Headlines 2013

Advice from Sweden to Greece


Magnus Henrekson, IFN, has in cooperation with Harald Edquist, Fores, written a chapter in a new book with the self-explanatory title What can we learn from economic reforms in Greece and Sweden?. The said chapter is about product market reforms and incentives to innovate in Sweden. The authors suggest a number of reforms to enhance economic developments in Sweden, including increased government support for venture capital in early-stage funding and increased R&D resources for SMEs.

One characteristic of the Swedish economy is that government is still large compared to many other countries. Still, Edquist and Henrekson remark, there has been a substantial liberalization of product markets since early 1990s.

The developments following deregulation of public monopolies are depicted in the book. Examples of markets that were opened up for competition include: taxi, electricity, telecommunications, airways and domestic air travel.

The authors report that:

  • The supply of taxis increased, resulting in shorter waiting periods for customers, particularly in metropolitan areas. Though, prices increased more than the consumer price index.
  • The average ticket price for a domestic flight fell by 7 percent in real terms from 2000 to 2008.
  • In regards to postal services it is difficult to tell whether increased productivity is due to market liberalization or technological change. Productivity is measured as delivered items of addressed mail per full-time employee, which increased by 32 percent in 1994–2000.
  • In the field of telecommunications it is not possible to separate the productivity effects of liberalization from technological improvements. Prices of electronic communication were sharply reduced and productivity growth has been very rapid.
  • In the electricity market the authors note that still today three firms account for nearly 90 percent of total output. Edquist and Henrekson write that “Vattenfall has provided the largest dividend payouts to the government. This gives rise to a conflict between two competing government interests: a high return on government assets and a well-functioning competitive electricity market.”
  • The effects of the deregulation of railways have not yet been thoroughly evaluated. The same goes for pharmacies and vehicle inspection.

So what can we learn from economic reforms in Swedish product markets?

The trend in reforms has been to keep at least one state-owned company in a leading position in the respective industries. “The state actor has been expected to improve its performance while allowing for, and facilitating, the entry of new actors. This appears to be a successful strategy in the short run”, Edquist and Henrekson argue. However, the rationale for retaining large state-owned companies as industry leaders gradually evaporates. “The next logical step is to develop an exit strategy for state-owned companies operating in competitive markets.”

And what about incentives to innovate?

A few key areas are deemed especially important for the incentives to innovate: the role of public policy actors, the higher educational system, research support, commercialization of research, publicly financed venture capital and loans, public procurement and tax incentives for innovation and entrepreneurship.

Edquist and Henrekson assert that even though examples exist where government action has been instrumental for innovation, such as the development of the GSM infrastructure in the 1990s, “it is not evident that more resources to governmental agencies and foundations directly translate into more innovation output and economic growth.”

The analysis by Edquist and Henrekson shows that there is an important network of government agencies with the aim of providing opportunities for researchers and innovators to develop their ideas. Still, “these resources could be used more efficiently, redirecting government support to early stage funding in the form of seed capital and loans.”

Despite the lack of direct R&D subsidies, business R&D investments in Sweden are among the highest in the OECD. “Government policy should encourage R&D investments in SMEs to a greater extent” Edquist and Henrekson suggest. “One way of doing so could be through public procurement. Swedish policy makers could look to the United States, where the Small Business Innovation Research program requires that a specified percentage of federal R&D funds are channeled to small businesses.”

When studying higher education Edquist and Henrekson contend that that even though the number of students participating in university education has increased by approximately 60 percent in two decades, Swedish students enter university level education later than the youth in other comparable countries and the average duration of these studies is about five years, which is higher than the OECD-average.

“Whether it is wise that many students remain within the system for such a long time should be evaluated” the authors suggest. The average length of many Swedish university programs could be shortened, writes Edquist and Henrekson, allowing government resources to be used to encourage firms to invest in vocational training for employees. “Since firms are likely to have better information than the government about the competencies they need, firm-driven vocational training would provide better employer–employee matching in the labor market.”

Sweden has a long tradition of supporting a system of “professor privilege” that gives the property rights of inventions to persons employed at the university, even if their research is funded by government grants. While this system provides strong incentives to innovate, it may not provide the best incentives for commercialization. Edquist and Henrekson argue that “sharing property rights between universities and faculty inventors could create better incentives for commercialization.”

Last but not least, Edquist and Henrekson suggest a way to stimulate employees to behave more entrepreneurially and that is stock options. Today, “the use of stock options to encourage entrepreneurial behavior is penalized by the tax system in Sweden. Thus, we deem that lowering taxes on options to employees in firms would increase the incentives for innovation.”

Read the book (PDF)

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