Sweden tops EC innovation despite incomplete eco-chain

The European Commission has recently put together the second Innovation Union Scoreboard. Scores are based on 25 different indicators, including venture capital as a percentage of GDP, research and development expenditure in the public sector, and population with tertiary education.

For the second year running, the Nordics have topped the ranks as "Innovation Leaders", with Sweden once again at the helm.

"Innovation Followers" include France, Austria and the UK, while "Moderate Innovators" – countries which fell below the average score of 27 – include Italy, Spain and Portugal.

"I think our success is due to a number of factors contributing to an upward evolution," said Martin Gemvik, investment manager and partner at Sting Capital. Gemvik attributes Swedish success to a high level of education widespread throughout the population and a homogenous market with a broad middle class affluent enough to purchase innovative gadgets, the lasting effect of the wireless valley era in Stockholm.

He also cites the Björn Borg effect. According to Gemvik, innovative digital giants such as Spotify have done for Swedish innovation what Borg did for the country's sporting reputation: shown Swedes what is possible and attracted international attention and capital. Such companies lead by example and catalyse innovative enthusiasm.

Venture capital plays a pivotal role in this fostering of innovation. According to the European scoreboard, only in Sweden and the UK does venture capital as a percentage of GDP exceed 0.2%. While the Swedish eco-chain then is well supplied at the lower end of the scale, the later stages of a project are harder to fund. According to Gemvik, "There is an obvious lack in strategy for innovation, mainly for the stage when you commercialise innovation. The problem is that the ecosystem, or the eco-chain, doesn't work all the way up here."

While Swedish innovators are well supplied with finance during the research, seed and start-up phases, later-stage ventures find it very difficult to access funding: "We need the government to find a way to combine money from the government with private and institutional capital. We miss that. They don't have a good programme for that," says Gemvik. "We also have a terrible taxing system for entrepreneurs, who are taxed higher than those who invest on the stock market. So I am almost surprised that we have this positive climate."

Italian funding gap
Similarly, missing links in the eco-chain are discernible in Italy, which ranked well below the EU 27 average in terms of innovation, this time at the lower end of the market. According to Maurizio Rossi, co-founder of Italian venture capital and technology hub H-Farm, "Venture capital does not exist in Italy. It's really zero. We need to build it from scratch. We need it in the seed stage, which is very different from later-stage. We need institutions that invest in funds-of-funds and a number of VC initiatives. That's why we score so low." Indeed, in Italy, venture capital as a percentage of GDP is only 0.04%, far below the European average of 0.1%.

A dynamic merger and acquisition culture also hinders Italian innovation, according to Rossi: "An M&A culture could create an innovation ecosystem. If start-ups are to succeed, the investors that are needed to promote innovation in the first place will want to exit. One option is an IPO, but it is chosen by a minority. Most companies, even the more mature markets in the US, need to find M&A opportunities."

The general consensus is that "innovation is about ecosystems", as elucidated by Nicolas von Bulow, partner at Clipperton Finance, and exemplified in Silicon Valley. Unsurprisingly, US innovation ranks higher than any country in the EU, particularly with regards to research and development in the business sector and tertiary education.

The hyper concentration of capital, expertise and entrepreneurs that characterises the dynamic stateside ecosystem is bolstered by a different outlook, far more optimistic than European caution. In Europe it is believed that failure is stigmatised, with target companies approached to discern the possible risks, not outline the potential returns. That, according to Gemvik, "is a very Swedish mentality."

Other industry professionals have indicated the need to celebrate entrepreneurs and stop stigmatising failure, instead viewing it as a formative experience. These criticisms are of course two sides of the same coin. Perhaps a cultural shift is what is required for Europe to truly become an innovation hotbed.

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