The Nordic Innovation Arguments That Never Die

Another day, another few posts of lazy, unsubstantiated arguments that the Nordic countries just do not innovate. I would say I am tired of dealing with those arguments by now, but the reality is I am always happy for an easy win.

Silicon Stockholm

From Brookings, we have this incredibly incorrect post by Martin Neil Baily:

In terms of innovation, Europe does not have the equivalent of Silicon Valley or the innovation hubs around Cambridge, Massachusetts, or the National Institutes of Health in Maryland. These creative centers generate innovations made in the U.S. that spread around the world and benefit everyone. Denmark is too small to sustain such centers by itself, but the problem extends to Europe more broadly, where policymakers struggle to match American innovation.

In reality, Europe does have the equivalent of an innovation hub like Silicon Valley. It's called Stockholm. It's the capital of the country called Sweden.

You don't have to take my word for this. Consider this March 2015 article in the Financial Times titled "Stockholm: the unicorn factory." Unicorn is the name for startups that reach a $1 billion valuation. In the article, Murah Ahmed tells the tale:

For Stockholm, the focus of Sweden’s tech industry, Truecaller is not an outlier. In the past decade, this city of 800,000 inhabitants has churned out more billion-dollar tech companies than any in Europe, beating metropolises such as London and Berlin. According to a study by Atomico, “on a per-capita basis, Stockholm is the second most prolific tech hub globally, with 6.3 billion-dollar companies per million people compared to Silicon Valley with 6.9”.

The past decade’s local successes include internet calls service Skype (bought by Microsoft for $8.5bn in 2011), music streaming service Spotify (valued at $8bn), online gaming company King Digital, the company behind Candy Crush Saga (market capitalisation of $4.9bn), Minecraft-maker Mojang, (sold last year to Microsoft for $2.5bn) and web payments service Klarna (valued at $1.4bn).

The article goes on to provide various speculations of how Stockholm can be such a successful tech incubator.

Baily is correct that the small size of Stockholm and Sweden more generally makes it much more difficult to sustain a Silicon Valley type hub. As the FT article explains, "Sweden’s relatively small population of 10m forces start-ups to operate overseas as soon as they can." Unlike Silicon Valley companies, which can lazily grow while only serving the large English-speaking American domestic market, Stockholm companies have to get involved in exporting and translating almost immediately. But despite this, they still manage to operate at Silicon Valley levels of innovation.
Patent Nonsense
On the very same day as Baily's post, Steven Pearlstein had this piece in the Washington Post:

The world, in fact, may be better off when different countries adopt different economic systems, argue Daron Acemoglu, Thierry Verdier and James Robinson in a widely noted paper, “Can’t We All Be More Like Scandinavians?”

The United States, with its more “cutthroat” form capitalism, they argue, plays a unique role in the global economy because it generates a disproportionate share of innovative new technologies and business practices that are quickly adopted by other countries. If Americans were to embrace Denmark’s  “cuddly” form of capitalism, they fear, there would be less of that disruptive innovation and both Americans and Danes would be worse off. A robust global economy requires the co-existence of both systems trading with each other.

The problem with this "widely noted paper" (which was mostly noted as part of being mocked) is that the authors have absolutely no compelling evidence for their thesis. The evidence the authors offer is adding up patents filed in the US Patent Office from various countries. But patents are a terrible quantitative indicator of innovation levels.

We know patents are a terrible quantitative indicator of innovation levels because patent levels in the US have shot up over time massively without any noticeable spike in innovation. Consider this telling graph from a 2014 CBO report, which shows patent levels lined up with Total Factor Productivity (TFP is where "innovation" would show up in the national accounts):

In the 20 years prior to 2013, patent applications and patent grants grew massively relative to the 20 years prior to 1983. But TFP hasn't budged. As the CBO concludes: "This suggests that the large increase in patenting activity since 1983 may have made little contribution to innovation."

In fact, the hot thesis today is that high levels of patenting are stranglers of innovation, not indicators of innovation. This is because high levels of patenting can also occur when firms are snagging any and every conceivable patent to sue other firms whenever those firms independently come up with and try to implement the passively patented idea.

In addition to citing from this silly patent-counting paper, Pearlstein also makes a number of very basic factual mistakes about Nordic countries. Pearlstein says they have "higher unemployment rates." In fact, the Nordic countries are known for having some of the highest rates of employment in the world, much higher than the US:

Pearlstein says the Nordic countries have "slower growth." Not even remotely true. Growth in GDP per capita is comparable to the US:

And growth in GDP per hour worked (i.e. productivity growth) exceeds the US:

All of this information is publicly accessible in OECD databases. Why Steven Pearlstein can't look it up remains a mystery to me.