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What is the role of the public sector in large knowledge-intensive investments?

In this report, we draw conclusions and give recommendations on the basis of five studies in which we have analysed the causes and effects of large knowledge-intensive investments (LKI). The central question has been to explain the basis on which the government and other public agencies can promote LKI, as well as what forms of investment-promotion can and should be conducted.

The competition for LKI is global

The development towards an intertwined and global knowledge-based economy is increasingly evident. At the same time, the importance of participating in global value chains concentrates to knowledge-based activities. Countries and regions therefore need to consider how attractive they are for investments in intangible assets (knowledge-based capital[1]), but also what potential spillover effects may arise as a result of these investments and how large these may be.

Use the LKI definition in policy development

LKI is not an established term. However, there is a clear need for a term that captures how globalisation and technological developments are changing conditions for firms, and the increasingly central role of knowledge-intensive investments and intangible assets play in the economy. These developments affect not only firms but also conditions for enterprise and industrial policy at all levels. It is in view of this the LKI concept is introduced in this project. The LKI concept means a shift away from considering investments as one-off economic phenomena to considering them as part of an ongoing and long-term relationship building. It also means that it is no longer sufficient to think about how knowledge-intensive investments can be promoted without this being done at a level in the value chain that corresponds to relatively high value added.

  • A large knowledge-intensive investment (LKI) is an investment in an activity that is characterized by large and continuous investments in intangible assets within the activity and/or give rise to such investments in up- or downstream activities. Intangible assets comprise (i) computerized information, (ii) innovative property and (iii) economic competencies. Large refers first and foremost to the extent of resources that is created or mobilized as a direct result of the investment decision, but also to the magnitude of the potential for positive indirect effects.

Our recommendation is to use the definition of LKI in shaping policies for enterprise and industries, trade, and related policies used to promote economic growth.

Characteristic of firms that are strongly linked with the SKI concept is that they position themselves early in the value chain and have a production with a strong research and development (R&D) orientation, which in turn often means relatively high wages and value added. To a large extent the staff have university education in a STEM-area (science, technology, engineering, and mathematics), even research education, and highly qualified professions, such as civil engineer, IT architect, system developer, test manager and research and development manager.

The establishment of Northolt’s plants in Västerås and Skellefteå are examples of LKI.

Focus on improvements in dominant motives and factors to promote LKI

A range of motives and factors can determine LKI. First of all, the investment decision is either demand driven or supply driven. Firms are attracted by factors such as market access and opportunities to adapt goods and services to local conditions. Alternatively, firms seek access to local knowledge-based resources in the form of technology, knowledge and a qualified workforce.

Our analyses show that, overall, fundamental framework conditions in countries and regions play a crucial role in how attractive they are for LKI. Subsidies and various forms of policy initiatives may also play a role but cannot compensate for shortcomings in the framework conditions. Factors that are closely related to policy, such as regulations and tax relief are less significant, but can still play a role.

Policy efforts to promote LKI should primarily focus on improvements in dominant motives and factors with a focus on the following four areas:

  • provision of competence, especially certain STEM education at university and research level
  • collaboration between knowledge-intensive companies and higher education institutions with a relevant education and research profile
  • protection of intangible assets, at international standard
  • work on developing growth policy that signals market potential and good prospects at local, regional and national level.

Subsidies and other forms of targeted support to firms can be used to promote LKI, but should be designed so that they change firm's incentive structure. If such policy instruments are used, efforts should be concentrated instead of spreading across many different types of initiatives.

Institutional conditions should continuously be evaluated and improved

Our analyses show that continuous and long-term work is needed in order to ensure that various institutional conditions such as corporation tax and requirements for permits – including environmental permit assessments – are internationally competitive and contributes to an attractive environment for LKI:s. We have specifically investigated how environmental permit processes can be improved, which is crucial since LKI-related activities can involve capitalintensive investments and can therefore require environmental permits.

Environmental permit processes can be improved in the following ways:

  • Provide initiatives that improve local authorities’ ability to identify suitable locations for LKI-activities.
  • The permit authorities (including important referral bodies), together with representatives of different industries, should jointly develop generic guidelines for environmental permitting of LKI for each industry. The permitting authorities’ knowledge of various LKI, including their environmental impact, available technical solutions and costs, should be strengthened.
  • The environmental permit assessment should, to a greater extent, be designed as a continuous process rather than as a ‘one-shot game’. This can be achieved by a more systematic use of longer trial periods as these make it possible to move on with the investment while giving the industry time to test and optimize various technical solutions.

The effects of LKI can be influenced

LKI result in both direct and indirect effects. Direct effects refer to the resources that the investment mobilises and/or creates, such as new jobs, export revenues or R&D labs that make annual investments in R&D in a region or country. Indirect effects refer to the spillover effects that are generated by an investment, such as productivity effects in other firms in the same or other industries. There are various types of mechanisms that explain how indirect effects arise and are dispersed. For example, knowledge-intensive activities can generate access to a local pool of skilled workers. Other companies can recruit from this pool and so gain access to valuable experience, knowledge and skills that the individuals have developed at their former employer. Knowledge-intensive firms can also represent a breeding ground for strong clusters and act as nurseries for the next generation of entrepreneurs. The effects of LKI:s and the size of these effects can be influenced. Policy initiatives can be used in order to increase the effects from LKI. Incentives should be focused on the following five factors:

  • firm´s strategy
  • economic relatedness
  • entrepreneurship
  • workforce mobility
  • basic framework conditions.


Prioritise regional policy initiatives from socio-economic effectiveness

LKI:s are strongly linked to metropolitan regions. On the other hand, the relationships between urban and rural areas may be strengthened through interregional investments in the form of LKI. Our analyses indicates that there are reasons to take into account socio-economic effectiveness when policy for LKI:s has a distinct regional dimension. This could for example be about creating priorities for geographically delineated policy initiatives, but also to take into account that LKI:s can bring interregional spillover effects between metropolitan regions and other areas.

Prerequisites for LKI policy

Following the development of global value chains, the conditions and prerequisites for policy development aimed at promoting LKI have changed significantly. Our analyses show that enterprise and industrial policy needs to be combined with other policy areas, such as policy for research and education, innovation and internationalisation. The

Swedish enterprise and industrial policy will also become more dependent on corresponding policy in other countries, given that knowledge-intensive activities are increasingly distributed across different countries and regions. Both policy goals and policy instruments must therefore be adapted.

Against this backdrop, it is possible to formulate seven specific deliberations for formulating LKI policy instruments and balancing a policy mix to support LKIs:

  1. Is the policy goal geared towards asset-seeking or market-seeking investments?
  2. Is the policy instrument aimed at attracting specific investments or improving the general attractiveness of the region?
  3. Is the policy focused on incoming or outgoing investments?
  4. Is the policy aimed at preparatory (pre-) or follow-up (post-) work related to investments?
  5. Is the policy geared towards science- or market-centered knowledge-intensive activities?
  6. Is the policy aimed at top-down or bottom-up development?
  7. Is the policy nationally or regionally demarcated?

We also believe that increased fragmentation, mobility and variation in knowledge-intensive activities indicate the need for an experimental method or policy initiative, in order to find a policy mix that works by means of learning and adaptation. It could therefore be interesting to consider further research into promotional initiatives linked to SKI establishments that are judged to be of particular interest. In the longer term, evaluation of quantitative methods could also be rewarding.

Improvements in the promotion system can be a key to success

Public actors are involved in a number of different activities aimed at promoting and attracting investment. Such as providing support and services before and after an investment, but also general initiatives such as international marketing of places, technology and innovation systems. The participating actors and their assignments, collaborations, tools and governing regulations can be jointly described as an “investment promotion system”. We can consider this system as an “instrument” that the public sector can use to influence firms' willingness to do LKI:s. For the system to be successful, potential investors must receive information about general framework conditions and other circumstances, and the investment process itself must to function without unnecessary obstacles.

There are a number of conditions and factors that affect the investment promotion system’s significance and success. We argue that the following initiatives could result in an improved system:

  • Improve the knowledge about the investment-promotion system and investigate how local and regional experiences could be used as a common resource. For the system to become more beneficial and easier to use, it could be interesting to consider a coordinating national resource with a mandate to inform, simplify and promote exchanges of information between actors in the system. This resource needs to ensure that local and regional experience from investment processes is disseminated rather than staying within one organisation or geographical area.
  • Give the regions better conditions for long-term work on investment-promotion. Also consider ways to improve Business Sweden’s conditions to work regionally, by means of more resources for coordination, collaboration and competence-raising initiatives in regional investment-promotion. A public actor with a national overview and regional presence should be charged with assisting local actors to improve procedures in the final phase of an investment process.
  • Create a structure to handle LKI:s that are very large and can be considered to be of "strategic importance". Therefore, investigate the possibility of classifying a LKI as strategically important, and also consider appointing special coordinators for such investments. Such coordinators can act as an “open door policy” for contacts with government agencies and other actors involved.

What is the role of the public sector in large knowledge-intensive investments?

Serial number: Rapport 2021:01

Reference number: 2018/020

Download the report in swedish (with english summary)

Status

Completed

5 of 5 partial studies has been published

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