The Swedish Paradox

An innovator according to the Swedish society? Buy one here.

The latest issue of European Business Magazine has a detailed analysis on the relationship between research and entrepreneurship in Sweden, called “Research Heaven or Entrepreneur Hell”. It confirms the state of the (lack of) Swedish innovation policy.

According to the European Innovation Scoreboard (EIS) Sweden and Finland are the EU’s innovative leaders. Innovation meaning “competitive and dynamic knowledge-based economy”. We have all the requirements and are leading in all the important indicators.

But according to the Global Entrepreneurship Monitor we’re up s**t creek in entrepreneurship. Sweden has severe problems to transform this strength into commercial applications. see previous post

The European Innovation Scoreboard also confirms the U.S. leading position in R&D expenditures. The US government is mainly focused on contracts and procurement like the SBIR program for early-stage technology funding for small businesses (approximately 80% of the US government effort with a strong emphasis on defence and space).

The US universities are integrated in the innovation process, largely contributing to the diffusion of an innovative spirit. The report also concludes that there is plenty of evidence of a widespread European corporate weakness, given the fact that European firms have lower commitments to research and patenting and their weak participation to the core international oligopolies.

I get the feeling that the Swedish attitude towards innovation systems is that it consists of a bunch of propeller heads. To be an innovator is not distinguished enough to be taken seriously.

"Why Sweden Works" part 2

Members of the Parliament in discussion after a vote in the Chamber, spring 2003.
Photo: The Information Department, Swedish Parliament

A comment on the comment on “Why Sweden Works” from Jersey Perspective.

At present seven political parties are represented in the Swedish Parliament. Members of the Riksdag who belong to the same party make up a parliamentary party group. All important issues are discussed in the party groups before final decisions are reached in committees and in the Chamber. (more info here)

Except for the minor Left Party and the Green Party, the rest are in reality not very far from each other. Political battles are always won in the middle, not in the political extremes. Therefore all major political parties have a similar kind of policy.

Concerning economic policy I definitely support the opposition, but concerning innovation policy there are also a few well-informed persons on the (not so) far left side.

But frankly “innovation” and “entrepreneur”, which I think are key in growth policy, are terms seldom used in Swedish political debates, except in broad outlines. The party program of the ruling Social Democratic Party does not mention “innovation” at all. And “entrepreneur” is mentioned only once – “New entrepreneurs and businesses must be promoted and co-operative enterprises must be stimulated.” That’s it.

In the Strategy Report (in Swedish) from the Swedish Trade Union Confederation (LO), a 112 pages thick tome, “entrepreneur” is mentioned three times and “innovation” three times.
As a comparison:
“co-operate” (samverka) is mentioned 71 times
“fairness” (rättvisa) 67 times
“distribution” (fördelning) 45 times
“equality” (jämlikhet) 28 times
“solidarity” (solidaritet) 24 times
“capital” (kapitalet) 21 times.

The whole economic policy strategy is about a fairer distribution of income among different groups in society. (LO is the largest and organizes workers within both the private and the public sectors and has about 1.918.800 members.)

The Swedish “right-wing alliance” - “borgerlig allians” – formed by the four largest opposition parties, haven’t really cared either. But things could change rather quickly. The party secretary of the Moderate Party (moderaterna), Swedens leading non-socialistic party, was for example quite impressed by the Innovation Journalism program.

"Why Sweden Works"

Got a link from Jersey Perspective from my friend Dan Kreiss. Interesting U.S. perspective comparing the Swedish innovation economy (or the lack of) with the U.S . The main points are that high taxes does not necessarily mean anti-business socialism and whether tax cuts creates new jobs, wealth, etc. Taxes are an everlasting discussion all over the world...

My comments:

Sweden and large corporations

From the very beginning Sweden was an entrepreneurial country. Many products common today are Swedish patents and innovations, like the freezer, the zipper, the centigrade thermometer, the propeller, the monkey wrench, the pacemaker, the dynamite, the safety match, the ball bearing.

We still invent stuff, but since the beginning of the 1960s large engineering corporations have totally dominated the trade and industry (well, except for the basic industry forest and mining).

A few families and banks have been controlling the largest listed firms in Sweden. This is due to a Social Democratic political ruling, almost without a break, since the 1930s.

The political and economic powers have been united by strong common interests. The Social Democrats get support for their social and economic policies from the private sector, if the largest firms remain under Swedish control to prevent the capital to migrate. And the economic policy was tailored to suit the large dominating companies. Sweden has for example the lowest corporate taxes in Europe – 28 percent, compared to 38 percent in Germany, 40 percent in the United States and 42 percent in Japan – plus a special tax relief for foreign key personnel. This is a traditional policy of appeasement to keep the large Swedish companies – Ericsson, AstraZeneca, ABB, Volvo, Saab, etc – within the country.

In Sweden public limited companies also separate stock owner votes from capital. On ideological grounds the Social Democrats focused on the largest listed firms, in particular their investments and R&D spending. They supported financing via tax-subsidized retained earnings and loans from a strongly relation-based banking system. The economic policy for egalitarian reasons disfavoured equity markets as a supplier of capital.

Thus Swedish firms have only to a limited extent been dependent on the stock market, ownership did not disperse and addition of new firms has been very poor. There has been a very limited formation of private fortunes tied to new, fast-growing firms fuelled by equity market financing.

The drawback

This agreement between the political and corporate powers worked well until the 1970s, but the economy stagnated and did not respond to recessions and the globalisation. The policies were too focused on the very largest firms, and systematically ignored the need to create new ones.

The result is an unusually large proportion of very old and very large firms in Sweden, with well-defined owners in control. 31 of the 50 largest listed firms in 2000 were founded before 1914. Only 8 was founded between 1945 and 1970, and no large company has risen after that.

Opportunity is the mother of innovations

I glanced at the latest Global Entrepreneurship Monitor, an annual research program that measures the national level of entrepreneurial activity in 37 countries. From a Swedish perspective it is a sad reading. Sweden is leading in many innovation indicators such as most patents per capita etc, but is ranked at the bottom of the entrepreneurial list. But you can draw a few other interesting conclusions (if I interpret the survey correctly.)

Necessity is the mother of inventions, but opportunity is the mother of innovations. In general most entrepreneurs perceive a business opportunity. Income and education are the factors. Necessity entrepreneurship is common in low-income countries, while opportunity entrepreneurs dominate in high-income countries. From the report: 65% are opportunity entrepreneurs versus 35% who have no other employment options. In low-income countries those with lower levels of education start businesses, and vice versa. More educated entrepreneurs are pursuing more opportunity-based ventures, while less educated entrepreneurs are involved out of necessity.

The report shows a “U-shaped” relationship between entrepreneurial activity and per capita GDP. The activity declines as countries attain higher national income, (reaching its lowest point at about US $30,000 per capita GDP), but rising again as the GDP rises. For example, South Africa has high rates but low national incomes, whereas the U.S. and Iceland have both high rates and high national incomes. I wonder what will show up if you for example compare California with Arkansas?

Also, as national incomes increase, so does the proportion of start-ups in the services sector. And only 3 percent of all start-ups qualify as businesses that expect to have few competitors, intend to bring innovations to the market and use state-of-the-art technology.

My personal thoughts: The Swedish problem (and EU) is lack of entrepreneurial mindset. I strongly suspect that generous employment protection and unemployment benefits reflect the low entrepreneurial rate in Sweden. Most people who have a higher-level education are more likely to work for wages than become entrepreneurs. There must be very good opportunities to leave a well-paid work.

	Entrepreneurship Index
New Zealand	14.7
Iceland	13.6
Australia	13.4
United States	11.3
Canada	8.9
Poland	8.8
Ireland	7.7
Norway	7.0
Israel	6.6
United Kingdom	6.3
France	6.0
Greece	5.8
Singapore	5.7
South Africa	5.4
Denmark	5.3
Spain	5.2
Netherlands	5.1
Germany	4.5
Finland	4.4
Italy	4.3
Hungary	4.3
Portugal	4.0
Sweden	3.7
Croatia	3.7
Belgium	3.5
Hong Kong	3.0
Slovenia	2.6
Japan	1.5

Entrepreneurship blog

I tripped over “Entreprenörsbloggen”, a very nice down to earth blog about the conditions for Swedish entrepreneurs and the spirit of enterprise. Only in Swedish, unfortunately, but interesting stuff for any Swedish speaking.