Iceland´s advance : foreign investment 2001-2006

Abstract

The recent sharp increase in Icelandic foreign direct investment (FDI) has caught the attention of the international financial community, gaining special attention in the media of Denmark and the UK, where Icelandic businesses have been most active. Such agressive expansion raises questions that must be answered in order to ensure a proper flow of information between Icelandic businesses and their host nations.

Foreign expansion is a necessary and natural evolution of Icelandic businesses that outgrow the domestic market. Iceland is a small country, with a small population and consequently limited workforce. In an economy of this size, the largest Icelandic companies can reach a market capitalization equivalent to substantial portions of GDP, unheard of in most other developed countries.

Iceland’s advance on foreign markets has been a rapid process that arose from a number of domestic factors in the last decades of the 20th Century. Membership in the European Economic Area opened up new markets to Icelandic companies, strong pension funds provided much-needed capital for investments, and the privatization of the banking system provided new sources of financing for companies wishing to expand operations abroad. Furthermore, increasing education opportunities gave rise to a young workforce often educated abroad that has become an entrepreneurial class of executives.

Such favorable circumstances enncouraged Icelandic companies to move abroad, leading to a situation where many companies currently establish an international focus from the moment of their inception. Most often, expansion has been directed at Northern Europe, with acquisitions concentrated in the UK and Scandinavian countries. Britain’s status as the financial center of Europe and its faorable attitude toward foreign firms make it an attractive destination; despite some negative press, language and cultural similarities make Iceland’s Scandinavian neighbors, particularly Denmark, common recipients of Icelandic investments.

Despite the geographical focus, Icelandic FDI has been very diverse across sectors, and has been largely successful because of it. Many companies operate in very specialized global niches, making an international focus critical to their growth. Furthermore, Icelandic companies’ structure has enabled them to take advantage of rapid changes in the business environment, with a typically small heirarchy that makes them more flexible and adaptible than others.

Though the future of Iceland’s advance is far from written, certain successes and failures show both a capacity to make sound, economically-profitable investments, and to learn from the mistakes of failed ventures. In all, the characteristics of Iceland’s rapid expansion abroad show great potential for businesses to make a positive impact on the global economic community for years to come.