Norway’s role in the global economy of the 21st century – key policy issues

Dr. Christian Ketels, Principal Associate, Institute for Strategy and Competitiveness, Harvard Business School, Boston

Introduction

The aim of this paper is to identify key priorities for Norwegian economic policy, focusing on foreign economic relations, for the medium-term future.

The paper is motivated by the clear sense that the global economy is undergoing structural changes that will require a review of current Norwegian policies.

The thinking builds on Michael Porter’s work on competitiveness, including joint work with him on applying this framework on Norway

The changing context for competition in the global economy

Norway has to define its role in a global economy that is undergoing fundamental changes in terms of the nature of competition between locations. New competitors require Norway to more clearly distinguish the value the country provides as a place to do business in the world economy

Competition between locations is becoming more important, more intense, and is changing in quality

Drivers of change

More locations – most notably China, India, and other emerging economies – have created conditions that meet the minimum requirements to participate in the world economy; these countries are opening up to foreign trade and investment and are taking many steps to improve their domestic business environments. 

Technological change has changed the relative value of activities and reduced the costs of integrating activities across locations and organizations; these changes in communication, information, and transportation technology have first reduced the costs of existing activities and now allow companies to also change the way in which these activities are being conducted.

Impact on patterns of economic activity

  • Globalization of markets; many more markets are becoming attractive for companies, with most future market growth occurring in emerging economies while Europe in particular will be loosing relative share
  • Different demographic trends in Europe versus other parts of the world are further reinforcing these changes
  • Globalization of value chains; activities across the value chain are getting dispersed across locations and companies, forcing locations to prove their attractiveness for each individual activity rather than the bundle of activities across the value chain
  • Changes in the innovation process, i.e. the perceived advantages of open models of innovation, support the dispersion of innovative activities across institutions while they reinforce the importance of geographic proximity
  • Changes in management practices, i.e. the focus on core activities and competences, support the dispersion of activities across institutions while they reinforce the importance of geographic proximity
  • Globalization of companies; multinational companies are increasingly ‘orchestrators’ that connect activities around the world to serve markets around the word
  • This also leads to an increasing number of multinational companies that have their roots in emerging economies
  • Globalization of knowledge; standardized knowledge is increasingly available everywhere around the globe
  • The need to adapt this knowledge to the more heterogeneous markets in the global economy is a driver towards R&D expenditures rising in many emerging economies 

Impact on patterns of relative demand and supply

On the supply side, the availability of low cost labor and the access to capital have become less important as a source of competitive advantages. China’s labor force in particular has significantly raised the global low skill labor pool. The integration of financial markets and improved macroeconomic policies have made capital more globally available.

On the demand side, there is a shift towards natural resources and capital-goods and towards knowledge and advanced services. The growth of the emerging economies leads to their particular demand patterns becoming more important globally. The changing nature of the global economy increases the demand for connecting activities in different locations. And the increase. 

The changes in the global context for competition among locations challenge policy makers to develop new approaches that can affect those factors that are growing in importance. 

Locations increasingly compete on the microeconomic conditions they provide for companies to achieve high levels of productivity. Preferential market access has lost relative importance with trade barriers falling. A sufficiently solid context in terms of macroeconomic and other policies is largely taken as a given. 

More and more activities at a location are exposed to global competition. This competition comes from a more heterogeneous set of locations that test every aspect of the business environment by providing significantly different alternatives.

Solid performance on ‘basics’, i.e. macroeconomic stability and predictable legal and political institutions,  is more and more widespread; better performance on these dimensions is beneficial but not sufficient for locations to succeed in competition.

Successful regions combine a strong general microeconomic business environment with a clear specialization around a value proposition defined by specific clusters or activities. 

Microeconomic conditions at a location are driven by the choices of a much broader set of institutions and affect by a much wider set of policies than the traditional macroeconomic policies.

Microeconomic conditions are affected by policies on education, infrastructure, and many other policies, including traditional economic development policies; the integration of policies across the many different parts of government involved becomes a major challenge for policy makers.

The clear separation between government setting the rules and companies competing under these rules is no longer a sufficient description of their respective roles; strong business environments depend on coordinated actions by different levels of government, businesses, and other institutions

The focus on the national government defining policies and other levels executing is no longer effective; the allocation of responsibilities to different levels – from local to cross-national – becomes central.

The old divide between foreign and domestic economic policy is becoming blurred; the integration of a location into the global economy is affected by many policies that traditionally were viewed as domestic affairs.

Norwegian’s current position

Norway registers high prosperity based on a solid context (macroeconomic policies, institutions, and general skills and infrastructure), significant natural resource wealth, and a few globally competitive clusters. But the country is effectively less integrated in the global economy than many of its peers. Norway’s economic performance is strong but reflects the role of natural resource wealth rather than the attractiveness of the country as a business location.

The level of prosperity and the quality of life is high; medium-term growth is solid but not exceptional compared to peers. Productivity (measured by GDP per hour worked) is high, but low levels of economic activity (hours worked per capita) and high domestic prices reduce the level of prosperity actually enjoyed; recently, Norway has become ‘more normal’ with productivity growing less and economic activity growing more than in peer countries.

On indicators of investment and global attractiveness Norway performs significantly weaker than on current prosperity; capital investment is low, patenting intensity is behind peer countries and falling, inward FDI stocks and inflows are relatively modest, and global export market shares outside oil and gas have been flat over the last few years.

Norwegian wages are high relative to most peers and relative to the country’s level of microeconomic competitiveness. Norway has created a strong general context but it faces a challenging geographic location and its microeconomic competitiveness lags behind peers.

Context

  • Norway benefits from its high level of integration with prosperous neighbors. But its remote location, its lack of metropolitan areas of global importance, and proximity to a relatively stagnant European economy pose clear challenges
  • The country has strong legal and political institutions, few social issues, and pursues a solid macroeconomic policy
  • Oil and gas resources are a major economic asset; Norway has managed to avoid the negative macroeconomic and institutional side-effects of natural resource wealth that many other resource-rich economies have experience

Microeconomic competitiveness

Norway ranks among the top 20 countries worldwide in terms of competitiveness but this puts it below most of its peers. In recent years Norway has registered some success in closing the gap.

A key challenge is the low level of internationalization of the Norwegian economy. It is one of the key reasons why competition on many Norwegian markets is relatively low and Norwegian companies on average receive relatively weak scores on their innovative capacity.

The maritime cluster is the only one in which a significant number of knowledge-driven companies based in Norway have achieved sustained success on a global scale. Norway’s economic policy debate is characterized by a rhetoric of non-interventionism based on classical economic theory and a reality with a large role of the government in the economy. 

Norway’s prosperity and wages are significantly higher than suggested by its competitiveness. The prosperity gap seems sustainable only as long as the country can draw on its natural resource assets.

Implications

  • The changes in the global economy erode the benefits that Norway can derive from an economic policy focused on creating a solid general context and prudently managing the county’s natural resources.
  • The relatively low level of internationalization on many Norwegian markets has increasing costs. It reduces the competitiveness of the Norwegian economy and limits the country’s ability to benefit from global market opportunities
  • Norway needs a new consensus on the importance of microeconomic drivers of competitiveness. Policy makers are under pressure from the public to be active in increasing Norwegian competitiveness but are left without the conceptual framework to formulate such policies

Key priorities for Norwegian policy

For Norway to be able to take more advantage from the emerging global economy, the general economic policies, the economic policy process, and traditional foreign economic policies are all important. While the focus here is on the latter, one key action in each of the two other areas is mentioned as well.

General economic policies

  • Norway needs a clear national economic strategy that would identify the role that Norway aims to play in the emerging global economy. The strategy would communicate the value Norway provides internationally. It would enable policy makers to understand where Norway needs to truly excel and where it just needs to meet global standards
  • Norway’s positing might be around technology to meet higher standards in terms of natural demands, environmental conditions, and quality of life. And it might focus on the efficient use of natural resources as a platform for value creation

International economic policies

  • Norway needs to aggressively internationalize its economy. It has to attract foreign companies, foreign individuals, and foreign investors. Higher internationalization would increase the level of rivalry on Norwegian markets and would strengthen the linkages of Norway to clusters and markets elsewhere
  • Norway needs to emphasize the cooperation with its neighbors. Countries selling natural resources often serve anonymous global markets and focus less on economic links with neighbors. A neighborhood strategy, for example around the existing Baltic Sea cooperation, could be a key pillar in internationalizing the economy. Regional cooperation also provides a crucial bridge for Norway to engage in EU policies as an active partner 

FDI attraction needs to be a key priority for Norway. Norway needs foreign companies not because of their capital, but because of the contribution they can make to upgrade Norwegian clusters, to strengthen linkages to foreign clusters and locations, and to increase the intensity of competition on Norwegian markets. Norway can be an attractive location for companies that can benefit from the specific skills and assets present in Norwegian clusters. Norway needs to be best in class in terms of one-stop relations between investors and government agencies. Costs will never be a competitive advantage for Norway, but it needs to broadly match the financial terms investors face in peer countries.

Norwegian trade missions need to be bridges that allow Norwegian companies to tap into foreign clusters, knowledge, and markets and allow foreign companies to connect to Norwegian locations. Norway needs to be proactive in negotiating global policies in markets that are important for companies based in Norway. Norway’s key clusters can be an important policy platform to provide Norwegian policy makers with detailed feedback on critical Norwegian interests. Norway can shape standards in ways that allow Norwegian companies to leverage their relative strengths.

Norway has a unique position in the dialogue between advanced economies and natural resource-rich economies. As a country with national interests shaped by characteristics relevant for both types of countries, it can become an important neutral bridge in the policy dialogue. To play this role in a consistent and credible way, Norway needs to clearly identify the political and economic benefits that it wants to gain from this position. 

Policy process

Norway needs a new policy process to integrate policies across different parts of government, to involve the many non-governmental institutions that shape the Norwegian business environment, and to educate the public about the implications that the global economy has for Norwegian prosperity

Countries like Denmark have used a ‘Globalization Council’ as an effective tool to achieve better integration. If Norway should choose this path, it is important to create an institutional structure that has real political weight and is tightly connected to government policy setting.

Government policy towards specific clusters needs to be viewed more broadly in terms of integrated policy choice on education, infrastructure, government procurement, market regulations, etc., not just or predominantly in terms of financial incentives.

Sist oppdatert: 03.12.2007
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