High taxation weakens Denmark’s innovation machine

The world wide financial crisis is undermining the environment for innovation in Denmark, with an increasing trend towards outsourcing activities in high tech sectors such as information technology and biotech.

These industries have moved R&D to more cost-friendly countries, as the prices in Denmark are seen as too high to sustain. “Taxes and other barriers are the prime reason why foreign investments are missing,” believes Karsten Vandrup, IT entrepreneur and former vice president of R&D at Nokia. Vandrup was responsible for offshoring the R&D activities of wireless communications company Litepoint to Taiwan and China.

There is much at stake here: the 2010 World Bank Entrepreneurship Snapshots put Denmark among the best performers of the 112 countries studied in terms of start-ups. Each year, between 14,000 and 18,000 new businesses are registered and start-ups make up 10 per cent of the total number of companies in Denmark.

Danish employment policies: pros and cons

Meanwhile, the World Bank’s Rigidity of Employment index places Denmark 9th in the world, in terms of the ease of employing workers. The country’s employment policies give companies leeway to hire and fire as it suits them, while the unemployed get high benefits and there are education and training programmes to ensure people can update and maintain their skills.

This also empowers workers, believes Susana Borrás, an expert in EU innovation policies at the Copenhagen Business School. The Danish culture, encapsulated by Danish Jante law, which states, “No one is better than anyone,” also applies to business culture, making the Danes a creative and entrepreneurial community, “The horizontal and non-hierarchical culture in Danish firms is very good for this; hierarchy kills creativity,” Borrás said.

The downside is that the high taxes associated with the generous unemployment benefits and flexible employment law have a negative impact on entrepreneurship, according to Søren Carlsen, chairman of Dansk Biotek, the biotech industry body, who says high taxes in Denmark, “Can frighten our best people away to work abroad.”  At the same time, foreigners employed in Danish companies pay only 25 per cent income tax for the first three years, but then move to a 50-68 per cent rate, at which point, “Almost all of them leave,” Borrás said.

“The high [taxation rates] make it almost impossible to become rich anyway, [so] why take the risk and go into entrepreneurship?” asks Vandrup.  As a consequence, many Danish entrepreneurs are establishing businesses abroad, or own them through foreign holding companies.

Denmark’s World connections

Into this mix, the Danish government has added a number of initiatives to attract foreign direct investment. In 2006 it launched its Globalisation Strategy, which aims to build ‘knowledge bridges’ between Denmark and innovation hotspots such as Silicon Valley. At the Innovation Centre Denmark office in Palo Alto, California, “Our goal is to create value for our customers in Denmark, create R&D alliances and jobs in Denmark,” says Lars Been Nielsen. The office has helped a number of Danish start-ups to raise venture capital, including the biotech company Evolva, which has raised $23 million.

Back home, venture capital is a problem. While the Danish start-up rate is higher than other European countries, only around 5 per cent of Danish entrepreneurs achieve high growth in terms of either turnover or employment, within the first few years. In the most entrepreneurial countries, the figure is three times as high.  The reason is, “We don’t have a very vibrant angel and venture market,” says Nielsen.

Intellectual Property Rights

Another of the obstacles to igniting entrepreneurship in Denmark - and the EU - is the way in which universities handle intellectual property (IP) rights. “The Danish tech transfer legislation is only 9-10 years old. So they are trying to build a strong flexible relationship with private companies and make sure that too many lawyers do not complicate the relationship too much,” said Nielsen, who sees the technology transfer office at Stanford University as a model to copy.

Some think that more focus on IP filing in public universities will also help to educate Danish companies, which overall have small IP portfolios. And other measures are needed, such as setting out a focused strategy for public research to build strong links with industry. “Today we just do a little of everything with no clear focus areas,” said Vandrup.

Teaching students about entrepreneurialism is a further issue. Some support organisations exist, for example, the International Danish Entrepreneurship Academy. “But the mindset needs to change from elementary school and up through the school system,” believes Nielsen.