Financial Bureaucracy Featuring Innovation Bureaucracy – Insights from Diverging Pathways in the Baltic States

The emerging friction between modern solutions in finance and the established financial policies of the pre-FinTech era echoes a challenge of how to effectively integrate radical technological innovations and changes in technology systems with appropriate institutional and social innovations (see Freeman, 1987; Perez, 2002). Consequently, financial regulators are called upon to devise “new methods for identifying, monitoring, and potentially counteracting shifting dynamics of decisional control and market power in the financial system” (Omarova, 2020, pp. 100). Furthermore, the state is expected to engage in innovations "within" its own institutions and organizations while simultaneously fostering market innovations through policies (Kattel et al., 2022). Some policymakers have assumed a more proactive role in developing innovative services and new technologies through experimentation within government, exemplified by financial authorities actively exploring blockchain technologies to enhance their operations (OECD, 2018; Berryhill et al., 2018). Additionally, policymakers have adopted various regulatory approaches, such as innovation hubs and regulatory sandboxes in the domain of finance (Buckley et al., 2020). From an organizational perspective, such numerous new approaches and innovative initiatives focusing on the FinTech sector have been adopted either independently or collaboratively by financial bureaucratic institutions, such as central banks (CBs), ministries of finance (MoFs), and financial supervisory authorities (FSAs). This suggests, at least partially, the integration of innovation bureaucracy elements within financial authorities (see Kattel et al., 2022 on innovation bureaucracy) and reflects their transformative capacity (see Borrás et al., 2024) to guide developments in the socio-technical system categorized as FinTech and its various subdomains. And, it can be conjectured that financial bureaucratic institutions that proactively address pressing issues related to FinTech possess specific capacities and capabilities to direct innovative activities in finance. Thus, the main aims of this paper are to explore how the general expectations of the innovation bureaucracy literature manifest within the domain of finance and to identify the specific challenges faced by innovation bureaucracy in the field of finance. As an exploratory comparative study, this research examines the extent to which financial bureaucratic institutions exhibit elements of innovation bureaucracy in the Baltic States. Estonia, Latvia, and Lithuania present a compelling selection of cases. They share a common historical background and political and economic structures, while also boasting vibrant, prolific local start-up communities, particularly in finance and technology. Each of these Baltic states is emerging as a global hub for FinTech innovation and activity (Aalto Capital, 2021). However, they have adopted differing approaches to FinTech policy (Raudla et al., 2024a) and have varied records in embracing innovative institutional measures—such as regulatory sandboxes—to support FinTech companies and innovation (Raudla et al., 2024b). Thus, one would expect that there is also a significant variation in the roles, available resources and embedded abilities of the financial bureaucracy in the three Baltic States.