Innovation Policy for a Small Country - The Case of Sweden

Bengt-Arne Vedin

Research Programme Swedish Business and Institute.

Director, SNS, Social Research

Bengt-Arne Vedin’s career has taken him from technical physics through semi- conductor R and D, editorship-in-chief of Ny Teknik (New Technology), the Royal Swedish Academy of Engineering Sciences as head of foreign secretariat and personal assistant to the president, and company directorships, to his present position as Research Programme Director of SNS, the Swedish Business and Social Research Institute. Dr Vedin serves on numerous research, technology and tele- communications bodies including membership of the Council on Industry and Technology for the Cabinet Minister of Industry. He is a company director and chairman, and he has published extensively in Swedish and English on media, technology and innovation.

Governments throughout the world are actively concerned to accelerate the pace of successful innovation in their industries. Of the smaller countries, probably none has a more elaborate system of incentives to innovation than Sweden. In this article the author describes and evaluates Swedish innovation policy. He contrasts Swedish industrialand economic performance with that of Switzer- land which had adopted a non-interventionist stance in relation to innovation, and raises fundamental questions about the distortions produced by an ‘over-organized’ society. The Swedish experience contrasts dramatically with the situation described by Professor Bruce in the adjacent article.

Introduction The two possible extremes of national

innovation policy are the totally planned and the utterly laissez faire economy. Neither exists in reality. ‘Complete planning’ violently contradicts the con- cept of innovation, and research and engineering education at least are seen as governmental responsibilities everywhere.

The case for having an innovation policy, and for some governmental acti- vity in the field, is that the benefits of innovation go to society much more than to the individual innovating com- pany. Mansfield and Terleckyj calculate average rates of return of 25-30 per cent for the innovating company, but give estimates which, though still con- servative, are as high as 55-90 per cent for society at large’t2. In innovation technologies much higher rates of return have been registered; Noyce reports a societal return in excess of 300 per cent in the electronics industry in the mid- 19702.

There are many other foundations for an innovation policy. Rothwell and Zegveld have outlined them in an octo- pus-like picture (Figure 1)4.

While innovation policy has been actively debated at least since Shanks wrote The Innovators in 1967s and ServanSchreiber Le Defi Americain in the same year6, discussions nationally as well as in bodies like the OECD has centred upon experiences gained from the big nations, especially the US, but also the UK, France, West Germany and, lately, Japan.

Big nations have much greater re- sources and influence than small ones. This is not to say that they have all the advantages. On the contrary, small countries do rely upon their greater cohesion, shorter communication channels, and other specific factors to form their own approach. Still, the feeling may be of helplessness, of being at a disadvantage.

This article reports on and scrutinizes the innovation policy of Sweden, one of the small countries. It is a country which has tried a great many varying tools to

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Figure 1 Industrial innovation - possible benefits.

foster innovation, sometimes very speci- fic tools. The Swedish experience reported here may be compared with that of Switzerland which is about as populated as Sweden, and has the same non-alignment neutrality policy and strongly armed defence. It is even less interventionistic than the US, and it has so far succeeded in keeping unemploy- ment low and growth relatively strong in the current recession.

The Swedish Industrial Background

Sweden’s population is somewhat in excess of eight million, with an area the same as that of European France, so the country is sparsely populated.

Sweden was a neutral country during World War II and its industry benefited greatly from the boom in the European markets after the war and up to 1970. The analysis of Swedish exports shows that they consisted to a very large extent of ‘low technology’ products, the bulk being iron ore, steel, and various products from the forestry industry.

These industries, as well as the mino- rity of high technology industries, were however, very advanced. An inter- national comparison, made through a multinational research project in the late 6Os, gave Sweden and Italy high marks, not for inventing, but for fast adoption of new technologies and techniques.

Sweden is unusual among small coun- tries in that it has an independent air- frame producer (Saab), depending upon defence contracts, two car manufac- turers, the world’s largest ball-bearing company, a leading telecommunication systems producer (Ericsson), and an independent producer of nuclear power stations as well as some innovative power generation and transmission systems (ASEA).

Up to 1970, Sweden displayed the highest per capita income of all countries and its economic growth outpaced that of average OECD. Since then, the picture has changed profoundly. Although this may be true of most OECD countries, except for Japan, Sweden’s plight is worse, comparatively speaking, than that of most other countries.

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8

7

6

5

4

3

2

1

0

-1

1955 60 65 70 75 80 Year

Figure 2 Annual changes in Swedish industrial production.

The country’s decline may be illus- trated by the following indicators:

l Production in 1982 was some 8 per cent lower than in the peak year 1974 - back to the level of 1972. Over time, growth of industrial production increased from 3 per cent per year during the 1950s to 8 per cent in 1965, since when it has decreased almost continuously for thirteen years as shown in Figure 2.

l Growth of productivity (value added per hour of work) also decreased

significantly during the 1970s from 14 per cent per year in 1963-74, until by 1979 it was only 8 per cent above correspondingvalue for 1974.

l Profitability in industry has shown a clear downward trend ever since the business boom at the beginning of the 50s a decrease which became more obvious during the 70s. At the same time business cycles have become more pronounced. This is illustrated in Figure 3.

l Although a steadily growing propor- tion of GNP has been earned from international exchange of goods

6-

5-

4-

3-

2-

l-

II ’ 11 11 11 11 11 11 1965 66 67 68 69 70 71 72 73 74 75 76 77 78 79

Figure 3 Net profits in the engineering industry (more than 500 employees).

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and services, the unfavourable pro- ductivity trend has been reflected in a loss of market shares both on the export market and at home. Since the beginning of the 1970s Swedish industry has lost 25 per cent of its foreign market, which singles it out from other OECD countries.

Research Policy Making

Some sectors have been more affected than others. Initially the textile and clothing industries were the main prob- lem areas. By the middle of the last decade, additional problem sectors had appeared - shipbuilding, steel, and sec- tors within the forestry industry. On the other hand, parts of the engineering industry and the chemical industry, especially pharmaceuticals, showed better performance.

The reduced profits from industrial activity also meant that industrial investments were drastically reduced. Investment volume in industry was down by 38 per cent between 1976 and 1982. Investments in R and D and marketing almost seem to make up for these losses, however, as shown in Figure 4.

R and D is part of the input contribu- ting to the desired output - innovation, ideas brought forward to a market. R and D figures are often taken as indica- tors of innovation performance, although this may be misleading. Sweden supports R and D very strongly, especially in private industry. As a percentage of GNP it rose from about 1.4 in 1967 to 2.0 in 1979. Part of the percentage increase is due to the dismal development of GNP, but the other part is almost entirely caused by a pronounced effort by indus- try. This is the largest increase of the last fifteen years in all of OECD, including Japan (see Figure 5). Two-thirds of all Swedish R and D is accounted for by industry.

At the same time, the efforts of Swedish industry are the most short term in all OECD. Sweden has not succeeded in becoming an exporter of high technology. The high technology export content figure of 13 per cent in 1963 (the lowest figure in all of OECD) was up to 19 per cent in 1977, but part of the percentage increase is because of

INDEX 1970 = 100 140

130

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Figure 4 GNP and its components.

42

Per cent

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Source: OECD

Figure 5 R and D expenditure in relation to GNP.

losses in export markets for mature products.

In view of the high priority of research policy, the new social democratic govem- ment has again reviewed the idea of establishing a research ministry. But, like their predecessors, they stick to the sectoral principle, which means that each ministry and each governmental agency should invest as much in R and D as befits that agency’s total programme, its overall task.

Some new means of coordination have been established or strengthened. The Deputy Prime Minister is responsible for the co-ordination of R and D, and the Minister of Industry has given more impetus to his industrial and technical council.

Three sectors account for about equal parts, somewhat in excess of 20 per cent each, of direct governmental R and D efforts. The Ministry of Industry (mainly through the National Swedish Board for Technical Development (STU) and the Energy Research Agency), the Ministry

of Education, which also holds respon- sibility for basic research, and the Ministry of Defence.

The technical universities receive most of their funding from sectoral agencies, mainly the STU, but also from other sources, including industry. Thus their basic funding, which is their long-term basis, tends to become somewhat mar- ginal at times. This forces their efforts to become rather opportunistic surveys and investigations instead of a long-term build-up of a knowledge base.

Basic research, including that in the technical field, is intended to be covered by the organization for the training of scientists, i.e. at the universities. In addition, the Ministry of Education has a number of research councils allocating funds for physics, chemistry, medicine, arts, literature, etc.

The Board for Technical Development (STU) is under the Ministry of Industry, and Agricultural Research is under the Ministry for Agriculture. The National Defence Research Establishment is under

44

the Ministry of Defence. There are separate organizations for research, deve- lopment, and services in information and documentation, jointly under the Minis- tries of Education and Industry (but somewhat closer to the former).

To safeguard co-ordination, there is also a co-ordinating body for the research councils. This does not dominate them, but neither is it powerless. It is a fairly new agency, and it has still to find its role. It is an interesting concept, since both MI’s and representatives of the Research Councils are members of this body. Some general tasks are informa- tion on science to the general public and expensive investments in scientific apparatuses.

Government procurement is also organized on a sectoral basis. This is an efficient means of stimulating innova- tion. Here the orders for telephone and energy and defence systems tend to be landed by large existing companies only, and they keep the job within their organizations. Sweden has nothing of the American experience of new companies started as the spin-off of such procure- ment orders.

Taxation Incentives for R and D

The increase in research by industry in the last fifteen years has been en- couraged by special tax preferences given to R and D. Companies may make an extra tax deduction for a percentage of their R and D outlays, and another such premium is given for increases in such outlays. The balance was recently shifted to encourage large R and D investments. During the period 1973- 81 the basic deduction was 10 per cent, and the deduction on increase 20 per cent. Now the percentages have shifted to 5 per cent and 30 per cent respec- tively. The reason for this approach is that social payoff on R and D is signifi- cantly higher than corporate payoff. The basis for the calculation is 2.5 times salaries paid out for R and D. Before 1982 it was salaries times 1.66. An average value over several years is used to calculate the basis for the reduction,

to prevent manipulations that would maximize tax benefits.

Though the system has been func- tioning for a decade it is not without defects. Only companies that register a profit benefit. Only companies over a certain threshold of effort qualify. Also, so many other tax deductions are available to reduce formal profits that many companies do not bother to utilize this incentive. Measures to solve these problems have been suggested, including the problem that small and new companies can hardly rely upon the favours of making extra tax deductions.

To bridge over business cycles, a Swedish innovation in economic policy which was quite successful, was the use of the investment funds. Companies get tax favours when setting aside money in such funds only to be used when govem- ment allows. This permission may be given either in a general way, during a depression, or more specifically, for investments in a particular region or a particular company. In a report for the Ministry of Industry in 1981 it was suggested that R and D should also be included in investments covered by the investment funds. The new Minister of Industry has announced that he is planning to implement that advice.

The Role of Universities In many countries universities play a central role in innovation and industrial innovation. This does not seem to be the case in Sweden. About 8 per cent of technical R and D at universities is funded by industry and that figure is lower than for all OECD countries, excluding Belgium. The United King- dom, the US, France, and West Germany all fall within the 20-40 per cent brackets.

To a large extent, this is the result of the student demonstrations in 1968 and the subsequent debate on whether university Rand D was ‘bought’. Research should be free, and industrial money was dirty, implying co-optation and corrup- tion. This attitude has started to change, and it is quite probable that there will be substantial changes in the near future.

National Swedish Boardfor Technical Development (STU)

This body is the central agency for the direct advancement of technology- based industrial development in Sweden. With 700 million Swedish kronor per year, and 350 people, it is a formidable resource. The funding structure is dis- played in Figure 6.

M SWK

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STU has several goals, the main one being to support technical development in industry by supporting promising but risky development projects. Large com- panies normally get loans with condi- tional payback rules, which means that if the goals of the project, defined in technical and cost terms, but not in market terms, are reached, then the money is paid back immediately.

Development companies. Consulting firms.

/

Institutions and trade organisations

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Companies <5 employees and individual

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Companies <500 employees

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Governmental institutions and authorities

Universities and university colleges

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68169 69170 70171 71172 72173 73174 74175 75176 76177 77178 78179 79180 80181 81182

Figure 6 National Board for Technical Development.

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For small companies and individual inventors, more liberal rules apply. Their payback of conditional loans is related to commercial success and income from the project. Unfortunately, the percen- tages are currently such that some inven- tors and companies have an incentive not to introduce a successfully concluded project’s result to the market, because initial payback would be disastrous to their cash flow. It has been suggested that this ‘Catch 22’ should be erased.

Probably Sweden, through STU, has the most extensive programme for sup- porting inventors in the world. STU offers inventors stipends to give some of them a one year term of tinkering with- out any severe economic problems. Inventors may obtain support for patenting, including advice on how to formulate their applications or how best to exploit the idea. STU is active in finding and negotiating the explora- tion of ideas that the Board funds. A problem for an inventor is often that STU will not fund an idea without any commercial partner showing an interest, but no partner might be interested until the ideas has been further developed so that it can be discussed in concrete terms.

Collaborative Research Institutes

There is comprehensive network of forty collaborative research institutes.

TypicG, industry funds a research foundation through which industrial contributions are channelled to the institute’s general and basic programme ; industry contributes about 50 per cent in most cases. The other 50 per cent is governmental, through STU.

There are two types of institutes, those sponsored by companies in speci- fic industrial sectors, like forestry, steel, or graphics production, and those dedicated to generic technologies such as optics, microwaves, and surface chemis- try. Needless to say, the latter may find it more difficult to raise funds and may have to rely on close relations with universities.

The institutes are very efficient as communication hubs, for the transfer and spread of technology. During the 60s Sweden was neither the inventor nor the first user but rather the fastest introducer of new technology on a broad scale according to international comparisons.

The institutes are one example of the advantages of a small country: its small community allows for experts from various companies and institutions to know each other. In the steel industry, almost everyone has been working in at least one competing establishment. In a small country, the American anti-trust legislation would not be applied, and we have to look for foreign competition to avoid monopolies.

One problem is that the institutes may be too practical, too little research orien- tated. Another is that their innovative potentials cannot be utilized, because they are legal non-entities, and also because industry wants to obtain the innovation for itself. Since it is a free- for-all, however, no one has an incentive to develop those innovations, and an impasse is the result.

Another problem is that institutes exist in well-established sectors, but not in the new growth industries. They might turn out to be helping to preserve an old structure.

Energy

Because of the importance of energy, not least to Sweden, which is endowed with so much hydropower but which is also very dependent upon oil and has one of the world’s most ambitious nuclear programmes, the oil price shock in 1973 caused a number of institutions and programmes to be instituted.

The previous rather complicated and inefficient structure is now reorganized. There is one council for energy research whose tasks include looking for ‘other’ energy sources and one general agency for energy questions. In addition, STU is responsible for innovation and direct technical development in this field.

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It is fair to say that, as in other coun- tries, the Swedish energy research and innovation programme has been a failure so far. Some interventions were unsuc- cessful because other factors dominated, such as building norms and standards. Efforts did not take into account well- known mechanisms within the innova- tion process. Wishful thinking played too large a role, and inventors and companies are lured into efforts by the government creating shadow demands, with the real demand non-existent. The same may be said about the allurement of public statements and general attitudes.

Other Means and Measures

Sweden is a well-organized country, perhaps too well organized for people to find their way through the maze of opportunities, and the other side of the coin, rules and regulations. There are regional development funds for the sup- port of local small companies, by money and consultancy, and they support some innovative projects. When a great number of regions encountered severe problems after the crises in steel, mining, and forest products, authorities started develop- ment companies, a combination of ven- ture capital funds and diversified produ- cers. Most of them, but not all, seem to have become failures. There is also an

Million US $

investment bank for large risky projects, and a restructuring company for injec- ting ownership capital into small com- panies in need of restructuring.

Another base for collaboration be- tween government money and private firms is formed by the Industry Fund which was started fairly recently. Its purpose is to bridge a gap in risks for large companies. There might be deve- lopment projects so inherently risky and large that large companies are reluctant to undertake them, because that would also pre-empt much of their potential for undertaking other projects. The Fund enters such projects on a joint venture, 50-50, basis, and the conditions are that the Fund should get paid back from the proceeds of the successful projects, normally through some kind of royalty arrangement.

Figure 7 shows a ‘map’ of the roles various bodies play in the support of innovation.

Finally, Sweden has pure crisis man- agement, in the form of support. A study on the electronics industry - there are many such studies for that sector alone as well as for many other sectors - showed that we have invested as much per capita in the electronics industry as have other countries. France, Japan, the UK, and Sweden were all about the same

TECHNOLOGY DEVELOPMEN

Figure 7 Sources of support for innovation. INVESTMENTS

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on a per capita basis. But while all the other countries have invested offensively in creating new technology, Sweden has put most of its money into ailing com- panies to save employment in corpora- tions such as Datasaab, Sonab, Luxor, and others.

Several efforts have been made to smooth technology importation. They have all failed.

Venture Capital Sweden’s innovation policy is very

‘push’ orientated, i.e. efforts are made to assist generators of ideas, such as inven- tors and firms, to launch these ideas. But the launching also requires something else - the prospect of commercial suc- cess.

To stimulate the development of a venture capital market and system, two measures have been implemented in the last year or so. One is the creation of an over-the-counter market, another is the establishment of a Swedish counterpart to the American Small Business Invest- ment Company (SBIC). Thus ‘Growth Investment Companies’ may obtain capital on favourable terms.

But there is a narrow limit to the availability of such venture capital and some of it can be obtained only if cer- tain rules are obeyed as to where the investments are being made - regional development is to be fostered.

Results

So far, the venture capital does not seem to be very venturesome. And the OTC market is more used to making a fast buck than to finance growth busi- ness.

The Industry Fund seems to work well.

The experiences from the tax rebate are also positive, but it is hard to supply any firm facts. Two investigations have failed in that respect.

The energy R and D system is now being improved. There is plenty of room for improvement.

Though the efforts to assist mainly small and medium sized companies in acquiring technology have failed, at con- siderable cost, no efforts have been made to emulate successful technology trans- fer operations such as those at Penntap or GeorgiaTech in the US.

STU has made a thorough analysis of the payback for the projects to 1980. From 1968, 364 projects out of a total of approximately 1500, most of them during the period 1968-70 had been implemented in industry, with a total STU support of 119.2 million Swedish kronor. Of these 255 or 70 per cent were still in industrial production, fourteen were discarded, and ninety-five were still judged as uncertain. Thus approxi- mately 25 per cent of the projects are subject to investment decisions, and some 17 per cent are successful. The difference between the 25 and the 17 per cent can be attributed to changes in markets and profitability.

The following table displays the com- position of the 255 projects in industrial production.

Roughly ninety-five of the 364 pro- jects have been paid back entirely. STU had got back 50 million SwK, out of 119.2 million invested by 1980. Twenty- four projects had been initiated by researchers at various university institu-

Single person Small company (< 50) Larger company (> 50)

No. of projects

To to1 revenue (m SwK)

No. employed

65 54 230 123 145 360

67 348 680

255 547 1270

tions of which fifteen had resulted in new companies being formed.

During 1980-l 12.9 million SwK came back to STU from earlier projects. A hundred and eighty-nine projects had been evaluated, with the result that 7 mil.lion SwK had to be written off, and 32 million SwK had to be paid back.

Discussion

Is Sweden’s innovation policy a success or a failure? Judging from the country’s economic performance, it is hard to deem it successful, yet some of those many policies would seem to be.

One problem is that while means and measures to further innovation abound, very few in-depth evaluations of the actual effects have been made. It is often said that ‘if you cannot measure, you cannot control’, and that may very well be the case here.

Another troublesome question is why Sweden has distorted her market economy through exorbitant taxation and high marginal taxes, with capital being locked in, staying in mature com- panies because of tax rules, through aid to ailing companies, too much wage equality, too efficient a social security net, and too few new companies being created.

Almost every governmental action and measure is designed to remedy, selec- tively, the effects of this catalogue of the welfare state’s characteristics. The ques- tion, then, is whether the country is better off with all those selective under- takings, which form a difficult maze of opportunities to negotiate, than with a more straightforward system such as that of Switzerland.

For the time being there is no certain answer to this question, though there are obvious beliefs, and it is not impossible to generate an answer. Again, evaluation of a profound nature might generate some highly interesting answers.

These answers would probably show that to some extent the system is distor- ting and that some distortions are hoped for while others are counterproductive

and may be remedied. Whether those remedies are practical, not least politi- cally, or whether the information that should reach the innovator can actually be transferred are different questions. .

A specific drawback in Sweden is the isolation of the universities from indus- try. A small country cannot afford to waste talent in this way. The change now taking place may take long, because atti- tudes change very slowly.

Attitudes are a keyword also on a broader scale, on that of society at large. It may very well be that this network of agencies, programmes and means of sup- port is much less powerful than if government, media, public opinion and educational institutions embraced inno- vation and new technology.

It has already been mentioned that the Swedish policy is very ‘push’orien- tated. It is also orientated towards policy-making of an institutional type, despite the fact that most action is in industry, and certainly most action that counts, in GNP, export figures, and com- petitiveness, for example. This fact is almost forgotten. The most important contribution to innovation for industry might well be well-trained, well-edu- cated personnel.

The institutional approach has another fundamental deficiency when it comes to innovation. The innovation process is uniquely dependent upon the ideas and efforts of single individuals. The success, or the failure, of the Industry Fund or the STU might be dependent less upon whether the support is for a good or bad idea than upon who happens to be the person in charge of the project.

Lessons for a Small Country Leaving aside the deficiencies in carry-

ing out evaluations and applying existing innovation theories, the following can be said of innovation policies for a small country on the basis of Sweden’s experi- ences.

The first important advantage is the opportunity to experiment and to reach a consensus about the lessons to be learnt.

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The major drawback is that a small country cannot have all expertise nor the wide range of information-suppliers available to a larger country. But this is minimized if the small country is open enough to rely upon scientific and tech- nical communications to reach out for such resources wherever they are. It may even be an advantage to have the freedom to shop around. A further dis- advantage has to do with large-scale projects, out of proportion for the small country’s funding, so that large-scale physics experiments, space and defence undertakings are impossible.

As soon as it comes to industrial colla- boration, national boundaries should be no barrier. Therefore, knowledge protec- tionism surfacing in the US is a cause for concern. But a small country has an advantage in that it is unthreatening to the large nation. Sweden has started some interesting projects together with countries like Japan, the US, France, and Hungary*

The small scale also affects the oppor- tunity to have several resourceful institu- tions in the same demanding field of R and D, with competition as a stimulant. But here STU has taken the step of having research projects evaluated by groups of international experts. This gives Sweden a number of observers and ambassadors all over the world and a sound feeling for impartial criticism.

The main advantage of a small country is perhaps the size of its community and the consequent easy communication, frequent and efficient networks, and the balance between competition and the furthering of the whole industry within the country. The collaborative research institutes are a good case in point. Some- times they do nothing more than co- ordinate efforts within individual firms, safeguarding general access to the more general findings, or preventing duplica- tion of expensive resources.

In the US, all of this would be stopped by anti-trust legislation. The small coun- try has its competitors abroad, and it is useless for it to try to introduce such legislation. All markets display imper- fections, and some imperfections are driving forces behind innovation.

The Industry Fund may be said to serve as a catalyst to very large scale projects, such as in Japan would be financed within a bank group, a Zaibatsu. The regional investment company is a Swedish variation of the American venture capital function, and it works.

Finally, the most important point is that a small country has to make a virtue out of necessity. It has to get knowledge from abroad, and thus design systems to that end. It has to sell to the world market, and thus be open to demands and competition there. It has to display cultural openness, adapt- ability, and creativity. The problem it has to handle is to balance its own administrative system against the func- tions and demands of some average or composed system representing the world market.

References

1 Mansfield, Edwin, Industrial Research and Technological Innovation W. W. Norton & Company, New York, 1968.

2 Terleckyj, Nestor E., The State of Science and Research : Some New Indicators Westview Press, Boulder, co, 1977.

3 Noyce, Robert N., ScienttjCic Ameri- can, September 1977.

4 Rothwell, Roy and Zegveld, Walter, Industrial Innovation and Public Policy Frances Pinter, London 1981.

5 Shanks, Michael, The Innovators. The Economics of Technology Cox & Wyman Ltd, London, 1967.

6 Servan-Schreiber, Jean-Jacques, Le Dbfi Americain Denoel, Paris, 1967.

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