Is it oil or nothing for Norway? A literature review.

Author

Johnathan Hammond

Bournemouth University

Industrial Design

Business Development (Level H)

5/05/2015

Word count: 5,433

Cover photo source: hHp://www.yourworldjob.com/wp-‐content/uploads/2015/03/

north-‐sea-‐oil-‐014.jpg

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http://www.yourworldjob.com/wp-content/uploads/2015/03/north-sea-oil-014.jpg

Abstract

When oil was discovered in the Norwegian conOnental shelf in 1969, Norway was

very aware of the finite nature of petroleum and so underwent a plan in order to

safe guard these resources for future generaOons, and implemented tacOcs in order

to manage their new booming industry. Since the turn of the century, not only have

we seen Norway’s oil and gas industry rise to one of the strongest and largest in the

world, but we have also witnessed the price of oil rise from colossal heights and

plummet to extreme lows in a dramaOc response to levels of demand and global

financial situaOons. Over this period there has been increased discussion in regard

to the effecOveness of Norway’s economic plan as the future of oil nears to a close.

In order to tackle this topic, the methodic approach I have adopted is to review the

main literature surrounding this area, basing my work around as many academic

journals between 2003 and the present day as possible in order to focus the project

over the last 12 years, where the majority of these concerns were raised due to the

mulOple economic problems associated with fossil fuels. Through this I have

discovered several main areas of discussion; this includes the associated problems

of running a resource-‐based economy in a concept known as the ‘Resource Curse’,

analysis over Norway’s approach to economic diversificaOon into other industries in

connecOon to the oil industry, and to what degree they were successful, and

controversy relaOng to their entrepreneurial scene and the government’s support

for new business’s. From this I can deliberate that Norway has not met a suitable

level of economic diversificaOon and support for entrepreneurial acOvity acceptable

in sustaining their economy at its current high level.

Key Words

Economic diversificaOon, resource curse, resource-‐based economy, Dutch disease,

economic growth, petroleum fund, entrepreneurship, sustainable development, the

Norwegian paradox

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Introduc3on

Norway is the world’s third largest natural gas exporter and seventh largest oil

exporter. In 2012, 69% of Norway’s exports came from the oil and gas industry,

which accounts to 26% of Norway’s total yearly revenue. Furthermore, the industry

is said to contribute $35 million USD a year in tax and other revenues alone. All of

this revenue is subsequently deposited in to the country’s colossal $900 Billion USD

government pension fund (commonly known as the oil fund), the largest fund of its

kind.

This enormous wealth has also had a major effect on the Norwegian way of life.

Norway boasts top spot on both the ‘Legatum InsOtute’s’ annual prosperity index

(for the past 4 years) and also the UN development index. Norway has the highest

global Gross domesOc product (GDP) equal to $512.6 billion USD (as of 2013) and is

rated 7th in the ‘Legatum insOtute’s’ ‘Entrepreneurship and opportunity’ index.

However, Norway’s oil income is rapidly coming to a close, with over half of their

consOtuent oil reserves already depleted, and the cost for extracOng the remainder

becoming harder and more expensive to produce, along with a falling demand and

price for oil, with peak demand reached in 2011, driven by new technologies,

cleaner energy sources and reduced subsidies. The 2009 Copenhagen Accord also

adds pressure to this situaOon as at least 2/3rds of the idenOfied global reserves

valued on oil, gas and coal companies’ balance sheets can never be extracted if the

Earth’s warming is held to the 2 degree limit 141 companies, including Norway,

commiHed to. Climate pressure has already lead to an increased focus on energy

efficiency, renewable alternaOves, carbon pricing, phasing out of oil subsidies and

stricter regulaOon -‐ all iniOaOves that will reduce the demand for fossil fuels.

This report intends to explore the main literature surrounding the various ways the

oil and gas industry has affected the Norwegian economy and what Norway has

done to prevent becoming a resource-‐reliant naOon, and if so, to what degree have

they succeeded in doing so. To do this I have focused on the three main subject

areas relaOng to Norway’s historic methodology. Firstly, their baHle against the

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resource curse and Dutch disease. Secondly, an analysis over to what degree they

have managed to achieve successful economic diversificaOon, before finally

evaluaOng Norway’s entrepreneurial scene and the government’s involvement over

encouraging new lucraOve industries. It is hoped that by doing so, this will enable

me to be able to build up a detailed examinaOon covering the complete spectrum of

the oil and gas industries effect on the Norwegian economy, before I am able to

postulate an educated opinion over whether Norway has done enough to inhabit a

sustainable economy aher oil.

1. Resource Curse

The Resource curse is a widely discussed phenomenon which examines the effect

that countries and regions with an abundance of natural resources tend to have less

economic growth and worse development outcomes than countries with fewer

natural resources (Sachs and Warner 2001). Factors of producOon move to

extracOon acOviOes, and this factor movement effect is part of the mechanism in

the Dutch Disease. The disease also includes a spending effect since resource

revenues allow increases in aggregate demand, in turn creaOng excess demand

domesOcally, which puts addiOonal pressure on manufacturing through real

appreciaOon and loss of compeOOveness (Corden and Neary 1982). Moreover, if

there are posiOve externaliOes connected to having a large non-‐resource traded

goods sector, resource countries also face a spillover-‐loss effect since resource

extracOon may be imply slower technological progress. Thus, moving factors from

the traded goods sector to the resource-‐extracOon sector leads to loss of posiOve

externaliOes (Sachs and Warner 2001).

While the majority of academics concede that Norway managed to escape both the

resource curse and the Dutch disease, many of them would agree that there is

strong evidence to suggest the onset of the two components (Larsen 2005, 2006;

Noreng 2008; Holden 2013; Bjørnland & Thorsrud 2013). The reasons why Norway

managed to escape the curse is mulO-‐faceted. Be that as it may, an argument that is

generally accepted as a key contribuOng factor to Norway’s prevenOon for

contracOng the curse and disease, is the manner in which they handled their

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resource revenue (Seymour 2000; Larsen 2003; Skancke 2003; Rosser 2006; Treanor

2014). Larsen (2005) reasons that conflicts of distribuOon were avoided because the

oil revenues were publicly controlled and evenly distributed. Further

congratulaOons have also been directed at Norway’s revenue management, as it is

stated that some economists and other social scienOsts have recommended

Norway’s approach with the Oil fund as a method of stabilising the economy by

reducing the impact of commodity price instability (Seymour 2000; Skancke 2003;

Rosser 2006;). Rosser (2006) applauds the government’s oil fund investment

strategy, whereby investments are made in accordance with their absorpOve

capacity and all recurrent costs associated with new investments are taken into

consideraOon, and investments are only made when the expected rate of return is

considerably above alternaOve risk-‐free investments. Larsen (2005) also comments

on Norway’s investment policy in its importance to prevenOng the naOon on

contracOng the curse, staOng that the valuable export commodity created large

receipts that helped finance further investments into know-‐how and technology.

Treanor (2014) prioriOses the levels of trust the government insOlled on the naOon

as the top contribuOng factor for avoiding the resource curse, as without the

naOons belief that by saving the funds, and restricOng all public investments and

spending to only 4% of the surplus -‐ it will have a more prominent benefit to them

and the country in the long run.

One of the most important factors argued that helped Norway prevent contracOng

both the curse and the disease is down to the fact that the naOon operated a

poliOcally sound and stable government and economy (Larsen 2008; Holden 2013;

Treanor 2014). Larsen (2005) strongly argues this case, staOng that Norway was in a

favourable posiOon to find oil as it had an educated populace and well-‐funcOoning

poliOcal and economic insOtuOons that helped secure a sustainable path of

economic development. The author further specifies that the legal and illegal

confiscaOons of oil-‐rents (which the author claims is a pathogen of the curse) were

difficult in a transparent and accountable bureaucracy, at the same Ome as a

popular social contract and strong social norms helped to prevent Ome-‐consuming

and disrupOve rent-‐seeking. Other authors support this claim, laying importance on

Norway’s long and stable tradiOon of democraOc rule, and well funcOoning state

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bureaucracy as it operated producer friendly insOtuOons, held good protecOon of

property rights, boasted a reliable public bureaucracy and history of very liHle

corrupOon (Holden 2013; Treanor 2014).

A paradoxical debate is that there is evidence to suggest Norway did become a

candidate of contracOng the resource curse (Larsen 2005; Noreng 2008; Holden

2013; Bjørnland & Thorsrud 2013). The variety of reasons for this includes an

increase in wages (Noreng 2008; Holden 2013), firstly between 1974-‐1977, when

the government embarked on a costly counter cyclical economic policy that raised

real incomes by 25%, seriously compromising the compeOOveness of non-‐

petroleum acOviOes (Noreng 2008). Evidence then proves wage costs increased

considerably again, relaOve to trading partners in 2003 when hourly wage costs in

the manufacturing sector was 26% above Norway’s trading partners in the

European Union. In 2012 this had increased to a towering 69% (Holden 2013). A

clear significaOon of the symptoms behind the economic mechanisms of the Dutch

disease.

Further arguments include a symptomaOc structural break in the 1990’s, in which

Norway reached maximum lead over its neighbours and started a relaOve descent

and decrease in industry (Larsen 2005, 2006). Also, the demand for investment

goods and other inputs has been labeled as a detrimental factor as in 2012, the

demand from the petroleum sector consOtuted about 12% of GDP in Norway. About

8% of Norwegian employment is directly or indirectly associated with the demand

from the petroleum acOviOes, in parOcular the investment demand exhibits large

fluctuaOons, and is for this reason also a source of fluctuaOons to the mainland

economy (Holden 2013). The government also built up a vast arsenal of oil reserves

abroad, denominated in foreign currencies (Larsen 2005). Moreover, the oil

industry, by raising the domesOc cost level, has appeared as a threat to employment

as it could easily destroy more jobs than it creates (Noreng 2008).There are also

reasons to believe that in Norway there is evidence of a two-‐speed economy, with

non-‐tradable’s growing at a much faster pace than tradable's (Holden 2013;

Bjørnland & Thorsrud, 2013).

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A topic that also aHracts some aHenOon is the concept of ‘The Norwegian Paradox’.

This theory contrasts the Dutch disease as it is believed Norway is characterised by

a peculiar combinaOon of low innovaOon and high economic performance

(Grønning et al. 2006; OECD 2007). However, Castellacci (2008) challenges this

statement as he postulates that the Norwegian sectoral systems are very innovaOve,

ohen above the European average and in some sectors they emerge as the most

innovaOve in Europe (including advanced knowledge providers in services, science

based manufacturing and network infrastructural services). On the other hand,

Castellacci (2008) also largely agrees with the concept of the ‘Norwegian Paradox’,

as hypothesis’s that these sectoral groups are relaOvely small, accounOng for a

much lower share of producOon than their European counterparts. The dominant

energy sector has aHracted the majority of the investment in the country, sustaining

the economic system for the last few decades. In turn this has resulted in a

crowding out process driving out producOve resources from high-‐opportunity

manufacturing and business services which have strong potenOal to be able to drive

the growth of the economy in the post-‐oil era. At present, Castellacci (2008)

believes these industries lack the amount of resources and minimum scale that

would be necessary to have a visible effect on the aggregate performance of the

Norwegian system.

2. Economic Diversifica3on

One method of assessing Norway’s ability to sustain their economy aher the end of

the fossil fuel industry is to consider the degree to which they have managed to

diversify their economy in to other sectors and industries. In this secOon, I focus on

the effect the Oil industry has had on economic diversificaOon in Norway, and they

key arguments surrounding the debate whether Norway has done enough to create

a sustainable economy aher oil.

Many scholars would argue that Norway’s successful economic diversificaOon can

be put down to their management over their petroleum revenue, in the form of the

Pension fund (Noreng 2005; Shediac et al. 2008; Elbadawi 2009; Movahed 2013)

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where since 1990, has been deposiOng the central government’s net cash flow from

the petroleum sector, as well as the return on fund investments. Shediac et al.

(2008) applauds the Norwegian government’s policy, describing it as sustainable

and robust. The fund has helped the economy diverge from fossil fuels through

various government led investments including markets abroad (Norway owns

roughly 1.25% of global stocks), both insulaOng the country from the shock of oil-‐

price changes (Noreng 2005; Shediac et al. 2008; Elbadawi 2009; Movahed 2013)

and removing excess liquidity from the economy (Shediac et al. 2008). By saving the

money into an independent account, instead of allowing it to flow directly into the

domesOc economy, this prevented the inflaOon of currency, which in turn prevented

price increase and a higher cost of producOon (Movahed 2013). The fund also

serves as an instrument for dealing with the financial challenges presented by an

ageing populaOon (Noreng 2005) and the compelling reality of the eventual

exOncOon of the oil and gas volumes (Noreng 2005; Elbadawi 2009). It is also

argued that the fundamental role the government plays in the poliOcal economy

further adds to this argument. The Norwegian state tradiOonally acts as the re-‐

distributor of money, levying taxes on incomes, turnover and property, with sums

reallocated by a democraOcally elected parliament -‐ these primary funcOons have

never been altered, even when oil revenues were flooding in. The government has

always maintained taxaOon on ciOzens, which has enabled a constant build up of

the petroleum fund, and the use of petroleum revenues indirectly (Noreng 2005).

In objecOon to this argument, Drennen (2013) puts heavy criOcism on the

governments handling of the Oil fund -‐ claiming that Norway is ‘doubling-‐down’ on

the petroleum industry, by re-‐invesOng an oil producing country’s savings back in to

the oil and gas industry, as it is said to have broken the cardinal rule of prudent

invesOng -‐ miOgaOng risk by diversifying into non-‐correlated asset classes. It is

stated that the Oil Fund’s management has in turn invested $37 million USD back

into the coal, oil and gas sectors. In 2013, it was esOmated that 12% of the total Oil

fund equity holdings belonged to this sector. Norway’s enOre economy is therefore

indirectly exposed to the trickle-‐down effect of salaries and wealth created from its

primary industry. Housing prices, commercial bank loan porpolio’s, the Norwegian

Kroner -‐ are all indirectly linked to the price and sustainability of oil and gas

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extracOon. A recent study by the Norwegian School of Management esOmates the

share of the Norwegian economy that is directly or indirectly correlated to the price

of oil is nearly 50%. Furthermore, the author also argues that the fund’s investment

managers are being too ‘cauOous’ when selecOng the markets to invest in, falling

into the insOtuOonal trap of using consultants and benchmarks to avoid taking

responsibility for the porpolio -‐ so long as it can hide behind the results and

composiOon of the FTSE/MSCI benchmark. He claims that most of the InsOtuOonal

porpolio managers are not focused on long or medium term investments into the

country other sectors, as 70% of all stock trading is now executed by high frequency

traders, holding their equity posiOons for a few seconds or hours at most.

Castellacci (2008) also adds to this argument postulaOng that the great availability

of the financial resources in the oil fund does not provide strong enough insurance

from the future risks of sustaining the economy aher oil, and instead argues that

the resources consOtute a good opportunity to start undertaking a new direcOon

already in the present, and to compensate for the costs associated with the new

development of a new path.

In contrast to this view, other authors have put more emphasis on the

advancements the Norwegian oil firms made in technologies and skills in the oil-‐

drilling sector and the resulOng spill-‐over effect this had on other industries -‐

contribuOng to a successful economic diversificaOon (Noreng 2005; Shediac et al.

2008; Ville and Wicken 2012; Movahed 2013). The Norwegian government’s

‘Transfer of knowledge’ policies implemented right at the beginning of their oil

producOon, which drew up licensing terms for the internaOonal oil companies

making it mandatory for them to transfer skills and competence to the Norwegian

companies. This resulted in a large Norwegian task force including young engineers

undergoing overseas training by the major oil companies, before they were taken

home to ‘Norweiganise’ their naOonal organisaOons. It is believed that this transfer

of technology and the cooperaOon in research and development, and by compelling

oil companies to transfer competence and cooperate in the development of new

technologies, Norway could assume the role of a leader in internaOonal petroleum

development, within a relaOvely short period of Ome (Noreng 2005). A highlight of

this competence, was the development of sub-‐sea technology.

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Due to the hosOle condiOons of the North sea, and the challenges faced to extract

oil at such extreme depths -‐ significant amounts of resources were allocated to sub-‐

sea research and development in the early 1980’s. This resulted in the Norwegian

oil industry making major advances in drilling and sub-‐sea technologies, including

processing, transportaOon and reservoir management technologies and the

applicaOon of informaOon technology -‐ that at some points are classed as world

leaders (Noreng 2005). This valuable know-‐how meant that Norway could sell these

technologies and experOse across the globe to other oil firms.

However, it was the spill-‐over effect that these areas of experOse had into other

industries that enabled the Norwegian economy to diverse from fossil fuels -‐ which

was heavily helped through government legislaOon that was brought in that

required internaOonal operators working in the North Sea to conduct as much

research and development in Norway and Norwegian insOtuOons as possible. This in

turn led to a huge over-‐spill of a highly skilled work force into other industries such

as engineering firms, mariOme services, mechanical industry, manufacturing sector

and research insOtuOons (Noreng 2005; Shediac et al. 2008; Movahed 2013). The

conOnuous development of enabling sectors, driven by the demand from the

resource industries, created a strong knowledge base which was then distributed

into various parts of the economy and society (Castellacci 2008; Ville and Wicken

2012). This knowledge base could then be exploited to improve producOvity in old

resource based industries and to develop new industries. This dynamic interacOve

relaOonship between the natural resource industries and enabling sectors is

regarded as the core aspect of the successful the successful economic development

of Norway (Noreng 2005; Shediac et al. 2008; Ville and Wicken 2012).

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3. Entrepreneurship

It is widely argued that Entrepreneurship is a key area the Norwegian government

has focused aHenOon on over the past 10 years to help move the country beyond

its consolidated strategy based on oil and the welfare state, and develop a new

culture of innovaOon and entrepreneurship (Ball, 2015). There has been much

debate regarding how successful Norway has been in terms of implemenOng an

entrepreneurial system throughout their naOon, with a majority of the arguments

focused on the government’s involvement (or in some cases, lack of) regarding the

establishment of government policies, including the availability of funding,

entrepreneurial teaching throughout the educaOon system and government

legislaOon and organisaOons introduced in order to help strengthen the

entrepreneurial scene, by increased encouragement for start-‐ups and support of

SME’s (small/medium enterprises) and gazelles. Further arguments involve an

evaluaOon of the current state of SME’s, the business and entrepreneurial culture in

Norway and also the cost’s involved in starOng and running a business in Norway.

One key argument against the Norwegian government is the strength of their policy

structure for entrepreneurship, as there is no official poliOcian responsible for

entrepreneurship or enterprise development and no comprehensive policy

document dealing with entrepreneurship. Instead they have several areas regarding

this field included as sub-‐topics in papers and strategy plans (Lundstrom et al. 2008;

Rotefoss & Nyvold 2008). Arguments have also been made against the amount of

start-‐up capital a business is required by law to own in order to incorporate a

limited company, which unOl 2009 was set at the equivalent of £10,000 GBP. This

has since been reduced to £3,000 -‐ but is nonetheless sOll quite a prohibiOve cost

for a start-‐up -‐ especially when compared to the European states (such as the U.K

where is it just £15) (Coleman 2014). Following on from this, since 2003 the

availability of finance for entrepreneurs and small business’s especially in the very

early stages has also aHracted criOcism being listed as one of the key areas for

improvement in a government lead evaluaOon of the entrepreneurship policies in

Norway (Rotefoss et al. 2003).

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In spite of these arguments, the Norwegian government has also received much

praise over the last 11 years for their contribuOon to entrepreneurship, as it is

believed that entrepreneurship has received increased poliOcal aHenOon, as a

number of government iniOaOves have been introduced since the first government

strategy was iniOated in 2004. Most policy instruments in this area are focused on

removing barriers to entrepreneurship, and nurturing an entrepreneurial culture

(Napier et al. 2012). A majority of authors would agree that funding has been the

most significant policy change the government has implemented (Lundstrom et al.

2008; Napier et al. 2012; Moe 2014; Coleman 2014; Johar & Addarii 2015; Tonning

2015). These changes in policy include the six new funds the government

established in 2012 for increasing seed capital supply to startup companies with

growth potenOal. The Governments revised budget proposal in 2013, increasing

funding for start-‐up grants, with a special emphasis on early stage businesses

(Napier et al. 2012; Lundstrom et al. 2008). A reducOon in administraOve burdens

through abolishing audit requirements in 2012. Tax reducOon schemes were also

introduced in R&D sectors for innovaOon policy in green innovaOons and

technologies (Napier et al. 2012). The addiOon of crowdsourcing in the naOonal

innovaOon policy (Johar & Addarii 2015). It can also be argued that the

government’s reducOon in the amount of start-‐up capital for a limited company also

shows willingness of the government to reduce the high entry barrier for start-‐ups

in order to foster and culOvate culture of entrepreneurship and innovaOon outside

the tradiOonal sectors of oil, gas, clean energy and fishery industries (Coleman

2014).

Furthermore, the government has also been congratulated on its policies regarding

entrepreneurism and the educaOon system, as it was one of the first countries to

develop a naOonal strategy plan for entrepreneurship in the school system

(Lundstrom et al. 2008). The iniOaOve was in the form of the organisaOon ‘Junior

Achievement -‐ Young Enterprise’. The three major objecOve’s for the strategy have

been to contribute to value creaOon, the establishment of new enterprises and

innovaOon in Norway by sOmulaOng the autudes, knowledge and skills of pupils,

students and teachers at all levels and to lastly develop a culture for

entrepreneurship -‐ puung increased emphasis on the area of moOvaOon in

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entrepreneurism. However, this plan was ended in 2008 to be evaluated (Lundstrom

et al. 2008), strongly suggesOng the iniOaOve’s success was limited.

Other Government contribuOons to entrepreneurship which have been

commended include the “Invest in Norway” iniOaOve launched by the government

in 2012 (Lundstrom et al. 2008). The introducOon of Norway’s first ‘White Paper’ on

innovaOon, with an objecOve to improve the ability to innovate in the Norwegian

economy in order to secure a conOnued welfare department through the formaOon

of a comprehensive approach to R&D, innovaOon in services and public sector and

immaterial property rights (Lundstrom et al. 2008). The introducOon of iniOaOves to

encourage entrepreneurship among women, ethnic minoriOes/indigenous groups,

unemployed and immigrants/expatriates. A problem that was highlighted in the

2003 government lead paper assessing Norway’s entrepreneurial scene (Rotefoss et

al. 2003). Norway’s move towards a renewal for public good creaOon has also been

applauded, which see’s a system for a new economy for commonwealth that

recognises the welfare state and public goods as true sources of innovaOon and

creaOve industries, challenging neoliberal paradigm’s which sees renewal as coming

only from the private enterprise (Johar & Addarii 2015). Norway’s dedicaOon

towards an economy that steers away from the reliance of petroleum is also

highlighted by a 10% reducOon in investments in the industry in 2015 (Moe 2014).

Arguments have also been made addressing the Norwegian business and

entrepreneurial culture, and the effect this has on the success of entrepreneurial

acOvity in the naOon. Some authors argue that Norway is rather ‘average’ when it

comes to entrepreneurship, staOng that Norway ranks 24/42 countries on the global

entrepreneurship monitor (Lundstrom et al. 2008) and scores low on

entrepreneurial moOvaOon (Rotefoss et al. 2003; Tonning 2015). It is argued that

Norway is sOll relaOvely new to the entrepreneurial concept (Coleman 2014). Also,

it is said that there has been a long standing problem persuading talented people to

forego the oil industry in favour of risking it all on entrepreneurship (Nickel 2015;

Tonning 2015). In opposiOon to these debates, some authors argue that Norway’s

entrepreneurial culture can be seen as a benefit for doing business, as they are a

naOon of highly skilled and educated populaOon (Coleman 2014; Nickel 2015).

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Norwegian’s are known to be technically advanced and early adopters of

technology, coupled with a high-‐spending power per-‐capita, creaOng an ideal test

market for start-‐ups in tech and ICT fields. Oslo is Ranked ninth most business

friendly ciOes in the world, with a thriving start-‐up scene and friendly environment

for entrepreneurs (Coleman 2014).

Conversely, it has been argued that Norway has performed badly in relaOon to the

naOon and government’s support for entrepreneurial acOvity and the formaOon and

management of new business’s (Lundstrom et al. 2008; Castellacci 2008; Napier et

al. 2012; Moe 2014; Coleman 2014;). The importance of SME’s, and their

contribuOon to the Norwegian economy has been firmly emphasised as it is known

that Norway is a country that has the highest firm birth rate out of the Nordic

countries, the highest share of gazelles as well as the highest share of high-‐growth

companies. It is also said that these enterprises consOtute 99.9% of the total

company populaOon and hold a 57.7% total share of employment (Lundstrom et al.

2008). Furthermore, each firm creates on average 50 new job opportuniOes (Napier

et al. 2012). Strong contenOons have been made against the amount of support

new businesses, namely gazelles (small, fast growing company) and SME’s receive

(Lundstrom et al. 2008; Castellacci 2008; Napier et al. 2012;). Arguments include

the fact that very few gazelles manage to upscale considerably (Napier el al. 2012),

which strongly suggests the government is not offering enough growth support to

these companies. Secondly, it is wriHen that R&D investments need to be increased

in exisOng SME’s, with the possibility that such investments can be given tax

reducOons in order to help increase growth potenOal among entrepreneurs

(Lundstrom et al. 2008; Castellacci 2008; Moe, 2014; Tonning 2015). Also, it is

believed that the capital market for start-‐ups is undersized and includes only a

handful of VC’s (venture capitalists) and a fragmented business angel community,

which is only partly compensated through public support and soh funding (Coleman

2014). Further arguments relate to the governments management over small

business start-‐ups, which include the uneven spread of gazelles amongst the main

industry sectors in Norway, with a vast majority found within the service sectors.

Norway also stands out as a country with a high number of gazelles in the primary

producOon sector, largely due to the fact that the sector includes the oil and gas

�15

industry as well as enterprises within aquaculture producOon. Roughly half of the

gazelles in Norway are consolidated in these two sub-‐sectors (Castellacci 2008;

Napier et al. 2012).

Conclusion

During the discussion at the introducOon for this literature review, it was idenOfied

that the Norwegian oil and gas industry affected their economy in 3 main ways.

Through the threat of contracOng the resource curse and Dutch disease, their ability

to diversify their economy away from the dominaOng resource-‐based industry, and

the effect it had on the entrepreneurial scene and the ability for new business start-‐

ups in the country.

Firstly, although it is predominately agreed that overall, Norway succeeded in

overcoming both the resource curse and Dutch disease, there is evidence to suggest

that the two components did have a detrimental effect on the Norwegian economy.

The main evidence behind this includes two separate occasions where wages

increased dramaOcally, relaOve to their European trading partners. Strong indicaOon

that the country went through a structural break in the 1990’s, and growth started

to descend. The increase in demand for investment goods and the resulOng strain it

put on the economy and the concept of ‘The Norwegian Paradox’, and its resulOng

effect of crowding out high-‐potenOal alternaOve industries. However, it is strongly

argued that Norway managed to protect its economy from the injurious effects of

the resource curse through the manner in which they handled their resource

revenue by evenly distribuOng wealth amongst the economy. Furthermore, credit is

given to the government’s ability to run a poliOcally sound and stable government

and economy, that was able to develop a sustainable economic policy and reduced

the capability of collecOon of legal and illegal rent-‐seeking strategies.

Secondly, the amount the Norwegian government has managed to diversify their

economy in relaOon to the oil and gas industry has received mixed speculaOon, as

although most of the literature I covered would largely agree that Norway has been

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successful in diverging their economy away from the Oil industry, either through the

governments management and investment of the petroleum fund and the

insulaOng effect this has on the security of the economy, the role the government

played relaOng to the advancements in technologies and skills within the oil

industry, and the subsequent spill-‐over effect this had into similar industries. Strong

arguments have been made against Norway’s policies involving economic

diversificaOon as criOcism has been made addressing the vast amounts of money

from the oil fund that is re-‐invested back into the oil industry, breaking the cardinal

rule of prudent invesOng miOgaOng risk by diversifying into non-‐correlated asset

classes. Also contenOons have been voiced arguing that the oil fund does not

provide strong enough insurance from the future risks of sustaining the economy

aher oil, and that the government needs to uOlise the funds in developing a new

path before it’s too late.

Finally, regarding the entrepreneurial policies and scene in Norway. It is fair to say

that Norway under performs in this sector, as although the government has made

entrepreneurship a priority on its poliOcal agenda in recent years, there is much

debate over whether the government’s involvement in supporOng entrepreneurial

acOvity and start-‐up business’s is sufficient enough. The main criOcisms include the

lack of a poliOcal representaOve and comprehensive policy document dealing with

entrepreneurship. Also, many authors would argue that there is a considerable lack

of support and effecOve management of SME’s and gazelle firms in Norway, as many

new business’ fail to upscale efficaciously and are generally consolidated into

narrow groups. This dissaOsfactory performance has also been aHributed to the

entrepreneurial culture in Norway, which has been labeled as average as it scores

low on entrepreneurial moOvaOon, increased by a long standing problem of

persuading talented people to forego the oil industry for a higher risk

entrepreneurial career. However, in defence of the Norwegian government, they are

making significant efforts in order to tackle these problems through introducing a

number of government iniOaOves helping to remove barriers to entrepreneurship

and to increase the amount of support of start-‐ups through increasing funding

schemes and budget allocaOon, as well as revising policies, reducing the costs

involved in starOng and running a company.

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Taking all of the above into consideraOon, It can be postulated that Norway has

managed to formulate a compelling, trustworthy economic policy in terms of their

response to their resource wealth, with a highlight being the formaOon of the oil

fund. Combined with their vigilant determinaOon to preserve the wealth, using

intelligent investment strategies to help build the fund further as a tool to help

safeguard the economy against fluctuaOons in oil prices. Moreover, the government

has also effecOvely uOlised the funds in order to increase economic diversificaOon

into other sectors. However, strong contenOons can be made against Norway’s

management over the oil and gas industry in the ability to establish a sustainable

economy aher oil, as the government has shown stubbornly behaviour in relaOon to

divesOng from their reliance on oil as they sOll conOnue to invest an extensive

amount of money from the oil fund back into the petroleum industry, when this

money should be used to support the growth of other high-‐potenOal industries

disOnct from the petroleum sector. Furthermore, in consanguinity with the

government’s approach to entrepreneurship and business start-‐ups, they have not

met an acceptable level in terms of management and support for entrepreneurial

acOvity if they intend to retain their high level of GDP and export income aher the

oil industry seizes to exist.

The literature studied, provided on the whole, exemplary research to facilitate the

conclusions made in this review. However, it became obvious the rather limited

amount of research in terms of academic journals surrounding the three main areas

studied. There was however, a lot of opinions considered relaOng to this topic area

in the form of newspaper arOcles and online journals, however it was discovered

that these forms of research did not elaborate in enough detail the reasons for their

raOonale, therefore the validity of their opinion was reduced.

This project also has the possibility of extending beyond the scope of this arOcle

through looking wider into the economic make-‐up of Norway beyond the direct

relaOon to the oil and gas industry in order to create a further understanding into

the security of a sustainable economy in Norway.

�18

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Is it oil or nothing for Norway? A literature review.

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