as well, e.g. two tech companies analysed for this study use the same technologies and components for different products due to personal relations. In addition, the production subsidiary of one of the studied companies has produced parts for the end product of another studied company. Such collaborations extend over various sub-branches of the mobility/delivery industry and beyond. One notable case is the battery development field and collaborations around it, where businesses have teamed up with an Estonian start-up — Skeleton Technologies — who is the global technology leader in ultracapacitor energy storage in automotive and transportation applications.

Socio-institutional Context

With its digitally advanced infrastructure and small territory, Estonia has been used as a testbed to develop, test, and launch pilot projects for the purpose of learning, benefiting from speed, and optimizing costs, while the local demand and customer base have been of secondary importance. This, in turn, has enabled to follow a path-skipping or path-creating development trajectory with a fluid business model, manifested in experimenting with various solutions and discovering their potential at the beginning, while upgrading along varying passages at the later stages. As emphasized by one interviewed CEO, ‘the parcel machine [experience] in Estonia showed that it was the right step, and nowhere in the world was this parcel machine used for e-commerce in the way we started it in Estonia’ (Interview 2, n.d.). Aside from a relatively small territory that has turned out to be an advantage, the mobility industry has also gained from the jurisdictional flexibility and access to key policymakers, including ministers. This, in turn, not only enabled lobbying and affecting national and EU legislation for new emerging industries but also sped up the process of experimenting with pilots in public space. In consequence, Estonia has gained leadership in some indicators, e.g. the use of parcel machines per person. Partially, such local experimentations and entrepreneurial discovery processes have been founded on a conscious decision to free oneself from externally imposed technological frames by creating and keeping in-house the know-how of one’s product. As a result, this has given a possibility to develop and make changes to technologies and products without external constraints on the side of physical hardware, software, or design.

Discussion and Concluding Remarks

In this paper, we have analysed the emergence of an organically grown cluster of inter-connected and academia-affiliated, yet technologically and commercially independent start-ups in the Estonian automated mobility/delivery industry that direct the developments on a local and international level. Thus, despite the well-known and accepted findings by, e.g. Ernst and Guerrieri (1998) and Sturgeon and Gereffi (2009) that latecomer manufacturing firms face the established and occupied value chains in the market segment they enter, the Estonian start-ups have managed to shape and control the value chain of niche products in quickly digitalizing and automating mobility/delivery industry where traditional companies (car manufacturers) are overtaken by software and data-first companies. This reveals that young tech companies may be capable of successfully entering not only regional but also global value chains by specializing in niche industry segments where entry barriers are lower and growth prospects relatively high.

All three analysed start-ups are involved in key business functions such as R&D, production, and marketing, and perform such functions independently from other firms. Hence, we argue that they qualify as OBM firms that sell their own brand products to multiple client firms or consumers in global markets. They have also successfully caught up with incumbent firms, but they have not undertaken a typical upgrading path by starting with an OEM subcontracting model and advancing to ODM and finally, to OBM. From the outset, they have dealt with the product concept design as well as designing digital platforms for mobility and delivery ‘as a service’ model and controlled the highest value-adding activities. At the same time, upgrading has taken place along the product-related, end-market, or inter-sectoral dimensions that have been made possible by multi-purpose technological solutions for wide-range applications in niche market segments. Thus, in the case of Estonia as a latecomer catching-up economy that first relied heavily on FDI-led growth, the above-noted catch-up cycle theory can have an explanatory power for longer-period economy-wide economic and structural transitions, but not so much for depicting the dynamics of new emerging industries.

Interestingly, the studied firms have grown out of or have been closely affiliated with academic institutions. Thus, contrary to reverse engineering or technology licensing — seen as a typical mode of learning in emerging economies (see Lall, 1996; Barba Navaretti & Venables, 2004) —, one can detect forward engineering in the automated mobility/delivery industry in Estonia, i.e. the important role of research institutions in developing scientific knowledge and in the promotion of indigenous firms through born global spin-off firms. Further, as the capabilities in the studied firms have incurred spillovers in the form of personal contacts, demonstration effects as well as forward and backward linkages, all this corroborates the findings by De Marchi et al. (2018) that on top of GVC-related knowledge, the more successful and innovative local firms make use of complementary know-how channels such as interactions with local universities and collaborative learning within the industry.

At the same time, one cannot overlook idiosyncratic small-state characteristics playing their role. As with the development path of the Estonian IT sector, where Skype Technologies (peer-2-peer communications platform) had a large impact and spill-over in terms of innovation and management culture to other waves of digitally-minded start-ups, the same goes with the emerging success stories in the mobility/delivery industry. The key trigger has been the global Formula Student project. Partially, the likelihood of the formation of such a tightly knit business community in one particular and the related industries could be seen as one distinctive element of a small society (see Ornston, 2012). Smallness in terms of a territory and the associated jurisdiction is another factor not to be omitted, as it has provided a playground for technological experimentation and finding a niche through an entrepreneurial discovery process. This follows the arguments made by Tidd et al. (2005) who pointed out that smaller firms tend to differ from large firms by specializing. However, the findings from our study contradict their conclusion that this contrast between the diversification of large firms and specialization of small firms translates into varying upgrading patterns, where the former diversify and enter new industries, while the latter upgrade by moving into high-value-added segments inside the industry. We have shown how the studied start-ups have managed to enter a new and high-value-added industry through the capacity to turn a technological regime in their favour by actively giving directionality to innovations in the mobility industry as well as by controlling technologies in the context of low-intensity innovations due to specialization in niche products. In addition, the network effects of digital platforms have provided the grounds for rapid scalability, while the first-mover advantages and lower costs have made it possible to meet a changing global demand for innovative products. Lastly, getting on the bandwagon of digital transformation and sustainability transitions as well as anticipating global trends by trying to address some of the (wicked) socio-economic problems and globally universal needs have set up the stage for outperforming competitors.

The paper contributes to the debate on how innovation takes place in local firms involved in GVCs. Also, the paper can provide lessons for other developing and catching-up countries for considerations in relation to public policies and the government’s role. Estonian industrial, innovation, and entrepreneurship policies have been traditionally horizontal in nature, following the European best practices, and guided predominantly by the end products, instead of looking at specializations defined by the position of local businesses in GVCs, or searching for policy options that maximise gains from participation in GVCs. That said, and despite the fact that the automated mobility/delivery industry in Estonia emerged without targeted policies, there are industry expectations for making more informed policy decisions based on the utilization of the entrepreneurial discovery and sectoral knowledge. This, in turn, calls for designing policy instruments and measures in more agile and responsive ways to face uncertain and dynamic GVC developments. The focus of governmental support itself should not be limited to particular sectors, but focus on improving competencies for entering or upgrading in GVCs, particularly, in the context where windows of opportunities and technologies change rapidly. Further, while some of the new start-ups can emerge without targeted policy support, the global uncertainties (especially the demand and financial context) may require governments to design policies that enable these companies to develop and build capabilities throughout temporal demand and financing downturns and thereby maintain its hard-fought place and position in the GVCs.