Copenhagen is the financial and political centre of one of the world’s happiest countries. The UN World Happiness Report has consistently ranked Denmark in the top three happiest countries since the index began in 2012. With a national focus on social justice that manifests in a 33-hour work week, a $20 minimum wage, high-quality healthcare and higher education as well as free childcare, what’s not to be happy about?

For years entrepreneurs and business-minded Danes who were seen to want to ‘rise above the rest’ in this egalitarian society felt the need to go abroad to launch their business. More recently, however, Denmark, and in particular Copenhagen, has emerged as one of the fastest-growing start-up ecosystems in the world. Copenhagen has succeeded in positioning itself as a forward-looking, business-friendly city while retaining its reputation for offering a high quality of life.

Start-up Genome’s 2021 Global Start-up Ecosystem Report (GSER 2021) ranked Copenhagen the second fastest-growing start-up ecosystem in the world.

The GSER 2021 values Copenhagen’s start-up ecosystem at $15.1bn, and Denmark has produced eight unicorns, which is impressive for the size of its economy.

Just Eat and Zendesk are unicorn pioneers of Copenhagen's start-up ecosystem. Newcomer unicorns include fintech company Pleo, which raised $150m at a $1.7bn valuation in December 2021, and Lunar, which raised $249m to achieve unicorn status in July 2021. A number of tech-focused events and organisations have become part of Copenhagen’s start-up ecosystem. The city’s Tech BBQ gathers 8,000 entrepreneurs each year for an innovation summit and the Danish Startup Group is a non-profit organisation offering events, workshops and networking opportunities.

Can a start-up scale up from Copenhagen?

However, like other locations outside Silicon Valley, Denmark has a scale-up funding problem. Founded in Copenhagen, Just Eat relocated its headquarters to London in 2008. Asbjørn Overgaard, CEO of investment promotion agency Copenhagen Capacity, says the city has strong pre-seed funding, primarily borne by public funding in Denmark, “and good funding for large series funding rounds, but we do seem to have this gap between the very early stage and more mature funding”, he says.

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A $228m venture fund, 2150, launched in 2021 to back technologies aimed at reducing the carbon footprint of cities, may help to address this issue. Sector-specific events and organisations such as Copenhagen Fintech Week, which connects start-ups with financial institutions, researchers, governments and non-governmental organisations, are also helping to facilitate funding.

The establishment of business-friendly environment where entrepreneurial endeavours are encouraged only took a small shift in the Danish mindset. “We are a nation of small trading businesses,” says Overgaard, adding that 98% of Danish businesses are small and medium-sized enterprises, something which has characterised Denmark’s economy for centuries. While Copenhagen is home to a number of international companies including AP Møller-Mærsk, Novo Nordisk, Carlsberg and Novozymes, Overgaard says Copenhagen’s proposition for foreign companies is different from some of its closest competitors in Sweden or Germany, for example, which may attract large industrial foreign investors. Denmark has more flexible social security and labour laws that allow smaller traders to set up more easily, scale rapidly and scale back when required. Overgaard argues that this is more in line with the needs of a growing business than a multinational.

Denmark’s history as a largely agricultural country has meant that despite its transition to a service-based economy, it retains unique expertise in the food and agriculture sector. Board professional Maria Horjth is co-founder of Vår Ventures, a fund focused on sustainable food production. “There has been a lot of pressure for a cleaner approach to agriculture, using technology to optimise harvests as well as using waste products in the production of food,” she says. Copenhagen is the perfect market for companies looking to test their products before scaling and growing internationally, Horjth adds, saying that it is also “a market for testing different ideas and iterations until you have a good market fit. That’s a strength of being a small country.”

Denmark's unpredictable FDI inflows

Denmark’s FDI inflows have been erratic over the past 20 years. According to World Bank data, the country’s inward investment peaked in 2000 at 21.9% of GDP. Since then, levels have zig-zagged between troughs of -5% and 4.8% of GDP. Data from the UN Conference on Trade and Development shows a similarly erratic pattern of inward investment flows, from $7.53bn in 2005, to -$8.98bn in 2010, to $3.61bn in 2015 and then dropping to $1.15bn in 2020.

Llife sciences remains Copenhagen’s strongest FDI sector, according to Overgaard. Copenhagen Capacity’s most recent reporting to February 2022 demonstrated that close to 40% of the city’s inward investment goes to life sciences, 30% to technology and the remaining to green industries and others, he adds.

A strong life sciences ecosystem, coined Medicon Valley, spans the greater Copenhagen region and moves into southern Sweden. The hub has been developing since 1997, but completion of the Oresund Bridge connecting greater Copenhagen with Malmo in Sweden in 2000 allowed the hub to become host to the largest agglomeration of medtech companies outside of Boston.

Across all sectors, the business activity attracting close to 70% of inward investment is research and development, according to Copenhagen Capacity. This is where Lisa Mallner, commercial advisor for Denmark’s Ministry of Foreign Affairs, says Copenhagen can differentiate itself with its world-class sector expertise. “The city’s talent is unprecedented," she says. "It has one of the highest percentages of Masters and PhD candidates in the world – and the talent is much more affordable than Silicon Valley or New York.”

Copenhagen is home to the University of Copenhagen, the IT University of Copenhagen, the Technical University of Denmark (one the leading engineering institutions in Europe), and Copenhagen Business School (one of Europe’s largest business schools).

Compared with some other cities in Europe, Copenhagen doesn't offer particularly competitive tax breaks or economic incentives, but instead competes on other metrics such as quality of life and ease of doing business, according to Mallner. “Most business activities can be done entirely digitally in Copenhagen, compared with Germany for example, where there is a lot of cutting through a lot of red tape,” she says. In Copenhagen, Mallner says the record for opening a business online was 11 minutes.

However, while Copenhagen is widely seen as business friendly, new foreign direct investment (FDI) screening rules that came into force in September 2021 have been characterised by some as being on the more restrictive end of those seen across the rest of the EU. The legislation follows the EU’s existing regulatory framework outlined in 2019 requiring member states to conduct wholesale reviews of their FDI screening processes.

Copenhagen's bid to become Europe's green capital

Copenhagen is hoping to attract increasing FDI from investors focused on decarbonisation, sustainability and green tech. Overgaard says that although the green sector in the city has been a politically expedient focus for many years, the reality has now caught up to the rhetoric. “Copenhagen really is a green capital with companies investing in this area because they can tap into an ecosystem and find collaboration partners to test and develop solutions with potential for a wider global market,” he says.

In 2019, Denmark passed the Climate Act, aimed at reducing greenhouse gas emissions by 70% by 2030 compared with 1990 emission levels. The Climate Act sits alongside the City of Copenhagen’s ambitious climate goal of becoming the world’s first carbon-neutral capital by 2025. The city has an extensive cycling infrastructure, regulations requiring a high percentage of social housing in new urban residential developments, a harbour clean enough to swim in, and public schools where academics, life skills, democratic education and citizenship are high on the agenda. “As the population of Copenhagen continues to grow, the city is committed to maintaining its strong social cohesion and diversity,” says the government’s 2021 Voluntary National Review.

However, Copenhagen’s population growth over the past 20 years, largely driven by immigration, has raised questions about this commitment to diversity.

Within a country with such a strong social conscience, Copenhagen has been challenged by the social and moral complexities of immigrant integration issues. The Danish government’s tough stance on immigration and asylum has garnered condemnation from organisations including Chatham House. Limiting non-Western immigrants and returning asylum seekers outside of Europe for processing, as well as a government targets for zero asylum seekers, are initiatives that mark a departure from Denmark’s progressive reputation.

Copenhagen enters post-Covid age in position of strength

Despite the many challenges, including social cohesion, funding gaps and the Covid-19 pandemic, Copenhagen’s economic indicators look strong. A small fall in GDP in 2020 appears not to have deterred the city from overall steady economic growth over the past two decades.

Copenhagen has hosted a number of large sporting and cultural events, which increase the city’s global profile and showcase its green ambitions. Copenhagen co-hosted the UEFA European Championship in 2021 and is due to host the Tour de France Grand Départ in 2022, with a particular focus on sustainable tourism. All told, with a vibrant start-up scene, a rich quality of life and a commitment to become Europe’s green capital, Copenhagen’s economic future looks bright.

This is the second in Investment Monitor's Future of Nordic Cities series. We have already profiled Stockholm, Helsinki and Bergen, and in the coming weeks we will cover Malmo, Reykjavík, Oslo and Gothenburg.