Main findings from the firm survey of the REGIS project

Regional Innovation Systems: Designing for the future

(1) This paper presents the main results of a firm survey conducted in the Tampere region as a part of the international project "Regional Innovation Systems: Designing for the Future". The project is sponsored by the EU-DG XII Targeted Socio-Economic Research Programme and the Academy of Finland. The research is based on a postal inquiry. The sample includes all industrial companies within the Tampere region having 10 or more employees. The service sector is left out. We also included a group of small high-tech firms with less than 10 employees, as these companies are in general very innovative. Altogether 593 companies were approached, of which 73 belonged to the group of small high-tech firms. A total of 142 companies returned the completed questionnaire, which is a response rate of about 25%. The separate response rate of the group of very small high-tech companies was 18%.

About 25% of all the companies which answered the questionnaire are from the mechanical engineering industry; this is the biggest share of all companies. The smallest comes from the food industry with about 9%. The other sectors are represented with shares between 10% and 15%. However, if we compare the structure of our sample with the industry structure in the Tampere region, we can see that our sample is, quite representative, as regards the sector variable. As we do not have comparable figures from official statistics for the IT sector we could not calculate its representativeness.

The situation is different with regard to the size of the companies. As has been mentioned already we did not intend to have the very small firms (1-9 employees) represented in our sample according to their number in the region. Furthermore the small companies (10-49 employees) are underrepresented in our sample while medium-sized and large companies are overrepresented.

Figure 1. Representativeness of the sample by sectors

(2) The Tampere region has not developed into a truly regional economy to the extent that companies form whole production chains, extensively exchange products, information and knowledge and co-operate very closely. We cannot find production clusters in this region but only an agglomeration of firms in specific industrial sectors, such as mechanical engineering, textiles and leather and, to a lesser extent, chemicals and pulp and paper. The majority of the companies in the region have a national orientation, they receive their input from Finnish companies outside the region and sell their products primarily to the national and only to a lesser extent to the regional market.

The main competitors also come from the national level in the first place, followed by Europe and only then comes the region. For the main partners the region is of some importance but still most of the companies co-operate with partners on the national level. From these figures we conclude that the economy in the Tampere region can be described as an agglomerated economy with a strong foothold in the national forest as well as in the engineering and in the textile clusters and also in the rapidly growing IT sector.

102 firms have a clear orientation concerning their sales, which means that more than 50% is targeted on one of the four geographical areas. Of these 102 firms 25% have targeted their sales mainly on the region, 56% to the nation, 17% to the EU and 3% to the rest of world.

(3) The Tampere region has a serious employment problem. Due to the fact that it is an old industrialized region with some declining traditional industries, the unemployment rate increased to about 20%. Although during the last years the turnover of many companies has often grown quite significantly, this has hardly led to the creation of new jobs. Only companies in the IT sector which are often very small high-tech firms have on average increased employment to a greater extent, of course from a low level. So far the newly created jobs cannot compensate for job losses in the traditional industries and in big companies. Our research clearly indicates that hopes for new jobs in industry can be associated mainly with very small high-tech firms particularly in the IT sector. However, in other industries there are also some companies which have managed to boost turnover and employment at the same time. These companies are often very innovative in regard to products as well as production processes. From our research we can conclude that innovative companies, introducing both product and process innovations, are economically often very successful and also create a significant number of new jobs.

(4) In general employees in the Tampere region are fairly skilled. However, there are also industries in which companies with unskilled workers dominate. In this respect we have to mention the food, textile, forest and the chemical industries. Furthermore, the skill level is rather low in the medium-sized companies. Of course skill needs differ from industry to industry, but a low-skilled workforce will definitely become a hindrance for innovation activities.

Figure 2. Levels of education of employees by industry (%)

While Figure 2 shows the distribution of different skill levels in various industries, Table 4 shows the share of companies in an industry which have a specific skill level. In the IT sector, for example, 65% of all companies have a highly skilled workforce.

(5) Our research gives only some superficial information as regards the quality and security of the jobs in the Tampere region. From this one can have the impression that jobs are fairly secure nowadays in the region, after a period of great job losses due to bankruptcies among small and medium-sized firms and the reduction of the workforce in big companies. In our sample there were only two so called "extended work branches" with assembly only, which are often at risk of being closed down. Furthermore, most of the companies performing knowledge-based functions such as R&D or marketing to a greater extent do this quite often in the region.

The fact that single firms and firms which are subsidiaries often do not perform such knowledge-based functions is no surprise, but could be cause for concern, as R&D as well as marketing can be seen as investments in the future. In stiffening price competition particularly with companies from Eastern and Central Europe, small and medium-sized supplying firms must also develop some technological knowhow which makes them attractive as partners and reduces their dependency on one core firm. Particularly companies from the forest and the basic metal sector do not perform knowledge-based functions in the region.

(6) There are only a few foreign-owned companies in the Tampere region. There is certainly the need to attract more foreign investment. As the example of some UK regions clearly shows, foreign investment can help to boost the economy and to create new jobs. The region has to develop a sharper profile indicating specific advantages that can attract foreign companies to set up production units in the region.

(7) Companies in the Tampere area are not only less regionally oriented, they also show a rather low international and particularly low global orientation (see tables 1. and 2.). But while in some sectors such as chemicals and mechanical engineering we can find a significant number of companies buying and selling products from and to European firms, only very few companies have a more global orientation connected with overseas markets. Obviously companies in the textile, leather and clothing industries make use of cheap labour in Eastern Europe, buying some of their products there to reduce overall production costs.

To be present in the most dynamic markets of the world economy, however, offers great opportunities to grow which can also help to create new jobs. If companies open up new production sites abroad this can at least stabilize their position in the world market and at the same time make jobs in the Tampere region more secure, as this will increase firmsï competitiveness. There is obviously a need to make small and medium-sized companies in particular aware of the chances the dynamic overseas markets can offer. But big companies also need a more global orientation because they often see their main competitors and partners located in the European and overseas markets (see page 4).

(8) Companies in the Tampere region concentrate on high quality niche markets in the first place. They see quality and time of delivery as their competitive advantage. These niche markets, however, do not present a safe segment any longer. More companies from all over the world have learned to produce high quality. What is now needed is to produce high quality and user-friendly products at a reasonable price and to deliver them on time. However, in a global market, the capability to innovate rapidly is becoming even more important. We can also assume that together with increasing ecological problems sustainability with regard to products and production processes will become a competitive edge. With regard to innovativeness companies in the Tampere region are less convinced of being on top, medium-sized companies are particularly at risk of falling behind in innovation competition. After sales service, user-friendly products and sustainability are also aspects of global competition in which companies in the region seem to be rather weak.

(9) Quality is seen as the major challenge which companies have to face. But they also realize that price competition is becoming more important. Surprisingly technological change and rapid change of demand, often mentioned in the literature as severe pressures from the business environment, are only seen by companies in the mechanical engineering and IT sectors as major challenges. We can either assume that companies do not see technical changes as a major challenge because their technical standard is often fairly high or they underestimate the dynamic of technological change particularly caused by information technology. The fact that companies do not worry about rapidly changing demand clearly indicates them not having reacted to the change from producer markets into user markets. We can conclude that many companies in the Tampere region are not very well prepared for the new type of global competition, demanding innovation and market orientation in the first place. But from the following findings we can conclude that they have become aware of the fact that market driven innovations are very important to stay competitive.

(10) Companies in the Tampere region are internally-focused to a high degree. To sustain their competitive advantage and to respond to major challenges from outside companies in the region rely in the first place on internal resources and strategies. They see the skills and knowledge of their workforce as a major resource when the question is raised how to stay on top. From the next table we can see that a qualified workforce pays. Those companies that have a highly qualified workforce more than those with an unskilled workforce have introduced both product and process innovations.

Moreover, they see an increase in R&D expenditures and efforts to improve their marketing as the most promising strategies to react to stiffening global competition. Still many companies have not realized the advantage of co-operation either with other firms or with supportive organizations in the regional environment.

(11) With regard to the qualification needs we found some interesting results. For companies in the Tampere region some kind of "new thinking" associated with creativity and entrepreneurship is more important, while the improvement of professional skills is obviously seen as a less pressing problem. The need to develop the technical, international and social skills of their workforce is also stressed by companies. As could have been expected, industries differ with regard to the need for new skills; obviously these are linked to different problems that occur in each industry. However, although companies have realized that to update the skills and competences of their workforce is crucial to be able to keep up with their competitors, the way they develop their training plans and programmes contradicts such experiences. The training activities of companies are mostly developed on an "ad hoc" basis.

(12) As companies in the Tampere region do not see innovativeness as one of their strengths in global competition it is worth having a closer look at their innovation activities. The general picture is that companies have spend more money for R&D in 1995 compared to 1990. But if we relate the R&D budget with companiesï turnover the picture is not so impressive. Only companies in the IT sector which have already spent quite a lot of money for R&D in 1990 have increased their R&D budget significantly. For all other sectors we can identify a stagnation or even reduction. Still, on average companies in the mechanical and surprisingly in the textile sector can be classified as high R&D intensive. On the other hand companies in the forest sector must be classified as low R&D intensive. If we look at firm size we can identify a clear trend. The bigger companies the lower their R&D budget is related to turnover.

(13) Looking at the other input factor, R&D personnel, we can see an only slightly different picture. The number of R&D personnel on average has increased, but if we look at the share of R&D personnel of total employment the trend is stagnation. In this respect only the chemical sector shows a significant increase, still the average share of R&D personnel of total employment is highest in the IT sector. Nearly every second employee in this sector is working in R&D. With regard to firm size we can see the same trend which was identified when looking at the R&D budget: big companies invest proportionately less in R&D than small ones.

From the development of the R&D budget and personnel we can conclude that companies in the Tampere region have not tried very hard to develop innovativeness as a competitive edge on the world market. The stagnating of R&D activities can partly be explained by the economic crisis; companies often react in a cyclical way; they reduce the R&D budget in a period of economic downswing. In a market in which innovation is becoming the number one factor and being able to rapidly innovate is an important criterion of survival such behaviour, however, must be seen as more critical. This can easily lead to a loss of competitiveness. These figures are even more alarming as only a minority of about 30% of all companies in our sample are planning to extend R&D activities in the region.

(14) The relationship between R&D expenditures on the one hand and innovation output factors is often not very clear. Some industries have to invest more in R&D activities than others to develop new products. In our research R&D expenditures and innovation output factors are positively correlated. Those firms that have a high R&D intensity have introduced both product and process innovations more often than those with low R&D intensity or no R&D at all. From our research we obtained the surprising result that companies in those sectors such as the forest and basic metal industries which invested less in R&D were particularly successful in introducing new products to the market. The very small high-tech companies on the other hand, although they have invested in R&D quite intensively, have introduced fewer new products to the market than the other SMEs. We can conclude that internal R&D is not always the key factor that causes innovations.

(15) It is often argued that the weakness of European countries is that they concentrate on process innovations instead of product innovations. This innovation behaviour is also seen as a major problem for stimulating employment. Our research, however, shows that in general more firms have introduced product than process innovations during the last three years. Only in some industries such as textile, forest and especially in the IT sector have companies given priority to process innovations. In some of these industries cost competition is rather stiff. Here we have to take into account, however, that we do not know what companies really mean when they claim to have introduced innovations. We do not know whether these are more basic or only incremental innovations.

(16) That cooperation obviously is a weak point in the regional economy can be shown when ascertaining firmsï innovation activities. Of course, customer and supplier firms are important resources when it comes to information about possible innovations, and they are also the main partners in the innovation process. Again national and even European companies are more important partners in the innovation process than regional ones. This also indicates the absence of a real regional innovation system. Supportive organizations being part of the environmental infrastructure are hardly seen as important resources or partners in the innovation process.

However, some exceptions must be mentioned: When it comes to the function of providing knowledge the Tampere University of Technology is seen as an important partner. However, only certain industries such as mechanical engineering and IT and to a lesser extent chemicals seek the partnership of the Tampere University of Technology. Big companies more than small ones use this university as a source of knowledge. Contract research institutes in the region are also mentioned several times by firms as important sources of technical knowledge in the innovation process. These relationships of firms with knowledge providing organizations are mostly long-term relationships, where companies routinely use the services of the supportive organization; they are mostly informal.

What becomes quite obvious from our research is that the existing supportive organizations do not function very well as knowledge providers for SMEs. The fact that there are only few linkages between SMEs and the Tampere University of Technology and other knowledge providers can be seen as a major problem with regards to innovation activities in the region.

Looking at industries we can see that there is no major difference concerning the intensity of co-operation with supportive organizations. Only very few companies co-operate very closely, but on the other hand only some companies do not co-operate with support organizations at all.

From the next table we can conclude that co-operation with support institutions pays. Those companies that often had contacts with support institutions are more innovative than those that did not co-operate. On the other hand those companies with no or little co-operation only have not innovated more often than co-operation oriented companies.

(17) From our research we can conclude that the provision of venture capital for innovative activities has been a problem in the region. Companies have hardly mentioned that they co-operate with regional venture capital providers. This, of course, can be explained by the fact that the supply of such capital has been rather low up to now. It has been realized, however, that this could become a major problem for innovation activities in the region, which has led to the establishment of a new fund for venture capital. On the other hand not only big but also small companies seem to have relatively good relationships with providers of financial subsidies, only medium sized firms seem to have major problems in this respect.

(18) More general support institutions such as trade associations, government agencies or training institutions, according to the companies, are of hardly any use for them in the innovation process. Saying this one must of course ask what innovation related functions these organization could perform. For training institutions this is quite obvious, and certainly there is a need for closer cooperation with industry to stimulate creativity, entrepreneurship and social skills as important competences in the innovation process. But what about the other organizations? Their most important role in the innovation process could be defined as stimulating and supporting cooperation between key actors in the region. Obviously, support organizations have not assumed such a role so far.

(19) With regard to cooperation in innovation processes participation in technology and training programmes and projects is also important, as this opens up chances of knowledge exchange. However, not many companies participate in such programmes and make use of the advantage of knowledge sharing. Regional and national programmes are prefered by companies while projects supported by the EU are very much critized for being too bureaucratic; but they are seen as important as they provide international cooperation. Participation in such technology and training programmes is concentrated in certain industries: the forest industry has to be mentioned here in the first place. A major problem is that SMEs, although there are specific programmes for them, are much less involved in such programmes than bigger ones. Their low participation is often explained by SMEs pointing to the lack of management time, while big companies do not participate in such programmes because they have difficulties in finding suitable partners or they do not expect any advantage from such cooperation.

(20) By analysing the introduction of modern ICTs and new organization forms and management practices we learn something about the adaptiveness and learning potential of companies. Looking at modern organization forms and management practices we got the impression that companies concentrate on internal restructuring while improving cooperation with other firms and organizations is not an important aspect of organizational restructuring.

With regard to modern ICTs we can distinguish three aspects: the tool, the organization and the connectivity aspect. Our research indicates that ICTs were mainly used as a tool but hardly seen as enablers of decentralized organization forms. Taking the aspect of connectivity into account, modern ICTs were mainly used to improve internal cooperation, to increase information and knowledge exchange with other firms and knowledge centres via modern ICT is not a high priority for companies.

Our results show that big companies in particular try to become more flexible and adaptable and thereby increase their learning potential, but they still have not realized the great advantages intensive cooperation and knowledge sharing with other firms and with support organizations can offer. Both aspects of firm restructuring the application of ICTs and the introduction of modern organization forms tell the same story: cooperation in innovation activities is a weak point in the economy of the Tampere region.

(21) Our research has shown that innovative companies have some characteristics in common: they have a highly skilled workforce, they co-operate more often with support organizations than others, they are larger than the average firm and they are less regionally oriented. Innovative companies more often have a high increase in both turnover and employment, and they have a higher R&D budget compared to other companies. The industry with the highest share of innovative firms is the IT sector, dominated by small companies.

(22) We can conclude that within the Tampere area a regional innovation system has not developed so far. Companies are much more nationally than regionally oriented and for the majority of the companies to have regional cooperation partners is not of great importance. Therefore the learning effect of constant interaction between producers within a network economy cannot materialize. Although an infrastructure of a variety of different support organizations exists it has not become of crucial importance to the effective operation of the regional socio-economic system, with the exception of the Tampere University of Technology. Often national supportive organizations are more important than regional ones. The fact that big companies in particular often have problems in finding an adequate regional partner to cooperate with in innovation processes adds to the picture we have drawn so far.

All this information might even challenge the idea of developing an integrated, clustered economy in the Tampere region. Due to the smallness of the region a more appropriate strategy could be to get a strong foothold in national production clusters. It then becomes important that strategic, value adding functions and parts of national or even global production chains are performed in the Tampere region. Nevertheless, even a strategy of this nature would need closer cooperation between companies and with supportive organizations in the region.