Throughout history, the Nordics have consistently managed to overcome challenges creatively and pragmatically, resulting in modern economies marked by an attractive blend of innovation and growth.
Not only have they come up with new inventions, ranging from the Lego plastic building blocks to music streaming services, and made themselves globally competitive, they have also set an example by making tough choices on issues such as sustainable development, population ageing and gender equality, while preserving economic viability and political stability.
As a result, the Nordic countries are now ‘punching above their weight’ as world leaders in domains including pharmaceuticals and medical aids, green power generation and affordable design furniture. They can sport many attributes that set them apart for global investors in a world where many developed nations are subject to growing turmoil, identity crises and protectionism.
We believe understanding this is essential for investors to be able to appreciate the opportunities in Sweden, Norway, Denmark and Finland. These relatively small countries on the edge of Europe are in the top 20 globally, as measured on GDP per capita. Technologically advanced, they boast high mobile and broadband penetration and a range of technology hubs. As an example, Stockholm has the highest number of software companies per capita in Europe and the second-highest worldwide after Silicon Valley.
Exhibit 1: EU member states’ innovation performance
Source: the Maastricht Economic Research Institute on Innovation and Technology (MERIT) and the Joint Research Centre of the European Commission
Keen entrepreneurship has allowed the region to enjoy higher economic growth than the rest of Europe over the past 20 years, which has been reflected in Nordic equity markets’ healthy performance until now. Success stories include Ikea, H&M and Lego, but also Skype, Spotify and Rovio (Angry Birds, underscoring the region’s potential to sprout growth companies with a global reach.
What sets the Nordic countries apart?
The factors include:
- Average employment rate above the EU average (2014)
- GDP growth ahead of the EU (in 16 out of the 20 past years)
- Renewable energy resources
- Commitment to balanced budgets
- Sustainable pension systems
- Effective governments and low levels of corruption
- High levels of income and gender equality
- Stable political environment
According to the World Economic Forum, “the region’s repeated success is driven by a large focus on education and training to skill its workforce, as well as an excellent enterprise environment with healthy competition in the national markets, well developed clusters, and financing that is more readily available than in many other parts of Europe. In addition, Nordic countries have adopted the latest digital technologies to enhance productivity and innovation.”
What propels innovation in the Nordics?
Nordic companies have tended to be outward-looking. Small home markets have forced them to specialise and compete in world markets. As a result, they have been able to attract foreign capital by offering strong capabilities at moderate prices.
Innovation is closely linked to research and development. Sweden and Finland are two of Europe’s top spenders in this area, having invested 3.2% of GDP in R&D in 2015. Already now they are running ahead of the EU-wide target of 3% of GDP investment by 2020. Private-sector R&D and innovation are supported by well-funded national innovation agencies, such as Finland’s Tekes, Sweden’s VINNOVA, Innovation Norway and the Danish Innovation Foundation.
The Nordics have a history of disruptive innovations and setting new international standards. As a global company, Skype is less than 15 years old, but it facilitates more international calls than any other telecoms operator, shaking up the global telecoms market. It is no surprise that in Sweden’s culture of open access and entrepreneurial collaboration, the free file-sharing websites The Pirate Bay, Kazaa and uTorrent were founded.
Leading in Insulin and hearing aids, but also beer and wind power
Denmark is now the world’s leading manufacturer of insulin (Novo Nordisk), hearing aids (William Demant), toys (Lego), beer (Carlsberg) and wind power (Vestas). Sweden has world-class industrial companies (Sandvik and Atlas Copco) and retail stars (IKEA and H&M). Nokia’s mobile phones and Kone’s elevators are examples of globally exported products by the Finns. Norway is a global leader in sub-sea technology and salmon farming.
According to the 2015 Boston Consulting Group e-intensity index, Denmark is the leading global internet economy. Multinationals often test new products on Nordic markets as local consumers are highly sophisticated and more willing to try new things.
In particular, software and mobile technologies are growing significantly as technology transforms the healthcare, education and finance sectors. Nordic countries should be well-positioned to benefit from this megatrend. Standout Capital , a private equity investor focusing on opportunities in the digital transformation of business and society, said: “Looking at both new and more established companies, the Nordic market becomes very exciting with a large number of potential tech growth companies… We have at least 4 000 reasons to be excited about.”
This is a summary of the white paper The Nordic cluster: leading in innovation and growth by Alfred Berg, the BNP Paribas Investment Partner providing Nordic investment solutions across a wide range of asset classes and investment strategies. Investment teams on the ground in the Nordic markets have a long tradition of fundamental bottom-up equity investing. To make the most of the theme of Nordic innovation and seeking to exploit the existing market inefficiencies, Alfred Berg combines the expertise from three knowledge centres (Stockholm, Oslo and Helsinki) to provide full Nordic coverage.
The full white paper on innovation in the Nordics provides extensive information on the Nordic countries’ top international rankings for economic performance, social well-being and innovation as well as examples of innovation leaders in Scandinavia.
Contact Alfred Berg for the white paper The Nordic cluster: leading in innovation and growth
This article was written by Cristina Lugaro, Senior Investment Specialist, Alfred Berg Asset Management in Stockholm