The Internetworked Nation
Neither cuckoo clock nor silicon, Switzerland’s adaptive system combines lasting quality with cutting edge innovation
In one the most notorious scenes from cinema history, Harry Lime, a racketeer played by Orson Welles in the The Third Man, compares the cultural achievements of Italy and Switzerland. He says,
“In Italy for thirty years under the Borgias, they had warfare, terror, murder, bloodshed. They produced Michaelangelo, da Vinci, and the Renaissance. In Switzerland, they had brotherly love, five hundred years of democracy and peace, and what did they produce? The cuckoo clock.”
It’s probably unfair to suggest that this stereotype of Switzerland as safe and sterile originates directly from the film, but it has certainly helped to perpetuate it. According to its purveyors, the stereotype holds that Switzerland is too rich to take risks, too boring to be creative, and officiously obsessed with petty rules governing everything from rubbish collection to toilet flushing — in short, the antithesis of innovation.
However, not only is this stereotype misplaced — Switzerland invented the internet, not the cuckoo clock— but Switzerland’s networked, outward-looking economic model sets it apart from other nations and provides a blueprint for how to succeed in the digital economy.
Measure twice, cut once
While it is high time to debunk some myths about Switzerland, Switzerland’s success should still be seen on its own terms. If we look at the start-up scene, for example, it bears little resemblance to Silicon Valley. Tech companies here tend to ramp up slowly. According to startupticker, Swiss tech start-ups take about 10 years to reach scale and grow almost twice as fast in their second decade as in their first. Without a large domestic (consumer) market to sell into, they look to sell to corporations and they seek to internationalize early, with the majority exporting within the first three years of their life. And, they tend to take comparatively little external capital with most businesses becoming stable, moderately growing SMEs rather than blow-out exits or IPOs.
Looked at on these terms, we could cast Switzerland as small-scale and parochial. It is a long way from blitzscaling and moving fast and breaking things. Instead, it is very much the slow and steady model of measuring twice and cutting once that leads to fewer unicorns and billionaire celebrity founders, but which also produces fewer negative externalities and inequality.
The fact is that drawing a comparison with the US tech scene is wrong and Switzerland should resist portraying itself as “Silicon Alps” or the “Silicon Valley of [insert term here]”. Like Operation Libero, the Swiss political movement that punctured the rise of the far-right Swiss People’s Party by reframing the political debate, Switzerland should not define its credentials in terms set by others. Instead, it should present the uniqueness of its model: a complex, adaptive system that combines lasting quality with cutting edge innovation and that marries economic growth with inclusiveness.
Complex, adaptive system
A complex adaptive system is one made up of a network of interdependent actors that collectively adapt quickly to changing environmental factors. For Switzerland, this system is made of a series of layers - from government to brand - each resilient and adaptive, which, as a whole, both reinforce the strength of the overall system and leave it well positioned to capitalize on the future.
- A distributed political system. In Switzerland, political power is distributed between the federal, cantonal and communal governments. This allows for a high degree of adaptiveness by keeping government nimble and localized enough to respond to diverse needs. In addition, it encourages competition between the different cantons and communes that promotes good governance and which, in practice, results in policies which are both pro-business, such as low tax and low employment regulations, and pro-citizen, such as a strong safety net, and which overall create the conditions for entrepreneurial risk-taking and shared prosperity.
- An inclusive culture. It is testament to its inclusiveness that Switzerland is able to seamlessly accommodate four different language groups and a population with 25% foreign-born residents. But, it is in its ability to meld the high-tech and the rural, the modern and the traditional into a coherent, confident whole that it really excels. In much of the world, digitization is leaving behind rural areas, but not so in Switzerland.
- A robust industrial set-up. Switzerland has a unique ecosystem, spread across multiple cities as opposed to one single dominant center. In place of unicorns it has lions, top-of-the-food-chain organizations that act as key nodes in the network. These include multinationals (Switzerland has more per capita than any other nation), top class universities (one in the top 10, two in the top 25), NGOs (including the UN) and scientific research hubs, such as CERN.
These organizations support a much larger network of SMEs, which form the backbone of the economy and middle-class employment, and attract key flows of capital and information. This last point is critically important since globalization is entering a new phase, one centered on virtual not physical flows. In practice, this means that big is not necessarily best, that the future probably doesn’t look like our popular imaginings and that small countries, like Switzerland, can have outsized impacts.
- Cutting-edge technology. Switzerland didn’t invent the cuckoo clock, but it did invent acid. In a whole range of fields, from micromechanics and hardware to life sciences and pharma, Switzerland is world-leading. Its high-tech economy is supported at a foundational/high-risk level by strong government spending on R&D (as a % of GDP it is behind only Korea and Israel, the latter a big military spender) and then a combination of top universities, research centres and high-spending corporations take it from there: Switzerland tops the Global Innovation Index.
- International connections. Its outward focus is symbolized through its international organizations as well as the annual Davos gathering, but it is supported bottom up through over 40 free trade agreements. International trade accounts for over 120% of GDP and the 2019 Freedom Index ranks Switzerland the fourth most open economy in the world, the most open in Europe. But its internationalism is also down to geography: if you draw a circle around Zurich into neighboring southern Germany and northern Italy, you realize it stands as the pinnacle of the global center for high-end, family-run design and manufacturing — everything from machine tools to Ferraris.
- A world-renowned brand. Switzerland wraps this adaptive system with a timeless, global reputation for quality epitomized by precision engineering and intricate design; more Zenith watch than cuckoo clock.
The model for Europe
One paradox of Switzerland is that it’s in the heart of Europe, yet not in Europe (the European Union, that is). But a greater paradox is that, though not in the EU, it represents the best model of how the EU should work.
Just as Switzerland should not compare itself to the US, nor should Europe. North America embodies a libertarian model where winners take all and corporations rule supreme.
Similarly, the Chinese model is not the European model, either. The Chinese model is one of planned economic activity. It can deliver fast growth, but at the expense of individual freedoms. Here corporate surveillance gives way to state surveillance, but the surveillance persists.
Europe seeks to forge a different path. A Goldilocks model of balanced freedoms and inclusive growth. The challenge is that Europe hasn’t yet found the recipe to make this happen. However, that recipe might well be the Swiss one: business friendly to promote growth, but with the welfare state to lift all boats; a federal model to allow for self-government and pooled sovereignty; a focus on science and lasting value that creates a prosperous middle class; and, an open model attracting the flows on which the next phase of globalization will be built.
Tweaking the Swiss model
While objectively a global success story, there could still be room to improve. A recent report from McKinsey highlighted, for example, that Switzerland is losing attractiveness as a home for MNCs, a key constituent of the ecosystem. Here are three measures that could help.
Unleash the capital. As should be clear, we would not advocate turning Switzerland into some sort plastic replica of Silicon Valley. However, that does not mean that more risk capital wouldn’t be helpful.
Last year, Swiss companies raised over USD1bn in venture financing, a 32% annual growth and the highest amount ever. Moreover, the money went to fund more companies in a more diverse range of sectors than ever before. But USD1bn is low relative to most other developed countries and very low relative to, say, over USD1 trillion that sits in the national Swiss pension pot.
Furthermore, not only does venture capital have significant economic multiplier effect, but it is also filling the vacuum left by traditional lending which is not adapting to the increasingly intangible nature of modern economies. As such, it would highly beneficial to get dormant Swiss capital moving. This might come naturally from tokenizing illiquid assets like real estate, but it might also require the hand of the state by, for example, creating the conditions for a new financing vehicle to emerge —one that promotes long-term, sustainable investments.
Foster the holding company model. Our view is that this networked organization of the future looks a lot like Ant Financial or Amazon, operating what we call the “holding company model” . This model allows group companies to remain small enough to cater to specific customer demographics and agile enough to respond to market changes. But, the holding company structure leverages growing financial muscle, shares supply side economies of scale, like IT infrastructure, and shares data network effects via APIs. Given the structure of the Swiss economy — as the world capital par excellence of holding companies — as well as the importance of holding companies to attracting data flows, it is vital that Switzerland makes this model as viable as possible before Singapore and others usurp it. Part of this relates regulations on data, but at least as important are rules on tax, especially around how capital flows between entities get treated.
Scale the brand. The future is small and invisible. It won’t be the future of flying cars and Fritz Lang’s Metropolis. And for Switzerland, nor could it be. A country of 8 million people, its future always had to be true to brand: high-end and high-quality. But there is a way to make this brand do more and we believe it is by pivoting from “Swiss Made” to “Swiss Designed”, accepting its increasingly intangible asset future, placing manufacturing closer to consumers and scaling its addressable market in the process.
A confident future
When you transit between terminals at Zurich airport, you are presented with a hologram of Heidi set against a mountain backdrop and accompanied by sounds of nature, yodeling and the Swiss horn. This is the manifestation of a society at ease with itself, the confident projection of a multi-faceted nation that can be at once modern and traditional, high-tech and rural.
The nature of our economies is changing. Our future will be increasingly networked. Switzerland as a complex adaptive system looks set to re-calibrate for this new phase of globalization.
While it might not have invented the cuckoo clock, it’s probably in for another five hundred years of peace and sisterly love.