Ping to the Swedish Ping List.
Posted on 02/08/2006 7:15:52 PM PST by SierraWasp
Scaling back socialism; Sweden looks to fuel growth via economic, market reforms
By Annie Helstrom Last Update: 1:49 PM ET Feb. 8, 2006
(This update corrects a reference to the combined turnover of companies owned by the Swedish state.)
STOCKHOLM (MarketWatch) -- Niklas Zennström is one of Sweden's growing ranks of entrepreneurial exporters.
Zennström and partner Janus Friis launched an Internet telephony company called Skype in 2003 that's already gained a global market. Yet the native Swede decided to base the company's headquarters outside his homeland to escape the burden of what is, in many ways, a socialist economy.
"Regrdless of where people are from, we always want to employ the very best. It is always hard to get them to come and work in Sweden because of the high taxation on labor," said Zennström, whose company was bought by eBay Inc. EBAY40.49, +0.56, +1.4%) in Sept. 2005. He also co-founded file-sharing service KaZaa.
His lament is often heard among start-up business owners who set up shop in neighboring countries. Their move abroad has become a rallying cry for four of Sweden's more conservative political parties, who have formed a coalition that will try to unseat the Social Democrates from their close to 70-year reign.
Largely dependent on foreign markets, Sweden has benefited from an economic upswing that began in 2004. Research and development investment is among the highest in the world at 3.7% of gross domestic product in December 2005. And few other countries have a higher patent filing per capita.
Yet many innovations have been commercialized abroad and not enough entrepreneurs are starting new companies within the Swedish borders.
"People do business in Sweden and it goes well; they may try launching the product in Denmark instead of considering a global business plan. On the financing side, VCs require too much downside protection and are not willing enough to take risks," said Zennström.
It's not that investors can't find good Swedish companies. Volvo AK (VOLVY: volvo, Ericsson LM Tele. Co. and retailer Ikea have helped Sweden become internationallly reknown for advanced research and internationally successful business ideas.
A changing political scenario may be good news for investors looking to invest in a few more Swedish names. And it comes amid moves to privatize companies away from government ownership, increase foreign venture capital and develop a more attractive combined pan-European capital market.
Non-Socialist alliance
Sweden endured a deep financial crisis in the early '90s, with sluggish growth and high unemployment, but this provided an impetus to new approaches in fiscal policy. As a result, the central bank became independent and set a low inflation target of 2%. Centralized salary negotiations were abolished and the labor market developed into one of Europe's most flexible.
Large companies have long been the major driving force behind the Swedish economy, but attention is now focused on the lack of small and emerging companies. Growth of new European Union members is creating more competition and increased mobility across borders; the Swedish Trade Council expects one in four Swedish companies to transfer production abroad in the coming years.
Household appliance giant Electrolux AB Analyst are further examples of large companies dominating the Swedish market. Existing large corporations now make up to 80% of Sweden's economy; none were started after 1970.
"We have quite a good policy for big companies but we have the same rules for small companies. If you only have one or two employees it's very hard to follow all the regulations," said Maud Olofsson, leader for the Center Party.
Together with the three other non-socialist parties, the Center Party has formed an alliance that's working to gain political power in 2006. The Social Democrates have been in power 65 out of the past 74 years, with a brief four-year interruption in the early '90s.
One of the biggest challenges for the conservative parties over time has been to step forth as a credible alternative to the government, and win voters who have been reluctant to embrace change. Coalition attempts have been frustrated by quarrels over fiscal policy and taxation. However, for the first time in many years an equally strong, or even stronger, opposition is challenging the Social Democrates with concrete proposals for structural reform of the economy.
"The Swedish state is the biggest owner on the Stockholm Stock Exchange, which means that the state owns companies with a combined turnover of $43.86 billion. We have to privatize many of them," said Mats Odell, vice-president for the Christian Democrates.
The lag between production and unemployment is now longer than usual and household spending is relatively weak thanks to the stagnation on the labor market. The unemployment rate is around 5.5 %. Trade Union Economist Irene Wennemo says the conservative coalition is not the only factor threatening the current government.
"The Social Democratic model is dependent on the people thinking it's OK to pay high taxes as long as they get a well-functioning social security system in return. But it's also very important that enough people are employed to finance the system. That's where we will have a problem in the future," said Wennemo.
Help them build and they will come
Larger questions lie in the challenge of Sweden's ability to stay attractive and keep growing in an ever-more competitive environment, and retain young businesses and commercialize innovations. Because of high costs involved in starting up an incorporated firm, currently only one out of five entrepreneurs is under 30 years old.
"A lot more soft financing as seed capital is needed for the early stages. We also think companies should be able to postpone taxation on capital gains if they are investing in new projects. We call it the 'forest account,'" said Tom Berggren, the general secretary for the Swedish Private Equity and Venture Capital Association.
The non-socialist alliance's main goal is to lower taxation on labor and wealth, but it seeks to abolish unnecessary rules and regulations for those who start up their own company. Easing the path for Swedish entrepreneurs is a key issue on both sides of the political spectrum. Since the peak years between 1997 and 2000, the number of entrepreneurs has gone down dramatically with 20,000 fewer people starting up their own company in 2005.
Non-politicians may be taking concrete steps in the right direction. Johan Staël von Holstein, a successful entrepreneur, started up IQube, a business center for entrepreneurs in central Stockholm in September 2004. Companies renting office space at low rates can access legal advice, a press center, venture capital and business advisors, designed to make it easier for new companies to develop products. Even though financing is important, other parameters are taken into account.
"Our incubator doesn't take financial responsibility. The entrepreneur should build the company; we'll build the entrepreneur," said Staël von Holstein. "We have to change the Swede's attitude towards entrepreneurship. People have to start looking beyond the national borders and say: 'We're going to be world dominating in our field.'"
Stefan Fölster, chief economist for the Confederation of Swedish Enterprise sheds light on some Swedish companies in more rural areas with big potential: Pharmadule Emtunga, a supplier of high-tech modular facilities, Hörnell International AB, a supplier of personal protective equipment for welding applications (acquired by 3M Co.
"In spite of these companies not being close to any university and that they're often in remote places, they manage to get a piece of the world market. That type of company is only limited by people's will and courage," said Fölster.
Lars Gatenbeck, CEO of Venture Capital firm GZ group, says there's often too much focus on tech development in the early stages of a company, and not enough broader thinking in terms of business plans and customer needs.
"We sometimes have a lack of vision in Sweden. You need to go to the States once every month to get some guts and a new refreshed attitude. But in life science we have some venture capital firms that have started to act in more international terms," said Gatenbeck.
The Swedish Private Equity and Venture Capital Association estimates $3.63 billion was raised in 2004, with 20% of those funds coming from the United States. Thomas Östros, minister for Industry and Trade, said larger companies could be used to create a better climate for early stage business and attract investment.
"In high-tech areas, having big players is essential to create a good business climate for entrepreneurs. That's why Sweden has been so successful in pharmaceuticals and telecom. Thanks to companies like Ericsson we've been able to attract international competence," Östros said.
SVCA's Berggren points to buyouts as a particular area of strength, reflecting a trend that's true in most of Europe.
"Sweden has an important role in Europe in buy-outs, where trade is active. Look at Nordic Capital's bids on the pharmaceutical company Nycomed and the Finnish copper manufacturer Outokumpu Copper (OUTKF: outokumpu oy cl a
Market players
OMX Stock Exchange includes Stockholm, Helsinki, Riga, Tallinn and Vilnius stock markets and has 509 listed companies, with 277 of those on the Stockholm Stock Exchange.
The Stockholm General index SAX has performed better than all leading European indexes over the past two years. SAX was up 30% in 2005. Low interest rates, increased earnings and higher M&A activity were cited as drivers for last year.
Meanwhile, a combined Nordic-Baltic Stock market is already taking shape. OMX Stock Exchanges will merge with the Copenhagen Stock Exchange CSE in 2006. Synergies and streamlining potential for Nordic and Baltic based members are expected to create cheaper infrastructure and increase liquidity in the equity markets.
The Swedish exchange, like most European Exchanges, needs to transition from small national markets, into regional or even pan-European markets.
"It's a favorable development. A combined capital market will give attractiveness for some of the Nordic companies; trade will intensify and give more quality to the stock exchange," said Thomas Östros, Minister for Industry and Trade, told MarketWatch.
Sweden is successful in health care and life science sectors, with both older companies like Anglo-Swedish AstraZeneca PLC (AZN: astrazeneca plc sponsored adr News, chart, profile, more Last: 46.33+0.45+0.98%
Sponsored by: AZN46.33, +0.45, +1.0%) and younger, like the venture backed Pharmacia spin off Biovitrum. But the geographical disadvantage and the size of the market is a challenge. GZ group's Gatenbeck states that those developing a product in Sweden have to consider all of the Nordic countries and maybe Germany as their home market. Alternatively they may need to launch in America straightaway as the Swedish market is just too small.
"We need a well functioning capital market to build the companies, therein lies one of our biggest dilemmas. Europe only makes up to one sixth of the U.S. market," says Gatenbeck.
Maybe someday, we'll follow their example.
wow,, they have one of the highest taxation rates in the world too, if I recall correctly.
Ping to the Swedish Ping List.
That's just a measure of stupidity. All a patent is a license to hire a lawyer - for which you have to hire a lawyer.
Better to put your time and money to be the first in the market.
They're waking up, huh? Yeah Sweden!
I hope they out-source the swedish bikini team. LOL!
They've become three little tireless capitalistic "love machines!!!" (wait till ya see how they do with tires!!!)
What are the so called "Swedes" going to do in 2040 or 2050???
I don't have any real allegiance to them. I think soccer is stupid.
Well... now... On that we can fully agree!!! Oh! And how are we gonna tease LewisLynn if Ford now owns Volvo and snopercod seems to have disappeared??? I miss that "good-ol-boy!"
Maybe we need a Sweed to explain this to Bush...
And Schwartzenegger, too!!!
*
I don't miss LewisLynn at all, although I didn't miss his attacks on me. Funny how you don't notice you're not afflicted when you're not afflicted.
But what the heck happened to snopercod?
Wi nøt trei a høliday in Sweden this yër?
I've never attacked you counselor. I was defending myself.
If anyone was attacked, it was me...and I was right too.
I saw someone refer to him as Wilsonegger...LOL!
Wilson was pro-choice but he was also a Republican. He kept the state out of the red and he opposed crime, gay rights and slowed the roll of the gun control movement. The guy literally got no respect - despite the fact that he was the best CA governor since Reagan.
That one stupid ah-$hit! erases all those atta boys.
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