Sweden, Finland and Denmark are leading countries when it comes to innovation and economic development. Enrico Deiaco, Swedish economist and former policy expert at the European commission, explains the secrets of this success.

Mr. Deiaco, for Sweden "innovation" is everything but a new concept. The last innovation index published by the EU confirms the lead of the country when it comes to innovation, followed by Switzerland, Finland, Japan and Denmark. What is the secret of Sweden's success?
This high standard in innovation is the result of at least three factors. First of all in the late 20th century Sweden made and adopted many breakthrough inventions that gave birth to companies like Ericsson (telecommunication), SKF (ball bearings)  and AstraZeneca (Pharmaceuticals) that soon grew internationally. If you compare the situation of Sweden to that of our neighboring countries Finland and Denmark for example, we have a noticeable bigger concentration of large companies. And most of our large companies were established around big inventions, which were originally developed outside Sweden but modified and marketed in Sweden. The adoption of foreign inventions and their modification into commercial products was a key strategy for Swedish companies.

Which role does the state play in this success story?
The large companies benefited from a close interaction with the state which included the promotion of flexible labor markets, competitive business conditions and favorable corporate tax regimes.  An important factor was also a sophisticated procurement strategy by government which created a strong demand and created incentives for increasing business R&D. These so called 'development pairs' between large companies and state agencies created strong industrial clusters that are still successful today.

Which role does the research play?
Research and especially engineering research is the third success factor for innovation in Sweden. In, the 1940s and 1950s, the government invested heavily in university education and research. As a consequence, the number of engineers increased and these in turn were hired by the large companies. As is well known, Swedish R&D spending are among the highest in the world, but almost 75 percent are carried out by private business.

According to the last Innovation Index, Northern Europe's economy has 60% of innovation sectors. How can we explain the delay of Southern Europe in innovation? Is this perhaps due to the fact that all these countries - Italy, Spain, Greece, Portugal - have a longer tradition of agricultural economy?
I wouldn't say that. Sweden is for sure a service economy, agriculture counts for  2 % of GDP, but it is extremely productive and innovative. Lack of innovation in these countries is no mystery but due to lack of competition, regulated markets, unfavorable business conditions and inefficient schooling and university systems.

How does the future of the other EU countries look like?
There is a lot of adjustment needed in Europe. Many countries will face a tough competition from the upcoming Asian countries (e.g. China and India), that includes Sweden as well and even the large Swedish companies are affected. It seems that Northern European countries have adjusted well, but others - like Italy - will have difficulties if structural reforms are delayed and protectionist measures are taken. Innovation takes time, needs a lot of new business experiments, particularly in the regulated service sectors, and incentives that encourage young people to start new companies.

Innovation can be learned?
Absolutely. If you want to be innovative, you have many choices of being so, starting in school. In the Nordic countries innovation is beginning to be part of the high school curricula. How to start a new company and to market and distribute its products and services is being taught. The government is promoting new programs on entrepreneurship and innovation for young managers of the future. In doing so you can change or form an innovation favorable attitude that will keep Sweden on top of the innovation rankings. If you would have asked a university student 10 years ago "where do you want to work?" it would have said "in a big company!" Nowadays many of them would say "I want to start a new company". This is what I mean with a change in attitude.

What is next in Sweden's innovation?
In a historical context we have been very successful with the large multinational companies and the co-operation between government and companies. Now we have to face a new challenge: the large companies are not growing in Sweden any more, at least when it comes in generating new employment. Thus, as in many other countries high hopes are turned to the small and medium sized companies. However, here Sweden has not been so successful over the last two decades. Compared to other EU-countries Sweden is not at the top in forming new companies.
This can be explained by the fact that incentives, laws and rules were developed for the large companies and not for new small companies. The result is that new companies have difficulties with taxes and public policies that do not fit their special business needs. This is something that we have to discuss now in Sweden: we have to develop an innovation policy for small and medium sized companies in order to remain innovative in the future.  And our regulated service sector, like health- care, tourism and education, would be an ideal candidate for allowing new entrepreneurship and innovative experiments. Interestingly enough this conclusion is also valid for a lot of European countries.

How can new ideas merge into a new company? 
Innovations need the right incentives and people willing to take the risk and chance of becoming entrepreneurs.  Sweden's IT and biotech-sector has boomed during the 90s with a lot of new start-up companies, partly because of high R&D competence and strong international demand and partly by regulatory reforms that made it attractive to create and form companies. If e.g. rules or taxes are not promoting innovation then you won't get innovation.

How do you create incentives for innovation? 
First, one has to remember that innovation is created by individuals, not by the government, the European commission or the universities. However, public policy is important in fostering attitudes towards entrepreneurship and innovation and fostering a conducive local/regional environment that makes these individuals willing to take risks and develop new products and services. Allowing new innovative experiments and entrepreneurship in the service sectors would be a powerful fix of stimulating innovation, not only in Sweden but probably in Italy as well.

23.02.06

Interview by Stefania Campogianni

Born in Sweden, with relatives in Val Badia (South Tyrol), Enrico Deiaco is an economist from the University of Stockholm and the Business School of Gothenburg, with specialization in public policy, particularly research and innovation policy. After a long experience as a researcher for international organizations and institutes, from 1993 to 1997 he worked as policy expert at the European Commission (DGXIII) and was one of the member of the first Green Book of Innovation that was published in 1996.
In Sweden, he was first vice president and then Acting President of the Royal Academy of Engineering Science till 2000. He is now Director of the Swedish Institute for Studies in Education and Research (SISTER).