sou · H3B3107 · 2016-01-01 00:00:00 — Even if these factors in many cases may fall outside of the firms’ direct control, they influence firms’ internal organisation of innovation activities. In both the economic policy debate and economic research on innovation climate, there is seldom any differentiation between capacity and effectiveness, which may lead to incorrect conclusions being drawn about the measures that best promote increased innovative capacity. Business sector R&D investments (Chapter 2) The corporate sector – the business sector – accounts for about 70 per cent of total expenditure on research and development in . Different industries vary in the intensity of their R&D use and it is therefore important to take industry structure into consideration when comparing R&D intensity between countries. A number of conclusions can be drawn on the basis of available statistics on both development of the Swedish business sector’s R&D expenditure over time, and how Swedish firms’ R&D expenditures compares with other countries’: The Swedish business sector is one of the most R&D intensive in the . R&D intensity has gradually increased since the beginning of the 1980s. In the 2000s Swedish firms continued to increase their R&D intensity, but at a slower rate than in the 1990s. Since the end of the 1990s and until 2012, R&D intensity in the Swedish business sector has even decreased slightly. More than half of all R&D in the business sector can be found in the following industries: “Computers, electronic and optical products”, “Trucks, other heavy motor vehicles and other transport equipment” and “Basic pharmaceutical products, pharmaceutical preparations”. These industries are also the most research intensive. Sweden distinguishes itself by having comparatively high R&D intensity in the private service sector. This may be an indication that the upgrading of, and specialisation in, research intensive services has gone further in than in comparable Bilaga 8 till LU15 Another explanation may be that hiving off and outsourcing of services has taken place to a greater extent (or earlier) in . High tech industries have the highest R&D intensity in all countries. However, in the significance of high tech industries is less than in , the and the UK. Specialisation into a number of R&D intensive industries is not unique to but a general pattern. The most R&D intensive industries may, however, vary from country to country. Countries with a high degree of specialisation (as regards industries) also generally have higher R&D intensity. Sweden has a positive “R&D gap” in relation to comparable countries. This gap derives from the Swedish business sector being specialised towards industries with high R&D intensity, but above all the high overall Swedish R&D intensity. In , as in many other countries with an R&D intensive business sector, large companies account for the majority of all R&D in the business sector. Differences in corporate structure play a part in explaining differences in R&D intensity (the R&D gap) between countries. The fact that a smaller number of large firms account for the lion’s share of the business sector's (and the country's) R&D and on to three firms may account for almost all R&D at industry level makes it tricky to compare countries on the basis of aggregate measures. An all-round description both of how R&D investments develop and how they are affected by various measures should therefore also look at the firm level (micro data) or even at individual company groups. There is a negative correlation between R&D intensity and company size. The positive R&D gap in the relative to the EU does not seem to depend solely on the being more specialised towards industries with higher R&D intensity, but also on the country having a (somewhat) more even distribution of R&D intensity as regards company size than the EU. Above all the has been successful in producing mid-size R&D intensive companies in fast-growing industries. Bilaga 8 till LU15 Specialisation, trade and internationalisation of R&D (Chapter 3) ’s standard of living has long been dependent on trade and other external economic relations. These relations have made possible a more effective resource use, while facilitating the utilisation of ideas and new technology. In that way it has been possible to raise productivity, generating higher real wages and higher employment levels, though not necessarily in exactly the industries that have met increased international competition. Despite a substantial volume increase in world trade and the relative free movement across national borders, mainly of financial capital, but also to an increasing extent of labour, the production of new technology seems to be relatively deeply rooted in the multinational enterprises’ countries of origin. However, even if firms’ R&D investments are slow-moving across borders, significant changes in multinational enterprises’ localisation of R&D have taken place. In the long term this will probably influence conditions of production and employment and thus living standards. Firms’ R&D also became less geographically concentrated in the early 2000s, which is an indication that firms’ R&D investments have become more globalised. Access to R&D capital and a skilled labour force has become an increasingly important factor in explaining international specialisation and trading patterns. There is also increasing trade in R&D services, either directly through service exports from R&D service firms, but also indirectly through intra-group payments (between countries) for R&D performed in one country but used in production abroad. Another important driving factor behind the increasing globalisation of R&D is that more countries are integrated in the world economy, thus becoming interesting as research nations. A local R&D presence in these new markets is increasingly important for adapting products to local requirements and preferences. As international ownership of companies has increased, a greater proportion of R&D falls under foreign control. It is difficult, using existing data, to satisfactorily describe all the driving forces and effects associated with this form of internationalisation. The factors that firms take into consideration when deciding where to locate their production and their R&D are Bilaga 8 till LU15 in many cases complex and vary not only from industry to industry, but probably also from firm to firm. Despite limited possibilities of identifying these often complex correlations, a few conclusions emerge: There is a positive correlation between R&D intensity and measures of the Swedish business sector’s comparative advantages in a number of industries. Overall, does not show comparative advantages in high tech exports. R&D intensity affects the focus of Swedish goods exports, but R&D intensity is far from the only factor of significance in explaining the international specialisation of the business sector. Swedish service exports have increased substantially in the 2000s. This is in some part due to an increase in exports of R&D services, but growth has also taken place as a consequence of an increase in remuneration to Swedish headquarters for R&D used in production abroad. R&D intensity is significant for the international competitiveness of the service sector. In addition receives considerable revenues from exporting patents, licenses, royalties etc. and reports a positive technological trade balance. Firms’ R&D investments have become more mobile across national borders. Despite more and larger countries, such as and , having been integrated into the world economy and become significant R&D countries, the majority of firms' R&D investments are still made in high-income countries. Economies of scale (market potential), access to skilled labour and the scope and quality of a country's innovation systems seem to be the most important factors behind the localisation decisions of multinational enterprises. Relative cost differences have a minor impact, but the design of the tax system and the existence of targeted subsidies affect the R&D firms’ localisation decisions. As a consequence of falling trading and coordination costs multinational enterprises have greater opportunities to separate production and R&D geographically and locate different parts of the value chain where conditions are the best. However, there is no clear-cut evidence that production and R&D are separated in all industries or that separation is becoming increasingly Bilaga 8 till LU15 Rather there are some indications that production and R&D are being localised together to a greater extent. The degree of co-location of production and R&D seems to vary relatively sharply between different industries. Relocation of R&D seems to be a complement to, rather than a substitute for, domestic R&D. Relocation of R&D can increase demand for R&D services in the home country as firms expand abroad. Domestic R&D may also derive benefit from R&D conducted in other countries, either by the firm itself or through good research environments in the host countries. China’s importance as a host country for large, Swedish groups’ R&D has increased considerably. In the 2000s has overtaken North as the next most important (after Europe) recipient region for large Swedish international groups’ R&D. Foreign firms’ of R&D brings several potentially positive effects for R&D in the host country. Domestic firms can be stimulated to increase their R&D to remain competitive, they can gain access to greater financial resources for R&D activities, and structural transformation towards an expansion of high tech industries can be speeded up. Cross-border mergers and acquisitions, if anything, seem to be positive for R&D in the (domestic) acquired companies. The fears that the domestic research base would be undermined as a result of increased foreign control seem to be exaggerated or at least not founded on solid empirical evidence. However, there are few systematic studies, in particular of the long-term effects, of foreign mergers and acquisitions on the domestic R&D base. ’s innovative capacity in an international perspective (Chapter 4) It is difficult to give a clear-cut picture of ’s innovative capacity, not least since it is difficult to measure satisfactorily the output of innovation activities. Patents are often used as a measurement in studies of the output of the innovation process, but for several reasons this is only a rough measure and is more suitable for studies of innovations in manufacturing than in the Bilaga 8 till LU15 fast-growing service and consumer goods industries. Besides patents other, more appropriate measures of innovations have been developed, such as the share of new products in total turnover. One problem in using these measurements is partly that only short time series exist, and partly that they seem to have a weak co- variance with common macroeconomic measures of innovations (such as R&D intensity). Despite the problems some conclusions can nevertheless be drawn: Sweden has a high level of innovation capacity according to available measurements and indicators. Firms’ total R&D expenditure has a positive impact on innovation capacity, measured as patent rate, even taking into account the existing patent stock, both in the home country and abroad. The econometric estimates made in this report show that the foreign patent stock is particularly important for generating (domestic) innovations. In addition, densely populated countries, all else equal, seem to be more inclined towards patents than more sparsely populated countries. This result may indicate that access to a large domestic market benefits innovative capacity. However, the results should be interpreted with caution. In terms of the “raw” relation between input factors, above all R&D expenditure, seems to generate few innovations (in terms of patents) relative to many other, comparable countries. However, it is worth pointing out that ’s relatively high R&D expenditure also fulfils the function of being able to assimilate and use innovations generated in other countries. sophisticated statistical analyses of the correlations between R&D initiatives and results in the form of patents indicate that is a country with high innovation efficiency close to or at the technology frontier. Studies show that innovation efficiency is affected by the design of both national innovation systems and framework conditions. This means that it is possible to support a more effective innovation process using political measures. Bilaga 8 till LU15 Effects of direct measures to stimulate R&D and innovation (Chapter 5) The market for innovations is not perfect in a number of aspects. The public nature of knowledge and the existence of spillover effects (or externalities) drive a “wedge” between the micro- economic and macro-economic return on investment in R&D to develop new methods and new technology. This wedge is assumed to lead to an unregulated market underinvesting in R&D compared with the economic optimal; which gives an argument for public intervention in the market for R&D and innovation. The public sector has played an important role in research and innovation in firms for a long time. Public commitment varies between different countries both regarding scope and choice of initiatives. However, over time most countries have decided to invest an increasing amount of public resources on R&D in relation to the size of the economy. Compared with other countries, public sector agencies in invest large resources in R&D in relation to the size of the economy (GDP). Market failures are in practice difficult to identify and differ between markets and industries, but above all between different types of research. is the existence of market failures a sufficient condition for public intervention, particularly not when it comes to R&D and innovation activities in profit-making companies. Public intervention may also lead to resources being used inefficiently and, in the worst case, lead to a worse outcome than would otherwise have been the case without the intervention. Extensive fiscal incentives, above all in the form of tax incentives, and high R&D intensity, exist in South , the and, to a lesser extent, in . , together with , , , and to some extent , have relatively limited fiscal incentives, but nevertheless report high R&D intensity. This indicates that the causality between fiscal incentives and R&D intensity may go the other way: extensive fiscal incentives may be an indication of deficiencies in other parts of the innovation system or of weak framework conditions that make return on R&D lower. This may mean that the governments in these countries instead decide to compensate for the weak Bilaga 8 till LU15 framework conditions by offering generous subsidies and/or tax incentives. The fiscal incentives seem overall to give the desired effect in the form of increased R&D expenditure in firms (called resource additionality) and, though to a lesser extent, higher innovation intensity (called output additionality). The effects of direct research support varies between different types of firm or research focus respectively; support to basic research (in firms) seems to bring higher macroeconomic return than support to more applied research, since spillover effects of the former type are greater. Several studies show, however, that cost effectiveness of fiscal measures is in many cases low. To achieve any significant increase – so that the effects are visible in macro data – in firms’ R&D or innovations requires fairly extensive reductions in income or increases in expenditure. These must then be weighed against other important objectives that require public financing. The role of education and research institutions, not least universities, for innovations in firms seems to have increased over time. Of European firms, Swedish, together with Danish and Finnish, firms are those that consider that universities and research institutions have contributed the most to their innovations. Publicly financed and performed academic research should in most cases probably stimulate R&D and innovation in firms. Academic research constitutes a kind of infrastructure – similar to traditional infrastructure such as roads, railways etc. – that firms cannot alone derive profit from since it is difficult to obtain payment for the services generated by the research. Nonetheless, publicly financed academic research can contribute to increasing competition for scarce resources, which, via price and wage formation effects, crowd out private research. However, it is probable that the net effect is positive, given that publicly conducted research is of good quality. Most firms are driven to concentrate their activities close to similar firms or firms that supply important input goods and services. The results of studies that try to estimate spillover effects between universities and firms indicate that firms’ R&D benefits from being localised near a university that conducts advanced research. The effects are greater in high tech industries such as pharmaceuticals. Economic research on agglomeration and cluster Bilaga 8 till LU15 formation assigns political measures a significant role in “accompanying” market forces and creating conditions for localising economic activity, including innovations. The same research also emphasises that what distinguishes the clusters that exist is that they constitute a complicated, economic ecosystem that is difficult to duplicate. Since the geographic proximity to the research laboratories of the universities is of importance for the emergence of spillover effects, the access to infrastructure, land and premises in direct proximity to research centres may be an important factor to take into consideration for decision-makers who wish to facilitate cooperation between universities and firms. In general it is more common for large firms to participate in cooperation with public research institutions than for small and medium-sized firms to do so. Among the countries it is by far the most common for firms in to collaborate with public research institutions. is among the countries with the highest percentage of firms participating in R&D cooperation with public institutions, in particular among the larger firms. The methodology problems involved in evaluating the effects of participation in research cooperation between public research institutions and firms are considerable. The (few) evaluations that exist support the idea that research cooperation may act as a lever to increase firms’ innovations and spread them through citations. The effects of cooperation seem to be greater for the firms that are already innovative, have previous experience of cooperation, are part of research networks with other firms etc. It becomes a challenge for the authorities responsible to balance the fact that the programmes probably give the greatest return – in terms of innovative activities – if they target those who are already successful, against the obvious risk that cooperation will be with firms that would have managed relatively well without the support. There is a statistically significant, positive correlation between individuals’ education levels and their innovation, but the causality of the correlation is not obvious. The educational level in has risen considerably in recent decades. The percentage with only compulsory education has fallen, and the percentage with some form of university education has more than doubled and is now over 40 per cent. In an international perspective there are relatively many people in with a theoretical education at a Bilaga 8 till LU15 higher level, but it is rather unusual to have short vocational preparatory programmes. Several emerging economies, including and , have drawn attention to education in natural sciences and technology (NT) as effective methods of promoting (future) growth. At the same time the proportion of students graduating in NT subjects has fallen in many countries over time, which also is the case in . To ensure innovative firms' access to skilled labour, but also to stimulate innovations more directly it is of the greatest importance that higher education maintains high quality and meets the labour demand of firms. Effects of indirect measures to stimulate R&D and innovation (Chapter 6) A country’s innovative capacity is also determined by (indirect) framework conditions. To a great extent the framework conditions that affect firms’ R&D and innovation are the same as affect their investments, partnerships and internal organisation. The framework conditions primarily refer to the supply side of the economy; that is the conditions that affect the extent to which real capital, intangible capital (including human capital), financial capital and other production factors are made available to firms. But framework conditions can also affect the demand for innovations. The significance of different framework conditions changes depending on a country's economic development level. Indirect and direct measures interact. A country with well- functioning framework conditions for R&D and innovation perhaps does not need to use direct measures, such as direct R&D support and tax relief, to stimulate R&D investments. Favourable framework conditions can also facilitate commercialisation of research results obtained by public research institutions. There is broad consensus on the importance of some form of minimum level for protection of intellectual property rights, but both theoretical and empirical research is divided on how extensive this protection should be. In addition there are other ways than patents to protect innovations, such as secrecy, short lead times to market introduction, a shorter time to the next innovation etc. Bilaga 8 till LU15 Protection of intellectual property rights can de facto facilitate the spread of ideas, since the alternative is to keep the innovations secret as long as possible. Nevertheless, with protection of intellectual property rights, other firms and individuals get access to new knowledge, even if there are restrictions on how they can use this knowledge for their own gain. It is important to make a distinction between the length of the patent (how long it is valid) and its breadth (how comprehensive the patent is, i.e. how many aspects of the innovation the patent protects). The conclusions concerning the optimal patent breadth and length vary according to assumptions on costs, barriers and consumer preferences. Decision-makers must find the delicate balance between favouring both early innovators and subsequent innovators. How the balance between advantages and disadvantages is to be achieved will also depend on a number of other factors that may differ between countries, such as transparency and economic development. Regulation in the labour and product markets has recently been highlighted as important in explaining innovation activities in firms, industries and countries. The growing empirical literature is, however, in many respects divided as to the effect regulation has on innovation. This is mainly because one regulation can have different effects on different parts of the innovation process, which becomes clear when a differentiation is made between resource inputs (for example expenditure on R&D) and outputs (for example patents). The effects also often depend on how regulation is implemented. Previous studies find some empirical support for more flexibility in the labour market, for instance in the form of weaker employment protection, giving more innovations. The effect seems to be greater for high tech industries.