The Nordic Countries Leaders in the New Economy? ICT, Innovation and Economic Performance

Date April 12, 2006
Speaker Thomas ANDERSSON(President, Joenkoeping University)
Moderator NEZU Risaburo (Director, RIETI)


The Nordic countries have a lot of movement with respect to the knowledge-based economy. Many countries are in a learning mood regarding where we stand but they meet with challenges as well as opportunities.

Jonkoping University is one of three major non-government-owned universities in Sweden. I believe there is a need for more flexibility and maneuverability for universities among other players in society today, applying to many countries around the world. In the case of Sweden, a government law restrains what can be done by individual universities. Because Jonkoping University is not government-owned the faculty can be organized to work in a different manner to that stipulated for government-owned universities. Our faculty is only concerned with checking quality. In other places, faculties are very engaged in the distribution of resources across different areas, which account for rigidities and in-fighting. Further, we control our own premises; in other places the premises are owned by a public authority, reducing their flexibility in acquiring and getting rid of premises. Our science park is organized on terms that fit us and has a business incubator and a growth area. This results in many students starting up their own companies. Almost one third of all companies started by students in Sweden are those who attend Jonkoping, despite being a fairly small institution. That kind of dynamism is very important today, a view shared by governments in Europe.

Technology is changing the shape of the world, and there are tremendous new opportunities. Above all, this has to do with reductions in the cost of diffusing, accessing and using information. Transport and communication costs have been declining for quite a long time. Information is becoming available at a tremendous speed. In moving toward a network society we have gone through several stages. In the 1950s through to the 1970s we spoke about data, products and competition. Then moving into the 1980s, the focus was more on information solutions and cooperation. In the 1990s, the focus was on knowledge, innovation and collaboration. Today there is the sense of the ubiquitous society. Business benefits have been increasing through e-mail, websites, e-commerce, e-business, networked organizations, and now perhaps digital eco-systems. Industries and different-sized companies vary in the extent to which they are taking advantage of these technologies. There are also geographic differences, raising worldwide concern about the digital divide. Telephone mainline penetration has increased across the board, but there is a far deeper penetration in North America and Western Europe than other regions. There was a dramatic increase in Internet users between 1995 and 2002 across all regions, however. The story is even more stark for mobile phone usage where, in absolute numbers, Asia is ahead. Even the least developed countries are now making real progress here, investing disproportionately in cellular technology.

Looking for the effects of all this, in the analysis there was a significant shift from looking at the producer side to the user side, which is where the real benefits of ICT are. There has been difficulty reconciling the evidence at the firm and industry levels, where many observations are clearly visible substantiating positive as well as negative effects. It has been argued that the impact is not as pervasive as expected on the aggregate side. It is difficult to get a link between ICT and the aggregate performance of individual countries. Then again we cannot just look at individual production factors; total factor productivity is increasingly in focus, and there is evidence linking ICT and the overall effectiveness of the factor setup. In terms of static and dynamic gains, for example, on the firm level, introducing ICT has initial costs which can be very substantial. There can be initial declines in productivity in many firms. On the organizational side there is a need for considerable development if the benefits are to be fulfilled. Over time, with organizational change at the firm level, there have been considerable gains. However that is contingent on complimentary enabling factors.

What are the crucial determinants of where different economies are heading? The macroeconomic setup is essential for fulfilling ICT success. There is a major difference between countries that have been effective in introducing the regulatory changes that allow for competition and those that keep investing in ICT but do not get regulations in order. Then, in the crucial human capital side, to deliver growth, the quality of education and good usage of skills is gaining importance over mere investment in quantity of education. Other determinants are research, innovation and linkages between actors in innovation, organizational change, entrepreneurship and risk-taking. All of these factors matter and constraints and weaknesses may arise in different places for different countries.

Moving toward the country level, within the Nordic and European context, and making comparisons with Japan, there are some important observations. Regarding human capital, whilst the United States appears to have marked strengths in education, a country such as Korea appears to be investing even more in education. Looking beyond quantitative measurement of the number of people and the amount invested in education, the most important is in which areas we invest, and our ability to become more creative. Nordic countries, Sweden and others, are considered strong in terms of some qualitative measures. However, at the highest level of skills in particular areas, such as science and technology, it is questionable whether one advances sufficiently to achieve the edge. In worker mobility, many countries have major problems, with students from Asia and Europe moving primarily toward the United States over the past years. However, this is changing with current US problems and as other developed countries sense an opportunity to attain a stronger position. Another source of strength is social trust, for example, with what certainty you can anticipate that you will get paid even if you are a small player with limited bargaining strength and political clout, if you undertake a transaction. Here, the Nordic countries are outstanding, and this is an area in which most societies around the world are faced with challenges.

The EU countries' Lisbon Agenda sets the objective of becoming the leading knowledge-based economy of the world by 2010. The scheme put research and development into a central role in Europe, with a strong drive to bring it to the level of the United States and Japan. However, the European Union is not really catching up and is now struggles with preparations for the Seventh Framework Program, for which there has been a real hope of increased R&D investment. However, the Nordic countries have very high R&D intensity as is, with Sweden being ahead even of Japan and the United States. However, Swedish business R&D is very much driven by transnational enterprises expanding production across the world for decades. Of course, R&D is being internationalized today, following production, although not to the same extent.

There is an excessive emphasis on the amount of funds going into R&D. What is more critical has to do with incentives, why investment is made in R&D and human capital, and how the different components relate to each other. In Sweden, there is a strong emphasis on university R&D, whereas investment by government organizations and research institutes is much smaller. In Japan, universities are much weaker. The Swedish model emphasizes investment in universities, and cherishes fairly free academic and basic R&D in that sector, plus puts a strong emphasis on big, established enterprises, with very much applied R&D and a driving force for globalizing production. However, the SME sector has much greater difficulties interrelating with university and academic R&D, and poorly developed industrial institutes. In measuring output by publications, Sweden and Switzerland rank highest, with large public investment in university R&D. Japan is much further down in this area.

Patents are an important indicator of commercialization. Sweden is well positioned, although not quite as strong as Japan or the United States. It has a more equal balance between European and U.S. patenting systems; whilst Japan goes more for the U.S. patenting system. Other European countries are far behind, and Russia, China and India are hardly on the map yet. Of course India and China have put intellectual property rights regimes in place now and things are changing.

In terms of high-tech exports, the situation is changing radically, with China being the prime source of increasing high-tech exports today, whereas most other places are in decline. China's growth here is still being driven not by high-value added production but by assembly of input from Korea, Taiwan and Japan. However, its ambitions are clearly to become stronger in high value-added production itself.

Looking at the actual growth of countries over time, Swedish industry is performing well and has done so for some time, in terms of productivity. That part of the economy which invests strongly in R&D and extensively uses ICT is doing extremely well. However, for the aggregate record, Sweden is not so well positioned. Ireland is the shining outlier in the European setup. The larger continental European countries such as Germany, France and Italy, plus the United Kingdom, are having considerable problems. It appears that they have real difficulty in embracing the need for change, and that the EU mechanism is too weak in terms of driving reforms that are really needed.

Innovation is very important. One has to look at both the supply side of scientific advance and the technological output of the scientific system, as well as the ability of the players to relate to the demand side and the marketplace, and the importance of organizational change for being able to link between these two sides effectively. There is a clear tendency today for companies to identify their core business, to interact with players that are complementary in their activities, and to learn in a way that is effective in their particular niche of expertise. There is also a need for improving conditions for spinouts, spin-offs and risk-taking in smaller units that are not within the established core business, and to find the right balance between established players and risk-taking in new areas. This makes it very important to have financial conditions allowing investment in earlier stages. There is an inherent funding gap between the initial publicly supported science base and the mature stage of established technology and firm expansion, where the market and private funding are effective in taking care of operations. The gap is not really a matter of financing; it is much more about information problems, agency problems and trust issues. Innovators and entrepreneurs must be able to match and team up with those that have funding, and they must be able to combine different competencies and put trust in each other in order to bridge that gap. Many policies today that try to address the gap seek the proper way to mobilize public money and action in order to catalyze market players to enter at an earlier stage of the commercialization process.

Despite the very intensive R&D in Sweden, venture capital is not really supporting commercialization when it is most needed in the early stages. In addition Sweden is not very dynamic in terms of the entry and exit of manufacturing or business-service firms.

The percentage of the population that is involved in entrepreneurial activity is fairly low in Sweden and even lower in Japan. Contributing factors in Sweden include high social trust, reliance on big business and the public sector. Taxes and other conditions and attitudes need to become more conducive to the startup of new firms and early stage risk-taking, without which it is difficult to capture the full potential of ICT or the very high R&D intensity prevalent in Sweden. R&D intensity allows large, established firms to keep expanding internationally, but Sweden must get more renewal and complementarities by new actors coming in from beneath.

GDP growth over the past two decades has declined in Western Europe, has been fairly stable in the United States and is picking up in China. There is now a sort of rebalancing going on, which has to do with globalization, technical progress and the information society, which now brings a lot of new opportunities for the world as a whole. The established countries must find their way forward. Nordic countries have strong potential in many respects, but also meet with challenges.

Comments, Questions and Answers

C: Regarding regional divides, North America and Western Europe rank high in development of ICT infrastructure. However India is quickly catching up, particularly in the so-called fast broadband infrastructures. Japan, Korea, Taiwan, Singapore, Hong Kong, densely populated countries have very efficient and very rapid telecommunication infrastructure. It is difficult to look at Asia as a whole. You should take into account the difference among Asian countries.

A: In ICT the emphasis is undoubtedly turning toward Asia, with Japan and Korea being very much in the forefront. In the mobile area northern Europe, Japan, Korea and gradually China are the most advanced players. It is true there are important differences between the individual countries, which in itself represents an opportunity.

C: Trust is a very interesting point which Japanese people should reflect upon. We have long thought that the level of trust in Japan must be the highest in the world; everyone knows each other, we can communicate without a word. That may no longer be the case; our trust system may be falling apart. It looks somewhat odd that Japan falls behind even China in terms of trust. We might ask how this figure has been prepared.

C: Europe is not spending as much as Japan or the United States on R&D in terms of ratio to GDP, however I think what matters more is how the money has been spent. Europe should therefore look more closely at this.

A: As you say, we need to use the numbers but also be very conscious of the need to look behind the numbers and aim for quality rather than quantity. Policymaking in many cases is too obsessed with just achieving numbers. They can be useful instruments for getting momentum but can also lead you in the wrong direction. I would strongly argue that in the European setup there is a mistake in emphasizing quantitative levels of R&D over other key issues such as labor mobility. France is a case in point.

C: Universities are becoming important players in developing communities and Japan is also aware of that. That is why Japan has been rather serious about university reforms, which are halfway there.

Q: How does your university get money; from government or industry?

A: The Swedish government does not tolerate universities charging students. However the government requests that it should pay for all students up to a certain ceiling. In this sense, funding for public and private universities is identical. However, from 2008 both public and private universities will probably be obliged to charge all non-European students. My point was that being non-government you are not bound by the same regulations and so are more capable of carving out your niche. Jonkoping is very much focusing on entrepreneurship and innovation, and on having a different kind of interface between the university and the private sector, with small and medium-sized enterprises being very strong in that particular region.

Q: How can contributions to universities enhance R&D and innovation? Why do the Nordic states have better performance than large Western European countries that have large facilities, good researchers and a much bigger budget? How can competitiveness be enhanced compared to other large European countries?

A: One should also keep in mind the importance of the new members of the EU, which are growing very strongly and are not putting in place the same strong limitations on the functioning of the labor market that Western Europe had. So they are pretty dynamic and the competition they bring will be important for getting reform underway in Europe as a whole.

I think that there is a major issue for European universities to become more open to change. There is too much rigidity and influence of traditional values. Much of the demand from the science system is on the need for more resources, to boost public research, and there is a mistaken belief in scale economies. Without reforming the way universities are working and giving them greater freedom to carve out their niches, more public money will not be very effective.

Q: Do you teach in English in Sweden or do foreign students have to learn Swedish?

A: I think Jonkoping International Business School is the only Swedish higher education institute where basically everything is taught in English. Even having an entire university program only in English is rather rare.

C: In Europe the Bologna process is changing the degree system. Many Swedish universities are devising new master's degree programs, many of which are in English.

A: These programs are being planned but they are not in place yet. Bologna means that all European countries will adopt a similar structure for higher education. There is a very strong commitment to do so. Students will be able to move between institutions much more effectively than today.

C: Also, on the research side, many departments of Swedish universities are quite international, with many foreign researchers doing studies or as professors.

Q: Given that the West Coast of the United States is heavily dependant upon top-level Chinese and Indian students who are now returning to their home countries, what do you think about Indian and Chinese future innovation potential, from the Nordic point of view?

A: There are changes under way, but so far it has been difficult for most European universities to be aggressive and open to accepting foreign students as there was a ceiling to the number that could be accepted. However once schools are obliged to charge non-European students from 2008 there will be much greater striving for Swedish universities to accept foreign students. However the big difference between Europe and the United States is in Europe's lack of openness to allow students to stay on to work outside of the university, diminishing entrepreneurship.

Of course many Chinese and Indian students are returning from the United States, but many already took the time to develop their businesses in the United States and develop U.S.-Asian relationships. In Europe the student can either become an academic or go back, but it is very difficult to be entrepreneurial. We really must tackle this serious issue.

Q: Sweden has an excellent trust infrastructure, but one weakness is the high tax rate; so can it attract entrepreneurs through policy initiatives or innovation driving forces on human resources?

A: Some firms are moving out some research and development, but at the same time there has been a complimentary relationship with R&D growing abroad as well as at home. Another aspect is inward foreign direct investment. So far, Swedish companies that became transnational have continued to invest in research and development in Sweden. So Sweden continues to be a platform for R&D, although there is intensive globalization both on outward and inward investment.

Q: Is there any fragile or weak basis and any danger in Nordic countries in the private sector's R&D?

A: In Finland there is recognition of a danger in reliance on Nokia. On the other hand, Finland has a clear-cut, conscious policy of supporting Nokia in a manner that pushes for creation of spinouts and new high-tech companies, therefore working towards reducing the reliance on Nokia. Denmark has a high R&D-intensity, given its structure, with lots of healthy medium-sized enterprises. Norway is very strong on oil and is also doing surprisingly well in many medium-sized firms in other sectors, largely avoiding the Dutch disease of destruction of other industries. Sweden has the broadest platform for research and development and internationalization. The research basis is particularly in telecom with Eriksson and the automobile sector with Volvo and Saab for instance; also in the pharmaceutical sector, with AstraZeneca being one of the players; then in other engineering companies such as Electrolux and ABB. This is a pretty broad basis; of course, looking at the distribution of R&D across firms, six or seven industrial groups still account for 80% or so.

Q: The UK model was previously so successful with universities contributing hugely to industry and creating many entrepreneurs and small companies. Is the lack of a high-tech industry one of the reasons for the declining of the UK model?

A: I think that the UK and British society faces significant challenges. It is a society very much influenced by traditional values. It has been a class society with very different levels of knowledge and education in different social groups and that is still very much there. Using traditional indicators, British universities, several of which are extremely high class, come out very strongly. But they have huge difficulties in reforming themselves, hampered by traditional ways of working. I believe that they need better conditions, not only for big internationalized firms but also for new firms. The financial sector is well developed but there is the problem of the European Monetary Union relationship, which the UK chose to opt out of.

Q: What is the social system to enhance such a scrap and build transformation? Is it different country by country even in the Nordic countries?

A: There is an argument in Sweden that the strong social safety system helps industry to be replaced and individuals to take on risk. If you lack social protection, that may hamper risk-taking and restructuring. But if the social protection is such that it makes people unwilling to move from one area to another then there is a problem. You have to design social protection so that it provides incentives for individuals to retrain. I think Sweden is right in-between. It also has instruments for retraining.

During the collapse of the shipbuilding industry, when the Swedish government tried to prop up the industry with heavy subsidies for several years, there was a very weak performance in the affected regions. When the government let go and the industry collapsed, but put in other efforts to facilitate entrepreneurship or retraining, then there was a revival.

Q: Could you say a little bit more about industries? Because if you go back a few years my understanding was that the Nordic countries, especially Sweden, were actually not doing very well, with a lot of heavy industries like shipbuilding, steel and autos, and they were having problems. Then the telecommunications industry was doing well, but after that was the high-tech bust. Now we have not heard so much about particular industries from Nordic countries for a while. Did these industries somehow revive themselves or do we have due industries now? How does this apparent recovery that you are showing show up in particular industries?

A: From 1870-1970 Sweden was the second best performing country in the world. By 1970 Sweden was one of the three richest countries in the world. Then the oil crisis set in, but more seriously there was a situation where the governments had expanded very much and conditions for entrepreneurship were no longer right. Most established industries in Sweden, even today, were created in the late 19th century or very early 20th century. During the 1980s and 1990s there was quite some fluctuation. In the early 1990s there was a major crisis, at almost exactly the same time as Japan's. The difference was that the Swedish government went in aggressively in the financial sector. A special authority was created that worked very hard on cleansing the financial sector of all the bad debt. It worked extremely effectively over a very short time and improved the situation. There was a major contraction in Swedish industry, but Swedish firms expanded abroad. That pattern has continued, so there is insufficient investment in new operations in Sweden itself. Swedish industry is one of the world leaders in terms of productivity growth but in a way the platform is too narrow and the base keeps expanding abroad. There is a question about what will happen in the years ahead; whether the renewal is sufficiently strong in Sweden itself. There are some very successful new establishments that have moved abroad. So productivity growth has remained very high in the established industries, including telecom and engineering, but expansion has taken place abroad and there is too little renewal within Sweden itself.

*This summary was compiled by RIETI Editorial staff.