PurposeTo analyse the evolution of the Swedish telecommunications sector (1970‐2003), with a focus on barriers and drivers of innovative activity.Design/methodology/approachDeveloping a functional approach to innovation systems analysis, where six basic interdependent functions need to be served for a new technology to be developed and diffused and for a supporting industry to evolve. The sector is divided into four major sub‐sectors: traditional fixed telecom; mobile telephony; fixed data communications (including internet); and mobile data communications (including mobile internet).FindingsRelate to two questions: first, how did it happen that Sweden developed a leading innovation system for mobile telephony but not for data communication; and second, what are the strengths and weaknesses of the innovation system for mobile data communications? Findings include that early developments mattered, innovative search direction is crucial as are the provision of incentives for innovative activity.Research limitations/implicationsFunctional analysis of innovation systems useful for guiding policy actions, which should have the purpose of strengthening weak functions, removing bottlenecks and stimulating inducement mechanisms, in particular if used to stimulate the transition from one phase to another. It needs further development, in particular with respect to the understanding of diffusion processes.Practical implicationsThe stimulation of innovation in, and diffusion of, mobile and broadband data services is crucial to development of the innovation system, globally, in Europe and in Sweden. An innovation system which allows for entrepreneurial experimentation should be fostered. Early stage financing and diffusion of services are major system weaknesses. Regulatory authorities should consider addressing innovation explicitly.Originality/valueNew (adapted) approach for guiding policy action. Better understanding of dynamics in the telecom sector, and the comparative success and failure of Swedish industry in sub‐sectors.

The paper investigates the evolution of the successful mobile internet service i‐mode in Japan, identifies the relevant explanatory factors, and provides implications for the further development of mobile data communications in Europe. In conclusion, the paper argues that there must be a balanced and efficient mix of industry coordination, service experimentation, and dynamic competition in order to provide a foundation for mobile data success in Europe.