Often cited as one the happiest countries in the world, Denmark's investment environment could use a bit of cheering up. The Scandinavian country of just 5.5 million inhabitants has witnessed a growing investment gap in the past decade, according to a recent report by Danish Industry. Citing the high costs of doing business and the large presence of the state as key barriers to investment, the report recommends a rethinking of key investment factors to attract more FDI to the country.

Up until 2006, Denmark’s inward investment flows were running high, with the differential between inward and outward FDI only €12bn. In 2012, however, the trend had reversed and the investment gap had increased significantly, reaching €69bn, equivalent to 28% of the country’s GDP. The cause of the gap is the result of fewer inwards flows, combined with a significant increase in outgoing FDI flows.

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While this trend is not exclusive to the Danish economy, Denmark is now one of the lowest ranking OECD countries for inward investment flows. In 2006, the Danish investment gap sat comfortably in 14th among OECD countries by this measure, while in 2012, the gap had widened and Denmark moved up to fifth. By comparison, fellow Scandinavian country Norway also has an investment gap, but unlike in Denmark the Norwegian investment gap has decreased from 2006 to 2012, due to high levels of investment in oil production and real estate.

Downward spiral

Greenfield data from crossborder investment monitor fDi Markets shows that Denmark’s highest number of projects over the past 10 years came in 2005, when 76 projects were recorded. In 2013, however, the number of projects was down to 33. The US remains Denmark's top source country overall, accounting for more than one-quarter of projects tracked, as well as claiming the highest generation of jobs created in the country.

The highest total and average investment comes from Norway, at €800m overall and €400m per project. Software and IT services is the top sector, accounting for almost one-quarter of projects tracked, while communications has generated the highest number of jobs, and real estate is responsible for the highest total investment. Pharmaceuticals has the largest project size on average in terms of both investment and job creation.

Susanne Hyldelund, a director at Invest in Denmark, says that this investment gap is not necessarily an indication of a negative Danish investment environment; it is just as much an indicator of the willingness of strong, competitive companies who are looking to enter new markets by investing internationally.

Indeed, Peter Munkholm Nielsen, research manager at Copenhagen Capacity, shares this view and adds that differences in methodologies when measuring FDI data make it difficult to compare crossborder activities, particularly so when it comes to value-adding greenfield investments.

“Most greenfield investments are not included in official FDI stocks and flow data due to the size of the amount invested," he says. "The National Bank of Denmark places a threshold of Dkr100m [€13.5m] for including greenfield projects in FDI flows. FDI retention is not included in official data but is often an important element of the efforts of investment promotion agencies.”  

At great expense

While the Danish Industry report suggests that Denmark’s key strengths are based around its productivity, innovation and skilled labour, its main weakness comes in its high cost of doing business, where Denmark ranks as one of the most expensive countries in Europe (albeit less expensive than nearby Sweden and Norway). This forces foreign companies looking to reap high returns on investment to look elsewhere for a location for their new FDI projects. Denmark also ranks 15th, behind both Sweden (sixth) and Norway (11th) in the 2014 World Economic Forum Global Competitiveness Report.

Interestingly, it is not only foreign companies that find Denmark's high costs of doing business a disincentive; Danish companies are increasingly outsourcing labour, citing lower wages and production costs as primary incentives for locating outside Danish borders, while proximity to clients and new markets is of less importance. While this trend is not unique to Denmark, the country is now the top outsourcer of industrial labour within Europe, with its total number of outsourced workers ranking higher than the combined total of Sweden and Norway.

“When promoting Denmark as an investment location, we recognise that the country might not be the optimal location for all companies, but we try to match the Danish business environment and its strengths to those businesses that we do target," says Ms Hyldelund. "We place emphasis on access to skilled labour, supported by excellent research and high levels of competence, as well as proving that Denmark is equally suitable as a competitive production location.” Data from fDi Markets supports this reasoning, highlighting skilled workforce availability and high levels of innovation as key attractions to investing in Denmark, while adding proximity to markets and customers (35.7%), market growth potential (26.5%), and infrastructure and logistics (22.4%) as top motives.

Strengthening links

The Danish Industry report recommends that stronger links be established between research institutions and businesses in an effort to maintain high levels of innovation and productivity, while increasing the country's attractiveness to foreign companies. A recent initiative is the Danish Innovation Fund, which seeks to strengthen exactly this link. The fund helps to support and maintain niche industries via the creation of niche clusters, where companies face relatively low entry barriers in terms of co-operative research and development.

For companies in these niches, Denmark continues to attract international investments, as the level of skill is often unmatched elsewhere. In particular, food science and technology have attracted attention from many companies. Danish-Swedish Arla Foods, the largest dairy producer in Scandinavia, has invested more than €100m in a new innovation centre, while US chemicals company DuPont, which acquired Danish company Danisco in 2011, recently opened a centre of excellence in Brabrand in western Denmark.

Claus Lønborg, CEO of investment promotion agency Copenhagen Capacity, says that this support is key, stating that “when we see a need that calls for change and innovation we commit ourselves and [our] broad range of partners, including leading companies, universities, trade organisations and public and private sector organisations, to innovate and develop groundbreaking and sustainable solutions.”

Staying on top

Despite the growing investment gap, Denmark continues to perform well on a number of FDI attractiveness indicators, with the Copenhagen region coming first in the small European regions category in fDi Magazine’s 2014/15 European Cities and Regions of the Future Rankings. The rankings, which use measures such as economic potential, human capital and lifestyle, cost effectiveness, infrastructure and business friendliness to assess the attractiveness of a region, also highlighted a strong dedication to FDI strategy in the Denmark, with Copenhagen finishing first for FDI strategy in in the small European regions category.

Mr Lønborg says: “[Our] ambition is to develop the most attractive business region in northern Europe, allowing us to attract companies, talent and capital to further spark regional growth and development.”

Changes such as these, complemented by Denmark's existing skilled labour pool and high levels of productivity, should enable the country to boost incoming FDI levels. Ms Hyldelund agrees that Denmark already has a solid foundation for growth, but adds: “Denmark will always be more appealing to certain industries as it is all about matching the Danish capabilities and promoting our niches.”

A recent growth strategy launched by the Danish government promises fewer administrative burdens as well as less corporate regulation. In 2013, the first steps were taken to lower corporate taxes from 25% to 22% until 2016. It is too soon to judge the effect of this initiative; however, it certainly is a credible signal of the intention to create an appealing environment for doing business in Denmark.