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16 February, 2022

Start-up success fuels Stockholm’s FDI story

Stockholm has built on its industrial legacy to become a leading European city for tech start-ups, but will a high cost of living stymie this progress?

By Jon Whiteaker

If you are luck enough to visit the Fotografiska museum on the island of Södermalm in the centre of Stockholm, from its top-floor café you will be able to take in one of the most pleasing views of the Swedish capital, encompassing rich blue waters stretching out to islands decorated with trees and an assortment of architecture dated from a span of hundreds of years.

A city built on an archipelago dissected by a criss-cross of canals and rivers, with green space scattered across its many islands, and boasting a historic old town of multicoloured buildings, Stockholm has a case to make as one of the most picturesque cities in Europe.

The city is not just a pretty face, however. It is the engine of the Swedish economy, with the greater Stockholm region accounting for 45% of the country’s GDP, according to investment promotion agency Invest Stockholm.

Sweden is the largest of the Nordic countries with a population of over ten million, and more than four million of those live in the greater Stockholm region. Sweden is by far the largest recipient of foreign direct investment (FDI) in the Nordic region, attracting $26bn (SKr241.16) in inflows in 2020, according to the UN Conference on Trade and Development.

Stockholm is so confident in its regional status that it markets itself as the “capital of Scandinavia”, and boasts 53% of the headquarters in the Nordics, according to Forbes Global 2000.

”While Stockholm has a lot of similarities with other Nordic capitals, there are also a lot of differences,” says Anna Gissler, CEO of Invest Stockholm. “As well as being bigger, Stockholm has a different culture and ecosystem.”

Gissler stresses that Sweden’s strong technical heritage stands it apart from other European cities. The country’s established multinationals include car companies Volvo and Saab , telecoms giant Ericsson, construction company Skanska and fast fashion retailer H&M.

The home-grown companies attracting the most attention (and investment) in recent years, however, have been tech start-ups.

Europe’s start-up capital

Stockholm now boasts eight unicorns, including Spotify , Skype and Klarna. According to Atomico , the city has produced more billion-dollar start-ups per capita than anywhere in the world outside Silicon Valley.

This success is the result of a thriving tech sector, which has attracted more investment since 2017 than any other European city.

Gissler says that a start-up ecosystem has grown in the city over the past ten to 15 years, “which would not have been possible without the technical heritage that was already here”. She adds that a lot of the money that was generated from buyouts has been reinvested in new companies in Sweden. “We have investors who are really loyal to Stockholm and reinvest over and over again, and this platform of course helps to attract additional international capital and financing,” she says.

An example is Norrsken House, a co-working centre in Stockholm for more than 350 impact entrepreneurs, which was set up by one of the founders of online financial services company Klarna. The Norrsken Foundation is an active impact investor itself.

“[These investments] are strengthening Stockholm in a way [the government] wouldn’t have been able to on its own,” says Gissler.

Although global investment flows have slowed during the Covid pandemic, 2021 still saw investments demonstrating Stockholm’s tech sector strengths.

Microsoft opened a ‘data centre region’ in Sweden, with two of the three new data centres based to the north of Stockholm in Gävle and Sandviken, while Icelandic data centre operator atNorth is constructing its first large-scale, high-density data centre outside of Iceland in the Swedish capital.

Chinese smart electric vehicle company XPeng Motors has set up a Nordic headquarters in Stockholm, and world-leading critical telecom network hardware company TXO , headquartered in the UK, has established a logistics hub in the city.

Senior Technology Material, a Chinese producer of separators used in the manufacturing of lithium-ion batteries, plans to build an industrial plant in Eskilstuna by 2025 in order to supply Northvolt , the Swedish battery manufacturer that raised $2.75bn via private placement in 2021.

The high cost of living in Stockholm

One challenge facing Stockholm and its efforts to attract talent and investment is its high cost of living, particularly when it comes to housing.

Stockholm has a chronic shortage of affordable housing, which the founders of music streaming service Spotify have previously highlighted as a motivation for growing their business overseas. In 2019, the number of Stockholm residents waiting for housing rose to 580,000 from just 100,000 in 2000, equating to a waiting time of anywhere between 12 and 15 years.

This supply deficit has pushed up prices to make Stockholm the city with the highest-priced accommodation in the Nordics.

Gissler concedes that “of course, costs are high” but argues that the quality of life and business services on offer in the city need to be taken into consideration. “What is included in that cost is a leading healthcare and transport system, and many other benefits, such as 240 days of paid leave per parent when any child is born or adopted,” she says.

Gissler also highlights that Stockholm has the biggest open fibre network in the world, which is “fast and actually cheap to connect to”.

The density of business expertise in and around the city certainly gives it a strong investment advantage, despite the high costs.

Kista Science City on the outskirts of Stockholm hosts more than 400 companies focused on smartphone technology, while there is a cluster of robotics and automation businesses in the neighbourhood of Västerås.

R&D programmes initiated in 2021 include a partnership between Stockholm Environment Institute and the Green Technology Center of Korea to promote collaborations between companies from both countries on mechanisms to foster climate, clean air and environmental policies.

Another South Korean company, CJ CheilJadang Corporation, joined the 4evergreen R&D initiative in 2021 to develop smart and sustainable packaging for the food and beverage sector.     

That so many FDI wins in emerging tech sectors continued during the pandemic shows that Stockholm looks set to grow on its impressive start-up ecosystem. Although it may annoy its close neighbours, it is likely to continue to call itself the capital of Scandinavia for some time to come.   

This is the second in Investment Monitor's Future of Nordic Cities series. We have already profiled Helsinki, and in the coming weeks we will cover Bergen, Malmo, Reykjavík, Oslo, Copenhagen and Gothenburg.

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