Iceland's business lessons

A small isolated country, dependent on fishing, has transformed itself into a free-market success story. How did it do it?

by Emilie Filou, World Business
Last Updated: 23 Jul 2013

In 1972, Iceland held the world chess championship, a big event for a small, isolated country. Everyone followed the championship, learnt the game and started to play. Eight years later, Iceland had seven or eight grand masters. Not bad for a population of just 300,000. This success had little to do with a genetic predisposition of Icelanders for chess. Rather, it stemmed from a desire to learn and emulate, and a culture of mutual help and encouragement.

This last is perhaps Iceland's strongest characteristic and the reason for the high number of millionaires and large companies in such a small population. The country's transformation from a small isolated fishing economy to a world-class business nation has puzzled many observers: 15 years ago, most would have been pushed to name anything but Bjork and geysers in association with Iceland. But over the past five years, company names such as Baugur, Icelandair and Kaupthing have entered the language.

For decades, the country existed in near isolation, exporting fish and importing everything else. Even now, the fishing industry provides 70% of export income and employs 4% of the workforce. Although it became a member of the European Free Trade Association in 1970 and entered into a free trade agreement with the EC in 1973, it was its membership of the European Economic Area in 1993, combined with an unparalleled liberalisation programme, that transformed the economy. State-owned companies were sold, banks privatised, income taxes and interest rates slashed. By the end of the 1990s, Iceland had completed the transition from centrally planned economy to free-market champion.

Although its GDP in 2005 was a mere $10.6 billion, it ranks among the world's richest countries due to its high GDP per head: $35,600 in 2005. The average yearly growth of 4.5% over the past 10 years compares with the OECD average of 2.7%. Unemployment is almost non-existent and employment is high (more than 80%), thanks to a young population. The average age is 36, the lowest in Europe.

Icelandic companies have boomed. With the banks behind them, they rapidly exhausted opportunities at home and looked abroad. The market value of companies on the Icelandic Stock Exchange (ICEX) has increased from 55% of GDP five years ago to 230% in 2006. The average size of companies listed has increased 18 times and total direct Icelandic investment abroad has grown from 8% of GDP to 65%. "I think this is pretty impressive," says Thordur Fridjonsson, CEO of ICEX.

A great deal of the UK high street is now owned by Icelandic investors, as is the travel industry in Scandinavia. Across Europe, Icelandic businesses have invested in everything from English football clubs to generic drugs companies in Bulgaria, department stores in Copenhagen and banks in London. Their common approach has been to identify undervalued assets that could be turned around and sold at a profit. It is hardly rocket science, but their track record is so impressive and consistent that one cannot help but wonder how it seems to have escaped everyone else.

Iceland may have a population of only 300,000 people, but it's all about quality rather than quantity. The workforce is highly educated, but until recently the country had only one university, so most people were forced to go abroad to study. Icelandic businesspeople therefore boast qualifications from Scandinavia, the UK and the US, and most maintain that having such a wide range of skills from around the world compensates for the small size of their talent pool.

Icelanders have learnt to draw strength from their surroundings. The country was a tough place to live in 40 years ago and most people haven't forgotten that. Anyone over the age of 40 will have spent time working on a fishing boat or on a farm during summer school holidays. "It taught you how to work," says Arni Magnusson, head of sustainable energy at Glitnir, an Icelandic bank specialising in seafood, renewable energy and offshore supply. "It taught you to be self-reliant, to work fast and to do things properly."

A strong work ethic has remained a feature of the Icelandic economy. Icelanders work the longest hours in Europe, not far off 50 hours a week on average. The country also has the highest labour force participation rate of women, teenagers and people over the age of 50. In other words, Iceland may be a nation of only 300,000 people, but it works like 500,000. Ingolfur Bender, head of research at Glitnir, says that this high level of workforce participation is made possible by proximity, a close-knit society and an ability to rely on family for support.

In this land of ice, so profoundly isolated and at the mercy of the elements, people have learnt to see solutions rather than problems. Isolation? Iceland is halfway between Europe and America, an excellent place to do business. This 'can-do' attitude is at the heart of the country's energy. Jon Karl Olafsson, CEO of Icelandair, says that when he lived in Germany, he was amazed by how people reasoned. "They plan a lot more and it's always 'either/or'. Shall I have a career or shall I have children? Here we just do it."

The same is true for his company. When one of his salespeople heard that a Cuban airline was looking for an aircraft to lease, he contacted it straight away and organised for the aircraft to be viewed four days later. "Nothing's ever a problem. I think it's to do with the fact that we started small."

Despite having grown, many companies have indeed retained the attributes of smaller, nimbler organisations. Steinunn Thordardottir, managing director of Glitnir UK and south Europe, says many decisions are taken through informal lines of communications such as emails, that structures are flatter and, thanks to minimum bureaucracy, decision-making is fast and relatively straightforward.

Because of the tiny size of the community, everyone knows everyone; all the people interviewed in this article knew one another, at least by name, and some were even related. This level of interconnectedness raised a few eyebrows in the international business community; there were concerns that companies would not be subject to the same level of scrutiny. But most Icelandic businesspeople argue that this is no different from any other business community in the world, and that they at least are completely transparent about it. Indeed, Iceland regularly comes top of transparency rankings.

This close-knit circle also creates opportunities. Armann Thorvaldsson, CEO of Kaupthing Singer & Friedlander in London, started working for Kaupthing, Iceland's biggest bank, in the mid 1990s. As the head of investment banking, he took part in many of the early acquisitions that launched today's big companies. Many of these companies, he says, would never have had the banking support to go ahead had it not been for the personal connections and trust. "These businesses were tiny at the time. It was a £30 million company going after a £100 million company. But it was always an entrepreneur we knew and trusted." As well as lending, Kaupthing also invested its own equity and raised further equity for its clients. But it has paid off. In 1996, the bank was worth about $5 million; today, it's worth more than $10 billion.

Iceland has never really followed the ups and downs of the world economy. As most of Europe succumbed to the dotcom crash in 2000, Icelandic businesses were busy buying undervalued assets. Thorvaldsson says five or six milestone acquisitions jumpstarted Iceland's raid in Europe: Baugur's 20% stake in retail empire Arcadia in the UK; Bakkavor's acquisition of Katsouris in the UK; Ossur's purchase of Flexfood in the US; the acquisition of Balkanpharma in Bulgaria by what is now Actavis and the acquisition of fashion retailer Karen Millen in the UK by a group of investors.

Since most of these investors knew each other, they helped each other out and learned from each experience. Most of the early investments were straightforward acquisitions, but provided investors with a taste of things to come. Soon, they were tackling turnaround cases. Palmi Haraldsson, chairman of investment company Fons Eignarhaldsfelag, has made this a speciality. Fons' acquisition of frozen food chain Iceland with Baugur (Haraldsson has known Baugur's CEO Jon Asgeir Johanesson for more than 20 years) is a case in point.

When Fons and Baugur bought Iceland for $650 million at the end of 2004, the company had been losing money every year since 2001 and team morale was at an all-time low after years of management drift. In a key move, the new owners attracted back former executives who had run Iceland during the good years, including founder Malcolm Walker. Two years on, Haraldsson says the business is worth at least $1.2 billion and sales are steadily increasing.

Thorvaldsson says Kaupthing does not take any credit for the achievements of its many clients. It's common business sense, he says. Finnur Oddsson, director of the MBA programme at Reykjavik Business School, explains. "I don't think there is an Icelandic way of doing business. But it's a mindset. Having grown up in a smaller community gives you a different outlook. It makes you what you are."

So what is there to learn? Iceland has a track record of managing its resources. Its fish stocks are among the most abundant in Europe (the 'cod wars' with the UK in the 1970s gave it a 200-nautical mile Exclusive Economic Zone, internationally recognised in 1994). It is blessed with plenty of water and nearly as much geothermal activity - 99% of its electricity comes from renewable energy sources, including hydropower and geothermal (see box); and it has invested in its people.

Reykjavik's streets are awash with brand-new four-wheel drives and homes are full of the latest gadgets. But, after a decade of domestic growth, the economy, always prone to inflation, is running out of steam. The central bank is struggling to control the krona's volatility, and the current deficit has rung alarm bells among rating agencies across the world. "There's a sense that it's all been a little too fast," says Glitnir's Bender. "But we are forecasting a necessary slowdown in 2007 when we will be able to adjust and fix imbalances. We're preparing for the next stage of growth in 2008-9."

There are indications that Iceland is already looking at new market opportunities in Asia. Glitnir recently opened an office in Shanghai ("We're following our clients," says Thordardottir) and has pioneered a geothermal district heating project in Xiangyang, central China. Haraldsson is thinking about low-cost, long-haul flights from Scandinavia to Bangkok through Fons' new venture Northern Travel Holding, while Olafsson's Icelandair has acquired four new Boeing 787s.

But it is difficult to know whether history will repeat itself. Market reforms as momentous as the 1990s liberalisation programme are unlikely to happen again. Affluence has brought its disadvantages. Olafsson says that young people are less ambitious than his generation. "We still employ young people in the summer," he says, "but they also want their holidays. People are not so hungry any more."

Higher education at home has improved - there are now five universities - but this development could endanger the very thing that has made Iceland so successful: the knowledge acquired by studying abroad. It is also more exposed to the world economy and therefore more susceptible to its fluctuations. But economists are optimistic, forecasting a return to 3%-4% growth by the end of the decade. As it enters its next phase of growth, Iceland's small but resourceful population will have new business lessons to master.


Iceland is located right on the North Atlantic rift, a location prone to tectonic and therefore geothermal activity (and geysers). It produces 19% of its electricity (1.4GWh) through geothermal energy (the rest is hydropower) and is the world's eighth biggest producer (the US is top with 17.9GWh). Iceland is also the world's fifth biggest direct user of geothermal energy. With a growing global market for renewable energy, it is in a good position to export its expertise. Worldwide, the capacity for geothermal electricity generation is 1,000TWh (terawatt hour). Current production stands at just 51TWh.

Arni Magnusson, head of sustainable energy at Icelandic bank Glitnir, says that geothermal energy is also economical and reliable. The only drawback is the initial investment. "Up to 50% of the cost is incurred in the early stages of the project," he says.

However, Glitnir, with FL Group and VGK Honnun Engineering, has set up Geysir Green Energy, an investment vehicle in the geothermal energy market. The firm aims to invest $1 billion globally. "There are currently 60 projects in preparation stage in the US, some more advanced," says Magnusson.

"If they all come to fruition, it would nearly double the US' current capacity. The investment would be worth at least $6 billion. If you say that they'll need about 30% equity, that's $2 billion, so the opportunities for investors are huge."

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