Tuesday, June 20, 1989

Innovation in Welfare Sweden

(A shorter version was published in the International Herald Tribune, a publication of the New York Times and Washington Post, in June 20, 1989. The entire article was published in Italian in Suecia l'Oggi in Italy 1991. )

Sweden, with a population of only eight million people, boasts an impressive range of internationally renowned companies such as Volvo, Saab, Ericsson, Asea (ABB after the merger with Brown Boveri of Switzerland), and Electrolux.
You would therefore expect to find an excellent climate for innovation in Sweden. However, its inventors, innovation researchers and others in the field, paint a more complex picture.

Swedes, like other people, want innovations, hence the need for innovative minds. But who would like to see their son or daughter marry an inventor?
-Remember that I am a researcher, not an inventor, says one Swedish creator of new technology, in a typical statement.
-I am sixty years old, but I cannot recall ever saying with pride that I am an inventor, says Olle Siwersson, Chairman of the Federation of Swedish Inventors.
The inventor is a risk-taker, and most people don't like taking risks. This is not an exclusively Swedish attitude, but through its welfare system, Sweden managed to eliminate risk-taking for the individual more than in most other Western countries.
Add to this the anti-capitalist and anti-technology trend that followed the rebellious year of 1968. However, with the eighties came a fundamental change of climate. A key factor behind this was the Swedish industrial crisis in 1977-78, which forced the nation to search for new industries and products to replace the faltering ones.
-Gone are the days when the technician was an easy prey for anti-business sentiments. We have also had a dramatic increase in the creation of new businesses, says a leading Swedish expert on innovation, professor Bengt-Arne Wedin, at the Royal Technical High School in Stockholm.

Today you find some 400 small start-up companies clustered around Sweden's technical high schools from Luleå in the North to Malmö in the South.
-We overcame the anti-technology mood. The attitude today is pro-technology, says professor Torkel Wallmark. He is chairman of Chalmer's Innovation Center, a partnership between Chalmer's Technical High School in Gothenburg and private interests, which aids the 135 start-up companies around the school.

Local authorities, sometimes together with retired businessmen, help inventors to create new businesses and new jobs. Yet another sign of this pro-innovation trend, is the growth of the Federation of Swedish Inventors. Ten years ago, there was only one local group. Today there are more than one hundred.
Mr. Siwersson, however, still worries about his country.
-The problem is that other countries are also very good, perhaps even better, at starting new production based on new ideas. Just take a look at Japan - it's scary!

This is of no minor concern. Sweden's industry and welfare system is heavily dependent on foreign trade. It exports almost 38 percent of its GNP, and half of its industrial production.
Many of its leading industrial enterprises grew out of 19th century technological inventions or innovations. But since World War II, hardly any major new company has been built on new technology.

The Social Democratic governments have tried to stimulate new technology and new industries with direct and indirect support.
-When I took up this trade twenty-one years ago, there was no National Board for Technical Development (STU) or public support at all, says Mr. Siwersson. If your invention wasn't ready when your money ran out, you were finished.

STU, founded in 1968, is the main public source of funds for new technology. Last year it spent 850 million Swedish Kronor (about 135 million US $) on about 3,000 projects. Forty percent was spent on technological research at high schools and research institutes, another forty percent on development and diffusion of new technology in industry. The rest was spent on individual inventors, small and mid-sized companies, and start-up companies. STU funds 80-85 percent of all new companies in Sweden.
-No other country gives as much state support per capita to its inventors, says Mr. Wedin.
Sweden's growing research and development (R&D) spending matches that of Japan's and the country now allocates three percent of its GNP towards R&D. Swedish industry, especially its big members, account for most of the R&D. The public share is small, but increasing.

Despite the R&D push, a surprisingly small portion of the industrial production - only seven percent - comes from the hi-tech sector. It is the low-tech, raw material-based industries that dominate the industry and employ half of the industrial workforce. This will continue to be the case, as long as the medium and high technology industries stagnate or shrink.

This is troublesome, as the high-tech industries show the fastest growth in the world market and the most job opportunities.
The Social Democrats have preferred large companies, rewarding them with generous tax breaks, as long as they reinvested their profits. The managers of Sweden's big corporations didn't mind this.
-As we don't have any home market, we have to get out into the world and fight with the dragons. That's why we have a comparatively concentrated industry says Hans Werthén, Chairman of Electrolux and a leading Swedish industrialist.

This is perhaps the most fundamental fact of the climate of innovation in Sweden. In the United States there is a huge internal market and a multitude of different companies. Japan is more dominated by big corporations, but they are much more diversified than Sweden's. This gives the inventor more freedom to expand into different areas.
-If you have talked with one company in Sweden, you may have talked to the whole market, says Curt Andersson, Director at the Federation of Swedish Industries.

He claims that the industry today is much more open to new ideas than before, even though the main interest is in those innovations, which supports its core business.
How you feel about being inventor or innovator in Sweden, therefore depends on whether or not you are in the mainstream.
The large companies will probably support you if you are in the right field. You then have the chance of making a small fortune by selling your company.
-Many start-up companies are being bought by big companies, says Sören Sjölander, a researcher at the Department of Innovation Research at Chalmer's Technical High School. We showed in a research report that these companies actually grew faster after having been bought.

This doesn't mean that you have to sell out to survive.
-An independent innovator can do things of great interest to Sweden's core business, says Mr. Andersson.
This is made easier with the spread of powerful and affordable personal computers and workstations.
-Suddenly, you can develop incredibly fine solutions, in a way that was not possible before. There are many more interesting and potentially dangerous ideas out there, and I believe the industrial managers understand this, says Mr. Andersson.

Perhaps they do, but are they are really looking for inventions?
-They want innovations; they want an invention that has proven itself on the market. They want to bet on the horse after it has won, says Mr. Siwersson.

What if you are not within the mainstream or if your invention is totally new?
This was the case for Torbjörn Lagerwall and his American colleague, Noel Clark, at the Chalmer's Technical High School. They developed a radically new display technology, based on a scientific discovery in the field of liquid crystals (a technology used in lap-top computer screens, digital watches and pocket TV's). After having courted the Swedish industry for a long time, the two researchers finally turned to Japan for help. Last year Canon presented a prototype of a ferro-electric liquid crystal (FLC) screen with ultra high performance.
-Sweden is an extremely narrow-minded country, says Torbjörn Lagerwall. You are supposed to have to the same opinion as everybody else, whether it concerns theater, literature or physics. You should stick to what is already being done, to what is already known.
-The Swedish industry defends itself by saying that Sweden is a very small country. Why is it then that the Finns, who also belong to a small nation, can be so open-minded? They showed much more interest in our work than the Swedish industry did, he says.
To set up a factory that can produce FLC-screens would cost at least 100 million Swedish Kronor (about 15 million US $). That is too much for a start-up company in Sweden. It would take a company the size of Ericsson, but they were badly burnt when they tried to get into the personal computer business. Since then it has been "back to basics".

It is hard to argue that Ericsson should not focus on telecommunications, but for Sweden such a strategy presents a dilemma.
-Here we have a potentially gigantic market, but we don't have industries working on it, says Sven Ingmar Ragnarsson, responsible for the FLC-screen project at STU.

This is not an isolated case. Spine Robotics with its innovative robot products was recently sold to a Japanese company, although Sweden's Asea Robotics is a world leader in the field.
-I don't believe Sweden can do without specialization, says Mr. Sjölander. We are a very small country and we cannot afford a highly diversified industrial structure. Instead, we need a built-in mechanism to detect changes early and quickly adjust to them.

The key word here is flexibility.
-What is the point of being number one in mechanical cash registers, when the world has gone digital, says Lennart Ståhl, in charge of innovation at STU.

Sweden must find new industries to replace those who becomes obsolete, but how? The big corporations are fully occupied with their core business.
-We have very little of the American model where new technology leads to new enterprises, as was the case with Apple, Compaq, Control Data, Digital Equipment, Data General, Intel and so on, says Mr. Wedin.
-The large companies are not good at handling products based on new technology. That is why we need small enterprises, says Mr. Ståhl.

New ideas pop up all the time, but without a good climate for small start-up companies, they will all to often pop out of the country.
STU helps out in the early stages of the innovative process, but in the later, more costly stages, the Swedish inventor runs into trouble.
He needs capital desperately, but he has no product to sell yet. What he needs is an investor who is willing to risk money for a long enough time to get the business going. He needs venture capital.
More importantly, he needs the knowledge of the venture capitalist.
-The entrepreneur, a rich person who works with and acquires knowledge about how to start companies based on new technology, has a tremendously important structural function, says Mr. Sjölander.

Sweden saw the growth of a venture capital market in the early eighties. But it was more capital than venture, says Ingemar Ahlandsberg at the Ministry of Industry. When the quick results didn't show up, the market collapsed.

To a certain extent the big corporations act as venture capitalists in Sweden by supplying capital, their competence and knowledge of production and markets.
-It is very hard to develop new products in Sweden with venture capital, says Peter Weisglass, head of the Swedish Institute of Microelectronics in Stockholm. I have looked at balance sheets of start-up companies in the US and not one of them I examined would have survived in Sweden.
-The profit is taxed more than once down the line to the stockowner in Swedish companies, which is why it is extremely unfavorable to cash in the profit, says Mr. Wedin. The owner is better off if his company re-invests the capital in old activities that yield a moderate profit, than if he withdraws his money and invests in something that yields a higher profit.

Not surprisingly, the venture capitalist is rare in Sweden. Why take big and long-term risks if you cannot get big rewards?

The sharpening international competition is now turning this question from a moral one to a practical one: How to avoid the threat of losing world market shares?
A recent report from a government think-tank, Statens Industriverk, stresses the need to improve the business climate, both for the big and increasingly trans-national corporations, and for small start-up companies.
This reflects the growing insight that this time it is "Moder Svea" (Mother Swede) who has to charm the industry - large and small - and not the other way around.

This looks like a good sign for Swedish inventors.

Hans Sandberg

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