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Field: Strukturomvandling

Innovation and entrepreneurship after major company closures

This report provides knowledge regarding the tendency of people who lost their jobs in major workplace closures to become engaged in innovation and entrepreneurship, and the potential role of public policy to promote this outcome. The overall conclusion is that the Swedish restructuring system functions quite well. However, there are areas in which public policy could be developed further to support these outcomes.

The public innovation system may have a complementary role

Public support for innovation should be regarded as a complement to the initial measures taken by the social partners and their job security councils. The job security councils are advising redundant individuals on how to run a business but it is not in their mission to realize the innovation potential in a workplace closure. Our conclusion is that it is mainly highly innovative projects, at an early stage of development, that are at risk of not getting the required support. Hence, the public support systems has foremost a role in promoting this type of projects. However, overall it turns out to be relatively unusual for individuals within the redundant workforce to engage in highly innovative projects.

The likelihood for this type of projects to emerge seems to increase if the there are many redundant workers within research and development as well as individuals with post-secondary education and long professional experience. Yet, it is more common that inventors join already existing firms. Especially young innovative companies in the same region can benefit from employing inventors who has lost their job. Moreover, there is research showing that inventors who are able to stick together with their inventor peers after experiencing a bankruptcy have an overall increased patent productivity. This is in line with more general research displaying that there are “team specific” values that arises from long-term collaborations between inventors.

The group that is most likely to initiate highly innovative projects are also the group that most easily could find a new employment on their own. Consequently, these individuals are unlikely to become a financial burden for the public welfare system even if they fail with their innovation projects. It also turns out that these individuals have a tendency to leave companies in crisis at an early stage of workplace closures. Especially companies that are facing a bankruptcy loses their ability to keep these individuals.

Public authorities can support innovation through, for instance, financing of research and development, publicly financed venture capital, or the promotion of test-beds for innovation. Since highly innovative projects are rare it can be argued that the existing public support system for innovation, in most cases, will meet the requirements of those redundant employees who initiate highly innovative projects. However, it is important that those who have lost their job are informed about the public support systems for innovation. If there is a major workplace closure with a high innovation potential it might be appropriate to adjust the existing public support for innovation. In addition, public authorities could also provide information regarding the conditions to develop innovations based on intellectual property belonging to the former employer.


Develop legislation and legal procedures for innovation

One way that public policy can promote innovation after major workplace closures is to develop legislation and legal procedures that do not inhibit individuals from initiating innovation projects when they have lost, or are about to lose, their jobs. Recently new legislation regarding trade secrets has been implemented, redefining personal skills and experience as not being trade secrets. Yet, there are other legislations and legal procedures geared towards the protection of trade secrets and “know-how” of established companies rather than providing good conditions for redundant workers to move on with innovation projects. This concern for example the regulation of non-compete clauses, duration of post-protection for companies, as well as the conditions for financially weak actors to take on patent disputes with financially strong companies. However, there is a need for more knowledge on how these legislations and legal procedures actually influence innovation and entrepreneurship after major workplace closures.


Local innovation leadership is especially important in peripheral locations

Yet, another central question is how the public interventions to support innovation should be adjusted depending on where in the country a major workplace closure occurs. Research shows that both entrepreneurship and innovation, as well as the effects of public support for innovation, are positively affected by proximity to larger cities and access to a highly educated workforce. In other words, innovation and entrepreneurship is less likely to occur after large workplace closures in peripheral locations. Nevertheless, it might occur. Something that seems to be of importance if there is a major workplace closure in a peripheral location is that local players, with support from public authorities, identifies innovation projects that builds on the competence of those who have lost their jobs as well as the unique conditions and growth trajectories of the region. The local leadership plays an important role in this case.


Coordination of the public innovation support may enable adjustments

In recent years, Tillväxtverket¹ has developed a new role where the agency supports regions that are facing major workplace closures and works proactively with regions that are depending on a few large employers via a number of measures such as sharing experiences from previous workplace closures, coordinating contacts with other governmental agencies, as well as enabling financing. However, these measures currently depend on the regular public financing opportunities, which in turn creates difficulties in terms of rapidly redirecting ongoing activities. A possible development would be to improve the coordination with the regional development strategies, the smart specialization strategies, as well as the strategic innovation programs in order to enable an adaption of the innovation support measures.

¹ The Swedish Agency for Economic and Regional Growth

Major workplace closures can be a sign of disruptive change

However, major redundancies within a sector can be a sign that major structural changes are underway. In this case, more comprehensive governmental investments can be justified in for example public research, competence development in promising areas and/or public procurement for innovation. Nonetheless, this type of measures may require an analysis that highlights the recent developments within the affected sector as well as existing public initiatives directed towards the sector. In the design of such measures, it can be beneficial to collaborate with firms conducting downsizing. If the government assigns a special coordinator, it can be a part of his or her mission to carry out the analysis and propose measures.


Applying for funding from the EU globalization fund

The government also has a responsibility to assess whether it is suitable to send in an application to the European Globalization Adjustment Fund (EGF), among other things to provide more financial support to entrepreneurial initiatives. Experiences from previous workplace closures where means from the fund has been allocated shows that the outcome has not always been as expected in terms of the number of people who have actually used the support for entrepreneurship. The usage of the fund has been higher in those cases where there has been a large number of highly educated people who have lost their jobs. At the same time, there are evaluations of major layoffs that describe other positive effects of using the fund such as giving the employment service a more flexible role. Hence, it is important that the government consider more aspects besides financial support for entrepreneurship when deciding on making an application.


Towards a restructuring system promoting innovation and entrepreneurship

Finally, the division between labor market policy and industrial policy in the handling of major workplace closures has been more or less the same since the mid-eighties. Today, as well as back then, the social partners and their job security councils are responsible for the initial restructuring work. However, something that has changed since the eighties is that innovation and entrepreneurship has been given more attention in the development of economic policy. This report show how the promotion of innovation and entrepreneurship after major workplace closures overlaps several policy areas and that there are opportunities to develop the role of public policy to these ends.

Innovation and entrepreneurship after major company closures

Serial number: PM 2020:16

Reference number: 2020/61

Download the report in swedish

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