Department of Business Studies, Aalborg University
Second Draft for the Wider-project
Denmark shares with the other four Nordic countries (Finland, Iceland, Norway and Sweden) certain attributes – pragmatic protestant religion, small and homogenous population, strong social democratic parties and ambitious welfare states. But it has certainly its own personality when compared to the other members of the Nordic family. High degree of specialization in so-called low tech sectors combined with high mobility and income security in labor markets (flexicurity) are elements that contribute to making the Danish system unique in the world.
Over the last 10 years the Danish economy has performed well in economic terms. Denmark is ranked among the top five in the world in terms of GNP per capita, registered unemployment is now (June 2008) probably the lowest in the world (less than 2%) while the inflation rate remains moderate. These goals for economic policy have been realized in an economy with a high degree of income equality. The current challenge for Denmark is to transform aspects of the system that hamper its performance (weakness in science-based learning and in the integration of workers with a different cultural background) without undermining some of the key characteristics that have contributed to its success. The consensus that has supported policy learning may also for political reasons be at risk.
In this paper we use the concepts ‘innovation system’, ‘the learning economy’ and ‘learning modes’ to analyze the evolution of the Danish model and what can be learnt from it. The Danish case shows that it is possible to establish a high level of productivity on the basis of experience based learning rooted in broad and intense social interaction. It is difficult to discern any ‘strategy’ understood as a shared plan carried through by a specific set of agents in Denmark. But the interaction among ‘policy makers’, social partners and other change agents in civil society has resulted in adaptive ‘policy learning’ that may be referred to as ‘strategizing’; when new challenges or crises have appeared institutions have been redesigned through social compromise.
We point to three factors behind the success of this egalitarian small scale low-tech strategy.
The high degree of ‘congruency’ within the national system. Different sub-systems related to education, work and labor markets support and match the small firm industrial structure and the predominantly experience-based mode of innovation.
The system matches well the current global regime: The globalizing learning economy. ‘Flexicurity’, networking and participation in organizational learning promote swift adaptation and incremental innovation.
Recent adaptations where labor market policy has become more active, the efficiency of the public sector enhanced and links between industry and science reinforced.
The three most important lessons that can be drawn from the Danish case are:
It is not necessary for a national economy to be specialized in high technology products and science based learning in order to grow rich.
Social capital rooted in high levels of trust supporting experience based learning and worker participation in traditional sectors constitutes an important source of wealth.
A system where the state interacts positively with civil society can manage social and economic transformations necessary to remain successful in global competition.
The Danish Model and the Globalising Learning Economy – Lessons for developing countries
Every nation-state has its own peculiar history. Nation specific institutions and structures have proven resistant to globalization and they give each national system its own distinct ‘personality’. In any specific period certain national systems tend to perform better than others in terms of wealth creation and in terms of the quality of life that they offer their citizens. Is it possible to learn from the successful examples when designing development strategies in the rest of the world? The assumption behind this chapter is that ‘learning-by-comparing’ is a fruitful exercise while ‘naïve benchmarking’ where attempts are made to replicate isolated successful institutions or mechanisms defined as global ‘best-practise’ may lead to unintended and negative consequences (Lundvall and Tomlinson 2002).
One way to explain why ‘naïve benchmarking’ does not work is to take the national system of innovation as point of departure. This concept was developed in the middle of the eighties (Freeman 1982; Lundvall 1985; Freeman 1987; Freeman and Lundvall 1988) and is now used world-wide as tool for analysis and policy. National systems of innovation of innovation differ in terms of what they do (industrial specialization), what they know (reflected in patterns of patenting and publishing) and in how they do and learn (different institutions and different organizational forms). The most important dimensions of innovation systems are the patterns of interconnectedness and interaction among individuals and organizations.
National systems of innovation – contingency, congruency and adaptability
National systems of innovation are open systems and the domestic pattern of interaction may be more or less well adapted to the global context. For instance its institutions may be supportive to certain generic technologies that in a specific economic era offer the greatest opportunities (Perez 1983; Freeman and Perez 1985). This implies that the performance of a specific national system is contingent and what appears to be a well functioning system in one époque may turn out to be a failure at a later stage. In this paper we will argue that Denmark benefits from an institutional set up and a mode of learning that matches well the current context of the globalizing learning economy.
At the foundation of the evolution of the national system are processes of interactive learning among agents and organizations within the system. Such forms of interaction will tend to develop a certain degree of ‘congruency’ between the pattern of specialization in production and knowledge on the one hand and the institutions that frame economic processes and learning processes on the other. In this paper we will argue that there is a good match in Denmark between the different elements of the system. The flexible labor market, the education system fostering personal competence and the system for life-long training supported by public sector matches well the industrial structure; i.e. the population of small scale firms operating in traditional sectors. Economic and social equality and related high levels of trust support interactive learning between organizations and high degrees of participation in organizational learning.
The state may play a more or less autonomous role in relation to the evolution of international contingency and internal congruency. When the system gets out of tune with the global context and/or when there is growing friction between the production system and the institutions that frame it, a new agenda for public policy will present itself. The state and the political process may in such situations prove to be more or less ‘intelligent’ when it comes to cope with the new threats and challenges. In some cases the path dependency will be strong and attempts will be made to reinforce the current institutional set-up. In other cases social and political conflict may result in development of new directions of change. This will be reflected in the degree of adaptability of the system. In this paper we will argue that the Danish history has fostered adaptability in this sense. At the core of this adaptability we find positive relationships between state and civil society. This includes tripartite interaction in labor market regulation where social partners interact with the state but it goes further than that.
Brief introduction to the structure of the Danish innovation system
The Danish system of innovation is characterized by many small and medium-sized enterprises (SMEs) with only a few (in international terms) large firms. In general, Danish firms are innovative (making both product innovations, process innovations and organizational innovations), but the innovations mainly take the form of incremental changes. A big share of the Danish manufacturing value-added, employment, and export is within low-tech industries (defined as industries with low R&D-intensity), although the share is decreasing. There are important exceptions from the traditional dominance of low- and medium-tech sectors – the most important being the pharmaceuticals and other medico-related industries.
Low or medium R&D-intensity does not, however, mean that the production is not knowledge-intensive. In fact, production in many of the industries characterizing Denmark’s so-called low and medium-tech production is based upon extensive knowledge inputs related to a high degree of change and flexibility in firms’ use of resources, including rapid diffusion of new technologies and frequent incremental product innovation combining a high level of competence in industrial design with advanced organizational techniques and marketing methods. The innovations often reflect a practical and experience-based interaction between skilled labor, engineers, and marketing people.
Social and economic performance
There are different ways to measure the performance of a national economy. The most common refers to GNP per capita. Denmark is doing well according to this measure. Actually it has been in the top ten-league in this respect for the last 10 years. Behind this lies a high participation rate in the labor force in general and especially for women. GNP per working hour or per active worker is less impressive but here the relative size of the public sector may be a factor that results in a downward bias (value added in public service does not include capital income). Measurement of productivity in the private sector puts Denmark in a more advantageous position.
The rate of unemployment is low (less than 2%) and the rate of inflation has remained moderate (3.4 %). The foreign debt is low and has been considerably reduced over the last 15 years. Public debt is also low.
Figure 1 – Denmark’s position international comparison 2003
There are more ‘holistic’ and impressionistic attempts to measure the relative performance of national economies. In April 2005 the Intelligence Unit of the British weekly The Economist defined Denmark as the most attractive country in the world seen from the investor’s point of view (the Economist). Recent years the World Economic Forum has presented rankings of international competitiveness where Denmark ends up among the top five.
A third way to measure welfare is through asking citizens about how they see their quality of life and how they evaluate different institutions in the society they live in. Also here Denmark comes out on top. Danes are among the most satisfied people in the world (the response pattern might reflect that each individual is in charge of his own happiness – declaring yourself not to be happy would be to accept failure).
A Danish paradox?
Denmark has realized these economic and social goals while developing an ambitious welfare state. This contrasts with the pro-market bias of standard economics as it is reflected in policy advice offered by international organizations such as the OECD and the World Bank. Big public expenditure, high and progressive tax rates and generous public social schemes have been characterized as hampering growth. This general message has been re-inforced through references to the threat coming from globalisation.
Globalisation has thus been referred to as a threat to the welfare state. However, as we shall see, globalisation does not affect welfare states uniformly, and actually the Scandinavian welfare model seems to prosper in the context of globalisation. Since 1990, the Scandinavian countries have outperformed not only Continental European countries on employment, economic growth and labour productivity but also the neo-liberal models of the UK and the US.
The paradox takes on an extra dimension in Denmark. Some of the success in Finland and Sweden may be explained by extraordinary heavy investments in R&D and in a strong growth in ICT-sectors. This transformation has not to the same degree taken place in Denmark where ‘low technology’ industries related to food, textiles and furniture still contribute strongly to exports. The absence of big multinational firms has been seen as another structural weakness of the Danish economy.
In this paper we will demonstrate that some of the assumed ‘weaknesses’ tend to become ‘strengths’ in the context of the globalizing learning economy where the capability and opportunity to learn is the key to success for individuals, organizations and regions. They form integral parts of an innovation system based upon experience based learning. In this alternative universe it is crucial for economic performance that a broad segment of the population is engaged in processes of change where they interact in developing, implementing and using new ideas. And it is here we find the secret behind the success of the Danish model.
A Danish model?
Denmark has in common with the other Nordic countries that most important rule setting for the labor market comes out of compromises between centralized trade unions and centralized employers’ organization. This stands in contrast to systems where rules are set through laws given by the state. Behind the autonomy of the interest organizations there is a complex of governmental laws. The most important is the state mediation authority who can be called upon when disputes develop.
The US labor market scholar Galhenson who introduced the concept ‘the Danish model’ already in the sixties referred mainly to this regulation mode of the relationship of capital and labor. In this paper we sketch a broader version of the Danish model. We try to demonstrate that in the context of the current ‘learning economy’ there are several mechanisms that support the dynamic performance of the Danish economy. The self-regulated labor market is part of this but there are several other dimensions related to the ‘national system of innovation and competence-building’ that need to be considered.
In the long run ‘adaptability’ may be seen as the most fundamental prerequisite for sustained economic growth.1 As we shall see the adaptability of the Danish system has both a macro-political and micro-economic dimension. The macro-political dimension may be illustrated by the fact that in periods of crisis the state, civil society and interest groups have interacted and established new frameworks for regulating and changing the system. This dimension will be discussed in section 2. We see the micro-economic dimension of adaptability reflected in interactive learning and incremental innovation as one key element behind the strong economic performance. Also important is the support these processes get from institutions related to education, training and labor market and this will be the major theme for the rest of the paper.