Iceland has a high standard of living in international comparison, but amongst OECD countries its relative ranking has been sliding. In the wake of the financial crisis, investment slumped and while the economic recovery has progressed, growth is appreciably slower than during the previous expansion. In particular, labour productivity growth has remained very weak. Against this background, policies that improve the business environment will help lift productivity growth through encouraging innovation and competition. A wide range of policies can have an impact. The regulatory environment for product markets is generally among the least restrictive economies in the OECD, but the regulatory stance is uneven. Regulations governing barriers to entrepreneurship are notably more restrictive. Strengthening competitive pressure is another means of encouraging greater efficiency and innovation, but achieving this is complicated in a small economy. Raising human capital levels amongst certain groups will also boost growth and facilitating resource reallocation can play a role in reacting to economic shocks while supporting productivity growth. Finally, public policy fostering innovation and firm creation can underpin a dynamic part of the economy, which would otherwise experience financing difficulties.