1. ETE 521: Telecommunication
Business and Management
Lec 09: Telecom Dynamics: History and
state of the Swedish telecom sector and
its innovation system.

2. Sweden:
Population: 9 m
GDP: US$333 b
GDP per capita: US$ 37,00
Currency: SEK
5.96 SEK = 1 US$
Telecommunications,
the automotive industry and
the pharmaceutical industries
are also of great importance.

3.  The telecom sector has contributed substantially and
increasingly to economic growth in recent decades. Rapid
technological development, innovation and diffusion have
turned telecom into a major growth generator, globally
and particularly so in Sweden.
 The Swedish telecom sector has been extremely
dependent on the manufacturer Ericsson and its capability
to generate innovations, and the success of Ericsson in
mobile communications during the 1980s and 1990s has
been a major growth driver for the Swedish economy.
 The Swedish economy and its innovation system have
been crucially impacted by the prosperity of one single
firm – Ericsson – for better for worse.

4.  The telecommunication sector is an important
part of the Swedish economy and has been
increasingly so during the 1990s.
 The contribution to economic growth (measured
as productivity improvements and value-added
growth) has increased to become almost half of
the contribution of the industry in 2001. The
increase in value added stems mostly from the
telecom equipment part of the industry (with
telecom-services contributions more marginal).
 Second only to Finland, Sweden is the OECD
country most dependent on the telecom product
sector of the ICT industry.

5.  Telecom has also been the major driver of growth
in the R&D component (as is also shown in
patenting statistics) of the Swedish national
innovation system, while the corresponding
computing part has been relatively low.
 It may be hypothesized that, for telecom R&D,
Ericsson’s growth, in particular in mobile
communications, has played an imperative role.
 If so, the Swedish R&D system overly depends on
the success and failure of one product area of one
firm.
 This has been a strength for Sweden, but may
equally turn out to be a threat and weakness.

6.  After a few decades of intense competition, a
de facto monopoly was established in the
Swedish operators’ market in the late 1910s.
 This monopoly of Televerket’s lasted until the
1980s.
 In terms of penetration of telephony services,
the state of technology implemented and
quality of services, Sweden has been an
advanced market since the late 19th century.
 Compared to many other “PTTs”, a number of
features rendered the position of Televerket
unique.

7.  It also had a division of equipment
manufacturing, which meant that it
could develop its own manufacturing
and R&D expertise, driven by a
genuine engineering culture, and
became a powerful purchaser.

8.  The Swedish supplier industry has been heavily
dominated by one firm: Ericsson. In 1970, there were a
few minor suppliers, including Teli. By the start of the
time period investigated, Ericsson accounted for around
three quarters of the Swedish telecom manufacturing
sector.
 The relationship with Televerket was one of collaboration
and to some degree competition.
 The development of the AXE switching system
(developed jointly by Televerket and Ericsson) became
crucial to the future competitiveness of Ericsson.
 In this respect it was very much a result of collaboration,
guidance and resource-sharing with an advanced
customer, but not of public procurement.

9.  In the Swedish telecom innovation system,
Ericsson is in 2004 by far the most important
actor in terms of revenues, followed by the
large operators.
 Around Ericsson, a vast number of companies
supplying components and services have
emerged.
 Based on statistics on the 500 most important
IT companies in Sweden, it was estimated that
the telecom industry generated revenues of
between 300 and 400 billion SEK in 2002.

10.  Industry has come to increasingly
dominate the sector’s R&D funding, in
particular Ericsson.
 Following the downturn, effects on
R&D spendings have been dramatic.
In 2001, Ericsson contributed more
than 20% of the total R&D spending
in the country.

11. Innovation System:
 The most obvious way is of course to
begin with the functions of (a)
developing/generating, (b) diffusing,
and (c) using innovations.

12.  The first is (i) the creation and diffusion of “new”
knowledge. Possible sources may be R&D, identification of
problems, search and experimentation, learning-by-
doing/using and imitation.
 The second is (ii) the guidance of the direction of search
among users and suppliers of technology. This function
includes guidance with respect both to the growth
potential of a new technology and to the choice of the
specific design approaches (e.g. standards). It also
includes the supply of incentives for actors to engage in
innovative work, i.e. companies must feel that they get a
reasonable return on investments.

13.  Thirdly we have (iii) the function of supply of resources such
as capital and competencies.
 The fourth concerns (iv) the creation of positive external
economies, both market- and nonmarket- mediated. It
involves the facilitation of information and knowledge
exchange, and is aided by connectivity between different
actors in the system and the feedback loops between them.
 Finally, the fifth function is (v) the creation of markets. Since
innovations rarely find ready-made markets, these may
require stimulation or even creation. This process may be
affected by governmental actions to remove legislative
obstacles, by various organizations’ measures to legitimize the
technology, and by incentives.

14.  After scrutiny of these functions, and
familiarization with the innovation systems in
the empirical cases, it was found that one
essential function seemed to be missing,
namely (vi) providing incentives for innovative
activity. These incentives could be financial
(e.g. tax reductions, loans), related to
appropriability conditions (IPR, revenue
sharing among actors).
 Expectations are also an important incentive
for innovative activity

15. Innovation Maturity:
 (1) the formation or birth phase, (2)
growth phase, (3) maturity phase and
(4) a decline phase.
 They emphasize four features of that
process: (1) market formation, (2) entry
of organizations, (3) institutional change
and (4) the formation of technology-
specific advocacy coalitions.

16. Where to innovate?

17. Main Growth in the Telecom
Sector:

24. Ericsson and the supplier
industry:

29. Revenue Breakdown:
 Infrastructure Providers – SEK 167.8 billion
in 2002
 The infrastructure providers are the most
important actors in the Swedish telecom
innovation system in economic terms,
constituting 55% of the top 500 IT companies’
revenues in 2002.
 Within this group, Ericsson of course stands out
as the dominant player, alone generating 87%
of the revenues among the group of
infrastructure providers.

30.  Terminal manufacturers – SEK 43 billion in 2003
 As late as 1998, Ericsson was still the third largest
terminal supplier, with almost 15% of the world market.
The company lost much of its position in the following
years. The terminal business was subsequently merged
with Sony’s terminal company, and the new company –
Sony Ericsson – had a market share around 5% in 2003.
 In 2004, two of the remaining product development
centers are located in Sweden – Kista and Lund – but the
headquarters are placed in London.
 In 2003, Sony Ericsson sold 27.2 million terminals.
Although the company was profitable in H2 2003, the
annual result was a loss of SEK 1.2 billion.Sony Ericsson
generated a total turnover of SEK 42.3 billion in 2003.

31.  Operators – SEK 129.6 billion in 2002
 Since the deregulation of the telecom service
market a number of operators have established a
foothold on the Swedish market. The business
magazine Veckans Affärer identified 27 operators
– with a total turnover of SEK 129.6 billion. The
most important operators were TeliaSonera,
Tele2 and Vodafone, between them generating
92% of total revenues. The value of the fixed
telephony market reached SEK 25.8 billion in
2002, 0.8 billion less than the year before.
Mobile telephony generated revenues of SEK
17.3 billion in Sweden in 2002, up from 16.2
billion in 2001.

32.  Consultants – SEK 21.6 billion in 2002
 An extensive consulting industry has
formed around the telecom companies in
Sweden. Most can be classified as suppliers
to the large telecom companies, assisting in
e.g. product development. To this category
belong companies such as TietoEnator,
Teleca and WM-data.

33. Collaboration Ericsson-Televerket
and the role of public procurement
 Recently, attention has been paid to the role of public
procurement for innovation.
 The importance of an advanced domestic demand
(Porter 1990) and lead users (whose needs later
become commonplace: von Hippel 1988) is by now
well known.
 So is the role of public procurement, and its effects on
long-term technological investments and innovation,
when private industry otherwise would under-invest.
 However, there can be negative effects as well; e.g.
stable procurement relations may also bring about
inefficiencies because of a lack of competition.

34.  An early form of cooperation between Televerket and
Ericsson was established in the early 1950s when the
electronics council was formed.
 Ericsson and Televerket had separately started exploring
the possibilities that opened up as a result of electronic
technology.
 It was difficult to recruit engineers, however, and the
electronics counsel was set up to coordinate the two
parties’ development work primarily in order to avoid
duplication of development work and the misuse of scarce
resources.
 In spite of this coordination, the two parties developed
two separate SPC switches (A210 and AKE 12). Obviously
the coordination did not work properly.

35.  In 1970 Ericsson and Televerket instead formed
a joint R&D company – ELLEMTEL. The company
had as its task to develop and construct
equipment for (1) electronic switches, (2)
computer networks, (3) digital transmission
systems, and (4) advanced telephones.
 Manufacturing was to be performed by either
Ericsson or Televerket. The major task was to
develop the computerized electronic switching
system (AX, later AXE).

36.  In the case of mobile telephony the role of “public”
procurement by Televerket was more clear-cut.
 It is unlikely that Ericsson would have entered into
cellular mobile telephony had it not been for
Televerket’s leading role.
 Televerket had built up a position as a competent
developer, operator, standardizer and procurer of
mobile telephony equipment.
 It increased the attention and resources spent on
mobile telephony at Ericsson and in particular SRA,
while at the same time influencing critical technological
choices, in particular adapting the AXE switch for
mobile use.

39.  Ericsson’s sales came to a drastic halt in 2001,
following a long period of steady growth. As
 seen in Figure 4-29, R&D investments have also been
cut, but increased as share of total
 sales. This implies R&D spending being cut back less
than other expenditures. Still, the
 reliance on Ericsson as a major contributor to the
Swedish R&D investments seems burdened
 by a great risk, considering how close the company
came to bankruptcy following the drastic
 market slowdown.

40. Supply of incentives to innovation
creation and exploitation
 Apart from the advancements on the international
scene, which set the pace also for the
 Swedish actors, the interest shown by Televerket was
an important reason for the escalation of the Ericsson
commitment in the 70s. This interest persisted in the
80s although Televerket still had no direct need for
more capacity.
 The basic incentive for Televerket was rather to invest
in order not to renovate its old copper network.
 As the Swedish market is relatively small, an increasing
international market in the area was probably an
additional incentive for the escalating operations of
Ericsson.

41.  During the 1970s and 1980s, Televerket played
an important role in the Swedish
telecommunications R&D system.
 With the monopoly situation, Televerket was
commissioned by the government to perform
long-term R&D.
 Until the de-monopolization in 1993, Telia (or
Televerket) funded both research and
development of telecommunication equipment.
 As discussed earlier, in the cooperation with
Ericsson, Ellemtel, the AXE switch was jointly
funded and developed.

42.  With Ericsson and TeliaSonera
decreasing their R&D investments, R&D
in small firms often funded by venture
capital could play a more important role
in the Swedish innovation system.
 The development of the venture capital
market will therefore (and for other
reasons) be assessed in the following
section.

43.  During the banking crisis in the early
1990s, the government made SEK 6.5
billion available for venture investments
through two new investment
organizations, Atle and Bure, and
stateowned venture capital
organizations.
 This was the start of a period of new
growth in the industry.

44. Telecom-related research and
development:
 The telecom industry is knowledge-intensive with complex
systemic products. The nature of the products calls for
large R&D investments in order to stay at the frontiers of
technological developments. Throughout the period large
investments have been made in the field, both with public
funds and with corporate R&D investments.
 Since the shift from electromechanics to electronics in the
1970s the industry has slowly but surely converged with
the computing industry, often using the same basic
technologies and components.
 Thus, it is difficult to identify public research projects
purely dedicated to telecom research. Due to the
importance of the telecom industry in Sweden, we make
the assumption that a large share of electronics R&D has
been invested in areas important for the industry.

45. Public R&D:

47. Industry R&D:
 As shown in Figure 4-28, industry has played an
increasingly important role in R&D in recent years;
perhaps more so in the IT field than in other areas.
Some estimates indicate that 90% of all IT-related
research was carried out in the industry in 1987, and
only 3% of total university research funds in 1990 were
allocated to IT-related fields.
 In 1993, costs for ICT research were almost SEK 12
billion for industry-related R&D, compared with around
450 million available for academic R&D programs.
 This corresponds to around 25% of all R&D funds in the
country in 1993. In most large-scale public R&D
programs, industry has provided up to half of the funds.

48.  During the whole period, the telecommunications
industry has had an influential role in Swedish R&D.
 In the late 1980s, telecommunications equipment made
up 58% of the electronics production in Sweden.
 R&D expenses in the Swedish electronics industry were
also focused on the telecommunications area; of the SEK
19.9 billion invested in electronics R&D in 1999, 10.8
billion were invested by the telecom products companies.
 In 1999, the electronics industry in Sweden had a total
turnover of SEK 190 billion, with electronics products
making up SEK 164 billion. Of the total electronics
production, communications equipment constituted 84%.

49.  The importance of Ericsson in the Swedish R&D system is
illustrated by the fact that the company spent SEK 43 billion
on R&D in 2001, equivalent to half the total Swedish R&D
investments.
 Although the share spent on R&D in Sweden is only roughly
half the total sum, Ericsson had great relevance for the
Swedish ICT R&D.
 As a rough estimate, 20 of the 43 billion SEK were spent in
Sweden, which would amount to more than a fifth (>20%) of
the total R&D in Sweden.
 Obviously the well-being of this one firm and its decisions
regarding R&D will have effects on the Swedish National
Innovation System.

50.  Sweden carefully nurtured the
development of highly knowledge
based telecom equipment maker:
Ericsson.
 Ericsson has taken the role of
nurturing Sweden as a highly
knowledge based economy.

51. Ericsson
in 2007:

56. How is Sweden benefiting?