Is The Nordic Model For Entrepreneurship, Innovation And Export Growth About To Be Disrupted?

In 2011 The World Economic Forum had focus on the Nordic Model as a case of a region, which had came out the financial crunch better than most other regions. In February 2013 The Economist had a feature article titled ’The Nordic Countries – The Next Supermodel" stating that politicians from both right and left could learn from the Nordic countries. The question is would Schumpeter agree today?

For at least the last 10-20 years supportive measures for entrepreneurship, innovation and export has been a cornerstone of economic policies in the OECD, EU and the Nordic countries. Many of these policies have their intellectual foundation in Joseph A. Schumpeter’s writings about the creative element of destruction and importance of entrepreneurs in the renewal of economies.

Schumpeter also argued that governments couldn’t be innovative. This article will look into how successful the Nordic governments’ policies for entrepreneurship, innovation and exports have performed in view of the political ambitions of creating entrepreneurship and innovation and continued growth and prosperity from these policies.

Schumpeter also argued that governments couldn’t be innovative

The applied method is that known as the Essex Method where a hypothesis is given the best possible conditions, and if the results go against it the, hypothesis is rejected. In the case of how competitive the Nordic model for entrepreneurship, innovation and export growth is, the Essex Method is relevant because the Nordic nations consistently have been ranked as global leaders for policies supporting entrepreneurship, innovation and export growth. The Nordics therefore provides therefore a good case for investigation. In order to assess the merits of the Nordic policies for entrepreneurship, innovation and export growth the article examines three questions:

  • Firstly, to which extent have newly established companies managed to break into the leading companies listed on the Nordic NASDAQ-OMX and the Norwegian stock exchange’s listings?
  • Secondly, governments have supported outsourcing of manufacturing activities to emerging economies like the BRICs and the Next-11 on the grounds that Nordic economies will have to compete on services, business model innovation and design. The reason being, that cost-based competition is seen as a loser game for the Nordic countries. How has this played out so far?
  • Thirdly, the aim of policies for innovation and entrepreneurship is ultimately to strengthen and expand the national pool of globally competitive companies on global markets. As a proxy for testing the performance the article will look into Nordic export performance on BRIC markets.

Entrepreneurship and stock exchange renewal rate

One of the main points in the book ‘Breakout Nations’ is that economic dynamism may partly be measured from watching the listings of new billionaires making it into the nation’s top league. A vibrant economy will show changes and be a sign of dynamic possibilities for entrepreneurs in the nation. Instead of looking at billionaires I have looked at the company listings of the five Nordic nations’ stock exchanges. (Sweden, Denmark, Finland, Norway and Iceland).

In this pursuit, the national Nordic stock exchanges and statistical offices were asked if they could provide lists showing which companies have been listed each year on the stock exchanges from 2002-2012. Surprisingly, there was no such time-series available. Faced with this lack of statistical information I have taken a snapshot of the NasdaqOMX and Norwegian stock exchange listed companies – including around 10 Nordic leading but not listed private owned companies like Lego.

The total number of companies from this exercise is 113. If we look at the year of establishment for those 113 stock exchange listed Nordic companies it appears that an overwhelming large majority of listed companies have been established between 1880 – 1950. The outlier is Norway, where around 25% of the listed companies have been established in the 1990s and 00’s – but all primarily within the oil and gas industries. The Swedish oil exploration company Boliden is a similar case.

What is striking is that if we take oil and gas out of the Nordic company renewal equation, there have hardly been any Nordic entrepreneurs within 30 years who have managed to grow into either the national leading stock listing or become a large international corporation. This corresponds also with Boston Consulting Group’s study ‘Revitalizing Nordic Manufacturing – Why Decisive Action is Needed Now’ from August 2013 where it is stated that:

In fact, 119 of the top 120 manufacturing companies in all four Nordic economies were incorporated in 2002 or earlier. This suggests that Nordic nations are not developing enough dynamic new manufacturers capable of becoming global leaders in next-generation industries.

It is of course fortunate that the Nordic nations have a large number of multinational companies like Sweden’s Ericsson, Denmark’s A.P. Møller, Finland’s KONE or Norway’s Wilhelm Wilhelmsen, that are able to sustain their global competitiveness and manage to renew themselves decade after decade.

Nevertheless, the significant lack of new entrants to the Nordic top league of corporations should worry anyone concerned with economic development and the future wealth and prosperity of the Nordic nations. It also calls into question: on what merits should we judge the last decade’s government policies for entrepreneurship and innovation in the Nordic nations? This is not to argue that there is no case for policies supporting entrepreneurs. The time it takes to establish a company, taxation, access to finance and procurement policies are all areas where government policies are very relevant. However, policies for developing university spin-offs, new high-tech companies have clearly not led to the anticipated results of new high growth companies developing into becoming global world beaters like Google or Facebook.

In parallel with these policies for government induced high growth university spinouts, the large established Nordic corporations are increasingly faced with the problem of getting national access to local talent within science, technology, engineering and mathematics (STEM).

In this regard, it can be argued that the national policies for entrepreneurship and innovation have overlooked the importance of ‘intrapreneurship

In this regard, it can be argued that the national policies for entrepreneurship and innovation have overlooked the importance of ‘intrapreneurship’. Intrapreneurship means the need for innovation and renewal within large Nordic corporations. Moreover, Nordic entrepreneurs aspiring to become high growth enterprises will most likely also need access to STEM talent. Therein, i.e. lack of access to STEM talent rests perhaps one of the most paradoxical consequences of policies for government supported entrepreneurship and university spinouts. In the eagerness to crate new high tech university spinouts the government policies overlooked the very platform for the existing and future competitiveness of entrepreneurialism namely the focus of educating world-class STEM students.

Another important issue is access to capital investment. After the financial crunch in 2008 the sums for venture capital and national growth funds have stalled or been decreasing. The only form of entrepreneurial investment capital that has increased is the relatively new phenomenon Corporate Venture Funds (CVF). CVF’s are venture funds established inside large corporations, and they are used to invest in start-ups in order for large corporations to expand their existing market portfolio and as an instrument for growth and innovation. Increasingly this relationship between David (entrepreneur) and Goliath (large corporation’s need for innovation) has become the driver of entrepreneurship and innovation in the US and Europe. So far, this new market dynamics is nowhere on the radar of government support policies for entrepreneurs and innovation.

Outsourcing manufacturing to become masters of service innovation

In 1979, When China’s Prime Minister Deng XioPeng announced the opening of the Chinese economy few people anticipated the true magnitude of the global consequences it was going to have. But from especially the 1990s it became clear that a shift in the global centre of economic gravity was immanent and taking place.

A few years later Richard Florida came out with the book about ‘the creative class’. The creative class characterised by highly educated people and notions like symbol analysts, innovation and design were the keywords for this class. It also gave politicians in the USA, EU and Nordics an argument for the prudence for two sets of policies.

Firstly, accelerate the outsourcing of manufacturing to China and other emerging economies like India, Russia and Brazil. Secondly, policies supporting new start-ups based on innovation, design and high tech content. Those new industries would replace the decreasing number of jobs within manufacturing outsourced to emerging markets. The question is: how have these policies panned out 10-20 years after?

In other words, the creative class has not replaced the blue and white-collar worker in manufacturing

Boston Consulting Group (BCG) has looked into the Nordic situation in the publication ‘‘Revitalizing Nordic Manufacturing – Why Decisive Action is Needed Now’ (August 2013). In spite of the still strong national economic performance of the Nordic countries, it is also clear that not all is as good as it could be. Thus, BCG concludes that:

‘In spite of the region’s competitive strengths, Nordic manufacturing employment has been shrinking for decades. From 1980 to 2010, the four nations shed nearly 1 million production jobs—a decline of almost 40 percent. Manufacturing’s share of Nordic GDP from 1980 to 2010 shrank from around 20 to 25 percent to about 15 percent’.

Just as importantly, the 1 million jobs lost within Nordic manufacturing have not nearly been replaced by the predicted high-end service jobs within innovation, design, new creative industries or high tech start-ups. In other words, the creative class has not replaced the blue and white-collar worker in manufacturing. In this respect, the last 10-20 years’ development bears resemblance to the situation described by Mancur Olson in the book ‘The Rise and Decline of Nations’ from 1982. Or the insight that what you can’t produce you can’t control as predicted by Stephen S. Cohen and John Zysmanin ‘ Why Manufacturing Matters – The Myth of the Post-Industrial Economy’ from 1987.

World leaders in R&D?

Finland, Sweden and Denmark have consistently for the last decade been among the nations investing the most in R&D as a percentage of their Ground National Product (GDP). World Economic Forum’s Global Competitiveness Annual Report and the European Innovation Scorecard bear evidence to this. (Norway scores lower, partly because of the world’s second highest GDP per capita, and probably because of the industrial configuration in combination with what gets measured as innovation by international statistical bodies).

There are, however, signs of the fact that there is a decreasing return on national R&D for the Nordic countries. Moreover, aggregate statistics for national innovation systems don’t tell the story about innovation taking place at industry or company level, which are clearly more important for global competitiveness than nation state statistics. From 2010-2012 the Nordic business model innovation programme Measured and Managed Innovation (MMI) under Nordic Innovation surveyed 70 Nordic companies of all sizes and from different sectors. (The applied framework was the Innovation Radar developed by Mohan Sawhney, Robert C. Wolcott et.al from the Kellogg School of Management).

75% of all companies had product innovation as their preferred dimensions for innovation

The MMI programme surveyed Nordic companies’ sophistication in regard to business model innovation and their preferred innovation focus. The results were that about 75% of all companies had product innovation as their preferred dimensions for innovation, a preference consistent over the two-year period of the survey.

This is puzzling in view of the fact that IBM showed in their global CEO innovation study from 2006 that companies with a business model innovation perspective on innovation already then clearly outcompeted companies having the narrower focus on product and process innovation. It would have been expected that the national innovation policies and stimulus for making the transition from manufacturing to high-end service industries, would have induced a much stronger focus on business model innovation among Nordic companies. This has seemingly not been the case, and it might be an explanatory factor behind why the expected creation of new jobs outside manufacturing hasn’t materialized in the Nordics.

… companies with a business model innovation perspective on innovation already then clearly outcompeted companies having the narrower focus on product and process innovation

In 2012 St. Petersburg Institute of Marketing and Innovation conducted a similar survey (also using the Innovation Radar) to the Nordic MMI programme among 215 Russian companies. The results are not yet published, but the information given is that around 80% of the Russian companies favour product innovation as their most preferred innovation dimensions.

In May 2013 PriceWaterhouseCoopers released their global innovation study ‘Unleashing the Power of Innovation’ which involved 246 CEO from all over the world. PWC’s study operates with almost the same innovation dimensions as the Nordic and Russian studies. What’s more interesting is that only 46% of global CEO have product as their preferred innovation dimension.

In other words, it seems that Nordic companies are more on par with Russian companies’ innovation focus than the global average as indicated by the PwC study. Product focused innovation may work for emerging market companies, but it doesn’t correlate with the Nordic nations’ policies of shifting from manufacturing to high-end service industries during the last 10-20 years. An important question that remains to be answered is why hasn’t the combination of the world’s highest national investments in R&D, innovation and entrepreneurship policies for making the transition from manufacturing to high end services led to at least an innovation focus on par with the global average?

Nordic exports to BRIC countries

The third,and final question to examine the effectiveness of Nordic government policies for supporting entrepreneurship and innovation is to look at exports to BRIC countries. This is done as a measure to examine the global competitiveness of Nordic companies on the fastest growing markets. In 2012 Nordic Innovation looked into the composition of the five Nordic countries’ exports. The overview is shown in the table below.

Figure 1: The composition of the five Nordic countries’ exports.

Click to enlarge

Source: Nordic Innovation 2012.

As the table shows, Nordic countries’ exports to BRICS and other developing economies still makes itup for a very small portion of total exports. This has to be seen in relation to the fact that from 2007-2012 two thirds of the growth in the global economy happened in the emerging markets. In addition, if China and Russia is taking out of the Nordic export markets to emerging markets the total export performance of Nordic companies to emerging markets is less than 5% of the total.

Lessons

  • The Nordic Supermodel should keep in mind the words of Clayton Christensen. Just one year before the incumbent large US steel companies were disrupted by the mini-steel mills the incumbents recorded record high profits.
  • In times like of rapid economic changes, like from 2002-2012 there is little evidence that even the best internationally ranked national (in case the Nordic countries) government policies for creating new high growth entrepreneurs have been remotely successful. Measured by new entrants into the league of leading national companies on the stock market very few have broken into the mould of the five Nordic countries.
  • Policies inducing a transition from manufacturing to high-end services have not materialized into new service growth companies, industries or jobs in the Nordic countries. Aggregate national statistics may often hide underlying weaknesses of national competitiveness at sector and company level.
  • The large multinational Nordic corporations have seemingly been slower than the global average to adopt strategies for business model adoption, and they are still more focused on product innovation than the global average. In fact, there are signs that they are more in the camp of BRIC companies. This is a conundrum given that Nordic policies have favoured high-end services over manufacturing for more than a decade.
  • One explanatory factor behind this product innovation focus paradox could be that the rhetoric for high end services over manufacturing have in reality not been backed up by innovation policy support programmes. As such government innovation programmes in the Nordics may in reality been biased towards new technology and products and neglected innovation support measures for marketing and new organizational forms, global partnerships and learning how to navigate in global innovation ecosystems. Nokia’s collapse is a case pointing in this direction.
  • National policies for innovation can either be guiding or misleading, and they can signal the wrong development directions for corporations competing globally. Both established and start-ups should be cautious about the tutelage offered by the relative easy access to national support funding over the market test of continuously winning new customers.

By Jørn Bang Andersen

About the Author

 
Jørn Bang Andersen is a Nordic and European thought leader from Denmark and he is considered an international expert on innovation and economic growth. He has served on the World Economic Forum’s panel on the Nordic Growth Model (2011) and been a contributor to The Economist’s article on ‘The Nordic Countries – The Next Supermodel’ (2013). Jørn is European Director to Clareo Partners.

 


References

 

The Economist. The Nordic Countries – The Next Supermodel”. Feature Article February 2013.

Sharma, Ruchir. “Breakout Nations – In Pursuit of the Next Economic Miracles”. W.W Norton and Company, New York 2012

Norden. MMI- Measured and Managed Innovation. December 2012. Nordic Innovation, Oslo 2012.

PriceWaterhouseCoopers. “Unleashing the power of innovation”. May 2013.

AndrasAlsén et al. “Revitalizing Nordic Manufacturing – Why Decisive Action is Needed Now”.Boston Consulting Group. August 2013

Cohen, S. Stephen and Zysman, John. “Why Manufacturing Matters – The Myth of the Post-industrial Society”. Basic Books. USA. 1987.

Olson, Mancur. “The Rise and Decline of Nations – Economic Growth, Stagflation, and Social Rigidities”.
Yale University Press, 1982

Norden. “Nordic opportunities in emerging markets – status, challenges and room for action”. Nordic Innovation, Oslo 2012.

Photo: Welder in a factory from shutterstock.com

  • http://linkedin.com/in/bobjacobson Bob Jacobson

    Jørn Bang Andersen has it right. Except for the agencies and institutions specially concerned with applied innovation, in the form of successful commercial firms, the Nordic social environment is essentially hostile to startups — in the same way it is hostile to most new commercial enterprises, the larger ones surviving mainly on inertia and politically determined subsidies. Of course there are exceptions, particularly in those semi-public sectors (like pharma) where commercial firms are highly dependent on public investment in R&D and sell back the resulting products directly to government agencies. But exceptions they are.

    Also, nominal agency experts on enterprise and entrepreneurship, when put to the test, often have little real-world experience in the domain. Their knowledge is obtained second-hand and frankly, is largely hackneyed.

    Nordic sponsorship of innovation and entrepreneurship is largely look-and-feel-good politics, not rigorous theoretically and in practice, not exceptionally successful.

    Of course, this situation is the case in most non-Nordic industrial nations. But innovation and entrepreneurship in these nations hasn’t the central strategic importance it has for the North. Its limited resources, manpower, and markets make it imperative to get the absolute most out of every investment of social wealth, to keep the region globally competitive and thereby relatively prosperous.

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