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2022-02-11

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Dariusz Zbytniewski

Thinking about the future of Poland, it is worth being aware of the development models being considered elsewhere. Interesting reflections on the current model of business and economic development in Switzerland, as well as the necessary changes in this model, were presented by Dominique Mégret, the head of Swisscom Ventures, in the book "Deeptech Nation What future for the Swiss model?[i] " Proposed solutions for the Swiss economy have a pan-European character. Therefore, it's valuable to consider them in the context of building the long-term competitiveness of Polish companies and increasing their ability to face global challenges related to the digital transformation of the world economy and the rapidly growing innovation of various countries and regions. 

 

Europe has become a major loser in the digital transformation. In 2006, three out of the top 10 companies in terms of market capitalization were European. 15 years later, in November 2021, there are no longer any European companies among the top ten, and the ranking has been dominated by high-tech firms (7 American and 1 from Taiwan).

The European economy has become heavily dependent on American software and Chinese hardware, and its competitive ability is decreasing due to declining innovation. Europe's strength lies in its ability to create theoretical solutions, but the closer it gets to the market and economic activity, the worse it performs, as confirmed by the following figures: 

 

  • 43% - Europe's share in fundamental scientific discoveries measured by the number of Nobel Prizes (physics, chemistry, medicine, plus Fields Medals in mathematics).
  • 23% - Europe's share in global R&D spending, which aligns with the region's contribution to the global GDP.
  • 11% - Europe's share in Venture Capital fund investments.
  • 2% - Share of European companies in the market capitalization of the top 25 technology companies (November 2021).

 

Amidst the European backdrop, Switzerland stands out, ranking first in the world for both innovation and competitiveness in 2021. In the same rankings, Poland occupies the 40th and 47th positions respectively[i]. Switzerland holds the third spot globally, following the USA and China, in terms of the market capitalization of the world's top 100 companies. In 2020, the three largest European companies hailed from Switzerland (Nestlé, Roche, and Novartis).

Other significant trends influencing the competitiveness of European companies include the growing power of American digital platforms. In May 2021, among the top 25 companies by market capitalization, only one European company (SAP) was present. The economy of the platform business model is based on scale of operation and data exploration. This means that a market leader (e.g. in personalized medicine) with the best algorithms for prevention and medical care will have a significant advantage over its competitors. Who would entrust their health to a lesser doctor/system? Similarly, with autonomous cars, who would risk using less safe algorithms?

The same logic applies to other areas. Overall, this could lead to a "winner takes it all" development model, further deteriorating the competitive position of European companies.

Key questions arise: What contributes to the high current competitiveness of Swiss companies? Will the global digital economic transformation impact the Swiss model? What does Switzerland plan to do to strengthen its position? The author of the book "Deeptech Nation What future for the Swiss model?" - an entrepreneur and investor - addresses these questions.

 

Traditional Model of Innovation and Competitiveness of Swiss Companies: This model is based on several pillars:

  • High level of scientific research in academic centers and specialization in deeptech - technologies derived from expensive basic and applied research. Leading technical universities (ETH Zurich, EPFL) rank among the best in the world. They compete globally to attract the most talented students and researchers, specializing in scientific research in the field of deeptech and fostering the development of startup ecosystems focused on the most advanced technologies. Approximately 100 academic spin-offs are created each year in Swiss universities in highly innovative areas such as biotech, AI, robotics, nanotechnology, and medtech.

 

  • Intensity of research and development activities - Switzerland spends the most per capita on R&D in the world (2,800 CHF). This ratio would be much higher if it included R&D expenses incurred abroad by subsidiary companies of Swiss firms (15 billion CHF). Of course, in absolute terms, Switzerland's total expenditures in this area are significantly smaller than those of the USA (25 times), the EU (20 times), or China (15 times). It is also important to note the intensity of R&D activities of leading digital players - for example, Apple spends around $16 billion annually on R&D (2019 data), which is equivalent to the entire Swiss private sector.  Nonetheless, 60,000 researchers work in the Swiss R&D sector, creating high added value, enabling expansion into foreign markets, and contributing to the creation of new industries and future jobs. Actelion (a subsidiary of Roche, acquired by Johnson & Johnson in 2017), which focuses on R&D, is a good example. In 25 years, this biotechnological startup created 5,000 direct jobs and many more indirectly (subcontractors, infrastructure and service companies, etc.). This example illustrates the importance of today's young firms' ecosystem. It is a breeding ground from which tomorrow's "high-tech champions" will emerge.

 

  • Direct competition among Switzerland's largest companies for global leadership in their industries.  - The success of Nestlé, Roche, and Novartis - the three largest European companies in 2020 - is based on a clear development vision, focusing on activities that generate the highest possible monetary (and reputational) value. Another significant factor is the intensity of research and development activities. Nestlé's R&D budget accounts for 55% of Switzerland's total R&D expenditures. The work is conducted in 10 research centers and covers the entire value chain, from basic research in nutrition and health to applied research related to new product development. For instance, Nestlé Research Center in Lausanne employs around 600 people, including 250 scientists from 50 countries. Developing new development projects within large corporations (intrapreneurship) is very difficult due to frequent internal resistance and clashes of different cultures. One of the more interesting cases of success that had a significant impact on the development of the parent company is Nespresso. Founded in 1986, it currently employs 13,500 people in 76 countries. Difficulties in implementing innovations in large corporations lead to a clear trend of outsourcing R&D to smaller, more innovative entities.

 

  • Development Capability of Small and Medium-Sized Swiss Firms (Hidden Champions) - These firms meet three criteria: (1) they should be among the top three companies in their sector globally or number one on their continent, (2) turnover below $5 billion, (3) the firm is little known to the public. Swiss companies in this segment operate in well-defined niches within industries such as precision instruments, watchmaking, electronics, machinery, pharmaceuticals, and plastics. The culture of these firms is built around hard work, intolerance for weak results, and employee loyalty. They are generally family-owned companies with an authoritarian leadership style on strategic issues and a participatory approach at the operational level. These firms typically do not like to spend more than they earn, so the time for building and developing them is longer than for new startups. For "hidden champions," it takes about 25 years to become a global leader. A startup with appropriate venture capital funding today can become a leader within 10 years. "Hidden champions" stand out with well-defined and consistently implemented long-term strategies for global expansion. These firms balance short- and long-term goals well, significantly reducing the pressure to sell the company to competitors.

 

  • Culture of Innovation - A love for technology, typically characterized by high precision, small size, and the best possible quality, is ingrained in Swiss DNA. Initially present in watchmaking and jewelry, this culture gradually spread to other sectors, such as textiles, measurement instruments, precision mechanics, microelectronics, and many more.

 

  • Socio-Political Stability - Switzerland is known for its peaceful management of social relations. Strikes are treated as a last resort and are rarely used according to international standards - 1 strike per 1,000 inhabitants per year (comparable rates are 16 for Germany and 118 for France). If they occur, they are planned and organized in the common interest - mostly outside working hours, in designated areas, without disrupting the activities of others. The Swiss understand the importance of cooperation among different partners in social dialogue thanks to pragmatism and survival instincts. The culture of change is based on enormous investments in research, academic education, and ongoing vocational training.

 

Swiss Entrepreneurship Model 2.0:

The need for changes in the Swiss, and more broadly European, entrepreneurship model arises from a very strong correlation between financial investments in the development of new innovative ventures and the scale of their subsequent success. Americans and Chinese understand this very well. These countries, thanks to massive investments in venture capital funds, collectively own:

 

  • 75% of unicorns (startups valued at least $1 billion)
  • Over 90% of the value of the world's top 25 high-tech companies

 

For comparison, Europe, where 36% of global startups were created between 2009-2019, generated only 14% of global unicorns and just 2% of the value of the largest technology companies.

These numbers clearly show that it is not enough to fund a large number of startups, but that large financial investments are necessary to position the best European companies at the forefront of the world. Major investors in the most advanced financing rounds create future market leaders. Companies with the best funding for their development achieve global leadership with comparable competencies. The example of Uber, which raised nearly $25 billion for its development between 2010 and 2020, illustrates this thesis well.

It is also worth noting that the development of 21 out of the top 25 technology companies was financed by venture capital funds.

To create leading companies capable of competing with American and Chinese giants, the scale of venture capital funding in Europe should increase three or fourfold.

In this context, the main framework of the Swiss model for building innovation and competitive capability will remain unchanged. According to Dominique Mégret's proposal, the existing model should be expanded to include a world-class startup financing ecosystem.

This would mean that over the next 10 years, investments in venture capital should amount to around 50 billion CHF (an average of 5 billion per year, compared to 2.1 billion CHF in 2020) to remain among the top 10 global innovation clusters. The recommended target is investments in venture capital funds of around 10 billion CHF annually from 2030 onwards.

Investments of around 5 billion CHF annually would allow Switzerland to remain among the top 10 most innovative countries and in the top 5 in the Deep Tech segment. According to this scenario, 3-5 unicorns would emerge each year in several highly technical sectors where Switzerland has a comparative advantage.

Investments of around 10 billion CHF annually by the end of this decade, combined with significant capabilities in R&D and the ability to attract talented resources from around the world, are expected to create a "small Silicon Valley" in the center of Europe, specializing in Deep Tech. Significant investments by VC funds will lead to the development of the startup ecosystem, which in turn will have a positive impact on building their value[ii] and increasing the attractiveness of the entire ecosystem. In this context, Switzerland's goal is also the rapid development of an ecosystem that supports startup growth.

 

10 Development Directions - Switzerland 2030:

Investments of 50 billion CHF in innovative projects can yield expected results if they are directed toward areas where the country already has considerable experience. The priority development directions are defined by three criteria (filters):

 

  • Global market size - above $10 billion
  • A sector where Switzerland already has a competitive advantage due to high R&D intensity, technological complexity, and high added value
  • Strategic significance - contribution to solving significant social problems

 

As a result, 10 areas have been defined as priorities:

 

1. Precision medicine and personalized and preventive medicine

2. Precision agriculture and food innovations

3. Digital sports and wellness

4. Industry 4.0

5. E-learning and education

6. Fintech 2.0

7. Digital trust economy

8. Humanized smart cities

9. Environment and sustainable development

10. Space exploration

 

The goal is to finance 1,000 startups, leading to the creation of 50 companies with individual values exceeding 1 billion CHF (unicorns) by 2030, including 5 companies valued over 10 billion CHF. These companies are intended to become a new driving force for the Swiss economy.

The analyses and action plans presented in the book "Deeptech Nation" can serve as a good inspiration for an in-depth discussion about Poland's future. Its long-term competitive and innovative ability will depend on solutions adapted to the challenges of the digital era in the areas of education, research and development, commercialization of research outcomes, the pace of development of new innovative ventures (startups), the ability to finance their development through venture capital funds, and the creation of ecosystems supporting business development.

The analyses and action plans presented in the book "Deeptech Nation" can serve as a valuable inspiration for an in-depth discussion about Poland's future. Its long-term competitive and innovative capacity will depend on tailored solutions to the challenges of the digital era in the following areas:

 

1.       Education: Introducing modern and flexible educational systems that not only adapt to changing labor market needs but also foster technological and innovative skills.

2.       Research and Development Activities and Commercialization of their Effects: Supporting research initiatives, especially in deep tech areas, to enable the transfer of research outcomes into practical applications and business.

3.       Pace of Development of New Innovative Ventures (Start-ups): Creating an environment that promotes the establishment and growth of start-ups, with a focus on access to capital, mentors, and appropriate support structures.

4.       Funding through Venture Capital Funds: Increasing the availability of funding for start-ups by developing local venture capital funds and attracting foreign investors.

5.       Creation of Ecosystems Supporting Business Development: Establishing a conducive ecosystem that connects universities, businesses, investors, government institutions, and non-governmental organizations to create synergy and mutual development.

 

 

[i] Dominique Mégret, "Deeptech Nation. What future for the Swiss model?", Summer 2021, Slatkine Geneva; www.deeptechnation.ch

i[ii] Global Innovation Index 2021, WIPO 2021; IMD World Competitiveness Ranking 2021

[iii] For instance, in an ecosystem consisting of 1000 start-ups, the average value of one is about $5.1 million USD. In the case of 4000 start-ups (the size of the ecosystem in Boston), the average value of one company doubles to around $10 million USD - primarily due to network connections.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If you don’t understand what’s happening in your business factually and you’re making business decisions based on anecdotal data or gut instinct alone, you’ll eventually pay a big price.

Bill Gates, Microsoft co-founder

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