Startup central

Even with its high taxes and extensive social security net, Sweden has far more startups per capita than the US.

In orthodox economic theory, it would be considered an impossibility. Sweden is a startup champion, surpassing the United States, but at the same time, it is a high-tax country with a sprawling social security net, reports The Atlantic.

In Sweden, there are 20 startups for every 1,000 employees, according to OECD data. In the US there are five. And after Silicon Valley, Stockholm has the highest number of unicorns – billion-dollar tech companies. It’s here that global players such as music-streaming service Spotify and online payment firm Klarna were founded.

Entrepreneurial optimism runs high. While 47% of Americans between 18 and 64 years of age consider that opportunities to start a company are good in their country, the percentage in Sweden is 65%.

There are several reasons for Sweden’s startup success. One is what famed economist Joseph Shumpeter called “creative destruction.” Up until the 1990s, Sweden had a heavily regulated economy that bolstered public monopolies. But in 1993, it introduced a new Competition Act that made it harder for monopolies to dominate and easier for new players to emerge. This was around the same time that the US was overturning its anti-monopoly laws, allowing consolidated behemoths to establish monopolies.

The second factor is tax reform. Previously, high corporate taxation favoured large players, while individuals starting a company had to pay high rates on their firm’s income and their own income from the business -- a double whammy that was easier for large businesses to minimize. Since 1991, the corporate income tax rate was lowered from 52% to 22%, compared with the US rate of 39%.

The third factor is foreign competition. Since the 1990s, foreign firms have been allowed to take substantial ownership of Swedish companies. Since startups could be bought out, this created an incentive for creating new businesses.