Textbooks suggest that the best location of a “scaler” – a firm that grows quickly – may change over time. High potential start-ups benefit from the connections available in dense urban agglomerations – from venture capitalists to academic researchers to business consultants – when they are developing their products or services. When it is time to produce at scale and hire many people, cheaper locations become more attractive. Scalers may also decide to relocate closer to new customers as they grow, especially if their services or goods are sourced locally.
But in reality all types of regions can be fertile ground for scalers, and re-locations from the “home” place are rare. A new OECD study Grow and Go? Retaining scale-ups in the Nordic countries shows that only between 2- 5% of scalers relocate.
So why do most scalers prefer to stay?
Dr. Windi Muziasari, the CEO of Resistomap, a scaler that provides environmental monitoring of antibiotic resistance, was ready to leave the tranquillity of her academic lab to embrace a risky entrepreneurial journey – as long as she could count on her local community. Her confidence stemmed from the solid network she had in Helsinki, which she knew would support her transition from academia to start-up.
Most of the founders of scalers we interviewed in Nordic countries told a similar story about the importance of local connections. Whether it is about recruiting, collaborating with universities, finding customers, or securing finance, the personal network of the founders and the senior managers is a key asset for scalers, and one that keeps them rooted in their region.
They are rooted in other ways too. Scalers invest in property and specialised equipment that is difficult to transport and scouting for new locations can take a lot of time and money. Relocations may also result in many workers leaving the company, either to avoid moving elsewhere, or because once they have to move, they may also consider opportunities in other companies.
A foot in two regions
About one in six scalers1 open branches or establishments in new regions, while retaining their headquarters in the original location. This helps them have the best of both worlds. The Institute of Technology of Linköping University is a talent hotbed for a company like Ferroamp, a scale-up focused on optimising the energy of buildings, headquarted in Spånga, near Stockholm. For their managers, opening a new office near the campus was the right move to make sure they could find the technical designers they were looking for.
Beyond access to talent, proximity to final customers is another driver of expansions, as one of the scalers interviewed by the OECD remarks:
- “Without a local presence and relationship building, it’s hard to become big.”
For companies providing goods and services that are delivered and consumed locally, such as perishable goods or cleaning services, expansions represent the opportunity to enter into new markets.
However, expansion also bring some risks. For instance, spreading the workforce across distant locations may weaken the company culture. Several interviews with scalers point to culture being an asset that is physically embedded in the headquarter location:
- “If we’re not all together physically some things will fall through the cracks”;
- “The pandemics made it slightly easier to have people off site thanks to teleworking but [it is] still hard to build company culture remotely”.
Lessons for local policies
Local and regional governments often create policies to attract scalers to set up in their areas, hoping to boost the local economy. Typical policies are tax breaks, business aid, special land use plans, or new transport links.
The findings of the OECD report suggest that these policies should not focus solely on attracting firms’ headquarters, which seldom relocate. Rather, policies should also set their sights on attracting new branches or plants, which are a more natural way for scalers to establish a presence in new locations.
But attracting businesses is only half the strategy. It’s crucial to nurture home grown businesses from the very start. This helps them not only succeed, but also take deep roots in their home region. Take the Finnish company Howspace, for instance. Even as its AI-driven digital platforms have gained worldwide popularity, it has steadily maintained operations in Helsinki since setting up shop in 2008. The support they received from national and local authorities was a vital factor in keeping them in Helsinki, according to one of their managers:
- “We have been supported by every possible authority in the field, mainly Business Finland – with loan instruments that were critical in product development and go-to-market phases”.
Local policy makers should take heart from this and back their businesses in the confidence that they will be rewarded – with loyal scalers eager to give back to their communities.
Scalers are more likely to expand than to relocate
Note: The period covers 2014 to 2020. The full sample includes five Nordic countries: Denmark, Finland, Iceland, Norway, and Sweden. Establishment-level data are not available for Iceland and Norway and thus information on expansions is missing for these countries.
1 15% to 19% of scalers expand over the 2014-20 period in the three Nordic countries covered by the analysis for which establishment level data are available (Denmark, Finland, and Sweden).