analyzing iceland economy and trade -...
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Master Thesis
MSc in International Business
Department of Business
Aarhus School of Business
Analyzing
Iceland economy and trade
Author/Exam ID
Haraldur Níels Sigurjónsson/402617
Supervisor: Philipp Schröder
September 2011
Table of Contents Abstract ................................................................................................................................................... 1
Introduction ............................................................................................................................................. 2
Brief Economic history of Iceland ............................................................................................................ 3
The rise of the Icelandic economy....................................................................................................... 3
The Meltdown ..................................................................................................................................... 5
2009-2011 Recovery ............................................................................................................................ 7
Methodology ........................................................................................................................................... 9
PESTLE Analysis.................................................................................................................................... 9
SWOT Analysis ................................................................................................................................... 10
International Trade Theories ................................................................................................................. 12
Ricardian model ................................................................................................................................. 12
The Heckscher-Ohlin Model .............................................................................................................. 14
Porter: The Competitive Advantage of Nations ................................................................................ 16
Iceland business culture and negotiations style ................................................................................... 22
Low Power Distance .......................................................................................................................... 22
Individualism ..................................................................................................................................... 23
Femininity .......................................................................................................................................... 23
Uncertainty of avoidance .................................................................................................................. 24
Fisherman and Viking mentality ........................................................................................................ 24
Icelandic business culture ................................................................................................................. 25
Chapter conclusion ............................................................................................................................ 26
Trade relations, agreements and trade policy ...................................................................................... 27
EFTA ................................................................................................................................................... 27
EEA ..................................................................................................................................................... 28
Other trade organizations ................................................................................................................. 28
General history of Icelandic foreign trade, policy and direction ....................................................... 28
Iceland: PESTLE analysis ........................................................................................................................ 30
Geography ......................................................................................................................................... 30
Opportunities and threats of Geography ...................................................................................... 31
Political environment ........................................................................................................................ 32
Threat and opportunities on the political environment ............................................................... 32
Economical environment .................................................................................................................. 33
Main sectors of industries ............................................................................................................. 34
Foreign trade in figures ................................................................................................................. 36
Taxes and foreign investment laws ............................................................................................... 38
Threat and opportunities in the economical environment ........................................................... 39
Other industries ............................................................................................................................. 41
Social environment and Demographics ............................................................................................ 42
Threat and opportunities in the social environment .................................................................... 44
Technological environment and infrastructure ................................................................................ 44
Threats and opportunities in the technological environment ...................................................... 45
Environment ...................................................................................................................................... 45
Natural resources .......................................................................................................................... 45
Threats and opportunities in the Environment ............................................................................. 46
Legal................................................................................................................................................... 47
Threats and opportunities in legal environment .......................................................................... 48
SWOT Analyses ...................................................................................................................................... 49
SWOT by industries ........................................................................................................................... 50
Fishing Industry ............................................................................................................................. 50
Energy industry .............................................................................................................................. 51
Tourist Industry ............................................................................................................................. 52
Industrial Industry ......................................................................................................................... 53
IT and Software industry ............................................................................................................... 54
Agricultural industry ...................................................................................................................... 55
Conclusion ............................................................................................................................................. 56
Bibliography ........................................................................................................................................... 58
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Abstract
Iceland has been going through process of changes in the export sectors, from the industrial
revolution to the 1970s Iceland’s exports consisted almost of only by marine products. From
the 1970s becoming more diversified exporting nation. This master thesis has the objective to
analyze the general business environment in Iceland and describe the past to present and what
direction Icelandic business environment is heading. Next analyzing the characteristics of the
export sector, business culture and attractiveness of the Icelandic export industry.
Qualitative research and desk research are the primary methods develop PESTLE analysis and
SWOT analysis. SWOT analysis is used to analyze all of the main export industries in Iceland
and general business environment. Trade theories are used to get better understanding Iceland
international trading pattern, with Ricardian model and Heckscher-Ohlin model as main
focus. To get deeper understanding of the competitiveness of nations this thesis uses Diamond
method from Michael E. Porter. The trade theories and Competitive advantages of Nations
theory are used in this master thesis to getting better understanding of Iceland trade and
specialization.
This thesis is divided into six parts. The first part focuses on the history of the Icelandic
economy from the industrial revolution, the evolution and the rice of the modern economy.
The second part focuses on the trade theories and competitiveness of nations. Third part
describes Icelandic business culture and traditions. Fourth part shows the importance of trade
agreements and foreign relations for the export sector. Fifth part is about analyzing the micro
environment of the Icelandic economy by using PESTLE model. The sixth part uses SWOT
model to analyze general part of Icelandic economy and the six major export industries in
Iceland.
The main conclusion from this master thesis is that Icelandic economic environment even
though going through economic crisis has great possibilities to resolve and work through the
crisis with improved economic policies, more foreign investment and increased export values.
With innovation and diligence of the Icelandic people, they have the right characteristics to
work through theses kind crisis and improve exports values to improve quality of life. Using
PESTLE analyzes, it shows that the Icelandic market offers numerous business opportunities
in green energy and tourism and should continue to focus more factors that Iceland has to
offer in comparative advantage and competitive advantage in world market trade.
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Introduction
From the 1970s Icelandic government realized that they needed to diversify the economy and
the exports. Iceland economy was too much connected to the fish stocks, when only one bad
fishing season could shock the economy into depression. Icelanders realized that they had an
excess energy and abundant of possibilities to harvest hydro power and geothermal. This lead
to the building of the Iceland first aluminum smelting plant by Swiss company Alusuisse in
1969, this became a turning point for the Icelandic economy and first indicator of
diversification of the export sector. In the last decades Iceland has been harnessing their
energy resources to attract foreign power intensive companies that are seeking cheap
electricity to make their product.
The objective of this thesis to analyze the general business environment in Iceland and
highlight the attractive opportunities for investors, looking into export and imports statics,
history, business culture, trade agreements, trade theories and how all these factors are
connected to the Iceland trade and to get better understanding the direction and possibilities
for the Icelandic economy. Using mostly journals, news and internet articles, report papers
from the central bank and other institutions to help gather information about the Icelandic
economy. The Icelandic origin of the author of this master thesis has helped greatly to gather
information more quickly and getting better understanding of the reliability of the sources
which was gathered. The author tried to keep the data neutral and when it came to translate to
do it without bias. The value of this paper is great report for investors, institutes, embassies or
individuals that want better understanding of the Icelandic economy and possibilities that it
has to offer.
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Brief Economic history of Iceland
The rise of the Icelandic economy
Iceland was late bloomer compared with its neighbors in Europe and North America. The
industrial revolution arrived around 1900 with mechanization of the fishing fleet, they
accomplished that in only 20 years. From period 1900 to 1930 there was fivefold increase in
the size of the country's fishing fleet. The export sector became quite large compared to other
European economies during period 1900- 1930 with 40% of GDP and evening reaching 60%
of GDP (Eggertsson & Herbertsson, 2005).
In 1930 the state-managed financial system had already established several state-owned banks
that served Iceland almost until the end of 20th
century. All banks, except for the relatively
small savings banks, were now state owned. The banking system was specialized by industry
with priority given to farming and fishing. The system was augmented by government
controlled investment credit funds that were also specialized by industry. Foreign exchange
was strictly rationed (Eggertsson & Herbertsson, 2005).
Iceland became independent as sovereign state in 1944, during the Nazi occupation of
Denmark. The country's response was not unlike the response of many European colonies that
gained independence after World War II. In particular, the country did not trust foreign
investment and entrepreneurs. That meant outlawed direct foreign investment, foreign capital
entered the country primarily through government controlled financial institutions that
allocated the fund to favored projects (Eggertsson & Herbertsson, 2005).
During World War II several thousand British troops were stationed in and around Reykjavik
to defend the Iceland from possible German invasion. In 1941 the United States took over
Iceland's defense. The foreign forces built vital infrastructure, including roads and airports.
The Marshall Plan aid after the war helped to build more infrastructures, including hydro-
electric power plants and capitalize the fishing industry. In year 1949 Iceland joined NATO
and U.S soldiers built up military base and airport in Keflavik, with several thousand strong
stationed there. The base was withdrawn in 2006, Keflavik is the main international airport of
Iceland (Ólafsson, 2008 ).
The war caused variety of problems, market closet and imported goods became more
expensive or harder to reach. With some agreements with the Allies the situation was
alleviated, but in most other respects the economy was booming in Iceland. British and US
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military activity created demands for a variety of goods and services, having the need for
much manpower which replaced the unemployment of the Depression. The military forces
built roads and airports, strengthen the country's infrastructure. Demand for fish increased in
the UK, the most profitable outlet of fish for Iceland was for vessels to sail to market with
their catches. Marshall Aid and revenues from the US manned airbase enabled Iceland to
sustain a substantial trade deficit after the war. The economy was characterized by public
participation in business, and extensive state intervention with price controls. Inflation had
been a consequence of the war and became a persistent feature of the economy. The economy
experienced major operating difficulties in export industries and shortages of foreign
currency, also with inflation that all caused short-term economic management problems
(Central Bank of Iceland, 1996).
The economy continued to be closely regulated between the 1950s and the 1980s. The
government partially reduced exchange controls in the 1960s, but continued to set the
exchange rate and influenced the allocation of foreign exchange, set the price of domestic
agricultural products and the maximum rate of return in retail, and maintained imports
controls until the 1960s. Critics called it ―a dysfunctional socialist economy,‖ yet Iceland had
exceptionally good economic performance from the 1950s to the late 1980s, helping to bring
the average income into the same league as the other Nordic countries. Indeed, as early as
1980 Iceland was ranked number two in the UN’s Human Development Index (reflecting
GDP per capita, health, and education). (Ólafsson, 2008 )
During the period of 1970-1980 the economy faced growing problems of inflation, the oil
crisis and inflation hit the economy hard. Real interest rates were kept substantially negative
during the inflation period and loans became gifts, Icelandic banks had the role of deciding
who was to receive those gifts. When people’s savings would burn up in the inflation, people
would be reluctant to save money and invested all of their money in housing. Banks were
controlled by massive governmental intervention, both on the financial side as well as the
operational side of the banks. Indexation of loans was made legal as part of broad-based
economic reforms in 1979. Indexation slowly changed the landscape of the credit market,
encouraging savings and forcing debtors to pay back the real value of their loans (Mattiasson,
2008). In 1969 the first aluminum smelter built in Iceland, it was the first steps by the
government to diversify the economy and decrease the dependence on the fisheries. The
development of the natural energy resources is a major factor in this undertaking (Hilmarsson,
2003).
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According to the Frasier Economic Freedom Index in 1980, the country’s credit market
ranked number 62 of 102 markets in as many countries. In 2002 Iceland had moved up
dramatically and was ranked 14 of 123 countries. These measures indicate that in the post-
World War II period and until the 1980s the Icelandic financial market is best described as a
Third World phenomenon (Eggertsson & Herbertsson, 2005).This dramatically jump was
possible because of highly educated population, ready to leap into opportunities being opened
by the information technologies, and it produced an export commodity, cold-water fish with
unusual property of a high income elasticity of demand (Ólafsson, Taxation Policy in Iceland,
2007).
During the years 1991 and 2004 the economy went through radical deregulation and
privatization reform process, under Prime Minister David Oddsson. While the government cut
taxes on business and financial earnings drastically, it raised taxes on lower and average-
income earners enough to raise tax revenues from 39 percent to 49 percent of GNP(Gross
national product) between 1995 and 2006 (Ólafsson, Taxation Policy in Iceland, 2007).
The most unusual aspect of the reform process in Iceland is the extraordinary expansion of the
banking system, in the period from 1996 to 2003 the ratio of deposits to GNP has increase
from 36.7% to 60.1%, and the bank lending/GNP ratio has increased from 52% to 148% and
up to 206% in 2004. In the survey of The Banker that showed performance of the world's
1000 largest banks in 2004 reports that three of Iceland’s commercial banks are among the
fasted growing banks in the world, being the 3rd, 4th, and 13th places. This can be explained
that these bank no longer limit their activities to Iceland, the country’s largest bank was
conducting some 80 percent of its business abroad. These are some of the factors lying behind
the extraordinary expansion of Iceland’s financial organizations (Eggertsson & Herbertsson,
2005). See appendix 1 for lending/GNP ratio
The Meltdown
Iceland’s meltdown began at the end of September 2008, when the central bank refused to
bail out Glitnir Bank, which went into receivership under the central bank. Within a week
Landsbanki and Kaupthing, the other two big banks also collapsed. All these three major
banks went into public ownership. The Icelandic krona(ISK) fell about 100% in value in most
foreign currencies during the meltdown, a massive cut in purchasing power. The foreign
exchange market stopped working, international investors are unable to sell Icelandic krona or
ISK except in small quantities in a parallel offshore market and foreign exchange is available
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only for government-approved imports. The stock market collapsed by about 98 percent in
2008. IMF team arrived in October 2008 and prepared crisis-management program. To
stabilize the ISK and stop capital from fleeing the IMF offered a loan of $2.5 billion, and
other Nordic central banks offered the same amount. The Central bank of Iceland has
strengthens foreign exchange controls and government begin to restructure and recapitalize
the banking sector (International Monetary Fund, 2008). Below, on figure one, it is shown
how Iceland was affected by the crisis compared to other countries. (Figure 1)
Figure 1: OECD crisis estimation (OECD, 2011)
To simplify crisis, Iceland forced its over-leveraged financial sector into a painful debt
restructuring instead of bailing out its banks. The government had no other choices, because
Icelandic banks' assets were roughly 1,000% of GDP and with world's smallest currency area.
The central bank could not take on role of lender as last resort without causing a currency
crisis. Iceland would serve as cautionary tale of "Icarus economy" whose banks had grown
too big to save. Even though Iceland banking system defaulted, this year government remains
solvent, with debt levels close to the European average of between 80% and 90% of GDP.
(Jónsson, 2011) One of the measures to save the Icelandic economy was set by the Icelandic
parliament that accepted a emergency law enabling the government to stage extensive
intervention in Iceland’s financial system, the most radical economic measure that have ever
been taken in the country’s history. The emergency law was necessary to prevent the nation
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from falling into crippling debt or even national insolvency in the coming decades. According
to the law, the minister of finance would be empowered to act on behalf of the state to allocate
capital to establish a new financial company or assume the operations, of existing financial
operations and including banks. These actions gave deposits a priority in the bankruptcy and
making them entirely insured, deposits in the bank’s subsidiaries in UK and Netherland would
be guaranteed by British and Dutch state. Shareholders of the financial companies would
sustain the damage (icelandreview, 2008).
2009-2011 Recovery
Iceland is slowly emerging from a deep recession following the collapse of its main banks, it
is well advanced in implementing the comprehensive economic program agree with IMF to
overcome these problems. The banking system was recapitalized by the end of 2009 and steps
have recently been taken to restructure private-sector debts. Reforms have been made to
regulation and supervision to address shortcomings exposed by the financial crisis. A strategy
to relax capital controls (part of the emergency law) was recently adopted, with a period of
liberalization likely to span several years (OECD, 2011).
The economy stopped contracting by late 2010 and consumption and business investment-led
recovery is projected to gather momentum, lifting economic growth to 3 per cent by 2012.
Inflation is projected to remain low and the underlying current account surplus to be sustained
(OECD, 2011). Iceland's government raised $1 billion in June 2011 through an issue of five-
year bonds at yields just above 3%. This successful return to private debt markets presents the
best evidence yet that Icelandic financial market is gaining trust and the country is on the road
to recovery (Jónsson, 2011).
With successful implementation of the policies will pave the way for a modest but robust
GDP growth in the medium term around 3% annually. Investments should pick up from
extremely low levels, and in the latest Statistics Iceland forecast, business investment
excluding large scale energy intensive projects will increase gradually as share of GDP and
reach 12% in 2015 (Iceland economic ministry finance, 2011).
As seen on figure 2 below the massive trade deficit between years 2000-2008 was mainly
cause by domestic demand and private consumption that had been driven by overexpansion of
the country’s financial sector, and massive personal and corporate borrowing (QFINANCE ,
2011).
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Since the crisis export values have been rising rapidly for the past few years in Iceland, the
global recession has had a limited affect on Icelandic export volumes. Marine and aluminum
production has been at full capacity, which is the largest share of Icelandic exports. The weak
Icelandic króna has giving exports highly competitive advantage in international market,
revenue from tourism has grown despite the global recession due to a weak króna (Iceland
economic ministry finance, 2011). Below on figure 2 shows development in exports and
import in last 10 years, and dramatic change caused by crisis and weakening of the króna.
Causing dramatic increase in export and creating trade surplus for trade in goods.
Figure 2 – Adapted from Statistics Institute of Iceland (Statistics Institute of Iceland, 2011)
Export and imports by months 2000-2011
Total
Export Fob Import CIF
2000 149,272.8 203,222.1
2001 196,582.2 220,874.0
2002 204,303.0 207,607.5
2003 182,580.0 216,525.1
2004 202,373.0 260,430.8
2005 194,355.3 313,854.6
2006 242,740.0 437,086.3
2007 305,095.8 429,468.9
2008 466,859.5 514,739.3
2009 500,854.5 446,128.2
2010 561,032.2 477,222.3
2011 . .
Trade Export Fob The Fob (Free on board) value means the price for the item when it is on
board whatever means of transport in the country of export.
Trade Import CIF CIF(Cost, Insurance, Freight) value means the Fob value plus costs
induced until the item is unloaded in the country of import. This chiefly involves freight rates
and insurance costs. Unit: Fob and CIF million Icelandic-ISK, reference time: 2000-2011
(Statistics Institute of Iceland, 2011)
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Methodology
In this thesis two methods are used to order to analyze the Icelandic market: PESTLE analysis
and SWOT analysis. The second one is used in order to analyze the five major industries and
attractiveness. PEST will be used to analyze the general business, social, political, technology,
environment and legal environment in Iceland.
The goal of this thesis is to determine the attractiveness of the Icelandic market and
understand its evolving opportunities and threats as they relate to the strengths and weakness
of the Icelandic market, also analyze competitive advantages of Iceland on international level
as trader and performance of economy. PEST offers a great way to understand political,
economic, socials and technology factors that contributes to nations competitive advantages
on the international market. SWOT offers great ways to understand and sum up all the
external and internal factors of industry, then analyze the strengths, weaknesses, opportunities
and threats.
Qualitative research methods were used primarily to define the Icelandic market. The main
method involved the search of secondary data such as institutions data, government
publications, articles from scholars and international economic institutions. Secondary data
research is able to show outline changes in economical and social patterns in a country.
PESTLE Analysis
The PESTEL analysis divides the general environment mainly into six categories: political,
economic, social, technological, legal and environmental factors. All of these factors in the
macro-environment will affect the decisions of the managers of any organization and strategic
development of a business. PESTLE analysis provides critical insights by mapping Iceland’s
performance through prism of current strengths, current challenges, future prospects and
future risks.
These factors in the macro-environment could affect decisions for entering international
markets. To analyze these factors with the use of the PESTLE model with following:
Political section provides understanding about the political system, key policies relevant
to businesses and governance indicators. Like taxation policy, international trade and
relationships.
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Economic section shows evolution of the economy along with in-depth analysis of
significant macro-economic issues. Like interest rates, exchange rates, national
income, inflation, unemployment and stock market.
Social factors offers information and analysis of customer demographics through
income, rural-urban segmentation and centers of affluence, attitude towards work, it
also deals with healthcare and educational factors.
Technological factors provide information on state of technological and telecom
development, technological policies and outcomes, patents, innovation and new
product development.
Legal section provide information about the legal structure, corporate laws, health and
safety, employment law, regulations to start a new business and the tax regime
Environmental section provides information on the policies, laws and performance on
environmental indicators. (Oxford university press, 2007)
A PESTAL or PESTAL analysis is a useful tool for understanding the big picture of the
environment which an organization is operating. Especially useful tool for understanding risk
associated with the market growth or decline. A PESTAL analysis is often used as tool for
finding out where organization or product is in the context, the six elements form a
framework for reviewing a situation and can also be used to review a strategy or position,
direction of a company, a marketing proposition or idea.
(The Chartered Instiute of Personnel and Development, 2011)
SWOT Analysis
A scan of the internal and external environment is an important part of the strategic planning
process. SWOT analysis is a method to sum up all the internal and external factors and then
analyze corresponding strengths, weakness, opportunities and threats. With the analysis on
strengths and weaknesses focused on power of rivals, and opportunities and threats is
contributed to the changes in external environment and their possible impact on enterprises.
The SWOT analysis provides information that is helpful in matching the firm's resources and
capabilities to the competitive environment in which it operates (Quick MBA, 2010).
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Table 1 SWOT Analysis Example (Gliffy, 2011)
Strengths Weaknesses > Internal factors
Technological skills
Distribution channels
Production Quality
Management
Leading brands
Lack of skills
Poor distribution channels
Lack of Quality
Management
Weak brands
Opportunities Threats > External factors
Change in government politics
Technological advance
Social changes
New distribution channels
Lower taxes
Change in government politics
Technological advance
Changing customers base
Tax increases
Social changes
New distribution channels
The SWOT analysis method will be used to analyze the Icelandic market and the six major
industries of export in Iceland:
The Icelandic business environment: Offer great opportunities in these six major export
sectors
Fishing industry – Iceland most important export sector with about 70% of exports
Energy sector – At moment it is only indirect in exports through power intensive
industrial exporters, has possibility to export electricity through sea cable to main
market in Europe
Tourist sector – The fastest growing industry in Iceland, with 6% annual growing rate
since 2000
Industrial – Consists mainly of aluminum smelters, aluminum related products,
pharmaceutical products, ferrosilicon, diatomite and marine machinery
Software industry – Has six-fold in export values in the last 10 years
Agriculture – Mostly consists of salmon, live horses, sheep products and dairy products
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International Trade Theories
International trade is the exchange of goods and services between countries. This type of trade
gives rise to a world economy, in which prices, supply and demand, are affected by global
events. Nations are more closely linked through trade in goods and services, through flows of
money and investment than ever before. This chapter introduces some of the main concepts
and methods of international economics and trade theories. Some of the theories are old ideas
that are still as valid as ever, this chapter will attempt to convey the key ideas that have
emerged in recent years while stressing the continuing usefulness of old ideas (Krugman &
Obstfeld, 2003).
Countries engage in international trade for two basic reasons, each of which contributes to
their gain from trade. First, countries trade because they are different from each other. Nations
can benefit from trade as like individuals, nations can reach an arrangement to trade goods
that each does things relatively well in. Second, countries trade goods to achieve economies
of scale in production. Meaning that each country produces limited ranged of good in larger
scale and hence more efficiently that if it tried to produce everything. When looking into the
real world of trade, patterns of international trade reflect the interaction of both these motives.
The first step of understanding the causes and effects of trade, it is useful to look at simplified
trade models (Krugman & Obstfeld, 2003).
Ricardian model
The Ricardian model is the simplest way to illustrate comparative advantage and the gains
from trade in a general equilibrium settings, the model assumes that production uses only 1
input (labor), with constant returns to scale. This assumption means that the technology in
each country and each sector is entirely determined by the labor requirement per unit of
output (Berkley Business College, 2011). The international trade model attempts to explain
the difference in comparative advantage on the basis of technological difference across the
nations. The technological difference is essentially supply side difference between the two
countries involved in international trade. The model expects that all other factors to be similar
across the countries (Economy Watch, 2011).
Suppose, for example, that Icelandic farmers grow 10 million flowers each year for the
Icelandic market, and the resources used to grow those flowers could have produced 100,000
tons of aluminum. The flowers in Iceland must be grown in heated greenhouses, at great
expense of energy, capital investment, and other scarce resources. Those resources could have
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been used to produce other goods. In this case, there is a trade-offs. In order to produce
flowers, the Icelandic economy must produce less of other things, such as aluminum.
Economists use the term opportunity cost to describe this trade-off. The opportunity cost of
those 10 million flowers is 100,000 tons of aluminum. Conversely, if aluminum were
produced instead, the opportunity cost of those 100,000 tons would be 10 million flowers
(Krugman & Obstfeld, 2003).
Let say those flowers could instead have been grown in Spain. It seems extremely likely that
opportunity cost of those flowers in terms of aluminum would be less than it would be in
Iceland. First thing, it is much easier to grow flowers all year around in Spain without heated
greenhouses. It does not require much energy and investment, because the flowers can be
grown outside and with year around sunny days. Furthermore, Spanish workers and industry
are less efficient than their Icelandic counterparts at making raw aluminum (mostly because
cheaper energy in Iceland), so the trade-off in Spain might be for example like 10 million
flowers for only 30,000 tons of aluminum (Krugman & Obstfeld, 2003)
Table 2- Hypothetical changes in production (Adapted example for Iceland)
Millions of flowers Thousand tons of aluminum
Iceland -10 100
Spain 10 -30
Total 0 70
A country has a comparative advantage in producing goods if the opportunity cost of
producing that good in terms of other goods is lower in that country than it is in other
countries. In this case, Spain has comparative advantage in growing flowers and Iceland has a
comparative advantage in producing aluminum. The standard of living could be increased if
both places if Spain would focus on producing flowers for Icelandic market, and Iceland
would focus on producing aluminum for the Spanish market. This gives great insight about
comparative advantage and international trade. This shows that trade between two countries
can be beneficial for both countries if each country exports the goods in which it has a
comparative advantage (Krugman & Obstfeld, 2003).
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The Ricardian model of international trade is an extremely useful tool to understand the
reasons why trade happens between nations and the effects of international trade on national
welfare. The Ricardian model still makes accurate predictions about international trade flows,
but there are number of ways in which the Ricardian model makes misleading predictions.
The model is simple and it predicts an extreme degree of specialization that is not always
accurate to the real world. Also the model shows no effect of income, resources and
economies of scale within countries and its effects on international trade. The Ricardian
model of international trade illustrate the potential benefits from trade, the model focuses on
international specialization and each country shifting its labor force from industries in which
that labor is relatively inefficient to industries in which it is relatively more efficient
(Krugman & Obstfeld, 2003).
The conclusion from Ricardian model according to the Icelandic trade direction is that Iceland
should focus on producing and export products that are have a lower opportunity cost than in
other countries. Using their effort on producing the products which there are best at, not
products they don’t offer any advantage even though in create jobs. Because the total value
addition increase when nations specialize in sectors which they have lower opportunity cost.
Iceland has an advantage in products have requires huge among of energy and need to by
close to fishing resources. This theory does not take into account land, cost of labor, cost of
capital or food security of a nation. Even though this theory is very simple, it give good basic
idea why nations trade.
The Heckscher-Ohlin Model
This theory shows that international trade is largely driven by difference in countries
resources, this theory is one of most influenced theories in international economics. It is also
referred as factor-proportions theory, because the theory emphasizes on the interplay between
the proportions in which different factors of production are available in different countries and
proportions in which they are used in production of different goods (Krugman & Obstfeld,
2003). According to the HO theory, a country specializes in the production of goods that it is
particularly suited to produce. This specialization in production and trade between countries
generates, according to the theory, a higher standard of living for the countries involved
(Nobelprize.org, 2006).
Features of the model are that factors of production, that is land, labor and capital will
determine a country's comparative advantage. Countries have comparative advantages in
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those goods which they have abundant locally, for example a country where capital and land
are abundant but labor is scarce will have comparative advantage in goods that require lots of
capital and land, but little labor (cheap labor). In this case the country is better off importing
goods that are labor intensive, like clothing and textile. Good example is the United States
with abundant of land and capital, and they export mainly agricultural products, computers,
machinery, vehicles, military equipment, chemical products and aircrafts. All these goods
require abundant of capital (including skilled workers) and in some cases also land intensive.
Meanwhile China as abundant of labor and capital, they tend to export labor intensive goods
like clothing and capital/labor intensive goods like electronics. The US has comparative
advantage in land and capital, while China has comparative advantage in labor (Choi, 2010).
Figure 3 (Nobelprize.org, 2006)
According to the HO model, tariffs and quotas have redistributive effects but reduce
efficiency. When redistribution is the main goal, there is generally a better way to
accomplished it (Leamer, 1995).
If we put the theory in use from Iceland's point of view, they have abundant of land and
resources. But the labor is scarce and few inhabitants compared to other countries. Over the
last decades Iceland has invested in more capital intensive goods and has distanced itself more
away from labor intensive goods, like clothing factories and other labor intensive industries.
With more focus on capital intensive goods like aluminum, hydro/geothermal plants, high
tech fishing with freezer trawlers, machinery and pharmaceuticals. While labor intensive
clothing factories and fishery plants have been outsourced to other countries or displaced with
high tech and low labor intensive machinery, making it less labor intensive and more capital
intensive.
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Figure 4- See on picture
Country A – having more capital than labor – has specialized in producing more cell phones
Country B- having more labor than capital – has specialized in producing more jeans
In this case, trade may benefit both countries involved (Nobelprize.org, 2006)
The conclusion from this chapter is that countries should focus on products that require things
that they have abundant locally. This is true for many countries that produce much of the
world’s clothing; they have abundant of cheap labor. Also countries like China that have
abundant of labor and capital, resulting that they produce large share of world’s need for
electronics and clothing. USA which has abundant of capital and land, they produce more
capital intensive products like airplanes, cars, military equipment and agricultural. Iceland has
focus more on capital intensive products, Iceland has to offer educated workforce, abundant
of land (compared to population) and close to resources that require high capital investment to
harvest.
Porter: The Competitive Advantage of Nations
Why are certain companies based in certain nations and how do the nations attract these
companies. Nations ruthlessly pursue improvements, seeking more sophisticated sources of
competitive advantage, how are they able to overcome these barriers. With Porter's Diamond
of national advantage, the answer lies in four broad attributes of nations. The playing field of
each nation establishes and operates for its industries. These attributes are:
Factor Conditions. What factors does a nation have to offer the production, such as
skilled labor or infrastructure, necessary to compete in given industry
Demand Conditions. The nature of home market demand for the industry's product or
service.
Related and Supporting Industries. The presence or absence of suppliers in the nation
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or other related industries that are internationally competitive.
Firm Strategy, Structure, and Rivalry. The conditions in the nation governing how
companies are created, organized, and managed, as well as the nature of domestic
rivalry. (Porter, 1990)
Figure 5 - Diamond diagram
Each point on the diamond and the diamond as whole system affects the essential ingredients
for reaching international competitive success. First, the availability of resources and labor
skills is necessary for competitive advantage in an industry. The information that shapes the
opportunities that companies perceive and the directions that they take in which they deploy
their resources and skills. The most import goals of the owners, management, and individuals
in the companies are to pressure on companies to invest and innovate (Porter, 1990).
Factor conditions: According to standard economic theory, nation will export factors which it
has abundant of. Labor, land, natural resources, capital and infrastructure will determine the
flow of trade. These classic economics date back to Adam Smith and David Ricardo,
according to Porter these ideas are at best incomplete and at worst incorrect. The most
important factors of production involve sustained and heavy investment and are specialized.
The basic factors like cheap labor and abundant of local raw material source, does not bring
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advantage in knowledge-intensive industries. Companies can easily access those factors
through global strategy or bypass them through technology. Having a workforce that is high
school or college educated does not by itself present competitive advantage in international
competition. To support competitive advantage, the factors must be highly specialized to an
industry's particular needs. A nation needs a scientific institute specialized in certain areas, a
pool of venture capital to fund innovation and industry upgrade. These factors can be scarce
and more difficult for foreign competitors to imitate, takes sustained investment to create
(Porter, The Competitive Advantage of Nations, 1990).
Nations succeed in industries where they are good at factor creation. Competitive advantage is
result of the presence of world-class institutions that first create specialized factors and then
continually working to upgrade them. Iceland has two universities that concentrate on
studying and researching in fields of pharmaceutical, biotechnology, medical science and
engineering. The result is Iceland has managed to diversify its exports with goods in
pharmaceutical, food processing machinery, medical equipment and selling medical research
result to the pharmaceutical industry. Without the presence of strong universities and research
institutions in Iceland those factors creation would have been fraction of its current presence
(Porter, The Competitive Advantage of Nations, 1990).
Disadvantages can become advantages only under certain conditions. First, they must send
companies the right signals about circumstances that will spread to other nations, thereby
equipping them to innovate in advance of foreign rivals. Some countries that experience labor
shortages have responded to this disadvantage by upgrading labor productivity and seeking
higher value, more sustainable market segments. In other parts of the world where there is
abundant of workers, tend to focus their attention on other issues, which resulted in slower
upgrading. Case in point is the Icelandic fishing industries, they have experienced labor
shortage and high labor cost in processing fish. Instead of exporting the fish and process it in
countries like China, they have focused on improving productivity with better technology. Big
part of that is from innovation in Iceland, where high tech companies research food
processing technologies in partnership with the fishing industry (Porter, 1990).
Demand Conditions: Home market demand helps to build competitive advantage when a
particular industry segment is larger or more visible in the domestic market than in foreign
markets, and gives a clearer or earlier picture of emerging buyer needs that pressures
companies to innovate faster. Local buyers can help a nation’s companies gain advantage if
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their needs anticipate or even shape of other nations, if their needs provide ongoing ―early
warning indications‖ of global market trends. With countries like Sweden with long standing
concern for safety and handicapped people has spawned into industry focused on this special
need. Denmark environmentalism has led to success for companies in water pollution control
and windmills (Porter, 1990).
Related and Supporting Industries: International home suppliers can create advantages in
downstream industries in several ways. First, they deliver the most cost-effective inputs in
efficient way. Home based related and supporting industries provide innovation and
upgrading, that is based on close working relationship. Suppliers and end-users located near
each other can take advantage of short line of communication, ongoing exchange of
information and innovations. Companies have the opportunity to influence their suppliers,
technical efforts and can serve as test sites for R&D work, accelerating the pace of innovation.
Case in point, close relation of the Icelandic companies building food processing equipment
for the fishing industry in Iceland. This supports the industry to maintain its competitive
advantage on international market with higher productivity, faster upgrades and higher value.
Companies benefit most when suppliers are themselves, global competitors. Suppliers should
also serve foreign competitors, preventing them to be dependent on domestic industry (Porter,
1990).
Firm Strategy, Structure and Rivalry: National circumstances and culture create strong
tendencies in how companies are created, organized, managed and how domestic rivalry will
be. In industries where Italian companies are world leader, they tend to focus customized
products, niche marketing, rapid change and flexibility fits to both the dynamics of the
industry and the character of the Italian management system. Products like Ferrari cars,
designer clothes, furniture, and packaging machines. But the German management system
works well in technical or engineering-oriented industries, where complex products demand
precision manufacturing and disciplined management system. German success is rather on big
market consumer goods and services where image marketing, rapid new-feature and model
turnover are important. Nations tend to be competitive in activities that people admire or
depend on. In Denmark they are more environmentally intergraded and focused on health care
issues, which resulted in world leader in wind mills and insulin products. In Israel, highest
callings have been in agricultural and defense related products. In Iceland the big focus has be
on good health care system, harvesting fish and energy resources. Highest calling have been
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in the fishing industry, energy sectors, energy intensive industries and health related products
(pharmaceutical and bio medic products) (Porter, 1990).
A video interview was taken with Michael Porter the man behind this theory in 2010 about
Iceland competitiveness as nation:
―Iceland is remarkable, unique location because of geothermal resources in Iceland and what
has happen in Iceland is that this tiny country has built a world class technological position in
this new form of clean energy. Iceland has developed more than other single location
technology in this field. Iceland has remarkable broad ways of uses of geothermal power, not
only to make electricity, but to heat homes, to support agricultural and many other fields. The
opportunity is so big that in Iceland they have to organize themselves better and have a better
strategy. They have to move more quickly, because there is so much demand of clean energy
in the world, and there are so many opportunities to grow geothermal power all over the
world, but what are missing, is the technology and the skills, which Iceland has.‖
―Iceland has remarkable position in variety of interesting fields, of course tourism, which we
all understand. But in software and variety of fields where Iceland tiny little country has some
remarkable expertise and strengths. But the challenge is to improving the economic policy to
keep streamlining the business environment and also give people confidence that the country
can succeed.‖ (Porter, MICHAEL PORTER IS INSPIRED BY ICELAND, 2010)
If we go back to the theory and how this interview relates to his theory of competitiveness of
nations:
Factor conditions: ―Iceland is that this tiny country has built a world class technological
position in this new form of clean energy‖ Nations succeed in industries where they are good
at factor creation. Competitive advantage is result of the presence of world-class institutions
that first create specialized factors and then continually working to upgrade them.
Demand conditions: ―Iceland has remarkable broad ways of uses of geothermal power, not
only to make electricity, but to heat homes, to support agricultural and many other fields.‖
Home market demand helps to build competitive advantage when a particular industry
segment is larger or more visible in the domestic market than in foreign markets, and gives a
clearer or earlier picture of emerging buyer needs that pressures companies to innovate faster.
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Related and supporting industries: Porter does not directly mention supporting industries in
this interview. But he mentions ―variety of fields where Iceland, tiny little country has some
remarkable expertise and strengths.‖ In that case of the geothermal industry the supporting
industries would be machine shops, engineering firms, drilling companies and companies that
specialize in installation of pipes. Home based related and supporting industries provide
innovation and upgrading, that is based on close working relationship.
Firm strategy, Structure and Rivalry: ―unique location because of geothermal resources in
Iceland‖ Icelandic companies have turned dangerous environmental circumstances of volcanic
environment into energy industry that serves homes and companies. ―They have to organize
themselves better and have a better strategy.‖ Which has often been the problem with
Icelandic companies in expansion, and being part of Icelandic culture to be less organize than
other Western European countries as mention in Icelandic negotiations chapter. National
circumstances and culture create strong tendencies in how companies are created, organized,
managed and how domestic rivalry will be. Nations tend to be competitive in activities that
people admire or depend on, in this case Iceland is depend on geothermal energy to heat up
their homes.
To further illustrate his approach to Iceland; His presentation in November 2010 taken in
Iceland, he said that ―Iceland has all possibilities to be a large player in this market in the
future‖, and that it would be important to now look into the future and the competitiveness of
the country. He referred to that Icelanders need to find ways to utilize the opportunities
presented by geothermal energy and sell their experience and know-how internationally, not
only the energy itself. In the future Icelanders have the possibility to own and operate
geothermal companies around the world. In the export of know-how, Icelandic engineering
and technical consultants have done a good job and projects with the involvement of Icelandic
players abroad have been successful.
He also mentions that the cluster approach that would be important for Iceland as it would
bring together all companies active in the sector and beyond. The Icelandic government and
government organizations and agencies should be assisting the industry where they could. He
also mentioned cluster work done in the U.S. state of Nevada and New Zealand that could be
competition for the Icelandic sector, but could also represent opportunities for cooperation.
(Richter, 2010)
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Iceland business culture and negotiations style
Iceland business culture is in many ways much younger than most other cultures in Europe. In
fact, Iceland has developed in just on century from a poor agricultural economy to an
advanced economy with specializations in fishing and technology (Eyjólfsdóttir & Smith,
1997). Iceland has one of the highest GDP per-capital currently is number 17th
of the
International monetary fund ranking system (economywatch, 2011).
In analyzing of the Icelandic business culture, this chapter will use upon the dimensions of
Hofstede study of 53 nations and regions. Even though Iceland was not included in that study,
his dimensions gives a great framework further analyzes. Hofstede four dimensions
(Hofstede, 2009):
Power distance – How society handles the fact that people are unequal
Individualism/collectivism – Shows how strong ties are between members of a society,
individualism focus on that everyone is expected to look after him/herself and his/immediate
family. Collectivism are which people from birth onwards are integrated into strong, cohesive
in groups, often extended families which continue protecting them in exchange for
unquestioning loyalty.
Masculinity/Feminity – Masculine societies (assertive, competitive and tough) versus
feminine societies (tender and quality of life)
Uncertainty avoidance - ―The extent to which the members of a culture feel threatened by
uncertain or unknown situations‖
Low Power Distance
Iceland does not have a history of any class difference and it has one of the most equally
distributed incomes among its people. Most Icelanders are therefore middle-class and the
lower class or ―working class‖ has little feeling of inferiority, often skilled seamen and skilled
labor force are better off economically than public officials and professionals. People
therefore undertake higher education not only for the power or materialistic reasons, but
because they are driven by old idea that knowledge, individual excellence and artistic ability
is valued above all else.
Difference between managers and subordinates are not clearly market, as a result of the
informal and egalitarian attitudes towards those inside or outside an organization. Nobody in
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Iceland are referred by a last name, people address each other by first name. People are also
reluctant to add titles or status to their names for fear being ridiculed when modesty is the
norm. With small population of 320.000 inhabitants, most people know each other more or
less. This means that superiors are less likely to be autocratic. This creates more friendly and
relaxed atmosphere between the top and bottom of very flat hierarchy in companies
(Eyjólfsdóttir & Smith, 1997).
Individualism
With many ―collectivist‖ characteristics of Icelandic society, such as equality over individual
freedom, high level of organization commitment, the dominant role of the state in the
economy and representing collective interests. But individualistic characteristics are also
strong in the Icelandic mentality and may be growing stronger. Children in Iceland are
brought up to be very independent. The vast majority of high school and university students
finance most of their own studies by working during the summer holidays, also working on
weekends and other holidays during the semester. Icelanders in general are very hard workers,
they have one of the largest labor force relative to size. Many hold two jobs and most of them
own their housed (70-80%), cost of living in Iceland is high and many Icelander have
tendency to live beyond one's means. In last 20 years Icelandic society has turned more
towards individualism, because of more positive attitudes towards increased competition,
private ownerships and less market regulation (Eyjólfsdóttir & Smith, 1997). But some would
argue that collectivism has gone stronger after the crisis with high employment rate, more
financial regulation and government focus to protect the social welfare system with higher
taxation. All things that to focus more on the community and the well being of the nation as a
whole, but all previous individualism points mention before are still valid today in Iceland
society even though collectivism has some aspects gotten stronger.
Femininity
Like other Scandinavian countries, Iceland holds strongly feminine values and quality of life.
With high standard of living, that is enjoyed by the great majority of the population. This is
further supported with the highest literacy rate 99.9% in the world and also with the lowest
infant mortality rate 1,8 per 1000 (World Bank, 2011).Iceland remains the country that has the
greatest equality between men and women, according to an annual report by the World
Economic Forum (WEF), also electing the first female president in the world (BBC, 2010).
With low power distance and individualism, with touches on some of the aspects of cultural
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femininity: modesty in self-presentation regardless of one's excellence or status, the search for
consensus with organizations and acceptance of failure (Eyjólfsdóttir & Smith, 1997).
Uncertainty of avoidance
Icelandic people should be more used to uncertainty than most other nations, because of the
harsh environment in which the live. Used to frequent earthquakes, volcanic eruptions and
changing weather makes it hard to avoid uncertainty. Hofstede predicted that low-uncertainty
avoidance nations will report greater happiness. Surveys have shown that Icelanders are
among the happiest in the world, even though with possibly high uncertainty of avoidance.
This can partly be explained by optimistic and generally positive state of mind, they feel quite
comfortable in ambiguous situations. As a consequence, Icelanders tend to lack self-discipline
and are often not punctual or detailed. Sometime they tend to be overly optimistic to the
extent of appearing careless. This lack of self-discipline allows room for originality,
flexibility and innovation (Eyjólfsdóttir & Smith, 1997).
Fisherman and Viking mentality
To understand the short-term orientation of Iceland society, you also need to understand the
fisherman mentality. The fishing industry is and has been the most important sector of
Iceland's economy and it has the characteristic of being very unstable economic environment,
which make it sometimes complicated to run and predict future income. To briefly describe
the fisherman mentality. A fisherman is dependent on luck and therefore sees no need to plan
how long he will fish. He goes fishing and hopes for a fast result. If he does not catch any fish
soon, he will give up for the day and try to find another location to fish. A fisherman is not
constrained by punctuality or by much organization. He is flexible and will work hard when
the fishing season is good, also tend to think they know their job and are not eager to adopt
new fishing techniques .Still today many Icelanders have very pragmatic approach to
management, fisherman society to not have the same need for management as like in
industrial society (Eyjólfsdóttir & Smith, 1997).
Like their ancestors the Vikings. Icelanders tend to be restless, artistic, fearless, fiercely
independent and stubborn men of action and enterprise. This is in many ways a strange
combination, but it allows the individual to be original, influence the environment, be curious
and capacity to take risks in more daring than cautious way. This creative ways of thinking
has blossomed entrepreneurship in Iceland since their independence, but many entrepreneurs
have either been insufficiently cautious or overestimated their abilities to manage a business
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on their own, and thus went bankrupt (Eyjólfsdóttir & Smith, 1997). Iceland shows the
highest total early stage entrepreneurship(TEA) in the world in the innovation driven
economies according to 2010 Global Entrepreneurship monitor (Kelly, Bosman, & Amarós,
2010).
Icelandic business culture
Icelandic business culture follows low-power distance and there is not much hierarchy in
Icelandic organizations. Managers in Iceland can be regarded as informal, direct and even
arrogant when doing business with foreigners. The Icelandic managers are used to direct
communication because of the low power-distance that is typical in the Icelandic culture
(Davidsdóttir, 2006). With regards to uncertainty of avoidance, Icelandic managers are not
afraid of taking risks, are thought to improvise and are unpredictable which is confusing for
the Scandinavian countries. They also have tendency to not follow formal rules, they do not
rely on their subordinates but on the other hand they highly rely on unwritten rules, their co-
workers and their own experience (Smith, Andersen, Ekelund, Gravesen, & Ropo, 2003).
Iceland has some typical characteristics of management with low uncertainty avoidance.
According to Davidsdóttir report, some non-Icelanders think managing a company the
Icelandic way is all to do with speedy operations and fast decision-making. The leadership
style is often claimed by foreigners to be similar to the American business culture. Icelanders
have a reputation for using different methods of doing business than other countries, quotes:
―Icelanders are intense and good at catching opportunities‖ and ―Icelanders are unafraid go-
getters and want to conquer the world‖ and ―Icelandic managers are straightforward‖, this
gives an insight into how others view Icelandic business culture. In Davidsdóttir report also
finds that Icelandic management culture and business methods in many ways contracts the
way business is managed in the Scandinavian countries of Norway, Sweden and Denmark
(Davidsdóttir, 2006).
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Chapter conclusion
This chapter mostly relied on the data from article from ―Icelandic business and management
culture‖ by H.M Eyjólfsdóttir and Peter B. Smith. This data was collected from Icelandic
managers with questionnaire survey and comparing them with other comparable surveys
made in other countries. Even though this data is from 1997, most of the points are still
relevant today. This article was most accurate according to Hofstede dimensions, adding
newer articles as well to this chapter. This analysis has mostly relied upon Hofstede's
concepts and his terms. To characteristic the Icelandic business and management culture as
typically Nordic and unique is not far off. Icelandic managers resemble other Scandinavian
nations in their emphasis upon low power distance, low uncertainty avoidance, and strongly
feminine values. However, the manner in which their balance of individualism and
collectivism is expressed is distinctive. In north Europe, managers report frequently with their
subordinates and rather less frequent contacts with their bosses and with colleagues at the
same level. Managers in Iceland report frequent with their executives and colleagues at same
level, much less with their subordinates.
In recent years the Icelandic businses management culture shifted more towards American
management culture with fast decison making and more risking taking. But the management
culture still has Scandinavian abroach in lower power distance and femininat values in work
places. Icelandic business management offers mix of American and Scandinavian culture, that
can be mostly explained by Iceland geographic location and cultural relationships. This
management style has served them well in some areas, some not so well as the finanical crisis
indicates. The harsh and dangerous enviroment over the centuries in Iceland has shaped the
mentality of the Icelanders, were fast decsion making is necesary to survie the nature
elements. But Icelanders have not distance them self away from their Scandinavian roots, of
little class difference among people, importance of quality life and gender equality.
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Trade relations, agreements and trade policy
Free trade agreements, under which governments remove tariffs and other barriers to the free
movements of goods and services across borders, are important on many levels. They affect
unemployment, wages, market access for exports and imports, as well as investments and of
country's industry structure, and they have significant political importance (Kocic, 2010).
Market access and investment – Under free trade agreement firms get better access to
larger markets and consumers get more choices with lower prices. Leads to more
foreign directed investment.
Jobs – With increased competition and some production moving to other countries
leads to job losses in some sectors. But new market opportunities for exporters leads to
new job creation.
Wages – In sectors that are affected by cheaper imports, there is pressure downwards
on the wages and the bargaining strength of the workforce. Workers in other sectors
that experience extra demand by the free trade agreement may insist on higher wages.
Political Importance – Countries enter into free trade agreements hoping that
economic cooperation will improve political ties and demonstrate closer relationship.
Globalization has increased both their economic and political significance (Kocic,
2010).
The vast majority of Iceland's exports go to the European Union (EU) and the European Free
Trade Association (EFTA) countries, followed by United States and Japan. The U.S. is by far
the largest foreign investor in Iceland, primarily in the aluminum industry (CIA, 2011). To get
closer details on Iceland trade see appendix number 2.
EFTA
In 1970 Iceland joined EFTA (European Free Trade Association). At the time, the other
members were Great Britain, Denmark, Norway, Portugal, Sweden, Switzerland and Austria.
(3) Iceland, Liechtenstein, Norway and Switzerland are current members of EFTA. The EFTA
Convention established a free trade area among its Member States in 1960. In addition, the
EFTA States have jointly concluded free trade agreements with a number of countries in
Central and Eastern Europe as well as in the Mediterranean region, Mexico and Singapore.
Iceland, Liechtenstein and Norway entered into the Agreement on the European Economic
Area (EEA) in 1992, which entered into force in 1994. The current contracting parties are, in
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addition to the three EFTA states, the European Community and the 15 EC Member States. In
addition Iceland has bilateral agreements with its two neighboring countries Greenland and
the Faeroe Islands (Icelandic customs authorities, 2011).
EEA
Iceland's relation to the European Union is mainly based on the Agreement on the European
Economic Area (EEA) which came into effect in 1994. Iceland's most extensive trade
agreement is within the EEA, which forms the basis for a common market for goods, services,
capital and labor between the 15 member countries of the European Union (EU) and three
member countries of the European Free Trade Association (EFTA), which includes Iceland.
The EEA agreement unites the EU member states and the three EFTA EEA states (Iceland,
Liechtenstein and Norway) into one single market governed by the same basic rules (Ministry
of foreign affairs, 2011).
Other trade organizations
Iceland is also a member of WTO, OECD and a number of other trade related
organizations.(2) Iceland became an associated member the General Agreements on Tariffs
and Trade (GATT) in 1964 and a full member in 1968. Iceland was a founding member of the
successor organization, the World Trade Organization (WTO) in 1995 (Ministry of foreign
affairs, 2000).
General history of Icelandic foreign trade, policy and direction
Fish and fish products command an overwhelming share in Icelandic exports. This can be
both an advantage (by implying a high degree of specialization) and a disadvantage (due to
the vulnerability of such an undiversified economy).
Table 3- Iceland Exports percentage of marine products (Embassy of Iceland, 2011)
1960s 1970s 2006
Marine product 90% 75-80% 51%
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The importance of fish exports starts falling the in 1970s when export of aluminum becomes
new export for the Icelandic economy (Embassy of Iceland, 2011). The decreasing
importance of fish products in the export sectors can be explained by more diversified
economy and exports. Such as aluminum, ferro-silicon alloys, machinery, software,
pharmaceuticals, woolen goods and electronic equipment for the fishing industry (CIA, 2011).
Imports are very diversified. Iceland is totally dependent on imports for its demand of oil and
auto products, and other machinery. Also has high dependent on wheat, timber and other
food related stuff. (4) The agricultural sector remains heavily subsidized and protected.
Iceland does not import much of meat, dairy products and live animals because of this
protection (U.S. department of state, 2011).
The foreign trade of Iceland is reflected in its geographical location, midway between Europe
and America. There have been considerable fluctuations in the geographical distribution of
exports in the last decades and this reflects that certain important fish exports are closely tied
to certain market or countries. Thus export of salted fish is largely in Spain and Portugal, and
market for fresh fish on ice is mostly in Northern Europe (UK and Germany main outlets).
Politics, domestic or international, is a big factor of shaping the geographical distribution of
trade. Some of the cases to support this were increase trade with Soviet Union in the wake of
the Cod War with the UK in the 1950s and another in a smaller scale, the closing down of
export of stockfish to Africa during the Bianfran war. Also product prices and exchanges rate
are important determinant of the geographical distribution of Iceland's exports, one case of
Iceland's exports followed the strong dollar in early 1980 and later they avoided the US
market as the dollar weakened half decade later (Embassy of Iceland, 2011).
Iceland trading policy was strengthened by accession to the European Economic Area in 1994
(EEA) and by the World Trade Organization (WTO) Uruguay Round agreement, which also
brought significantly improved market access for Iceland exports and specially seafood
products.(6) Extensive trade is conducted with the European Union, which is by far the most
important market area. In 1998 no less than 65% of Iceland's export markets were in the EU
(Embassy of Iceland, 2011).
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Iceland: PESTLE analysis
The Icelandic economy is in need for more foreign investor and investment. That would
create more jobs and increase exporting. Foreign companies have mainly been interested
investing in energy demanding industries that are aimed for export to foreign markets. The
Icelandic market is small and does not attract many investors for domestic use that is not
aimed for export.
This PESTLE analysis will describe the macro environment factors that could affect
companies interested to invest or entering the Icelandic market. Also factors that could affect
the economy and the exporting factors, this chapter analyses political, economic, social,
technological, legal and environmental structure of Iceland. The PESTLE segments are
supplemented with relevant quantitative data to support trend analysis.
Geography
Iceland is a volcanic island located south of the Arctic Circle in the North Atlantic, around
300 km east of Greenland and 4000 km north-east of North America. The nearest countries to
the east are the Faroe Islands (around 400 km away), Scotland (around 800 km away) and
Norway (around 950 km away). Iceland has an area of approximately 103,000 sqkm and is the
second largest island in Europe after Great Britain (About, 2005).
Figure 6- The following map shows the location of Iceland in the North Atlantic (Google
Maps, 2011):
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Flight time from capital of Reykjavík (Keflavik international Airport is about 45 minutes
drive from Reykjavík) to the European capitals of London, Paris, Berlin, Copenhagen and
Amsterdam is approximately three to three and a half hours. Cities in the US like New York
and Minneapolis are around five to six hours away by air (Iceland Trade Directory, 2011).
The landscape of Iceland is dominated by strong contracts between sea and mountains,
glaciers are around 10% of total area, also many volcanic zones and hot springs. The large
part of Iceland is untouched and uninhabited. Iceland has a low population density, with
around 318,000 inhabitants in area of 103,000 sqkm (around 3 inhabitants per sqkem). Two-
third of the population lives in the capital of Reykjavik or in surrounding area (CIA, 2011).
Despite its northerly location near the Arctic Circles, Iceland enjoys a relatively mild climate
due to the Gulf Stream, with only minor difference between average temperature in winter
and summer. During the coldest month of January, Reykjavík has an average temperature of
around -0.4°C (which is roughly equal to the average temperature in New York in January),
while average temperatures climb to 11.2°C in the warmest month of July (Iceland Trade
Directory, 2011).
Opportunities and threats of Geography
Iceland has some geographic importance, its midway between North American and Northern
Europe. It has served has military base and strategic importance since the World War 2, but
the airbase has closet down (2006) due to spending cuts by the US military. But still has some
opportunities by its geographic location, here are some examples:
The Icelandair airline has transformed Iceland’s geographical location between North
America and Europe into a business opportunity by building an international route network
with Iceland as a hub.What Icelandair’s international expansion has accomplished for
Icelanders, apart from an increase in the number of tourists and the business activities that
have developed around the tourist industry throughout the country, is a system of outstanding
flight services between Iceland and other countries (Icelandair, 2011). This show the
geographic importance when comes for flights through the North Atlantic ocean, specially
flights from North America to Europe. More airlines could use this opportunity to use Iceland
as a hub for flight and airplanes.
The rapid melting of the North Arctic sea route is opening new possibilities for Iceland, this
would make new shipping route for goods coming from Asia to Europe or east coast of US.
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Iceland lies just in the pathway of the shipping route, this important geographic location could
bring investment in Iceland for servicing ships and uploading port (Seidler, 2010).
Threats are mostly concerning volcanic eruptions that usually happens every 5 years, 98%
percent of the inhabitants don't live close to those threats. This mostly affects airports and
roads being closed down due to ash. Iceland sits astride the middle of the Mid-Atlantic Ridge.
These eruptions are caused by the separation of the North American and Eurasian tectonic
plates (Iceland.is, 2011). Iceland an island in the North Atlantic and has some isolation
factors, and it brings some disadvantages in transportation and traveling. It takes bit longer
and cost more to travel to Iceland than other European countries (if traveling from London).
Political environment
In 1918, Iceland achieved independence from the Danish state by becoming a sovereign state
under the Danish Crown. However, Denmark still assumed control over Icelandic foreign
affairs. On 17th June (National Holiday) 1944, Iceland formally became an independent
republic after communication with Denmark had severed as a result of the German occupation
of Denmark in 1940. Today the country is a parliamentary republic with a president (head of
state), a prime minister (head of government), a cabinet with 12 ministers (including prime
minister) and a unicameral parliament with 63 members.
In the autumn of 2008, the Icelandic banking sector collapsed as a result of the worldwide
economic crisis, precipitating Iceland's own economic crisis. In the face of serious protests
and distrust from the public, the government, a coalition of the Independence Party (IP) and
the Social Democratic Alliance (SDA) under the Prime Minister Geir Hilmar Haarde,
resigned in January 2009.
In April 2009, a majority coalition between the SDA and the environmentally focused Left-
Green Movement (LG) was elected. Johanna Sigurdardottir (SDA) is the first female prime
minister in Iceland. The country is further represented by President Olafur Ragnar Grimsson.
The new government has initiated economic reforms and has also submitted the controversial
application for Iceland to join the European Union (Iceland Chamber of commerce, 2011).
Threat and opportunities on the political environment
With left wing government in control in Iceland at the moment, new tax ideas have been
proposed with increased corporate tax. This is also recommended by the International
monetary fund, they have been advancing that the government reform their tax system on
33 | P a g e
natural resources and strengthen the corporate tax system (IMF, 2011). This could scare away
possible investors and even scare some large corporation away from Iceland and consequently
it could affect the export values in the long run.
On the other hand the government has initiated significant economic reforms and submitted
Iceland's application to join the European Union (EU), the application process will take few
years and after that the Icelandic people will vote on joining the EU (Traveldocs.com, 2011).
The government has been able to refinance the banking sectors and brought the economy
stable levels. They have brought back trust on the international finance market with successful
bonds issued for $1 billion in June 2011 (Wall street journal, 2011). This is a good indicator
that the Icelandic economic market is gaining back the trust form investors, who are willing to
invest in Icelandic bonds and see a brighter future ahead for Iceland.
Economical environment
Before the crisis Icelandic economy depends heavily on the fishing industry, which makes up
roughly 40% of the total export earnings and employs 7% of the workforce. However, in the
last decades efforts have been made to diversify the economy into manufacturing and
services, with new developments in the area of software production and biotechnology.
Tourism has shown steady growth rates and is becoming more and more important for the
country’s economy. In the years prior to the crisis of 2008, the Icelandic economy recorded
high growth rates with average growth of GDP from 2004 to 2008: 5.3%, virtually full
employment (unemployment of 1.0% in 2007 and 1.6% in 2008) and a remarkably even
distribution of income.
Foreign investors were attracted by emphasizing the low corporate tax rate of 15%, low
energy prices, also with Iceland being the only country in Europe with 100% of energy
consumption from renewable energies and with special incentives for companies willing to
invest in Iceland (IMF, 2008).
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Figure 7- Danske bank predictions % by Lars Christansen 14.04.2011 see below (Christansen,
2011)
According to the report from Danske Bank the Icelandic economy is recovering after the
collapse of the Icelandic banking sector in October 2008. They believe that recovery could
prove sustainable, as macro-economic imbalances have been reduced significantly.
It is expected that Icelandic GDP growth of around 3-4% in the coming two to three
years
Inflation is likely to continue to ease and should stay below the Icelandic central
bank's inflation target of 2.5% throughout 2011-2013
Purchasing power parity (PPP) estimates indicate the Icelandic krona is around 25%
undervalued versus the euro on the of shore basis. The offshore krona rate is much
more undervalued (Christansen, 2011)
Main sectors of industries
The fishing industry contributes the largest share of Iceland's exports. Next to fish and fish
products, exports include aluminum, animal products, ferrosilicon and diatomite. Iceland has
been a member of the European Economic Area since 1994, which has improved market
access for the country’s exports (CIA, 2011). The figure below shows percentage of
employment by industry (Central Bank of Iceland, 2010).
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Figure 8 - (Central Bank of Iceland, 2010)
As seen on figure, fishing and agriculture have been declining as total workforce since the
1963. This can be explained by better industry technology and some cases decline in
production. The economy of Iceland has become more diversified with more jobs in finance,
tourism, aluminum and other industries like software and pharmaceutical. The decline of
government services in 2000 can mostly be explained by privatization of some of it services,
like postal service, communication services, banks and other private companies take over
services that was previously done by the State. Also some public services are not categorized
as same as before, even though they are still owned 100% by the State. People in Iceland have
not seen much decline in public service, even though these numbers could indicate large
decline in public service.
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Foreign trade in figures
Figure 9 - Adapted from central bank of Iceland statics (Statistics Institute of Iceland, 2011)
As seen in year 2000 there is massive negative balance on trade, this negative balance
continues from 2000 to 2008. This is more clearly shown in first chapter ―Rise of the
icelandic economy‖ in figure 2. This was caused by boosting domestic demand, private
consumers, companies and public sector borrowed increasingly in foreign currency. Also
booming construction industry, financial sector becoming more privatized and expand rapidly
to foreign markets (Central Bank of Iceland, 2010, bls. 66). In 2009 is drastic positive change
in the trade balance due the significant drop value of currency (krona) and result of drop in
private consumption directed towards imported durable goods. This fall from previously high
level imports has led to a large positive contribution to growth from net exports, resulting in a
much smaller loss of output and jobs. Also affecting this is the fact that Icelandic export
volumes have not hit by the global demand contraction to the same extent as in many other
countries. This transfer of expenditure towards the domestic economy and the relative
strength of exports has facilitated by the plunge of the exchange rate (Central Bank of Iceland,
2010)
1990 1995 2000 2009
-1000
0
1000
2000
3000
4000
5000
16841925
3161
4565
1615 1728
3837 3767
69197
-676
798
Iceland: Trade in goods
Exports
Imports
Balance
Year
Mill
ion
s o
f E
uro
s
37 | P a g e
Figure 10 - Geographic distribution of foreign trade (fob value) 2009, adapted from (Central
Bank of Iceland, 2010)
EU or the European Union is Iceland's main export partner. The UK, Netherlands and
Germany are Iceland's main export partners in the EU (as seen in appendix 3). Iceland is a
member of the European Economic Agreement which explains the high percentage of export
to the European Union. When including other European countries (Norway, Russia and
Eastern Europe) outside EU it is almost 90% of total exports of Icelandic economy. Iceland
has a great access to the European Union market, with the EEA agreement and constant
shipping routes to mainland Europe. Developing countries like China and India are becoming
more important export partners and USA is coming less import than it had been in the decades
before. (see in appendix 2 )
77,7
3,911,2 8,9
EU USA Other European countries
Developing countries
2009 Exports
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Figure 11 - - Geographic distribution of foreign trade (fob value) 2009 (Central Bank of
Iceland, 2010)
Iceland's main imports partner is EU, this is also explained by the EEA agreement which
allows imports of goods with none or less tariffs than other countries. But other European
countries and developing countries are much stronger in the import sector than export sector
of Iceland economy. To see more details and evolution of the import sector.(see in appendix
2)
Taxes and foreign investment laws
The Icelandic tax system is relatively simple and effective. Current objectives aim to reduce
tax rates further, broaden the tax base and conclude additional double taxation conventions.
These actions will further increase the competitiveness of Icelandic corporations and attract
foreign investors. Corporate income tax stands at 20%, one of the lowest tax rates within the
OECD member countries (Invest in Iceland Agency, 2011).
Some characteristics of Icelandic tax law:
Corporate income tax of 20% on net income only
No municipal taxes on corporate profits
Foreign tax credit available to avoid double taxation in the absence of tax treaties
No tax on dividends received by corporations
Individuals tax rate 37,22% to 46,12% depending on income
46,1
6,2
18,214,8
EU USA Other European countries
Developing countries
2009 Imports
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Individuals get reimbursement of ISK 44.205 pr. Month (About 400$)
The financial income of individuals is taxed at a rate of 10%
There are some restrictions by foreign investment in fishing, energy, and airlines. Other types
of foreign entities are free to establish and own any type of business enterprise and engage in
all forms of legal remunerative activity. If a foreign citizen from outside the EEA wishes to
purchase land or real estate in Iceland, a permit is required from the Ministry of Justice.
Icelandic law treats private and public enterprises with equality when it comes to market
access and other business operations. Foreign investors are permitted to participate in the
privatization of government-owned businesses, subject to restrictions imposed by the
government (Dimireva, 2010).
Iceland’s foreign investment framework is one of the world’s most restrictive according to
OECD reports. The reasons for Iceland’s poor performance are the limitations set on foreign
investor ownership share in fisheries and processing, harnessing and production of power and
distribution, along with ownership in flight operations. The restrictions are mostly directed at
countries outside the EEA, but in the fisheries sector, all foreign parties, regards of
nationality, are forbidden to own more than 25 percent of the share capital or initial capital in
fisheries companies and no more than 49 percent shall be owned indirectly (Ministry of
foreign affairs, 2011).
Threat and opportunities in the economical environment
Because of the crisis and currency exchange controls the rules restrict the outflow of foreign
currencies from Iceland unless the currency is used to import goods or services or to travel.
This means at the present time that foreign investors in Iceland cannot remove their capital.
The rules allow for purchasing foreign currencies to pay on interest, indexation, dividends,
capital gains, contractual installment payments and salaries. It is prohibited to settle
transactions of transferable financial instruments denominated in ISK in foreign currencies,
and to conduct cross-border prepayment of financial instruments (Dimireva, 2010).
Another threat for the Icelandic economy is the indexed- loans, these loans are most common
long-term loans for individuals and small businesses. Indexed loans are usually long-term, in
Iceland they are affected by inflation and consumption index. This is done in Iceland because
prices typically rise over time and the principal amount of the loan thus loses value with every
time period, benefitting the borrower and hurting the lender. But with indexed loans it's turned
40 | P a g e
around, benefitting the lender and hurting the borrower (or borrower taking all the risk)
(Investorwords, 2011). It has been argued by some economists that these loans actually fuel
up the inflation and cause more damage to the economy. Indexed loans are common in
countries that have experienced problems with inflation and unstable currency (University of
Iceland, 2003).With these loans and high inflation it's hard for individuals and businesses to
plan ahead into the future and the tendency they will pay more for borrowing money than
those in countries without indexed loans.
Figure 12 – Inflation from 2003 to 2011 (Central Bank of Iceland, 2010)
Main opportunities
Tourism
Renewable Energy - Hydro/Geothermal
Fishing
Industries that require and are dependent on cheap energy
Industries that want clean and renewable energy for their service or production
Prosperity has been built largely on Iceland’s comparative advantages in abundant marine and
energy resources. Tourism has been among the fastest-growing industries in Iceland in recent
years. Over the past 10 years, the number of foreign tourists has risen by 60% to 495 thousand
41 | P a g e
in 2009, becoming one of the main engines of export growth in Iceland (Central Bank of
Iceland, 2010). Cheap energy has attracted foreign investment in power intensive industries,
and now aluminum and ferrosilicon are important exports (Randburg, 2011). Iceland has
started to attracted new opportunities in software and computer services, especially in
growing market of data centers. That requires large amounts of land and energy, especially
renewable energy for the company image. This is what Iceland has to offer to those
companies:
Location, its placement between Europe and the U.S. means that companies in the U.S. can
run their web services for both continents in one location, potentially saving money. Secondly,
because of its abundant hydropower and geothermal power, Iceland can offer data center
services powered by 100 percent clean power for the same price or less than web services
powered by fossil fuel-based grids in other locations. Internet companies can use the clean
power to market their green services, or take advantage of green subsidies in certain markets
(Fehrenbacher, 2010).
The country's largest energy company Landsvirkjun, has started researching for a sub-sea
cable project which began last year and is estimated to finish by the end of 2011. The plan is
to see how profitable it is to sell energy through underwater sea cable to European homes. On
the drawing board for receiving such energy are Britain, Norway, Holland and Germany,
which means they need cable at least 745 miles long, with potential to stretch up to 1180
miles. Iceland can sell estimated five terawatt-hours, or approximately five billion kilowatt-
hours, annually enough to power 1.25 million European homes. At current prices, that's about
$400 million in revenues each year (Nusca, 2011).
Other industries
In other export industries like software and agricultural offers also great possibilities, the
strength of Icelandic software sector lies in entrepreneurial labor, small-scale teams, good
education and adaptability reinforced with sophisticated telecommunication systems.
Icelandic IT and software companies have specialist know-how and long practical experience
in creating solutions for food processing and fisheries, bank technology, multimedia, Internet
applications, electronic commerce, real-time telecommunications systems for aviation and
transport, medical software, and general office and database systems, In the last 10 years ITC
exports have been around 0,5 to 1% of Iceland total exports of goods. (Iceland Trade
Directory, 2011).
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The Agriculture industry has been as small scale industry in Iceland since the 1980; high
potential exist in Iceland for developing both land- and sea-based farming. Major advantages
include abundant supplies of clean fresh water and economical geothermal for heating, which
means that framing of warm water species, is equally viable. One of the key advantages of
farming in Iceland is the virtually disease-free environment. It is the only country in Europe to
be A-grade nationwide according to EU regulations. Agricultural exports have been increasing
in Iceland should expand significantly in the future and forecast for 2012 estimates exports of
36000 million isk, up from 1400 million isk in 2003 (Iceland Trade Directory, 2011).
Social environment and Demographics
Iceland is a modern welfare state that guarantees its citizens access to universal health care,
education, and a high degree of social security. 28% of the GDP in 2009 was spent on health,
education, welfare, social security and other social affairs. Life expectancy is one of the
highest in the world and with one of world's lowest infant mortality rate (2,5 per 1000 live
births in 2008) testify to the advanced status of health care in Iceland, both primary health
care and hospitals. Health care services are mainly free of charge, except from adult dental
services. Education is free of charge throughout all public levels, but some private schools
and universities charge extra fees or tuitions from students.
University enrollment has increased substantially in recent years. In 1997, 21% of population
had a university degree. But in 2007, 30% of the population held a university degree. About
one of every five university degree held by Icelanders is obtained in other countries. The ratio
of pre-school enrollment is also one of the highest among the OECD countries (Central Bank
of Iceland, 2010). This can be explained by that Iceland has the highest rate of women's
participation in the labor market among the OECD countries, or 82,6%. Women are 45,5% of
the Icelandic labor force. Women work 37 hours a week and men work 47 hours on average.
In spite of this active participation in the workforce and long working hours, Iceland has one
of the highest fertility rates in Europe, or 2,1 children per woman. Women started entering the
labor market at an increased rate in the 1970s. This development has been met with childcare
for pre-school children, also strong legal right for parents to return to their jobs after
childbirth and generous parental leave system (Ministry of Welfare, 2011).
Iceland remains the country that has the greatest equality between men and women according
to annual report by the World Economic Forum (WEF). The report measures equality in areas
of politics, education, employment and health. "Low gender gaps are directly correlated with
43 | P a g e
high economic competitiveness. Women and girls must be treated equally if a country is to
grow and prosper." said Klaus Schwab, founder and executive chairman of the World
Economic Forum (BBC, 2010).
Iceland is considered to part of the ―Nordic Model‖ with mixed market economy and with
generous welfare system. The aim of the model is to enhance individual independence, human
rights and stabilizing the economy. It is distinguished from other welfare states with similar
goals by its emphasis on high labor force participation, promoting gender equality, education
and extensive benefit levels, large magnitude of redistribution and liberal use public funds
(Andersen, 1991).
Statistics below from (Nationsencyclopedia, 2000)
The population of Iceland was 318,452 1 January 2011, compared with 317,630 1 January
2010. Although increasing, the population growth of 0.3% was nevertheless historically low.
This is due to negative net migration in 2010, just barely outweighed by the natural
population growth (births less deaths) (Statics Institute of Iceland, 2010). The population has
nevertheless grown in the past five years by an annual average growth rate of 1.2%. Iceland
has a relatively young and middle-aged population—65 percent are between 15 and 64 years,
23 percent less than 14 years, and 12 percent aged 65 and older. It enjoys one of the highest
life expectancy rates in the world. Iceland also possesses one of the world's highest literacy
rates at 99.9 percent (1997 est.). Literature and poetry are a passion of the people and its per
capita publication of books and magazines is the highest in the world (Nationsencyclopedia,
23 %
65 %
12 %
Age structure percentage0-14 15-64 65+
44 | P a g e
2000).
Threat and opportunities in the social environment
Iceland has young and educated workforce, with higher birth rate (2,1) than most European
countries it gives Iceland greater balance with longer life expectancy. Iceland is not
experiencing the same problems as other countries in Europe with aging population and low
birth rate. People in Iceland take later retirement, official age is 67 years of age (with good
health people tend to work longer), also with good healthcare and low infant mortality rate.
All these factors improve Iceland's competitiveness on the international market.
With the financial crisis not over and with many young students studying abroad, there been
indications that large number of medical students and other educated students don't move
back to Iceland, especially because of bad job market at the moment and better salaries
abroad. This makes it really important to speed up the recovery of Iceland economy so they
don't experience brain drain of young educated doctors and other skilled workers. Also young
families have moved to other countries for job opportunities because of the crisis, this can
mostly explain low population growth rate in 2010.
Technological environment and infrastructure
The communication market in Iceland is characterized to be one of the highest penetrations of
internet, mobile phone, and broadband and fiber optic connections in the world. In 2009, 90%
of households in Iceland had internet connection, as 67% in other European countries. Nearly
all internet connections are high-speed, and 90% of connected households are regular users,
compared to 62% in EU (Central Bank of Iceland, 2010). The country's state of the art energy
infrastructure is highly ranked on international business indices for reliability, efficiency and
cost (Invest in Iceland Agency, 2010).
Because of Iceland's isolation as an island in the North Atlantic it is highly dependent on both
imports and exports. Iceland has therefore developed extensive air and maritime services to
hand its cargo and passengers transportation needs, and both harbor and airport capacities are
being steadily increased. There are 57 sea ports in Iceland; all ice-free year round and 15 ports
have some cargo activity. The port of Reykjavik receives more than 79% of all imports to
Iceland, and direct scheduled to Europe is also operated from three main ports in the western,
northern and eastern regions respectively. Four international-standard airports are in Iceland,
45 | P a g e
Keflavik is the main international airport (30min drive from Reykjavik) and a border point for
entering Europe under the Schengen Agreement (Iceland Trade Directory, 2011).
Iceland has an extensive road system that connects the various coastal communities around
the country and is kept open all year round. Trucking has increased dramatically in recent
years and there are now daily haulage services from Reykjavik to every major community
(Iceland Trade Directory, 2011). The road system around the island may not impressive
compared to typical European road system, but most of roads to all major communities and
towns are paved. But around the country side and in wilderness most of the roads are unpaved
and narrow.
Threats and opportunities in the technological environment
Icelandic companies have specialist know-how and long experience in creating solutions for
food processing and fisheries, bank technology, multimedia, internet applications, electronic
commerce, real-time telecommunications systems for aviation and transport, medical
software, and general office and database systems. These give possibilities to expand to other
foreign markets with new better technological communications to the mainland with
improved broadband data capacity (Icenews, 2011). Iceland relies on under water sea cables
to be connected to the world, if any of those cables would get damage to cut off Iceland’s
connection with the world.
Environment
Iceland is on a geological fault line. There are active volcanoes and the island experiences
earthquakes. Iceland is known for lava fields, hot springs, geysers and rocky mountains. Ice
fields and glaciers cover some of the highest areas. With majority of land mountains, rocky
shoreline it does not support huge areas for forest and woodlands. Vegetation and farming
areas are along the coastal lowlands. Arctic foxes and seals can be found in Iceland. Whales
can be seen along the coast. The island is also the home to large colonies of nesting sea birds
and colonies of puffins. Vegetables grown in Iceland include carrots, cabbages, potatoes and
turnips. Some vegetables and fruit, such as cucumbers, peppers, tomatoes, and even bananas,
are cultivated in heated glass houses (World info zone, 2011).
Natural resources
Iceland is endowed with abundant natural resources. These include the fishing grounds around
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the island, within and outside the country’s 200-mile EEZ. Furthermore, Iceland has abundant
hydro- electric and geothermal energy resources (Central Bank of Iceland, 2010). Iceland is
the only country in Western Europe that still has considerable resources of competitively
priced, renewable energy remaining to be harnessed. Only one third of the country's energy
potential will be tapped by the end of 2010. Hydropower and geothermal energy are the
sources of Iceland's uniquely sustainable electricity generating capacity. These
environmentally-friendly, green resources produce electricity without harmful atmospheric
emissions (Invest in Iceland Agency, 2010). Iceland has very few mineral resources, and a
small area of arable land, so mining and agriculture are not major parts of its economy. With
abundance of glaciers, clean fresh water and unspoiled nature. Also its location in the
unpolluted waters of the North Atlantic Ocean means that fishing has become prime
contribution to its economy (Maps of world, 2009).
Threats and opportunities in the Environment
As mention previously Iceland has threat of volcanoes and earthquakes, other dangers can be
avalanches and river floods. Icelanders have learned to adapt to the dangerous elements and
has an experienced emergency response team that organizes the response to every certain
situations. Most populated places posed no risk from those elements, but in the wilderness of
Iceland there can be more dangers. With a harsh landscape, narrow dirt roads, un-bridged
rivers, dangerous hot springs and dynamic weather, people need to be careful and prepared in
the Icelandic nature.
With the increased number of tourists visiting Iceland, the island could face threat in the next
decades with increased number of tourists in remote areas. Some of these places are fragile
and it takes sometimes many years to recover from the encroachment of men. These activities
include off-road driving, throwing garbage, over-crowded nature tourist places and other
damages cause by humans. Iceland needs to invest in better infrastructure to deal better with
increased number of tourists, like improve roads, national parks, road signs and improve
access to places of importance for tourists.
The environment of Iceland offers many opportunities, either if you want to invest in tourism,
energy, agricultural and fishing (highly restricted by foreign investment). The unspoiled
Icelandic nature give many possibilities in the tourist industry, for hotels, spas, sights seeing
or other tourist related activity where the Icelandic nature plays a big role. Piece of land is
relatively cheap in Iceland compared to most other European countries. This makes Iceland
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very suitable for fish farming, shellfish farming, raising fur animals, raising sheep and other
agricultural activity that requires large pieces of land and with minimum arable possibilities.
With abundant of geothermal and hydro energy, this has opened many possibilities for
Iceland, in agricultural the farmers are able to produce most of the domestic needs of
vegetables. Which some are grown in green houses that are heated by the near by hot springs.
Iceland clean energy has brought interest from many foreign investors; their interest is to
produce products with renewable clean energy to promote their products. Like solar panels or
related products, data storage centers and other activity. Previously energy-intensive
industries like aluminum and other mental smelting plants have invested greatly in Iceland
because of cheap renewable energy.
Iceland is reckoned as a forerunner in the field of renewable energy. The country is generating
around 81 percent of its primary energy needs and 100% of electric needs from renewable
sources. Figures in 2007 show that geothermal energy accounts for 66% of primary energy,
hydropower 15% and fossil fuels 19%(transportations, cars, ships and airplanes) (Eriksson,
2010).
The fishing industry gives a great opportunity for investment, even though it is bit difficult for
a foreigner to invest in this industry. Possible by some joint ventures, but is no direct
investment is allowed. Many of Iceland’s main fish stocks have been growing in last recent
years, also with higher market prices in Europe is giving this industry a boost. In recent years,
total Icelandic catches have ranged from 1,5 to 2,1 million tons (Iceland Trade Directory,
2011).
Legal
Although Iceland is not a member of the European Union, Iceland is signatory of the
European Economic Area (EEA) agreement and therefore incorporates all EU employment
and social directives into its national laws. Iceland is the most highly unionized country in
Europe and trade unions hold a great deal of political power. Special permission must be
obtained from the Ministry of Social Affairs before redundancies involving four or more
employees can take place. Extensive consultations must also take place with the trade unions
to discover if an alternative to labor shedding can be found. Sex equality is a serious issue,
both in labor relations and under Icelandic law. The same salaries must be paid for work of
equal value (National labour law, 2011).
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The Icelandic act on working environment, health and safety in workplaces is intended to
ensure a safe and healthy working environment which in general is in accordance with the
social and technical developments in society, and to ensure such conditions that within the
workplaces it is possible to solve safety and health problems in accordance with acts and
regulations, in accordance with guideline from employers and employees and in accordance
with guidelines and instructions from the Administration of Occupational Safety and Health.
This act covers all activities, where one or more person are employed, whether they are
owners of the company or employees. Employers are obliged to ensure that the working
environment, safety and prevention of hazards are appropriate and according to the safety act
(AOSH, 2011).
The main objective of the Icelandic antitrust law or the competition law is to promote
effective competition and thereby increase the efficiency of the factors of production of
society. This objective shall be achieved by (Ministry of Economic Affairs, 2005)
Preventing unreasonable barriers and restrictions on freedom of economic operation
Preventing harmful oligopoly and restriction of competition
Facilitating the entry of new competitors into the market
Threats and opportunities in legal environment
The most important factor in the legal environment is if Iceland fully joins the EU,
membership could mean threats for some industries like fishing and agricultural. Membership
could also mean opportunities for other industries in finance and better market access for
Icelandic companies, improved economic stability with euro currency and better finance for
home and companies.
Threats would be less economic independent nation and would be more up to EU regulation
how business environment in Iceland would be controlled. Iceland would lose some if it
controls if its territorial waters and need to stop subsidizing the agricultural industry.
Opportunities would be as member of EU, allowing Iceland to adopt the Euro. That would
mean more stable currency, it would help be export industries and make planning process
much easier. Most of exports go to Euro currency countries, so it would be suitable for the
export industry to have home currency in euro. Also Icelandic homes and companies would
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be able getting better finance with affordable loans from European banks, by having income
and loans in euro currency (idebate.org, 2009).
SWOT Analyses
SWOT Analyses was made of Iceland economic environment mostly based on previous data
in this thesis and from Global competitive rankings from the World economic forum
(weforum, 2011). See in appendix 3
Iceland business environment
Positive Negative
Internal Strengths Weakness
Little Bureaucracy
Competitive salary cost
Renewable energy
Little corruption
Abundant of fishing
resources
Low taxes on
corporations
Bridge between Europe
and US
Young and educated
workforce
Safe society
European legal frame
Innovation spirit
Gender equality
Small workforce
Small domestic market
Unstable currency
Unstable economic
environment
Strict foreign exchange
controls
External Opportunities Threats
Unspoiled nature
Green tourism
Energy sold to Europe
Good exchange rate
Power intensive
industries
Environmental hazards
Inflation
Unstable economic
environment
Exodus of educated
workforces to another
countries
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SWOT by industries
Fishing Industry
Positive Negative
Internal Strengths Weakness
High productivity
Technology leader
Close to resources
Strong brand image
Fast industry upgrade
Few big control the
market
High barriers for entry,
because of quota system
No foreign investment
allowed
Industry heavily in debt
External Opportunities Threats
Warmer ocean currents
– new species
High innovation in
industry
Main fish stocks have
been rising
Changes in fish stocks
Changes in ocean
currents
Changes in quota
system – Different
Political agenda
High oil prices
The Fishing industry has higher productivity and is technology leader in the fishing industry,
catch value per fisherman nearly 3 times that in any other country. Iceland has huge coastline
and closeness to the fishing resources (Iceland Trade Directory, 2011). With warmer ocean
currents new fishing species are entering Icelandic ocean territory, for example like tuna and
mackerel. The industry has high barriers because of quota system, it is expensive to contain
quota and makes barriers for new entry high. Industry is heavily in debt, especially because
many companies in the industry took loans in foreign currency and with the fall of the
Icelandic currency the total debts would double in Icelandic kronas. But what is saving the
industry it that most of their income is also in foreign currency. Also the current government
has bill in place (which has not passed yet), if the bill will pass in parliament take back the
quota in during period of 15 years and distribute back under new provisions (fishupdate,
2011). The industry is highly sensitive to changes in oil prices, the big fishing fleet uses large
share of Iceland import of oil.
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Energy industry
Positive Negative
Internal Strengths Weakness
Abundant of energy
Renewable clean energy
Competitive pricing
Long waiting list of
buyers
Dependent of domestic
market
Slow decision process
State and community
owners – Bureaucracy
in decision making
External Opportunities Threats
Abundant of
possibilities of
harnessing energy
Sell electricity to
Europe with underwater
sea cable
Improved technology in
geothermal drilling
Changes in
environmental polices
Changes in public views
on power plants and
their affects on
environment
Abundant of energy, only one third of Iceland hydro/geothermal power has been harvested.
Energy companies offer renewable and clean energy, both with geothermal and hydro power
and ability to offer competitive pricing. They have long waiting list of possible buyers of
energy, have already made agreements to sell most of future increase in energy before they
have started constructed new power plants. Dependent of domestic market, needs sea cable to
sell electricity to Europe. Government and community are owners, tend to create bureaucracy
and slow down decision making. Abundant of possibilities of harnessing hydro power and
geothermal around the island and sell electricity to Europe through under water sea cable.
There is already long list of possible buyers of unharnessed energy. Technology has improved
over the years in the geothermal drilling and harvesting. The big threats are changes in
government policies in protection of the environment, and changes in public views how far to
let the energy companies harness the energy of Iceland (Iceland Trade Directory, 2011).
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Tourist Industry
Positive Negative
Internal Strengths Weakness
Fasted growing sector in
Iceland
Strong brand for green
tourism
Good infrastructure
Huge contracts in
seasons
Island – only get there
by plane or ship
Inadequate road system
around the island
External Opportunities Threats
Weak currency – great
value for tourists
New Music and
convention center
Green tourism
Unstable currency
Natural disasters
Fragile ecosystem
One of the fasted growing sectors in Iceland economy and growing steadily at an average
annual rate of 6% since 2000, Iceland is a good international brand when it comes to beautiful
nature, clean environment and unspoiled nature. Good infrastructure, like airports, sea ports,
rescue teams and general services for tourists. The industry experiences huge contracts with
high season of 3 to 4 months in summer time, and low season for 8 to 9 months.
Iceland has some geographic disadvantages, can only get there by ferry or airplane. But also
offers advantages for people traveling between Europe and North American, making Iceland
great place for stop-over. Iceland has in some cases primitive country road system compared
to other Western Countries, the roads can be dangerous for those less experienced. Weakness
of the Icelandic currency has made Iceland a great value for money. With a new music and
convention center in Reykjavik, offer great opportunities to target groups in the low season.
Green tourism; Iceland is one of the best places in the world for green tourism, because of
unspoiled nature, clean environment and few habitants. Unstable currency, when currency
gets stronger it becomes less value for money for tourists. Natural disasters like volcano
eruption, earthquake or floods. With increased number of tourist, could damage the fragile
ecosystem of Iceland (Iceland Trade Directory, 2011).
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Industrial Industry
Positive Negative
Internal Strengths Weakness
Access to cheap clean
energy
Abundant of available
land
Access to well educated
workforce
High transportations
costs
Unstable currency
External Opportunities Threats
Bridge between US and
Europe
Improve brand image
with clean energy
source
Price of energy
Strong Workers Unions
They have access to cheap clean energy and abundant of available land to build factories, and
access to young and well educated workforce. Transportation cost is higher when for export,
because Iceland is not on the mainland, but offers great geographically placement right
between North American European market. Big international companies can improve brand
image by using green energy source from Iceland to make their products. Big threats are from
politicians that want to charge more for the energy sold to big power intensive industries in
Iceland. Unions are very strong in Iceland, and they are usually successful get salary increase
for workers by threatening to go on strike (Iceland Trade Directory, 2011).
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IT and Software industry
Positive Negative
Internal Strengths Weakness
Growing industry
Innovated workforce
Well educated
workforce
Require less capital
investment than other
industries
Unstable economic
environment
Profit takes longer
Outdated taxation
policies
External Opportunities Threats
Great possibilities for
entrepreneur
Iceland is great for
innovation
New internet sea cables
improves access
Easy to move jobs in
software industry
between countries
The values of exports have grown rapidly in last decade. The strength of IT- software sector
lies in entrepreneurial labor, small-scale teams, good education and adaptability reinforced
with sophisticated telecommunication systems. This industry requires less capital to create
jobs and has successful records of innovation projects. The industry is affected by unstable
economic environment and outdated taxation policies that are better suited to typical export
products. With better internet sea cables from the mainland, comes more possibilities to
expand services with more data broadband capacity. Big threat is that jobs in IT-software
industry can be easily moved between countries with minimum costs compared to other
industries, to follow the best suited taxation polices (Iceland Trade Directory, 2011).
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Agricultural industry
Positive Negative
Internal Strengths Weakness
Clean nature and soil
Little usage of pesticide
No imports of live
animals – little history
of animal diseases
Abundant of land
Highly regulated
industry
Subsidized industry
Higher barriers in some
sectors with quota
Not much land for
vegetation
External Opportunities Threats
Clean image
Growing organic
industry
Animals diseases
Changes in importation
policies
One of the key advantages of agriculture in Iceland is virtually disease-free environment.
Iceland is known for cleanness of nature and little or none usage of pesticide. There is
abundant of land for farm animals like cattle, sheep and other live stock. Regulation does not
allow imports of live animals, excepts for pets in rare cases. This has kept the live stock
almost free of all animal diseases. This industry is highly regulated and centralization by
industries leaders. Industry gets subsidized by the government and is one of the most
subsidized in Europe. Has some quotas systems in dairy and sheep production, makes it hard
for new beginner to enter with high barriers. Iceland does not offer much vegetation land for
growing grain, wheat and vegetables. On the other hand has created a strong industry for
growing vegetables in green houses for domestic market, using green energy to power the
green houses. Iceland has strong brand image for purity and cleanness and has been taking the
advantage of popularity of organic foods. Big threats in industry are animal disease and
changes in importation policies that could let to more competition from foreign suppliers
(Iceland Trade Directory, 2011).
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Conclusion
Iceland has gone through some dramatic changes over few decades, experiencing constant
unstable economic environment with inflation and devaluation of the currency. Icelanders
have shown success of utilizing and harvesting their resources, mostly in fisheries. Hardly
ever experienced high employment, expect in last two years. Economic controls and
stableness of economic environment has been Icelanders Achilles heel, but Icelanders have
always had strong work ethics and found ways to work through their problems. In beginning
of last century Iceland was one of the poorest countries in Europe and they managed to
become one of the richest in Europe (per capital) and offering one best living standards in the
world. Even though critics called it ―a dysfunctional socialist economy,‖ yet Iceland had
exceptionally good economic performance from the 1950s to the late 1980s helping Iceland
bring the average income into the same league as the other Nordic countries and 2th highest in
the human development index(reflecting GDP per capita , health care education).
The Ricardian model illustrates that Iceland has comparative advantage in catching fish and
access to cheap energy, making Iceland suitable for power intensive industries. Iceland has
access to abundant fish and energy resources that most other nations don’t have. Iceland is
according to Heckscher-Ohlin Model best suited to produce capital intensive goods that
require a lot of land, also with less focus on labor intensive goods. This is because Iceland has
few inhabitants, high income society and abundant of available land. According to Porter’s
competitive advantage of nations, Iceland has created good infrastructure of factor creation in
fishing technology and geothermal technology with strong home market and supporting
industries. Iceland has taken the two biggest characteristics of Iceland, the big ocean around
the island and the hot springs, and has made it a focus on specialization. With factors of
national circumstances and culture, Iceland has become a world leader in technology in
geothermal and fisheries.
Characteristic of the Icelanders managers resemble other Scandinavian nations in their
emphasis upon low power distance, low uncertainty avoidance, and strongly feminine values.
However, the manner in which their balance of individualism and collectivism is expressed is
their distinctive from other Scandinavian nations. With innovation spirit, fast decision making
and flexibility they have distinctive outtake on projects, but often lack in planning and
organizing.
57 | P a g e
Trade agreements have improved Iceland’s market access and strengthen the export values;
they should be considered an important factor in Iceland’s improved economic performance
over the last decades and have shaped the direction of exports towards the EU.
The main conclusion from this thesis is that Iceland has all the possibilities to regain its
strengths and even go beyond that. Iceland is not facing the same problems as the rest of the
world will be facing in the near future: Iceland has enough renewable clean energy to fulfill it
needs into the future, the birth rate is still above 2 per women. Opposed to rest of Europe
(except from Ireland) and has younger demographic population, they have highest
participation of women on the job market and best gender equality. All the main
infrastructures are still strong, health care, universities and welfare system. All the right tools
and opportunities are available, only thing that left is to take the steps and move ahead.
The economic reforms have in some ways slowed down this process, with tight capital and
exchange controls. Because of this foreign investment has not been as attractive with tight
regulation of capitals controls, which where attended to protect the Icelandic currency and
stop capital fleeing after the financial crisis. But with reforms and remove of capitals controls
should help foreign investment to pick up in the next years, opening up great possibilities in
all export industries.
58 | P a g e
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Appendix
Appendix 1 - Sources: (Eggertsson & Herbertsson, 2005)
Appendix 2 – sources: (Central Bank of Iceland, 2010)
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Appendix 3 –Sources: World economic forum
Appendix 4 – Sources: EIE
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Appendix 5 – Sources: EIU
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Appendix 6 – Sources: World economic forum