sou · H3B3107 · 2016-01-01 00:00:00 — However, the relation between labour market regulation and innovations could be expected to apply in the short term; regulations that get firms to retain their employees during crises may have a positive impact on innovation and radical breakthroughs in the longer term. shows a closer relationship between investments in knowledge- based capital and GDP than is motivated by a simple regression between employment protection and the share of knowledge capital. In other words, there are factors other than employment Bilaga 8 till LU15 protection that are (more) important. generally, mobility on the labour market is an important channel for knowledge diffusion and thus generating spillover effects. The empirical literature on effects of researcher mobility on innovations indicates that research results and innovations are spread by researchers changing workplaces. Firms increase their innovative capacity by receiving new researchers. Product market regulations that make competition and new more difficult are negatively related to productivity growth. The negative effect is greater the further away a country is from the technological frontier, since such regulations can hinder the adoption of new technologies. The relation between product market regulation and innovations is not clear-cut, however, and there is also empirical evidence that the effect of regulation may even be positive in proximity to the technology frontier. ’s relative position as regards regulation of product markets and costs for starting companies varies depending on the index used but seems to be at about the average mark in the as regards product market regulation. Economists have long tried to understand the effect of competition rules on investments in R&D. Some believe that competition is necessary to create incentives for firms to make investments, while others believe that some degree of monopoly is required for innovation to take place. There is also a growing body of research literature that concludes that the relation between competition and R&D is rather reminiscent of an inverted ”U”. The U-formed relation between R&D and competition is assumed among other things to be due to the distance to the technology frontier, where competition has a positive effect on R&D among technologically advanced firms, but a negative effect on R&D among laggards. New research indicates also that the relation between R&D and competition may be due to company size and innovation costs in an industry. International trade and direct investments stimulate firms’ R&D and innovation through several channels. Trade enables countries’ comparative advantages to be utilised and countries with a sound framework for a highly skilled labour force will probably be specialised in R&D and high-tech production. Access to foreign markets also enables firms to spread (fixed) costs associated with Bilaga 8 till LU15 innovation over the larger volumes that can be achieved through exports. In that way the expected return on innovation projects increases. Increased import competition can stimulate domestic firms to be more innovative as a way of “getting ahead of” increased competition. Trade and other forms of cross-border economic exchange, not least foreign direct investment, are also important channels for spreading new knowledge and new technology. In the economic policy debate it is often stated that a good innovation climate for firms is important for increasing exports. A number of studies show, however, that increased import competition for input goods from low-wage countries has been important for promoting more innovative companies in countries with higher wage costs. Access to cheaper input goods makes it possible for firms in high cost countries to specialise in products with a higher value added. They are also generally more productive, which makes it even more interesting to set aside resources for innovative activities. Reforms that facilitate trade in input goods can thereby contribute to increasing return on innovations. A well-functioning and dynamic system of innovation financing is important for being able to develop future growth industries. Innovation projects are characterised by long waiting times, uncertainty and great risks. This makes it more difficult to finance innovation projects than other projects. The inherent uncertainty associated with the expected return on innovations makes potential financiers hesitant to provide financing at an early stage of the innovation process. Comparisons between countries show, at an aggregate level, that financing opportunities, for example in terms of getting a bank loan, are relatively good in . Relative to other EU countries, there are few firms that state that access to (private) financing is a major problem in ; reports the largest proportion of firms that do not consider financing to be a problem. Unlike in many other countries, Swedish firms do not seem to have been affected as seriously by the financial crisis as regards renewing bank loans. Apart from (bank) loans and their own cash flow, risk capital is another existing form of financing. The supply of risk capital differs considerably between countries as regards the amounts of risk capital invested and at what stage (of the development of the Bilaga 8 till LU15 product/process towards being ready for market introduction) the investment is made. In it is less common than in other countries to have innovation financing via “business ” and even more uncommon via risk capital. When such investments are made, however, the average levels are comparatively high. In the distribution between financing at an early and later stage is relatively even, but in the it is considerably more common to have financing at later stages. Many countries’ governments try in various ways to intervene in the risk capital market and even actively increase the supply of risk capital through direct or indirect ownership in target companies, for example through state risk capital funds/companies, co-investment funds or “funds of funds”. Central government financing, above all in the form of grants but also government loans, are common in (approximately one third of total capital investment in start-up companies consists of central government financing). The proportion of public funds is at a much higher level than for example in American start-up companies. The supply of (risk) capital at early stages is, according to available data, relatively good in , while central government investments are mainly made at later stages. However, there are few studies of the effects of public sector risk capital investment in R&D and innovation. As far as is concerned, there seem to be positive effects of central government seed financing provided that patents have already been commercialised to some extent. However, patents with market oriented government loans given during the commercialisation phase have approximately the same profit outcome and tendency to be renewed as the average of other commercialised patents. Seen in the light partly of risk capital investments satisfying a very limited part of firms' financing needs, partly of the supply of risk capital in being relatively good, initiatives to increase the supply of public sector risk capital do not seem to be a decisive factor in stimulating firms' innovative capacity. Public and private risk capital investments can complement each other if made in the right way. The participation of private actors may function to impose discipline and profitability requirements while the public funds can help to both manage the uncertainty that is the rule for investments at early stages and in innovations Bilaga 8 till LU15 that have not yet reached the market. The public co-financing should be sufficient to make a difference, but not too great in relation to the private actors' financing. If the public share of financing is too large, it may reduce the motivation of private financiers to ensure that the investment is made under the best market conditions. The formulation of general tax policy affects firms’ return after tax on investments in R&D, and thus affects the amount of knowledge capital and how it is used in production. In general, mobile tax bases, particularly those that are internationally mobile, should be taxed at a lower rate than less mobile tax bases. Intangible capital can be assumed to be internationally mobile, at least in the long term. All else being equal, this indicates that the return on intangible capital should meet a lower tax rate to retain its activities in the country and to maximise public finance revenue. Multinational enterprises have great opportunities to utilise differences in taxation between countries. By means of tax planning, multinational enterprises located in countries with relatively high taxation can transfer ownership of patents to subsidiaries in countries with lower taxation. An obvious problem in tax planning of investments in intangible capital is that it leads to tax base erosion, i.e. reduction in the tax bases in the firms’ home countries, which means that higher taxes must be levied on other tax bases (for the same level of public income). However, the existence of favourable tax conditions for profits from patents, for example, may also have real economic effects, i.e. affect the level of investment in intangible assets and where the fruits of this investment come into use. Several countries, including , take various forms of action to restrict multinational enterprises’ tax planning. It is difficult to estimate with any precision the significance of tax planning opportunities multinational enterprises have for investing in intangible assets and innovations. Since it is more difficult for new, small innovation companies to derive benefit from opportunities for international tax arrangements, in the long term this may inhibit innovation capacity in a country, or at least the opportunities of developing new, radical innovations. Moreover, there is a risk that countries could be thrown into a “race to the bottom” when it comes to trying to stimulate or retain multinational enterprises’ innovations in their own countries. Bilaga 8 till LU15 not only leads to the undermining of tax bases, but also means it is less likely for investments in R&D and other intangible capital, to end up in the locations that have the best fundamental conditions for research and innovation. The public sector can promote innovations in firms by increasing demand for innovations. It may be a matter quite simply of establishing a market that has not existed before, for example because of high entry barriers or traditions (historical), or making an existing market larger (demand greater volumes). By means of the public sector in various ways guaranteeing demand (at a reasonable price) for the firms’ innovations, uncertainty about innovation projects can be reduced. Moreover, the role of the public sector as a customer can be seen as a stamp of quality by potential investors and financiers, which reduces the credit restrictions that innovation firms may encounter, in particular if they are new and/or small. Another, common reason for the public sector to create demand for innovations, in addition to what the market itself can generate, is to give an industry an advantage over corresponding industries in other countries. The aim is to help increase the domestic industry’s – or even the entire country’s – competitiveness and growth. Increased demand can be achieved, in principle, through public procurement and through regulation and standards with a specified purpose – though not necessarily as the main purpose – to stimulate the emergence of new technology. instruments such as price guarantees, differentiated charges, discounts, vouchers or tax credits, targeting consumers or firms to demand a certain technology may also contribute to increased demand for – and thus the emergence of – new products and processes. The use of demand-oriented measures has been fairly marginal to date, in relation to other ways for the public sector to stimulate innovation. An explanation for this is that great requirements are often posed on government agencies in terms of knowledge of industry specific or technology specific circumstances, not least as regards innovation procurement. There are also considerable risks that demand-oriented measures, particularly regulation and technical standards, will be designed in a way that intervenes too much in the function of the economy, for example by obstructing new . This can then lead to a Bilaga 8 till LU15 decrease in total production or employment, even if the intervention leads to (further) innovations. Complicated regulation and standards may also lead to markets becoming fragmented and monopolised because it is too expensive, above all for small companies, to comply with the regulations and adapt to standards. To calculate in advance the economic costs and benefits of demand-oriented measures is therefore very difficult. Demand- oriented measures may also be associated with deadweight losses, i.e. they create a demand in the market that otherwise would have arisen through households and firms’ preferences in combination with the market economy’s equilibrium creating mechanisms. Supply of skilled labour is a prerequisite for innovations to materialise. Higher levels of knowledge not only mean that a country can produce its own innovations, but raise its capacity to assimilate as well as implement and spread others’ ideas. Firms are increasingly seeking highly educated labour outside the country’s borders. The research literature on immigration of highly educated people, and also foreign students, and its effect on innovation activities have been based, with a few exceptions, on data from the . Even if the research literature is not entirely clear cut, immigration of foreign students and highly skilled labour has generally proved to be an important input factor in the creation of innovations, and therefore migration policy is also part of innovation policy. Labour from other countries that immigrated to the accounts for about a quarter of the labour force in innovative industries, and contributes an equal amount to measurements of innovations (outputs), such as patents granted. People who have immigrated to do not seem to be equally inclined to devote themselves to innovative activities measured in terms of the patent rate. The lower inclination to seek patents among immigrants to may be due to negative selection. Language and the even income spread are factors that make less attractive to foreign labour with leading edge skills, compared to for example the and the UK. In addition has a greater share of asylum seeking immigrants than other developed countries. The importance of macro-economic stability is rarely specified as an important framework condition for firms’ investments in R&D and innovation. The financial crisis and the subsequent Bilaga 8 till LU15 protracted recession have, however, raised fears that production capacity in the worst affected countries could have been damaged for a long time or even permanently (through a permanently lower GDP growth rate). A protracted recession can mean that the R&D stock – and ultimately the stock of innovations – grows more slowly for a period, which has a negative impact on growth, not only in countries worst hit by a crisis but also in other countries via reduced spillover effects. The financial crisis has probably affected innovations negatively in several countries, but the negative effect of the crisis was different in severity in different countries and industries. Emerging economies in , including South , managed the financial crisis relatively well. High tech, innovative firms also managed the crisis better than other company categories. Countries also differ with regard to how they acted in response to the potential effects of the crisis on innovative capacity. Some countries have invested in an infrastructure that promotes innovation (for example broadband) and introduced targeted, financial support for innovations. Countries whose innovation systems are characterised by ample access both to skilled labour and credit and risk capital seem to have been able to reduce the negative effects of the financial crisis considerably. There is much to indicate that a stability focused macro- economic policy should also take into account the long-term effects of recessions. However, there are researchers who believe that periods of weak growth, or even economic crises, are more or less a prerequisite for enabling new technology development. Crises provide scope for the process of “creative destruction” that is the core of the Schumpeterian view of economic function. Firms with products that are not viable are forced to leave the market or be taken over by new firms that see their chance to become established or to take new market share. Periods of low growth become, in this perspective, good soil in which companies let their innovation seeds grow. An examination of studies of how firms’ R&D expenditure co-varies with the economic cycle shows, however, that expenditure is procyclical, that is, it increases in economic upswings and vice versa. In other words economic crises are more of a bad thing for innovations in firms than the other way around. This does not, however, mean that it is not desirable to have a high degree of creative destruction – not taking into account Bilaga 8 till LU15 the distribution effects of this transformation – when the economy is in cyclical balance. Economic policy for strengthened innovative capacity (Chapter 7) Correctly formulated, firms’ incentives to invest in R&D and innovation – and thus innovation capacity – can be influenced by economic policy measures. It also seems probable that countries’ international patterns of specialisation, albeit in the long term, can be geared towards more human capital and R&D intensive production. The effects of both political decisions and decisions taken by the firms themselves last in many cases for long periods of time. Thus ’s relatively good innovative capacity is a result of historic decisions. Correspondingly, the foundations for future innovative capacity are laid through today’s decisions. ’s prominent role in the area of innovation builds both on high R&D investment and other resources that promote innovation (i.e. high innovative capacity) and a relatively effective use of these resources (i.e. high innovation efficiency). The Swedish leading position as regards innovation is intimately connected to the development of a competitive business sector and, above all, a strong industrial base. The significance of large, Swedish multinational enterprises for this development cannot be enough emphasised. To be able to retain, or even strengthen, sound innovative capacity firms must continue to enjoy good conditions for investment in R&D and innovation. An economic policy for strengthened innovative capacity should be adapted to the fact that already at the outset has good innovative capacity and can be assumed to lie close to the global technological frontier. This circumstance implies a focus on policy measures that are “innovation promoting” rather than “imitation promoting”. It means that it will be relatively more important to have institutions and measures that support a dynamic business sector where new technology and new products can rapidly and at low cost be allowed to replace existing technology and products. Institutions and measures that are innovation promoting include a high degree of external Bilaga 8 till LU15 transparency and low entry barriers. Moreover it will be relatively more important to promote academic leading edge education rather than broad education. Since there are differences between industries, with regard to both innovative capacity and innovative efficiency, there may be industries that rather have a need to assimilate research results and innovations from other countries. This means that broad education will continue to be important even for countries that show a high innovative capacity at the outset. In the same way the effects of policies that promote increased competition and lowers entry barriers can affect different industries in different ways, depending on how close to the technology frontier they are. It is not possible on the basis of economic research to issue a clear “prescription” for how an optimal economic policy for innovation should be formulated. Even if economic research has come to devote itself increasingly to better understanding firms’ R&D investments and innovation, not least thanks to better access to large and rich datasets of firm behaviour, it is still difficult to draw clear-cut policy conclusions from research. In addition, innovations are, in some contrast with the linear perspective that economic research and this report also adopts, often the result of experimentation, failures and “mutations” between different ideas, products and concepts. In particular this evolutionary perspective applies to new, radical innovations; that is, innovations that give rise to fundamental changes in activities and behaviours in an organisation or industry. Therefore, a characteristic of innovative activities is high risk. A too exaggerated belief that political measures can create innovations that give a direct – and rapid – return in the form of higher productivity and employment risks leading policy in the wrong direction. Neither historical success nor previous rapid growth are good indicators of future innovation. Policy must address what is sometimes called the “innovator’s dilemma”: the firms that fail do not so much do so due to bad decisions but due to management making the same decision that once made the firm great. A policy that tries to support established, successful firms risks preserving the old while missing out on the new. Despite difficulties in deriving clear policy conclusions from the economic research on what drives firms to invest in R&D and Bilaga 8 till LU15 become innovative, there are a number of insights that should guide the formulation of economic policy measures: R&D intensity in the business sector is higher in than in most other countries, which is mainly due to higher R&D intensity overall, rather than industry composition. This also indicates that has managed to upgrade production to a more knowledge-intensive content to a greater extent than many other, economically developed countries. R&D intensity in the private service sector is considerably higher than in comparable countries. This indicates a possibility that further measures to strengthen conditions for innovation in the service sector may be warranted. Access to a skilled labour force in is still good, but worse learning outcomes and increasing international competition for labour constitute factors for concern. for skilled labour may be expected to increase, which makes it even more urgent to take a coherent approach to education, migration and research and innovation policies. Publicly performed R&D, in particular at universities, is important for firms’ R&D and innovations. The collaboration between firms and public research institutions should therefore be strengthened. Fiscal R&D incentives have played, and should play, a limited role in the innovation policy toolbox in . Considerable effects on innovative capacity of such measures can probably only be achieved at very high costs. General tax policy should not disadvantage small innovation firms. Large multinational enterprises today have tax advantages that can disadvantage the production of new, radical innovations in which new, small firms play a decisive role.