Effective Innovation Policies and Institutions Continue to Help Drive Success of Nordic Economies

Nordic countries

On Wednesday, October 16, ITIF hosted representatives from innovation and government agencies from Denmark, Finland, and Sweden to discuss Nordic Innovation: What Can America Learn from the Scandinavian Innovation Ecosystem. (Video and audio from the event are available here.) The speakers credited the recent success of the Nordic economies to several factors, including: a strong bipartisan consensus regarding the importance of federal investment in education, scientific research, and innovation; well-organized national innovation systems that benefit from formally articulated national innovation strategies (Finland’s, Sweden’s, Denmark’s) and well-funded national innovation agencies; and fundamental reforms undertaken in these economies over the past two decades that have made their tax structures more globally competitive, markets more competition-based, federal budgets better balanced, and workers greater skilled.

Indeed, across a range of indicators, it’s clear that Denmark, Finland, and Sweden represent some of the world’s most innovative and globally competitive economies. For instance, Finland, Sweden, and Denmark rank second, third, and eighth, respectively, in ITIF’s Atlantic Century II report, which benchmarks 44 nations and regions on 16 key indicators of innovation and competitiveness. In terms of national R&D intensity—how much these nations invest in research and development as a share of GDP—Finland ranks third (3.78 percent), Sweden fifth (3.37 percent), and Denmark sixth (3.09 percent). (The United States places ninth at 2.77 percent.) In 2011, Finland led all OECD countries in federal investment in R&D as a share of GDP. Also in 2011, Denmark and Sweden ranked first and second (and Finland sixth) in government funding for university R&D as a share of GDP (data on which ITIF will be releasing a new report shortly). Nordic countries also generally outperform the United States in terms of how much industry is investing in university R&D scholars (a measure of how effective university researchers are at attracting funding from businesses), for which Sweden ranks eighth, Denmark ninth, and Finland seventeenth. (The United States places fourteenth, while East Asian countries, led by Korea, pace the world on this metric.)

Yet while these countries are already near the top of league tables in federal R&D investment, their governments are doubling down on the future by leveraging recent economic success to increase federal investments in scientific research. For instance, Sweden—whose economy has grown by approximately 10 percent more than the United States’ since 2010—recently announced a new Research and Innovation Bill that will increase government funding for research and innovation by SEK 9 billion ($1.4 billion) over the originally anticipated baseline from 2008-2016. This represents a 25 to 30 percent increase in the Swedish government’s funding for scientific research through 2016, whereas in the United States such budgets were slashed by 8.7 percent annually as a result of the January 2013 sequestration, which ITIF estimates will result in almost $100 billion in R&D cuts over the next nine years.

Nordic countries have also worked hard to make their tax environments more globally competitive. For example, Sweden’s statutory corporate tax rate, which was a sclerotic 60 percent in 1982, was reduced to 28 percent in 1999 and cut to 22 percent in September 2012. Finland’s corporate tax rate stands at 24.5 percent today, but will be reduced to 20 percent in January 2014. Denmark’s statutory rate stands at a competitive 25 percent. Meanwhile, the U.S. statutory corporate tax rate, at 35 percent, remains the highest in the industrialized world. But it’s not just that these countries have lowered base corporate tax rates, they’ve also introduced more attractive incentives for enterprises to invest in R&D and capital equipment. For instance, Denmark offers the fifth most generous R&D tax credit in the world and has also introduced a new collaborative tax credit—a 150 percent taxable income deduction for all companies collaborating with a university or research institute.

Nordic countries have also made significant educational reforms, both at the K-12 level to promote competitive schools and at the university level to create new kinds of academic institutions and to bring industry and university closer together in conducting industrially relevant academic research. Sweden probably has the world’s most competitive K-12 education system, a result of the country introducing universal school vouchers that can be used at any accredited private, nonprofit, or public school. Both Finland and Sweden have also begun to offer entrepreneurship courses at the high school (not to mention college) level. Finland consolidated three of its institutes of higher learning into a single institution, Aalto University, which Finland intends to become by 2020 one of the world’s leading academic institutions at combining business, technology, and design. Likewise, Denmark, desiring to create four very strong, globally competitive universities, merged eight universities into four. These reforms are producing an adult workforce possessing better skills, as reflected in a new assessment of adult skills published by the OECD last week, in which Finland ranked first and Sweden fourth. And both Finland and Sweden are trying to make their universities greater engines of national innovation by allocating a share of R&D funding to universities based on performance. For example, in Sweden, 10 percent of regular research funds allocated by the national government to universities are now distributed using performance indicators. Half of these funds are allocated based on the amount of external funding the institutions have been able to attract, with the other half based on the quality of scientific articles published by each institution (as determined through bibliometric measures such as the number of citations).

And far from being the debt-ridden socialist “basket cases” of the 1970s that many remember, these economies have implemented difficult reforms to maintain balanced budgets while still being able to provide needed social support services, free kindergarten to university education, and national health care. For example, Sweden has a balanced budget requirement—but over a budget cycle. Sweden’s budget process entails setting a firm expenditure ceiling, and then prioritizing within that constraint. Denmark recently introduced reforms to index the retirement age to life expectancy. It also cut the duration of employment benefits by half, from four years to two, yet has introduced a flexicurity system designed to give Danish workers not job security, but skills security.

And private-sector R&D and innovation in each of these countries is supported by well-funded national innovation agencies, such as Finland’s Tekes, Sweden’s VINNOVA, and Denmark’s new (as of October 2013) Danish Innovation Foundation. These entities are key components of these countries’ national innovation systems and play important roles in enhancing the innovation capacity of their nation’s enterprises. For example, a 2011 review of the Swedish national innovation system found that its adaptation and performance had been quite successful during the previous fifteen years and attributed much of this success to Sweden’s effective innovation policies.

In short, the competitiveness of the Nordic economies has come not by chance—it’s been a result of difficult reform, hard work, and committed investment. The United States has much to learn from these nations. As in Sweden, this should start with the United States’ honest recognition that it is in intense economic competition with other nations. (The Foreword to the Swedish Innovation Strategy notes that “global competition is increasing between companies and nations.”) We should learn from the bipartisan consensus that exists in the Nordic countries regarding the importance of increasing investments in scientific research, education, and innovation for a country’s economic growth. And we should not be afraid to undertake the politically difficult reforms necessary to rebuild our educational institutions, entitlement systems, and federal budgets to place them on a more sustainable path for future generations.

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About the author

Stephen Ezell is a Senior Analyst with the Information Technology and Innovation Foundation (ITIF), with a focus on innovation policy, international information technology competitiveness, trade, and manufacturing and services issues. He is the co-author with Dr. Atkinson of "Innovation Economics: The Race for Global Advantage" (Yale, 2012). Mr. Ezell comes to ITIF from Peer Insight, an innovation research and consulting firm he co-founded in 2003 to study the practice of innovation in service industries. At Peer Insight, Mr. Ezell co-founded the Global Service Innovation Consortium, published multiple research papers on service innovation, and researched national service innovation policies being implemented by governments worldwide.