Prof Göran Roos, Chairman, Advanced Manufacturing Council SA

Knowledge created by one agent can be used by another without compensation, or with compensation less than the value of the knowledge. Knowledge spillovers are particularly likely to result from basic research, but they are also produced by applied research and technology development.

This can occur in obvious ways, such as "reverse engineering" of products, and also in less obvious ways, such as when one firm's abandonment of a particular research line signals to others that the line is unproductive and hence saves them the expense of learning this themselves.

The spillover beneficiary may use the new knowledge to copy or imitate the commercial products or processes of the innovator, or may use the knowledge as an input to a research process leading to other new technologies.

Market spillovers result when the operation of the market for a new product or process causes some of the benefits thereby created to flow to market participants other than the innovating firm.

It is this "leakage" of benefits through the operation of market forces, rather than the flow of knowledge itself, that distinguishes market spillovers from knowledge spillovers.

Any time a firm creates a new product, or reduces the cost of producing an existing product, the natural operation of market forces will tend to cause some of the benefits thereby created to be passed on to buyers.

Network spillovers result when the commercial or economic value of a new technology is strongly dependent on the development of a set of related technologies.

The value of a network to any one participant is an increasing function of the number of participants; here the expected value of any one research project is an increasing function of the number of different projects undertaken.

Snergistic market interactions among a small number of technologies is unlikely to create a coordination problem, but when the number of technologies that must be developed is large and the necessary capabilities are diverse, the coordination problem may become severe.

All advanced product development ”spills” technologies that become available for free to other firms in proportion to their receiver capacity (Commercialization)

Social economic value creation occurs

Spilled technologies are a byproduct of sophisticated product development (joint production)

They have the character of unpredictable innovations, and have to be commercialized to result in measured contributions to economic growth

Their development spills technology to other (civilian) industry

These spillovers may be very large

Recognizing them, or not recognizing them in a cost benefit analysis of a public development project makes all the difference for the outcome of the analysis

1. Competent and active Customers

Technology Supply 2. Innovators who integrate technologies in new ways

Commercialization of Technology 3. Entrepreneurs who identify profitable innovations

4. Competent venture capitalists who recognize and finance the entrepreneurs

5. Exit markets that facilitate ownership change

6. Industrialists who take successful innovations to industrial scale production

In advanced product development the customer is often directly involved contributes user knowledge

which becomes a characteristic of technology supply, and

raises spillover intensity

New firm formation

TFP increases in civilian production

Net Military exports

Individual learning of modern methods and technologies.

During the 26 year period 1982 through 2007 77 billion SEK in 2007 prices were invested in Gripen development

Had the same money instead been invested in financial markets at a 4 percent real interest the amount foregone by the Swedes during the same period would be 131.5 billion, or on average 0.17 percent of GNP annually.

In return, realized spillover values in the form of new firm formation, productivity improvements in existing civilian production, or Gripen exports amounted to at least 350 billion SEK or 0.43 percent of Swedish GNP annually.

If the spillover value is divided by the development investment we obtain a spillover multiplier of at least 350/131.5 = 2.6

The spillover mutliplier corresponds roughly to the ratio between the social and private rates of return on the development (R&D) investment

Econometric research on less advanced R&D in US firms show even larger spillover multipliers

The spillover multiplier from project Gripen 1982-2007 is at least 2.6 Swedish society has got the entire development investment back, plus at least 1.6 times more in the form of increased growth

In other words:

Local entreprenurial abilities to commercialize technology come in between

Core technologies Saab´s regional aircraft and subsystems for Boeing and Airbus

Volvo Aero moving from military to civilian aircraft engine markets

Related technologies Civil security

Space

General engineering technology

Light weight technologies (Acab, Saab, Volvo Aero)

Systems integration

Distributed and flexible manufacturing

High speed machining (Modig)

General industrial technology Direct :

Ericsson mobile telephony

Kapsch Traffic Systems

Rosemont Tank Radar

Indirect: Engineers and skilled workers from aircraft industry move to other industries , e g the Swedish automotive safety industry and Autoliv.

Development of industrialcompetence blocs in Linköping around Saab och LiTH

Aircraft industry

Image analysis and medical equipment

Innovative entry (Birth) enforced through competition

Reorganization

Rationalization

Exit (Death)

The excellent procurement competence of the customer

The entrepreneurial capabilties of the local economy

Military aircraft industry, in addition, already today uses the technologies and manufacturing processes of future engineering industry. In practice it has therefore served as a technical university providing new technology and training for engineering industry in particular.

One firm cannot internalize the development of all needed technologies. Some have to be sourced externally. The competence to integrate it all into a flying aircraft a competitive advantage.

The importance of varied markets of specialist subcontractors, as a breeding ground for the spontaneous development of large firms

When the decision was taken to develop the Gripen combat aircraft 1982 three alternatives were compared:

Modify the previous generation combat aircraft Viggen

Buy a foreign platform, modify it to the extent possible and manufacture in Sweden

Develop an entirely new combat aircraft with demanded unique specifications

If the value of the spillover cloud surrounding Gripen development had been made statistically visible and properly entered into the cost benefit analysis Gripen would have been the by far least expensive alternative for Swedish society.

Computer guided (”unstable”) aircraft

Light weight technologies

Multirole switching in flight

Easy to service by non specialist staff, high availability

Extremely low life time cost

The more radically new the design, the larger technical risks, but also the larger spillover intensity

This is particularly so for products using electronics and software intensively

The cloud often more valuable for society than the procured product

But almost all of that additional value is lost to the firm that created it - even though that firm would have been happy to charge for it

The consumers gain most, and

the spillover generating firm has a property rights problem

Government should be interested in both the product it procures, and the cloud and be concerned, both about maximizing its economic value for society, and,therefore, paying something for it

Should be unique and superior to those of the enemy, and

Uniquely protected from the weapons of the enemy

This means that unique and superior equipment constantly has to be developed

Innovative product competition occurs, and

Spillover intensity is maximized

The more complex the system,

the more demanding on many specialized technologies, and

the more electronics intensive

Today impossible even for a large economy to do it all

A sophisticated product requires the best globally available technologies

Hence Gripen very import intensive.

Integration can however be achieved in a small economy by a sophisticated systems integrating firm that draws on a global industry of specialist subcontractors.

To achieve unique product functionalities the customer and the supplier normally have to work together, both contributing to product quality

When customer and supplier cooperate, and together contribute to a better product conventional thinking of competitive purchasing no longer holds.

When the customer and the supplier develop a superior product together the business is about agreeing how to share the extra value created together (incentives)

Gunnar Eliasson, Professor Emeritus of Industrial Economics, KTH, Stockholm