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The Significance of Human Capital to Large Knowledge Intensive Investments

This report is one of the studies in Growth Analysis’ framework project: What role does the public sector have for large knowledge-intensive investments (LKI)? The overall aim of the framework project is to create learning regarding how the public sector can promote efficient establishment- and absorption processes for LKI.

The purpose of this study is to investigate the importance of human capital for LKI. This is done from two central research questions. The first is to explore the demand for knowledge and skills in LKI. This is done in a descriptive analysis that explores human capital structures in firms that in different ways relate to the conceptual definition of the LKI-concept, as defined by Growth Analysis (PM 2019:13). The second is to analyse the importance of regional human capital resources and other relevant determinants for the location of LKI. This is analysed with an econometric framework. The study is mainly an empirical contribution to the understanding of LKI and the importance of human capital resources for LKI. The results are based on data from Growth Analysis's unique database that basically covers all individuals and firms in Sweden.

What features LKI-intensive firms?

The most LKI-intensive firms refer to Sweden's most knowledge-intensive firms in the high-tech manufacturing- and service production industries. The human capital structure of these firms are very knowledge-intensive, implying a very high proportion of employees with research competence and in professions that typically require theoretical specialist competence and advanced university education (at least 3 years). LKI-intensive companies also tend to be, or belong to, multinational enterprises, and most of them are engaged in foreign trade and pay relatively high salaries. Furthermore, there are indications that LKI-intensive firms are firms that position themselves early in global value chains and have a production that is highly R&D-oriented, which, in turn, should imply a relatively high value added.

What educational backgrounds are common in Sweden’s most knowledge-intensive firms in high-tech manufacturing and service production industries?

The picture that emerges is that these firms are dependent on the opportunity to recruit staff with STEM education.[1] However, the demand for STEM-educated is highly concentrated to a few, primarily technical and scientific, higher education programs at the advanced level. The five most common types of education are civil engineering in engineering physics, mechanical engineering, electronics, computer technology and chemistry. It is also common with research (PhD) education in these areas as well as in computer science and mathematics. An important difference between these firms and firms that - by definition - are somewhat less knowledge-intensive is that staff with education at the research level is not as frequent. The less knowledge-intensive firms are, the more the human capital structure is dominated by employees with different types of non-secondary educations. The fact that LKI can be promoted through skills provision efforts is implicit given how the LKI concept is defined. At the same time, our study shows that adequate skills supply efforts, for the most knowledge-intensive companies in the high-tech manufacturing industry and service production, to a large extent refer to relatively long (5‑10 years) and demanding STEM education at the university level.

What factors determine the location of LKI-intensive establishments?

Our analyses show that regional human capital resources are an important localization factor for LKI-intensive establishments. We find an unambiguously significant and positive relationship between the proportion of employees with longer university education and the number of LKI-intensive establishments. This applies to higher education programs specifically focused on technology, but also more generally. The results also show that the number of LKI-intensive establishments is positively correlated with access to colleges and universities in the region. The more graduates from higher education institutions located in the region, the higher the number of LKI-intensive establishments tend to be. This applies throughout, regardless of whether we measure regional human capital production in terms of the number of graduates from higher education or with the number of doctoral degrees, also in this case both for programs specifically focused on technology/science and more generally. In addition to the importance of regions' human capital resources, the results show that factors such as regions' market size and business specialization in high-tech industry and knowledge-intensive services are positively associated with the number of LKI-intensive establishments. We also find that the number of establishments is higher in regions with high accessibility to airports with international connections. A result that reflects, among other things, the importance of networks and links that facilitate regions' exchange with other cities and regions around the world.

What can the public sector do to promote LKI?

Overall, this study shows that the most knowledge-intensive firms are dependent on highly educated and research-trained workers. This means that the state, universities and university-colleges, have an important role for large knowledge-intensive firms. Also, research environments can be important for attracting LKI. In addition to industry policy, education and research policy is thus central for Sweden's ability to attract and promote LKI. It is important that policy design is not focusing on short-term initiatives. Instead, an adequate competence provision for LKI-intensive firms largely involves long and costly STEM-educations at advanced (master's/master's) and doctoral level. At the same time, it is important to consider changes in the demand of highly educated people. Failure to do so may result in matching problems. This highlights the need for firms to be specific about what knowledge they expect to demand in the future, and for higher education institutions to be explicit about what efforts are needed to facilitate an adequate provision of skills through education and research activities. The study also shows that the link between LKI and human capital has a very distinct regional dimension that policy work needs to take into account. Thus, policy design needs to consider how different regional conditions affect LKI.

[1] STEM = Science, Technology, Engineering, Mathematics

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