100920 Acknowledgments This report is based on the work of a di- World Bank colleagues as well as exter- verse and dynamic team of experts and nal professionals, including Mohammad practitioners in the business environment Amin, Wafa M. Aranki, Santiago Croci, and human development fields. It was Johan Eklund, Lucia C. Hanmer, Sarah written under the supervision of Hulya Iqbal, Hervé Kaddoura, Munawer Sultan Ulku by a core team of authors comprising Khwaja, Olena Koltko, Jakob Kopper- Mark Dutz, Anushavan Hambardzumyan, ud, Arvo Kuddo, Peter Kusek, Frédéric Nan (Charlotte) Jiang, Thibault Meilland, Meunier, Jorge Luis Rodriguez Meza, Valeria Perotti, Tanya Primiani, Valentina Thomas Moullier, Parvina Rakhimova, Saltane and Julien Vilquin. In addition, Rita Ramalho, Sylvia Solf and Alexandria John Anderson, Baria Nabil Daye, Marie- Valerio. Lily Delion, Dorina Georgieva, Tania Ghos- sein, Joyce Antone Ibrahim, Khrystyna The data on Sweden for the chapter on Kushnir, Nina Paustian, Sophie Pouget, regulation of foreign direct investment Morgann Reeves, Katrin Schulz, Dieter were collected with the help of local De Smet and Christian De la Medina Soto contributors: Ida Otken Eriksson, Mats contributed to research, writing and data Hellström, Elisabeth Lagerqvist, Cor- analysis. Augusto Lopez-Claros and Me- nel Marian, Magnus Runnbeck, Jörgen lissa Johns provided feedback and general Schéle, Jesper Schonbeck and Jonas guidance throughout the report produc- Wetterfors. tion process. Alison Strong edited the manuscript. The The report’s chapters benefited from com- Word Express, Inc. designed the report ments, writing assistance and reviews by and graphs. Contents v Executive summary 1 Business entry regulation 11 Tax regulation and incentives 25 Labor market regulation 37 Urban planning and construction permitting 43 Regulation for firms’ access to finance 53 Regulation of foreign direct investment 67 Gender equality and economic opportunity for women 79 Education, skills and innovation 95 Annex 99 References Executive summary In today’s increasingly integrated global This report’s starting point is thus to ac- economy, implementing sound economic knowledge that despite Sweden’s many policies is a challenging task. Many of the virtues, there are areas in which it can do key factors that affect outcomes are out- better—and the task has been to identify side the control of government author- those areas, focusing particularly on the ities. Despite best efforts, missteps are quality of the investment climate and common. Even countries that have man- competitiveness. This has been done in aged to build a policy architecture that 2 main ways. First, by looking at areas of supports economic growth—and that the business environment captured by promotes equity and sustainability—are databases compiled in the World Bank not immune to the risks associated with Group’s Global Indicators Group—Doing an uncertain global environment. Business, Foreign Direct Investment (FDI) Regulations, and Women, Business A useful point of departure for this re- and the Law. And second, by examining port is to recognize that there is always other critical areas where there is a large room for improvement in the policy body of data, knowledge and insight that framework underpinning the activities casts relevant light on several key policy of the private sector, the main engine of challenges facing the country in coming economic growth and job creation. No years. In the paragraphs that follow we country is best at everything. All have present a summary of the report’s main strengths and weaknesses, and all can conclusions. learn from the experiences of others. This is the key lesson to come out of more than a decade of data collection and analysis in the World Bank Group’s THE REPORT’S MAIN Doing Business project. CONCLUSIONS: AN OVERVIEW • Overall, Sweden has performed well Over the past 20  years Sweden has by on Doing Business indicators through- and large implemented sound economic out the past decade. In the most re- policies resulting in buoyant econom- cent ranking on the ease of doing busi- ic growth and shared prosperity. It has ness, for 2013, it places 14th among done so in a context of macroeconomic 189 economies, higher than the aver- stability and sustainable public finances. age G7 and OECD high-income rank- Policy makers elsewhere in the world, ings. However, Sweden has registered seeking to learn about crisis manage- less improvement since 2009 on the ment, often look at the Swedish re- Doing Business distance to frontier sponse to the financial crisis of the early metric—a measure of absolute per- 1990s and, more recently, at the after- formance with respect to the world’s math of the global financial crisis. That best practices—than such countries Sweden today has lower levels of public as the Republic of Korea, Denmark, debt than it did in 2007, on the eve of the Finland and Singapore. crisis—in marked contrast to virtually all • Sweden rates lower than many of other advanced economies—is testa- its comparator economies in the fol- ment to the high quality of its economic lowing six areas of Doing Business: management. starting a business, paying taxes, VI SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS employing workers, registering prop- • While Sweden is among the global more active in adopting new technolo- erty, getting credit and protecting leaders in providing laws and regula- gies and processes. Sweden’s document investors. tions that guarantee gender equality clearance process remains relatively slow. • The process of starting a business, and increase economic opportunities It takes 14 days for Bolagsverket, the com- as measured by Doing Business, takes for women, it could do more to further pany registrar, to review the application longer and costs more in Sweden than reduce the gender gap in wages and for incorporation and issue the registra- in many other OECD high-income the gender segregation (horizontal tion certificate. In addition, Sweden has a economies, including New Zealand, and vertical) in professional fields. fairly high minimum capital requirement. Australia, the United States and the • Further improvements in several ar- The amount required, though reduced in United Kingdom. This may act as a eas of education and skills develop- 2010, remains among the highest in the constraint on entrepreneurship and ment could help strengthen human Nordic region. The economies that make job creation. capital capacity and smooth the func- it easiest to start a business—such as • Sweden’s profit tax rate as calculated tioning of labor markets in Sweden. New Zealand, Singapore, Canada and by Doing Business is lower than the These include reducing differences Australia—have start-up procedures that OECD high-income, G7  and Nordic in performance between schools as can be completed in 2–3 days and require averages and is expected to decrease well as closing the gap between im- no minimum capital. further.1 But Swedish firms face a total migrant and native students; making tax rate as measured by Doing Busi- the teaching profession more selec- High costs and delays in starting a new ness that is one of the highest among tive and attractive; improving the firm have real economic impact. Glob- OECD high-income economies. The scientific competitiveness of tertiary al cross-country analysis shows that share of social security contributions education institutions; increasing the economies with a lower cost of business in the total tax burden borne by busi- completion rate of tertiary students; incorporation tend to have both higher nesses is among the largest in the and reducing mismatch between the numbers of newly registered companies world. As part of a strategy aimed fields of student enrollment and the and higher revenue from income, profit at creating a tax system more sup- skills demanded in the labor market. and capital gains taxes. They also tend portive of economic growth, there is Of utmost importance to promote to have a higher labor force participation scope in Sweden for a gradual shift in Sweden’s business environment for rate among youth (ages 15–24). Con- the tax burden in a way that is bud- innovation and long-term global versely, economies with a higher cost get neutral—away from income taxes competitiveness are policies encour- to start a formal business tend to have (personal and corporate) and toward aging grassroots entrepreneurship, higher levels of self-employment. There other types of taxes. continuous global technology learn- is also strong evidence of a relationship • Sweden’s labor market regulation ing and the upgrading of managerial between higher levels of regulation and is more rigid than the OECD high- skills. a larger informal sector. In Sweden the income average in some areas mea- informal sector represents 14% of GDP, sured by Doing Business, including and more than 800,000 individuals per- areas related to the use of fixed-term form at least some kind of work in the employment contracts and dismissals BUSINESS ENTRY REGULATION sector each year. of redundant workers. As countries emerged from the global • Construction projects in Sweden financial crisis, many began pursuing Regulatory requirements for company must go through a long zoning ap- policies aimed at promoting entrepre- incorporation are not the only concerns proval and permitting process, which neurship because of its direct impact affecting entrepreneurship. Sweden lags may be contributing to the inability of on productivity, innovation, employment in the rate of new firm formation com- the housing sector to meet demand. and growth. Changes making it easier pared with such counterparts as Aus- • Strengthening the protections of mi- to start a business have been common. tralia, Canada, Denmark and the United nority shareholders’ rights, the legal In Sweden the start-up process remains Kingdom, and this is in part because of framework for secured transactions, more burdensome than in many com- policies favoring long-term employment the sharing of credit information and parator economies. Despite a relatively and larger firms over entrepreneurship the efficiency in registering property high ranking on the overall ease of doing and small and medium-size enterpris- and resolving insolvency would help business, Sweden ranks only 61st (out of es. Recent government efforts to lower increase access to finance for entre- 189 economies) on the ease of starting a unemployment rates through income preneurs as well as improve the over- business, its lowest ranking in the areas support, training opportunities and job all regulatory environment. measured by Doing Business. Moreover, it search assistance have focused largely • Sweden’s regulations relating to the fell 6 places in the ranking between 2012 on promoting employment rather than activities of foreign investors are most- and 2013. on encouraging entrepreneurship. Earlier ly in line with best practices around the policy choices favoring market stability world. But they could be made more This drop in the ranking does not neces- and promoting employee security have efficient in areas relating to company sarily mean that the start-up process in contributed to keeping the new firm entry start-up, employment of skilled expa- Sweden has deteriorated; instead, it in- rate low. Creating a more dynamic econ- triates, and mediation and conciliation. dicates that other economies have been omy requires a greater balance between EXECUTIVE SUMMARY VII the incentives offered to salaried person- entrepreneurship and other drivers of contracts from 36  months to 24. Some nel and those offered to entrepreneurs. economic growth. High taxes on labor economies apply a more flexible ap- are in general detrimental to growth. proach. Denmark and Singapore, for ex- Personal income tax and social security ample, set no limit on the duration of contributions paid by employees affect fixed-term contracts, which allows the TAX REGULATION AND labor supply through their impact on de- employer and employee to tailor a con- INCENTIVES cisions about whether to take paid work tractual agreement to suit both parties. Taxes are necessary to finance public and how many hours to work—particu- Sweden also requires comparatively goods and services and to redistribute in- larly for such workers as low-income peo- long paid annual leave. Swedish employ- come to disadvantaged groups. And tax ple, married women and single mothers. ees work 1,621  hours a year on average, systems that are well designed support And social security contributions paid by 144 hours less than the OECD average. the growth of businesses and ultimately employers affect the demand for labor by the growth of overall investment and em- affecting its cost to them. The rigidity in Swedish labor law is no- ployment. table not only in requirements relating In addition, there is strong empirical ev- to contracting workers but also in those Doing Business data show that Sweden idence showing that an increase in the relating to dismissing redundant work- provides a relatively simple and trans- effective corporate tax rate leads to a de- ers. Before dismissing a redundant em- parent structure for complying with tax crease in aggregate investment, foreign ployee, Swedish employers are required obligations. Swedish firms must make direct investment and entrepreneurial ac- to provide an average of 14.4  weeks’ only 4 payments a year as measured by tivity. According to a recent report by the notice as measured by Doing Business. Doing Business, clearly a global best prac- European Commission, recurrent property Among OECD high-income economies, tice. And they spend less time preparing, taxes and environmental taxes are the only Luxembourg requires longer notice filing and paying taxes—122 hours a year least detrimental to growth.2  As part of (17  weeks). The average notice period as recorded by Doing Business—than do a strategy aimed at creating a tax system required in OECD high-income econo- firms in many other OECD high-income more supportive of economic growth, mies is 6.5  weeks. And some, including economies. Yet there is room for im- there is scope in Sweden for a gradual Denmark, New Zealand and the United provement: Swedish firms spend about shift in the tax burden in a way that is bud- States, require no notice. twice as much time on these tasks as get neutral—reducing the combined bur- firms in Switzerland (63  hours a year) den of income taxes (personal and corpo- In addition to requiring ample notice, Swe- and about 50% more than those in Sin- rate) and increasing that of consumption, den is among the 6  OECD high-income gapore (82 hours). property and environmental taxes. economies (17  worldwide) that require an employer to reassign or retrain a work- Tax rates also stand out in the compara- er before making the worker redundant tive Doing Business data. Sweden’s total tax and that apply priority rules for both re- rate as calculated by Doing Business is one LABOR MARKET REGULATION dundancies and reemployment. Sweden of the highest among OECD high-income Despite ranking among the top econo- also requires an employer to notify a third economies, at 52% of commercial profit mies on competitiveness and business party and carry out good-faith negotia- in 2012. Social security contributions ac- regulatory efficiency, Sweden lags in in- tions with the relevant trade union before count for 68% of the total tax cost borne dicators measuring the flexibility of labor dismissing a group of 9 redundant work- by businesses on average, higher than market regulation. Sweden’s labor market ers. In contrast, 82 economies—including the average shares in OECD high-income regulation is more rigid than the OECD 12 OECD high-income economies, among economies (56%) and G7  economies high-income average in 7  areas covered them Canada, Denmark, Iceland, Switzer- (50%). Sweden’s profit tax as computed by Doing Business: the maximum dura- land and the United States—apply more by Doing Business is moderate: at 16% of tion of fixed-term employment contracts, flexible redundancy rules. commercial profit, it is somewhat lower the restrictions on work on the weekly than the average for OECD high-income holiday, the length of the workweek, the Research by the OECD has highlighted a economies (16.1%), other Nordic econo- length of paid annual leave, the notifica- gap between the level of protection that mies (17%) and G7  economies (19.3%). tion required for collective dismissals, the Sweden provides to workers under per- The total tax rate for years after 2012  is obligation to reassign or retrain and to manent contracts (high) and the level expected to decline, reflecting the reduc- follow priority rules for redundancy and that it provides to those under tempo- tion in the statutory corporate income tax reemployment, and the duration of the rary contracts (lower). This gap may help rate stipulated in the 2013 budget (from notice period before dismissal. explain why the Swedish labor market 26.3% to 22%) for fiscal years starting on relies heavily on fixed-term and tempo- or after January 1, 2013. Some changes to Swedish law are push- rary contracts. It can ultimately give rise ing the country even further away from to a “dual” labor market—with “insiders” While the main goal of tax policy is to OECD high-income averages. One ex- who bear little risk of losing their job and raise revenue, growth-oriented tax sys- ample is the 2007  amendment to the “outsiders” who work under a fixed-term tems seek to minimize distortions and Swedish Employment Act, which reduced or temporary contract and have less pros- obstacles to investment, innovation, the maximum duration of fixed-term pect of transitioning to a permanent one. VIII SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS Sweden could look to the example of Second, there is too little coordination factor in Sweden’s relatively low ranking countries that have narrowed the differ- between Swedish municipalities and is that it does not have a unified legal ence in employment protection between counties in spatial planning. This leads to framework for secured lending. Rules for the 2  types of contracts by introducing fragmented and strictly local planning de- publicizing security interests and deter- more flexibility in the regulation of per- cisions, which may often involve conflict- mining the priority of creditors’ claims manent contracts. Denmark and the ing interests between different munic- vary depending on the type of security United States, for example, have rela- ipalities. It also results in a construction instrument used. This can discourage tively flexible contractual and dismissal approval process that is unpredictable lenders from extending credit—because it regulations that encourage greater over- and may vary substantially across munic- makes it more difficult to find out wheth- all demand for workers. The large role of ipalities. In contrast, in Singapore spatial er there are existing rights to assets being trade unions in Sweden, along with the planning involves a high level of coordi- offered as collateral and creates uncer- constructive overall spirit of employer- nation between different jurisdictions and tainty about which priority rules apply to employee relations, suggests a potential agencies. competing claims on collateral. for trade unions to play a central part in creating a more dynamic labor market. Third, almost half of all construction proj- Another factor in Sweden’s ranking is that Swedish trade unions acted pragmatically ects in Sweden are appealed at the plan- the country’s largest credit bureau (UC) during the global financial crisis, agreeing ning stage, and the appeals can take collects and distributes credit information to lower the minimum wage for some in- 3 years or more to resolve. The high rate only from financial institutions. In 19 oth- dustries. There is room to pursue a more of appeals against planning decisions is er OECD high-income economies credit comprehensive reform agenda. due in part to the discretionary, case-by- bureaus also include data from retailers case process for approving spatial plans and utilities in credit reports, expand- for most construction projects. In con- ing the coverage of credit information. trast, in New Zealand proposed changes Collecting and distributing information URBAN PLANNING AND in spatial plans are evaluated on the ba- on the payment of electricity and phone CONSTRUCTION PERMITTING sis of objective criteria, outlined in an en- bills, for example, can help establish good Sweden has a substantial shortage of vironmental impact assessment prepared credit histories for people without previ- housing, which could be potentially detri- by a third-party expert. Any further ap- ous bank loans or credit cards. mental to the economy in light of the pro- peals are handled by specialized environ- jected increase in housing demand over mental courts, which deal with planning Equity investment may also be sup- the next few decades. Administrative bar- disputes more efficiently. pressed by outdated laws. Sweden ranks riers to new construction may play a part 34th on the strength of investor pro- in the housing shortage. For most hous- Some of these features of Sweden’s zon- tections as measured by Doing Business, ing projects, Swedish municipalities must ing approval and construction permitting lower than New Zealand, the United approve a detailed development plan process seem to be at odds with its other- States, the United Kingdom, Norway (detaljplan) before issuing a construction wise fairly efficient system of regulations and Denmark. Its scores underlying the permit. Getting the plan approved can underpinning the activities of the private ranking suggest that relative to many take 3–4 years and sometimes more, and sector. They suggest ample scope for fur- comparator economies, Sweden makes resolving any appeals launched against it ther modernization. it more difficult for minority sharehold- another 2–3  years. In some cases it can ers to hold directors liable for damages take up to 10 years to obtain the required caused to a company through self-dealing. approvals and start construction. In many developed economies sharehold- REGULATION FOR FIRMS’ ers have a lower bar for showing director A comparative review of the Swedish ACCESS TO FINANCE or management misdeeds, needing only to construction permitting process reveals Access to finance is crucial for both as- prove that there was a conflict of interest several areas for improvement. First, the piring entrepreneurs and firms seeking in the directors’ or managers’ actions. In process involves designing or modify- to expand. Doing Business measures sev- Sweden shareholders must also show that ing a spatial plan (detailed development eral areas of regulation affecting access a director intentionally or through negli- plan) for each construction project sep- to finance for small and medium-size gence caused damage to the company. arately, rather than having a spatial plan enterprises—including getting credit, in place that has been ratified beforehand registering property, protecting investors When plaintiffs win their case, minority and covers the entire municipality. As a and resolving insolvency. Sweden’s per- shareholders in Sweden receive lower result, getting even moderately complex formance on the rankings and underlying compensation. In such countries as Can- construction projects approved can take indicators in these areas varies. ada, Israel, New Zealand and the United several years. In contrast, New Zealand States shareholders can not only recover and Singapore rely on ratified, legally Sweden ranks 42nd on the ease of get- damages in court (the remedy available in binding comprehensive spatial plans that ting credit, lower than many other OECD Sweden); they can also demand that lia- cover the entire city or municipality, al- high-income economies, including the ble directors return to the company any lowing a much faster and more efficient United Kingdom, Australia, New Zealand, personal profit made from a transaction process. the United States and Denmark. One in which they had a conflict of interest. EXECUTIVE SUMMARY IX In addition, Swedish laws impose no ob- their loans than the Nordic and G7 aver- foreign investors is strong. Sweden’s ligation on directors to disclose poten- ages. Litigation of creditors’ claims takes economy is among the most open to tial conflicts of interest to the rest of the the most time during the proceedings, foreign equity ownership as measured board. Fourteen other OECD high-income and attorneys’ fees and payment of the by the investing across sectors indica- economies require directors to provide administrator account for much of the tors—both globally and among the OECD detailed disclosure of all material facts high cost. Eliminating duplicate or un- high-income economies included in the relating to their potential interests in pro- necessary steps and setting reasonable database. Despite Sweden’s openness to posed transactions. deadlines that are adhered to in practice foreign equity ownership, however, prac- could shorten the duration of insolvency tical impediments to FDI remain. These Registered property is the most accept- proceedings, help lower the cost and in- include a fairly extensive, though non- ed form of collateral, and firms able to crease the recovery rate. discriminatory, system of permits and offer it have a better chance of obtaining authorizations needed to engage in many a loan. Efficient systems for registering activities. Another impediment is the property transfers, by creating secure dominance of a few very large players in property rights, can help increase access REGULATION OF FOREIGN certain sectors, such as construction and to finance. Sweden ranks 38th among DIRECT INVESTMENT food wholesaling. 189  economies and 14th among OECD Many countries have removed the most high-income economies on the ease important regulatory barriers to foreign Foreign investors setting up a company of registering property, below all other investment. But further reforms target- in Sweden complete the same few proce- Nordic economies and such OECD high- ing more nuanced regulatory issues may dures as domestic investors do. While the income economies as New Zealand, the be a key to staying at the forefront in at- equal treatment of foreign and domestic United States and Italy. tracting FDI. firms is good practice, setting up a foreign limited liability company in Sweden takes The low ranking is because property Sweden is widely recognized as a favor- longer (at 16  days) than the average for registration is relatively slow in Sweden. able environment for investment. The OECD high-income economies (14 days). It takes 28  days as measured by Doing country offers a competitive, largely cor- Sweden could further streamline the pro- Business, longer than in almost any other ruption-free economy with access to new cess to be in line with best practices in OECD high-income economy and several products, technologies, skills and inno- such countries as Australia (2  days) or times longer than the Nordic average of vations. Relatively low corporate income New Zealand (3 days). In addition, while 6 days. The time measure is expected to tax levels, the absence of a withholding Sweden imposes a paid-in minimum improve once the land registry completes tax on dividends and a favorable holding capital requirement on both domestic the implementation of its new informa- company regime make Sweden partic- and foreign investors, most high-income tion technology system for registering ap- ularly attractive to foreign companies. economies have done away with this re- plications, in 2014. But registering prop- Other positive factors include a well-ed- quirement or have reduced it to a very erty in Sweden is also relatively costly. ucated labor force, an outstanding tele- small or symbolic amount. At 4.3% of the property value, the cost is communications network and a stable nearly twice the Nordic average of slight- political environment. Sweden’s laws, regulations and institu- ly under 2.4%. Some economies, such as tions for alternative dispute resolution New Zealand and Poland, have moved FDI inflows to Sweden lagged in 2010 and set the trend for international best prac- from fees linked to the value of the prop- 2011  because of the financial crisis, but tice. Mediation and conciliation practic- erty to low fixed fees reflecting the costs appear to be well on the way to a full re- es could be further developed, howev- of administering the property registration covery. In 2012 the country was the 20th er. Sweden has a long tradition of using system. Rather than viewing the registra- largest recipient of FDI in absolute terms. mediation in some areas, such as in labor tion system as a source of revenue, these In terms of FDI per capita, Sweden ranked disputes and certain copyright disputes. countries are intent on reducing the costs 6th among OECD high-income econo- But arbitration has long been the predom- faced by entrepreneurs as they start a mies. inant method of resolving commercial new business. disputes, and the use of institutional or Using new data from the FDI Regulations structural mediation and conciliation re- Effective insolvency proceedings promote database, the report compares legal and mains fairly limited. Many countries now economic activities and access to finance regulatory practices in Sweden with those make conciliation mandatory before cer- by enabling viable but financially dis- of 104 other economies in 5 areas directly tain types of disputes are heard in court. tressed firms to continue their operations relevant to FDI: investing across sectors, This often helps settle these cases before and creditors to recover larger shares of starting a foreign investment, arbitrat- they go to litigation, relieving pressure on their loans from insolvent firms. In Swe- ing and mediating disputes, employing the courts and reducing costs. den completing the insolvency process skilled expatriates, and converting and takes longer and costs more than in many transferring currency. For work permits, Swedish laws on em- other high-income economies, including ploying skilled expatriates are transpar- all G7  and Nordic economies. In addi- The data confirm that Sweden’s regu- ent and generally follow best practices. tion, creditors recover smaller shares of latory framework in areas of interest to But obtaining a temporary work permit X SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS takes much longer in Sweden than in oth- occupations or levels of responsibili- higher responsibilities and greater earn- er OECD high-income economies. Pro- ty—remains prevalent in Sweden, and ings. cessing times by the Migration Board can research shows that this can account for vary greatly depending on an applicant’s a significant share of the gender gap in More can be done to encourage fathers to nationality and employer. For example, wages. use parental leave. In 2000 Iceland intro- obtaining a temporary work permit can duced a 9-month parental leave scheme take up to 32  weeks for an information In Sweden, as in other Nordic and OECD that grants each parent a nontransferable technology specialist. By comparison, the economies, women are overrepresented entitlement of 3 months in addition to a average for OECD high-income econo- among graduates in some fields of ter- 3-month family entitlement that is freely mies is 11.5 weeks, and the global average tiary education, such as education and shared between parents. Sweden could captured by the FDI Regulations database health and welfare. Conversely, they are follow this example, increasing the du- is only 8 weeks. underrepresented among tertiary gradu- ration of its nontransferable element as ates in such fields as computing and engi- a way to encourage parents to share the Like most OECD high-income economies, neering, manufacturing and construction. parental leave more equally. Sweden maintains a fully open foreign ex- Gender differences in educational choices change regime. As part of the country’s translate into occupational segregation, harmonization with EU rules, the central which in turn contributes to the gender bank abolished virtually all exchange con- gap in earnings. EDUCATION, SKILLS AND trols in 1989  and eliminated the rest in INNOVATION 1994. There are no controls on FDI-related Targeted efforts in vocational guidance Sweden competes in the global market on capital flows, and investment-related pay- and training can challenge stereotypes ideas, innovation and high-tech products. ments may be made freely. Nor are there in educational and professional choices Its competitive advantage therefore lies in any restrictions on making current pay- and contribute to a better gender balance the size and quality of its human capital ments in foreign exchange, other than a in tertiary education and beyond. These stock, which depend vitally on the educa- need for reporting related to anti-money- efforts should focus on introducing non- tion system and skills development. Swe- laundering or tax requirements. traditional occupations to both male and den faces challenges in both these areas female students. Good practices include as well as in innovation capacity. using visits to companies and institutions to introduce girls and boys to jobs and ca- Like most developed economies, Sweden GENDER EQUALITY AND reers where gender stereotypes and seg- has very high enrollment rates in primary ECONOMIC OPPORTUNITY FOR regation are stronger; encouraging young and lower secondary education. Yet 8% WOMEN people to enter such fields by providing of children of lower-secondary-school The Women, Business and the Law project mentoring and information on require- age were out of school in 2011—a share identifies regulatory barriers to wom- ments and courses of study; promoting that has been steadily increasing from en’s opportunities as entrepreneurs and role models; and training guidance coun- 0 in 2006. The main concern in the pub- employees. Regulatory restrictions have selors. lic debate on education in Sweden is that been shown to lead to differences be- despite large investments in education, tween men and women in both their Gender division of family responsibilities results in international assessments of participation in the labor force and their remains a significant obstacle to wom- student competencies have been de- earnings. en’s career advancement and earnings clining. Among 49  economies, Sweden progression in Sweden. To help lessen suffered the largest decline in interna- A review of Sweden’s performance across this obstacle, Sweden could further en- tional comparisons of student achieve- Women, Business and the Law indicators hance incentives for a more equal divi- ment between 1995 and 2009, with pro- shows that Swedish laws and regula- sion of family responsibilities and paren- nounced differences between high- and tions establish a framework conducive tal leave—and actively promote women’s low-performing schools. to women’s economic participation on participation in corporate decision-mak- equal terms with men. This is reflected in ing structures to strengthen their ca- In addition, there are problems of skills the relatively high participation of women reer and earning prospects. Sweden’s matching in the labor market that are in employment in Sweden compared with generous parental leave policy provides linked to worrying outcomes in tertiary other Nordic economies as well as with incentives for parents to share the leave education. Compared with the OECD av- OECD and G7 economies. more equally (such as through the 60- erage, Sweden has a larger share of work- day father-only parental leave and fiscal ers who are underskilled or underqualified Despite the favorable legal and regulato- “equality bonus”). Yet Swedish mothers for their job. At the same time, many ter- ry environment, the gender gap in wag- continue to take more leave than fathers, tiary graduates fail to find the right job and es in Sweden, while close to the OECD who take only about a quarter of all avail- are overeducated for their tasks. About a average, remains greater than that in all able days. This imbalance disproportion- third of Swedish adults ages 25–64 have other Nordic economies except Finland. ately affects women’s professional lives, a tertiary education (a smaller share than Occupational segregation—women’s because longer career interruptions di- in Finland or Norway), and only about half under- or overrepresentation in sectors, minish opportunities for advancement, of students who start a tertiary program EXECUTIVE SUMMARY XI go on to graduate (a much smaller share to challenges in areas relating to educa- To support the upgrading of managerial than in other Nordic economies). tion and skills development where policy skills, Sweden could consider efforts to actions could improve competitiveness— enhance the business sophistication of Efforts on several fronts could help ad- by training people with entrepreneurial its knowledge workers and use education dress these issues: Disseminating in- talent and increasing the attractiveness to encourage managers to link pay more formation about employment rates and of starting new businesses and by sup- closely with worker productivity. Sweden skills mismatch in different fields of porting further managerial skills upgrad- lags behind comparators in the extent to education could lead to more informed ing. which managers are perceived to follow choices by students enrolling in tertiary this practice: it ranks in 74th place among programs. Efforts to attract top academic To train entrepreneurs and make new 148 countries, far below the United King- talent could improve the quality of ter- ventures more attractive, Sweden could dom (11th) and the United States (12th). tiary education. And addressing housing consider policy actions in several ar- Sweden may also wish to consider add- market restrictions would facilitate the eas. One area is facilitating patenting by ing a managerial upgrading initiative to mobility of workers and students, helping young firms: only 8% of patents filed in policy actions aimed at broadening the to improve the skills match. 2009–11 came from young firms in Swe- sources of growth of the Swedish econ- den, less than in comparator economies. omy, by stimulating productivity growth On the innovation front, Swedish busi- Another is tilting public research and de- in service businesses and relevant public nesses are facing tougher global compe- velopment (R&D) support toward small- sector activities. tition. Over the past 3 years the number er firms: more than 80% of public R&D of top Swedish corporations recognized support to the business sector goes to as being among “the top 100 innovators” large firms, compared with roughly 50% has fallen from 6  to 2. Sweden too has in Denmark and Finland. A third area is NOTES fallen in rankings of innovation: between reducing the costs of experimentation 1. Nordic average excludes Sweden through- 2010  and 2013  it fell from 1st place to and failure: creditors can expect to re- out the report, except where otherwise 3rd in the ranking on the Innovation Ca- cover only 75 cents on the dollar through specified. pacity Index, and from 2nd place to 6th reorganization or liquidation in Sweden, 2. European Commission 2013c. in the ranking on the World Economic compared with almost 89  cents in the Forum’s Global Competitiveness Index. United Kingdom and more than 90 cents Analysis of innovation indicators points in Finland and Japan. Business entry regulation Around the world, entrepreneurs have the deceleration in global growth and rise received repeated praise as economic in unemployment, job creation has be- heroes. A wealth of studies confirm that come a pressing priority. According to the this praise is warranted, showing that en- International Labour Organization, more trepreneurship has a direct impact on key than 197 million people around the world economic indicators such as productivity, were unemployed in 2012.6 • Sweden has the lowest ranking in innovation, employment and growth. Not the Nordic region on the ease of surprisingly, promoting entrepreneurship Ample evidence also points to the posi- starting a business (61st among 189 has topped regulatory agendas in devel- tive impact of entrepreneurship on eco- economies worldwide). oped and developing countries alike. nomic growth. One study found that the • Sweden has reduced its minimum entrepreneurial activity rate has a signif- capital requirement for limited A constant flow of new firms into the icant positive correlation with growth in liability companies by half. Yet the market adds new products and services. developed countries.7 Other studies, fo- requirement remains among the It also increases competition, encourag- cusing on Germany, showed that regions highest in the Nordic region, topped ing existing firms to improve productivity with a higher concentration of new firms only by Denmark’s. in order to maintain their market pres- had higher growth rates and greater labor • A strong association exists between ence. In Finland, for example, a high firm productivity.8 Such results have been re- entrepreneurship and favorable entry rate explains almost all the produc- peatedly corroborated in the literature, outcomes in growth, innovation, tivity peaks since 1985. At that time labor confirming the significant positive rela- productivity and employment. productivity in the country lagged behind tionship between entrepreneurship and • Entrepreneurship rates in Sweden levels in Sweden and the United States. economic growth.9 For example, recent are comparatively low: 86% of But within about 2 decades Finland had employees tend to stay with the research found that young companies are raised productivity to 35% above the lev- same employer for their entire more likely to become high-growth firms, el in Sweden and 16% above that in the career, while only 3% of the with greater productivity, employment “movers” choose entrepreneurship. United States—and was racing toward and sales turnover.10 the global productivity frontier.1 • OECD high-income economies have made business start-up easier by eliminating minimum capital According to recent research, innovative small and medium-size enterprises pro- THE DOING BUSINESS requirements and streamlining INDICATORS ON STARTING A registration procedures. vide a better working environment than large firms and have higher productivity BUSINESS • Active labor market policies that promote employee security tend to as well as stronger financial performance. To foster a thriving economy with abun- lower new firm entry rates. They are also more adaptable—better dant employment opportunities, govern- • Further policy improvements are able to respond quickly in introducing new ments seek to create conditions favorable needed to foster an entrepreneurial products or technological innovations and to entrepreneurship and new company business climate in Sweden. to tailor products and services to custom- formation. Doing so requires identifying ers’ needs.2 Moreover, economists have barriers to entry in the legal and regulato- widely credited small and medium-size ry framework for starting a company. To enterprises with being engines of job cre- support efforts to ease such barriers, the ation.3 A recent study reported that they World Bank Group’s Doing Business proj- constitute 90% of all enterprises and ac- ect—through its starting a business indi- count for more than 50% of jobs world- cators—annually records the time, cost, wide.4 Yet some studies show that small procedures and paid-in minimum capi- and medium-size firms also account for tal required for a small to medium-size high levels of job destruction, especially limited liability company to start up and during times of economic distress.5 With formally operate. Over the past decade 2 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS Doing Business has tracked the start-up kronor (SKr) (US$7,345). They begin the drawing up the memorandum of associ- process and related reforms in more than process by drawing up the memorandum ation. Once the registration is approved, 180 economies around the world. and articles of association. The articles Bolagsverket assigns the company an or- must specify the proposed business name ganization identity number and publishes The starting a business indicators mea- and the business activities of the compa- a notice of incorporation in the official sure laws and regulations related to start- ny. To find out whether a desired com- gazette (Post-och Inrikes Tidningar). The ing a business as well as their implemen- pany name is available, entrepreneurs notice includes the name, mailing address tation and enforcement. This approach is can visit the website of Bolagsverket, the and identity of the board members, direc- consistent with the findings of a recent company registrar, to check whether the tors and all other authorized signatories. study highlighting the importance, in pro- name is already registered or wait until Bolagsverket also sends the company its moting the formalization of firms, of not submitting the registration documents, certificate of registration, acknowledging it only making the start-up process easier when it is checked against the company as a legal entity. The registration procedure but also increasing the enforcement of register. Then the entrepreneurs proceed takes 2 weeks on average to complete. rules.11 The indicators also measure the to a bank—or a credit market company or implicit administrative requirements that credit institute—to deposit the required Finally, the company must register for entrepreneurs face, such as having to get minimum capital and obtain a bank cer- taxes 2 weeks before starting business a company seal made. In each economy tificate confirming the deposit (figure 1.1). operations. Any employer in Sweden and Doing Business follows the path of a lo- The certificate must be signed by 2 bank any company subject to value added tax cal entrepreneur attempting to formally officials and include information on the and intending to do business in the coun- register a limited liability company in the subscription amount paid for shares. try must register with the Swedish Tax largest business city. To make the data Agency. Employers must withhold social comparable across economies, Doing The next step is to visit Bolagsverket to security taxes from employee salaries and Business uses a standardized case study pay the registration fee of SKr 2,200 account for the withholding in monthly of a business that is 100% domestically (US$323) and submit a completed com- returns. Companies need to complete a owned, has start-up capital equivalent to pany registration form along with the tax registration (F-tax registration) as a 10 times income per capita, engages in bank certificate and the memorandum prerequisite to requiring payment for ser- general industrial or commercial activities and articles of association. Additional vices rendered without the customer hav- and employs between 10 and 50 people documents, such as minutes of a board of ing to withhold preliminary income tax. within the first month of operations. directors meeting appointing an employ- All application forms can be downloaded ee representative, may also be required. from the Swedish Tax Agency’s website.15 Analyses of the Doing Business data on Alternatively, entrepreneurs can use the starting a business often show results lower-cost option of online registration, Once all these stages of the start-up consistent with the findings of other key at a fee of SKr 1,900 (US$279), through process have been completed, the new research. A body of research supports a website administered jointly by Bo- company can commence its business op- the notion that high costs and bureau- lagsverket and the Swedish Tax Agency. erations. cratic procedures for starting a business This electronic “one-stop shop” for regis- hinder formal entrepreneurship and thus tration makes it possible to register a new job creation. Indeed, one study found that company in the company register, apply setting costs too high turns aspiring en- for income and value added tax registra- HOW DOES SWEDEN’S START- trepreneurs into job seekers rather than tions and for employer registration as well UP PROCESS COMPARE job creators.12 Similarly, another study as file a preliminary tax return. GLOBALLY? concluded that burdensome regulatory Where does Sweden stand in the rank- requirements for entry—particularly as A company’s founders must carry out the ings reported by Doing Business 2014? It measured by the number of procedures registration procedure within 6 months of ranks relatively high on the overall ease of and the required minimum capital—im- pede entrepreneurship.13 Moreover, there is ample evidence that a lower level of business regulation overall leads to an in- FIGURE 1.1 The 3 main procedures to incorporate a limited liability company in Sweden crease in entrepreneurship.14 Deposit minimum Apply for registration Register for taxes capital in a bank at Bolagsverket • Submit application WHAT DOES IT TAKE TO START • Deposit at least • Submit application form for income and SKr 50,000 in form, bank preliminary F-tax A COMPANY IN SWEDEN? capital certificate, and registration • Receive bank memorandum and • Register for value To register a new private limited liabil- certificate on the articles of added tax if ity company in Stockholm, the found- deposit association applicable • Pay fee ers must be residents of the European Economic Area with a minimum capital investment of at least 50,000 Swedish Source: World Bank Group, Doing Business database, 2013 edition. BUSINESS ENTRY REGULATION 3 their start-up process over the past year. FIGURE 1.2 Process of starting a limited liability company in Sweden as measured by One example is Chile, which moved up Doing Business from 30th place to 22nd in the ranking on the ease of starting a business. 20 0.6 As measured by Doing Business 2014, starting a limited liability company in Cost (% of income per capita) 15 Stockholm takes 3 procedures and 16 0.4 days and costs about 0.5% of income per Time (days) capita (US$294) in fees (figure 1.2). The 10 minimum capital requirement is about 0.2 13% of income per capita (US$7,345). 5 By comparison, economies where start- ing a business is easiest often require 0 0 no minimum capital and have a start-up Deposit minimum Submit application Register with capital in a bank online and obtain Swedish Tax Agency process that can be completed in 1–3 registration certificate procedures and 2–3 days and costs less Procedure than 1% of income per capita (figure 1.3). These economies also generally provide Time Cost online services and effective one-stop shops used by the majority of newly reg- Source: World Bank Group, Doing Business database, 2013 edition. istered enterprises. doing business, at 14th among 189 econ- worldwide). And it fell 6 places in the Take New Zealand, which leads the omies worldwide, reflecting its good per- ranking between 2012 and 2013. But this world in the ease of starting a business. formance on most of the Doing Business drop in the ranking does not mean that Its process, which can be completed on- indicators. But it has the lowest ranking in the start-up process in Sweden has de- line, takes just 1 procedure, half a day, the Nordic region on the ease of starting teriorated; instead, it indicates that other 0.34% of income per capita (US$130) in a business (61st among 189 economies economies have been actively reforming fees—and no paid-in minimum capital. In Canada the process takes 1 procedure, 5 days and a cost of 0.38% of income per capita (US$195). In Singapore, regis- FIGURE 1.3 How Sweden’s start-up process compares with those of other high-income tering a company requires 3 procedures, economies 2.5 days and a cost of 0.6% of income per capita (US$283). Other best practice 25 8 economies include Australia and Hong Kong SAR, China. None of these econ- Time (days) and Procedures (number) 7 omies have a paid-in minimum capital 20 Cost (% of income per capita) 6 requirement. 15 5 4 HOW OECD HIGH-INCOME 10 3 ECONOMIES HAVE MADE 2 START-UP EASIER 5 1 Many OECD high-income economies have taken steps to make starting a business 0 0 easier. Some have eliminated their min- New Zealand Singapore Canada United States United Kingdom Finland Japan Sweden Germany Nordic average OECD high-income average imum capital requirement, while others have streamlined procedures so as to make the start-up process simpler and faster. Procedures Time Cost Eliminating minimum capital requirements Note: Doing Business also measures the paid-in minimum capital requirement. However, half of OECD high-income economies either have no requirement or have one that is less than 5% of income per capita. Historically, the primary purpose of mini- Nordic average excludes Sweden. mum capital requirements was to protect Source: World Bank Group, Doing Business database, 2013 edition. creditors and encourage confidence in 4 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS FIGURE 1.4 Time and minimum capital requirements for starting a business still relatively burdensome in Sweden 10 25 Procedures (number) 20 Time (days) 15 5 10 5 0 0 2005–07 2008–10 2011–13 2005–07 2008–10 2011–13 10 10 Cost (% of income per capita) (% of income per capita) Paid-in minimum capital 5 5 0 0 2005–07 2008–10 2011–13 2005–07 2008–10 2011–13 OECD high-income average Nordic average Sweden Note: Nordic average excludes Sweden. Source: World Bank Group, Doing Business database, 2013 edition. financial markets. But companies have put aside for company incorporation. minimum capital requirement for private different probabilities of becoming insol- Portugal is one country that has taken joint stock companies from 100,000 Nor- vent. And even with a minimum capital this approach. Through a 2011 decree, it wegian kroner (NKr) (US$16,733) to NKr requirement there is no guarantee that a enabled a company’s founders to choose 30,000 (US$5,020). firm would not face insolvency because the amount of minimum capital and make of other factors—such as market chang- their paid-in capital contribution up to a A study of 5 European Union member es, bad business conditions, or poor man- year after the company’s creation. economies shows that lowering or elim- agement and decision making. Moreover, inating minimum capital requirements analysis shows that higher paid-in mini- While less active in reforming the start-up makes it easier to start a small to medi- mum capital requirements are associated process than some other OECD high-in- um-size enterprise. In 4 of the economies with larger informal sectors.16 come economies, Sweden has reduced its studied that have done so (France, Ger- minimum capital requirement for limited many, Hungary and Poland), the number In many countries minimum capital re- liability companies. In February 2010 its of registered businesses rose. Besides quirements are now ancient history; parliament cut the requirement in half— significantly increasing the total number among OECD high-income economies, from SKr 100,000 (US$14,689) to SKr of limited liability companies, the reforms 48.4% have no minimum capital require- 50,000 (US$7,345). Yet the requirement also raised the number of new firms cre- ment. Governments prefer to take other remains among the highest in the Nordic ated annually.20 steps to protect investors and creditors, region, topped only by Denmark’s.18 minimize risks of bankruptcy and safe- guard consumers from potentially haz- Over time in the Nordic region, reforms Streamlining procedures ardous products. In the United States, making it easier to start a business have Denmark was among the first developed for example, creditors now rely primarily focused mainly on reducing the mini- countries to directly link company and on negotiated contractual protections as mum capital requirement (figure 1.4). tax registration. In 2005 it centralized the stipulated in statutory and incorporation In September 2006 Finland adopted a business and tax registrations in a one- agreements.17 Another good practice new Companies Act that reduced the stop service, enabling entrepreneurs to widely used among OECD high-income minimum share capital from €8,000 complete all formalities simultaneously economies is to allow entrepreneurs to (US$10,462) to €2,500 (US$3,269).19 when registering a new limited liability decide how much capital they need to And in 2011 Norway lowered the company with the Danish Commerce and BUSINESS ENTRY REGULATION 5 Companies Agency. New Zealand and Canada, the economies making it easi- FIGURE 1.5 Japan, Germany and Singapore have substantially improved regulatory efficiency in the area of starting a business since 2005 est to start a business, have taken similar steps. 100 Distance to frontier (percentage points) New Zealand merged company incorpo- 95 ration and tax registration into 1 procedure in April 2008, combining all start-up for- 90 malities in a single application accessible 85 through a unified online portal. The new system enabled entrepreneurs to apply for 80 an Inland Revenue Department number and register for the goods and services tax 75 while submitting their online application 2013 70 for incorporation to the Companies Office. 2005 Entrepreneurs receive both the company 65 Finland France Sweden United States Singapore United Kingdom Germany Japan tax number and the certificate of incorpo- ration on the same day by e-mail, with no need to deposit minimum capital—gain- ing instant access to the formal economy. Canada similarly combined business and Note: The distance to frontier scores shown in the figure indicate how far each economy is from the best perfor- tax registration in a single online proce- mance achieved by any economy on the starting a business indicators since 2003. The scores are normalized to dure, in October 2007. To register a lim- range between 0 and 100, with 100 representing the frontier. Source: World Bank Group, Doing Business database, 2013 edition. ited liability company, entrepreneurs file a completed application form along with the articles of association, the address of the company’s registered office and the While starting a business in Germany For example, in cases of employee layoffs, names of its first board of directors. Entre- remains relatively time consuming, the the Swedish Employment Security Act preneurs can simultaneously register for country has been continually improving protects workers with longer tenure— the applicable taxes—such as corporate the process in recent years (figure 1.5). thereby providing job security but at the income tax, goods and services tax, and In 2006/07 Germany implemented an same time minimizing employee turnover harmonized sales tax—to set up the com- electronic registration and online pub- and increasing the opportunity cost of pany’s tax accounts with the Canada Rev- lication system, doing away with the pursuing an entrepreneurial endeavor. Ef- enue Agency. Thus after completing just 1 need to publish a notice of incorporation forts of the Swedish government to curtail procedure and paying Can$200 (US$195), in the official gazette. In 2008/09 it re- unemployment in recent years (including entrepreneurs can receive their business duced the minimum capital requirement through income support, training oppor- number for tax purposes within 5 days and to a symbolic €1. And in 2009/10 it in- tunities and job search assistance) also officially commence business operations. creased the efficiency of communication have tended to encourage employment between notaries and the commercial rather than entrepreneurship.22 A study Other countries have continually stream- registry and eliminated the requirement analyzing 7.5 million observations on lined procedures, often by combining to publish a notice of incorporation in a Swedish employees found that 86% tend multiple registrations. Besides reducing newspaper. to stay with the same employer for their its paid-in minimum capital requirement entire career, while only 3% of the “mov- in 2008/09, Poland also consolidated its ers” choose entrepreneurship.23 application for business registration with THE BUSINESS ENVIRONMENT Providing generous unemployment insur- those for tax, social security and statis- FOR ENTREPRENEURSHIP: ance and other social security benefits tics registration. During that same year EMPLOYMENT AND OTHER encourages people to pursue long-term Slovenia combined tax registration with POLICIES employment rather than leave the em- company registration, both online. A year later Slovenia introduced other online ser- The regulatory requirements for starting ployee comfort zone by choosing an en- vices. More recently the Slovak Republic a business form only part of the business trepreneurial path.24 While an argument improved its processes for obtaining trad- environment that potential entrepreneurs can be made for such policy practices ing licenses, income tax registration and face; other aspects also influence deci- in a welfare state like Sweden, the im- health insurance registration at its one- sions on whether to launch a new ven- portance of an entrepreneurial economy stop shop. Croatia and Greece introduced ture. In Sweden entrepreneurship rates suggests that it is critical to strike a bal- new types of limited liability companies are low,21 and this appears to be a result ance between the incentives offered to with no minimum capital and simpler and at least in part of welfare state policies fa- salaried personnel and those offered to less costly incorporation processes. voring long-term employment. entrepreneurs. However, private sector 6 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS Economic Forum’s global competitive- FIGURE 1.6 Youth unemployment has been comparatively high in Sweden ness ranking indicates room for improve- ment: in 2013 Sweden dropped slightly in 30 the ranking for the second year in a row.27 And unemployment rates—especially 25 (% of labor force ages 15–24) youth unemployment rates—in Sweden Youth unemployment rate exceed those in Denmark, Finland, Ice- 20 land and Norway (figure 1.6). 15 In a policy environment that encourages 10 employment over entrepreneurship and favors the development of large firms over 5 the creation of small ones, starting a busi- ness can depend on rare circumstances, 0 such as winning the lottery or receiving 2004 2005 2006 2007 2008 2009 2010 2011 2012 an inheritance.28 Low household savings Sweden OECD high-income average New Zealand in Sweden have contributed to this situ- Nordic average Singapore ation: since 1970 household savings in Sweden have fallen to 2–3% of disposable income, compared with 9–10% in other Note: Nordic average excludes Sweden. Source: World Bank, World Development Indicators database, 2013 edition. OECD economies. Moreover, potential entrepreneurs lacking the funds to start a business could hardly count on Sweden’s venture capital industry: in the late 1990s development policies in Sweden before opment of a few large firms—including only 8% of venture capital firms—also the 1990s systematically disfavored small Astra and Ericsson—rather than to an in- subject to high tax rates—provided seed firms by encouraging debt rather than eq- crease in start-ups.25 Moreover, substan- funding.29 uity financing and imposing a heavier tax tial research evidence shows that high tax burden on individual owners than on in- rates are associated with lower rates of In 1970 Sweden’s GDP per capita was stitutional ownership. entrepreneurship and economic growth among the top 3 in OECD economies, ex- (for more on Swedish tax policies, see the ceeding the OECD average by 10%. How- Despite the tax reform efforts that fol- chapter on tax regulation). ever, by the end of the 1990s it had fallen lowed, entrepreneurs still bear a high to 15% below the OECD average—large- income tax burden, and the growth in While Sweden remains one of the most ly as a result of the 1992 financial crisis, high-tech production during the 1990s innovation-driven economies in the which left the Swedish banking system has been attributed largely to the devel- world,26 its performance in the World practically insolvent—and 15 other OECD economies had surpassed Sweden in the ranking.30 During that same period, employment in Sweden dropped by 8%. FIGURE 1.7 A big increase in newly registered limited liability companies in Sweden after The Swedish economy’s weakened per- the financial crisis formance has been attributed to a policy framework that generally favors larger firms and exerts greater control over the 450 50 Total limited liability companies (thousands) private sector than those in other OECD 400 45 economies.31 companies registered (thousands) 40 350 In the wake of the financial crisis, the glob- New limited liability 35 al economy has not yet fully recovered 300 30 from the economic downturn. In OECD 250 economies start-up rates are still below 25 precrisis levels.32 After a 5.1% decline in 200 20 GDP in 2009,33 Sweden was able to make 150 15 a quick recovery through a series of ac- tive labor market programs and reform 100 10 efforts undertaken in 2006–10, leading 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 to an observable increase in the number Total limited liability companies New limited liability companies registered of limited liability companies entering the market after the crisis (figure 1.7). Never- Source: World Bank Group, Entrepreneurship Database, 2013 edition. theless, Sweden has not yet returned to BUSINESS ENTRY REGULATION 7 FIGURE 1.8 Lower cost to start a business associated with higher labor force participation among youth—and higher cost with higher rate of self-employment AUS GRC NZL NLD CAN Labor force participation rate, KOR % of total employed, 2012 DNK ages 15–24 (%), 2012 GBR ITA Self-employed as EST AUT ISL CHL CHL PRT CHE ESP IRL PRTCHE POL SVK SVN DEU LUX POL FIN NZL ISL USA BEL NLD CZE SGP GBRFIN ESP SWE AUT HKG CAN SWE SVN NOR JPN SGP JPN AUS DNK CZE ISR KOR GRC HKG DEU FRA IRL SVK FRA ISR NOR USA ITA BEL EST Cost to start a business (% of income per capita), 2013 Cost to start a business (% of income per capita), 2013 Note: Both relationships are significant at the 1% level after controlling for income per capita. The relationships also hold after controlling for country fixed effects and time shocks. Source: World Bank, World Development Indicators database, 2013 edition; World Bank Group, Doing Business database, 2013 edition. its precrisis growth rate and to low levels a higher labor force participation rate new firm registrations per 1,000 people of unemployment.34 After surviving the among youth (figure 1.8, left-hand chart). ages 15–64; figure 1.9). crisis, the challenge thus lies in sustaining and boosting economic growth, employ- Conversely, a higher cost to start a formal In addition, analysis of data for OECD ment, productivity and innovation. business is associated with higher levels high-income economies reveals that a of self-employment (figure 1.8, right- lower cost and fewer procedures to start hand chart). Other research shows that a business are both associated with high- in tight labor markets workers are more er revenue from income, profit and capital PROMOTING likely to move toward self-employment gains taxes (figure 1.10). One explanation ENTREPRENEURSHIP: WHAT than to incorporate and expand a small may be that in economies with lower CROSS-COUNTRY ANALYSIS to medium-size enterprise.36 Although barriers to entry, more formal firms are SHOWS not all self-employed entrepreneurs op- being created, which leads to higher tax As noted, small and medium-size enter- erate in the informal sector, the Interna- revenue. Formalization not only results in prises contribute significantly to employ- tional Labour Organization recognizes the higher tax revenue but also creates jobs of ment levels in an economy, accounting self-employed as being part of the infor- better quality. And for the firms entering for more than 50% of jobs on average. mal sector. Of the 420–510 million mi- the formal sector, it leads to better access Cross-country analysis confirms that mak- cro, small and medium-size enterprises to finance and higher overall productivity. ing it easier and less costly to start such around the world, 70–80% are informal Yet research shows that informal firms are enterprises in the formal sector can make and nonemployer firms.37 According to unwilling to register their business where a difference in employment levels and pro- the most recent data, the informal sector they face a large time and cost burden to vide other positive economic outcomes. in Sweden represents 13.9% of the coun- complete registration procedures as well try’s GDP. More than 800,000 Swedish as strict labor market regulations.40 Rig- This can be particularly important for citizens perform at least some kind of id labor market regulations can hamper young people: in developed economies work in the informal sector each year.38 companies’ ability to adjust their work- youth unemployment increased by an A growing informal sector is associated force in accordance with business needs, alarming 25% between 2008 and 2012— with lower levels of growth and compet- adversely affecting their ability to allocate and the rate is projected to remain high itiveness. It is also associated with a loss resources effectively as well as their pro- through 2017.35 In Sweden the youth of tax revenue, which can lead to a greater ductivity (for more on this issue, see the unemployment rate exceeded 20% in tax burden on registered labor.39 chapter on labor market regulation). September 2013 (for more on youth un- employment in Sweden, see the chapter Not surprisingly, a lower cost of business In any economy, entrepreneurs are inev- on labor market regulation). Supporting incorporation is associated with higher itably affected by the surrounding busi- existing research, analysis of data for numbers of newly registered companies. ness environment. Where the regulatory high-income economies shows that a Analysis shows a strong negative correla- burden and start-up costs outweigh the lower cost to incorporate a small to me- tion between the cost to start a business potential gains from pursuing a busi- dium-size enterprise is associated with and new business density (measured as ness opportunity, entrepreneurs become 8 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS supports the strong association between FIGURE 1.9 Lower cost to start a business associated with higher new business density entrepreneurship and favorable outcomes in growth, innovation, productivity and NZL employment. Indeed, research has shown HKG that new start-ups, within a dynamic (per 1,000 working-age adults), 2012 entry-and-exit entrepreneurial environ- ment, are responsible for about 20–40% New business density of growth in labor productivity. New ISL start-ups often exploit opportunities that EST GBR might be overlooked by larger firms with SGP CAN standard ways of doing business, turning AUS fresh ideas and advanced knowledge into SVK DNK ISR IRL PRT LUX SWE CHL NOR ESP successful ventures that generate jobs FRA SVN CZE NLD BEL KOR FIN DEU CHE POL ITA GRC and boost the economy.44 Perceiving en- JPN AUT trepreneurship as the answer to the chal- lenge of economic growth and prosperity, Cost to start a business (% of income per capita), 2013 nations around the world have adopted policies aimed at promoting new small Note: New business density is defined as newly registered limited liability companies per 1,000 people ages and medium-size enterprises. 15–64. The relationship is significant at the 1% level after controlling for income per capita. The relationship also holds after controlling for country fixed effects and time shocks. Source: World Bank Group, Entrepreneurship Database, 2013 edition; World Bank Group, Doing Business Despite standing out as an innova- database, 2013 edition. tion-driven economy, Sweden lags behind its counterparts in the rate of new firm formation. Entrepreneurs continue to face barriers to business entry and develop- discouraged.41 The dampening effects on smarter business regulations that facil- ment, including a higher minimum capi- new firm creation in turn constrain pro- itate entry to market fosters the devel- tal requirement and a more burdensome ductivity, innovation, employment and opment of an entrepreneurial business process for starting a business than in growth in an economy and thus its overall climate. many other developed economies. While competitiveness. Given the research find- Sweden has lowered its minimum capital ings on the economic benefits of entre- requirement, more can be done to make preneurship, it is not surprising that gov- start-up easier. ernments are increasingly shifting toward CONCLUSION entrepreneurship-enabling policies—pol- The economic impact of entrepreneur- Earlier policy choices also have created icies that eliminate barriers to entry, re- ship has received growing attention in some disadvantages for entrepreneurs. duce bureaucracy and create incentives the public policy sphere since the ear- These are reflected, for example, in for formal incorporation.42 Implementing ly 1970s.43 Research evidence today Sweden’s tax-to-GDP ratio, the highest FIGURE 1.10 In OECD high-income economies, lower cost and fewer procedures to start a business associated with higher tax revenue Taxes on income and profit (% of GDP), 2012 Taxes on income and profit (% of GDP), 2012 NOR DNK NZL SWE AUS ISL NZL FIN BEL CAN GBR ITA AUS CHELUX SWE CAN NOR USA AUT FIN BEL ITA IRL ISR ISR ISL GBR DEU NLD CHL CZE FRA ESP EST SVN PRT POL AUT ESP JPN FRA USA KOR DEU GRC PRT IRL SVK CHE JPN SVN CHL CZE NLD EST KOR GRC POL SVK LUX Cost to start a business (% of income per capita), 2013 Procedures to start a business (number), 2013 Note: Both relationships are significant at the 1% level after controlling for income per capita. The relationships also hold after controlling for country fixed effects and time shocks. Source: World Bank, World Development Indicators database, 2013 edition; World Bank Group, Doing Business database, 2013 edition. BUSINESS ENTRY REGULATION 9 among OECD economies. Relying on ac- 7. Van Stel, Carree and Thurik 2005. The must include only 3 provisions: trade name, tive labor market policies that promote study focuses on countries with income per domicile and field of business. employee security as well as other wage capita above US$20,000. The entrepre- 20. Hornuf and others 2011. neurial activity rate is defined as the share 21. Andersson and Klepper 2013. policies has contributed to keeping the of the population ages 18–64 who either are 22. Hansen 2011. new firm entry rate low.45 actively involved in starting a new business 23. Rider and others 2013. or own or manage a business less than 42 24. Henrekson and Rosenberg 2001. Today in Sweden, new policies are in- months old. 25. Henrekson and Rosenberg 2001. creasingly replacing and counteract- 8. Audretsch and Fritsch 2003; Audretsch and 26. As measured by the World Bank’s Knowl- ing the effects of policies that are being Keilbach 2004. edge Assessment Methodology in 2012 phased out. Further policy improvements 9. Hafer 2013. (http://www.worldbank.org/kam). to foster an entrepreneurial business cli- 10. Daunfeldt, Elert and Johansson, forthcoming. 27. WEF 2013. mate are encouraged. By further promot- 11. Bruhn and McKenzie 2013. 28. Lindh and Ohlsson 1996, 1998. ing the creation and growth of small and 12. Fonseca, Lopez-Garcia and Pissarides 2001. 29. Henrekson and Rosenberg 2001. 13. Dreher and Gassebner 2011. 30. Acs and Karlsson 2002a. medium-size enterprises, Sweden would 14. Nyström 2008; Bruhn 2011, 2013; Kaplan, 31. Acs and Karlsson 2002b. certainly reap economic benefits from Piedra and Seira 2011. 32. OECD 2013d. greater employment, productivity, inno- 15. http://www.skatteverket.se. 33. World Bank, World Development Indicators vation and growth. 16. See the case study on minimum capital database. requirements in Doing Business 2014 (World 34. Anxo 2012. Bank Group 2013a). 35. ILO 2013b. 17. Booth 2005. 36. Jütting, Parlevliet and Xenogiani 2008. 18. Denmark reduced its minimum capital 37. Ardic Alper and Hommes 2013. NOTES requirement in 2009 from 125,000 Danish 38. Swedish Tax Agency projections; Schneider Thais chapter has been written by Valentina kroner (DKr) (US$22,284) to DKr 80,000 2013. Saltane with the assistance of Baria Nabil Daye. (US$14,262), though it remains relatively 39. World Bank 2013. high at 23.96% of income per capita. 40. Stein, Ardic Alper and Hommes 2013. 1. Maliranta, Rouvinen and Ylä-Anttila 2010. 19. This reform also simplified documentation 41. Ahmad and Hoffmann 2008. 2. Laforet 2012. requirements, replacing the requirement for 42. Audretsch and Link 2012; Henrekson and 3. Neumark, Wall and Zhang 2011. a deed of incorporation and minutes of the Stenkula 2010. 4. IFC 2013. constitutive meetings with one for the articles 43. Blackburn and Schaper 2012. 5. Kliesen and Maués 2011. of association that establish a limited liability 44. Calcagnini and Favaretto 2012. 6. ILO 2013a. company. And the articles of association now 45. Andersson and Klepper 2013. Tax regulation and incentives Taxes are essential. They not only finance tiveness of its economy, starting with ma- much-needed public goods and services; jor reforms in 1991 and following up with they also serve as an important tool for reforms in 1994, 2005, 2008  and, most redistributing income to disadvantaged recently, 2013. groups, including children, the aged and the unemployed. In many economies taxes are Sweden’s personal income tax change in • Thanks to electronic filing and the main source of funding for a wide range 1991 was part of a wider reform aimed at payment systems, Swedish of social and economic programs. But not all enhancing the efficiency of the tax sys- firms need to make only 4 tax tax systems serve these purposes effective- tem through rate cuts and base broad- payments a year on average. In only ly while also serving economic goals. High ening. One goal was to reduce the risk of 2 economies—Hong Kong SAR, tax rates and cumbersome administrative capital flight through dual income taxa- China, and Saudi Arabia—do firms requirements foster tax evasion;1 so do tion—by taxing personal capital income make fewer. loopholes in tax legislation. Well-designed (such as interest, dividends and capital • Firms in Sweden spend 122 hours a tax systems better support the growth of gains) at lower and proportional rates and year complying with tax regulations, businesses and ultimately the growth of labor income at higher and progressive less than their counterparts in overall investment and employment.2 rates.7 Another was to make “tax plan- many other OECD high-income ning” less attractive; for this purpose, ef- economies. But firms spend even According to the World Bank Enterprise forts were made to increase uniformity in less time doing so in Switzerland Surveys, businesses in a majority of the the taxation of different types of income. and Singapore, suggesting room for 135  countries covered consider high tax The 1991 tax reform introduced a range of further improvement. rates to be among the top 5  constraints changes: • Businesses in Sweden pay 52% of profit in taxes, more than the to their business. They also have concerns average in G7 or OECD high-income about the heavy burdens of tax adminis- • To reduce the tax burden on low in- economies. tration.3  Indeed, there is strong evidence come earners, the state tax on per- • Social security contributions paid that high tax rates and excessive admin- sonal employment income was lev- by Swedish employers account istrative complexities in the tax system ied only above a certain threshold. for 68% of their total tax burden, lead to lower rates of investment, entre- Income earners with employment among the highest shares in the preneurship and economic growth and to income up to the threshold were to world. a larger informal sector.4 Sweden provides pay only local government employ- • Research has shown distortionary an example of what can happen when gov- ment income tax. The state tax rate effects from corporate and personal ernments address such issues: A reduc- was set at 20%, and the local gov- income tax and social security tion in its marginal personal income tax ernment tax rates (which varied from contributions. Opportunities exist rate in 1991  led to an increase of around one municipality to another) at an in Sweden to shift the tax burden 0.5% in reported taxable income.5 And the average of about 31%. In total, the to consumption, property and introduction of its electronic tax declara- highest marginal tax rate on personal environmental taxes in a budget- tion (“e-tax”) system in 1996 significantly income from employment was 51%. neutral way. improved the efficiency of the system and Personal capital income was sepa- the quality of information available to tax- rated from employment income and payers—and increased user satisfaction.6 taxed by the state at a proportional rate of 30%. • The corporate income tax rate was reduced from 52% to 30%. In addi- SWEDEN’S TAX SYSTEM— tion, corporate taxation was rede- RECENT REFORMS signed to increase its neutrality, so Sweden has been periodically undertak- that the composition of a company’s ing tax reforms to increase the competi- assets would matter less for tax rea- 12 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS sons. This was done by replacing the from the perspective of a domestic, untaxed reserves—which had been medium-size firm. associated with certain types of as- THE DOING BUSINESS sets and therefore strongly affected INDICATORS ON PAYING TAXES Doing Business records the taxes and investment choices—with a new tax Jean-Baptiste Colbert, French philoso- mandatory contributions that the case equalization reserve based on com- pher and minister of finance to King Louis study firm must pay in a given year and panies’ equity or payroll. XIV, once remarked that “the art of tax- measures the administrative burden of • Value added tax, which had previous- ation consists in so plucking the goose paying taxes and contributions. It does so ly covered only goods and a few ser- as to obtain the largest possible amount using  3  indicators: number of payments vices, was made more broadly based of feathers with the smallest possible made, time spent on filing and paying by extending it to most types of ser- amount of hissing.” How taxes are col- taxes, and total tax rate. The number of vices at 25%. lected and paid has changed a great deal payments indicates the frequency with • Carbon dioxide and sulfur taxes were since then. But governments still face a which the company has to file and pay introduced to increase the tax on fu- challenge in getting the balance right in different types of taxes and contributions, els—both to help finance the reform taxation—they need to collect revenue adjusted for the way in which those filings and to encourage more environmen- without destroying incentives to work or and payments are made. The time indica- tally friendly consumption. to create a business and without losing tor captures the number of hours it takes revenue to their competitors in a global- to prepare, file and pay 3 major types of The 1991  tax reform lowered the top ized economy. taxes: profit tax, consumption tax, and marginal tax rate from about 73% to labor tax and mandatory contributions. about 51% and appeared to have re- In Sweden today the government collects The total tax rate measures the amount duced opportunities for tax avoidance.8 revenue from firms through a broad range of taxes and mandatory contributions But a study of the effects of the reform of taxes, including corporate income tax, borne by the firm as a percentage of com- points out that a difference between the value added tax, real estate tax, social mercial profit.13 Rankings on the ease of total marginal tax rate on employment taxes paid by employers, stamp duties paying taxes are simple averages of the income and that on corporate and cap- and a variety of environmental taxes. In percentile rankings on its 3  component ital income created an opportunity for doing so, it imposes administrative costs indicators, with a threshold applied to the owners of corporations to reclassify on businesses to comply with these the total tax rate.14 The most recent data, their employment income as corporate taxes. The World Bank Group’s Doing published in Doing Business 2014 and used profit.9 The 1991 tax reform also had an Business project, through its indicators in this report, cover the period January to impact on the composition of consump- on paying taxes, measures this process December 2012. tion and savings. The broadening of the base for value added tax reduced de- mand in some consumption categories, such as hotels, restaurants and tourism. And the elimination of the variations FIGURE 2.1 Swedish firms face few tax payments but a high total tax rate in effective marginal tax rates across different savings vehicles led to shifts 250 60 from savings in real assets to financial Total tax rate (% of commercial profit) savings.10 50 200 Payments (number per year) Time (hours per year) The main features of the 1991 tax reform 40 have been retained, along with a few fur- 150 ther important changes. In 1994 the 25% 30 value added tax rate was reduced to 12% 100 for foodstuffs and certain tourism ser- 20 vices and to 6% for books, newspapers, 50 periodicals, domestic passenger trans- 10 port and cultural events and activities;11 in addition, a 25% surtax was introduced for 0 0 Singapore Finland Nordic average Sweden Denmark United States OECD high-income average G7 average Germany high income earners.12 The inheritance tax was eliminated in 2005, followed by the wealth tax in 2007 and residential prop- erty taxes in 2008. There have also been some changes in tax rates. These include reductions in the corporate income tax Time Payments Total tax rate rate from 30% to 28% in 1993, to 26.3% in 2009  and to 22% according to the Note: Nordic average excludes Sweden. 2013 budget. Source: World Bank Group, Doing Business database, 2013 edition. TAX REGULATION AND INCENTIVES 13 FIGURE 2.2 Slight decline over time in the total tax rate for Swedish firms HOW DOES SWEDEN PERFORM ON THE PAYING TAXES 60 INDICATORS? Total tax rate (% of commercial profit) Among the 189  economies covered by 50 Doing Business 2014, Sweden ranks 41st on the ease of paying taxes. Swedish firms face relatively low tax adminis- 40 trative costs. They spend less time and make fewer payments a year to comply with tax regulations than their coun- 30 terparts do on average in other OECD high-income economies and in G7 econ- omies (figure 2.1). But Swedish firms face 20 a relatively high total tax rate—higher 2004 2005 2006 2007 2008 2009 2010 2011 2012 than the average in other Nordic econo- 40 mies, in OECD high-income economies and in G7 economies.15 Labor tax paid by employer (% of commercial profit) 30 Tax rates high but declining Sweden’s total tax rate as calculated 20 by Doing Business declined from 54.1% of commercial profit in 2005  to 52% in 2012 (figure 2.2).16 The reduction came 10 through cuts in both 2006  and 2009  in the general social security contributions paid by employers. The total tax rate for 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 years after 2012  is expected to decline further, reflecting the reduction in the corporate income tax rate stipulated in 30 the 2013  budget (from 26.3% to 22%) Profit tax (% of commercial profit) for fiscal years starting on or after Janu- ary 1, 2013. 20 Yet at 52% of commercial profit, Swe- den’s total tax rate is still one of the highest among OECD high-income econ- omies (figure 2.3).17 Labor tax accounts 10 for 68% of the total tax cost for busi- nesses—a higher share than the average in both OECD high-income economies 0 (56%) and G7  economies (50%). In 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sweden the statutory rate for social se- curity contributions paid by employers is Sweden G7 average OECD high-income average equal to 31.42% of total remuneration.18 Nordic average Chile Singapore Canada Based on this rate, labor tax as calculated by Doing Business is 35.5% of commercial Note: Nordic average excludes Sweden. profit—considerably higher than the av- Source: World Bank Group, Doing Business database, 2013 edition. erage in other Nordic economies (15.5% of commercial profit), OECD high-in- come economies (23.1%) and G7  econ- omies (24.1%). employers pay only one labor tax—the contributions of 10,000–12,000  Danish Among OECD high-income econo- accident compensation corporation kroner (US$1,845–2,214) per employee mies, labor tax as a share of commercial (ACC) levy, equal to 2.04% of taxable per year; social security is financed main- profit is lowest in New Zealand (3.1%) income in fiscal 2012. In Denmark em- ly through direct taxes.19 Compared with and Denmark (3.6%). In New Zealand ployers pay only fixed social security their counterparts in Sweden, employers 14 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS FIGURE 2.3 Sweden’s total tax rate is one of the highest among OECD high-income economies 60 Total tax rate (% of commercial profit) 50 40 30 20 10 0 Canada Denmark Singapore Chile Nordic New Finland OECD United G7 average Germany Sweden average Zealand high-income States average Profit tax Labor tax paid by employer Other taxes Note: Nordic average excludes Sweden. Source: World Bank Group, Doing Business database, 2013 edition. in the other Nordic economies also face Doing Business.) Other Nordic economies context of broad macroeconomic stabili- lower statutory rates for social security have lower statutory corporate income ty (figure 2.4).23 contributions—in Iceland 7.79% of total tax rates, at 20% of taxable income in remuneration, in Norway 14.1% and in Iceland, 24.5% in Finland and 25% in Sweden’s government too has taken Finland 21.34–23.74%.20 Denmark.21 measures to strengthen the potential for growth as well as to prevent unemploy- But this is only part of the story. The Worldwide, Singapore has one of the ment persistence. Besides lowering the difference between the wage costs to lowest profit tax rates as calculated statutory corporate income tax rate, the employers and the amount of net in- by Doing Business. Its statutory corpo- 2013 budget introduced a new tax cred- come that workers receive—called the rate income tax rate is 17%.22 To make it for individual investors in young and tax wedge—not only includes the social Singapore an attractive investment expanding firms. The reform is comple- security contributions and payroll taxes destination, the government has been mented by increasing public investment paid by employers; it also includes per- consistently lowering the rate over the in infrastructure, research and innova- sonal income tax paid by workers, their past years, supporting these efforts tion as well as redistributive measures social security contributions and the with greater spending efficiency in the to promote regional growth. 24 family benefits they receive in the form of cash transfers. In Denmark employers may pay low fixed amounts for social FIGURE 2.4 Singapore has consistently lowered its statutory corporate income tax rate security contributions, but workers con- tribute 8% of their gross salary or earn- 35 ings to the labor market fund for unem- Statutory corporate income tax rate (%) ployment insurance and voluntary early retirement. 30 Sweden has a moderate profit tax as calculated by Doing Business. At 16% of 25 commercial profit, it is lower than the average in OECD high-income econo- mies (16.1%), in other Nordic economies 20 (17%) and in G7  economies (19.3%). Sweden’s statutory corporate income tax rate in fiscal 2012  was 26.3% of 15 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 taxable income. (With the deductions applying to businesses in Sweden, firms Canada Denmark Sweden Singapore effectively paid 16% of commercial profit in corporate income tax as computed by Source: World Bank Group, Doing Business database, 2013 edition. TAX REGULATION AND INCENTIVES 15 Compliance time low, though FIGURE 2.5 The time required to comply with taxes has remained low but unchanging unchanging for Swedish firms Medium-size companies in Sweden can expect to spend 122  hours a year com- 250 plying with 3  major taxes: corporate in- come tax (50 hours), social security con- tributions (36 hours) and value added tax 200 Time (hours per year) (36  hours). This is less time than their counterparts spend preparing, filing and paying these taxes in many other OECD 150 high-income economies. Still, it is about twice as much time as firms 100 spend in Switzerland (63 hours) and 50% more than in Singapore (82 hours). More- over, Swedish firms saw no change in the 50 2004 2005 2006 2007 2008 2009 2010 2011 2012 time spent complying with tax regulations between 2004  and 2012—even as their G7 average OECD high-income average Sweden counterparts in other Nordic economies Nordic average Australia Singapore benefited from major improvements (fig- ure 2.5). So while 5 years ago businesses Note: Nordic average excludes Sweden. in the other 4  Nordic economies spent Source: World Bank Group, Doing Business database, 2013 edition. more time dealing with tax compliance on average than their Swedish counterparts, today they spend 10 hours a year less (fig- about 5  hours a year by eliminating the and freed up administrative resources ure 2.6). obligation for companies to report em- for the Swedish Tax Agency, allowing ployee benefits of less than 1,000 Danish it to focus on complex matters such as For example, Finland cut compliance time kroner (US$184) in 2011/12. auditing or questionable returns. Such by 26 hours a year by extending electron- changes are particularly important for ic filing to include corporate income tax While unchanged in recent years, com- smaller enterprises, which face greater in 2008/09 (it had previously covered pliance time in Sweden is nevertheless in compliance costs relative to firm size.26 all other taxes). And Finland lowered the medium to low range, thanks to the But compared with the world’s most ef- compliance time by another 150 hours a use of modern information technology. ficient tax compliance systems—such year by launching a new “Tax Account” Sweden’s introduction of e-tax, its elec- as those in Switzerland and Singapore— system for self-initiated taxes in 2010.25 tronic tax declaration system, has re- Sweden’s still has room for improvement Denmark reduced compliance time by duced compliance costs for businesses (see figure 2.6). FIGURE 2.6 Other Nordic economies have surpassed Sweden in reducing tax compliance time for firms 250 200 Time (hours per year) 150 100 50 0 Switzerland Hong Kong Singapore Finland Australia Nordic Sweden Denmark United OECD G7 average Germany SAR, China average States high-income average Profit tax Labor tax Consumption tax Note: Nordic average excludes Sweden. Source: World Bank Group, Doing Business database, 2013 edition. 16 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS Number of payments among the once. As a result, only 4  payments are Multiple taxation, in which the same lowest counted for the 5 taxes (figure 2.8). tax base is subject to more than one To comply with taxes, firms in Sweden tax treatment, makes efficient tax man- make 4  payments a year as measured agement challenging. It increases firms’ by Doing Business (figure 2.7). In only administrative cost of doing business as SOME GLOBAL GOOD well as the government’s cost of revenue 2  economies—Hong Kong SAR, China, PRACTICES IN PAYING TAXES administration. Sweden makes tax com- and Saudi Arabia—do firms make fewer (3 payments a year in both). Worldwide, economies that make paying pliance simple by levying only 1 profit tax taxes easy for domestic firms typically (the corporate income tax), 1  labor tax This does not mean that Swedish com- offer electronic systems for tax filing and (social security tax) and 1  value added panies are liable for only 4 taxes a year. payment, have one tax per tax base and tax. Seven other OECD high-income The case study company must comply use a filing system based on self-assess- economies also have one tax per tax with 5  taxes—1  profit tax, 1  labor tax, ment. Sweden has implemented all 3  of base (Chile, Greece, Norway, the Slovak 1  consumption tax and 2  other taxes. these good practices. Republic, Slovenia, Spain and the United Instead, the low number of payments Kingdom). in Sweden reflects the country’s imple- Sweden’s e-tax system is used by most mentation of electronic filing and pay- firms to pay taxes, benefiting both the Self-assessment—where taxpayers are ment for corporate income tax, social Swedish Tax Agency and the firms. For expected and trusted to determine their security contributions and value added the Swedish Tax Agency, electronic own liability under the law and pay the tax.27 The Doing Business tax payments filing lightens the workload and reduc- correct amount—has become a popular indicator takes into account electronic es operational costs, such as the costs way to efficiently administer a country’s filing. Where the majority of firms use of processing, storing and handling tax tax system. With high rates of volun- fully electronic means to both file and returns. At the same time, it increases tary compliance, administrative costs pay a particular tax, the tax is counted as tax compliance and saves time. Elec- are much lower and so is the burden of paid once a year even if the payment is tronic filing also saves time for taxpay- compliance actions.30 Self-assessment more frequent. ers, by reducing calculation errors on tax systems also reduce the discretionary returns and making it easier to prepare, powers of tax officials and opportunities In addition, Sweden’s real estate tax, file and pay taxes.28 Moreover, the e-tax for corruption.31 The majority of OECD which firms file jointly with corporate system may reduce potential incidents high-income economies, including Swe- income tax, is not counted as a separate of corruption, which are more likely to den, allow firms to calculate their own tax payment. And the fuel tax, which is em- occur with more frequent contact with bills and file the returns. bedded in payments to third parties other tax administration staff.29 Among OECD than the government, is counted as 1 pay- high-income economies, all but 2  offer ment even though it is paid more than electronic filing. OPPORTUNITIES FOR A MORE GROWTH-ORIENTED TAX SYSTEM While the primary goal of tax policy is FIGURE 2.7 Sweden has kept the number of tax payments for firms low to raise public revenue, growth-oriented tax systems seek to minimize distortions and obstacles to investment, innovation, 20 entrepreneurship and other drivers of economic growth. Based on empirical Payments (number per year) 15 analysis, an OECD report suggests a “tax and economic growth” ranking: this rates corporate income tax as the most harm- 10 ful type of tax for economic growth, fol- lowed by personal income tax and then consumption taxes—and recurrent taxes 5 on immovable property as the least harm- ful.32 A European Commission report finds that recurrent property taxes and 0 environmental taxes are the least detri- 2004 2005 2006 2007 2008 2009 2010 2011 2012 mental to growth.33 The different distor- Nordic average OECD high-income average G7 average tionary effects of different taxes suggest Singapore Sweden Hong Kong SAR, China that a growth-oriented tax reform should shift part of the burden from income tax- Note: Nordic average excludes Sweden. es to consumption, residential property or Source: World Bank Group, Doing Business database, 2013 edition. environmental taxes.34 TAX REGULATION AND INCENTIVES 17 FIGURE 2.8 Electronic systems allow Swedish firms to pay 5 taxes through 4 payments a year 14 12 Payments (number per year) 10 8 6 4 2 0 Hong Kong Sweden Singapore Finland Germany Denmark G7 average United States OECD Nordic SAR, China high-income average average Profit tax Labor tax Consumption tax Other taxes Note: Nordic average excludes Sweden. Source: World Bank Group, Doing Business database, 2013 edition. Are there opportunities in Sweden to shift Further evidence comes from a recent of the existence of the informal sector.40 the tax burden in ways that would better study showing that EU member coun- The size of an economy’s informal sec- support growth? This section addresses tries can be classified into 2 groups with tor is therefore a relevant indicator here. that question through a comparative re- respect to employment and unemploy- Sweden’s was estimated to be 13.9% of view. ment: one characterized by a high tax GDP in 2013.41 Switzerland had the small- wedge, low employment and high un- est informal sector among EU-27 econo- employment, and the other conversely mies, at 7.1% of GDP, followed by Austria Labor taxes by a low tax wedge, high employment (7.5%), Luxembourg (8%), the Nether- A recent European Commission report and low unemployment.39 The study lands (9.1%), the United Kingdom (9.7%) finds that Sweden has the 5th highest confirms a negative relationship be- and France (9.9%). implicit tax rate on labor in the Europe- tween the tax wedge and employment, an Union, after Belgium, Italy, Austria showing that an increase in the tax High social security contributions may and Finland.35 High taxes on labor are in wedge of 1  percentage point reduces not only create incentives for businesses general detrimental to growth. Personal the employment growth rate in the EU- to become informal; they may also affect income tax and social security contri- 27 by around 0.04 percentage points, all workers’ choices in allocating time be- butions paid by employees affect labor else being equal. tween labor and leisure and stimulate la- supply by affecting the decisions of in- bor supply in the informal sector. The big- dividuals about taking paid work and the Consistent with existing research, analy- ger the difference between the total cost number of hours they work—particularly sis by Doing Business shows that in OECD of labor in the official economy and the for such types of workers as low-income high-income economies labor taxes paid after-tax earnings for employees—that people, married women and single moth- by employers have a negative relation- is, the bigger the tax wedge—the great- ers.36 One analysis shows that raising the ship with the level of employment and a er the incentive to work in the informal personal income tax rate by 12.8 percent- positive one with the level of unemploy- sector. Since this difference depends age points leads to 122  fewer hours of ment (figure 2.9). A 1  percentage point largely on social security payments and market work per adult per year, a drop of increase in the labor tax as calculated by the overall personal income tax burden, 4.9 percentage points in the employment Doing Business is associated with a de- these are the key factors in the existence to population ratio and growth in the in- crease of about 0.2  percentage point in and growth of the informal sector. Swe- formal sector equal to 3.8% of GDP.37 the share of the working-age population den reduced the tax wedge for building Labor taxes, particularly social security in employment and an increase of about renovation and reconstruction work and contributions paid by employers, also 0.07  percentage point in the unemploy- for household services through special affect the demand for labor, by affecting ment rate. tax relief programs known as ROT and its cost for employers.38 Moreover, labor RUT.42 The Swedish Tax Agency esti- income taxes affect investment and the A study also has shown that the overall mates that ROT and RUT led to the ad- capital base of an economy by affecting burdens of taxes and social security con- dition of 10,000–20,000 new jobs in the the absolute level of saving. tributions are among the main causes formal sector.43 18 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS FIGURE 2.9 Lower labor taxes paid by employers are associated with higher employment—and higher labor taxes with higher unemployment ISL ESP NZL SVK Employment rate (% of population Unemployment rate (% of total KOR CAN AUS labor force), 2004–11 NLD PRT POL age 15+), 2004–11 EST CHE CZE IRL LUX GRC CHL SVN FRA DNK DEU USA FIN BEL GBR JPN SWE SVK AUT EST SWE USA ISR NOR CAN PRT ITA POL FIN ISR DNK GBR ISL NOR IRL DEU CHL CHE ESP SVN AUS CZE GRC FRA JPN AUT NZL NLD BEL ITA KOR Labor tax paid by employer (% of commercial profit), 2004–11 Labor tax paid by employer (% of commercial profit), 2004–11 Note: Data are averages for the period shown. The relationships are significant at the 5% level after controlling for GDP per capita. Source: World Bank Group, Doing Business database, 2013 edition; World Bank, World Development Indicators database, 2013 edition. Labor taxes are not a one-sided issue. The report finds that Sweden’s employ- their taxes are commensurate with the In Sweden revenue from labor tax- ment rate in 2012, at 79.4% of the pop- taxes they pay. But the report also sug- es—equivalent to 22.6% of GDP in ulation ages 20–64, was well above the gests that Sweden’s high employment 2012—funds important social security EU-27 average (70.1%) and the Europe rate may be masking employment is- benefits, including old age, sickness, 2020  employment target of 75%.44 sues for particular groups whose par- maternity, work-related disability, survi- This high employment rate despite ticipation in the labor market is highly vor and unemployment benefits (figure the high level of labor taxes reflects an responsive to labor supply incentives 2.10). Yet a recent European Commis- interesting dynamic: the level of taxes created by lower after-tax wages—in- sion report suggests a need to consider people are willing to pay without an- cluding second-earners, single moth- the effects of the tax burden for some guish also depends on whether in their ers, low-skilled workers and both older groups. perception the benefits they get for workers and youth. Measuring the tax FIGURE 2.10 Swedish labor taxes provided substantial revenue for funding benefits in 2012 30 Revenue from labor taxes (% of GDP) 25 20 15 10 5 0 Iceland Ireland Portugal Slovak Republic Switzerland Poland United Kingdom Greece Czech Republic Luxembourg Slovenia Sweden Netherlands Germany Austria Denmark France Italy Belgium Social contributions by self-employed and nonemployed persons Employees’ social contributions Employers’ social contributions Taxes on individual or household income Source: Eurostat, Main National Accounts Tax Aggregates data set, http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=gov_a_tax_ag&lang=en. TAX REGULATION AND INCENTIVES 19 burden on low-skilled workers, and the Another study finds that an increase in rate from 28% to 26.3%. The measure “traps” they face in entering (or reen- the effective corporate tax rate leads is expected to decline further as it takes tering) the labor market from inactivity to a decrease in aggregate investment, into account the large corporate income and unemployment in Sweden, the re- foreign direct investment and entre- tax cut specified in the 2013  budget, port concludes that the country faces preneurial activity.49 In particular, rais- from 26.3% to 22%. In 2012  revenue the particular challenge of reducing the ing the first-year average rate at which from corporate income tax in Sweden, tax burden on low-skilled workers. pretax profits are taxed—the first-year equivalent to 2.9% of GDP, was higher effective tax rate—by 10  percentage than the EU-27 average at 2.5% of GDP Another report, by the International points reduces the investment rate by (figure 2.12). Monetary Fund, points out that while 2.2  percentage points and the foreign Sweden’s extensive structural reforms direct investment rate by 2.3 percentage since the early 1990s have boosted trend points. A 10  percentage point increase Consumption taxes growth and employment, they could in the first-year effective corporate tax While labor and corporate income tax- be better targeted at helping groups of rate also reduces business density (the es are commonly associated with lower workers facing the most challenges.45 number of firms per 100  people) by economic growth, consumption taxes, The report suggests, for example, that 1.9 and decreases the average entry rate including value added tax, are among the the Swedish government might consider by 1.4 percentage points. taxes least detrimental to growth.50 Con- lowering payroll taxes specifically for new sumption taxes are less distortive than entrants to the labor market who need In OECD high-income economies high personal income taxes because they fall extra help in finding a job (rather than for profit and labor taxes for businesses have in part on accumulated assets, which the entire population of young potential a negative relationship with new business respond little to changes in tax levels. workers, as it does now). The report notes density (figure 2.11). A 1 percentage point Consumption taxes do not affect the re- a general tradeoff between simplicity and increase in profit and labor taxes as calcu- turns to saving and in most cases are not the ability to pinpoint the most problem- lated by Doing Business is associated with progressive. atic groups. a decrease of 7.8 in the number of newly registered limited liability companies per An OECD report finds that a revenue- The Swedish government argues that 100,000 people. neutral shift from income taxes (par- broad, general reforms that increase in- ticularly personal income tax) to centives to work are the most effective In Sweden the profit tax as calculated consumption taxes has little effect on the way to improve labor market outcomes, by Doing Business declined from 16.6% total taxes paid by typical workers and including for groups with weak attach- to 16% of commercial profit between thus on their decisions on whether or not ment to the labor market.46 It is the gov- 2004  and 2012, reflecting a reduction to work.51 But because income taxes are ernment’s view that the reduction in pay- in the statutory corporate income tax broadly progressive while consumption roll taxes for youth increases employment among this group. But the government has also undertaken extensive reforms directed toward vulnerable groups, in- cluding immigrants, the disabled and the FIGURE 2.11 Higher profit and labor taxes for businesses are associated with lower long-term unemployed. entrepreneurship ISL Corporate income tax There is ample evidence on the distortion- New business density (per 1,000 working-age adults), 2004–11 ary effect of high corporate taxes. Find- GBR EST CAN ings from an empirical study suggest that a high corporate tax burden contributes AUS to profit shifting by multinational compa- ISR PRT SVK nies, which take tax policy into account IRL DNK CHL SVN ESP SWE in allocating shared costs and returns LUX CZE FIN FRA and the value of intrafirm deliveries and KOR NLD NOR BEL services among subsidiaries in different POL ITA GRC CHE DEU JPN countries.47 In addition, parent firms tend AUT to be located in countries with relatively low taxation of foreign-source income. Profit and labor taxes (% of commercial profit), 2004–11 Despite the general possibility of defer- ring taxation until income is repatriated, Note: Data are averages for the period shown. New business density is defined as newly registered limited liability companies per 1,000 people ages 15–64. The relationship is significant at the 5% level after controlling parent-country taxation is instrumental for GDP per capita. in shaping the structure of multinational Source: World Bank Group, Doing Business database, 2013 edition; World Bank, World Development Indicators enterprises.48 database, 2013 edition. 20 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS FIGURE 2.12 For most EU-27 economies, revenue from corporate income tax was less than 3.5% of GDP in 2012 6 Revenue from corporate income tax 4 (% of GDP) 2 0 Estonia Greece Slovenia Poland Netherlands France Italy Ireland Slovak Republic Austria United Kingdom Germany Portugal Sweden Switzerland Denmark Belgium Czech Republic Luxembourg Source: Eurostat, Main National Accounts Tax Aggregates data set, http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=gov_a_tax_ag&lang=en. taxes are proportional to income and Sweden’s revenue from consump- explained by the fact that Sweden has expenditure, the shift reduces work- tion taxes, at 12.5% of GDP in 2012, is one of the highest standard statutory ers’ marginal tax rate and increases their relatively close to the EU-27  average value added tax rates (at 25%)54 in the incentive to work additional hours. Re- of 11.2% (figure 2.13). But its implic- European Union and above-average search suggests that a revenue-neutral it tax rate on consumption, at 27.3% rates for excise duties. These features shift from personal and corporate income in 2011  and on a growing trend, was would require careful consideration taxes to consumption and property tax- the second highest in the European when analyzing whether further shifting es of 1% of GDP would increase GDP per Union (after Denmark’s 31.4%) and the tax burden from labor and corporate capita by a range of 0.25–1  percentage roughly 7  percentage points above the income taxes to consumption taxes is an point in the long run.52 EU-27  average (20.1%).53  This can be option. FIGURE 2.13 Sweden’s revenue from consumption taxes in 2012 was close to the EU-27 average 15 Revenue from consumption taxes 10 (% of GDP) 5 0 Switzerland Spain Slovak Republic Italy Ireland France Netherlands Belgium Germany Luxembourg Norway Austria Czech Republic Poland United Kingdom Iceland Greece Portugal Sweden Estonia Slovenia Fiinland Denmark Value added tax Taxes and duties on imports Other taxes on consumption Source: Eurostat, Main National Accounts Tax Aggregates data set, http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=gov_a_tax_ag&lang=en. TAX REGULATION AND INCENTIVES 21 Property taxes immovable property, are among the tax- 2000  and 2012, according to Statistics Stefan Ingves, governor of Sveriges Riks- es least detrimental to growth.60  Con- Sweden, environmental taxes increased bank, the central bank of Sweden, recent- versely, favorable tax treatment of home by 43% in Sweden while environmentally ly expressed concern about household ownership, while it contributes to posi- motivated subsidies grew by 33%.63 debt, calling it an increasing risk to the tive externalities for society, can lead to economy.55 Mr. Ingves has seen firsthand distortions in the economy. Home own- The revenue from environmental taxes what bursting asset price bubbles leave ership tends to reduce labor mobility, and remained relatively stable in Sweden be- behind. He had a hands-on role cleaning the deductibility of interest payments can tween 2000 and 2010, varying from 2.7% up after Sweden’s banking meltdown in stimulate overinvestment in the housing to 2.9% of GDP.64 In 2011 it dropped slight- the early 1990s. sector. In Sweden incentives toward debt ly, from 2.7% to 2.5% of GDP. Compared financing and the lack of taxation on im- with labor and corporate taxes, the scope According to a recent OECD report, low puted rents have led to overinvestment in for revenue from environmental taxes is property taxes in Sweden fuel growth in immovable property to the detriment of relatively low because of the relatively nar- house prices, given constrained supply other productive investment.61  Sweden’s row tax base. But the higher revenue from in the short run, and increase household revenue from property taxes is signifi- environmental taxes in Denmark (4.1% of debt.56  The report recommends that the cantly below the European average, sug- GDP), Finland, Italy and the United King- country increase taxes on owner-occupied gesting room to shift tax burden from la- dom suggests a potential for raising reve- housing as a way to achieve greater hori- bor and corporate taxes to property taxes nue levels in Sweden (figure 2.15).65 zontal equity in the taxation of different as- (figure 2.14). sets.57 The European Commission has also There is also further scope for compre- taken note of Sweden’s low property taxes. hensive policy reforms aimed at level- It considers Sweden to be among 10  EU Environmental taxes ing and aligning taxes across sources of member countries facing the challenge of Environmental taxes are an important damaging emissions and scaling back a tax system that favors housing invest- fiscal tool for improving environmental ef- redundant energy taxes. Sweden stands ment and household indebtedness.58  The fectiveness, increasing economic efficien- out among EU countries for its limit- International Monetary Fund also rec- cy and raising public revenue.62 In recent ed reliance on fossil fuels; almost half ognizes the challenge for Sweden from years Sweden’s environmental policy has its electricity is produced by hydro, and its low property taxes. It recommends a included using tax and other economic coal end-use consumption and natural phased-in reform to better balance the tax instruments, such as taxes on energy use gas consumption are low. In addition, treatment of household assets by lowering and emissions, emission permits and pay- sulfur dioxide and nitrogen oxide taxes tax deductions for mortgages and increas- ments for measures to improve the envi- have been fixed in nominal terms since ing residential property taxation.59 ronment. The government has conscious- 1991, while the carbon dioxide tax has ly aimed at an overall tax shift in which been updated for inflation from time to This makes sense, because property “green taxes” gradually replace income time.66  These features would require taxes, particularly recurrent taxes on taxes and social contributions. Between careful consideration when analyzing FIGURE 2.14 Sweden’s revenue from property taxes in 2012 was significantly below the European average 4 Revenue from recurrent taxes on immovable property (% of GDP) 3 2 1 0 Luxembourg Switzerland Austria Czech Republic Estonia Norway Slovak Republic Hungary Germany Slovenia Fiinland Portugal Sweden Ireland Spain Belgium Denmark Italy Iceland France United Kingdom Source: OECD, Revenue Statistics, http://stats.oecd.org/Index.aspx?DataSetCode=REV. 22 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS FIGURE 2.15 Sweden’s revenue from environmental taxes in 2011 was lower than that of many comparators 5 Revenue from environmental taxes 4 (% of GDP) 3 2 1 0 Spain Lithuania France Romania Slovak Republic Iceland Belgium Germany Czech Republic Luxembourg Austria Latvia Norway Hungary Sweden Ireland United Kingdom Italy Estonia Bulgaria Finland Malta Slovenia Netherlands Denmark Poland Pollution taxes Transport taxes Energy taxes Source: Eurostat, Environmental Tax Revenues data set, http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=env_ac_tax&lang=en. options for further shifting the tax burden claiming deductible expenses against fully from labor and corporate income taxes to taxable income and reporting income in environmental taxes. NOTES forms granted preferential tax treatment. The reform eliminated the asymmetric tax This chapter has been written by Nan rules and disincentivized tax planning by (Charlotte) Jiang with the assistance of Nina lowering the statutory corporate income Paustian. CONCLUSION tax rate, reducing the availability of different tax shields among companies and taxing Businesses in Sweden pay 52% of profit 1. Hibbs and Piculescu 2010. Tax evasion individual capital income at a proportional does not appear to be significant in Sweden in taxes, more than the average in G7 or rate with no exemptions. The reform further despite relatively high tax levels. According OECD high-income economies. These reduced tax avoidance by eliminating the to the Swedish National Council for Crime taxes include employer-paid social se- Prevention (2012), 15,800 tax evasion cases holding-period distinction for capital gains, curity contributions that are among the were reported under the Tax Offences Act which had led to short-term gains (those highest in the world. While the primary on shares held for less than 2 years) being (skattebrottslagen) in 2012. goal of tax policy is to raise public rev- fully taxed while long-term gains were 2. Djankov and others 2010. taxed at 40% of the income tax rate. enue, taxation shapes incentives, and 3. http://www.enterprisesurveys.org. 9. Agell, Englund and Sodersten 1996. through active policy choices taxation can 4. Djankov and others 2010; Lee and Gordon 10. Agell, Englund and Sodersten 1996. In par- be structured to promote innovation, new 2005. ticular, the reform reduced the tax discrimi- business creation and economic growth. 5. Hansson 2007. A higher personal income nation against financial savings and the tax tax rate has an impact on tax avoidance benefits to savings in real assets. The new through changes in the form of compen- Different taxes have different effects on tax rules gave households strong incentive sation, including between earned income the economy. Personal income tax and so- to shift from real to financial savings outlets and fringe benefits or between earned and cial security contributions have distortion- unearned income. by selling off assets and amortizing debt, ary effects on labor supply, employment leading to a dramatic increase in the house- 6. Egowan 2011. and the size of the informal sector. And a hold financial savings rate and net lending 7. Sørensen 2010a. rate in the early 1990s. high corporate income tax level increases 8. Agell, Englund and Sodersten (1996) 11. Insurance, financial services, medical ser- the risk of profit shifting and lower levels evaluate the impact of the 1991 tax reform vices and immovable property are exempt of entrepreneurial activity and foreign in Sweden. They find that before the reform from value added tax in Sweden. direct investment. Consumption taxes, Sweden had highly nonuniform treatment 12. Sørensen (2010b), however, suggests that recurrent property taxes and environmen- of capital income, with a steeply progres- shifting back from the differentiated value tal taxes are less detrimental to growth. sive tax schedule and children treated as added tax to a uniform one could generate a A comparative review suggests that op- separate taxpayers. As a result, firms set up gain in economic efficiency equal to 0.5–1% joint ventures to shift their capital gains to portunities exist in Sweden to shift part of of total private consumption, while moving tax-exempt institutions and parents shifted from the surtax on high income earners to a the tax burden from labor and corporate their capital income to their children, uniform personal income tax could expand taxes to these less detrimental taxes. TAX REGULATION AND INCENTIVES 23 the tax base. Similarly, the Economist (2012) 15. See note 13 for an explanation of how some new companies are eligible for a full argues that although the elimination of the total tax rate is computed by Doing exemption from tax for the first S$100,000 inheritance, wealth and property taxes led to Business. (US$79,600) of normal chargeable substantial increases in capital income at the 16. The big drop in total tax rate shown for income and a 50% exemption for the next top of the income scale, it has not always Canada in figure 2.2 reflects efforts by the S$200,000 (US$159,200) during the first 3 improved efficiency because it tends to favor federal government and the Ontario provin- consecutive years of assessment beginning residential property over more productive cial government to harmonize federal and from 2005. investment. While Copenhagen Econom- provincial corporate income taxes, which 23. According to the International Monetary ics (2007) suggests that value added tax allowed Ontario businesses to file a single Fund (IMF 2013a), initiatives in Singa- should in general be levied to the extent corporate tax return and make a combined pore’s fiscal 2013 budget—including wage possible on a broad base, minimizing rev- payment starting in fiscal 2009. To facil- credits, corporate income tax rebates and enue losses from exemptions and reduced itate this change, Ontario harmonized its investment subsidies—are designed to rates, the preferential value added rate (such provincial corporate income tax base with benefit firms affected by wage increases as that for restaurants and catering services) the federal one and allowed accelerated de- and new investments, particularly small is for purposes of job creation. The Swedish preciation for certain categories of assets. In and medium-size enterprises. These government has commissioned an in-depth addition, the main federal corporate income support mechanisms, combined with social analysis of the effects of the reform, to be tax rate was reduced from 19.5% in 2008 to measures (improving access to educa- presented in early 2016. 19% in 2009 (and further to 18% in 2010), tion, expanding wage supplements for 13. The total tax rate measures the amount of and the provincial corporate income tax rate low-income workers and increasing direct taxes and mandatory contributions borne from 14% to 12%. These efforts, combined assistance to the elderly), are expected to by the firm, including profit tax, labor tax, with other minor changes in property inject a stimulus of 1.75% of GDP in 2013 sales tax and other taxes, expressed as taxes and labor taxes borne by employers, and 2014. a percentage of commercial profit. The lowered the total tax rate from 42.3% of 24. European Commission 2013b. total tax rate differs from the statutory tax commercial profit to 27.7% between 2008 25. The Tax Account concerns taxes that rate, which merely provides the factor to and 2009. taxpayers report and pay on their own be applied to the tax base. In computing 17. In Germany firms effectively pay 23% of initiative (excluding asset transfer tax and the total tax rate, the actual tax payable is commercial profit in profit tax, which is on supplementary prepayments). The system divided by commercial profit. Commercial the high end in Europe. The reason is that contains information on the payments, profit is essentially net profit before all taxes Germany levies 3 profit taxes: the corporate debits, refunds and interest on value added borne. It differs from the conventional profit income tax (statutory rate of 15%), the mu- tax and employers’ social contributions. before tax reported in financial statements. nicipal trade tax (14–17%) and the solidarity 26. Pope and Rametse 2001; Pope 2001; In computing profit before tax, many of surcharge (5.5% levied on the corporate European Commission 2004; Foreign the taxes borne by a firm are deductible, income tax). Businesses in the United Investment Advisory Service 2007; Crain while in computing commercial profit, these States also pay a high percentage of profit and Crain 2010. taxes are not deductible. Commercial profit in corporate income tax—reflecting not only 27. http://www.skatteverket.se. therefore presents a clear picture of the a federal corporate income tax (statutory 28. Che Azmi and Kamarulzaman 2010. actual profit of a business before any of the rate of 15–39%) but also a state corporate 29. James 2009. taxes it bears in the course of the fiscal year income tax (7.1% in New York State) and 30. Ricard 2008. are deducted. Commercial profit for the a city corporation income tax (9% in New 31. Imam and Davina 2007. case study company reflects assumptions York City). 32. OECD 2010c. about its business, including its assets and 18. Employees born in 1937 or earlier are not 33. European Commission 2013c. a property transaction. It is computed as subject to the special salary tax on business 34. European Commission 2013c. sales minus cost of goods sold, minus gross income. The rate for individuals younger 35. European Commission 2013c. The implicit salaries, minus administrative expenses, than 26 is 15.49%. tax rate measures the actual or effective tax minus other expenses, minus provisions, 19. European Commission 2013c. burden levied on different types of econom- plus capital gains (from the property sale) 20. In Finland the labor taxes borne by em- ic income or activities that could potentially minus interest expense, plus interest ployers comprise social security contri- be taxed. The rate is computed as the income and minus commercial depreciation. butions (2.12% of total remuneration), ratio of total tax revenues of the specific To compute the commercial depreciation, a pension insurance contributions (17.35%), economic category (consumption, labor or straight-line depreciation method is applied, unemployment insurance contributions capital) to a proxy of the potential tax base with the following rates: 0% for the land, (0.80–3.20%), accident insurance contribu- defined using the production and income 5% for the building, 10% for the machinery, tions (1%) and group-life insurance contri- accounts of national accounts. The taxes 33% for the computers, 20% for the office butions (0.07%). In Iceland the general rate on labor include those on employed labor equipment, 20% for the truck and 10% for for the social security contributions borne (taxes directly linked to wages and mostly business development expenses. Doing Busi- by employers has been further lowered from withheld at source), paid by employees and ness assumes that the commercial profit of 7.79% to 7.69% starting January 1, 2013. employers (for example, compulsory social the case study firm is 59.4 times the income 21. In Finland the rate has been lowered to contributions), and those on nonemployed per capita of the relevant economy. 20% effective January 1, 2014. In Denmark labor income (all taxes and compulsory so- 14. The threshold is defined as the highest total the rate will be further reduced to 24.5% in cial contributions raised on transfer income tax rate among the top 15% of economies 2014, 23.5% in 2015 and 22% from 2016 of nonemployed people, where these could in the ranking on the total tax rate. It is on. be identified, for example, unemployment calculated and adjusted on a yearly basis. 22. Furthermore, a partial exemption of 75% is and health care benefits). All economies with a total tax rate below available on the first S$10,000 (US$7,960) 36. Meghir and Phillips 2010. this threshold receive the same score as the and 50% on the subsequent S$290,000 37. Davis and Henrekson 2004. economy at the threshold. (US$230,840) of income. In addition, 38. European Commission 2013c. 24 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS 39. Dolenc and Laporšek 2010. The authors 44. European Commission 2013d. tax, taxes and duties on imports excluding define tax wedge as the ratio of total labor 45. IMF 2012. value added tax, stamp taxes, taxes on taxes to total labor costs. 46. IMF 2012. financial and capital transactions, taxes on 40. Schneider, Buehn and Montenegro 2010. 47. De Mooij and Ederveen 2008. One international transactions and on pollution, 41. Schneider (2013) estimated the size of important route for shifting multinational undercompensation of value added tax, poll the informal sector in 31 European and profits is the manipulation of transfer prices. and expenditure taxes, and payments by 5 other OECD countries between 2003 While the OECD Transfer Pricing Guidelines households for licenses. and 2013. He defines the informal sector require entities of a multinational company 54. As noted, Sweden reduced the value as all market-based legal production of in different countries to trade with one added tax rate for restaurants and catering goods and services that is deliberately another on the basis of arm’s-length prices services on job creation grounds, in 2012 concealed from public authorities to avoid (the prices that would apply to market (European Commission 2013d). payment of income taxes, social security transactions between unrelated parties), no 55. Duxbury 2014. contributions, value added taxes or other outside market exists for many goods and 56. OECD 2012b. taxes; to avoid having to meet certain legal services, including intangibles such as brand 57. The issue is known as tax on imputed labor market standards, such as minimum names and intellectual property rights. This rents, which refer to the benefit gained by a wages, maximum working hours and safety leaves multinationals free to determine their household living in a dwelling that it owns standards; as well as to avoid complying own prices. By charging an artificially low compared with a corresponding household with certain administrative procedures, such price for goods transferred from high-tax living in a rental dwelling with market rent. as completing statistical questionnaires or to low-tax countries, a multinational can 58. European Commission 2013d. other administrative forms. reduce its overall tax liability. 59. IMF 2013b. 42. McKinsey Sweden and McKinsey Global 48. Barrios and others 2009. 60. European Commission 2013d. Institute 2012. The government’s tax relief 49. Djankov and others 2010. 61. IMF 2013b; OECD 2012b. program for renovation, reconstruction and 50. European Commission 2010. 62. OECD 2011a. extension work (ROT) was introduced as 51. OECD 2007a. 63. Statistics Sweden, “Total Environmental a temporary measure for the first time in 52. Heady and others 2009. Taxes in Sweden 2000–2012: Corrected 1993 and was repeated a number of times. 53. Eurostat, Implicit Tax Rates by Economic 2013–10–29” and “Total Environmentally It was reintroduced on a permanent basis in Function data set, http://appsso.eurostat. Motivated Direct Subsidies 2000–2012,” 2008. The tax relief program for cleaning, ec.europa.eu/. The tax on consumption is http://www.scb.se. maintenance and laundry work (RUT) was that levied on transactions between final 64. Eurostat 2013. introduced in 2007. consumers and producers and on the final 65. Eurostat 2013. 43. Swedish Tax Agency 2011. consumption goods, such as value added 66. Heine, Norregaard and Parry 2012. Labor market regulation While Sweden ranks among the top econ- Sweden has long taken a pragmatic ap- omies on measures of competitiveness or proach to implementing labor market pol- the efficiency of business regulation, it icies and has actively reformed them over lags behind on measures of the flexibility the past decades. After having pursued of labor market regulation.1 This was re- low inflation and wage leveling through cently highlighted in the Heritage Foun- marginal employment subsidies, income • Sweden‘s labor market regulation is dation’s 2013 Index of Economic Freedom, security for job loss and supply-side pol- more rigid than the OECD high- which points out that although Sweden’s icies designed to enhance labor mobili- income average in 7 areas covered regulatory environment is highly effi- ty (the Rehn-Meidner model), Sweden by Doing Business. cient, its labor market regulations remain responded to the 1973–74 oil crisis with • The flexibility in Sweden‘s among the most rigid in Europe.2 The massive state subsidies for industries in regulation of fixed-term and regulations protect employees, especial- crisis and with selective employment temporary employment contracts ly those holding permanent jobs, but at a programs. In the 1980s it implemented coupled with the rigidity in cost to firms’ ability to respond to market new policies focusing heavily on work- its regulation of permanent fluctuations. force training, which effectively replaced employment contracts points to demand-oriented programs as the most a significant gap in the level of Employment regulations are unquestion- important labor market policy measure.6 protection between the 2 types of ably necessary. They are needed to pro- Shortly after, the government introduced contracts. tect workers from arbitrary or unfair treat- a temporary system of universal em- • There is a risk of creating a “dual” ment and to ensure efficient contracting ployment subsidies for firms hiring un- labor market—with “insiders” who between employers and workers. They employed workers. By the late 2000s it bear little risk of ever losing their increase job stability and can improve had introduced programs designed to job and “outsiders” who work under productivity through employer-worker facilitate young workers’ entry into the a fixed-term or temporary contract cooperation. They benefit both workers labor force (Youth Job Program), new with less likelihood of transitioning and firms.3 measures targeting long-term unemploy- to a permanent one. ment, other policies designed for those in • Constructive dialogues with trade need of basic knowledge on job seeking unions can lead to better policy Labor market regulations encompass a as well as a wide variety of programs for results and increased labor market wide spectrum, from rules governing in- people with disabilities or the mentally ill. flexibility. dividual employee contracts to those re- lating to collective action, and can have a significant impact on economic growth While structural reforms in Sweden have and competitiveness.4 That impact can helped lower the unemployment rate, be negative where regulatory interven- challenges remain. One is the relatively tions are insufficient or excessive, so high youth unemployment rate, which finding the right balance is essential. The was 23.2% in the third quarter of 2013.7 World Bank’s World Development Report Over the past 10 years this rate has been 2013 uses the term plateau to describe consistently higher than the general un- that balance, which can differ among employment rate in Sweden (figure 3.1). economies depending on the econom- Indeed, between 2000 and 2005 the ic or political context. According to the number of unemployed youth doubled plateau effect, regulations that are too and the number of long-term unem- loose or too strict can be counterpro- ployed youth tripled.8 While the youth ductive, leading to losses of employment unemployment rate declined somewhat in an economy or to its missing out on between 2010 and 2011, it still remains job-supporting agglomeration effects much higher than the general unemploy- and knowledge spillovers.5 ment rate. Today in Sweden, more than a 26 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS FIGURE 3.1 Unemployment in Sweden has been consistently higher among youth 30 10 Total unemployment rate (% of labor force) Youth unemployment rate (% of labor 9 25 8 7 force ages 15–24) 20 6 15 5 4 10 3 2 5 1 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012 Sweden OECD average Nordic average Sweden OECD average Nordic average Note: Nordic average excludes Sweden. Source: OECD Employment Database, 2013 edition. third of the unemployed population is un- a country’s labor market regulation is in specific assumptions about the business der the age of 24. comparison with that of others. and the worker. For example, it is assumed that the business is a limited liability com- Several factors need to be considered in pany in the manufacturing sector, that it is assessing the flexibility of a country’s la- 100% domestically owned and that it op- bor market and thus its capacity to adapt THE DOING BUSINESS DATA ON erates in the economy’s largest business to changes in the society, in the economy EMPLOYING WORKERS city (Stockholm, in the case of Sweden). It or in production. These include the level of Doing Business uses 4 indicators—known is assumed that the worker earns a salary employment protection, the way in which as the employing workers indicators—to plus benefits equal to the economy’s aver- wages are set and other restrictions on capture labor market flexibility and rigid- age wage, resides in the largest business labor relationships (such as those relat- ity: difficulty of hiring, rigidity of hours, city and is not a member of a labor union. ing to work schedules and the types of difficulty of redundancy and redundancy contracts that may be granted). Through cost (figure 3.2). To assess the difficulty of hiring, Doing a set of data covering the main factors af- Business measures the ability of firms to fecting labor market flexibility, the World To ensure comparability of the data col- grant fixed-term contracts as well as le- Bank Group’s Doing Business project offers lected across economies, Doing Business gal requirements relating to time limits a tool for determining how rigid or flexible uses a standardized case study with for such contracts and to the minimum FIGURE 3.2 Doing Business uses 4 indicators to capture labor market flexibility Areas generally covered by labor market regulation Four employing workers indicators Difficulty of hiring Rigidity of hours Freedom of association and Conditions of • Fixed-term contracts • Nonstandard collective employment • Minimum wage work schedules bargaining • Paid annual leave Forced labor, Difficulty of redundancy Redundancy cost child labor and Health and • Mandatory legal • Notice period and discrimination safety requirements for severance payments dismissal for measured in weeks economic reasons of salary Social security LABOR MARKET REGULATION 27 wage. Specifically, it measures whether institutions assessing competitiveness In Sweden the 2007 amendment to the fixed-term contracts are prohibited for issues, including labor market condi- Employment Act reduced the maximum permanent tasks; the maximum duration tions.9 cumulative duration of fixed-term con- for fixed-term contracts, including renew- tracts from 36 months to 24, pushing the als; and the minimum wage for a 19-year- country further away from the G7, OECD old in his or her first job. high-income and Nordic averages. This HOW DOES SWEDEN COMPARE means that if a Swedish employer wants To assess the rigidity of hours, Doing ON THE DOING BUSINESS to retain an employee who has been un- Business analyzes several components MEASURES? der a fixed-term contract for 2 years, the affecting the schedule of the worker in What do the Doing Business employing employer will have to extend a permanent the standardized case study. It collects workers data show about the flexibility offer to the employee—because the fixed- information on whether restrictions or or rigidity of Sweden’s labor market reg- term contract can no longer be renewed. premiums apply to work on the weekly ulation? This section discusses the data This situation is arguably favorable to the holiday or at night, whether the work- for Sweden in light of the results for other worker, who receives a permanent job week can extend to 50 hours a week for OECD high-income and Nordic econo- offer—and thus greater employment se- 2 months each year in response to a sea- mies. Table 3.1 summarizes the results for curity—more quickly. But it puts pressure sonal increase in production and whether Sweden as well as for selected economies on the employer to decide whether the paid annual vacation is mandatory. It also that do well on the employing workers in- company needs an additional employee measures the maximum number of work- dicators. for the long term. Firms unsure about ing days allowed per week. whether they will provide long-term em- The comparative review shows that Swe- ployment are more likely to let a worker Doing Business measures the difficulty of den’s labor market regulation is more rig- go when the fixed-term contract reaches redundancy through 8 components, with id than the OECD high-income average its maximum duration; without the time data on whether redundancy is disallowed in 7 areas covered by Doing Business: the restriction, they could keep the worker on as a basis for dismissing workers; whether maximum duration of fixed-term con- the payroll for the short term. the employer needs to notify a third party tracts, the restrictions applying to work (such as a government agency) to dismiss on the weekly holiday, the length of the Denmark, Singapore and the United 1 redundant worker or a group of 9 redun- workweek, the length of paid annual States apply a more flexible approach. dant workers; whether an approval from a leave, the notification required in case They set no maximum duration for fixed- third party is needed to dismiss 1 redun- of collective dismissals, the obligation to term contracts, allowing the employer dant worker or a group of 9 redundant reassign or retrain and to follow priority and employee to tailor a contractual workers; whether the law requires the rules for redundancy and reemployment, agreement to suit both parties. In Iceland employer to reassign or retrain a worker and the duration of the notice period re- the maximum duration allowed for fixed- before making the worker redundant; and quired before dismissal. term contracts varies depending on the whether priority rules apply for redundan- type of employee; while the default is 2 cies or for reemployment. years, there is no limit on the duration Difficulty of hiring for managerial personnel. In contrast, in To calculate redundancy cost, Doing Busi- About three-quarters of all OECD high-in- France an employer can hire a person for ness measures the cost of advance notice come economies—Sweden among them— only 18 months under a fixed-term con- requirements, severance payments and allow fixed-term contracts for permanent tract for a permanent task.11 Among the penalties due when dismissing a redun- tasks. They thus provide more flexibility OECD high-income economies that set a dant worker, expressed in weeks of sala- for firms than economies (such as Finland) limit on the maximum duration for fixed- ry. The measure is based on the average that restrict the use of fixed-term con- term contracts, the average is 45 months. value of notice requirements and sever- tracts. ance payments for a worker with 1 year of A minimum wage, because it limits the tenure, a worker with 5 years and a work- How long a fixed-term contract can be ability of the parties to an employment er with 10 years as well as whether the used also matters. Economies that allow agreement to negotiate its terms, can worker can benefit from unemployment businesses to extend a fixed-term con- be seen as increasing the rigidity of the protection. Penalties include any addi- tract for a longer period, or that impose labor market. In a survey of 102 empir- tional payments required of employers no time limit at all, permit greater flexi- ical studies on the employment effects when dismissing a redundant worker. bility in creating employment contracts of minimum wages, researchers found suitable to both firms and workers.10 Con- that two-thirds of the studies indicat- Unlike for other Doing Business indica- versely, economies that restrict the max- ed that minimum wages had a negative tors, the data collected for the employing imum cumulative duration of fixed-term (though not always significant) effect on workers indicators are not used to com- contracts limit employers’ flexibility: once employment, while only 8 studies arrived pute rankings. The employing workers a fixed-term contract has reached the at the opposite result.12 Studies in Latin data are published in an annex of the maximum duration, an employer’s only America have found that employment in annual Doing Business report. The data options are to extend a permanent offer the formal sector decreased when min- also are published and used by other to the employee or to let the employee go. imum wages were increased.13 Workers 28 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS TABLE 3.1 Employing workers data for Sweden and selected comparator economies, 2013 United United Sweden Denmark Finland Singapore Switzerland Kingdom States Difficulty of hiring Fixed-term contracts prohibited for permanent No No Yes No No No No tasks? Maximum duration of fixed-term contracts 24 No limit 60 No limit 120 No limit No limit (months)a Ratio of minimum wage for trainee or first-time 0.00 0.00 0.33 0.00 0.00 0.28 0.20 employee to value added per workerb Rigidity of hours Major restrictions on night work?c No No No No No No No Major restrictions on weekly holiday work?c Yes No No No No No No Maximum length of workweek allowed, including 5.5 6.0 6.0 6.0 6.0 6.0 6.0 overtime (days) Premium for night work (% of hourly pay)c 0 0 8 0 0 0 0 Premium for work on weekly rest day (% of 0 0 100 100 0 0 0 hourly pay)c Fifty-hour workweeks permitted for 2 months due Yes Yes Yes Yes Yes Yes Yes to an increase in production? Paid annual leave (working days)d 25 25 30 10.7 20 28 0 Difficulty of redundancy Dismissal due to redundancy allowed by law? Yes Yes Yes Yes Yes Yes Yes Third-party notification required for dismissal of No No Yes No No No No 1 worker? Third-party approval required for dismissal of 1 No No No No No No No worker? Third-party notification required for dismissal of a Yes No Yes No No No No group of 9 workers? Third-party approval required for dismissal of a No No No No No No No group of 9 workers? Employer obligated to reassign or retrain and Yes No Yes No No No No to follow priority rules for redundancy and reemployment? Redundancy cost Notice period when dismissing a redundant 14.4 0.0 10.1 3.0 10.1 5.3 0.0 worker (weeks of salary)d Severance payments and penalties due when 0.0 0.0 0.0 0.0 0.0 3.1 0.0 dismissing a redundant worker (weeks of salary)d a. Including renewals. b. Economies for which 0.00 is shown have no minimum wage. c. In case of continuous operations. d. Average for workers with 1, 5 and 10 years of tenure. Source: World Bank Group, Doing Business database, 2013 edition. displaced from the formal sector may the wage distribution and have small ad- modest negative effect on employment, consequently attempt to find work in verse effects on employment.15 this is not always the case. And a min- the informal sector for a period of time.14 imum wage often has only a modest ad- Higher minimum wages could also be On balance, while an increase in the min- verse effect on employment or none at associated with a strong compression of imum wage is most likely to result in a all.16 Moreover, setting a minimum wage LABOR MARKET REGULATION 29 can have economic and social benefits. For proposes that every employee shall enjoy paternal leave. ILO Convention 132 pro- example, according to an OECD report, in every period of 7 days a period of rest poses that employees have the right to minimum wages can raise the average comprising at least 24 consecutive hours. 3 weeks of paid leave a year. Among measured labor productivity in an econo- According to the Doing Business meth- OECD high-income economies, more my.17 odology, economies are characterized as than 40% provide for 15–21 days of balanced between flexibility and worker paid annual leave, balancing flexibility Among OECD high-income, G7 and protection if they allow between 5.5 and and worker protection (figure 3.4). On Nordic economies, only 10% do not set 6 working days per week.22 They are char- the basis of the Doing Business meth- a minimum wage by law. These include acterized as excessively flexible if they do odology, Sweden, which like Denmark Sweden. But while no minimum wage is not require that employees have in every requires 25 days of paid annual leave, is set by law in Sweden, and not all workers period of 7 days a period of rest compris- more rigid than the United States, which are covered by a minimum wage, in prac- ing at least 24 consecutive hours. has no legal requirements for paid an- tice wages in the country are set through nual leave. But it is more flexible than collective bargaining. This may allow less On this basis, close to 90% of OECD Finland, which requires 30 days of paid flexibility than the law and the Doing Busi- high-income economies have balanced annual leave. 24 ness data imply.18 workweeks (figure 3.3). Sweden, which allows 5.5 working days a week, is among them. Denmark, Japan, and Singapore, Difficulty of redundancy Rigidity of hours which allow 6 working days a week, are Sweden does not require an employer to Sweden does not restrict night work. But also classified as balanced. Compared notify a third party (such as a government unlike such economies as Denmark, Sin- with many OECD economies, however, agency) or obtain a third party’s approv- gapore, Switzerland, the United Kingdom Sweden has a low average for the num- al before dismissing 1 redundant worker and the United States, it does restrict ber of hours worked annually: 1,621 hours (see table 3.1). But it does require an em- weekly holiday work. Sweden requires per employed person in the working-age ployer to notify a third party and carry out that workers’ weekly rest take place on population (ages 15–74), 144 hours less good-faith negotiations with the relevant weekends to the extent possible. Only than the OECD average.23 trade union before dismissing a group of temporary exceptions can be made, and redundant workers. Under the Doing Busi- only under special circumstances that the Doing Business again refers to an ILO ness methodology, these requirements for employer could not have foreseen.19 convention in assessing the flexibility collective dismissals are considered an reflected in requirements relating to additional cost and a procedural inconve- In the United Kingdom, where workers paid annual leave. Paid annual leave is nience that increase the rigidity of labor are entitled to fewer uninterrupted breaks the time employees are granted leave market regulation in Sweden.25 than in Sweden (24 hours’ rest per 7-day with social protection and income. It period or 48 hours’ rest per 14-day peri- is in addition to public holidays, sick Giving employment services timely od), the labor code applies no restrictions leave, weekly rest, and maternity and advance notice of mass redundancies on weekly rest. In some cases in which workers are required under their employ- ment contract to work on Sunday (partic- ularly shop workers and betting workers), these workers are allowed to opt out of FIGURE 3.3 Almost 90% of OECD high-income economies balance flexibility with worker Sunday work by providing a 3-month no- protection in setting the maximum length of the workweek tice.20 While offering some protection to workers, this provision does not impose Distribution of OECD high-income economies by maximum length of workweek (%) any rigidity on employers because it does not require that they give their “opted out” 80 employees work on other days instead. 70 Like almost all OECD high-income econ- 60 omies, Sweden allows a 50-hour work- 50 week during seasonal increases in pro- 40 duction (see table 3.1).21 Australia, France and Luxembourg are the only OECD 30 high-income economies that do not. 20 In assessing the flexibility reflected in 10 the maximum number of working days 0 allowed per week, Doing Business refers Flexible (7 days) Balanced (6 days) Balanced (5.5 days) Rigid (5 days) to International Labour Organization (ILO) Convention 14 on weekly rest. This Source: World Bank Group, Doing Business database, 2013 edition. 30 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS sulting in less rigid labor market regula- FIGURE 3.4 More than 40% of OECD high-income economies balance flexibility and tion. These include 12 OECD high-income worker protection in mandatory paid annual leave economies, among them Canada, Den- mark, Iceland, Switzerland and the United Distribution of OECD high-income economies by mandatory paid annual leave (%) States. In the United Kingdom, employers are required to notify the authorities of a 45 collective dismissal only when it involves 40 20 or more workers; in Sweden the thresh- 35 old is 5 workers. In the United States the federal Worker Adjustment and Retrain- 30 ing Notification (WARN) Act requires em- 25 ployers to notify state and local authorities 20 before closing a facility or discontinuing an operating unit with 50 or more workers or 15 before laying off 50–499 workers. 10 5 0 Redundancy cost Excessively flexible Balanced Semirigid Excessively rigid Before dismissing redundant employees, (less than 15 days) (15–21 days) (21–26 days) (more than 26 days) Swedish employers must give them rela- tively long notice: 14.4 weeks on average Note: Paid annual leave refers to economy averages for workers with 1, 5 and 10 years of tenure. Source: World Bank Group, Doing Business database, 2013 edition. for workers with 1 year, 5 years and 10 years tenure, according to Doing Business data (figure 3.5). Among OECD high-in- come economies, only Luxembourg re- might help in developing measures to dant or in rehiring after an employee was quires a longer notice period for redun- mitigate the effects on local communi- dismissed. A recent study using macro dancy dismissals (17 weeks). The average ties and labor markets. Before dismissal data on Swedish firms found that such notice period among OECD high-income of a group of 9 workers, however, such rules could even impair firms’ productivity. economies is 6.5 weeks, suggesting that high-income economies as Singapore, The study analyzed the effects of a 2001 Sweden has more rigid labor market Switzerland and the United States do Swedish reform of employment protection regulation with respect to redundancy not require third-party notification. The rules making it possible for small firms dismissals than the rest of the OECD United Kingdom has provisions similar to to exempt 2 employees from the last-in, high-income group. By comparison, 5 those in Sweden, except that notification first-out rule. Results showed that being OECD high-income economies, including is optional for dismissal of a group of less exempted from this seniority rule could in- Denmark, New Zealand and the United than 20 workers. crease firms’ labor productivity by 2.5%.26 States, require no notice before dismissal When estimating annual effects, the study of redundant employees. Only 17 economies worldwide, including found that labor productivity could gradu- only 6 OECD high-income economies, ally increase for each subsequent year. For On severance payments, however, require an employer to reassign or retrain some firms the estimated productivity ef- Sweden and all other Nordic econo- a worker before making the worker redun- fect of the reform could be as large as 6%. mies offer the highest level of flexibil- dant, and apply priority rules for both re- ity to employers. Like 41 other econ- dundancies and reemployment. Sweden is The author of the study advances several omies around the world, including 12 among them, along with such economies possible explanations for such productivi- other OECD high-income economies as France, Italy and Norway. Thus in Swe- ty increases. One possibility is that a high- (among them 3 G7 economies—Italy, den an employer may make an employee er probability of dismissal could cause a Japan and the United States), Sweden redundant only if the worker could not have behavioral change in workers, reducing has no legal requirement that employ- been retrained or reassigned. In dismissing some problems of moral hazard such as ers provide severance payments for re- redundant employees, the employer must shirking at work. Another is that a higher dundancy dismissals. Instead, collec- follow a specific order of seniority or take probability of dismissal could lower the tive bargaining agreements provide for into account marital status or other spe- costs of adjusting to structural change, fee-based insurance schemes, funded cific priority criteria. And employers are increasing productivity in this way. A third by employer contributions. So employ- required to first offer any positions that possibility is that the reform might have ers who wish to dismiss a worker do not become available to workers previously made it easier for smaller firms to retain need to provide a severance package. dismissed for redundancy before opening a valuable workers and dismiss less valu- Viewed as best practice by the OECD, position to a wider pool of applicants. able ones. these insurance schemes ease separa- tions while ensuring that workers re- These rules considerably limit a firm’s In contrast with Sweden, 82 economies ceive some compensation after their flexibility in making an employee redun- apply more flexible redundancy rules, re- employment ends. 27 LABOR MARKET REGULATION 31 nets (such as unemployment insurance) FIGURE 3.5 Swedish employers must give almost 4 months’ notice before dismissing a and active social policies. Inspired by the redundant employee flexicurity model, collective agreements between the state and labor unions may 16 allow greater flexibility in some areas, Average notice period for redundancy 14 including working hours, wages and ben- efits. This model highlights the role of so- dismissal (weeks of salary) 12 cial partners (such as labor unions) who 10 are capable of adjusting to the integration 8 of flexibility and security. 6 In most economies the coverage of collec- 4 tive bargaining declined over the past 2 de- cades, mainly as a result of technological 2 progress, legislative changes and a global 0 0 shift toward the services sector.29 This was 0 Hong Kong SAR, Denmark United States China United Kingdom G7 average OECD high-income average Nordic average France Germany Switzerland Sweden also the case in Sweden, where trade union density (the share of wage and salary earn- ers who are trade union members) fell from 80% in 1999 to 67.5% in 2012. Even so, trade union density in Sweden is more than twice as high as the average for OECD Note: Notice period refers to economy averages for workers with 1, 5 and 10 years of tenure. Nordic average economies, and much of the Swedish labor excludes Sweden. force is still covered by collective bargain- Source: World Bank Group, Doing Business database, 2013 edition. ing (87% of the private sector and 100% of the public sector; figure 3.6).30 In assessing redundancy cost, Doing Busi- employing workers indicators focus pure- Labor relations in Sweden have been ness considers the total cost to employers ly on the law in place. The methodology characterized as good and conducted represented by both the length of the re- assumes that an economy without legally in a constructive spirit.31 But the weight quired notice period and the amount of binding collective bargaining agreements of trade unions in the country suggests severance payments. A few OECD high-in- provides more flexibility in the regulation that the Doing Business employing work- come economies—Australia, Greece and of employment contracts. But the reality ers data may underestimate the level of Spain—provide flexibility by allowing firms may be different. Collective bargaining rigidity in its labor market regulation. One to give employees little or no notice be- agreements, even if not legally binding, example relates to the minimum wage. fore dismissing them (3 weeks or less) but may still affect the rigidity of employment Because Sweden does not set a minimum make dismissals more costly by requiring contracts and the labor market, especial- wage by law, its labor market regulation high severance payments (equivalent to at ly in economies where trade unions and is characterized as flexible in this respect least 8.7 weeks’ salary). Others—includ- collective bargaining agreements cover a by Doing Business. Yet entrepreneurs per- ing Sweden as well as Finland, Iceland and large share of the labor force. ceive wage setting in Sweden as more Switzerland—make the dismissal process centralized than the average for OECD longer and more complex for firms by re- Collective bargaining agreements aim to high-income economies (figure 3.7).32 quiring a long notice period (at least 10 enhance employment security and earn- weeks) but make dismissals less costly ings by balancing the level of information by not requiring any severance payments. between firms and the workforce. Their HOW DOES SWEDEN COMPARE Only 10 economies around the world effect on productivity may be both pos- ON OTHER INDICATORS OF (including 3 OECD high-income econo- itive and negative: The “unified voice” LABOR MARKET FLEXIBILITY? mies—Denmark, New Zealand and the of collective representation may lead to United States) impose no legal require- better information sharing between firms Doing Business is not the only benchmark- ment either to provide workers with notice and the workforce, which improves pro- ing report that assesses the flexibility of la- prior to dismissal or to provide severance ductivity. But unions that negotiate re- bor market regulation in Sweden and other payments when terminating an employ- strictions on hours worked and pay rules economies. Reports of the World Econom- ment contract. can create greater rigidity in the regulato- ic Forum, the Fraser Institute, the Heritage ry framework for firms, reduce effort and Foundation and the OECD also analyze hinder productivity.28 labor market flexibility across economies. The influence of trade unions The work of the first 3 organizations is One limitation of the Doing Business One approach to balancing worker protec- not discussed in detail here because their methodology is that in measuring the tion and labor market flexibility is “flexicu- assessments either use a combination of rigidity of labor market regulation, the rity,” combining flexible regulation, safety perception-based data and Doing Business 32 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS which are useful for the purposes here: in- FIGURE 3.6 Trade unions and collective bargaining covered a large share of the Swedish dividual dismissal of workers with regular labor force in 2012 contracts, additional costs for collective dismissals (together, these first 2 compo- Collective bargaining coverage (% of labor force) 100 AUT nents are used to compute the index on BEL 90 FRA SWE FIN employment protection against individual ESP NORDIC 80 NLD ITA and collective dismissals) and regulation DNK NOR of temporary contracts.33 70 GRC 60 DEU OECD LUX What do the OECD data show? They 50 CHE CZE PRT IRL show that Sweden’s regulation of per- 40 SVK AUS G7 manent contracts for regular workers is HUN GBR CAN 30 more rigid than that in any other Nordic 20 JPN NZL economy or than the average for OECD USA 10 economies. But they also show that Swe- MEX 0 den’s regulation of temporary contracts is 0 10 20 30 40 50 60 70 80 more flexible than that in any other Nordic Trade union density (%) economy or than the OECD average. Note: Trade union density is the share of wage and salary earners who are trade union members. The data set The flexibility in the regulation of tem- excludes Israel. Nordic average excludes Sweden. porary contracts but rigidity in the regu- Source: OECD Employment Database, 2013 edition. lation of permanent contracts points to a meaningful gap in the level of protec- tion between permanent and temporary contracts in Sweden (figure 3.8). Among employing workers data (World Economic of employment protection regulations OECD high-income economies, only the Forum) or rely almost exclusively on Doing and information on the cost of labor. The Netherlands has a gap wider than Swe- Business employing workers data (Fraser indicators of employment protection den’s. This gap may help explain why the Institute, Heritage Foundation). regulations measure the procedures and Swedish labor market relies heavily on costs involved in dismissing individuals fixed-term and temporary contracts. The OECD database on employment pol- or groups of workers and the procedures icies provides 2 main data sets relevant involved in hiring workers on fixed-term A regulatory framework that combines to understanding the level of flexibility or temporary work agency contracts. The flexibility for temporary contracts with ri- of the Swedish labor market: indicators indicators include 21 components, 3 of gidity for regular contracts creates a great- er risk of excluding part of the population from permanent employment—because firms will tend to substitute temporary FIGURE 3.7 Wage setting in Sweden is more centralized than the average for OECD high- workers for regular employees.34 Ulti- income economies mately, in countries with highly protect- ed regular workers and lightly regulated 7.0 fixed-term and temporary contracts, there 6.5 is a risk of creating a “dual” labor mar- ket—with “insiders” who bear little risk of Centralization of wage setting 6.0 ever losing their job and “outsiders” who 5.5 work under a fixed-term or temporary 5.0 contract (youth and other workers with 4.5 little experience) and have less likelihood 4.0 of transitioning to a permanent one.35 3.5 3.0 The OECD information on the cost of la- 2.5 bor is also revealing. It shows that among 2.0 OECD high-income economies, Sweden 2005 2006 2007 2008 2009 2010 2011 has the highest minimum cost of labor rel- ative to the labor cost at the median wage G7 average OECD high-income average Nordic average Sweden (figure 3.9). While Sweden has no legal minimum wage, the labor cost is never- Note: Figure shows perception-based data from the national-level Executive Opinion Survey. The survey asks entrepreneurs how wages are generally set in their country, with a score of 1 indicating “by a centralized bar- theless high because it includes employer gaining process” and a score of 7 “by each individual company.” Nordic average excludes Sweden. contributions as well as the wage at the Source: World Economic Forum data. level set for the sector through collective LABOR MARKET REGULATION 33 bargaining—a wage level higher than the minimum wage in most OECD economies. FIGURE 3.8 Sweden provides far greater employment protection for permanent employees than for temporary ones Thus a Swedish worker earning €100 per hour worked costs the employer another €51 for each hour, for a total cost of €151. 3.0 Private sector employees in Sweden’s 2.5 manufacturing sector cost €43.80 per Protection against dismissal hour worked on average, nearly 7 times (0 = least; 6 = most) 2.0 as much as their counterparts in Poland, which has the lowest cost of labor among 1.5 OECD high-income economies.36 1.0 0.5 HOW DOES LABOR MARKET RIGIDITY AFFECT ECONOMIC 0 OUTCOMES? Sweden G7 average Nordic average OECD high-income average When labor market regulations are too Gap Permanent employees Temporary employees rigid or too flexible, they prevent optimal adjustment of the labor market, which is Note: For full details on the methodology and weights used to compile the indicators, see OECD (2013a). Nordic likely to have adverse effects on the econ- average excludes Sweden. omy’s overall performance.37 Some studies Source: OECD, Employment Protection Legislation indicators, 2013 edition. have concluded that more cumbersome labor market regulations are associated with both lower employment and slow- er adjustment to shocks.38 Other studies the protection of permanent employees. and on unemployment, both in general have noted, however, that the findings on This section looks at how the flexibility or and among such groups as youth and employment effects of employment pro- rigidity of the Swedish labor market may low-skilled workers.40 Studies have sug- tection legislation are mixed and that the affect 3 economic outcomes: unemploy- gested, for example, that a higher min- results are fragile or inconclusive.39 ment, productivity and entrepreneurship. imum wage could be associated with poorer employment prospects for youth, In Sweden several factors contribute to women and workers with low levels of ed- greater rigidity of labor market regulation, Labor market rigidity and ucation or experience.41 especially the restrictions on the maxi- unemployment mum duration of fixed-term contracts, the Many studies have focused on the mini- These findings suggest that labor mar- centralization of wage determination and mum wage and its impact on employment ket regulation in Sweden—given the high FIGURE 3.9 Among OECD high-income economies, Sweden had the highest relative minimum cost of labor in 2010 80 70 of labor cost at median wage Minimum cost of labor as % 60 50 40 30 20 10 0 Korea, Rep. Sweden New Zealand Slovenia Portugal Australia Greece France Ireland Netherlands Belgium Slovak Republic United Kingdom Poland Spain Canada Estonia Luxembourg United States Japan Czech Republic Wage (median) Social security contributions Source: OECD 2012b. 34 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS average labor cost and low flexibility in introducing new products with greater temporary contracts, as it is in Sweden, determining wages—may not be optimal productivity growth potential. In addition, this raises the risk of creating a dual labor for promoting employment. Other econo- excessively rigid restrictions on hiring and market in which vulnerable workers expe- mies, such as New Zealand, Singapore and redundancy tend to raise labor costs, re- rience long-term unemployment. the United Kingdom, have sought lower ducing opportunities for firms to spend on labor costs for companies by encouraging innovation and adopt new technologies.45 Other countries have narrowed the differ- wage determination at the company level. ence in protection levels between the 2 Analysis has also shown a strong nega- types of employment contracts by intro- Rigidity in hiring may also have employ- tive relationship between restrictions on ducing more flexibility in the regulation of ment effects. Factors contributing to ri- fixed-term contracts and labor produc- permanent contracts. For example, while gidity in hiring in Sweden include not only tivity.46 If fixed-term contracts become Sweden requires employers to notify the the maximum duration of fixed-term con- prohibited for permanent tasks, the level authorities before dismissing as few as 5 tracts, which is comparatively short, but of productivity in the economy decreas- workers, other countries have made noti- also the duration of trial periods during es. Fixed-term contracts allow companies fication optional or set a higher threshold, a hiring process. In Sweden a trial period to adjust employment levels without in- relying on the courts to prevent abuses cannot extend beyond the first 6 months curring high redundancy costs. They can by employers. Others have shortened the of employment. The regulation of trial also provide firms with an opportunity to notice period required before dismissal, periods in other OECD economies is less screen newly hired employees.47 while Sweden’s remains longer than that strict, allowing employers more time to of any other OECD high-income econo- make up their mind about a newly hired my except Luxembourg. Regardless of employee. In Israel, for example, trial pe- Labor market rigidity and the length of the notice period, workers riods are not regulated. Most collective entrepreneurship remain highly protected by the Swedish bargaining agreements allow trial periods Good labor market regulation promotes unemployment insurance system, which ranging from 6 months to 3 years, with the new businesses and can help shift work- is among the most generous in the world. most common length being 6–24 months. ers to the formal sector, where they will And employers have the right to extend benefit the most from worker protection The large role of trade unions in Sweden, trial periods under certain circumstances. and where higher productivity boosts along with the constructive overall spirit economic growth.48 Research has found of employer-employee relations, sug- The comparatively high level of rigidity that good labor market regulation also gests a potential for trade unions to play in the Swedish labor market may create plays a critical part in individuals’ decision a central part in increasing labor market a risk of higher unemployment for some to start a new business.49 By contrast, re- flexibility. Swedish trade unions have al- categories of workers and make it harder strictive labor market regulation can dis- ready acted pragmatically, agreeing to for them to find regular employment. Rig- courage the development of formal sec- lower the minimum wage for some in- id employment regulation is most likely tor businesses.50 Higher minimum wages dustries during the global financial crisis. to have adverse effects on young, low- appear to reduce the number of formal But recent examples from other countries skilled and immigrant workers as well as jobs (and increase the number of infor- point to possibilities for a more compre- workers over 55.42 A study in Chile found mal ones).51 hensive approach. In France, under the that job security increases the age profile accords de competitivité, unions may by- of employment, with employment rates In Sweden research has shown that pass some legal requirements (such as higher among older and skilled workers the regulation of hiring and dismissal lowering the legal minimum wage for a and lower among younger and unskilled of workers is more rigid than the aver- category of workers) and increase flex- workers.43 While young workers typically age for OECD high-income economies, ibility in exchange for guaranteed em- lack training and substantial experience, especially with respect to the level of ployment. Similarly, in Germany the Kur- high redundancy costs may be an addi- redundancy costs and the duration of zarbeit, a work sharing program, allows tional discouragement to potential em- the notice period required before dis- flexibility in wages and working hours ployers. missal. during times of crisis. The program was recognized by the World Bank’s World Development Report 2013 as an effective Labor market rigidity and tool for saving jobs.52 productivity CONCLUSION The level of flexibility in labor market Sweden, like many of its neighbors, has Finally, Sweden could continue to tailor regulation also affects productivity and faced challenges in determining the right its approach for vulnerable workers, such growth. Stricter regulation can limit the level of labor market regulation. The as young workers, low-skilled workers ability of companies to adjust their work- flexibility of the country’s labor market or immigrants. For regular contracts, for force and prevent them from allocating regulation is low, particularly in aspects example, Sweden could identify catego- resources optimally, reducing productiv- relating to the protection of permanent ries of workers for which the trial period ity.44 Rigid employment regulation can employees. Where rigid regulation of per- could become unlimited. This could help also reduce the level of risks that firms are manent employment contracts is coupled narrow the gap between labor cost and willing to accept, discouraging them from with light regulation of fixed-term and productivity for some groups. Sweden LABOR MARKET REGULATION 35 could also look to the experience of many 19. Working Hours Act of 1982, section 14. and medium-size enterprises and large OECD high-income economies that have 20. Employment Rights Act 1996, article 40. companies representing the main sectors of revamped their active labor market pro- 21. The Doing Business indicators on employing the economy). workers record whether a 50-hour work- 32. Kullander 2013. grams in recent years to more efficiently week (including overtime) is allowed for 33. The concept of temporary employment address the needs of vulnerable workers. 2 months a year when there is a seasonal used by the OECD is broader than that Some have introduced a “one-stop shop” increase in production. of fixed-term contracts used by Doing to implement their active labor market 22. The employing workers indicators are Business. In particular, the OECD “regula- program, as Germany has done through fully consistent with the ILO conventions tion of temporary contracts” subindicator Jobcenter and the United Kingdom on which they touch directly, including quantifies regulations governing fixed-term through JobCentre Plus. These programs Convention 14 on weekly rest, Convention and temporary work agency contracts are gaining momentum as they prove to 132 on holidays with pay, Convention 158 on with respect to the types of work for which be convenient and efficient tools for job termination of employment and Convention these contracts are allowed and their dura- seekers. But it must be kept in mind that 171 on night work. The indicators do not tion. It also includes regulations governing cover any of the ILO core labor standards, the establishment and operation of tem- job search programs like these can suc- such as the right to collective bargaining, porary work agencies and requirements for ceed only if firms are offered the optimal the elimination of forced labor, the abolition agency workers to receive the same pay or regulatory framework for creating jobs.53 of child labor and equitable treatment in conditions (or both) as equivalent workers employment practices. in the user firm, which can increase the 23. McKinsey Sweden and McKinsey Global cost of using temporary agency workers Institute 2012, illustration 10; OECD 2013e. relative to the cost of hiring workers on NOTES The OECD value is a weighted average. permanent contracts. Based on these 24. The designation excessively flexible accords criteria, regulation of temporary employ- This chapter has been written by Julien Vilquin with ILO Convention 132, which states that ment in Sweden is quite flexible, assessed with the assistance of Dorina Georgieva and paid annual leave should not be less than 3 at 0.81 on a scale of 0 to 6 (from least to Morgann Reeves. working weeks (15 working days if a 5-day most restrictive) compared with the OECD workweek is assumed). The designations average of 1.72. 1. The measures referred to in the discussion semirigid and excessively rigid are based on 34. Boeri and Garibaldi 2007. here are those of the World Economic the assessment of the Employing Workers 35. Saint-Paul 1996. Forum, the Fraser Institute, the Heritage Consultative Group, a group of experts 36. German Federal Statistical Office (Destatis), Foundation and the OECD. from the ILO, the OECD, civil society press release 116/13, March 26, 2013. 2. Heritage Foundation 2013. and the private sector that worked with 37. World Bank 2012. 3. Pierre and Scarpetta 2007. the World Bank Group between 2009 38. Botero and others 2004; Djankov and Ra- 4. Nataraj and others 2012. and 2011 to review the Doing Business malho 2009; Nataraj and others 2012. 5. World Bank 2012. indicators on employing workers. OECD 39. World Bank 2012. 6. Erixon 2010. high-income economies are classified as 40. Neumark and Wascher 2007. 7. OECD, Short-Term Labour Market Statistics follows on the basis of paid annual leave 41. Boeri, Helppie and Macis 2008. Database, 2014 edition. requirements. Excessively flexible: Canada 42. World Bank 2012. 8. Nordic Social Statistical Committee 2011. and the United States; balanced: Belgium, 43. Montenegro and Pagés 2004; Pagés and 9. These institutions include the Heritage Chile, the Czech Republic, Ireland, Israel, Montenegro 2007. Foundation, the Fraser Institute and the Italy, Japan, the Republic of Korea, the 44. Hopenhayn and Rogerson 1993. World Economic Forum. Netherlands, New Zealand, Norway, Slo- 45. Pierre and Scarpetta 2007; Kuddo 2009. 10. In a study analyzing the impact of reduced venia and Switzerland; semirigid: Australia, 46. The analysis uses the independent variable job security costs in Colombia, Kugler Austria, Denmark, Estonia, Germany, fixed-term contract to illustrate whether or (2004) found that a decline in unemploy- Greece, Iceland, Luxembourg, Poland, not fixed-term contracts are prohibited for ment was explained mostly by increased Portugal, the Slovak Republic, Spain and permanent tasks. The variable is part of the use of fixed-term contracts. See also Djan- Sweden; excessively rigid: Finland, France Doing Business employing workers data on kov and Ramalho (2009). and the United Kingdom. difficulty of hiring. The dependent variable 11. OECD 2013b. 25. Botero and others 2004. labor productivity is the forecasted labor 12. The findings of the survey, conducted by 26. Bjuggren 2013. productivity in the economy. Neumark and Wascher (2007), are as 27. OECD 2013e. 47. Portugal and Varejao 2010. reported in Knabe and Schöb (2008). 28. World Bank 2012. 48. La Porta and Shleifer 2008. 13. Bell 1997; Maloney and Nuñez Mendez 29. World Bank 2012. 49. Ardagna and Lusardi 2008. 2004. 30. The trade union density data are from the 50. World Business Environment Surveys and 14. Santiago 1989; Carneiro 2004. OECD Employment Database, 2013 edition. Investment Climate Surveys conducted in 15. Lemos 2004. The data set excludes Israel. more than 80 countries by the World Bank in 16. World Bank 2012. 31. McKinsey Sweden and McKinsey Global 1999–2000. 17. OECD 2007b. Institute 2012, p. 79. In addition, the World 51. Jones 1997; Kaplan 2009; Kugler 2004; 18. According to the World Economic Forum’s Economic Forum, in its Global Competitive- Mondino and Montoya 2004. Global Competitiveness database, the level ness Report 2013–2014 (WEF 2013), ranks 52. World Bank 2012. of flexibility in wage determination is low Sweden well (in 6th place) on cooperation 53. World Bank 2012. in Sweden because wages are generally set in labor-employer relations, which were through centralized bargaining agreements, deemed generally cooperative by survey re- not by each company. spondents (business executives from small Urban planning and construction permitting The state of the housing market is among the most important indicators of an econ- omy’s health. And getting housing-related URBAN PLANNING AND policies right is critical. According to an HOUSING SUPPLY IN SWEDEN OECD study, where land use and other Urban development has been somewhat policies related to housing are badly de- stagnant in Sweden. Between 1995 and • Sweden has a substantial housing signed, they can hurt an economy “by 2005 urban land use in the country in- shortage, which could potentially increasing the level and volatility of real creased by only 1.7%, a lower rate than destabilize the economy in light of house prices and preventing people from in other Nordic economies.4 Several fac- the projected increase in housing moving easily to follow employment op- tors have contributed to this slow de- demand over the next few decades. portunities.”1 It is no wonder that the velopment rate, including long planning • Swedish municipalities must housing market has received close atten- processes and inefficiencies created by a approve a detailed development tion from policy makers, especially since municipal monopoly on planning. plan for most housing projects the global financial crisis of 2008–09. before issuing a construction permit. Getting the plan approved In Sweden housing prices have been sta- Issues in supply and pricing can take 3–4 years, and resolving ble and rising over the past decade, ex- Housing prices in Sweden have risen appeals launched against it another cept for a short period of sluggishness sharply over the past decade, despite 2–3 years. during the financial crisis. Demand for the global financial crisis (figure 4.1). Be- • Almost half of all construction housing has been increasing over the long tween 2005 and 2013 they increased by projects are appealed at the term as a result of urbanization, immi- 60%, far more than the 15% in the Euro- planning stage. This is in part gration and rising disposable incomes in pean Union.5 A recent study by the Swed- because of the discretionary, case- urban areas. In Stockholm, for example, by-case approach to approving the ish National Board of Housing attributed the housing stock will need to grow by detailed development plans. the increase in housing prices in Sweden 9,000–13,000 units a year over the next • Sweden could make its construction in the past 15 years mostly to the housing permitting process more efficient 2 decades to accommodate the expected shortage.6 population growth—from today’s 2  mil- by adopting legally binding, lion to about 2.3–2.5 million.2 comprehensive plans that cover the Yet the increase in Swedish housing pric- entire municipality, rather than the es has not boosted construction, indicat- current practice of using project- But constraints in the Swedish housing ing a problem in the way the price signal based detailed development plans sector limit its ability to meet the robust works in the housing sector. Indeed, con- that cover only the area of the housing demand. Administrative rigidities struction activity has slowed in recent proposed construction. and rent control policies distort the mar- years. The number of building permits • There is too little coordination ket and discourage adequate investment issued in Sweden fell by about 15% be- between municipalities and in the sector. According to a European tween 2011 and 2012.7 And construction counties in spatial planning. As a Commission report, these constraints investment in 2012 was well below the result, the construction approval have an alarming potential to exacerbate Nordic average, relative to both GDP and process may vary substantially the housing shortage and harm the Swed- population.8 across municipalities and may ish economy.3 involve conflicting interests Most researchers agree that there between them. This chapter examines issues in Sweden’s are 2 main factors behind the housing construction and housing sectors, focusing shortage in Sweden: rent control poli- on structural rigidities that limit the supply cies and administrative barriers to new of new housing units. Drawing on global construction. By keeping rents low, best practices, it also offers a range of poli- rent control policies discourage invest- cy options for addressing these issues. ment in new housing units and lead to 38 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS by Doing Business in Singapore—only FIGURE 4.1 Housing prices have been rising in Sweden—but building permit numbers 26 days. have not Moreover, the 116 days measured by 120 10,000 Doing Business in Sweden does not cap- 9,000 ture the entire administrative burden House price index (2010 = 100) 100 8,000 for complex construction projects such 7,000 as housing projects and multistory of- 80 Building permits 6,000 fice buildings. Based on a case study 60 5,000 approach, the Doing Business indicators measure only the time, cost and proce- 4,000 40 dures required to build a standardized 3,000 warehouse in a periurban area, make 2,000 the warehouse operational by getting 20 1,000 it hooked up to utilities and, if applica- 0 0 ble, register it in the state registry. The 2005 2006 2007 2008 2009 2010 2011 2012 indicators do not account for Sweden’s House price index Building permits complex zoning system, which involves lengthy regulatory procedures if the con- Note: Building permits are for new residential construction, both single- and multi-dwelling buildings, throughout struction requires a modification in the Sweden. spatial zoning plan. Most housing proj- Source: Eurostat data (for house price index); Statistics Sweden data (for building permits). ects in Sweden go through a zoning ap- proval process that takes about 3 years in most cases and up to 10 years in some.11 inefficient use of the existing stock of from the World Bank Group’s Doing So the Doing Business indicators on deal- rental apartments.9 Business project that measure the pro- ing with construction permits capture cess for dealing with construction per- only a fraction of the regulatory issues in mits. The indicator of time shows no construction and planning. Burdensome regulation for change between 2005 and 2013 in how complex projects long the process takes in Sweden—the While rent control policies in Sweden time required has stayed at a steady 116 A municipal monopoly on planning have been shifting toward more liberal days. Meanwhile, the Nordic average The main reason for the long zoning ap- practices since the 1990s, construc- fell from 126 days to 87 (figure 4.2). proval process in Sweden is the way the tion regulation has changed little since Globally, dealing with construction per- country’s planning system is set up. The 1995.10 This is reflected in indicators mits takes the least time as measured main planning instrument is the detailed development plan (detaljplan), which is the only legally binding planning docu- ment in Sweden. The detailed develop- FIGURE 4.2 Dealing with construction permits in Sweden takes longer than the average ment plan is the main tool used by local for other Nordic economies municipalities (kommun) to approve construction projects and is ratified af- 200 14 ter consultation with residents and other 180 stakeholders.12 The plan is designed or 10 modified on an ad hoc basis every time 160 a construction project is proposed, usu- 140 Procedures (number) 8 ally by private developers, and covers Time (days) 120 only the specific area of the proposed 100 6 construction. The plan is not required for 80 certain simple projects that have no sig- 4 60 nificant impact on the community. Ac- 40 cording to the Stockholm Planning De- 2 20 partment and an OECD study, however, 0 0 more than half of all construction proj- Sweden Nordic average Best perfomance OECD high- ects—including most apartment build- income average ings—involve designing or modifying a detailed development plan.13 This means Time Procedures a long planning process for a large num- Note: Nordic average excludes Sweden. ber of the housing construction projects Source: World Bank Group, Doing Business database, 2013 edition. proposed. URBAN PLANNING AND CONSTRUCTION PERMITTING 39 The municipality of Stockholm estimates emerging alike, have been experimenting through meaningful public involvement. that getting a detailed development plan with new tools and frameworks to ad- The plan provides investors and devel- confirmed takes about 18 months on av- dress rapidly changing conditions through opers with a reliable reference to guide erage.14 In about 20% of cases, usually for innovative and responsive planning solu- them in the design and conceptual stage, more complex projects such as multi-story tions. While societies and administrative before they apply for a construction per- apartment and office buildings, getting systems differ, experiments aimed at cre- mit. And it provides municipal authorities the plan confirmed can take 3–4  years if ating more efficient and predictable plan- with a consistent basis for approving there are no appeals.15 But in Stockholm ning regulations—regulations striking the or rejecting construction permits, with more than half of all construction projects right balance between “input legitimacy little discretion involved. In contrast, involving a detailed development plan are and output efficiency”20—nevertheless the Swedish construction approval sys- appealed at this stage. According to the offer lessons for other economies. tem—with no legally binding planning Stockholm Planning Department, the ap- document that covers the entire munic- peals can go on for 3 years. And even after Two sources of potential lessons are New ipality, and with a detailed development the detailed development plan is approved Zealand and Singapore. Both have high plan that is approved or rejected through and ratified, appeals might be launched rankings on the ease of dealing with con- an ad hoc, negotiation-based process—is at the building permit stage, taking up struction permits as measured by Doing more discretionary and more prone to to 1.5  years more.16 Some Swedish me- Business. In New Zealand, which ranks inconsistent and unpredictable decisions dia sources complain that “ten years can 12th among 189 economies globally, and delays. elapse in Sweden between the conceptual completing the administrative process phase and the completion of a building.”17 for permitting—obtaining a building per- New Zealand’s process for modifying a mit, undergoing the necessary clearanc- zoning plan is also more efficient and pre- Lack of coordination between different es and getting the building ready to op- dictable. The district plan specifies 6 cat- levels of government adds to the ineffi- erate—takes only 94 days. As noted, in egories of construction projects—ranging ciencies in zoning. Sweden has only a few, Singapore it takes only 26 days, and the from “permitted” to “prohibited” (along relatively weak institutional mechanisms country ranks 3rd on the ease of dealing with intermediate categories)—requiring for coordinating long-term spatial plan- with construction permits. different levels of municipal review de- ning between municipalities, with the re- pending on the specifics of the project. sult that the detailed development plan- A project not in the permitted category ning is strictly local and carried out case The case of New Zealand requires a “resource consent,” an offi- by case. Municipal and regional compre- New Zealand has among the most effi- cial approval verifying that the proposed hensive plans exist, but these documents cient zoning and planning regulations. construction project is in line with the re- are not statutory and therefore serve a They are comprehensive, predictable and source use requirements specified in the more general advisory function rather streamlined in implementation. New Zea- Resource Management Act and ratified than support planning coordination be- land uses 2 main types of planning doc- in the district plan.22 A developer apply- tween municipalities. Many construction uments: regional plans and district plans. ing for a resource consent must provide projects ratified in detailed development Regional plans specify general require- an assessment of environmental effects plans are contrary to “higher order plans,” ments, such as air and water quality and and a written consent from the parties indicating that strategic planning is im- the use of coastal areas. District plans are affected. More complex projects also re- plemented ineffectively or not at all.18 The detailed planning guidelines that outline quire public hearings; simpler ones are lack of effective planning coordination the specific land use and design require- processed without public involvement and sharing of resources and expertise ments for builders. except for notification of the directly af- between municipalities means a loss of fected parties. potential synergies. The district plans are legally binding, cover the entire usable land in a munic- Municipalities face official time limits In addition, the strictly local planning ipality and are periodically reviewed to for making a decision—20 working days sometimes results in conflicts of interest ensure that they reflect the changing ur- for simple cases and 4 months for more between residents and developers.19 In ban needs. Each district plan is approved complex cases that involve public hear- some municipalities residents are block- through a participatory process in which ings. According to Doing Business data, ing further construction in order to keep the district council holds public hearings most complex cases are processed in 100 prices on the existing housing stock high. to allow residents to submit objections days. or suggestions. Once the residents’ com- ments have been processed, the plan be- Thus there are 3 main factors behind comes “operative”—as a statutory doc- the efficient processing of construction SWIFT DECISIONS THROUGH ument that regulates land development permits in New Zealand. First, there are COMPREHENSIVE PLANNING activities for the entire municipality.21 clearly defined steps for modifying a Spatial planning is a set of complex pro- zoning plan (that is, obtaining a resource cesses with far-reaching social, economic This means that all municipalities in New consent), requiring different levels of and demographic consequences. Econ- Zealand have a detailed, up-to-date zon- review depending on the complexity of omies around the world, developed and ing plan in place that has been approved the project. Second, there are objective 40 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS criteria for municipalities to use in mak- The case of Singapore helps to create a coordinated, long-term ing a decision to approve or reject a con- Singapore offers one of the best examples strategy for urban development that struction proposal—the assessment of of efficient streamlining of construction in turn results in efficient implementa- environmental effects and the written permitting globally. The entire process tion of planning and zoning activities. In consent from affected parties. And third, is completed online, and city authorities contrast, the locally focused and proj- there are official time limits for complet- face strict time limits in making decisions. ect-based planning practices in Sweden ing each procedure related to obtaining a The efficiency of the process is enhanced result in potentially redundant transac- resource consent (zoning modification) by the use of “qualified profession- tions, because the necessary coordina- or construction permit. als”—third-party professionals with offi- tion is done separately for each project cial certification and authorization to re- rather than through a comprehensive All this is in contrast with the situation in view construction plans and drawings. In planning solution. Sweden. Sweden has no clearly defined cases when project proposals are submit- and consistently applied sequence of ted by qualified professionals, construc- procedures for dealing with detailed plan- tion plans can be approved immediately. ning; instead, different municipalities ap- CONCLUSION ply different processes and timelines for All this is possible because Singapore has In Sweden, obtaining administrative ap- approving detailed development plans. in place both strategic and operational provals for construction is a long and Nor are there preexisting, objective cri- plans covering the entire city and outlining tedious process, especially for relatively teria for approving or rejecting a detailed detailed planning requirements both for complex structures such as multi-story development plan; instead, the process is current development and for the city’s fu- apartment and office buildings. Part of based on negotiation between municipal ture development vision. Despite the big the reason is that zoning and planning authorities, the developer and affected differences between Singapore and Swed- processes are directly linked to con- parties. And there are no official time ish cities in land constraints, governance struction permitting—because detailed limits for making decisions on a detailed and historical background, Singapore’s development plans are issued or re- development plan, though once the plan efficiency in processing construction per- viewed every time a developer applies is confirmed there is a 10-week time limit mits and dealing with zoning issues offers for a construction permit. This greatly for issuing a building permit. potential lessons for Sweden. complicates the construction permitting process. New Zealand also has a more efficient Singapore uses 2 main documents for process for appealing a municipal coun- planning—the concept plan and the There are several possible options for im- cil’s decision on construction permitting. master plan. The concept plan is a stra- proving the efficiency of construction per- An appeal usually involves 2 phases. tegic document for urban development mitting. First, Sweden could separate the First, the objecting party has the right to that takes a forward-looking perspective, planning and zoning process from con- present his or her case to the municipal strategically allocating land and water struction permitting, as many developed council within 15 business days after the resources on the basis of current needs countries have done, including New Zea- council issues its decision. Second, if the as well as demographic and economic land and Singapore. In both these coun- council does not revise its initial decision, trends projected over the next several de- tries the development of comprehen- the case can be appealed in environmen- cades. Concept planning in Singapore is a sive planning documents for the entire tal courts, which usually require about 6 well-coordinated and integrated process in municipality or city means that a detailed months to process the case. Thus even for which all government agencies involved in plan is already in place when a construc- the most complex cases—those that in- social, economic, environmental and infra- tion company applies for a construction volve zoning changes and are appealed in structure development come together to permit, greatly reducing the time required court—the entire process takes less than resolve competing needs and tradeoffs.23 for the permitting process. 10 months. By contrast, in Sweden it can Once the strategic concept plan is ap- take more than 5 years (3–4 years for the proved and ratified, the more detailed, Second, Sweden could consider increas- detailed development plan and 2–3 years lower-level planning therefore becomes ing the efficiency of the appeal process or more for the appeal). less contentious and easier to implement. for construction projects and detailed development plans, which now can take New Zealand’s efficiency in handling This lower level of planning is done 3 years or more. Separating the planning appeals of construction permitting and through the master plan, a more oper- and permitting processes might im- zoning decisions is due in part to the exis- ational and detailed document used in prove the efficiency of the appeal pro- tence of specialized environmental courts everyday building and planning activities. cess somewhat, though further stream- responsible for the process. In addition, in The master plan follows the strategic lining could be considered as a way to most cases municipal councils base their guidelines of the concept plan and is peri- reduce the time required to go through permitting decisions on the assessment odically updated to reflect revisions in the the process. of environmental effects, which is usual- concept plan. ly prepared by a third-party expert and Third, Sweden could improve the coordi- therefore less likely to be appealed as dis- The cooperation between agencies in nation of urban planning between munic- cretionary or biased. designing the concept and master plans ipalities and counties. This might improve URBAN PLANNING AND CONSTRUCTION PERMITTING 41 efficiency in spatial planning and zoning 12. Hentilä and Soudunsaari 2008. through synergies in sharing resources 13. In-depth interview with an expert in the and expertise and in settling conflicts. NOTES Stockholm Planning Department conducted This chapter has been written by Anushavan by the Doing Business team on December 5, Today the coordination between munici- Hambardzumyan with the assistance of 2013; Hüfner and Lundsgaard 2007. palities takes place case by case for every Marie-Lily Delion. 14. City of Stockholm, “Planprocessen,” http:/ / project, resulting in redundant transac- www.stockholm.se/TrafikStadsplanering tions during zoning and appeal process- 1. Andrews, Caldera Sánchez and Johansson /Stadsutveckling/Stadsplanering es. Better planning coordination could 2011, p. 2. /Planprocessen/. eliminate these redundant transactions. 2. Stockholm County Council, Office of Re- 15. In-depth interview with an expert in the It could also reduce conflicting zoning gional Planning 2010. Stockholm Planning Department conducted claims by helping to resolve competing 3. European Commission 2013a. by the Doing Business team on December economic interests between municipal- 4. Busck and others 2008. 5, 2013. ities before they are ratified in detailed 5. Eurostat data. 16. McKinsey Global Institute 2006. 6. Swedish National Board of Housing, Build- 17. “Swedish House Building Reminiscent of development plans. ing and Planning 2013a. East Germany,” Eurotopics.net, August 29, 7. Statistics Sweden, data on building permits 2012, http://www.eurotopics.net/en/home Finally, Sweden could seek to establish for new construction, dwellings in residen- /presseschau/archiv/results/archiv_article a better balance between the rights of tial buildings and buildings for seasonal and /ARTICLE110348-Swedish-house- residents and those of developers. As a secondary use by region and type of building, building-reminiscent-of-East-Germany. recent study suggests, creating a more quarterly 1996K1–2013K3, http://www 18. Mäntysalo, Saglie and Cars 2011. “level playing field between those want- .ssd.scb.se/databaser/makro/MainTable 19. Hüfner and Lundsgaard 2007. ing to develop land and those wanting to .asp?yp=tansss&xu=C9233001 20. Mäntysalo, Saglie and Cars 2011. leave it unchanged” could lead to more &omradekod=BO&omradetext=Housing 21. New Zealand, Ministry of Environment, “An construction activity.24 Among the rec- %2C+construction+and Everyday Guide to the Resource Manage- +building&lang=2&langdb=2. ment Act Series 1.1: Getting in on the Act,” ommendations for doing so, the most 8. European Commission 2013a. http://www.mfe.govt.nz/publications/rma notable ones proposed by recent re- 9. Swedish National Board of Housing, Build- /everyday/overview/. search include setting up an independent ing and Planning 2013b. 22. New Zealand, Ministry of Environment 2008. planning commission and giving devel- 10. Hedin and others 2011. 23. Yuen 2012. opers the right to challenge municipali- 11. In-depth interview with an expert in the Stock- 24. Hüfner and Lundsgaard 2007, p. 39. ties’ decisions on detailed development holm Planning Department conducted by the 25. Mäntysalo, Saglie and Cars 2011; Hüfner plans in court.25 Doing Business team on December 5, 2013. and Lundsgaard 2007. Regulation for firms’ access to finance Without access to finance, aspiring entre- show some variation. Its lowest ranking preneurs and small businesses struggle is on the ease of getting credit (42nd to get their ideas and products into the among 189  economies)—and its high- market—and to expand their operations est is on the ease of resolving insolven- once they get them launched. Sweden cy (20th). Its rankings on the ease of has a relatively high start-up rate among registering property and the strength of • Sweden’s regulatory environment OECD high-income economies, but only investor protections are 38th and 34th, for credit markets is among the 25% of its new businesses grow to more respectively. 3 most conducive to private sector than 50 employees. By contrast, 48% do borrowing. But Sweden could in Finland, and 38% in Norway—both This chapter compares Sweden’s perfor- do more to support access to countries where firms have better access mance as measured by Doing Business in finance for small and medium-size to finance.1 these 4  areas with the average for oth- enterprises. er Nordic economies (referred to as the • Broadening the scope of credit The World Bank Group’s Doing Business Nordic average), for OECD high-income information and extending the project measures 4  areas of regulation economies and for G7  economies—as period over which credit bureaus affecting access to finance for small well as with the performance of indi- make historical credit information and medium-size businesses—through vidual economies in these groups. The available for distribution could make its indicators on getting credit, register- contrasts highlight relative strengths and it easier for both individuals and weaknesses as well as opportunities for small businesses to gain access to ing property, protecting investors and improving access to finance. credit. resolving insolvency. These indicators • Unifying Sweden’s fragmented legal assess the extent to which an econ- framework for secured lending omy’s credit information system and could strengthen the legal rights of collateral and bankruptcy laws support transparency and efficiency in lending, GETTING CREDIT borrowers and lenders, supporting greater efficiency in lending. increasing the chances that business- More effective credit information sys- • Sweden is generally protective es can access credit. They measure tems and collateral registries and stron- of minority investor rights. But it the efficiency of systems for register- ger legal rights of borrowers and lenders could strengthen these protections ing property transfers—systems that increase firms’ access to finance and by making it easier for minority create secure property rights and thus bank lending.4 Mandatory credit report- shareholders to hold directors liable facilitate transactions in assets and en- ing improves financial intermediation and for harming their company through able their use as collateral.2 The indi- access to finance.5 And the sharing of self-dealing and to recover the ill- cators measure legal safeguards of the information among creditors reduces the gotten profits. rights of minority shareholders against probability of financial crisis and increas- • Completing the insolvency process self-dealing by directors and majority es growth.6 takes longer and costs more in shareholders—safeguards that encour- Sweden than in many other high- age investment in firms. And they eval- Doing Business uses 2  main indicators to income economies. Eliminating uate the extent to which bankruptcy measure these aspects of the credit sys- duplicate or unnecessary steps and laws reduce financial risk for firms and tem and assess the ease of getting credit setting reasonable deadlines that creditors by helping insolvent but viable for individuals and firms.7 The depth of are adhered to in practice could firms continue their operations and en- credit information index captures the shorten the duration of insolvency abling creditors to recover a higher share extent to which rules and practices al- proceedings, help lower the cost and of their loans. low effective credit reporting about bor- increase the recovery rate. rowers. The strength of legal rights index How does Sweden perform on these measures the extent to which the legal Doing Business indicators? The coun- framework supports the rights of secured try’s rankings in the 4 areas measured creditors in the event of default. Rankings 44 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS on the ease of getting credit are based on On this indicator Sweden ranked number Perhaps more informative than the rank- the sum of the 2 indexes. 1 in 2011. Its 2013  Doing Business ranking ing on the ease of getting credit are the on the ease of getting credit, which focus- scores on the underlying measures. On Doing Business is not the only source of es on credit reporting and the legal rights the depth of credit information index rankings in this area. The Fraser Institute’s of borrowers and lenders, is 42nd among Sweden has a score of 4 out of 6, lower Economic Freedom of the World project 189 economies.9 Sweden’s ranking on the than the G7, OECD high-income and Nor- computes an indicator on regulation of ease of getting credit, while higher than dic averages (figure 5.1). On the strength credit markets using 3 macroeconomic in- the Nordic and OECD high-income aver- of legal rights index Sweden’s score is dicators: the share of total deposits in pri- ages, is below the average G7 ranking as 8 out of 10. This score is higher than the vate banks, the fiscal deficit as a share of well as the rankings of the United King- Nordic, G7 and OECD high-income aver- gross savings, and interest rate controls.8 dom, the United States and Denmark. ages, though lower than the scores of the FIGURE 5.1 Sweden performs comparatively better on legal rights than on credit information sharing Depth of credit information index (0–6) Strength of legal rights index (0–10) Austria 6.0 Australia 10.0 Canada 6.0 New Zealand 10.0 Germany 6.0 United Kingdom 10.0 Japan 6.0 Denmark 9.0 Korea, Rep. 6.0 Ireland 9.0 Poland 6.0 Israel 9.0 United Kingdom 6.0 Poland 9.0 United States 6.0 United States 9.0 G7 average 5.6 Finland 8.0 Australia 5.0 Korea, Rep. 8.0 Chile 5.0 Slovak Republic 8.0 Czech Republic 5.0 Sweden 8.0 Estonia 5.0 Switzerland 8.0 Greece 5.0 Nordic average 7.5 Iceland 5.0 G7 average 7.1 Ireland 5.0 Austria 7.0 Israel 5.0 Canada 7.0 Italy 5.0 Estonia 7.0 Netherlands 5.0 France 7.0 New Zealand 5.0 Germany 7.0 Portugal 5.0 Iceland 7.0 Spain 5.0 Japan 7.0 Switzerland 5.0 OECD high-income 7.0 OECD high-income 4.8 Belgium 6.0 Nordic average 4.3 Chile 6.0 Belgium 4.0 Czech Republic 6.0 Denmark 4.0 Norway 6.0 Finland 4.0 Spain 6.0 France 4.0 Netherlands 5.0 Norway 4.0 Greece 4.0 Slovak Republic 4.0 Luxembourg 4.0 Slovenia 4.0 Slovenia 4.0 Sweden 4.0 Italy 3.0 Luxembourg 0 Portugal 3.0 2 4 6 2 4 6 8 10 Note: Nordic average excludes Sweden. OECD high-income refers to the average of 31 OECD high-income economies. Higher values indicate better credit information and stronger legal rights of borrowers and lenders. Source: World Bank Group, Doing Business database, 2013 edition. REGULATION FOR FIRMS’ ACCESS TO FINANCE 45 United Kingdom, Denmark and the Unit- security transfer of ownership). But rules correctly assess and collect taxes. It also ed States. for publicizing security interests and de- improves their ability to map the different termining the priority of creditors’ claims needs in their cities and strategically plan One important factor affecting Sweden’s vary depending on the type of security the provision of services and infrastruc- score on the depth of credit information instrument used. For some types, registra- ture in the areas of each city where they index is that the country’s largest cred- tion of the security interest is necessary to are most needed. it bureau (UC) collects and distributes establish the secured lender’s priority over credit information only from financial in- the collateral; for others, possession of the To assess the efficiency of property reg- stitutions. In 19 other OECD high-income collateral is enough. istration systems in each economy, Doing economies—including Canada, Denmark, Business records every procedure neces- Germany, New Zealand, the United King- The use of different publicity and priority sary for a business to purchase a property dom and the United States—credit bu- rules undermines predictability and trans- in the main business city and transfer the reaus also include data from retailers and parency in secured lending—by making it title to the buyer’s name. For each proce- utilities in credit reports. Doing so is an difficult for secured creditors to deter- dure, it also measures the time (in days) effective way of expanding coverage by mine whether there are existing rights to and cost (as a percentage of the property credit registries and bureaus. Collecting collateral and creating uncertainty about value). The ranking on the ease of regis- and distributing information on the pay- which priority rules apply to competing tering property is the simple average of ment of electricity and phone bills, for ex- claims. The fragmentation of the legal the percentile rankings on its 3  compo- ample, can help establish good credit his- framework also limits the collateral op- nents: procedures, time and cost.14 tories for people without previous bank tions of borrowers, by disallowing the use loans or credit cards. of some security instruments for specif- Among 189 economies around the world, ic types of assets or limiting their use to Sweden ranks 38th on the ease of register- Distributing historical information also only part of a business. ing property. Among OECD high-income helps expand coverage. In Sweden the economies it ranks 14th—lower than all largest credit bureau preserves histori- Countries such as New Zealand and the other Nordic economies, 2  G7  econo- cal information and makes it available for United States have solved this issue by mies (the United States and Italy) and distribution for 1  year. In 24  other OECD taking an integrated and functional ap- the 2 OECD high-income economies with high-income economies—including Cana- proach to the legal framework for secured the best performance, New Zealand and da, Finland, Germany, New Zealand, Nor- lending. These countries apply the same Denmark.15 way, the United Kingdom and the United publicity and priority rules to all types of States—the largest credit bureau distrib- security instruments, limiting the possi- Sweden ranks among the top economies utes more than 2 years of historical data, bility for secret liens on the movable as- on the number of procedures: it requires including information on repaid defaults.10 sets of a potential borrower.11 only 1, an interaction with the land reg- istry (figure 5.2). This is half as many as Beyond the features of credit reporting For Sweden, implementing this type of were required before 2010, when Sweden systems measured by Doing Business, modern legal framework for secured eliminated the need for clearance of pre- other prominent ones include the devel- lending would require a legislative review emption rights by the municipality.16 Reg- opment of online platforms to retrieve and consolidation of the existing security istering property takes longer in Sweden, data and the provision of additional val- instruments. It would also require reform at 28  days, than in almost any other ue added services. In Sweden financial of the country’s collateral registries. So far, OECD high-income economy, however. institutions can access credit bureaus’ Sweden’s only reform recorded by Doing The Nordic average is only 6 days. But the online platforms (such as UC’s site at Business in this area was its amendment time measure for Sweden should improve: https:/ /www.uc.se/) to retrieve and ex- of the Rights of Priority Act in 2009, to over the past 2 years the land registry has change credit information. Additional give priority to secured creditors’ claims been introducing a new information tech- services—such as fraud detection, debt in cases of default outside bankruptcy. nology system for registration of appli- collection, marketing services and credit cations. Full implementation is expected scoring—are not yet offered by the coun- in 2014. Meanwhile the land registry is try’s largest credit bureau. using the old system as well as the new REGISTERING PROPERTY one, leading to backlog and delay. Despite The main issue affecting Sweden’s score Registered property rights support in- the addition of more staff, processing ap- on the strength of legal rights index is the vestment, productivity and growth.12 Ev- plications is taking longer while the new fragmentation of its legal framework for idence from economies around the system is being implemented. secured lending (for example, collateral world suggests that property owners laws). Sweden does not have a unified law with registered titles are more likely to Over the long term, though, computer- that regulates secured lending as a whole. invest.13  They also have a better chance izing the property transfer process helps Case law has solved some of the legislative of getting credit when using their proper- reduce processing times and enhance weaknesses over the years through the in- ty as collateral. For governments, having efficiency. Going electronic also makes it troduction of security instruments (such reliable, up-to-date information in ca- easier to identify errors and overlapping as financial leasing, the floating charge and dastres and land registries is essential to titles, improving title security. Denmark 46 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS FIGURE 5.2 Registering property in Sweden requires only a single procedure—but it takes a month to complete Procedures to register Time to register Cost to register property property (number) property (days) (% of property value) Norway 1.0 New Zealand 1.0 Slovak Republic 0.0 Portugal 1.0 Portugal 1.0 New Zealand 0.1 Sweden 1.0 Netherlands 3.0 Switzerland 0.3 New Zealand 2.0 Norway 3.0 Estonia 0.5 Nordic average 2.5 Iceland 4.0 Denmark 0.6 Austria 3.0 Denmark 4.0 Chile 1.2 Czech Republic 3.0 Australia 5.0 Nordic average 2.4 Denmark 3.0 Nordic average 6.1 Iceland 2.4 Estonia 3.0 Korea, Rep. 9.0 Norway 2.5 Finland 3.0 United States 12.0 Ireland 2.6 Iceland 3.0 Spain 13.0 Canada 3.4 Slovak Republic 3.0 Japan 13.0 United States 3.4 Italy 4.0 Finland 14.0 Czech Republic 4.0 Switzerland 4.0 Italy 16.0 Finland 4.0 United States 4.0 Switzerland 16.0 Sweden 4.3 OECD high-income 4.7 Canada 17.0 OECD high-income - 4.4 Australia 5.0 Slovak Republic 17.0 Italy 4.4 Germany 5.0 Estonia 18.0 Austria 4.6 Ireland 5.0 Greece 20.0 United Kingdom 4.7 Netherlands 5.0 Austria 21.0 G7 average 4.8 Spain 5.0 United Kingdom 22.0 Australia 5.0 G7 average 5.6 Czech Republic 24.0 Korea, Rep. 5.1 Canada 6.0 G7 average 24.0 Germany 5.7 Chile 6.0 OECD high-income 24.0 Japan 5.8 Israel 6.0 Luxembourg 27.0 France 6.1 Japan 6.0 Sweden 28.0 Netherlands 6.1 United Kingdom 6.0 Chile 29.0 Spain 7.1 Korea, Rep. 7.0 Ireland 37.0 Israel 7.3 Luxembourg 7.0 Germany 40.0 Portugal 7.3 Belgium 8.0 France 49.0 Luxembourg 10.1 France 8.0 Belgium 64.0 Greece 11.7 Greece 11.0 Israel 81.0 Belgium 12.7 0 4 8 12 0 50 100 150 0 3 9 12 15 Note: Nordic average excludes Sweden. OECD high-income refers to the average of 31 OECD high-income economies. Source: World Bank Group, Doing Business database, 2013 edition. implemented an efficient and reliable time required to transfer property in Den- financial sector created a central hub electronic registration system over the mark from 42 days to only 4. allowing banks and the land registry to past 5  years. In 2009  the government share land registration data. started to modernize its land registry, The Danish system was designed to re- progressively digitizing its records—more spond to the needs of a range of stake- The cost to register property in Sweden, than 80  million documents. Once digiti- holders, from citizens to financial insti- at 4.3% of the property value, is also zation was complete, the land registry in- tutions. With online access to a single high relative to the Nordic average, at troduced electronic lodgment of property source of land registry information, citi- 2.4%. Sweden has the highest stamp transfers. By 2011 it was accepting prop- zens and businesses can transfer proper- duty rate among the Nordic economies. erty transfer applications only online. The ty on their own, with no need for a third In 2011 its stamp duty for corporate pur- information technology system allows party. They can also get information on chasers of real estate rose from 3% of rapid screening of all applications. Imple- any property. And to facilitate access to the property value to 4.25%. By com- mentation of the new system has cut the credit as well as information, the Danish parison, Iceland’s stamp duty is only REGULATION FOR FIRMS’ ACCESS TO FINANCE 47 0.4% of the official real estate valuation economic benefits for a country. But over damages in court; they can also demand (usually lower than the purchase price). the longer term such companies may also that liable directors return to the compa- In Denmark the entire cost to register pose higher risks of management en- ny any personal profit made from a trans- property is 0.6% of the property value. trenchment, lower managerial initiative action in which they had a conflict of in- In Norway it is 2.5% of the property val- and fewer incentives for research and de- terest if the transaction was found to have ue, and in Finland 4%. velopment (R&D) spending.22 harmed the company.25 Some economies have reduced the cost Sweden’s performance varies across the In addition, the Swedish Companies Act by moving from proportional fees to low protecting investors indicators. Its best 2005  imposes no obligation on direc- fixed fees. Poland made registering prop- performance is on the extent of disclo- tors to disclose any potential conflict of erty less costly by switching from variable sure index. Its score of 8 (out of 10) is interest to the rest of the board.26  Four- registration fees to a fixed fee schedule. the highest among the Nordic econo- teen other OECD high-income econ- All costs related to property transfers are mies and higher than the G7  and OECD omies—including Australia, Canada, also fixed in New Zealand and the Slovak high-income averages, pointing to strong France, Japan, New Zealand, the United Republic. ex ante safeguards to protect minority Kingdom and the United States—require shareholder interests. Sweden has a score detailed disclosure by directors of all ma- of 7  on the ease of shareholder suits in- terial facts relating to their potential inter- dex—above the OECD high-income and ests in proposed transactions.27 PROTECTING INVESTORS Nordic averages but below the G7  aver- In economies with stronger protections of age—showing that it offers above-aver- Moreover, in Sweden access to docu- minority investors in related-party trans- age access to evidence for minority share- mentary evidence and information from actions, market capitalization tends to be holder plaintiffs in civil jurisdictions. But defendants and witnesses is limited to higher and the concentration of corporate its score of only 4 on the extent of director information that directly proves specific ownership lower.17  Strong investor rights liability index, lower than the scores of the facts in the plaintiff’s claim.28 To increase also increase corporate risk taking and majority of OECD high-income econo- the likelihood that shareholders can ob- economic growth.18 mies, reflects a liability regime that tends tain incriminating evidence held by the to shelter company executives appointed company, such countries as Belgium and Through its protecting investors indi- or supported by majority stakeholders Germany allow shareholders to access cators, Doing Business measures the from court remedies initiated by minority any information that may lead to the strength of minority shareholder pro- shareholders (figure 5.3). discovery of relevant information when tections against directors’ misuse of attempting to compel evidence from the corporate assets for personal gain. The Thus while Sweden is generally protective opposing party or its witnesses. indicators measure 3 aspects of investor of minority investor rights, some aspects protections: approval and transparency of its regulation of related-party trans- of related-party transactions (extent of actions could be further strengthened. disclosure index), liability of company di- One relates to the level of evidence re- RESOLVING INSOLVENCY rectors for self-dealing (extent of director quired for shareholder plaintiffs to prevail Effective insolvency proceedings are im- liability index) and shareholders’ ability to in court: shareholders must show that a portant on several fronts. They enable obtain corporate documents before and director intentionally or through negli- insolvent but economically viable firms during derivative or direct shareholder lit- gence caused damage to the company to continue operating as a going con- igation (ease of shareholder suits index). when performing his or her duties.23  In cern, helping to sustain feasible econom- The ranking on the strength of investor New Zealand they need only show that ic activities and saving jobs.29 They help protection index is the simple average of there was a conflict of interest and that nonviable firms exit the market faster the percentile rankings on the 3  indexes the transaction led to unfair results, even and at minimal cost, speeding up the re- identified here. All range from 0  to 10, if nothing in the director’s conduct or de- allocation of resources. And they enable with higher values indicating stronger cision was found to be negligent.24 creditors to recover high shares of their protections.19 loans from insolvent firms, increasing the Even when plaintiffs win their case in availability of credit for other firms and for Sweden ranks 34th among 189  econo- Sweden, the only remedy available is entrepreneurs. mies on the strength of investor protec- compensation for damages caused by tions as measured by Doing Business.20 It directors found to be liable. There is no The Doing Business indicators on resolving has the 25th highest number of listed additional requirement for directors to insolvency measure the time, cost and firms worldwide, 15th highest stock give up any remaining profits gained from outcome of the most likely insolvency market turnover ratio and 13th highest the transaction causing damages. Nor is proceeding—foreclosure, receivership, market capitalization as a percentage there any possibility for shareholders to liquidation or reorganization—for a do- of GDP.21  Together, these data suggest request that the transaction be annulled mestic entity.30  The ranking on the ease an economy with a relatively high con- by the court. In such countries as Cana- of resolving insolvency is based on the re- centration of large companies. Having da, Israel, New Zealand and the United covery rate, which is recorded as cents on larger, more stable companies provides States shareholders can not only recover the dollar recouped by creditors through 48 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS FIGURE 5.3 Swedish regulation is generally protective of minority investor rights, but some aspects could be further strengthened Extent of disclosure Ease of shareholder Extent of director index (0–10) suits index (0–10) liability index (0–10) France 10.0 New Zealand 10.0 Canada 9.0 Ireland 10.0 Canada 9.0 Israel 9.0 New Zealand 10.0 Ireland 9.0 New Zealand 9.0 United Kingdom 10.0 Israel 9.0 Slovenia 9.0 Australia 8.0 Poland 9.0 United States 9.0 Belgium 8.0 United States 9.0 United Kingdom 7.0 Canada 8.0 Czech Republic 8.0 Belgium 6.0 Chile 8.0 Japan 8.0 Chile 6.0 Estonia 8.0 Slovenia 8.0 Ireland 6.0 Sweden 8.0 G7 average 7.1 Japan 6.0 G7 average 7.7 Australia 7.0 Norway 6.0 Denmark 7.0 Belgium 7.0 Spain 6.0 Greece 7.0 Denmark 7.0 G7 average 5.9 Iceland 7.0 Finland 7.0 OECD high-income 5.3 Israel 7.0 Italy 7.0 Austria 5.0 Italy 7.0 Korea, Rep. 7.0 Czech Republic 5.0 Japan 7.0 Norway 7.0 Denmark 5.0 Korea, Rep. 7.0 Portugal 7.0 Germany 5.0 Norway 7.0 Slovak Republic 7.0 Iceland 5.0 Poland 7.0 Sweden 7.0 Nordic average 5.0 United States 7.0 United Kingdom 7.0 Portugal 5.0 Nordic average 6.8 OECD high-income 6.8 Switzerland 5.0 OECD high-income 6.6 Nordic average 6.8 Finland 4.0 Finland 6.0 Estonia 6.0 Greece 4.0 Luxembourg 6.0 Iceland 6.0 Italy 4.0 Portugal 6.0 Netherlands 6.0 Korea, Rep. 4.0 Austria 5.0 Austria 5.0 Luxembourg 4.0 Germany 5.0 Chile 5.0 Netherlands 4.0 Slovenia 5.0 France 5.0 Slovak Republic 4.0 Spain 5.0 Germany 5.0 Sweden 4.0 Netherlands 4.0 Greece 5.0 Estonia 3.0 Slovak Republic 3.0 Spain 4.0 Australia 2.0 Czech Republic 2.0 Switzerland 4.0 Poland 2.0 Switzerland 0 Luxembourg 3.0 France 1.0 0 2 4 6 8 10 0 2 4 6 8 10 0 2 4 6 8 10 Note: Nordic average excludes Sweden. OECD high-income refers to the average of 31 OECD high-income economies. Higher values indicate stronger investor protections. Source: World Bank Group, Doing Business database, 2013 edition. the insolvency proceeding. The recovery average or the G7  average.32 In Sweden 5—Japan, Canada, the United Kingdom, rate is computed using the time and cost the most likely proceeding is liquidation, Germany and the United States—the pro- of the proceeding and such other factors and the most likely outcome for the insol- cess takes between 0.6 and 1.5 years (fig- as the lending rate and the likelihood of vent company is to continue operating as ure 5.4).33  The longest part of the pro- the company continuing to operate. The a going concern (which is better than the ceedings in Sweden is the litigation of type of proceeding usually determines other possible outcome, piecemeal sale creditors’ claims. its relative speed and cost, as well as the of its assets). most likely outcome.31 Sweden also has more costly insolven- To complete an insolvency proceed- cy proceedings than most other OECD Sweden ranks 20th on the ease of resolv- ing—and for creditors to recover loans— high-income economies. As measured by ing insolvency as measured by Doing Busi- takes 2 years in Sweden. This is much lon- Doing Business, the cost amounts to 9% of ness—higher than the OECD high-income ger than in all other Nordic economies the value of the debtor’s estate, with the average but lower than either the Nordic and in 5  of the G7  economies. In these largest share of it due to attorneys’ fees REGULATION FOR FIRMS’ ACCESS TO FINANCE 49 FIGURE 5.4 Compared with insolvency proceedings in many other OECD high-income economies, those in Sweden take longer, cost more and recover less for creditors Time to resolve insolvency Cost to resolve insolvency Recovery rate (years) (% of estate) (cents on the dollar) Ireland 0.4 Norway 1.0 Japan 92.8 Japan 0.6 Nordic average 3.0 Norway 91.3 Canada 0.8 Belgium 3.5 Finland 90.2 Norway 0.9 Finland 3.5 Netherlands 89.2 Finland 0.9 Iceland 3.5 Belgium 89.0 Belgium 0.9 Japan 3.5 United Kingdom 88.6 Nordic average 1.0 Korea, Rep. 3.5 Nordic average 88.3 United Kingdom 1.0 Netherlands 3.5 Ireland 87.6 Iceland 1.0 New Zealand 3.5 Canada 87.3 Denmark 1.0 Switzerland 3.5 Denmark 87.0 Australia 1.0 Denmark 4.0 Iceland 84.5 Austria 1.1 Slovenia 4.0 New Zealand 83.3 Netherlands 1.1 United Kingdom 6.0 Germany 82.9 Germany 1.2 Canada 7.0 Austria 82.4 G7 average 1.3 United States 7.0 Korea, Rep. 82.3 New Zealand 1.3 Australia 8.0 United States 81.5 United States 1.5 Germany 8.0 Australia 81.3 Spain 1.5 OECD high-income 8.8 G7 average 77.7 Korea, Rep. 1.5 G7 average 8.9 Sweden 75.5 OECD high-income 1.7 Estonia 9.0 Spain 72.3 Italy 1.8 France 9.0 Portugal 71.6 France 1.9 Greece 9.0 OECD high-income 70.6 Sweden 2.0 Ireland 9.0 Czech Republic 65.0 Slovenia 2.0 Portugal 9.0 Italy 62.7 Portugal 2.0 Sweden 9.0 Israel 60.6 Luxembourg 2.0 Austria 10.0 Poland 54.8 Israel 2.0 Spain 11.0 Slovak Republic 54.1 Czech Republic 2.1 Chile 14.5 Slovenia 50.1 Switzerland 3.0 Luxembourg 14.5 France 48.3 Poland 3.0 Poland 15.0 Switzerland 47.6 Estonia 3.0 Czech Republic 17.0 Luxembourg 43.5 Chile 3.2 Slovak Republic 18.0 Estonia 38.9 Greece 3.5 Italy 22.0 Greece 34.0 Slovak Republic 4.0 Israel 23.0 Chile 29.1 0 1 2 3 4 5 0 10 20 30 0 20 40 60 80 100 Note: Nordic average excludes Sweden. OECD high-income refers to the average of 31 OECD high-income economies. Source: World Bank Group, Doing Business database, 2013 edition. and payment of the administrator. In Fin- United Kingdom, Canada, Germany and Shortening the proceedings may also land, which ranks number 3 worldwide on the United States. help lower the cost. the ease of resolving insolvency, proceed- ings take 0.9 years and cost 3.5% of the Bankruptcy laws producing higher rates value of the estate. of recovery and faster insolvency pro- ceedings encourage more lending and CONCLUSION In Sweden secured creditors can expect increase access to finance for firms. Overall, Sweden’s regulatory environment to recover 75.5  cents on the dollar from Sweden might consider speeding up for credit markets is among the most an insolvent firm. This is higher than the insolvency proceedings by eliminat- conducive to private sector borrowing: it OECD high-income average (70.6) but ing duplicate or unnecessary steps and has one of the highest shares of total de- lower than in all other Nordic economies ensuring that the law sets reasonable posits in private banks, the lowest fiscal and in 5 of the G7 economies—Japan, the deadlines that are adhered to in practice. deficits as a share of gross savings and 50 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS no controls on interest rates. But Swe- improve once the land registry has fully are then normalized to range between 0 den could do more to support access to implemented its new system for register- and 100. See Napier and others (2012) for finance for small and medium-size enter- ing property transfer applications. more details. 2. Besley and Ghatak 2009. prises. It could increase the coverage of 3. For rankings of the Doing Business indica- credit information, clarify its legal frame- When directors of a company cause it tors, see http://www.doingbusiness.org/. work for secured lending, strengthen the harm through a related-party transaction, 4. Love, Martínez Pería and Singh 2013; Hasel- protection of minority shareholder rights, it can be difficult for minority sharehold- mann, Pistor and Vig 2010; Giannetti and and make the processes for both regis- ers to hold them liable in Sweden. Under Jentzsch 2013. tering property and resolving insolvency Swedish law, directors can be made lia- 5. Giannetti and Jentzsch 2013. speedier and less costly. ble only when they harmed the company 6. Houston and others 2010. intentionally or through negligence—and 7. The getting credit indicators are aimed at Broadening the coverage of credit in- then they need only pay compensation for providing information on whether the laws formation could make it easier for both the damages caused. Many other OECD are favorable to borrowers and lenders using movable assets as collateral, whether bank- individuals and small businesses to gain high-income economies—and all other ruptcy laws protect the rights of borrowers access to credit. One way to do so is to Nordic economies except Finland—make and lenders and whether lenders have have Sweden’s credit bureaus collect it easier to hold directors liable. Many sufficient information on entrepreneurs who and distribute information from retailers also apply harsher penalties. And unlike would like to borrow money. For more detail and utilities in addition to financial insti- Sweden, 14  other OECD high-income on the methodology of the indicators, see tutions, as those in many other OECD economies have laws obligating directors http://www.doingbusiness.org high-income economies do. Another is to to disclose potential conflicts of interest /methodology/getting-credit. extend the period over which credit bu- to the rest of the board, reducing their 8. Gwartney, Lawson and Hall 2013. reaus make historical credit information opportunities to cause harm in the first 9. See annex table A.1 for the rankings of available for distribution. While Sweden’s place. OECD high-income economies on the ease of getting credit. largest credit bureau retains informa- 10. See annex table A.2 for data showing which tion for only 1  year, those in more than When companies in Sweden run into fi- OECD high-income economies collect three-quarters of OECD high-income nancial difficulties and must go through credit information from utilities and retailers economies distribute more than 2  years insolvency, completing the process takes and which keep historical information for of historical data, including information longer and costs more than in many oth- more than 2 years. on repaid defaults. er high-income economies—and credi- 11. The United States was the first to tackle this tors recover smaller shares of their loans. type of issue, through the introduction of Unifying Sweden’s fragmented legal Litigation of creditors’ claims takes the article 9 of the Uniform Commercial Code in framework for secured lending could most time during the proceedings, and the 1950s. Other economies have done so strengthen the legal rights of borrow- attorneys’ fees and payment of the ad- since, including New Zealand in 2001 and Australia in 2012. ers and lenders, supporting greater ef- ministrator account for much of the high 12. Deininger 2003. ficiency in lending. While case law has cost. Eliminating duplicate or unnecessary 13. Dower and Potamites 2012. patched some of the legislative weak- steps and setting reasonable deadlines 14. For more detail on the methodology of the nesses, the use of different publicity and that are adhered to in practice could short- registering property indicators, see http priority rules for different types of secu- en the duration of insolvency proceedings. ://www.doingbusiness.org/methodology rity instruments creates uncertainty for This might also help lower the cost. /registering-property. secured lenders by opening possibilities 15. See annex table A.1 for the rankings of for competing claims to collateral. Ap- OECD high-income economies on the ease plying the same publicity and priority of registering property. rules to all types of security instruments, NOTES 16. Before 2010 the municipality of Stockholm had the possibility to buy any property that as countries such as New Zealand and This chapter has been written by Hulya Ulku was being transferred. In most cases the the United States do, would limit the with the assistance of Santiago Croci, Nan municipality would not use this preemption possibility for secret liens. (Charlotte) Jiang, Hervé Kaddoura, Olena Koltko right and would instead issue a certificate to and Frédéric Meunier. clear the property transfer. Registering property in Sweden costs 17. Djankov and others 2008. about 80% more than the Nordic aver- 1. Start-up rate is measured by new business 18. John, Litov and Yeung 2008. age as a share of the property value. This density, defined as newly registered limited 19. For more detail on the methodology of the is thanks to Sweden’s stamp duty rate, liability companies per 1,000 people ages protecting investors indicators, see http:/ / the highest in the region. Moving from 15–64. Data are from the World Bank’s www.doingbusiness.org/methodology World Development Indicators database, /protecting-investors. proportional fees to low fixed fees—as 2013 edition. Data on the growth of small 20. See annex table A.1 for the rankings of such countries as New Zealand, Poland enterprises and their access to finance are OECD high-income economies on the and the Slovak Republic have done— from Napier and others (2012). Access to fi- strength of investor protections. would make property registration less nance is measured based on debt financing, 21. World Bank, Financial Development and costly. The time to register property in venture capital and stock markets. Each Structure Database, 2010 edition. Sweden, now among the longest in the indicator is computed using several indica- 22. Shleifer and Vishny 1989; Brossard and OECD high-income group, is expected to tors from international data sources, which others 2013. REGULATION FOR FIRMS’ ACCESS TO FINANCE 51 23. Swedish Companies Act 2005, chapter 29, 28. Under chapters 36 and 38 of the Code of 33. Typical procedures for closing a business in sections 1 and 3. Judicial Procedure. Sweden are as follows: After a bank files the 24. New Zealand Companies Act of 1993, 29. Lilienfeld-Toal, Mookherjee and Visaria claim to commence liquidation proceed- sections 131, 133, 137, 139 and 141. 2012; Giné and Love 2010. ings, the court issues a decision declaring 25. In Canada, for example, section 241(3)(h) 30. For more detail on the methodology of the the debtor insolvent and appointing an of the Canadian Business Corporations Act resolving insolvency indicators, see http:// administrator (trustee). The debtor verifies gives courts the power to “set aside a trans- www.doingbusiness.org/methodology its inventory in court. The administrator action or contract to which a corporation is /resolving-insolvency. prepares a report on the debtor’s financials. a party.” 31. Foreclosure and receivership are generally Creditors submit proof of their claims, and 26. Swedish Companies Act 2005, chapter 8, faster and less costly procedures; however, any disputes about creditors’ claims are sections 23 and 34. they usually result in a piecemeal sale of litigated. No creditors’ meetings are held 27. In Australia section 191 of the Companies the underlying business. At the same time, during the proceedings, and the court is Act requires that interested directors give companies are more likely to continue not heavily involved. Assets are normally notice to the other directors. The notice operating at the end of liquidation and, sold through a tender; the administrator must give details of the nature and extent especially, reorganization proceedings, but advertises the sale, and potential buyers of the interest and the relationship of the these proceedings may take longer and be submit their bids. interest to the affairs of their company and more costly. must be sufficient to allow the board to un- 32. See annex table A.1 for the rankings of derstand the scope of the benefit and the OECD high-income economies on the ease potential profit to the interested director. of resolving insolvency. Regulation of foreign direct investment Many countries have removed the most Most international organizations and important regulatory barriers to foreign assessments recognize Sweden as a investment. But further reforms targeting favorable environment for investment. more nuanced regulatory issues may be a The country offers a competitive, largely key to staying at the forefront in attract- corruption-free economy with access to ing global foreign direct investment (FDI). new products, technologies, skills and in- • Sweden offers a favorable Drawing on the World Bank Group’s FDI novations.7  Low corporate tax levels, the environment for foreign investors Regulations project, this chapter looks at absence of a withholding tax on dividends and attracts large inflows of foreign 5 regulatory areas directly relevant to FDI, and a favorable holding company regime direct investment (FDI). comparing legal and regulatory practices make Sweden particularly attractive to • The country’s laws and practices in Sweden with those of other economies. foreign companies. Other positive fac- in the regulatory areas affecting It also identifies good practices in econ- tors include a well-educated labor force, FDI are mostly in line with best omies that have succeeded in attracting an outstanding telecommunications net- practices. large FDI inflows. work and a stable political environment.8 • The country is very open to foreign equity, though requirements to Research has shown that outside the ex- The Economist Intelligence Unit adds fur- obtain operating licenses in some tractive industries, factors important in ther detail, stating that “Sweden’s main sectors can be burdensome for attracting FDI include a large and grow- attraction as an investment location is investors. ing market, a well-educated labor force, its exceptional infrastructure, particu- • Foreign investors setting up a good infrastructure, trade openness, larly its facilities for research and devel- company in Sweden complete the and macroeconomic and political stabil- opment.”9  The World Economic Forum same few procedures as domestic investors do. But the process takes ity.1  Institutional and regulatory quality puts Sweden at number 4 in a ranking of a bit longer, and the minimum is also associated with higher FDI in- 144 countries on overall competitiveness capital requirement is higher, than flows.2 An efficient regime for arbitrating and productivity in its Global Competitive- in many other economies. commercial disputes and a low number ness Report 2012–2013  and has ranked it • Sweden’s laws, regulations and of procedures to start a foreign subsidi- among the top 5 for the past 10 years. institutions for alternative dispute ary are strongly associated with larger resolution follow—and indeed set FDI stocks.3 Moreover, in economies with Sweden also performs well on the United the trend for—international best less burdensome business and labor reg- Nations Conference on Trade and Devel- practices. Mediation could be ulations, FDI has a greater impact on eco- opment (UNCTAD) FDI Potential Index, further developed, however. nomic growth.4 which captures 4 key determinants of an • Laws on employing skilled economy’s attractiveness for foreign di- expatriates are transparent and A wide range of research has document- rect investors.10 Sweden ranks high in the generally follow best practices. But ed positive direct and indirect knowledge first quartile—alongside such countries obtaining a temporary work permit transfers to the host economy resulting as Australia, Austria, Belgium, Canada, takes much longer in Sweden from FDI.5 And numerous studies provide Chile, Finland, France, Germany and the than in other OECD high-income evidence that FDI has a positive impact United States—while most other Nordic economies. on growth.6  An overarching conclusion economies are found in the second quar- • Like most OECD high-income of these studies is that FDI contributes to tile (table 6.1). economies, Sweden maintains a growth when there is a good match be- fully open foreign exchange regime. tween the technology that foreign inves- tors use and the technology needs and learning capacity of the domestic firms TRENDS IN FDI INFLOWS AND they interact with—and when the invest- REGULATIONS IN SWEDEN ment climate is conducive to knowledge A range of data shows that Sweden is a transfer and innovation. strong destination for FDI. While it was 54 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS TABLE 6.1 OECD high-income economies by ranking on the UNCTAD FDI Potential Index First quartile (best) Second quartile Third quartile Fourth quartile (worst) Australia; Austria; Belgium; Canada; Chile; Czech Denmark; Estonia; Greece; Iceland; Ireland; Israel; Luxembourg Republic; Finland; France; Germany; Hungary; Italy; New Zealand; Norway; Portugal; Slovak Republic; Japan; Republic of Korea; Netherlands; Poland; Slovenia Spain; Sweden; Switzerland; United Kingdom; United States Source: UNCTAD 2012. heavily affected by the global financial the same industry as well as technology control over Swedish firms should be pre- crisis, FDI inflows for 2012  indicate that transfers.16 served to safeguard Swedish interests.”17 the country is well on its way to making a full recovery in attracting investment. A more liberal approach was introduced A shift in regulatory approach toward the end of the 1980s, when the Inward FDI in Sweden’s manufacturing Until the mid-1980s Sweden took a fair- government removed many of the obsta- sector seems to be dominated by mar- ly restrictive approach to FDI, governing cles to foreigners acquiring Swedish firms. ket-seeking FDI—investment attracted it through a complex system of laws and Sweden abolished its foreign exchange by the size of the domestic market and regulations. In 1973, possibly as a reac- controls and the rule restricting foreigners its potential for growth. Technologically tion to the increase in FDI inflows during to “restrictive shares” of Swedish corpora- advanced industries attract a large share the 1960s, new legislation restricted for- tions.18 It also eliminated the requirement of FDI, while natural resources, such as eign ownership of natural resources and for foreigners to get permission from the the country’s forestry industry, attract stated that other assets of national inter- authorities to acquire shares in Swedish relatively little.11 Foreign companies invest est—such as technical know-how, patents companies. This shift in approach, togeth- in Sweden’s manufacturing and services and trademarks—needed protection from er with a general trend of more interna- sectors in part because of the country’s foreign ownership. The law also declared tional mergers and acquisitions in most comparative advantage in capital-, hu- that acquisitions of “large” domestic firms industrial economies, led to greater for- man- and energy-intensive products and could be stopped, as well as acquisitions eign ownership in Swedish business sec- because of the appeal of industries of- of firms in industries that already had sig- tors. These changes are highly correlated fering assets in the form of well-known nificant foreign ownership. In 1982 a new with changes in FDI inflows.19 products and strong brand names.12 law made the acquisition of all companies with more than 10  employees or more Sweden’s entry into the European Union Local technological competencies are than 3.8  million Swedish kronor (SKr) in (EU) in 1995  also greatly improved the probably an important factor in attract- assets subject to review by the authori- investment climate and attracted foreign ing FDI in Sweden, since the operations ties. There was a general feeling that “the investors to the country (figures 6.1  and of the majority-owned foreign affiliates in the country are part of an asset-seeking strategy.13  While traditional cost factors continue to affect investment locations, FIGURE 6.1 Sweden saw a surge in FDI inflows following its entry into the European agglomeration forces—as measured by Union the physical and intellectual sophistica- tion in a country—are extremely import- 25 ant in attracting production to the Scan- dinavian countries.14 20 FDI inflows as % of GDP The inflow of foreign firms and owners seems to strengthen Sweden’s future 15 prospects rather than erode the basis for the competitiveness and attractiveness 10 of dynamic local sectors.15  The substan- tial increase in foreign ownership in Swe- 5 den in the 1990s led to greater relative demand for skilled labor in the country. 0 And the larger presence of foreign mul- 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 tinational enterprises in an industry ap- pears to increase the relative demand for skills in Swedish multinationals within Source: UNCTAD FDI/TNC database, 2013 edition, based on data from Statistics Sweden. REGULATION OF FOREIGN DIRECT INVESTMENT 55 6.2). In Sweden the globalization of cor- porate networks was reflected in a surge FIGURE 6.2 Comparative data highlight the big increase in FDI inflows in Sweden in 1998–2002 from 3,300  foreign-owned firms in the middle of the 1990s to 7,800 at the be- 12 ginning of the 2000s.20 FDI inflows as % of GDP, 5-year averages 10 Recent trends in FDI inflows 8 Sweden, like other EU countries, was heavily affected by the global financial 6 crisis. Swedish GDP contracted se- verely in 2009, rebounded in 2010 and 4 then continued to grow at a steady but moderate rate in 2011  amid the con- 2 tinuing euro zone crisis. FDI inflows to 0 Sweden were also severely affected by 1988–92 1993–97 1998–2002 2003–07 2008–12 the global economic downturn. Annual OECD high-income average Nordic average Sweden inflows during 2008–11  averaged SKr 97.6 billion (about US$14 billion), down Note: Nordic average excludes Sweden. from the precrisis (2005–07) average of Source: UNCTADstat database, 2013 edition. SKr 163.3  billion (about US$23  billion). Despite the recovery of the economy in 2010, FDI flows were slower to im- FIGURE 6.3 Sweden was among the top 20 recipients of FDI in 2012 prove, and the decline was so sharp that in 2010  divestment exceeded new in- vestment by almost SKr 9 billion (about United States China US$1.4  billion).21  Ernst & Young, in its Hong Kong SAR, China 2010  European Attractiveness Survey, re- British Virgin Islands ported that in 2009  Europe, hit by the Brazil United Kingdom downturn and its aftershocks, received Singapore a smaller amount of investment and Australia smaller FDI projects in fewer locations. Russian Federation Canada Sweden accounted for only 2% of the Chile total number of foreign investment proj- Ireland ects in Europe in 2009 (32% fewer deals Spain Luxembourg than in the previous year). The country India did not make it into the top 20 in the re- France port’s ranking of jobs created by foreign Indonesia Colombia investments into Europe.22 Kazakhstan Sweden Despite the drop in FDI inflows in 2009– 0 20 40 60 80 100 120 140 160 180 10, the stock of FDI in Sweden has been FDI inflows (US$ billions) steadily growing. In 2011  it amounted to 63% of GDP, putting Sweden in 8th place Source: UNCTAD 2013b. among OECD economies—after Luxem- bourg, Belgium, Ireland, Switzerland, Ice- land, Estonia and the Netherlands. The Patterns in origins and forms of Ownership of FDI assets in Sweden is OECD average in 2011 was about 29% of FDI dominated by companies registered in Eu- GDP.23 Foreign direct investments in OECD econ- rope, mainly in EU member states. While omies like Sweden have primarily taken the origin of FDI in Sweden fluctuates In 2012  Sweden ranked among the top the form of acquisitions, in which foreign greatly from year to year, the countries 20  host economies for FDI inflows in multinationals expand their network of with the most investment assets in Swe- absolute terms, according to UNCTAD’s production, sales, and research and de- den are the Netherlands, Luxembourg and World Investment Report 2013, ahead of velopment (R&D) units and locate them the United Kingdom, followed by Finland, all other Nordic economies (figure 6.3). as FDI firms across a set of countries.24 In Denmark, the United States and Norway.26 Among OECD high-income economies, Sweden about 50% of foreign-owned on a per capita basis, Sweden was the 6th firms are acquisitions, and 30% new es- Between 2002 and 2011 the EU-27 coun- largest recipient of FDI (figure 6.4). tablishments.25 tries’ share of the FDI assets in Sweden rose 56 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS industry (13%), the food industry (19%) FIGURE 6.4 Among OECD high-income economies, Sweden ranked 6th in FDI inflows per and others (6%). capita in 2012 Luxembourg 53,267 Ireland Norway THE FDI REGULATIONS Australia INDICATORS Iceland The World Bank Group’s FDI Regulations Sweden Hungary project offers one means of identifying Israel reform possibilities that countries could Canada pursue to stimulate further growth in Estonia FDI. The project measures and compares Czech Republic regulation of FDI across 105  economies, United Kingdom making it possible to benchmark econo- Portugal mies against one another and to identify Austria good practices.29 New Zealand Spain United States The standard definition of FDI is an in- 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 vestment in a foreign economy in which the investor has some management FDI inflows per capita (US$) control over the newly invested enter- prise.30  Such investment could include Source: UNCTADstat database, 2013 edition. new equity capital, reinvested earnings or intracompany loans, but does not include portfolio investment abroad or short- from just under 61% to almost 80% (figure manufacturing. In 2011  foreign compa- term foreign capital flows. The FDI Reg- 6.5). During the same period the U.S. share nies employed about 631,000  workers ulations case study approach focuses the fell from about 21% to around 7%, with the in Sweden. Foreign ownership in urban regulatory analysis on a particular type of decline between 2007 and 2010 due main- areas is dominated by Norway and EU FDI: wholly foreign-owned subsidiaries of ly to transfers and other changes in direct countries.28 international firms. The aim in doing so is investment loans. Asia’s direct investment to measure regulations affecting invest- assets in Sweden are still relatively small, Manufacturing accounts for almost half ments that are long term and engaged in at just over 1% of the total.27 the FDI assets in Sweden (figure 6.6). productive economic activities. Within manufacturing, the chemicals Foreign ownership in Sweden has in- and pharmaceuticals industry accounts The FDI Regulations indicators focus on creased rapidly in the past decade. For- for the largest share (38%), followed by legal and regulatory issues affecting for- eign-owned firms now employ almost engineering (23%), the wood and paper eign investors in 5 areas: 25% of the workforce in business and industrial sectors, mostly in services and • Investing across sectors—measuring restrictions on foreign equity owner- FIGURE 6.6 Among industries, ship in various manufacturing, ser- FIGURE 6.5 EU-27 countries accounted for manufacturing claimed the vices and natural resource sectors of the largest share of FDI assets largest share of FDI assets in the economy. in Sweden in 2011 Sweden in 2011 • Starting a foreign investment—measur- ing the regulatory regime and proce- Asia Central America Other Transport, storage, dural burden that foreign companies North America 1.4% 1.0% Construction industries communications 8.5% Other and property 5% 4% face when establishing a subsidiary regions 6% firm in a new market. 0.6% Other Other • Arbitrating and mediating disputes— European Insurance services 3% countries 7% measuring the legal regime for, and 8.8% implementation of, alternative dis- Other financial pute resolution (ADR) for interna- services tional and domestic commercial 8% disputes. Electricity, gas, heating and • Employing skilled expatriates—mea- water Trade in goods Manufacturing EU-27 10% 48% suring the rules and practices for ob- 79.8% 10% taining temporary work permits for Source: UNCTADstat database, 2013 edition. Source: Statistics Sweden 2012. foreign directors and specialist staff. REGULATION OF FOREIGN DIRECT INVESTMENT 57 • Converting and transferring curren- subsidiary, established as a limited liabil- of a one-stop shop and availability of a cy—measuring foreign exchange ity company in the manufacturing sector. fast-track option for temporary work per- restrictions on the inflow of foreign In addition, the indicators evaluate the mit applications, the portability of a tem- capital, the repatriation of investment characteristics of the regulatory and ad- porary work permit, the availability of an proceeds and other current transac- ministrative regimes for business start- appeal procedure, the possibility to obtain tions related to international business. up, such as foreign investment approval permanent residency or citizenship and requirements (nature of investment ap- the existence of a spousal work permit. All What the indicators measure proval requirement, possibility of appeal, these are elements that companies as well The investing across sectors indicators minimum required amount of investment, as skilled individuals take into account in identify legal restrictions on foreign eq- period of validity), the availability of on- their investment location decisions. uity holdings in new investment projects. line services (online laws, regulations, Such ownership restrictions usually spec- documents and registration) and mini- The converting and transferring currency ify the permissible maximum of foreign mum capital requirements. indicators measure foreign exchange re- equity participation, ranging from sectors strictions, with the goal of identifying reg- being either completely closed or com- The arbitrating and mediating disputes in- ulatory reforms that could improve this as- pletely open to foreign ownership. The in- dicators focus on alternative dispute res- pect of the investment climate for foreign dicators measure ownership restrictions olution—specific procedures for settling investors. The indicators focus on regu- on FDI across 32  sectors classified into disputes outside of court litigation, in- lations affecting 4  types of transactions: 12 sector groups and report on a scale of cluding commercial arbitration, mediation Receiving investment inflows—including 0 to 100 the degree of openness to FDI in and conciliation.32 The indicators identify whether controls exist on receiving in- each sector.31 economies that have adopted generally flows of foreign equity or foreign loans. accepted good practices, including con- Repatriating investments and income— Restrictions on foreign ownership limit solidated ADR laws, regulations following covering whether there are controls on and in some cases prohibit FDI in certain the United Nations Commission on Inter- repatriating liquidated investments or re- sectors. But abolishing foreign ownership national Trade Law (UNCITRAL) Model strictions on making dividend payments restrictions and having a completely open Law on International Commercial Arbi- or loan repayments abroad. Making pay- economy do not guarantee success in at- tration and laws encompassing substan- ments abroad—including whether there tracting more FDI; besides openness to tially all aspects of commercial mediation are restrictions on paying for imported foreign ownership, there are many other and conciliation.33 goods, paying for imported services, pay- determinants of FDI, including market size, ing for international travel and making infrastructure quality, cost factors, political The arbitrating and mediating disputes personal payments or transferring wages stability and economic growth, actual and indicators also identify where functional abroad. Holding foreign exchange—iden- potential. The main goal of the investing ADR institutions exist to ensure the effi- tifying whether export proceeds must be across sectors indicators is to help econ- cient conduct of arbitration proceedings, repatriated and surrendered and whether omies benchmark their policies against to enhance the likelihood that time limits a firm can hold foreign exchange bank ac- those of their peers and to use these com- assigned by the arbitration tribunal will counts at home and abroad. parisons to inform their policy decisions. be respected and to increase the certain- ty that the arbitral award will withstand The starting a foreign investment indicators the scrutiny of a domestic court. In par- How the data are collected build on the data on starting a business ticular, the indicators include data on the The data for the FDI Regulations indica- collected by the World Bank Group’s Do- strength of ADR laws and institutions; the tors are gathered through questionnaires ing Business project and look specifically ease of the arbitration process, before and administered to local legal and regula- at the process of establishing a wholly after arbitration proceedings are initiated; tory experts in each economy, including foreign-owned business. Establishing a and judicial assistance in recognizing and private lawyers and accountants working foreign-owned company often involves enforcing foreign arbitral awards (includ- with international firms and government 2  types of procedural steps: those re- ing the length of the usual recognition regulators in charge of implementing quired of both foreign and domestic and enforcement proceedings for such national law. To ensure that the data are companies (for example, company reg- awards).34 comparable across economies, the ques- istration) and those required only of for- tionnaires use a case study approach, ask- eign companies (for example, a foreign The employing skilled expatriates indicators ing respondents to provide information investment approval). The indicators measure the ease of hiring skilled expa- about the regulatory framework relating to cover both types, because both matter to triates. The indicators focus on elements a specified type of standard medium-size foreign companies seeking a new location that are generally agreed to contribute to foreign investor. The data are supplement- for their investment. streamlining a regime for temporary work ed by technical review of the national laws permit applications, making it faster and and regulations governing FDI. The data Based on case study assumptions, the more accessible, flexible and user-friend- thus comprise both a de jure review of the starting a foreign investment indicators ly. These elements include the possibility regulatory framework and a de facto per- measure the time and procedures re- to complete an application for a tempo- spective on how the laws and regulations quired to set up a wholly foreign-owned rary work permit online, the presence are implemented in practice. 58 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS For Sweden, the project gathered data As a result of these deregulation ef- of defense material (though these too from August to November 2013. For all forts, Sweden’s economy is among the are being eased),37 but the nonstrategic other economies included in the FDI Reg- most open to foreign equity ownership side of the defense industry is open to ulations database, the data were collected as measured by the investing across foreign investment. Notable examples in 2012. The FDI Regulations project team sectors indicators—both globally and of recent foreign investments are the is particularly grateful to the lawyers who among the OECD high-income econo- state’s sale of the distiller Vin och Sprit agreed to contribute to this project, on a mies included in the FDI Regulations da- to the French company Pernod Ricard in pro bono basis. Their names are listed in tabase (figure 6.7). March 2008  and the merger of Posten the acknowledgments section. with Danish Post in June 2008. The gov- ernment also encouraged the purchase While the FDI Regulations database in- Openness to foreign equity of Volvo Cars by the Chinese carmaker cludes 18 OECD high-income economies, ownership Geely and supported the acquisition Sweden is the only Nordic economy that The indicators show that in Sweden all of Saab by Spyker Cars (now called it currently includes.35 but one of the 32 sectors covered are fully Swedish Automobile) in early 2010. open to foreign capital participation. Like But the second deal ended in December other EU countries, Sweden imposes own- 2011  with Saab filing for bankruptcy. In ership restrictions in the international pas- early 2010  the government privatized INVESTING ACROSS SECTORS senger air transport sector, where foreign the pharmaceutical company Apoteket, Sweden made much progress in deregu- equity is limited to 49%. But this equity allowing for private retailing of pharma- lating its product markets in the 1990s, restriction applies only to investors from ceuticals.38 and the country’s markets are generally economies outside the European Econom- open and competitive. In a number of ic Area (that is, the EU member states plus The Nordic economies opened to foreign areas, including electricity and tele- Iceland, Liechtenstein and Norway). banks relatively recently, and Sweden was communications, Sweden has been on the last to liberalize its banking sector. It the leading edge of reform to increase Foreigners do not need permission or did so in 1985, and a number of foreign efficiency and lower prices. The coun- prior government approval to acquire banks entered at that time.39  Foreign try is far ahead of the European Union equity or voting rights in Swedish com- banks, insurance companies, brokerage in market deregulation, and it continues panies, and individual companies are firms and cooperative mortgage institu- to push the organization to accelerate not allowed to limit foreign equity. Some tions are permitted to establish branches the opening of markets in other member foreign ownership restrictions remain for in Sweden on equal terms with domestic countries.36 companies involved in the production firms, though permits are required. FIGURE 6.7 Sweden’s economy is among the most open to foreign equity ownership 100 90 Average equity restrictions (%) 80 70 60 50 40 30 20 10 0 Korea, Rep. France Netherlands Global average Greece Japan Canada Austria OECD high-income average Spain Australia Czech Republic Germany Ireland Italy Slovak Republic United Kingdom Sweden New Zealand United States Note: The equity restriction is calculated as an unweighted average of all foreign equity ownership indices across the 32 sectors covered. A value of 100% indicates that an economy is fully open to foreign equity ownership across all 32 sectors, and a lower value that limitations are imposed in one or more of them. The global average includes the 103 economies covered by the FDI Regulations data on investing across sectors, and the OECD high-income average all OECD high-income economies shown in the figure. Source: World Bank Group, FDI Regulations database, 2012 edition. REGULATION OF FOREIGN DIRECT INVESTMENT 59 Practical impediments prevent overconsumption and to reduce establishment process. Otherwise, inves- Despite Sweden’s openness to foreign eq- the profit motive for the sale of alcohol. tors go through the Swedish Companies uity ownership, practical impediments to They exist in all Nordic economies except Registration Office (Bolagsverket), and FDI remain. These include a fairly exten- mainland Denmark, as well as in Canada the process takes 16 days on average. For- sive (though nondiscriminatory) system (except the province of Alberta). eigners have the same rights as Swedes to of permits and authorizations needed to form and operate corporations, make in- engage in many activities. Another is the vestments and acquire shares. The prohi- dominance of a few very large players in bition on foreigners serving as board chairs STARTING A FOREIGN of Swedish companies ended when Swe- certain sectors, such as construction and INVESTMENT den joined the European Union in 1995. food wholesaling.40 In construction a tight web of regulations limits competition in all Governments around the world have stages of the building process. made changes to ease business start-up, In addition, foreign companies estab- helping domestic and foreign compa- lishing a subsidiary are not required to Foreigners seem to be particularly dis- nies alike avoid excessive administrative go through a local counsel or notary. couraged by licensing requirements, hurdles when setting up a business. A This is good because foreign companies restrictions on their own machines and study measuring restrictions on FDI in often prefer to deal with their own in- equipment (testing and certification re- the services sector finds that difficulty in house lawyers. Sweden is party to the quirements) and requirements to pay navigating the requirements involved in 1961  Hague Apostille Convention, which Swedish salaries, insurance and certain starting a foreign investment can have a facilitates the authentication of docu- union fees, even for foreign workers. critical impact on companies’ investment ments for foreign firms. These regulations apply to all companies, decisions.42  In almost every economy regardless of origin, and are not directed observed, establishing a local subsidiary against foreign companies. But the collec- of a foreign company takes longer and A bit of a wait at start-up tive effect of these regulations appears to requires more steps than establishing a While the equal treatment of foreign and have stifled the entry of foreign contrac- domestic enterprise. domestic firms is good practice, setting tors in Sweden.41 up a foreign limited liability company in In Sweden, however, domestic and foreign Sweden nevertheless takes slightly longer Finally, despite extensive deregulation, investors go through the same process (at 16  days) than the average for OECD foreign and domestic investors are still when setting up a business. The most high-income economies (14  days) as barred from the retail sale of alcohol- common way to establish a subsidiary measured by the FDI Regulations data- ic beverages. Government monopolies in Sweden is to buy a preregistered shell base. In some countries the process can over alcohol are typically driven by public company (one that has been set up but take as little as 3 days (New Zealand) or health considerations and are created to is not operating), which expedites the even 2 (Australia). FIGURE 6.8 Starting a foreign subsidiary takes longer in Sweden than the OECD high-income average 45 Time to set up a foreign subsidiary (days) 40 35 30 25 20 15 10 5 0 Korea, Rep. Austria New Zealand Netherlands Canada Italy United States Ireland France Greece United Kingdom OECD high-income average Sweden Germany Slovak Republic Czech Republic Japan Australia Global average Spain Note: The global average includes the 103 economies covered by the FDI Regulations data on starting a foreign investment, and the OECD high-income average all OECD high-income economies shown in the figure. Source: World Bank Group, FDI Regulations database, 2012 edition. 60 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS Sweden’s process is much faster than company must reside within the Europe- approved, electronic identification. the global average of 38  days. But the an Economic Area—unless Bolagsverket Those without electronic identification country could nevertheless work toward grants an exception. Under the Swedish can download the forms from the web- reducing the processing time to bring it Companies Act 2005, Bolagsverket may site and mail the signed and completed closer to the time in some of the best do so on the basis of a derogation ap- forms to the registration and tax author- performers (figure 6.8). For more about plication. Processing the application for ities.44 the process of starting a business in company registration may take longer if Sweden, see the chapter on business en- the application also includes a derogation try regulation. application.43 A continuing requirement for minimum capital In all, only 3  procedures are required to Sweden imposes a paid-in minimum capi- Procedures few and start a business in Sweden—just 1  more tal requirement on both domestic and for- straightforward than in some of the global best perform- eign investors. For a private limited liabil- The procedures required to start a for- ers, such as Australia, Canada and New ity company, as well as corporations, the eign subsidiary in Sweden are straight- Zealand (figure 6.9). minimum required capital is SKr 50,000 forward. Commercial banks are allowed (US$7,800); for a public limited liability to approve applications for capital trans- company the minimum required share fers into Sweden, though approval from Online services available capital is SKr 500,000 (US$78,000). Bolagsverket is also necessary to list One way to ensure speedier processes is The capital must be initially paid into an a new corporation. Bolagsverket must to put procedures online—and Sweden, account opened in a credit institution also approve the new company’s name, like most high-income economies, pro- based in the European Economic Area. ensuring that it is neither the same as, vides a wide range of online services for There is no minimum capital requirement nor too similar to, existing names. And it company registration. Bolagsverket, the for partnership and branch offices. must grant approval if more than half the Swedish Tax Agency (Skatteverket) and company’s board members (or its man- the Swedish Agency for Economic and Sweden’s minimum capital requirements aging director and his or her deputy) are Regional Growth (Tillvaxtverket) operate tend to be less of an impediment for for- not residents of the European Economic a joint website for company registration. eign companies (especially for large mul- Area. Using this website, people can register tinationals) than for domestic small and all types of companies allowed under medium-size enterprises. Even so, most Unlike in other high-income economies Swedish law and can file applications high-income economies have done away included in the FDI Regulations database, for the appropriate tax status with the with this requirement or reduced it to a in Sweden the founder of a limited liability tax authorities once they have obtained very small or symbolic amount. FIGURE 6.9 Sweden requires fewer procedures to start a foreign subsidiary than all but the best performers 16 Procedures to set up a foreign subsidiary 14 12 10 (number) 8 6 4 2 0 Korea, Rep. Australia Canada New Zealand Sweden Ireland Netherlands Italy United Kingdom OECD high-income average United States France Slovak Republic Global average Czech Republic Japan Austria Germany Greece Spain Note: The global average includes the 103 economies covered by the FDI Regulations data on starting a foreign investment, and the OECD high-income average all OECD high-income economies shown in the figure. Source: World Bank Group, FDI Regulations database, 2012 edition. REGULATION OF FOREIGN DIRECT INVESTMENT 61 ARBITRATING AND MEDIATING for waivers when the parties are not Good practices in proceedings and DISPUTES domiciled in Sweden, allowing them to enforcement waive, in writing, their rights to challenge Speed is one of the advantages of arbi- A good ADR regime is part of the overall the award for procedural irregularities tration over court litigation—the speed of attractiveness of the investment climate (Swedish parties cannot do so). It also arbitration proceedings means not only for foreign investors. When facing a dis- includes specific provisions on the taking a quick resolution of a dispute but also pute, foreign investors need to be able to of evidence and the choice of law for the lower costs for the parties. In Sweden rely on effective ADR regimes that pro- arbitration agreement, which gives the arbitration proceedings take 300  days vide the ability to tailor the dispute and parties more security in the proceedings. on average. This is in line with the av- ensure the necessary confidentiality.45 There is no particular restriction on the erage for OECD high-income econo- types of disputes that can be submitted mies—335  days. Some countries report Sweden has a long tradition of arbitra- to arbitration or the freedom of the par- shorter times, such as the Czech Republic tion. The practice goes back to the 14th ties to appoint their counsels and the ar- (158  days) and Spain (226). And some century, when it was established that bitrators. report longer times, including Canada disputes could be submitted to “entrust- (495) and the United Kingdom (431). ed persons.”46  The Swedish Arbitration Sweden is a party to major international Act of 1999 replaces the Arbitration Act conventions on arbitration. In 1972  the Sweden is generally viewed as a pro-en- of 1929  and the related Act on Foreign country acceded to the New York Con- forcement jurisdiction. As a general rule, Arbitration Agreements of 1929, which vention on the Recognition and En- foreign arbitral awards are recognized had remained unchanged for 65  years. forcement of Foreign Arbitral Awards, and enforced in Sweden.49 The procedure The 1999  law applies to both interna- 1958.47 And since 1965 it has been a par- for enforcement of a domestic award tional and domestic arbitration, which ty to the Convention on the Settlement of typically takes about 1–2  weeks, as long is considered good practice. While the Investment Disputes between States and as the opposing party raises no objec- law does not follow exactly the wording Nationals of Other States (ICSID Con- tions. The procedure for recognition of a of the UNCITRAL Model Law on Inter- vention), 1965.48 foreign award in the Svea Court of Ap- national Commercial Arbitration, many peal takes roughly 3  months, as long as of its provisions are identical or similar to In contrast with arbitration, mediation the opposing party raises no objections the model law’s. and conciliation are less developed than to the enforcement. If the Svea Court of they could be in Sweden. This could be Appeal approves an application for rec- The Swedish Arbitration Act has spe- an area of improvement. Both these prac- ognition and enforcement of a foreign cial provisions for foreign parties to dis- tices complement arbitration and can be award, the award is immediately en- putes. It triggers special considerations beneficial for the business environment. forceable. This gives Sweden one of the FIGURE 6.10 Sweden has among the fastest processes for enforcing foreign arbitral awards 900 Time to enforce a foreign arbitral award 800 700 600 500 (days) 400 300 200 100 0 Korea, Rep. Slovak Republic Canada Sweden Japan France Ireland Germany OECD high-income average Spain United States United Kingdom Netherlands Austria Czech Republic Greece Italy Global average Note: The global average includes the 100 economies covered by the FDI Regulations data on arbitrating and mediating disputes, and the OECD high-income average all OECD high-income economies shown in the figure. Source: World Bank Group, FDI Regulations database, 2012 edition. 62 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS fastest processes for enforcing foreign Stockholm Chamber of Commerce (SCC) predominant method of resolving com- arbitral awards—much faster than the are in line with best practices established mercial disputes. The use of institutional average for OECD high-income econo- at other major arbitration institutions. The or structural mediation or other forms of mies (around 10 months) and the global SCC has both a specialized arbitration and ADR remains fairly limited.52 average (around 2 years). In some OECD mediation institute and is one of the leading high-income economies included in the arbitration centers in the world. According The development of a formal mediation FDI Regulations database, the process to the SCC’s website, it registered 177 new practice faces some obstacles in Swe- can take as long as 16 months (Republic arbitration cases in 2012, among which a den. The implementation of the Europe- of Korea) or even 17 (Italy) (figure 6.10). majority (99 cases) were administered un- an Directive on Mediation (EU Directive der the SCC Arbitration Rules.50  The SCC 2008/52/EC) has led to the develop- How long recognition and enforcement also registered 63  expedited arbitrations, ment of a new Swedish law on media- proceedings take in a particular economy for which the proceedings are limited to tion, the Law on Mediation of Certain depends on such factors as the number 3 months from the time the case is referred Private Law Disputes (2011). But this law of steps required to execute the foreign to arbitration (also called fast-track arbi- does not cover formal conciliation pro- arbitral award. Among the economies tration). The SCC does not yet offer online ceedings as defined by the UNCITRAL included in the FDI Regulations database, arbitration services. Model Law. 70% require parties to apply for recog- nition of a foreign arbitral award prior to In this, the practice in Sweden is con- Conciliation differs from mediation in its enforcement before the competent sistent with the typical practice among that the conciliators usually have expert court. The recognition phase is the con- the OECD high-income economies in- knowledge of the domain in which they version of the arbitral award into a court cluded in the FDI Regulations database: conciliate and can make suggestions for judgment. In Sweden the recognition and most offer fast-track arbitration, but settlement terms and give advice on the enforcement happen together, speeding only half offer online arbitration ser- subject matter. Among the economies up the process. vices (table 6.2). included in the FDI Regulations database, 64% have laws providing for court refer- Other requirements may also add to the ral of cases to mediation or conciliation time required for enforcement of foreign Mediation and conciliation less in commercial disputes where court pro- arbitral awards. These include proving developed ceedings have been initiated. that the parties consented to arbitration Mediation, another common ADR mech- and providing evidence of the validity of anism, differs from arbitration in that it is In Colombia, for example, conciliation is the arbitration proceedings. Neither of a negotiated settlement between the par- a prerequisite of litigation in commer- these requirements apply in Sweden. ties, typically assisted by a third party (the cial, family and administrative law cases. mediator). Businesses around the world During commercial trials there is a spe- The proceedings in Sweden may take engage in mediation as an alternative to cial preliminary hearing for the purpose of considerably longer, however, if recog- litigation because it is cost-efficient and conciliation in which the judge acts as a nition and enforcement is disputed in fosters collaboration.51 Mediation generally conciliator. According to 2010–11  statis- court and before the execution authority. takes less time than litigation or arbitration, tics provided by the Colombian Minis- Ten years is the time limit under Swed- keeping the costs down for the parties. It try of Justice website, some 50% of the ish law for seeking enforcement of an also allows the parties to maintain greater cases referred to conciliation are settled, award; after that the courts will no lon- control over the outcome and is more likely highlighting the importance of such prac- ger enforce it. The grounds for refusal of to lead to a result agreeable to both. Thus tices.53 enforcement are based on the New York mediation is often seen as the best way to Convention and laid down in the Swed- maintain good commercial relationships ish Arbitration Act. while resolving disputes as they arise. EMPLOYING SKILLED EXPATRIATES Sweden has a long tradition of using Effective arbitration institutions mediation in some areas, such as in la- The ease of hiring skilled expatriates The arbitration rules and case manage- bor disputes and certain copyright dis- is among the factors that multination- ment of the Arbitration Institute of the putes. But arbitration has long been the als take into consideration in location TABLE 6.2 Availability of fast-track and online arbitration services in OECD high-income economies Fast-track and online arbitration Fast-track arbitration only Neither Canada; Czech Republic; France; Germany; Italy; Australia; Austria; Japan; Republic of Korea; New Greece; Ireland Netherlands; Spain; United Kingdom; United States Zealand; Slovak Republic; Sweden Source: World Bank Group, FDI Regulations database, 2012 edition. REGULATION OF FOREIGN DIRECT INVESTMENT 63 decisions.54  When they cannot obtain documents can be submitted online, the Swedish nationals with similar qualifi- the required expertise in the host coun- process can be monitored online, and no- cations. They must have advertised the try, they need skilled immigrants to start tifications are received online. The only job in Sweden and the European Union up new subsidiaries and train workers. Or missing element for a fully online process for at least 10 days and offered terms of they may need to deploy a skilled immi- is online receipt of confirmation. Most employment and salary on the same level grant with specific expertise from within OECD high-income economies includ- as under Swedish collective agreements the corporate group. Where skilled im- ed in the FDI Regulations database offer (a minimum monthly pretax salary of SKr migration regimes are overly restrictive some combination of these options. Only 13,000, roughly US$1,975). or cumbersome, the result can be long the Republic of Korea and the Nether- processing times for work permits. For lands allow the entire process—including Sweden offers neither a one-stop shop the foreign firms affected, this can mean monitoring and the receipt of confirma- nor a fast-track procedure for process- stalled productivity or the loss of strategic tion—to be completed online. ing temporary work permits. Having a or first-mover advantage in a field. And one-stop shop makes the process easier restrictions such as quotas may affect the Sweden has no skilled expatriates pro- for applicants by eliminating the need viability of new ventures, leading compa- gram. While having a special program for for them to coordinate the approvals and nies to invest in economies with less re- expedited processing of skilled labor is documents that are typically required strictive skilled immigration policies. not essential for effective management of from different authorities. While no guar- foreign workers, many countries have cre- antee of a speedy process, a one-stop Economies that have smart, fast-acting ated one. For example, Canada’s Federal shop typically also results in shorter waits. immigration regimes for skilled expa- Skilled Worker Program allows the coun- Many countries offer one, including Aus- triates have a competitive advantage in try to annually select the type of workers tralia, France, Germany and Singapore. A attracting FDI flows. A recent research most needed by the economy and most fast-track procedure is another option for paper provides evidence that a less re- likely to integrate in the labor market. accelerating the processing of temporary strictive skilled immigration regime Skilled expatriates programs like Cana- work permits: companies are often willing is conducive to attracting FDI.55  In a da’s often include a list of occupations to pay a premium for fast-tracking the 2010  report the McKinsey Global Insti- that would benefit from the program. process once they’ve identified the right tute concluded that “limits on the immi- candidate. This option is offered by few- gration of skilled workers handicap US Like most countries, Sweden imposes a er economies—only about 10% of those companies when competing abroad and labor market test to hire foreign workers, surveyed by the FDI Regulations data- in some cases discourage investment at though that test was relaxed in 2008. base, including Spain, the United King- home.”56 In addition, there is a consensus Such tests enable countries to determine dom and the United States. among experts that international migra- whether suitably qualified national work- tion can contribute to global economic ers are available, or could be easily trained In some economies the ability of a for- growth and development. Among hosting to do the work, and should be offered the eign-owned firm to hire an expatriate is (predominantly developed) economies, it employment rather than overseas tempo- sometimes conditional on its having a is widely acknowledged that skilled im- rary workers. Some labor market tests are minimum amount of capital investment migrants enhance their productivity and more stringent than others. In New Zea- or registered share capital. These require- competitiveness and contribute signifi- land, for example, the test is done by the ments limit investors’ ability to bring in cantly to their GDP.57 Department of Labor and involves seek- expatriates. Sweden does not impose ing advice from industry representatives such requirements. Nor does it apply Sweden’s application process for tempo- and government agencies to determine quotas on skilled foreign workers. But it rary work permits generally follows best skill shortages. In deciding an employer’s does require that at least half the mem- practices. Completing the process can case, the government also seeks evidence bers of a company’s board of directors be take much longer than in other OECD that the employer has made genuine at- residents of the European Economic Area, high-income economies, however. tempts to find New Zealand workers, unless the company obtains an individual such as by advertising or by using a re- exemption from Bolagsverket.59 If a com- cruiting company. pany has no authorized representative A legal framework in line with best who is resident in Sweden, the board of practices Sweden has phased out the agency-based directors is required to authorize a person The main laws applicable to temporary labor market test, making it easier to hire who is resident in the country to act as work permit applications in Sweden are foreign workers. The Swedish Public Em- agent for service of process on the com- the Aliens Act (2005), Aliens Ordinance ployment Services is no longer able to pany’s behalf (a special agent for service (2006) and the Posting of Workers Act argue that qualified labor is available in of process).60 (1999). All these laws are available on- Sweden, in other members of the Euro- line.58 pean Union or European Economic Area, Residency requirements like these, or in Switzerland. Instead, decisions though not uncommon, have been elim- Sweden’s application process for tempo- are based on employers’ own assess- inated by many economies. Only 16% of rary work permits is almost fully online: ments of their needs. Employers need economies around the world still have the application form is available online, only show that they have tried to recruit such requirements; among the OECD 64 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS high-income economies surveyed by the intended to force the Latvian company Positive practices in work permits FDI Regulations database, 27% still do. Laval un partneri to sign a Swedish col- and residency status One is Canada, which requires that at lective agreement for its workers.61  Such Time limits for work permits in Sweden least 25% of the members of a company’s conflicts led the government to make were extended in 2008. A temporary per- board be permanent Canadian residents. changes to the labor laws in 2009. Un- mit can be granted for the duration of the Ireland requires companies to have at der the amended law, unions may not employment, up to a maximum of 2 years. least one director who is a resident of the take action (such as a blockade) against If the person is still working after this, the European Economic Area. Japan requires foreign companies whose workers are in permit may be extended once or several that at least one representative director Sweden if those workers have wages and times, though the total permit period may live and be domiciled in Japan. And Sin- benefits that are at least equal to the min- not exceed 4 years. After 4 years a per- gapore requires that at least one director imum in Swedish collective agreements. manent residence permit can be granted. reside in the country. In addition, to help avoid problems that The examination of an application for an could lead to conflicts similar to that with extension of a work permit takes place in Laval, the Swedish Work Environment Sweden, and the applicant does not need Longer processing times Authority was appointed to serve as a to return home to apply for the extension. Any company bringing a foreign worker liaison between Swedish unions and for- The validity of temporary work permits is into Sweden must obtain a work permit. eign companies sending workers to Swe- linked to a single employer, a specific job The competent authority, the Migration den. The changes took effect on April 1, function and a specific industry but not to Board, examines whether the terms of 2010.62 a geographic area. employment (salary, insurance and other terms) are in accordance with the con- Processing times by the Migration Board After having had a temporary residence ditions that apply to employees already can vary greatly depending on a foreign- permit for 48  months, an employee can resident in Sweden and that have been er’s nationality and employer.63 According acquire permanent residency status established by collective agreements. to the data collected by the FDI Regula- through the Migration Board. A perma- While foreign companies may be asked to tions team, obtaining a temporary work nent residence permit remains valid as specify why a Swedish national cannot do permit can take up to 32  weeks for an long as the employee lives in Sweden. the job, authorities generally do not block information technology specialist (figure Obtaining permanent residency status permits for regular foreign workers. 6.11). The Migration Board website shows takes up to 10  months. Foreign workers a processing time of 11 months for online can also obtain citizenship, a process that Swedish unions were historically con- applications for a work permit.64  This is similarly takes up to 10 months. The path cerned about foreign workers entering much longer than the processing time in to citizenship is an important part of the the market, and some conflicts oc- other high-income economies. The av- package for foreign workers and is offered curred. In one well-known incident, union erage for OECD high-income economies by all the OECD high-income economies members staged a blockade at a school is 11.5 weeks, while the global average is covered by the FDI Regulations indicators building project in the town of Vaxholm, only 8 weeks. on employing skilled expatriates. FIGURE 6.11 Processing temporary work permits takes much longer in Sweden than in other OECD high-income economies 35 Time to process a temporary work 30 25 permit (weeks) 20 15 10 5 0 Korea, Rep. Ireland New Zealand Canada Australia Netherlands Spain Global average Germany Czech Republic France Japan OECD high-income average United States Italy Austria Slovak Republic United Kingdom Greece Sweden Note: The global average includes the 93 economies covered by the FDI Regulations data on employing skilled expatriates, and the OECD high-income average all OECD high-income economies shown in the figure. The data are based on the case study of an information technology specialist. Source: World Bank Group, FDI Regulations database, 2012 edition. REGULATION OF FOREIGN DIRECT INVESTMENT 65 In conjunction with a successful appli- Sweden, according to contributors to the the trend for—international best practic- cation for a work permit, the employee’s FDI Regulations database. Sweden main- es. However, the country could consider spouse and other family members can tains a fully open foreign exchange regime. further developing mediation and con- also obtain work permits. A spousal work As part of the country’s harmonization ciliation, which are less widely used than permit provides immediate access to with EU rules, the central bank (Sveriges arbitration but offer many benefits for Sweden’s labor market and is not tied to Riksbank) abolished virtually all exchange companies. a specific employer, job, industry or geo- controls in 1989 and eliminated the rest in graphic area. Sweden recognizes common 1994. There are no controls on FDI-related Laws on employing skilled expatriates law marriages as well as same-sex mar- capital flows, and investment-related are transparent and generally follow best riages in granting spousal work permits. payments may be made freely. And there practices. Obtaining a temporary work are no restrictions on making current pay- permit in Sweden takes much longer than Granting work permits to spouses is a ments in foreign exchange, other than a in other OECD high-income economies, positive practice that eases the immi- need for reporting related to anti-mon- however. gration process for families. But many ey-laundering or tax requirements. high-income economies do not offer this Like most OECD high-income economies, option. Among the OECD high-income Contributors to the FDI Regulations da- Sweden maintains a fully open foreign ex- economies surveyed, only Australia, Can- tabase note that the central bank has change regime. ada, New Zealand and the United King- the authority to request transaction in- dom join Sweden in doing so. formation for statistical purposes, which is done monthly for large firms. These reporting requirements are common in NOTES most economies. They are not viewed as This chapter has been written by Tanya Primiani CONVERTING AND cumbersome in Sweden and do not affect TRANSFERRING CURRENCY with the assistance of John Anderson, Tania a firm’s ability to do business there. Firms Ghossein, Sophie Pouget, Dieter De Smet and The foreign exchange regime that regu- may freely open foreign currency bank ac- Christian De la Medina Soto. lates currency conversion and transfers counts in Sweden or abroad, and there are of currency abroad is a crucial part of a no restrictions on export proceeds. 1. Hornberger, Battat and Kusek 2011. country’s investment climate for foreign 2. Daude and Stein 2007. investors. Firms undertaking foreign in- 3. Waglé 2011. vestment rely on the ability to bring in 4. Djankov and others 2002; Busse and foreign capital, freely convert local cur- CONCLUSION Groizard 2008; World Bank Group 2012; Lopez-Claros 2013. rency and foreign exchange and repatri- Sweden is an attractive destination for 5. Javorcik 2004, 2010; Smeets 2008; Moran, ate investment returns. Firms also rely FDI, and inflows are on the rise since Graham and Blomström 2005. on access to foreign exchange to pay for the financial crisis. The data collected in 6. Hansen and Rand 2006; Lim 2001; OECD imports, and the ability to use export pro- the FDI Regulations database confirm 2002. ceeds freely is an incentive to engage in that the regulatory framework in areas 7. Transparency International ranked Sweden international business. of interest to foreign investors is strong. as one of the most corruption-free countries Indeed, Sweden performs very well in all in the world in 2012, placing it 4th in its Perceptions of global business leaders 5 areas measured by the FDI Regulations ranking of 176 countries. confirm the importance of converting indicators. Alongside the good practices, 8. U.S. Department of State 2013. and transferring currency. In response however, are some areas of potential im- 9. Economist Intelligence Unit 2013, p. 4. It to a recent survey by the Multilateral provement: adds this about Sweden: “Its strong techno- Investment Guarantee Agency, 22% logical base, the close relationship between of senior executives from multination- The country is very open to foreign equity. academia and industry, a highly educated al firms investing in developing econo- But while the market is open, the require- workforce, a traditionally strong and stable mies identified political risk—including ments to obtain operating licenses in some economy and well-informed consumers and currency convertibility—as the greatest sectors can be burdensome for investors. suppliers also enhance Sweden’s attractions constraint to cross-border investment as a research and manufacturing base, particularly in high-technology, capital-in- in the next 3  years.65  Forty percent Sweden’s process for setting up a compa- tensive industries.” pointed to transfer and convertibility ny does not discriminate against foreign 10. The UNCTAD FDI Potential Index measures restrictions as the political risk that con- investors, and only a few procedures are FDI potential based on 4 FDI determinants cerned them the most. And nearly 30% required. But setting up a business in and proxy indicators: the attractiveness of of companies reported having with- Sweden takes a bit longer than in many the market (for market-seeking FDI), the drawn or canceled planned investments other economies. In addition, the country availability of low-cost labor and skills (to because of such restrictions in the pre- could consider eliminating (or reducing) capture efficiency-seeking FDI), the pres- vious 12 months. its minimum capital requirement. ence of natural resources (resource-seeking FDI) and the presence of FDI-enabling Foreign investors face no obstacles in Overall, Sweden’s ADR laws, regulations infrastructure. converting and transferring currency in and institutions follow—and indeed set 11. Modén 1998a. 66 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS 12. Karpaty and Poldahl 2007. and interest-focused process, facilitated by in combination with other ADR mecha- 13. Ivarsson and Jonsson 2003. one or more mediators, enabling the parties nisms, to resolve cross-border disputes 14. Kottaridi and Nielsen 2003. to agree on the resolution of their dispute (PricewaterhouseCoopers and Queen Mary through a mediation agreement. Concilia- University of London 2006). Commercial 15. Holm, Malmberg and Sölvell 2003. tion is a process in which the parties are as- arbitration is considered to provide a neutral 16. Bandick and Hansson 2009. sisted in their attempt to reach an amicable forum for the settlement of FDI-related 17. Bandick and Hansson 2009, p. 115. settlement of their dispute. disputes, which can often be sensitive, and 18. These allowed corporations to have rules in 33. Considered good practice for arbitration thus to limit the risks associated with FDI their bylaws stipulating that all or part of the laws, the UNICTRAL Model Law was (Schwartz 2009). shares in the company may not be acquired adopted by UNICTRAL on June 21, 1985. It 46. Nordenson and Öhrström 2013. by any person who is not a Swedish citizen. provides a pattern that national lawmakers 47. The Convention on the Recognition and En- 19. Modén 1998b. can adopt as part of domestic legislation on forcement of Foreign Arbitral Awards, also 20. Johansson and Lööf 2011. arbitration. known as the New York Convention, was 21. UNCTAD 2013a. 34. For more information, see Pouget (2013). adopted by a United Nations diplomatic 35. The 18 OECD high-income economies conference on June 10, 1958, and entered 22. Ernst & Young 2010. included are Australia, Austria, Canada, the into force on June 7, 1959. The convention 23. U.S. Department of State 2013. Czech Republic, France, Germany, Greece, requires courts of contracting states to give 24. Lipsey 2002. Ireland, Italy, Japan, the Republic of Korea, effect to private agreements to arbitrate and 25. U.S. Department of State 2013. the Netherlands, New Zealand, the Slovak to recognize and enforce arbitral awards 26. Statistics Sweden 2012. Republic, Spain, Sweden, the United King- made in other contracting states. Widely 27. Statistics Sweden 2012. dom and the United States. considered the foundational instrument 28. U.S. Department of State 2013. 36. Economist Intelligence Unit 2013. for international arbitration, it applies to 29. While the FDI Regulations project includes 37. Economist Intelligence Unit 2013. arbitration awards that are not considered 105 economies overall, some indicators 38. U.S. Department of State 2013. to be domestic awards in the state where cover fewer than 105 for reasons related to 39. Engwall and others 2001. recognition and enforcement is sought. data collection. The number of economies 40. U.S. Department of State 2013. 48. The International Centre for Settlement of covered by each indicator is noted in rele- 41. OECD 1993. Investment Disputes (ICSID) is an interna- vant figures in the chapter. 42. Golub and Ling 2006. tional arbitration institution that facilitates 30. A rule-of-thumb threshold is that a 10% 43. With respect to the founders of a limited arbitration and conciliation of legal disputes equity ownership in a foreign enterprise liability company in Sweden, chapter 2, between international investors. It is part of represents sufficient managerial control section 1 of the Swedish Companies Act the World Bank Group. to be counted as FDI (see for example the 2005 states that “a company is formed by 49. See section 53 of the Swedish Arbitration International Monetary Fund’s Balance of one or more founders. A founder must be: Act of 1999. Payments Manual and the UNCTAD classifi- (1) a natural person domiciled within the 50. http://www.sccinstitute.com/skiljedoms- cation of FDI). European Economic Area; (2) a Swedish regler-4.aspx. 31. The sector groups and sectors are (1) agri- legal person; or (3) a legal person which has 51. PricewaterhouseCoopers and Queen Mary culture and forestry; (2) mining and oil and been formed pursuant to the laws of a state University of London 2006. gas; (3) manufacturing (food processing, within the European Economic Area and 52. Lundblad 2012. manufacturing of basic chemicals and light which has its registered office, its head of- 53. National Conciliation Program, manufacturing); (4) electricity (electric fice or its principal place of business within http://conciliacion.gov.co. power generation, including biomass, solar the Area. A partnership or equivalent legal 54. Medina 2012. and wind; transmission; and distribution); person which has been formed pursuant 55. Medina 2012. (5) waste management and water supply to the laws of a state within the European 56. Cummings and others 2010, p. 6. (waste management and recycling and wa- Economic Area, may be a founder only 57. WEF 2010a. ter distribution); (6) transport (freight rail where each partner with unlimited liability 58. Government Offices of Sweden, “Public transport, freight transport by road, internal is domiciled within the Area. The Swedish Administration,” http://www.government waterways freight transport, international Companies Registration Office may, in a .se/sb/d/3288/a/19564; and “Labour Leg- passenger air transport, port operation and particular case, allow a person other than islation,” http://www.government.se courier activities); (7) telecoms (fixed-line as referred to in the first and second para- /sb/d/3288/a/19565. telecommunications infrastructure and graphs to be a founder.” 59. See chapter 8, section 9 of the Swedish services and wireless or mobile telecommu- 44. Economist Intelligence Unit 2013, p. 16. Companies Act 2005. nications infrastructure and services); (8) 45. ADR is now widely recognized as the 60. See chapter 8, section 40 of the Swedish media (newspaper publishing and television preferred dispute resolution mechanism Companies Act 2005. broadcasting); (9) financial services over litigation for many investors and en- 61. In the “Laval” decision, the court ruled that (banking, life insurance and health insur- trepreneurs (McLaughlin 1979). Even if no the blockade inhibited free movement of ance); (10) education (higher education); systematic evidence has been found about labor and was illegal under EU regulations. (11) accounting (accounting, bookkeeping the impact of ADR on FDI (Governance and 62. Economist Intelligence Unit 2013. and auditing services; tax consultancy); Social Development Resource Centre 2013), 63. Economist Intelligence Unit 2013. (12) tourism (accommodation services). authors recognize that to attract FDI, econ- 64. “Swedish Work Permit Application Waiting 32. Through commercial arbitration, the parties omies need to improve their ADR regimes Times,” http://www.migrationsverket.se agree to submit their dispute to an indepen- and allow flexible and faster dispute settle- /info/2272_en.html. dent and impartial arbitrator or arbitration ment. More than two-thirds of multinational 65. MIGA 2013. tribunal that issues a final and binding corporations prefer commercial arbitration arbitral award. Mediation is a structured over traditional litigation, either alone or Gender equality and economic opportunity for women While the intrinsic value of gender equal- in  2012, behind the Netherlands but ity is widely recognized and documented, ahead of Switzerland, Denmark, Norway a  growing body of literature focuses on and Germany.3 The World Bank Group’s its economic, or instrumental, value. The Women, Business and the Law indicators World Bank’s World Development Report support a  similar conclusion, showing 2012 presents gender equality both as that Sweden has fewer regulatory restric- • Swedish laws and regulations important in its own right and as “smart tions on women’s economic opportuni- concerning women’s economic economics” that could help achieve other ties than most of the 142 other economies participation on equal terms with development goals. The “smart econom- covered. Even so, Sweden could do more men are consistent with best ics” argument rests on  3 premises: Ad- to consolidate and deepen gender equali- practices. dressing gender inequality in education, ty, so as to reap the full benefits of greater • Sweden has higher participation economic opportunities and access to equality between men and women. of women in employment than inputs can generate productivity gains for several other Nordic economies as society as a  whole. Improving women’s Drawing on the Women, Business and the well as most OECD high-income absolute and relative status can lead to Law indicators, this chapter uses a com- economies and G7 economies. better outcomes in children’s education parative lens to explore some persisting • Despite a favorable legal and and health. And promoting women’s ac- obstacles to women’s full and fair par- regulatory environment in Sweden, cess to decision-making can foster more ticipation in the Swedish economy. The the gender gap in wages remains representative and more inclusive institu- chapter analyzes several characteristics higher than that in all other Nordic tions and policy choices.1 of women’s economic participation in economies except Finland, though it Sweden as well as in comparator econ- is close to the OECD average. omies—Nordic economies and selected • Occupational segregation, both Recent research has pointed to the po- OECD and G7 economies. horizontal and vertical, remains tential economic gains for high-income prevalent in Sweden as well as economies from promoting greater gen- in most developed economies. der equality. One study suggests that Research shows that this can raising women’s labor force participation rate to the same level as men’s would in- THE WOMEN, BUSINESS AND THE account for a significant share of crease output by 5% in the United States, LAW INDICATORS the gender gap in wages. • Gender differences in educational 9% in Japan and 12% in the United Arab The Women, Business and the Law project choices mirror the persistent Emirates.2 The same study suggests that examines laws and regulations that differ- distinction between female- and in aging economies, increasing women’s entiate between men and women in ways male-dominated sectors and participation in the labor force could mit- that may affect women’s opportunities translate into gender differences in igate the effects of a shrinking workforce. and incentives to work and actively par- career choices. In Japan, for example, raising women’s la- ticipate in economic activity. The indica- bor force participation rate to the average tors focus on 6 areas: for the G7 economies could increase the annual growth rate by about  0.25 per- • Accessing institutions—explores wom- centage points. en’s legal ability to interact with public authorities and the private sector in Sweden has made tremendous progress the same way as men. toward gender equality over the years. • Using property—analyzes women’s The United Nations Development Pro- ability to access and use property gramme (UNDP) places Sweden among based on their ability to own, manage, the countries with the least gender in- control and inherit it. equality, ranking it number 1 on its Gender • Going to court—considers the ease Inequality Index in  2010 and number  2 and affordability of accessing justice 68 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS by examining small claims courts as well as a woman’s ability to testify in court and the incidence of women on BOX 7.1 Components of the Women, Business and the Law measure constitutional courts. of legal differences • Getting a job—assesses restrictions on Differences between men and women of the same marital status women’s work, such as prohibitions on working at night or in certain indus- • Applying for a passport • Having ownership rights over tries. Data in this area also cover laws • Traveling outside the home property on work-related maternity, paternity • Traveling outside the country • Having inheritance rights over and parental benefits; retirement ages; • Getting a job or pursuing a trade property equal remuneration for work of equal or profession without permis- • Working the same night hours value; and nondiscrimination in hiring. sion • Doing the same jobs • Building credit—identifies minimum • Signing a contract • Enjoying the same statutory retire- loan thresholds in private credit bu- • Registering a business ment age reaus and public credit registries and • Being “head of household” or • Enjoying the same tax deductions or tracking those that collect informa- “head of family” credits tion from microfinance institutions, • Conferring citizenship on their • Having their testimony carry the utilities and retailers. children same evidentiary weight in court • Providing incentives to work—examines • Opening a bank account • Absence of a gender or sex nondis- personal income tax credits and de- • Choosing where to live crimination clause in the constitution ductions available to women relative • Obtaining a national identity • Validity of customary law if it vio- to men, and the provision of child care card lates the constitution and education services. • Validity of personal law if it violates the constitution Taken together, these  6 areas constitute a set of 103 data points on which the 143 Differences applicable to married women economies covered by the indicators can • Being legally required to obey • Having legal recognition of non- be compared. A seventh area of focus is their husband monetary contribution to marital legislation covering certain types of vio- • Being able to convey citizenship property lence against women, where indicators to their non-national husband • Having inheritance rights to the examine the laws, regulations and insti- • Administering marital property property of their deceased husband tutions that deal with domestic violence and sexual harassment. women’s capacity to seize economic and and  1.75 legal differences between men A COMPARATIVE LENS professional opportunities (box 7.1). The and women, 2 of them OECD high-income THROUGH COMPOSITE indicator covers 47 potential restrictions economies—Japan (with  0.25) and the MEASURES on women’s rights and autonomy.4 Republic of Korea (0.5).7 To simplify analysis, Women, Business and the Law has developed composite None of the  143 economies covered Sweden, along with  15 other OECD measures, one assessing the number by Women, Business and the Law estab- high-income economies, has  2 legal dif- of legal differences between men and lishes all  47 potential legal differences. ferences between men and women (fig- women, and the other the number of Saudi Arabia has the highest number, ure  7.1).8 Sweden’s arise from the fact legal incentives for women to work. with  27.25. These differences include that its constitution lacks a  provision Sweden performs comparatively well additional requirements for women ap- specifically prohibiting discrimination on these measures. Results show that plying for a  passport or national iden- based on gender or sex. Since this legal Swedish laws and regulations establish tification document, different statutory difference affects both married and un- few differences between men and wom- retirement ages and restrictions on night married women, it is counted twice. This en and provide incentives for women’s work and certain categories of jobs (such is also the case for 13 of the other OECD employment. as mining, construction, metalworking high-income economies with 2 legal dif- and factory work). ferences. How many legal differences Fifteen economies have no legal differ- Canada does have a  constitutional pro- between men and women? ences between men and women.5 Among vision specifically prohibiting discrim- Women, Business and the Law draws on them are 6 OECD high-income economies: ination based on gender or sex. Arti- its  6 main thematic areas in developing Canada, Estonia, the Netherlands, New cle  15(1) of the  1982 Constitution Act its composite indicator of the legal dif- Zealand, the Slovak Republic and Spain.6 provides that “every individual . . . has ferences and restrictions that may affect Six other economies have between  0.25 the right to the equal protection and GENDER EQUALITY AND ECONOMIC OPPORTUNITY FOR WOMEN 69 FIGURE 7.1 Like most OECD high-income economies, Sweden has only 2 legal differences between men and women 8.0 7.5 7.0 6.5 Number of legal differences 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Korea, Rep. New Zealand Netherlands Canada Estonia Spain Slovak Republic Japan Switzerland Finland Austria Iceland United States Denmark Australia United Kingdom Germany Portugal Greece Ireland Italy Sweden Belgium Norway Slovenia France Czech Republic Poland Israel Chile Source: World Bank Group, Women, Business and the Law database, 2013 edition. equal benefit of the law without dis- Switzerland, one of the other OECD the workplace (such as equal remunera- crimination . . . based on race, national high-income economies with 2 legal dif- tion for work of equal value and nondis- or ethnic origin, color, religion, sex, age ferences, has a constitutional prohibition crimination in hiring practices). or mental or physical disability.” By con- on gender-based discrimination. Its  2 trast, in Sweden article  13 of the  1974 differences arise from the difference in This aggregate measure shows that Instruments of Government, one of the statutory retirement age between men Sweden has a high number of incentives country’s  4 fundamental laws, prohibits and women, both married and unmarried. for women to work, with  5.7 (table  7.1). “unfavorable treatment of anyone on In the other 6 OECD high-income econ- Among the 30 OECD high-income econ- grounds of gender” yet does not mention omies the number of legal differences omies covered, only 5 have a higher num- discrimination. ranges from  2.25 (in France and Slove- ber of incentives than Sweden: the Czech nia) to 7.25 (in Chile). These differences Republic, the Slovak Republic, Spain, Nor- Reference to the legal concept of discrimi- stem from unequal property rights for way and Belgium (figure 7.2). nation can help cover the many forms that spouses (Chile), differences in statutory limitations on women’s rights may take, retirement ages (Israel) and restrictions Even so, Sweden is among  14 OECD as illustrated in United Nations instru- on the job categories available to wom- high-income economies that do not ments. For example, article 1 of the Con- en (mining in the Czech Republic, Poland mandate equal remuneration for work vention on the Elimination of All Forms of and Slovenia). of equal value, as recommended by the Discrimination against Women defines International Labour Organization (ILO). “discrimination against women” as “any These  14 include  2 other Nordic econ- distinction, exclusion or restriction made How many legal incentives for omies (Finland and Iceland) and  3 G7 on the basis of sex which has the effect or women to work? economies (France, Germany and Japan). purpose of impairing or nullifying the rec- Another way to compare gender equality By contrast, 16 OECD high-income econ- ognition, enjoyment or exercise by wom- across economies is to assess the poli- omies do mandate equal remuneration en, irrespective of their marital status, on cies they adopt to provide incentives for for work of equal value—including Can- a basis of equality of men and women, of women’s participation in the labor force. ada, Denmark, Italy, Norway, the United human rights and fundamental freedoms Women, Business and the Law does this Kingdom and the United States.9 in the political, economic, social, cultural, through an aggregate measure of 12 legal civil or any other field.” Thus according to provisions. Ten are provisions directly re- Sweden has established a  set of reg- this United Nations convention, the con- lated to promoting women’s employment ulations, policies and implementation cept of discrimination not only refers to (such as quotas, fiscal incentives, and mechanisms to promote equal pay certain acts and behaviors, but also cov- maternity and paternity benefits), while for equal work (box 7.2). Still, it does ers their stated purposes and unforeseen the other 2 are provisions aimed at equal- not explicitly mandate the principle consequences. izing the treatment of men and women in established by the ILO’s  1951 Equal 70 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS Remuneration Convention (No. 100). TABLE 7.1 Decomposition of Sweden’s performance on the Women, Business and the This convention’s definition of equal re- Law measure of legal incentives muneration encapsulates not only wag- Component Score es but also additional emoluments and work-related benefits, whether direct or Measure of the maximum length of fully paid maternity leave (in days)a 0.3 indirect, cash or in kind—benefits that Measure of the maximum length of fully paid paternity leave (in days)a 0.4 can amount to a  substantial share of overall remuneration. Ratio of the length of fully paid paternity leave to fully paid maternity leave 1.0 Law mandating equal remuneration for work of equal value b 0.0 Along with  22 other OECD high-income economies, Sweden prohibits gen- Law mandating nondiscrimination in hiring practicesb 1.0 der-based discrimination in hiring. Nor- Law penalizing employers for or preventing them from firing women for pregnancy-related 1.0 way is the only other Nordic economy to reasonsb do so. All OECD economies prohibit the dismissal of women on the grounds of Law requiring employers to give the same or an equivalent position to female employees 1.0 when they return from maternity leaveb pregnancy. But only 22 of them, including Sweden, make it mandatory for employ- Law requiring employers to provide break times for nursing mothersb 1.0 ers to reinstate a  woman returning from Tax deduction applicable to women 0.0 maternity leave to her former position and salary. Sweden, along with  23 other Legal quota for women on corporate boardsc 0.0 OECD economies, also makes it manda- 0.0 tory for employers to provide break time Legal quota for women in parliamentsc for nursing mothers. These protections Legal quota for women in local governments c 0.0 and guarantees are crucial to women’s ability to participate in the job market and Total 5.7 retain their position after giving birth. a. The value of this measure is reflected on a scale from 0 to 1,where 0 represents the shortest fully paid mater- nity/paternity leave and 1 represents the longest fully paid maternity/paternity leave. For example, a score of 0.7 A strong incentive favoring women’s par- means that, for this economy, the fully paid maternity/paternity leave is 0.3 (or 30 percentage points) away from the longest fully paid maternity/paternity leave. ticipation at higher levels of management b. If there is an explicit legal provision, the score is 1.0. If there is no such legal provision, the score is 0.0. and decision making is a  legal quota on c. The score reflects the value of the quota (for example, a 20% quota would be reflected by a score of 0.2). the share of women on corporate boards. If there is no quota in place, the score is 0.0. Of the  143 economies covered, only  6 Source: World Bank Group, Women, Business and the Law database, 2013 edition. have established such quotas. Other than Rwanda, all are OECD high-income FIGURE 7.2 Sweden has established more legal incentives for women to work than any G7 economy 9 8 Number of legal incentives for 7 women to work 6 5 4 3 2 1 0 Korea, Rep. Czech Republic Slovak Republic Spain Norway Belgium Sweden Italy Estonia Canada Ireland Greece Netherlands Portugal France Germany Slovenia United Kingdom Poland Australia Denmark Japan New Zealand Israel United States Iceland Austria Chile Finland Switzerland Source: World Bank Group, Women, Business and the Law database, 2013 edition. GENDER EQUALITY AND ECONOMIC OPPORTUNITY FOR WOMEN 71 economies—Belgium, France, Iceland, It- aly and Norway. BOX 7.2 Swedish policies favoring gender equality in wages Norway led the way. In 2002 its secretary In 2009 Sweden’s new Discrimination Act replaced 7 previous acts, including the of state for trade and industry proposed Equal Opportunities Act of 1991. To promote pay equity, the new act requires all voluntary quotas to increase women’s rep- companies with 25 or more employees to draw up an action plan for equal pay resentation on corporate boards to  40% every 3 years. The plan is supposed to provide a precise outline of the measures in  2005, up from  6%. But by  2005 vol- needed to achieve pay equity, including cost estimates for these measures and untary compliance had led to only  25% a timeline (of less than 3 years) for implementing them. In addition, the act cre- representation. So the Norwegian Parlia- ates mechanisms for supervision and transparency, establishing an equality om- ment amended the Public Companies Act budsman to oversee compliance and permitting access by employees’ organiza- to enforce mandatory quotas by applying tions to confidential information on pay. gradual and increasingly strict penalties: Many other OECD economies (such as Austria, Finland, France, Italy and Nor- fines, followed by delisting from the Oslo way) also have compulsory reporting. And other Nordic economies (for example, Stock Exchange and, ultimately, disso- Finland and Iceland) as well as Spain have requirements in place for equal pay plans.a lution. By  2008, 80% of Norway’s listed firms had complied with the 40% quota, a. Foubert 2010. increasing women’s presence among se- nior corporate decision makers. Sweden has opted for a  voluntary and ployment rates between men and wom- (see figure  7.4). In France the gender self-regulatory approach. Under rule  4.1 en; in  2012 all had a  gender gap of less gap narrowed from 14 percentage points of the Swedish Code of Corporate Gov- than  5 percentage points. The G7 group to 8, in Canada from 11 percentage points ernance, listed companies should “strive offers a more varied picture, with a gen- to 6 and in Germany from 15 percentage for equal gender distribution on the der gap ranging from 6 percentage points points to 10. Japan and Italy, starting from board” while ensuring that “board mem- in Canada to almost 20 in Japan and Italy comparatively large gender gaps, also ex- bers . . . collectively . . . exhibit diversity (figure 7.4). perienced substantial reductions—Japan and breadth of qualifications, experience from 24 percentage points to 20, and Ita- and background.” In January 2013 wom- But all Nordic and G7 economies had at ly from 29 percentage points to 20. en made up 25.5% of board members in least a moderate reduction in the gender Swedish listed companies.10 gap in employment rates between 2000 Nordic economies, including Sweden, and  2012—and some a  substantial one had both a  high female employment LABOR MARKET PARTICIPATION AND WAGE GAP Two key aspects of women’s participation FIGURE 7.3 Sweden had the third highest male and female employment rates among G7 in the economy are the difference in em- and Nordic economies in 2012 ployment rates between men and wom- en and the difference in wages between 100 90 Employment to population ratio (%) them. 80 70 Narrowing gaps in labor market 60 participation 50 In Sweden participation in the labor force 40 is high among both men and women. Em- 30 ployment rates for 2012 show little differ- ence between them, though the rate was 20 slightly higher for men (figure 7.3). Other 10 Nordic and most G7 economies also have 0 Iceland Norway Sweden Denmark Canada Finland Germany United Kingdom United States Japan France Italy very high employment rates among both men and women—above  60% in  2012. The exception is Italy, where the employ- ment rate was below 50% for women but was 68% for men. Male Female Nordic economies, including Sweden, Note: The employment to population ratio is the percentage of the working-age population that is employed. have relatively small differences in em- Source: OECD Employment Database, 2012 edition. 72 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS is  14.33%.12 Six OECD economies have FIGURE 7.4 Sweden has had a small but steady gender gap in employment rates a gender gap in wages of less than 10%, ranging from 7.78% in Norway to 4.22% 30.0 in New Zealand. And 12 OECD economies Gender gap in employment to population 27.5 have a gender gap in wages greater than 25.0 the OECD average, ranging from 16.66% ratio (percentage points) 22.5 20.0 in the Netherlands to  37.47% in the Re- 17.5 public of Korea. 15.0 12.5 There is also much variation across 10.0 economies in how the gender gap in 7.5 wages evolved over time (figure 7.5). Be- 5.0 tween 2000 and 2012 the gap narrowed 2.5 substantially in Belgium (from  13.60% 0 to 7.04%) and in Hungary (from 14.10% Finland Iceland Sweden Norway Denmark Canada France Germany United States United Kingdom Japan Italy to 6.86%). Conversely, the gap widened in Italy (from  7.41% to  10.64%) and in France (from 9.52% to 14.34%). 2000 2004 2008 2012 Sweden saw a  more modest change in the gender gap in wages between  2000 Source: OECD Employment Database, 2012 edition. and  2012, with the gap narrowing from 15.50% to 14.33%. Denmark, starting with a  roughly equivalent gap (14.70%), rate and a small gender gap (averaging 7 Persisting gender gap in wages also experienced a  moderate reduction percentage points) in  2000. In most The gender gap in wages varies widely (to  11.80%). Iceland, with a  much larger of these economies the gender gap in among all OECD economies. According gender gap in wages in  2004 (19.20%), employment rates narrowed over time. to  2012 data from the OECD Employ- saw its gap narrow substantially by 2012, Sweden’s, however, remained steady at ment Database, the gender gap in wag- to slightly below the level in Sweden around 4 percentage points. This is larger es among full-time employees averag- (13.30%). than the gender gaps in Finland and Ice- es  15.02% among OECD economies.11 land in  2012, though both countries had Sweden, along with 9 other OECD econo- started out with larger gender gaps than mies, has a gender gap in wages between WHY GENDER GAPS IN WAGES Sweden’s in 2000. the OECD average and  10%—Sweden’s PERSIST—A LOOK FOR CAUSES Where gender gaps in wages persist, the possible causes can be analyzed through the hypotheses of gender discrimination FIGURE 7.5 The gender gap in wages barely changed in Sweden between 2000 and 2012 and occupational segregation—both hor- izontal and vertical. 27.5 25.0 22.5 Discrimination Gender gap in wages (%) 20.0 A first explanation commonly identified 17.5 for a gender gap in wages is direct gen- 15.0 der-based discrimination—when individ- 12.5 uals with the same level of educational 10.0 attainment and work experience are 7.5 treated differently because of their gen- 5.0 der. Differentiated treatment can take 2.5 several forms, such as receiving different 0 pay for the same work or having different 2000 2004 2008 2012 job requirements for the same pay. Germany Finland G7 average OECD average Sweden Iceland Denmark Norway New Zealand Many countries have addressed direct discrimination through laws or supportive Note: The gender gap in wages is based on data for full-time employees and is unadjusted. It is defined as the institutions. Sweden’s Discrimination Act, difference between male and female median wages divided by male median wages. which prohibits gender-based wage dis- Source: OECD Employment Database, 2012 edition. crimination and establishes compliance GENDER EQUALITY AND ECONOMIC OPPORTUNITY FOR WOMEN 73 mechanisms, is a good example (see box 7.2). FIGURE 7.6 Women are underrepresented among computing professionals, including in Sweden Precisely accounting for the role of di- rect discrimination in the gender gap in 25 wages is difficult, however. A typical ap- Share of women among computing proach is to estimate wage regressions 20 specifying the relationship between professionals (%) wages and productivity-related charac- 15 teristics for men and women. The gender gap in wages can then be statistically de- 10 composed into  2 components. The first derives from gender differences in mea- sured characteristics (such as education- 5 al attainment). The second is considered “unexplained” and potentially stems 0 Sweden France Denmark Finland Norway Italy Germany United Kingdom from gender-based discrimination. Re- lying on this statistical residual method presupposes that all necessary explan- 2006 2010 atory variables are taken into account.13 Source: ILO Laborsta Database, 2012 edition. Horizontal segregation in occupations Beyond direct gender-based discrimina- within the public sector. Drawing on the a set of comparator economies, Sweden tion, occupational segregation can also ILO’s Laborsta Database, the same study had the highest share of women among play a  role in the persistence of a  gen- shows that in almost all OECD economies computing professionals in  2010 (fig- der gap in wages. One type is horizon- women in the public sector are employed ure  7.6). But women were still under- tal segregation, defined as an under- or predominantly in education and health represented: 80% of computing profes- overrepresentation of a  certain group in and in social work.16 sionals were men. occupations or sectors.14 Gender-based horizontal segregation—the concentra- Gender-based horizontal segregation A look at the teaching profession in the tion of women or men in occupations also occurs in other sectors and occu- same group of economies reveals the re- or sectors—occurs at varying degrees pations. A  good example is computing verse picture, with women overrepresent- across the labor markets of all OECD professionals, a  group in which men ed (figure  7.7).18 Sweden shows a  rela- economies. tend to be overrepresented.17 Within tively high level of horizontal segregation, A good illustration of horizontal segrega- tion is women’s representation in public FIGURE 7.7 Women are overrepresented among teaching professionals, including in sector employment. The public sector Sweden accounts for about 20% of total employ- ment on average in most OECD econo- 100 mies—and well above  30% in Sweden 90 and Denmark. Looking at the role of pub- Share of women among teaching 80 lic sector employment in women’s labor market outcomes, a  recent study found 70 professionals (%) that in a  large majority of OECD econo- 60 mies women are overrepresented in pub- 50 lic sector jobs.15 40 30 Interestingly, economies with high fe- 20 male labor force participation—such as 10 Canada, New Zealand and the Nordic economies—also tend to have a  larger 0 Italy Sweden Germany Norway Denmark United Kingdom Finland France overrepresentation of women in public sector employment, with female employ- ees accounting for well over 60% of the 2006 2010 total. Women also tend to be concen- trated in certain segments and activities Source: ILO Laborsta Database, 2012 edition. 74 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS with women making up more than  70% of vertical segregation. OECD data for white-collar women’s concentration in of its teaching professionals. years between  2000 and  2012 show administrative support and service occu- that women’s overrepresentation in part- pations rather than in production occupa- How does horizontal segregation affect time employment was sustained over tions.24 A study found that in Sweden ver- the gender gap in wages? The impact var- time in a  sample of OECD economies tical segregation accounts for 75% of the ies across economies. One study found (figure  7.8). In all but  3 of these econo- gender gap in wages among white-collar that in the United States  11.3% of the mies—Finland, Sweden and Denmark— workers.25 gender difference in wages is due to the women’s share of part-time employment concentration of women in low-paying in- stayed above  70%. And it remained dustries and 15.6% to their overrepresen- well above  80% in  3 of the G7 econo- POSSIBLE EXPLANATIONS FOR tation in establishments with lower rel- mies—France, the United Kingdom and OCCUPATIONAL SEGREGATION ative wages.19 By contrast, other studies Germany. But while this level of over- found that horizontal segregation plays representation stagnated in France and Two factors can help explain occupational no significant role in explaining the gen- Germany, it decreased sharply in Sweden, segregation: the concentration of female der difference in wages in Nordic econo- Denmark and Iceland. graduates in certain educational fields that mies such as Norway and Denmark.20 But then translate into occupational choices; a study in Sweden shows that while hori- Several studies look at how the incidence and the need to reconcile family responsi- zontal segregation accounts for only 9.1% of female part-time work affects the bilities with professional obligations. of the gender gap in wages among gender gap in wages. For example, one white-collar workers, it explains 67.6% of study analyzed the evolution of the gen- the gap among blue-collar workers.21 der gap in wages in France between 1990 Educational segregation through and 2002.23 The authors found that part- traditional choices time employment was a key factor in ex- Gender differences in education trajec- Vertical segregation in plaining the gender gap in wages over the tories can translate into differences in occupations period, with 60% of the explained part of professional choices, reinforcing occupa- Beyond horizontal segregation, wom- the wage gap due to the length of working tional segregation.26 Using data from  14 en are also subject to vertical segrega- hours. OECD economies, one study analyzed tion—underrepresentation at upper levels gender differences in the relationship of responsibility and decision making or in Studies have also looked at the impact of between tertiary-level education choices jobs with desirable levels of income, pres- differences in occupations within sectors. and labor market outcomes.27 The study tige or stability.22 A  study analyzing the Finnish manufac- observed significant gender differences turing sector, for example, found that at in the choice of fields of study: women Women’s high representation in part- least half the gender gap in pay stemmed make up the majority of graduates in time employment is a  good illustration from horizontal segregation, such as education, humanities and health, while men make up the majority in engineering and architecture. Women also acquire a little more tertiary education than men on average. FIGURE 7.8 Women’s overrepresentation in part-time employment has dropped sharply in Sweden Data from a sample of OECD economies on the share of tertiary qualifications awarded to women in different fields 100 Women’s share of part-time employment (%) in  2010 support similar conclusions 90 (figure  7.9). The data cover education, 80 computing, health and welfare, and en- 70 gineering, manufacturing and construc- 60 tion—as well as all fields. Immediately 50 clear is that in all economies in the sam- 40 ple women are overrepresented among tertiary graduates overall (all fields). 30 This overrepresentation can be signifi- 20 cant and well above the OECD average 10 (56%). Iceland has the highest repre- 0 sentation of women among graduates Finland Sweden Denmark Iceland United States Canada Norway OECD average Italy France United Kingdom Germany overall, with  67%, followed by Sweden with  64%. Germany, France and the 2000 2004 2008 2012 United Kingdom have more balanced representation of women among tertiary Source: OECD Employment Database, 2012 edition. graduates overall (55%). GENDER EQUALITY AND ECONOMIC OPPORTUNITY FOR WOMEN 75 A comparison across fields illustrates the extent of gender segregation in ed- FIGURE 7.9 Women were greatly overrepresented in some fields of tertiary study in Sweden in 2010 ucation. In all economies in the sample, women are massively overrepresent- ed among graduates in education and 100 Share of tertiary qualifications awarded to health and welfare, while they make up 90 a  much smaller share of graduates in 80 computing and engineering. Patterns in 70 Sweden are consistent with this: young women (%) 60 men rarely pursue studies in health and 50 welfare, where they make up only  17% 40 of graduates (8 percentage points below the OECD average). And young women 30 make up a  minority of the graduates in 20 computing and engineering, with shares 10 of  24% and  29% (slightly above the 0 Germany France Canada United Kingdom Iceland Norway Denmark United States Sweden Finland OECD averages). The study analyzing 14 OECD economies shows that these differences in educa- Education Health and welfare Engineering, manufacturing and construction tional choices translate into differences in Computing All fields occupational patterns among profession- als and technicians.28 Women represent Source: OECD Education at a Glance Database, 2012 edition. a  large majority of the teachers in these economies, while men dominate in pro- fessions relating to physics, mathematics policies—that appear to attract married often presented as a  major factor in the and engineering. women with children. economy’s high female labor force partic- ipation (box 7.3).34 Another study analyzed how educational Evidence also shows that the growth segregation at the tertiary level translates of part-time employment and women’s While good for work-life balance, paid into occupational segregation across  17 overrepresentation among part-time leave can have ambiguous effects on la- economies of the European Union.29 Its workers have been driven in large part by bor market outcomes for women. One findings confirm the high correlation a search by women with children for ways study shows that in 30 OECD economies between educational segregation and to balance formal paid employment with between 1970 and 2010, the provision of occupational segregation in these coun- caring responsibilities.31 But while part- paid leave had a positive effect on wom- tries, though with noticeable variations: in time work often offers greater flexibility en’s employment rate as long as the dura- Belgium, France, Germany, Ireland, Portu- in working hours, it comes at the cost of tion of the leave did not exceed 2 years.35 gal, the Slovak Republic and Spain lower lower hourly earnings, less job security As paid leave gradually lengthens and levels of educational segregation do not and fewer opportunities for training and becomes more generous over time, how- automatically translate into lower levels promotion, with long-term effects on ca- ever, it is correlated with a widening of the of occupational segregation. reer prospects, pension benefits and old- gender gap in pay for full-time employees. age poverty.32 A recent study shows that in Belgium almost half the promotion gap These findings are consistent with the A need to reconcile work and between men and women is explained by Women, Business and the Law analysis of family responsibilities differences in working hours, both con- the impact of paid maternity leave and The need to reconcile family responsi- tractual and overtime.33 Women’s over- parental leave on women’s labor force bilities and professional obligations can representation in part-time employment participation in  103 economies.36 The dictate labor market strategies and oc- can thus be seen not only as a manifes- ambiguity in effects reflects the potential cupational choices that deepen occu- tation of vertical segregation but also as impact of child-related leave entitlements pational segregation. One study docu- a factor that reinforces it—by limiting op- on vertical segregation: long periods of ments the impact of the “compensating portunities for career advancement. leave may reduce women’s opportuni- differentials” offered by public sector ties for career advancement and earnings employment on women’s occupational Also promoting work-life balance are progression. One analysis suggests, for choices in  15 OECD economies.30 The child-related leave entitlements. All example, that employers, anticipating authors suggest that even if private sec- OECD economies except the United that women will take advantage of leave tor jobs may offer higher wages, public States and the Republic of Korea mandate entitlements, may engage in statistical sector jobs provide other employment paid parental leave, with varied policies discrimination against women as a group terms—such as shorter or more flexible on the duration of leave and entitlements by limiting the opportunities for advance- working hours and more flexible leave to pay. Sweden’s parental leave scheme is ment available to them.37 76 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS of the United States), the Slovak Republic, South Africa and Spain. BOX 7.3 Parental leave in Sweden 6. Whenever used in this chapter, OECD high- income economies refer to the following According to Women, Business and the Law data, Sweden’s current parental leave economies: Australia; Austria; Belgium; scheme grants 480 days of paid leave. The government covers the cost of the pa- Canada; Chile; the Czech Republic; Denmark; rental leave benefit, paying 80% of the parent’s wages. Each parent must take 60 Estonia; Finland; France; Germany; Greece; days of the 480-day period, with the rest allocated as the family decides. Anoth- Iceland; Italy; Israel; Japan; the Republic of er 491 days of unpaid parental leave may be taken by either parent with no restric- Korea; the Netherlands; New Zealand; Nor- tions. Beyond this, mothers are entitled to 98 days of unpaid maternity leave, and way; Poland; Portugal; the Slovak Republic; Slovenia; Spain; Sweden; Switzerland; the fathers to 10 days of paid paternity leave. United Kingdom; the United States. Women’s professional and earning prospects can improve when fathers take 7. The other 4 economies are Bosnia and a portion of shared parental leave. One study showed that in Sweden a mother’s Herzegovina (with 0.75 legal differences future earnings increased by almost  7% on average for every month of shared between men and women), Ecuador (1.5), parental leave taken by the father.a While incentives such as reserved days and Ethiopia (0.5) and Thailand (1.75). tax credits encourage Swedish parents to share parental leave days more equally, 8. The other 15 OECD high-income economies mothers continue to take more leave than fathers, with the latter taking about are Australia, Austria, Belgium, Denmark, a quarter of all days. Finland, Germany, Greece, Iceland, Ireland, Italy, Norway, Portugal, Switzerland, the a. Johansson 2010. United Kingdom and the United States. 9. The other 10 OECD high-income economies doing so are Australia, Belgium, the Czech Republic, Greece, Ireland, the Republic of the family-friendly policies and incentives Korea, the Netherlands, Poland, Portugal put in place in recent years. Increasing and Spain. CONCLUSION incentives for parents to share parental 10. Deloitte 2013. 11. The OECD Employment Database’s mea- A review of Sweden’s performance on leave more equally, and actively promot- sure of the gender gap in wages is based Women, Business and the Law indicators ing women’s participation in corporate on data for full-time employees and is shows that the country’s laws and regula- decision-making structures, could have unadjusted. The measure is defined as the tions establish a framework conducive to positive effects on their career and earn- difference between male and female median women participating in the economy on ing prospects. wages divided by male median wages. equal terms with men. This is reflected in 12. The 9 other OECD economies with a gender women’s relatively high rate of participa- gap in wages between the OECD average tion in employment in Sweden compared and 10% are the Slovak Republic (14.84%), France (14.34%), Australia (14.04%), with rates in other Nordic economies as NOTES Portugal (13.45%), Iceland (13.33%), well as in OECD and G7 economies. Greece (12.17%), Denmark (11.75%), Ireland This chapter has been written by Thibault Meil- land with the assistance of Katrin Schulz. (10.68%) and Italy (10.64%). Yet despite the favorable legal and reg- 13. Vandenberghe 2011. ulatory environment, the persistence of 1. World Bank 2011. 14. Bettio and Verashchagina 2009. the gender gap in wages—around  15% 2. Aguirre and others 2012. 15. Anghel, de la Rica and Dolado 2011. between 2000 and 2012—calls for addi- 3. Introduced in the UNDP’s Human Devel- 16. Anghel, de la Rica and Dolado 2011. tional efforts to ensure women’s fair par- opment Report 2010, the Gender Inequality 17. The International Standard Classification ticipation in the Swedish economy. Oc- Index is a composite measure reflecting of Occupations (ISCO) definition used by inequality in achievements between women the ILO defines computing professionals cupational segregation—both horizontal and men in 3 dimensions: reproductive as performing a range of tasks such as and vertical—remains prevalent in Swe- health, empowerment and the labor market. conducting research into the theoretical den, as it does in other Nordic and OECD 4. The measure of legal gender differences is aspects of and operational methods for the economies. Of particular concern are constructed by adding the restrictions on use of computers; designing hardware and patterns of educational choices that per- married and unmarried women together. Five software configurations for specific appli- petuate traditional career choices, with restrictions that apply only to married women cations; designing computer programs; and female- and male-dominated sectors are counted once, while 21 restrictions that preparing manuals. For the full list of tasks, and occupations offering unequal earning apply to married or unmarried women are see to the ISCO website (http:/ /www prospects. Through vocational guidance counted twice, for a total of 47 restrictions. .ilo.org/public/english/bureau/stat/isco and targeted training, young women and The measure can sum to a whole number /isco88/213.htm). or a decimal for any economy because the 18. The ISCO definition used by the ILO defines young men alike could be encouraged to question on job restrictions has 8 subques- teaching professionals as performing enter nontraditional fields. tions (each equal to one-eighth) examining a range of tasks such as conducting classes specific restrictions on women’s work. at a particular educational level, including The tradeoffs between professional ob- 5. These 15 economies are Armenia, Canada, private lessons; conducting adult literacy ligations and family responsibilities also the Dominican Republic, Estonia, Hungary, programs; teaching and educating handi- remain a significant obstacle to women’s Kosovo, Mexico, Namibia, the Netherlands, capped persons; designing curricula; con- career and earnings progression—despite New Zealand, Peru, Puerto Rico (territory ducting research in their particular subjects; GENDER EQUALITY AND ECONOMIC OPPORTUNITY FOR WOMEN 77 and preparing scholarly papers and books. 22. Bettio and Verashchagina 2009. 30. Anghel, de la Rica and Dolado 2011. For the full list of tasks, see to the ISCO 23. Meurs and Ponthieux 2007. 31. OECD 2010a. website (http://www.ilo.org/public/english 24. Korkeamäki and Kyyrä 2005. 32. Thévenon 2013. /bureau/stat/isco/isco88/23.htm). 25. Meyersson Milgrom and others 2001. 33. Deschacht 2013. 19. Bayard and others 2003. 26. World Bank 2011. 34. Elborgh-Woytek and others 2013. 20. Petersen and others 1997; Datta Gupta and 27. Flabbi 2011. 35. Thévenon and Solaz 2013. Rothstein 2001. 28. Flabbi 2011. 36. World Bank Group 2013b. 21. Meyersson Milgrom, Petersen and Snart- 29. Smyth and Steinmetz 2008. 37. Blau and Kahn 2013. land 2001. Education, skills and innovation Education and continuous global technol- Sweden’s annual spending per student, ogy learning contribute to an economy’s which was considerably higher than the competitiveness, innovation and growth OECD average at all levels of education by providing current and future workers and up to 45% higher at the tertiary level.1 with the skills most valued by employers and by improving the ability of manag- Sweden’s investment in education is re- • Swedish firms have difficulties ers and entrepreneurs to operate in an flected in a number of highly positive in- filling vacancies, and compared with increasingly complex business environ- dicators (from high preschool enrollment international averages more Swedish ment. This chapter provides an overview rates to high secondary completion rates, workers are underqualified for their of recent reforms in Sweden’s education from low private expenditure to low stu- job. But many tertiary graduates are system and reviews evidence on edu- dent-teacher ratios). Yet the country’s overeducated for theirs. cation outcomes and their relationship education system faces a few worrying • About a third of adults ages 25–64 with labor market and innovation issues. problems. These include a steady down- have a tertiary education, but only It presents data for Sweden along with ward trend in student performance on half of tertiary students go on to key high-income comparators—the other international tests in reading, math and graduate. Nordic economies (particularly Finland, science;2  the limited attractiveness of the • Swedish universities lack which has been regarded as a world- teaching profession and related concerns dynamism and are losing scientific class performer in education), the United about teachers’ skills; and mismatches competitiveness. Though still high States and other G7  economies, and all between skills developed in school and in global rankings of innovation, the OECD economies as a group. those demanded in the labor market. There country has slipped a few notches. are also concerns on the innovation front. • Average reading, math and science Although Sweden’s research and develop- scores of ninth graders have been declining—and variability in these ment (R&D) spending as a share of GDP is SWEDEN’S EDUCATION among the highest in the world, the coun- scores remains among the highest SYSTEM—RECENT REFORMS try lags behind comparators in grassroots in the OECD group. Differences AND DEBATES entrepreneurship, internationalization of between immigrant and native students could be tackled by In the past 20 years Sweden has undertak- knowledge and managerial skills upgrading. promoting early enrollment of en major education reforms aimed at both immigrant children. strengthening the school curriculum and In  2000–10  Sweden saw both a large in- • Swedish teachers earn less than granting greater independence to schools. crease in the share of students enrolled in their peers, and measures of their In 1993 it launched a voucher system de- private schools and a deterioration in the abilities have declined. Making signed to foster competition between pub- performance of its students on internation- the profession more selective and lic and private schools by allowing students al tests. Particularly striking is the difference attractive would benefit student to freely choose between them. More re- with neighboring Finland, whose students performance. cently, 2011  legislation introduced better have been top performers in these assess- • Higher mobility and integration of child care and preschool into ments. These results have led many to be- internationalization of skills could the education system and applied an equal lieve that the expansion of private schools help Sweden tap into a wider talent legal framework to public and approved has had a negative effect on overall student pool and attract top researchers. private schools. New curricula and grading performance, but there is no evidence of • Expanding trade in products, capital, criteria were also introduced. this. Indeed, students in private schools and ideas could enhance continuous have tended to have better test scores than global technology learning. In addition, Sweden invests substantial those in public schools, though this differ- • Broader use of incentives resources in education. Its public expen- ence narrowed in the latest test results.3 management practices—rewarding diture on education in  2010  amounted performance more than to  7% of GDP, higher than the OECD One difference between private and seniority—would support the average of  5.8%. Even more telling is public schools in Sweden is that private upgrading of managerial skills. 80 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS schools have a much smaller share of at a range of indicators, including mea- in international assessments of student teachers who have completed qualified sures of participation (such as enrollment competencies have been declining. This teacher training (58%) than do public rates), educational attainment and learn- is reflected, for example, in results from schools (80%). But the quality of teach- ing outcomes. For Sweden such indica- the Programme for International Student ers’ skills in public schools appears to tors provide a mixed picture, suggesting Assessment (PISA), a triennial survey of be an issue: a recent study using data some possible policy directions as well as competencies of ninth graders in reading, on male teachers at municipal schools questions warranting further research. math and science.10 The average scores for  1980–2006  found evidence of a de- of Swedish students dropped in all 3 sub- cline in teachers’ grade point averages ject areas between 2000  and  2012 and in other measures of cognitive and High primary and secondary (figure  8.1). Using PISA and other social abilities.4  To address such issues, enrollment test scores, a recent study found that the  2011  reforms changed the qualifica- Like most developed economies, Sweden among  49  countries, Sweden suffered tion requirements and introduced new has very high enrollment rates in prima- the largest decline in international com- teacher training programs. ry and lower secondary education. Policy parisons of student achievement be- makers in these economies therefore fo- tween 1995 and 2009.11 Salary levels for teachers raise questions cus their attention on participation rates about the attractiveness of the teaching either at very early stages of education Sweden’s PISA results are not only be- profession in Sweden. The highest pay lev- (preschool and preprimary) or in upper low the OECD average but also far be- els for primary school teachers are  20% secondary education. low those of neighboring Finland, often lower than the OECD average. And Swed- regarded as having among the best ed- ish teachers earn  20% less on average Growing international evidence shows ucation systems in the world. The gap than other full-time Swedish workers with that receiving a good education in early with Finland also exists at lower levels a tertiary education. By contrast, Dan- childhood has a large impact on socio- of education, as reflected in the average ish and Finnish teachers—at least those economic outcomes later in life.7  High scores on international tests taken in in upper secondary schools—earn more preprimary enrollment rates are common fourth grade under the Progress in Inter- than their peers. Yet despite the lower among the Nordic economies. In Sweden national Reading Literacy Study (PIRLS) salaries in teaching, a large share of tertia- the rate in 2012 was 94.7% among chil- and Trends in International Mathematics ry graduates in Sweden are in education dren ages  4–5  and  77.2% among those and Science Study (TIMSS). (15%, compared with 6% in Finland). ages  1–3, according to the Swedish Na- tional Agency for Education. Finland, the PISA results for reading reveal interesting A fundamental role of the education sys- regional champion in international stu- patterns. A Nordic Council of Ministers tem is to provide students with the skills dent tests, stands out as an exception: report estimates that among the PISA they need to succeed in the labor market. its enrollment rate in  2011  was just be- study participants, the share of weak In the past, Swedish employers had com- low 50% for 3-year-olds and below 70% readers increased in Sweden from  13% plained that the country’s vocational ed- for  5-year-olds, similar to rates in the in  2000  to  17% in  2009.12  Meanwhile, ucation and training was too theoretical United States.8 in Denmark and Norway this share fell to and did not adequately prepare students around  15%, and in Finland it increased for the labor market.5 In response to these Data on secondary enrollment in Swe- by 1 percentage point, to only 8%. In Swe- concerns Sweden reformed the vocational den may be cause for concern, however. den some groups were overrepresented education and training system in 2011, by Sweden’s secondary enrollment rate is among weak readers: boys, students with restructuring the curriculum and the pro- similar to or higher than those in other an immigrant background, students who grams offered. In the first academic year developed economies. Yet 8% of children did not attend preschool and students after the reform, the 3 programs attracting of lower-secondary-school age were out with weaker relationships with teach- the most students were building and con- of school in 2011—a share that has been ers.13  The report emphasizes the large struction, electricity and energy, and vehi- steadily increasing from  0% in  2006. differences among schools and suggests cle and transport6—3 areas where employ- Moreover, a growing share of young peo- that they might be explained by the ers report difficulty in hiring. In 2008 the ple are not in employment, education or growing number of private schools and programs with the largest enrollments training: among  15- to  29-year-olds this of schools with a large share of students had been social sciences, natural scienc- share rose from  9.2% in  2005  to  10.3% with an immigrant background. es, electrical and electronics, and arts. The in 2010, putting Sweden at 27th place in new enrollment rates seem to better re- a ranking of 32 OECD economies on this The PISA results indeed show great- flect the needs of the labor market. indicator.9 er variability of scores among stu- dents in Sweden than in other coun- tries. Compared with Finland, Sweden Falling international test scores at has not only lower average scores but MIXED OUTCOMES IN primary and secondary levels also higher variability of scores across EDUCATION The main concern in the public debate all  3  subject areas (figure  8.2). The re- Evaluating education systems is not easy. on education in Sweden is that despite sults of the PISA  2009  study, which Getting a better picture requires looking large investments in education, results focused more on reading, show that the EDUCATION, SKILLS AND INNOVATION 81 variance in reading performance in Fin- land was  83% of the average variance FIGURE 8.1 Swedish students’ average PISA scores have been declining in all 3 subject areas across all OECD economies, while the variance in Sweden was  110% of the 570 OECD average. And the variability of 560 scores in Sweden increased for all sub- 550 Average reading score jects between 2000 and 2009. 540 530 520 Test scores and policy questions 510 The variability of scores in Sweden raises 500 an important question: Do high-perform- 490 ing students tend to concentrate in cer- 480 tain schools, or are there high-performing 470 students in most schools? One way to ad- 2000 2003 2006 2009 2012 dress this question is by comparing how much scores vary within schools and how 570 much between them. The PISA 2009 re- 560 sults for reading show that in Finland the 550 Average math score 540 variance in scores within schools was 530 more than 10 times the variance between 520 schools, while in Sweden the variance 510 within schools was  4.5  times that be- 500 tween schools. Similar differences were 490 found in  2012  for math performance. 480 This means that Sweden has more pro- 470 nounced differences between high- and 2003 2006 2009 2012 low-performing schools. 570 Schools can differ along many dimen- 560 sions, but the most interesting one in 550 Average science score Sweden is whether they are public or 540 private. Students in private schools had 530 higher average PISA scores than students 520 in public schools across all 3 subject areas 510 500 in  2009.14  This difference in scores per- 490 sisted in  2012  in reading and to a lesser 480 extent in science, but not in mathemat- 470 ics. Overall, test scores of private school 2006 2009 2012 students (and their difference with public Finland Nordic average OECD average Sweden school scores) increased until 2006 and decreased afterward (figure  8.3  shows Note: Nordic average includes Sweden. the trend for reading). Source: OECD, PISA 2000, 2003, 2006, 2009 and 2012 results. What does research show about the effect of the growing private school en- rollment since the  1993  school voucher More research is needed to assess the cultural status than do children in public reform in Sweden? A recent study as- causal relationship between private schools.16 sessing the reform’s effect on education school attendance and test performance outcomes at the municipality level found in Sweden. In parallel, more needs to be Preschool can help to establish a level that an increase in the share of private done to understand what causes some playing field for students with different school students leads to better average students to attend public schools and economic backgrounds. Results from grades and better longer-term education others to attend private ones. While the 2009 PISA study show that students outcomes.15 Interestingly, the study notes private schools are not allowed to se- who attended preschool tend to have that the improvement in average munici- lect students using criteria other than higher scores than students who did not, pality performance was due not to private time of application, presence of siblings in almost all countries and even after schools’ outcomes improving more than and place of residence, children in pri- taking into account the socioeconomic public schools’ but to greater competition vate schools score significantly higher status of students.17  Evidence from Fin- among schools. on an indicator of economic, social and land, for example, shows that preprimary 82 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS higher teacher salaries are associated FIGURE 8.2 PISA 2012 scores show greater variability in Sweden than in many other with a bigger improvement in student countries performance.18 120 Standard deviation in reading scores ISR Room for improvement in tertiary 110 FRA education SWE NZL SVK LUX BEL Advanced economies like Sweden rely 100 ITA NOR JPN heavily on high-level technical and pro- GRC ISL GBR AUS PRT OECD FIN fessional skills that are usually acquired SVN NLD CAN ESP AUT USA DEU through tertiary education. And global 90 CZE CHE KOR TUR DNK POL IRL competition—including in the labor mar- MEX ket—constantly raises the bar for work- 80 CHL EST ers’ qualifications. 400 450 500 550 Average reading score How many people in Sweden have graduated from a tertiary education 110 program—and how do its rates com- Standard deviation in math scores ISR pare internationally? Among those SVK BEL 100 NZL ages  25–64, some  35% have attained FRA KOR LUX AUS DEU CHE HUN PRT GBR CZE JPN a tertiary education (figure  8.5). This SWE ITA AUT NLD 90 TUR USA ISL OECD POL share is higher than the OECD aver- GRC NOR CAN ESP IRL FIN age of  32% but lower than the shares CHL DNK EST in Finland (39%) and Norway (38%). 80 Younger adults (ages 25–34) in Sweden MEX are doing better: 43% have attained a 70 tertiary education—a higher share than 400 450 500 550 in Finland (40%) though still lower than Average math score in Norway (47%). Moreover, while the gross enrollment ratio for tertiary ed- 110 ucation is just above  70% in Sweden, Standard deviation in science scores ISR NZL LUX it is more than  90% in Finland.19  Swe- SWE NOR BEL GBR 100 SVK AUS den also lags behind other countries in FRA ISL USA NLD DEU JPN the completion of tertiary education: ITA OECD AUT CHE FIN only  53% of students who enter a ter- 90 DNK CAN GRC PRT HUN CZE SVN IRL tiary education program go on to grad- ESP POL uate, compared with 68% for all OECD KOR 80 CHI TUR economies, 76% in Finland and 81% in EST Denmark. 70 MEX 400 450 500 550 Sweden’s low tertiary completion rate, Average science score particularly worrisome given its high youth unemployment rate, might be ex- Source: OECD, PISA 2012 results. plained at least in part by lack of incen- tives: the average earnings of workers with a tertiary education are only  25% higher than those of workers with an programs are particularly effective in im- or secondary education. But PISA scores upper secondary education. On average proving the reading performance of chil- have a strong positive correlation with among OECD economies, they are  57% dren with an immigrant background. the ratio of primary teachers’ salary to higher.20  Eurostat data for  2010  show the salary of other workers with a ter- a similar contrast: while the median Policy choices emerge from looking at tiary education (figure  8.4). While this hourly earnings of upper secondary and the relationship between resources in- is not sufficient evidence of a causal re- postsecondary graduates in Sweden are vested in education and test results. lationship, it suggests that the skills and higher than the EU-27  average, those of For example, average test scores across status of teachers matter more than the tertiary graduates are lower than the EU- countries (whether from TIMSS/PIRLS overall level of spending in education. 27 average. Differences in average hourly or PISA) have no clear relationship with Other studies confirm this by showing wages between tertiary and upper sec- the student-teacher ratio or the level of that although smaller class sizes have ondary graduates in Sweden are particu- spending per student, in either primary a positive effect on student outcomes, larly small in the public sector and even EDUCATION, SKILLS AND INNOVATION 83 negative in education, health and social services. FIGURE 8.3 A rising then falling trend in PISA reading scores for private schools in Sweden Tertiary education is often regarded as 550 16 the crucial phase in which students de- Share of students in private schools 540 14 velop skills—either managerial or tech- 530 Average reading score nical—that will foster innovation and 12 520 productivity once they enter the labor 510 10 market. Sweden has a very high level of (%) 500 8 higher education expenditure in R&D 490 6 (twice the OECD average), according to 480 4 the OECD Review of Innovation Policy 470 for Sweden.21  In addition, 4  universities 460 2 (Karolinska, Lund, Stockholm and Uppsa- 450 0 la) regularly appear among the top 100 in 2000 2003 2006 2009 2012 global rankings (such as the Times Higher Private school scores Public school scores Education Supplement). Share of students in private schools But the OECD report also points out that Source: OECD, PISA 2000, 2003, 2006, 2009 and 2012 results. Sweden has lost scientific competitive- ness. For example, while Sweden is among the 39 countries with the largest produc- tion of scientific publications, it had the outflow of grant recipients, and the intro- while the increase in the number of third smallest increase in the mean ci- duction of tuition costs for students from universities (by  17  since the  1970s) ac- tation rate over the past 2 decades. And outside the European Economic Area has commodates the educational needs of a the average annual growth in publications reduced the inflow of foreign students. In sparsely distributed population, it has had between 2000 and 2008 was only 3.5%, addition, research conducted in Swedish an unclear impact on their overall R&D ef- compared with an average 5.1% in the Eu- universities has a low impact as measured fectiveness. ropean Union. by citations, and it is concentrated mostly in a few successful fields (such as bio- The OECD report also suggests some The report’s findings suggest a need to medicine). Moreover, the system attracts possible causes of the decline in Swe- address several issues. One of these is the few elite authors: according to a recent den’s research effectiveness. These in- very low mobility in the higher education study, only  3.7% of academic authors clude the fragmented funding system and sector: 58% of instructors have a PhD in Sweden during  1996–2010  would be the limited power of university leadership from the same institution in which they considered elite, compared with 5.0% in in contrast to the strong power of individ- teach, there is only a limited inflow and Denmark and 7.7% in Switzerland.22 And ual professors. FIGURE 8.4 PISA scores have no clear relationship with primary education spending—but a strong one with primary teachers’ relative salary 540 JPN 540 Average PISA reading score, 2012 Average PISA reading score, 2012 FIN CAN IRL FIN CAN 520 IRL 520 POL EST POL EST NLD AUS NLD AUS FRA DEU 500 FRA 500 USA DNK USA DNK CZE ESP AUS ITA CZE ITA ESP AUT SWE SWE 480 480 SVK SVK 460 460 15 20 25 30 0.4 0.6 0.8 1.0 1.2 Primary education expenditure per student Primary education teacher salary ratio, 2011 (% of GDP per capita), 2010 Note: Primary education teacher salary ratio compares primary teachers’ average salary with the average earnings of peers—full-time, full-year workers ages 25–64 with a tertiary education. Source: OECD, PISA 2012 results and Education at a Glance 2013. 84 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS FIGURE 8.5 Sweden lagging behind some OECD comparators in tertiary education attainment and completion rates in 2011 60 90 Share of age group with tertiary education (%) Tertiary education completion rate (%) 80 50 70 40 60 50 30 40 20 30 20 10 10 0 0 France Denmark Sweden Norway Finland United Kingdom United States Japan United States Sweden Norway United Kingdom Finland France Denmark Japan 25–34 25–64 Source: OECD, Education at a Glance 2013. more difficulties filling vacancies than While immigration to Sweden follows larger firms, possibly because of less at- patterns similar to those in neighboring PROBLEMS OF SKILLS tractive employment conditions.24 economies, immigrants to Sweden in- MATCHING IN THE LABOR clude a relatively large share of refugees, MARKET An earlier survey by Svenskt När- who have more difficulties finding jobs.26 Ideally, the supply of skills developed ingsliv found that the number of un- through the education process should filled vacancies increased by 40% be- Unemployment rates among people at match the demand for skills in the labor tween  2005 and  2010, even though the all education levels have been declin- market. This match may not happen for unemployment rate was the same in both ing since  2005—with the exception of everyone, however, and some percent- years.25 According to projections by Sta- the 2007–10 period, reflecting the global age of the population will experience tistics Sweden, the demand for workers financial crisis. But the unemployment either a lack of match (when unemploy- with secondary and tertiary education rate has always been higher among peo- ment and vacancies coexist) or a mis- will increase over the period to 2030. But ple with up to a lower secondary educa- match between the qualifications and while the supply of workers with tertiary tion than among those with higher levels skills they have and those that would be education will expand, the supply with of education. The unemployment rate most appropriate for their job. Both prob- lower qualification levels will shrink. It among people with an upper secondary lems seem to be relevant for Sweden, as is expected that when the older genera- education is remarkably close to the rate demonstrated by the large share of firms tion exits the labor market, there may be among those with a tertiary education. having difficulties in filling vacancies and shortages of skilled labor, particularly in Unlike in other Nordic economies, how- by the substantial share of underskilled small towns and rural areas. ever, in Sweden unemployment is higher workers. among people with a vocational upper Whatever the level of vacancies, some secondary education than among those groups have more difficulties than others with a general upper secondary educa- Unemployment coexisting with in finding jobs, a fact that immediate- tion.27 vacancies ly becomes clear when unemployment A substantial share of Swedish employers rates are broken down by age group, Sweden’s overall unemployment rate have difficulties filling vacancies. Accord- country of origin and educational attain- is low compared with that of other Eu- ing to a new survey, 24% reported such ment. In Sweden the unemployment rate ropean countries. But the process that difficulties in  2013, compared with  36% among  15- to  24-year-olds is far higher matches the demand for and supply in 2012.23 The top 10 jobs for which em- than in any other age group—and higher of labor seems to have deteriorated in ployers have difficulties filling vacancies than in comparator economies. The un- recent years. Evidence for this can be are engineers, sales representatives, employment rate for foreign-born individ- seen in the relationship between the un- skilled trades, managers, cooks, techni- uals is more than twice the rate for Swed- employment rate and the job vacancy cians, drivers, supervisors, accountants ish-born people, though the rates show rate from the early  2000s to  2012  for and machine operators. Small firms have a similar trend over the period 2000–12. Finland and Sweden (figure  8.6). This EDUCATION, SKILLS AND INNOVATION 85 relationship is also called a Beveridge curve, which typically has a negative FIGURE 8.6 Beveridge curve for Sweden shows declining efficiency in matching labor supply and demand slope. When the mechanism for match- ing labor supply and demand improves, it leads to a shift of the Beveridge curve 2.5 2002 toward the bottom left-hand part of the 2012 graph—because at a given level of un- 2.0 Job vacancy rate (%) employment, employers are able to fill 2001 vacancies faster, leading to a lower va- 1.5 2012 cancy rate. But while this has occurred in Finland, in Sweden the curve has moved in the opposite direction, indicating a 1.0 less efficient matching mechanism. 0.5 While knowing the overall vacancy rate for an economy is useful, this aggregate 0 rate reveals little about matching prob- 4 6 8 10 12 lems that may be happening in specific Unemployment rate (% of labor force) sectors. In Sweden the arts and enter- Sweden Finland tainment sector had the highest vacancy rate in 2012, and the agriculture, forestry Note: Job vacancy rate is the number of vacancies divided by the sum of vacancies and occupied jobs. Each dot and fishing sector the lowest (figure 8.7). represents a different year, starting in 2001 or 2002 and ending in 2012. But because there are no data about how Source: Eurostat data. many people look for jobs in each sector, it is difficult to assess whether there are matching problems in particular sectors. According to data from Statistics Swe- FIGURE 8.7 Job vacancy rates varied widely across sectors in Sweden in 2012 den, in the last quarter of  2010  recruit- ment times were longest for information Arts and entertainment technology specialists and for profession- and other services als. Among geographic areas, Stockholm Health and social work had the longest recruitment times.28 Education Skills and education mismatch Public administration and defense and social security A growing literature is trying to assess the extent of education or skills mismatches Services (business) in the labor market. These concepts are sometimes used interchangeably, and Industry and construction both can be measured in different ways. But generally speaking, education mis- Agriculture, forestry and fishing match refers to a situation in which work- 0.0 0.5 1.0 1.5 2.0 2.5 ers have an education level that is higher or lower than the level considered most Job vacancy rate (%) appropriate for their job, and skills mis- match to a situation in which workers’ Note: Job vacancy rate is the number of vacancies divided by the sum of vacancies and occupied jobs. Source: Eurostat data. skills are underutilized or insufficient for performing well on the job.29 These phenomena are difficult to mea- of education in female-dominated occu- mismatches—situations in which the sure, and they have unclear effects on pations (such as preschool teaching and unemployed and jobs that are suitable wages and productivity.30 Only a few em- pharmacology), while women are more for them are too far away to be able to pirical studies have focused on Sweden. likely be mismatched in male-dominat- meet.33  This issue may be particularly One shows that overeducated workers ed occupations (such as engineering and relevant for Sweden, where labor mobil- are penalized early in their career by a other technical fields).32 ity is somewhat limited by long distances lower rate of return to schooling, from and by highly regulated rental housing which they do not recover later on.31 An- Moreover, as a study in the United markets, particularly in the main cities. other found that men are more likely to States and Britain noted, the skills mis- Newspapers recently reported the case have jobs that do not match their field match may be exacerbated by spatial of a woman who managed to rent an 86 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS relatively small share of total graduates, FIGURE 8.8 High education-occupation mismatch in fields of study with large however, and so are probably of less con- percentages of graduates in Sweden in 2007 cern than the social sciences, business and law sector (where 21% of young uni- Social sciences, business and law versity graduates were overqualified) or the engineering and construction sector Services (where 14% were). Science, math and computing To collect data on the level of workers’ Humanities and arts skills and how these skills are utilized on the job, the OECD launched the Survey Health and welfare of Adult Skills within the Programme for Engineering, manufacturing the International Assessment of Adult and construction Competencies (PIAAC). The PIAAC sur- Education vey measures skills in literacy, numeracy and problem solving—skills that may Agriculture and veterinary not be reflected in the level of educa- 0 5 10 15 20 25 30 35 40 45 50 tion.35 Results for 2012 show above-aver- age levels of literacy and numeracy skills Percent in Sweden (figure  8.9). Literacy scores Graduates by field of study Education-occupation mismatch for the age group 16–24 were within the average range, however. And within the Note: Education-occupation mismatch is defined as the percentage of people ages 25–34, with a tertiary educa- group of participating countries, Sweden tion, whose job requires a lower qualification than they have. had the largest difference in average lit- Source: Eurostat, EU Labour Force Survey 2007; UNESCO Institute for Statistics data, http://www.uis.unesco.org/. eracy scores between immigrants and native speakers—and among the largest differences between tertiary graduates apartment in Stockholm after 28 years on requirements (figure  8.8). The results and people with up to a lower secondary a waiting list.34 show that in 2007 a large percentage of education. these graduates were overqualified for What do available data suggest about their job, especially for fields of study The PIAAC survey also collects informa- the extent of mismatches in the Swed- such as services (more than  45%), hu- tion allowing assessment of education ish labor market? One set of data comes manities and arts (about  35%), and the and skills mismatch.36  According to the from a comparison of the education of agriculture and veterinary sector (close results for Sweden, the share of workers young university graduates with their job to  30%). These sectors account for a who report that their highest qualifications FIGURE 8.9 Survey results show above-average adult literacy and numeracy skills in Sweden 300 300 290 290 Average adult numeracy score Average adult literacy score 280 280 270 270 260 260 250 250 240 240 230 230 220 220 Italy France United States Germany Denmark Canada Norway Sweden Finland Japan Italy United States France Canada Germany Denmark Norway Sweden Finland Japan Source: OECD, PIAAC 2012 results. EDUCATION, SKILLS AND INNOVATION 87 FIGURE 8.10 A strong correlation between average adult literacy and numeracy scores and corresponding average PISA scores in 2012 300 290 JPN JPN Average PIAAC adult numeracy score Average PIAAC adult literacy score FIN 290 NLD FIN 280 SWE DNK NLD SVK CZE AUT 280 AUS EST SWE DEU EST 270 AUS SVK CZE CAN DNK CAN 270 AUT USA DEU POL IRL POL FRA 260 IRL 260 FRA USA ESP ITA 250 ITA 250 ESP 460 480 500 520 540 480 500 520 540 Average PISA reading score Average PISA math score Source: OECD, PIAAC 2012 and PISA 2012 results. exceed the qualifications that they deem entrepreneurs using new ideas to improve the levels in such comparator economies necessary to get their job today is slight- productivity within an enterprise—includ- as the United Kingdom, Denmark and ly less than  20%, below the average for ing through product, process, managerial Finland. But Sweden’s investment lev- participating countries. But the share of and marketing technologies. It requires els were lower than those of the United workers reporting that their qualifications skilled people who have both the ability States, which averaged almost  15% of are lower than would be required to get and the incentives to continue learning augmented GDP a year.41 their job today exceeds 20%, well above throughout their tenure in a job. And it the international average. At the same demands access to global knowledge The country appears to be lagging behind time, analysis of the skills mismatch on to enable continuous global technology top performers in other areas as well. the basis of literacy shows that Sweden learning as well as incentives for experi- Sweden has the lowest level of employ- has a larger share of underskilled workers mentation and rapid scaling up. Because ment contribution to knowledge-based and a smaller share of overskilled workers human capital is the foundation for all in- capital in manufacturing among compar- than the international average.37 vestments in innovation capabilities, edu- ator countries, at 25%; the United States cation and continuous global technology has the highest, at 37% (see figure 8.11). The availability of new data on adult skills learning play a paramount role in foster- (This indicator measures the share of allows a comparison of the proficiency ing innovation. manufacturing employees who are in oc- results for adults with those for ninth cupations that contribute most to the for- graders in countries participating in both Sweden has been at the vanguard of in- mation of knowledge-based capital—in the PISA and PIAAC studies (figure 8.10). novation-driven growth, but there is room particular, those directly contributing to Across countries, there is a strong posi- for improvement. In 2012 labor productiv- R&D, design and software development tive correlation between adult literacy and ity in Sweden was only 89% of that in the and to firms’ organizational know-how.) PISA reading scores as well as between United States.38  Investments in knowl- Sweden also ranks behind comparator adult numeracy and PISA math scores. edge-based capital accounted for more countries in knowledge-intensive em- In Sweden, however, the differences be- than a fifth of labor productivity growth ployment, with only 33% of the workforce tween the competencies of adults (in in Sweden in 1995–2007.39 But this share, in such employment (according to an In- both literacy and numeracy) and those of while higher than that in Finland, is less ternational Labour Organization classifi- ninth graders are much larger than those than the share in the United States, where cation of employment that includes man- in other countries. investments in knowledge capital ac- agers, professionals and technicians). counted for a third of labor productivity growth over the same period.40 Differences across countries in the rate of investment in different types of in- FROM EDUCATION AND SKILLS Investments in innovation capabilities novation capabilities have implications DEVELOPMENT TO BOOSTING vary substantially across countries (fig- for the competitiveness of both young INNOVATION ure  8.11). Sweden’s investment levels in emerging and large established enter- Education and skills development con- knowledge-based capital are the highest prises. Swedish businesses are facing tribute to business competitiveness and in Europe. In 2000–10 these investments ever tougher global competition, with the sustainable growth largely through their amounted to 14% of an augmented GDP number of top Swedish corporations rec- impact on innovation. Innovation is about measure a year on average, higher than ognized by objective measures as being 88 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS One possible area is in entrepreneurship FIGURE 8.11 Investments in innovation capabilities vary widely across countries training and complementary support to facilitate patenting by young firms. 50 In Sweden only  8% of patents filed 45 in 2009–11 came from young firms (less 40 than 5 years old), a substantially smaller 35 share than in comparator countries (fig- ure  8.12). The share of patents filed by 30 young firms was almost twice as high Percent 25 in the United Kingdom (14%) and al- 20 most 3 times as high in the United States 15 (22%) and Finland (23%). 10 5 Another is in tilting public R&D sup- port toward smaller firms. In Sweden 0 Sweden Finland Denmark United Kingdom United States more than 80% of government-financed R&D support to the business sector Average annual investment in KBC (% of augmented GDP), 2000–10 goes to large businesses (with more Employment contribution to KBC in manufacturing (%), 2012 than  250  employees). By contrast, Fin- Knowledge-intensive employment as % of total, 2010 land directs 48%, and Denmark 55%, of public R&D support to smaller firms (with Note: KBC = knowledge-based capital. less than 250 employees; see figure 8.12). Source: Corrado and others 2013 (for investment in KBC); OECD 2013g (for employment contribution to KBC); Cornell University, INSEAD and WIPO 2013 (for knowledge-intensive employment). Yet another possible area for policy ac- tion is in reducing the costs of experi- mentation. Grassroots entrepreneurship among “the top  100  innovators” falling and business sophistication (from  2nd will be attractive relative to employment from 6 to 2 over the past 3 years.42 Only place to 7th).44 in large, already successful businesses Ericsson and Sandvik have remained on only if the cost of experimenting, learn- the list since 2011, with Alfa Laval, Atlas Analysis of innovation indicators points ing from failure and starting up again is Copco, Scania and Volvo displaced by to innovation challenges for Sweden not too high—and if the full resale value businesses such as Taiwan Semiconduc- in  3  areas relating to education and skills of initially invested assets can be rapidly tor (TSMC). development where policy actions could recovered (through efficient insolvency improve competitiveness45—by training procedures) for redeployment in new Not just individual Swedish companies people with entrepreneurial talent and in- ventures. As measured by the World but Sweden itself has fallen in rankings creasing the attractiveness of starting new Bank Group’s Doing Business project, the of innovation and competitiveness. Be- businesses so as to foster grassroots en- efficiency of Sweden’s insolvency regime tween 2010 and 2013 it fell from 1st place trepreneurship,46 by enhancing continuous lags behind those of comparators. Credi- to  3rd in the ranking on the Innovation global technology learning opportunities tors can expect to recover 75 cents on the Capacity Index, largely because of drops through internationalization and by sup- dollar through reorganization, liquidation in its ranking on  2 “pillars” of the index: porting further managerial skills upgrading. or foreclosure in Sweden, compared with regulatory and legal framework (from 11th almost  89  cents in the United Kingdom place to 16th) and adoption and use of in- and more than  90  cents in Finland (see formation and communication technol- Training entrepreneurs and making figure 8.12). ogies (from  2nd place to  12th).43  During new ventures more attractive the same period Sweden fell from  2nd Sweden has a strong export-oriented place to 6th in the ranking on the World business sector, with the top  10  firms Promoting continuous global Economic Forum’s Global Competitive- each having a turnover of more than technology learning ness Index. Its fall in the ranking on this €10  billion in  2010.47  The very success Swedish businesses need to operate in a index occurred largely because of drops of Sweden’s top firms means dependen- learning environment that is as interna- in rankings on  5  pillars: institutions cy on relatively few large businesses. tional as possible—so that they are aware (from  2nd place to  5th), infrastructure A business environment that makes it of every incremental improvement to (from  10th place to  20th, with the big- more attractive for entrepreneurs to allo- technology made by competitors and can gest fall related to adoption and use of cate their talent to higher-risk start-ups rapidly introduce improvements before information and communication technol- could reduce this dependency and facili- others do so. Creating such an environ- ogies—from 10th place to 48th in mobile tate the growth of young transformation- ment means providing all businesses with telephone density), higher education and al firms. To foster grassroots entrepre- opportunities to learn through open ac- training (from  2nd place to  8th), goods neurship, Sweden could consider policy cess to global technology flows—whether market efficiency (from 5th place to 12th) actions in several areas. through trade in products, in capital EDUCATION, SKILLS AND INNOVATION 89 (including R&D-related inward and out- ward investment by international busi- FIGURE 8.12 What is the extent of grassroots entrepreneurship—and of support for it? nesses), in ideas (including open innova- tion models) or in talent (including active 100 participation in international innovation networks and research cooperation). In- 80 dicators relating to such learning oppor- tunities suggest that Sweden could en- 60 hance opportunities to learn from foreign Percent direct investment (FDI) inflows, from for- eign intellectual property and from pat- 40 ents (figure 8.13). 20 With net FDI inflows averaging  0.6% of GDP in  2010–12, Sweden lags in oppor- 0 tunities to learn from foreign investors Sweden Finland Denmark United Kingdom United States compared with Finland and the United States, with net FDI inflows averaging Patents filed by young firms (%), 2009–11 roughly 1.5% of GDP—and even more so % of government-financed R&D support to SMEs, 2011 compared with the United Kingdom, with Recovery rate in insolvency (cents on the dollar), 2013 net FDI inflows averaging  2.1% of GDP. Note: SMEs = small and medium-size enterprises. No data on patents filed by young firms are available for Denmark. Sweden also lags in opportunities to learn Source: OECD 2013g (for patents and SMEs receiving public R&D support); World Bank Group, Doing Business from foreign intellectual property. Royal- database, 2013 edition (for recovery rate in insolvency). ties, license fees and similar payments to nonresidents—which reflect learning op- portunities from the use of patents, copy- rights, trademarks, industrial processes sophistication of its own knowledge Test (GMAT).48  This standardized test and franchises—account for  3.2% of workers. One indicator of knowledge measures aptitude for academic success service imports in Sweden. This share is workers’ business sophistication included in graduate business studies—including larger in all comparator countries except in the latest edition of the Global Innova- English fluency, essential in today’s glo- Denmark, and especially so in the United tion Index is a country’s average score on balized business world. Sweden’s aver- States, where these payments account the Graduate Management Admission age score of 500 puts it in 76th place in for more than 8% of its significantly larg- er service imports. The extent to which domestic patents are sold or licensed is another indicator of the ease and extent of knowledge flows. Here too Sweden FIGURE 8.13 For Sweden, indicators of continuous global technology learning lags behind its comparators, with  8% of opportunities suggest room for growth patents sold and 7% licensed. 16 14 Supporting further managerial skills upgrading 12 Supporting improvements in manageri- 10 al quality through education could also Percent have an important impact on innova- 8 tion. Sweden lags behind comparator 6 countries on some indicators of mana- gerial quality, perhaps in part because 4 of the growing business sophistication 2 of knowledge workers in other countries and in part because of inadequate dis- 0 semination of structured management Sweden Finland Denmark United Kingdom United States practices essential for consistent top-of- Net FDI inflows (% of GDP), 2010–12 average class performance. Royalty and license fee payments as % of service imports, 2011 Patents sold or licensed as % of all patents, 2011 To support the upgrading of manage- rial skills, Sweden could therefore con- Source: World Bank, World Development Indicators database, 2013 edition (for FDI inflows); Cornell University, sider efforts to enhance the business INSEAD and WIPO 2013 (for royalty and license fee payments); OECD 2013j (for patents). 90 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS the extent to which managers follow this FIGURE 8.14 Sweden ranks below comparators on measures of business and managerial practice. In a ranking of 148 countries on aptitudes the perceived use of this management practice, Sweden is in 74th place, far be- 80 low the United Kingdom (11th) and the 70 United States (12th).49 60 Across countries, businesses with more 50 educated employees tend to follow more Ranking structured management practices for 40 both operations management (perfor- 30 mance monitoring and target setting) and incentives management (use of 20 merit-based rather than seniority-based 10 rewards). And businesses that employ these more structured management 0 Sweden Finland Denmark United Kingdom United States practices perform better, with higher rates of innovation, greater productivity Average GMAT score (ranking), 2012 Incentives management score (ranking), 2012 and profitability, and faster employment growth. Among a sample of countries in Note: Lower rankings reflect better performance. which the use of such practices has been Source: Cornell University, INSEAD and WIPO 2013 (for GMAT score ranking); WEF 2013 (for incentives manage- measured—through “management prac- ment score ranking). tice scores”—Sweden ranks  4th, behind the United States, Japan and Germany (no other Nordic country is in the sam- a ranking of  142  countries (figure  8.14). Sweden could also use education to ple; figure 8.15).50 Sweden lags behind the Its average score is more than 10% lower encourage managers to link pay more United States largely because the best than that of Denmark (33rd in the rank- closely with worker productivity. The U.S. firms perform significantly better ing) and almost  20% lower than that of perception of global businesspeople is than the best Swedish firms. The scores the United Kingdom (10th). that Sweden lags behind comparators in also show that Sweden has by far the FIGURE 8.15 Sweden could invest more in incentives-intensive managerial capital United States China Japan India Germany United States Sweden Canada Ireland Australia Poland United Kingdom Northern Ireland Italy Brazil France United Kingdom New Zealand Canada Mexico Poland Greece Ireland Portugal Portugal France Chile Australia Argentina Germany Greece Brazil Japan China Italy India Sweden 2.6 2.8 3.0 3.2 3.4 –0.2 0 0.2 0.4 Average management practice score, Operations management score minus incentives 2012 management score Note: The left-hand chart shows each country’s average score, for businesses across the country, on operations management (performance monitoring and target setting) and incentives management, on a scale of 1 (worst practice) to 5 (best practice). The right-hand chart shows the difference between each country’s average scores on the 2 measures, with a positive value indicating that the country is relatively better at operations management and a negative value that it is relatively better at incentives management. Source: Bloom, Sadun and Van Reenen 2012. EDUCATION, SKILLS AND INNOVATION 91 biggest relative advantage in operations to ensure that every child has the same be taken to improve the quality of ter- management, while the United States, opportunity to attend a good school. One tiary education. For example, supporting China and India are relatively better at possible approach could be to create in- greater mobility of both students and fac- incentives management. So Sweden may centives for teachers from high-perform- ulty would increase the effectiveness of wish to focus especially on helping its top ing schools to spend time teaching at Sweden’s research sector in attracting top businesses make more effective use of in- low-performing ones.55 In addition, shar- researchers and in fostering productivity centives management.51 ing more information about outcomes at and innovation. individual schools could help students Finally, Sweden may wish to consider and their families make more informed Sweden’s investments in innovation ca- adding a managerial upgrading initiative choices. pabilities, though sizable, still lag behind to other, complementary policy actions those of the United States. Policy actions aimed at “going from one to three strong The differences in performance between in 3 areas relating to education and skills engines of growth in the Swedish econ- students with a Swedish background and development could help boost innova- omy,” as a McKinsey report puts it—by those with an immigrant background tion: First, expanding entrepreneurship stimulating productivity growth in service need to be tackled as early as preschool education and increasing the attractive- businesses and relevant public sector age. Promoting the participation of im- ness of entrepreneurial ventures so as to activities, including in hard-to-measure migrant children in preschool would take foster grassroots entrepreneurship—by industries such as health care.52 Accord- advantage of the positive effects of pre- providing entrepreneurship training and ing to recent research on management school attendance on reading skills. More complementary support to facilitate pat- practices and the quality of health care, effort is also needed to better integrate enting by young firms, tilting public R&D the adoption of more structured man- immigrant students who enter the school support toward smaller firms and reduc- agement practices by cardiac units in U.S. system at an older age. ing the costs of experimentation. Second, hospitals has been associated with im- enhancing continuous global technology provements both in process of care and Sweden’s education outcomes have been learning opportunities through inter- in rates of mortality from acute myocar- deteriorating despite its high level of ed- nationalization—by expanding trade in dial infarction.53  Similar evidence comes ucation spending. But evidence shows products, capital, ideas and talent as em- from public hospitals in England. Im- that not all spending is equal: increas- bodied in such things as FDI inflows and provements in their management quality ing teachers’ salary—and therefore their intellectual property. And third, support- (as measured by both higher operations status—improves student performance ing the upgrading of managerial skills by and incentives management scores) is more than spending on other education enhancing the business sophistication strongly correlated with better financial inputs (such as a low student-teacher ra- of knowledge workers and promoting and clinical outcomes. And higher com- tio). Making the teaching profession more the practice of linking pay more closely petition is positively correlated with man- attractive could help improve outcomes with productivity. Promoting productivi- agement quality.54 across all levels of schooling. Making the ty-linked pay could in turn involve putting profession more selective is also critical. greater emphasis on incentives manage- Criteria based on measured (or otherwise ment practices, not only in manufacturing demonstrated) skills could prove to be a but also in services and in relevant public CONCLUSION useful complement to specific training sector activities. Among the education reforms undertak- requirements. en by Sweden in recent decades, one of the most important was to introduce the Other important concerns are the com- NOTES voucher system giving students the free- paratively low percentage of tertiary stu- dom to choose between public and pri- dents who proceed to graduation, and the This chapter has been written by Mark Andrew vate schools—at no cost to their families. comparatively high percentage of young Dutz and Valeria Perotti. The consequent large increase in private people who are neither pursuing educa- 1. OECD 2013c. enrollment was accompanied by a decline tion nor working. In addition, compared 2. OECD 2013h. in the performance of ninth graders on in- with international averages, Sweden has 3. The causal link between higher enrollment ternational tests in reading, math and sci- a larger percentage of workers who are in private schools and overall student ence. There is no evidence of a causal link underqualified or underskilled for their performance is difficult to assess because between these two things, however. On job. And there is significant education-oc- many factors are at play. On one hand the contrary, students at private schools cupation mismatch in areas with large public and private schools may differ in their have tended to have higher scores than shares of the country’s tertiary graduates, effect on student performance; on the other such as social sciences, law, engineering hand different types of schools may attract those at public schools, though this gap different types of students (for example, narrowed in the latest results. and construction. private schools may attract students from more favorable socioeconomic back- But the high variability in scores, espe- Among the ways to help improve tertiary grounds). Changes in students’ distribution cially between schools, suggests a need completion rates, the hardest to achieve may also affect performance (for example, a to do more to reduce differences between would be a higher wage premium for more mixed environment may lead to higher high- and low-performing schools—and tertiary education. But measures could overall performance). 92 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS 4. Gronqvist and Vlachos 2008. 18. Fredriksson and Öckert 2008; OECD 2010b. background and a module on skills use 5. Cedefop 2009. 19. The UNESCO definition of gross enrollment (relating to cognitive, social, physical and 6. Cedefop ReferNet Sverige 2012. ReferNet ratio is the number of pupils or students en- learning skills). Results were published in is a network of institutions created by rolled in a given level of education, regard- October 2013. the European Centre for the Development less of age, expressed as a percentage of the 36. As explained by the OECD (2013i, p.172), of Vocational Training (Cedefop) in 2002 to official school-age population correspond- “the [PIAAC] survey asked workers wheth- provide information on national vocational ing to that level of education. For the tertiary er they feel they ‘have the skills to cope with education and training systems and policies level, the population used is the 5-year age more demanding duties than those they are in the EU member states, Iceland and group starting from the official secondary required to perform in their current job’ and Norway. school graduation age. whether they feel they ‘need further training 7. See Schweinhart and others (2005); Mel- 20. OECD 2013c. in order to cope well with their present huish and others (2008); Schütz (2009); 21. OECD 2013f. duties’. To compute the OECD measure and Cascio and Whitmore Schanzenbach 22. Karlsson and Persson 2012. Elite authors are of skills mismatch, workers are classified (2013). defined by Karlsson and Persson as “authors as well-matched in a domain if their profi- 8. OECD, Education at a Glance 2011. in a given field who have written at least ciency score in that domain is between the 9. OECD, Education at a Glance 2012. five top-10% publications over a fifteen year minimum and maximum score observed 10. One important caveat is that the PISA tests period” (2012, p. 42). The data come from among workers who answered ‘no’ to both can measure only a few student skills (for the publication database at the Swedish questions in the same occupation and example, they provide no information about Research Council. country.” creative skills, which may be very important 23. Manpower Group 2013. 37. OECD 2013i. for innovation). And they are inevitably 24. Cerna 2012. 38. OECD 2012a and updates. affected by country-specific cultural aspects 25. Svenskt Näringsliv 2011. 39. Knowledge-based capital captures invest- such as discipline, language complexity, 26. Cedefop ReferNet Sverige 2012. ments in the “soft” or intangible technol- social stigma related to school performance, 27. OECD, Education at a Glance 2011. ogies of software and databases (digital and frequency of use of PISA-type tests in 28. Statistics Sweden 2011. capital); R&D, designs and intellectual schools. But these tests have proved useful 29. For a discussion of different measurement property rights (intellectual capital); worker in comparing education outcomes across approaches, see for example Chevalier skills and management upgrading (man- countries and in studying the relationship (2003); McGuinness (2006); Johansson agerial capital); branding and advertising between the skills measured and labor and Katz (2007); and Leuven and Ooster- (marketing capital); organizational change market outcomes later in life. beek (2011). and new business models (organizational 11. Hanushek, Peterson and Woessmann 2012. 30. According to standard human capital capital); and networking and peer-to-peer 12. Weak readers are students classified theory (Becker 1964), if workers are more learning from value chains, consultants below the 2nd of 6 levels of reading skills. educated they are also more productive and other transmitters of global knowledge They are defined as “able to perform some and more highly remunerated. By contrast, (collaboration capital). basic reading skills, but they have difficul- the literature on job satisfaction claims 40. Corrado and others 2013. ties reading more complex texts, using the that overeducation leads to frustration 41. When expenditures on knowledge assets information in the texts to integrate and and therefore to lower productivity. An in an economy are correctly capitalized and interpret the content of the texts as well as early study on the United States found treated as longer-lived investments rather difficulties reflecting on and evaluating the negative effects of overeducation on than intermediate costs of production, the texts” (Nordic Council of Ministers 2012, productivity through lower job satisfaction economy’s investment rate and GDP are p. 24). (Rumberger 1987), while more recent increased accordingly. For the United States, 13. The student-teacher relationship is mea- studies have found a positive relationship for example, including investments in the sured by a composite index based on a between overeducation and productivity main types of knowledge-based capital group of questions asking students about (Jones and others 2009; Kampelmann and would produce an augmented GDP measure their interactions with teachers. Rycx 2012). for 2006 that is more than 10% larger than 14. The PISA study presents an in-depth 31. The study, by Korpi and Tåhlin (2009), the conventional GDP measure for that year. analysis of the differences in performance tests 2 main hypotheses: “(a) that edu- 42. The criteria include volume of new patents between public and private schools by cational mismatch reflects human capital (excluding “equivalents,” when the same taking into account differences in the PISA compensation rather than real mismatch, invention is subsequently filed in another index of economic, social and cultural and (b) that educational mismatch is real country), success based on patents actually status. But this analysis is conducted only but dissolves with time spent in the labour being granted and not just recorded as a for the subject of specific focus in a given market, so that its impact on wages tends published application, and global reach edition of PISA (science in 2006, reading toward zero over a typical worker’s career” based on being registered with the Chinese, in 2009 and mathematics in 2012). The dif- (p. 183). The findings support neither of European, Japanese and U.S. patent offices ference in reading and science performance these hypotheses. (Thomson Reuters 2013). between public and private school students 32. Nordin, Persson and Rooth 2010. 43. See Lopez-Claros and Mata (2010). in Sweden was negative and still significant 33. Houston 2005. 44. See WEF (2010a, 2013). after taking into account the socioeconomic 34. For further details on the Swedish housing 45. The data underlying these 3 areas are based status of students only, but not significant market, see Hüfner and Lundsgaard (2007); on innovation indicators on which Sweden after controlling for the status of both and OECD (2012b). lags behind one or more comparator coun- students and schools (see for example table 35. The PIAAC survey includes a comput- tries. The presumed links between improve- IV.3.9 in OECD 2010b). er-based skills assessment (or a paper- and ments in these indicators and the boosting 15. Böhlmark and Lindahl 2012. pencil-based one if the respondent lacks ad- of innovation in Sweden are hypotheses 16. OECD 2013h. equate computer skills) and complements to spur debate among policy makers and 17. OECD 2011b. this information with socio-demographic not based on rigorous statistical tests of EDUCATION, SKILLS AND INNOVATION 93 causality (because of lack of sufficient data operations management, scores cover both 52. McKinsey Sweden and McKinsey Global for such tests). performance monitoring (the collection of Institute 2012, p. 101. The McKinsey report 46. The importance of facilitating broad-based production information that allows compa- points out that while Sweden’s international entry of new businesses is emphasized else- nies to track what goes on inside their firm manufacturing sector has been an indisput- where in this report. The focus here is on and use it for continuous improvement) ably strong engine of growth, with annual fostering the allocation of entrepreneurial and target setting (the extent to which value added growth of 4.3% in 1993–2010, talent to higher-risk start-up ventures rather companies are setting coherent and binding local services (accounting for about 40% of than to existing large businesses. targets and measuring outcomes, together the Swedish economy) increased value add- 47. OECD 2013f. with taking the right actions if targets and ed by only 2.3% a year and the public sector 48. The Global Innovation Index is produced outcomes are inconsistent). For incentives (accounting for about 30% of the economy) by Cornell University, INSEAD and WIPO (or people) management, scores cover the had no appreciable increase in value added (2013), which report that the GMAT is an extent to which companies are promoting over this period. important part of the admissions process and rewarding employees on the basis of 53. McConnell and others 2013. for more than 5,600 graduate management merit, together with questions on the extent 54. Bloom and others 2011. programs in approximately 2,000 business to which firms systematically hire and keep 55. As Andreas Schleicher, the OECD schools worldwide. their best employees (Bloom, Sadun and deputy director for education and skills, 49. The ranking is based on subjective scoring, Van Reenen 2012). mentioned in a recent interview, Shanghai for 148 countries, in which 1 indicates that 51. The available data do not provide a has improved its test score performance pay is not related to worker productivity robust story on what factors are causing by linking teachers’ career advancements and 7 that pay is strongly related to produc- Sweden’s best firms to lag so much to their effort in low-performing schools tivity (WEF 2013). in managerial quality (Maloney and (Peter Wilby, “The OECD’s Pisa Delivery 50. Management scores, on a scale of 1 (worst Sarrias 2013). This is an area that could Man,” Guardian, November 25, 2013, practice) to 5 (best practice), are based benefit from further exploration before http://www.theguardian.com on surveys of more than 7,500 firms deciding on the best strategy for improv- /education/2013/nov/26 and cover practices in 3 broad areas. For ing performance. /pisa-international-student-tests-oecd). Annex 96 SWEDEN'S BUSINESS CLIMATE: OPPORTUNITIES FOR ENTREPRENEURS THROUGH IMPROVED REGULATIONS TABLE A.1 Rankings of OECD high-income economies in 4 areas measured by Doing Business Getting credit Registering property Protecting investors Resolving insolvency Economy Rank Economy Rank Economy Rank Economy Rank United Kingdom 1 New Zealand 2 New Zealand 1 Japan 1 Australia 3 Denmark 7 Canada 4 Norway 2 New Zealand 3 Norway 10 Ireland 6 Finland 3 Poland 3 Slovak Republic 11 Israel 6 Netherlands 5 United States 3 Iceland 12 United States 6 Belgium 6 Ireland 13 Nordic average 14 United Kingdom 10 Nordic average 7 Israel 13 Estonia 15 Slovenia 14 United Kingdom 7 Korea, Rep. 13 Switzerland 16 Belgium 16 Ireland 8 Austria 28 United States 25 Japan 16 Canada 9 Canada 28 Finland 26 Norway 22 Denmark 10 Denmark 28 Portugal 30 Chile 34 Iceland 11 Germany 28 Italy 34 Denmark 34 New Zealand 12 Japan 28 Austria 36 Sweden 34 Germany 13 Switzerland 28 Czech Republic 37 G7 average 38 Austria 14 G7 average 36 Sweden 38 Nordic average 44 Korea, Rep. 15 Estonia 42 Australia 40 Iceland 52 United States 17 Finland 42 Netherlands 47 Italy 52 Australia 18 Iceland 42 Poland 54 Korea, Rep. 52 G7 average 18 Slovak Republic 42 Canada 55 Poland 52 Sweden 20 Sweden 42 Chile 55 Portugal 52 Spain 22 Nordic average 46 Ireland 57 OECD high-income 56 Portugal 23 average OECD high-income 47 OECD high-income 58 Australia 68 OECD high-income 27 average average average Chile 55 Spain 60 Estonia 68 Czech Republic 29 Czech Republic 55 Japan 66 Finland 68 Italy 33 France 55 G7 average 68 France 80 Israel 35 Spain 55 United Kingdom 68 Greece 80 Poland 37 Belgium 73 Korea, Rep. 75 Austria 98 Slovak Republic 38 Netherlands 73 Germany 81 Czech Republic 98 Slovenia 41 Norway 73 Slovenia 83 Germany 98 France 46 Greece 86 Luxembourg 124 Spain 98 Switzerland 47 Italy 109 France 149 Netherlands 115 Luxembourg 53 Portugal 109 Israel 151 Slovak Republic 115 Estonia 66 Slovenia 109 Greece 161 Luxembourg 128 Greece 87 Luxembourg 170 Belgium 180 Switzerland 170 Chile 102 Note: Nordic average excludes Sweden. Rankings refer to 189 economies around the world. Source: World Bank Group, Doing Business database, 2013 edition. ANNEX 97 TABLE A.2 Collection and distribution of selected types of credit information in OECD high-income economies Economy Data collected and used from utilities and retailers? Historical data distributed for more than 2 years? Australia Yes Yes Austria Yes Yes Belgium Yes No Canada Yes Yes Chile Yes No Czech Republic No Yes Denmark Yes No Estonia Yes Yes Finland No Yes France No Yes Germany Yes Yes Greece No Yes Iceland Yes No Ireland No Yes Israel Yes Yes Italy No Yes Japan Yes Yes Korea, Rep. Yes Yes Luxembourg No No Netherlands Yes Yes New Zealand Yes Yes Norway No Yes Poland Yes Yes Portugal No Yes Slovak Republic No Yes Slovenia No Yes Spain Yes No Sweden No No Switzerland Yes Yes United Kingdom Yes Yes United States Yes Yes Source: World Bank Group, Doing Business database, 2013 edition. References Acs, Zoltan J., and Charlie Karlsson. 2002a. 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