How has Sweden become the Silicon Valley of Europe despite having one of the highest tax rates in the world?

Swedishcapital Stockholm has become the Silicon Valley of Europebirthing and incubating the likes of Spotify, Skype, and Klarna, even though it has some of the highest tax rates in the world.

Both established companies and startups are flocking to the city due to its home computer drive, and concurrent early investment in internet connectivity.

Some executives and campaigners say the Scandinavian nation demonstrates that a deep social safety net, often viewed as counter to entrepreneurial spirit, can foster innovation.

It's an outcome that might not have been envisaged by the architects of Sweden's welfare state in the 1950s.

Childcare is, for the most part, free. A range of income insurance funds can protect you if your business fails or you lose your job, guaranteeing up to 80 per centof your previous salary for the first 300 days of unemployment.

Feast of capitalism

As Klarna's billionaire founder Sebastian Siemiatkowski prepares to stage one of the biggest-ever European fintech company listings, a feast of capitalism, he credits an unlikely backer for his runaway success: the Swedish welfare state.

In particular, the 39-year-old pinpoints a late-1990s government policy to put a computer in every home.

"Computers were inaccessible for low-income families such as mine, but when the reform came into play, my mother bought us a computer the very next day," he said.

Startup rate vs Silicon Valley

Although overall investments are larger in the bigger European economies of Britain and France and their longstanding finance hubs, Sweden punches above its weight in some regards.

It has the third-highest startup rate in the world, behind Turkey and Spain, with 20 startups per 1000 employees and the highest three-year survival rate for startups anywhere, at 74 per cent, according to a 2018 study by OECD economists.

Stockholm is second only to Silicon Valley in terms of unicorns - startups valued at above $1 billion - per capita, at around 0.8 per 100,000 inhabitants, according to Sarah Guemouri at venture capital firm Atomico.

Silicon Valley, San Francisco and the Bay Area,boasts 1.4 unicorns per 100,000, said Guemouri, co-author of a 2020 report on European tech companies.

No one can say for sure if the boom will last, though, in a country where capital gains are taxed at 30 percent and income tax can be as high as 60 percent.

In 2016, Spotify said it was considering moving its headquarters out of the country, arguing high taxes made it difficult to attract overseas talent, though it hasn't done so.

Sweden's digital minister Anders Ygeman said that social regulation could make it "possible to fail" and then "be up and running again" for innovators.

Peter Carlsson, CEO of startup Northvolt, which makes Lithium-ion batteries for electric vehicles and is valued at $11.75 billion, said that ultimately success bred success.

"You're really creating ripple effects when you're seeing the success of somebody else and I think that's perhaps the most important thing in order to create local ecosystems."

(With inputs from agencies)