In the early 1970s, Sweden enjoyed one of the highest standards of living in Europe. Since then, however, its economic performance has undergone a relative decline. By 1990, Sweden had been overtaken by Germany, France, and Japan in GDP per capita; three years later, it had also fallen behind Italy and the United Kingdom (Exhibit 1).

To examine the causes of this decline, the McKinsey Global Institute studied productivity and employment in several key sectors between 1980 and 1992, comparing Sweden’s performance with that of Germany, Japan, and the United States.¹ In order to determine which features of capital, product, and labor markets influence differences in performance, it focused on eight industries: retail; banking; construction; film, TV, and video; processed food; cars; trucks and buses; and computers. (See pp. 137-144.)

Its principal findings were:

• In productivity and job creation, Sweden trails both global best practice and best European performance in all the industries studied except trucks and buses and computer software, where it is world class.
• Sweden’s performance is strongly affected by the unusually low level of competitive intensity in the large part of the economy that is...