Can Sweden show Europe how to compete again?

Sweden’s economy has, in many ways, suffered from the same tribulations as the rest of Europe: recent bouts of crushing inflation and recession, and now the prospect of meagre growth in a world split by geopolitical and economic conflict.

Nevertheless, the Nordic country has a roster of high-tech entrepreneurs that is the envy of its neighbours. Spotify and Skype are globally recognised brand names. Klarna, a financial tech firm, and King Digital Entertainment, the maker of the video game juggernaut Candy Crush, are other examples of homegrown tech powerhouses.

“They have something — particularly in the tech sector — which other European countries do not really have to the same extent,” said Jacob Kirkegaard, a senior fellow at the German Marshall Fund.

That entrepreneurial track record has been attracting renewed attention at a time when anxieties are mounting about Europe’s ability to compete with American and Chinese advancements in high technology.

The United States has turned out a generation of companies like Google, Meta and Amazon, while China’s tech scene flourished with firms like Alibaba, Huawei and ByteDance, the owner of TikTok.

Europe, of course, has its own star tech giants like the Netherlands’ ASML, a global leader in the semiconductor sector. But as a whole, the continent is seen more as a bystander than an innovator, known more for its aggressive regulation of foreign tech firms than building businesses of its own.

The economic impact of falling behind is substantial, but it also has important social implications. European policymakers worry about the long-term effect of relying on foreign corporations for communication, social media, shopping and entertainment rather than on companies with what is widely referred to as “European values.”

Those values include a stronger appreciation for protecting privacy, preventing the dissemination of hateful speech and maintaining strong labour protections and a better work-life balance.

Critics of European tech policies complain about less access to venture capital and a cultural aversion to risk-taking. Europe’s tech workers often have moved to the United States rather than build companies at home.

But Sweden has had a different experience. It has produced more tech unicorns — startups valued at more than $1 billion — per capita than any other country in Europe after tiny Estonia, according to a report on European tech by Atomico, an investment firm. And it ranked fourth in the number of unicorns, after Britain, Germany and France, countries whose populations are six to nine times as large.

Mario Draghi, a former president of the European Central Bank who is analysing the “competitiveness crisis” for the European Union, recently pointed to Sweden as an example to be followed. Its tech sector is twice as productive as the European Union’s average and it provides strong social programmes, he noted.

In interviews, a dozen entrepreneurs, investors and economists agreed that an ingredient of Sweden’s success were initiatives in the 1990s that gave a wide swath of the public access to personal computers and broadband. At the time, most people were just getting used to the screeching woof of dial-up modems.

Fredrick Cassel, a partner at Creandum, a VC firm that invested in Spotify and Klarna, said his ability to use the Internet at home set him on the path to being a tech investor.

The push to get a PC in every home and build connectivity gave Sweden an edge in producing an “engineering generation,” Cassel, 50, said. “I have a hard time seeing that happen without those two pieces of infrastructure in place.”

Swedish tech entrepreneur Hjalmar Nilsonne had a similar experience. He remembers getting his own Pentium II HP computer in 1998 when he was 10 years old: It “changed my life, by introducing me to programming and the Internet.”

Nilsonne, who founded and later sold Watty, recently co-founded a startup called Neko Health with Daniel Ek, the founder and CEO of Spotify.

“He had the exact same story as I did,” Nilsonne said of his Neko partner. “We started playing around with computers. We learned how to build websites. We started selling websites to friends and family when we were teenagers. And that was all possible because we had very early access to the Internet.”

Analysts also point to a tradition in Sweden of public and private investment in research and development, which currently amounts to 3.4% of total output, one of the highest percentages in Europe. There was also a deep pool of assets from family foundations like Wallenberg and Ikea as well as a government-controlled pension system that served as local sources of early venture capital in the small nation.

Swedish businesses have always been pushed to search for customers outside the country, which has a population of only 10 million, said Asa Zetterberg, the managing director of TechSverige, a trade organisation. That has forced startups and industry, she said, to “be competitive in the global economy.”

Half of the country’s gross domestic product comes from exports, and the tech sector accounted for 11% of total exports in 2022.

Niklas Zennstrom, a founder of Skype who is now CEO of Atomico, said that startups could get early funding but had a much harder time getting financing for expansion in Europe compared with their counterparts in the US.

Pressure for more financing comes amid a push by governments around the world to more forcefully direct economic development. The US has kicked up spending on semiconductors, alternative energy and electric vehicles by hundreds of billions of dollar to compete aggressively with China.

Founders and investors in Sweden repeatedly pointed to the crucial role that the country’s expansive social safety net plays in encouraging entrepreneurs to experiment and take risks — despite the high taxes it takes to finance the programmes. An effective “social welfare system” is the best way the Swedish government can encourage entrepreneurship and innovation, Cassel said. Free education, free health care, free child care. “You can afford to take risks, you will not be on the street” if you fail, he said.