The Dynamics of Firm and Industry Growth The Swedish Computing and Communications Industry Dan Johansson The Dynamics of Firm and Industry Growth The Swedish Computing and Communications Industry The Dynamics of Firm and Industry Growth The Swedish Computing and Communications Industry Dan Johansson A dissertation submitted to the Royal Institute of Technology (Kungliga Tekniska Högskolan, KTH) in partial fulfilment of the requirement for the degree of Doctor of Philosophy Royal Institute of Technology, KTH Department of Industrial Economics and Management SE-100 44 Stockholm Sweden Stockholm 2001 Dan Johansson, 2001 Royal Institute of Technology, KTH Industrial Economics and Management Cover: Nils Kölare “Frates”, (P.v.S.) Acrylic on panel, 1998, 140 x 140 cm Printed by Universitetsservice US AB TRITA-IEO R 2001:05 ISBN 91-7283-148-0 ISRN KTH/IEO/R-01/05--SE To my teachers: past, present and future ACKNOWLEDGEMENTS Those who are familiar with the process of writing a doctoral thesis know that its completion and quality depend on the help of others. My thesis is no exception in this regard, and I am fortunate to have received helpful and insightful advice from a number of persons to whom I would like to express my gratitude. I am most fortunate to have had Professor Gunnar Eliasson as my thesis advisor. He has taken a keen interest in my work and has displayed great enthusiasm. It has never been too late to ring him (and vice versa…) to discuss new ideas and various details. He has put down an enormous work in reading and commenting on numerous drafts of the thesis, thereby improving it considerably. He has also put down much effort in improving my English. I think it is fair to say that Professor Eliasson has been of an unusual importance as a thesis advisor, since I have also been heavily inspired by his theory of the Experimentally Organised Economy and Competence Blocs as the intellectual foundation of my analysis. I am thankful to Niclas Berggren and Roger Svensson for having read the entire manuscript and for having done so in a most thorough manner. Their comments have significantly improved the thesis. Overall comments from Nils Karlson are likewise appreciated. In addition, Niclas Berggren has helped to ameliorate the language. Participants at seminars at the Royal Institute of Technology, particularly Bengt Domeij, Staffan Laestadius, Anita Lignell Du Rietz, Hans Lööf and Sven Modell, have given valuable comments on various drafts of the thesis. Chapter 5 has been presented at a workshop at the Stockholm School of Economics, where particularly useful advice was given by Almas Heshmati and Sune Karlsson. Urban Fredriksson at Statistics Sweden has served as a competent provider of the micro-data set that is used in the econometric analysis. In a general way, I am indebted to Niclas Berggren and Fredrik Bergström, whom I met at Stockholm School of Economics where I once began my doctoral studies. They have been good friends and close colleagues throughout the years, always encouraging and supportive when the studies have been burdensome. They have also meant a lot for my training as an economist. Since the first time we met, they have served as keen discussion partners, both on economic issues and on related topics. I think we all can agree that we have learnt at least as much from these discussions as from various forms of literature. I would like to acknowledge the valuable assistance of Pontus Braunerhjelm who hired me at The Research Institute of Industrial Economics (Industriens Utredningsinstitut, IUI) and who was a considerate boss. I have had good use of my experience from IUI in my thesis work. I would also like to thank Magnus Henrekson, whom I also met at IUI, and with whom I have had a fruitful and instructive co-operation since then. I am part of a group of economists who have met more or less regularly, most often at weekly luncheons, to discuss economics and politics. Thanks to Niclas Berggren, Fredrik Bergström, Anders Bornefalk, Per Hortlund, Mikael Sandström and Daniel Waldenström for provocative and inspiring discussions. I have also been involved in the research group for studies of Sweden’s technological systems, led by Professor Bo Carlsson. Enlightening discussions with the members in this group are appreciated. Special thanks go to Ann-Charlotte Fridh who has supported my Ph.D. studies from the very beginning, and who has been a close colleague using the same theoretical approach as I. I am especially grateful to Christina Carlsson, but also to Caroline Pettersson, for helping me with all practical and administrative details that are so difficult for a Ph.D. student under stress to remember and get in order. Financial support from the Swedish Transport & Communications Research Board (Kommunikationsforskningsberedningen, KFB) is gratefully acknowledged. Lastly, I would like to thank my parents, Ingrid and Berndt, and my brother, Hans, for their inexhaustible support. Stockholm, July, 2001 Dan Johansson Abstract The growth of the Swedish Computing and Communications industry is studied in this thesis. Growth is seen as a dynamic process moved by the entry, expansion, contraction and exit of firms. The analysis is founded on the theory of the Experimentally Organised Economy, which views the economy as an experimental process. The entire thesis is organised around the problem of resource allocation and the issue of growth through the introduction of new combinations into the economic system, using the terminology of Schumpeter (1911). Competence blocs determine the efficiency of the economic process, i.e., the extent to which it leads to sustained economic growth rather than stagnation. Change is a fundamental feature of the economic process, firms have to be flexible to survive and the economic system must promote flexibility to grow. Many trials, or experiments, are required to discover and select “winning” firms and technologies. Hence, the turnover (i.e., entry and exit) of firms is supposed to have positive effects on growth. Theory, furthermore, predicts that new and small firms are more entrepreneurial and innovative and that they, therefore, will grow faster than old and large firms. The empirical results show that firm growth decreases with firm age, decreases with firm size, increases with firm independence, decreases with government ownership and that industry growth increases with firm turnover. Moreover, the smallest firms have been the major job contributors during the 1993-1998 period investigated empirically. It is also shown that employment growth is facilitated by a sustained high entry of firms. Lastly, many policies, several of which were introduced in the late 1960s and early 1970s, have selectively supported large firms in mature industries. Hence, they have exercised a relatively negative influence on exactly the types of firms that have been shown to contribute to growth. These policies have also made the Swedish economy less flexible. It is argued that this partly explains the slow economic growth in Sweden compared to other OECD countries since the 1970s. An interesting question is where Sweden would have been today with a different policy orientation. Keywords: The Experimentally Organised Economy; Competence Blocs; Industrial dynamics; Industrial transformation; Firm age, Small-firm growth; Turnover of firms; Computing and Communications industry; IT industry; Institutions. TABLE OF CONTENTS LIST OF TABLES .......................................................................................................................XIII LIST OF FIGURES ..................................................................................................................... XIV CHAPTER 1 INTRODUCTION.................................................................................................... 1 1.1 THE PROBLEM..................................................................................................................................................... 1 1.2 PURPOSE ............................................................................................................................................................... 2 1.3 METHOD............................................................................................................................................................... 3 1.4 DATA..................................................................................................................................................................... 4 1.5 LIMITATIONS ....................................................................................................................................................... 5 1.6 RESULTS................................................................................................................................................................ 7 1.7 OUTLINE OF THESIS.........................................................................................................................................10 CHAPTER 2 THE EXPERIMENTALLY ORGANISED ECONOMY, ............ COMPETENCE BLOCS AND ECONOMIC GROWTH ........................................................................13 2.1 INTRODUCTION.................................................................................................................................................13 2.2 RESOURCE ALLOCATION IN THE EXPERIMENTALLY ORGANISED ECONOMY.....................................16 2.3 THE COMPETENCE BLOC................................................................................................................................20