Download Download PDF

Finland: A European Model of Successful Innovation
Robert Werner MBA/MIA ‘04
© 2003 by The Trustees of Columbia University in the City of New York. All rights reserved.
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS FALL 2003 www.gsb.columbia.edu/chazenjournal
1. Introduction
Over the course of the 1990s, Finland underwent an economic transformation on par with that of
any Western European state in the post-World War II era. The country began the decade in the
mire of a severe economic depression, marked its middle by joining the European Union, and
celebrated its end as one of the most competitive economies not only in Europe but in the world.
This dramatic transformation was largely due to the country’s ability to re-orient its trade toward
partners and sectors that offered higher growth potential—in this manner, Finland has clearly
illustrated the benefits to be gleaned from the process of “globalization.” Its success in this new
global framework was the result, partly, of lucky timing, but more importantly, of deliberate
government policies aimed at fostering economic growth through innovation.
It is not the purpose of this paper to calculate precisely how much of the country’s growth can
be attributed to such government policies, versus how much was a result of pure luck or
exogenous factors such as “globalization.” What it does offer is a discussion of why Helsinki’s
policy choices have served Finland so well in the past decade, and how they must adapt in order to
ensure continued growth and competitive success well into the future. The paper begins with an
overview of Finland’s economic performance in the 1990s, highlighting its recent rise to the top of
the list of international economic competitiveness. It then provides some insights into one of the
factors that was crucial in achieving this high level of competitiveness: namely, investment in
research and development. A discussion of the Finnish government’s innovation policies is then
provided, along with a brief case study of the information and communication technology (ICT)
sector—arguably the single largest Finnish success story of the last decade. Finally, the paper
highlights some of the challenges that Finnish policy will have to address in the future, and
concludes with a discussion of Finland’s emerging role in the expanding European Union.
2. Finland in the 1990s: From Bust to Boom
Finland’s post-War industrial growth was driven by heavy, export-oriented industries, such as
paper and pulp, basic metals, and chemicals—a strategy that helped the country reach the GDP
level of the world’s wealthiest countries by the end of the 1980s (Schienstock and Hamalainen
2001, 33). The start of the new decade, however, signaled the beginning of a different chapter in
the country’s economic history. In the autumn of 1990, the country plunged into what would turn
out to be the most severe depression of its independent history (ibid., 34).
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 1
Figure 1: Real GDP Growth in Finland and the Euro Zone, 1990-2001
130
125
Real GDP (1990 = 100)
120
115
110
105
Finland
100
Euro Area
95
90
85
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source: Author's calculations, based on Economist Intelligence Unit, 2002.
Figure 1, above, illustrates the dramatic downturn that occurred in the Finnish economy over
the first half of the 1990s. In real terms, Finnish GDP did not recover to its 1990 level until 1996.
This stands in stark contrast to the experience of the Euro area as a whole, which experienced a
steady upward trend over the course of the decade (except for a slight drop-off in 1993). The
explanations for such an extreme and lengthy downswing in Finland have been well-documented
and researched, and range from pure external shocks (the collapse of the USSR, a leading trade
partner) to poorly designed financial deregulation and even mistaken reactions to the beginning of
the depression itself (Honkapohja and Koskela 1999, 400).
What is unmistakable is the fact that Finland entered the 1990s with completely different
future prospects than it had even a few years previously. By 1994, its unemployment level had
reached 20 percent, up from 3 percent a mere four years earlier (ibid., 401). The rest of the decade
would, however, bring much more positive economic news. First, in 1995, Finland joined the
European Union—a factor which did not, in and of itself, bring immediate economic relief, but
which certainly brought the Finns greater peace of mind and enhanced their belief in prospects for
longer-term recovery and stability. As Figure 1 shows, Finland’s GDP performance in the latter
half of the decade was stellar. And as is illustrated in Figure 2, below, this impressive GDP
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 2
growth was surpassed by an even more impressive growth in the country’s exports. This
illustrates two important facts about the Finnish economy in the latter half of the 1990s: that its
recovery was driven largely by the growth of export industries, and that Finland’s competitiveness
on the world stage increased dramatically during this period (a necessary condition for such
dramatic and sustained export growth).
Real level (1990 = 100)
Figure 2: Finland’s Real GDP and Export Growth, 1990-2001
250
240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
90
80
GDP
Exports
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source: Author's calculations, based on Economist Intelligence Unit, 2002.
This intuitive sense of the country’s increased competitiveness has been repeatedly confirmed
in leading international surveys. One of these, the International Institute for Management
Development’s (IMD) World Competitiveness Yearbook, ranked Finland the second most
competitive economy in the world in 2002, behind the United States. Furthermore, as illustrated
in Table 1, it has shown Finland consistently increasing its competitive position in the world over
the past five years. Its rankings attempt to capture “the ability of nations to provide an
environment that sustains the competitiveness of an enterprise,” and are based on statistical
calculations taking into account economic performance, government and business efficiency and
infrastructure, as well as executive opinions (IMD, 2002). According to the Yearbook, Finland’s
strengths include a government that can be trusted to respond quickly to changes in the economy
as well as very highly credible managers and corporate boards (ibid.).
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 3
Table 1: World Competitiveness Scoreboard Rankings, 1998-2002
USA
Finland
Luxembourg
Netherlands
Singapore
1998
1
6
3
4
2
1999
1
5
3
4
2
2000
1
4
6
3
2
2001
1
3
4
5
2
2002
1
2
3
4
5
Source: International Institute for Management and Development, 2002.
In recent years, Finland has also been among the top performers in the World Economic
Forum’s Global Competitiveness Report. In 2002, Finland ranked second (again, behind the
United States) in both of the Report’s main rankings:
•
The Growth Competitiveness Index, which “is based on three broad categories of
variables that are found to drive economic growth in the medium- and longterm:
technology,
public
institutions,
and
the
macroeconomic
environment”(Cornelius 2002, 3). Finland has performed especially well in the
area of public institutions, receiving the number 1 ranking for two years running
(Cornelius, Blanke, and Paua 2002, 12).
•
The Microeconomic Competitiveness Index (MCI), which “examines the
underlying conditions defining the sustainable level of productivity” by focusing
on company sophistication and the quality of the national business environment
(Cornelius 2002, 7). Michael Porter, current custodian of the MCI and one of the
most well-respected international business economists, notes that, in order to
remain competitive, “a nation’s companies must shift from competing on
comparative advantages (low-cost labor or natural resources) to competing on
competitive advantages arising from unique products and services” (Porter 2002,
3). As will be discussed shortly, this was precisely the route taken by Finland in
the 1990s.
Both the IMD and World Economic Forum rankings illustrate that, a decade after its most
severe depression, Finland finds itself among the most competitive countries in the world. How
did it manage to turn its situation around so quickly? This is the topic to which we turn our
attention next.
3. Innovation: Finland’s Turnaround Catalyst
“In the course of one decade, Finland has undergone a fundamental structural shift from a
resource-based to a knowledge-based economy” (Wagner and Vocke 2001, 3). This quote, from a
recent International Monetary Fund report, nicely summarizes the transformation that the Finnish
economy underwent in the 1990s. Table 2, below, partially illustrates this trend, showing that the
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 4
electrical equipment sector (which includes such knowledge-intensive industries as information
and communication technology) more than tripled in size over the second half of the 1990s and
ended up constituting one quarter of all industrial value added. On the other hand, sectors such as
wood and paper and metal, in which the country has a resource-based comparative advantage,
grew little, and lost significant ground in terms of their overall share of industrial value added. It
is little surprise then, given Michael Porter’s previously mentioned observation about the source of
national competitiveness, that Finland has been viewed as such an international success story.
Table 2: Value Added Growth of Selected Leading Finnish Industrial Sectors
(all figures in million €)
1995
1996
1997
1998
1999
2000
2001
Wood and Paper Industry
% of total
5,461.5
23.8%
5,297.3
22.3%
6,070.6
23.6%
6,317.0
22.5%
6,542.9
22.0%
6,844.0
20.7%
6,351.2
19.4%
Electrical Equipment
% of total
2,566.9
11.2%
2,892.7
12.2%
3,353.6
13.1%
4,744.4
16.9%
5,849.0
19.7%
7,947.0
24.0%
8,105.9
24.8%
Metal Industry
% of total
2,585.7
11.3%
2,678.9
11.3%
2,865.5
11.2%
2,965.2
10.6%
2,933.0
9.9%
3,216.0
9.7%
3,177.9
9.7%
Total Industry
industrial growth rate
22,941.6
23,701.9 25,685.3 28,032.3 29,685.2 33,057.0 32,726.4
3.3%
8.4%
9.1%
5.9%
11.4%
-1.0%
Source: Author’s calculations based on Statistics Finland 2002, Industrial Statistics; Volume Index of Industrial Output.
Of course, a great deal of investment in innovation—both in terms of technology and product
development and the creation of competitive enterprises—has been required to bring such
knowledge- and technology-intensive industries to the forefront of the Finnish economy. Table 3
illustrates just how much of the country’s overall research and development (R&D) spending has
gone to the electronics industry, showing it to be more than 50 percent in the late 1990s. Aside
from leading the drive to a knowledge- and technology-based economy, R&D spending has played
an important role in reducing unemployment across the economy. Firms with high levels of R&D,
in both the manufacturing and service sectors, have been the most successful in sustaining
employment growth post-recession (Asplund 2002, 11). Thus, increases in R&D spending have
helped Finland to both restructure its economy from an industrial point of view and to tackle the
high levels of unemployment that arose during the early 1990s.
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 5
Table 3: Business Enterprise R&D Expenditure by Industry in 1999 and 2000
1999
million €
Business Enterprise Total
Manufacturing Total
Food Industry
Textile, Clothing & Leather
Wood Processing
Chemicals
Metal & Mechanical
Electronics
Other Manufacturing
Utilities
Construction
Wholesale & Retail Trade
Transport, Storage, Communication
Computer Services
R&D
Other Industries
2643.9
2000
million €
%
100%
3135.9
%
100%
2,161.9
53.8
12.6
76.3
222.5
338.7
1,421.1
36.8
81.8%
2.0%
0.5%
2.9%
8.4%
12.8%
53.8%
1.4%
2,538.9
62.7
13.3
87.2
256.8
350.1
1,725.0
43.7
81.0%
2.0%
0.4%
2.8%
8.2%
11.2%
55.0%
1.4%
28.0
24.7
42.1
110.6
94.0
111.1
71.5
1.1%
0.9%
1.6%
4.2%
3.6%
4.2%
2.7%
19.8
31.7
57.5
107.0
123.2
135.8
122.1
0.6%
1.0%
1.8%
3.4%
3.9%
4.3%
3.9%
Source: Statistics Finland 2002, Business Enterprise R&D Expenditure by Industry in 1999 and 2000.
R&D expenditure, measured as a percentage of overall GDP, has increased dramatically in
Finland over the course of the 1990s, as shown in Exhibit 6. Finnish R&D growth over the course
of the decade outpaced that of all OECD countries except Iceland, and by the end of the decade
Finland was by far the biggest R&D spender (relative to GDP) of all OECD countries.
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 6
Table 4: GDP Share of R&D Expenditure in Selected OECD Countries in 1993-2000
Country
1993
1995
1997
1998
1999
2000
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Hungary
Iceland
Italy
Japan
Netherlands
Norway
South Korea
Spain
Sweden
United Kingdom
United States
OECD Total
1.49
1.71
1.71
1.21
1.74
2.17
2.4
2.35
0.98
1.33
1.13
2.88
2
1.73
2.22
0.91
3.27
2.12
2.52
2.15
1.55
1.72
1.74
1.01
1.84
2.3
2.31
2.26
0.73
1.54
1
2.89
1.99
1.71
2.5
0.81
3.46
1.98
2.5
2.11
1.68
1.87
1.72
1.16
1.94
2.72
2.22
2.29
0.72
1.84
0.99
2.83
2.04
1.66
2.69
0.82
3.67
1.83
2.57
2.16
1.79
1.9
1.82
1.24
2.04
2.89
2.17
2.31
0.68
2.04
0.98
2.94
1.95
1.8
1.98
1.83
1.25
2.06
3.19
2.19
2.44
0.69
2.32
1.03
2.93
2.05
1.7
2.47
0.89
3.8
1.87
2.65
2.21
1.8
2.55
0.9
1.83
2.6
2.18
1.94
1.35
3.37
2.15
2.46
0.82
0.9
2.76
% change,
1993-99
20.8%
15.8%
7.0%
3.3%
18.4%
47.0%
-8.8%
3.8%
-29.6%
74.4%
-8.8%
1.7%
2.5%
-1.7%
11.3%
-2.2%
16.2%
-11.8%
5.2%
2.8%
Source: Statistics Finland 2002, GDP Share of R&D Expenditure.
But what have been the sources of this R&D spending? In the early 1990s, as a result of the
country’s depression, the Finnish government undertook massive cuts in public spending
(Schienstock and Hamalainen 2001, 36). As a result, one might think that public funding of R&D
decreased over the course of the decade. However, the data presented in Table 5 illustrate that this
has indeed not been the case. Annual public sector R&D expenditures increased steadily in
absolute terms between 1991 and 2000, and the only reason why their relative share of overall
R&D spending declined was because of the even more dramatic increase in private (business
enterprise) spending on these activities.
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 7
Table 5: R&D Expenditure by Sector in 1991-2000
(all figures in million €)
1991
1993
1995
1997
1998
1999
2000
Business Enterprises
% of total
975.1
57.0%
1,048.5
58.4%
1,373.4
63.2%
1,916.7
66.0%
2,252.8
67.2%
2,643.9
68.2%
3,135.9
70.9%
Public Sector
% of total
357.5
20.9%
379.7
21.1%
374.4
17.2%
408.6
14.1%
443.9
13.2%
470.1
12.1%
497.4
11.2%
University Sector
% of total
378.0
22.1%
367.5
20.5%
424.6
19.5%
579.5
19.9%
657.8
19.6%
764.8
19.7%
789.3
17.8%
1,710.6
2.04%
1,795.7
2.17%
2,172.4
2.30%
2,904.8
2.72%
3,354.5
2.89%
3,878.8
3.22%
4,422.6
3.37%
Total
share of GDP
Source: Statistics Finland 2002, R&D Expenditure by Sector in 1991-2000.
One caveat that must be added to this analysis of sources of R&D spending is the fact that,
over the course of the 1990s, Finland has fallen behind the United States as well as the EU and
OECD averages when it comes to the public sector’s share of total R&D expenditures (Ali-Yrkko
and Hermans 2002, 3). Does this imply that the Finnish government has been less focused upon
supporting R&D spending than its counterparts around the world in recent years? As the
subsequent section will illustrate, this has hardly been the case. The Finnish government has been
among the most focused in actively supporting R&D, but has proven that it is not the relative
amount of public R&D spending that matters in determining a country’s competitive edge, but the
manner in which it is employed.
4. Finnish Innovation Policy and R&D Effectiveness
In order to better understand how Finland has been able to simultaneously boost its international
competitiveness (in terms of both current situation and future prospects) and decrease the public
sector’s relative contribution to national R&D expenditures, we must consider the goals,
institutions, and strategies governing the R&D portion of Finnish innovation policy. These
dimensions are discussed below, and an illustration of how they have been used to effectively
achieve national innovation goals is provided through a discussion of the information and
communications technology (ICT) sector.
4.1 Public R&D Goals
The overall goal of an efficient publicly funded R&D program should be to ensure that projects
with positive social profitability are undertaken. Viewed in this context, public R&D spending
can be understood as a correction of a market failure. A private financier is only concerned with
investing in projects that will provide an adequate rate of private return. However, most projects
also provide positive social returns, in the form of productivity and knowledge spillovers to other
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 8
firms in the investment target’s value chain or the development of new markets. In fact, it has
been estimated that, on average, the social rate of return on an R&D project is over 1.5 times the
private rate of return in industries with vertical or horizontal firm linkages (Luukkainen 2001,
279). However, unless they are stakeholders in some of the other firms in the given value chain,
private investors will solely be interested in the private rate of return.
Thus, if investment decisions are left solely up to private investors, projects with substantial
social-profit potential may not be undertaken, for their private rates of return may not be attractive
to private investors. Governments can correct this market failure by funding R&D projects that
have a high social rate of return, yet do not provide an attractive risk-return profile for the private
investor (ibid., 278). The government need not cover the entire project expense in these cases; it
need only provide enough funding to minimize the risk and improve the returns for the private
investor, thereby compelling him or her to fund the remainder of the project.
4.2 Public Innovation Institutions
Finland’s system of public innovation institutions has evolved with the goal of correcting this
precise market failure. The structural overview of the system provided in Figure 3 illustrates that
it aims to do so through a collaboration between government bodies, academic institutions, and the
private sector. The three component institutions profiled below illustrate the extent of the
country’s commitment to innovation as well as its single-mindedness in using national innovation
policy, not as a mere subsidizing scheme, but as a true corrective mechanism aimed at maximizing
social profitability.
Figure 3: Public Innovation Institutions in Finland
Source: Cordis, Innovation in Finland.
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 9
The Science and Technology Policy Council (STPC) is the lead actor in designing the
country’s innovation policy: it makes recommendations as to how all public funding of R&D
should be allocated among industries and sectors, but leaves individual ministries and agencies
responsible for the actual implementation of this plan (Romanainen 2001, 380). The STPC’s
membership includes several government ministers, academics, and business leaders, and it is
chaired by the Finnish Prime Minister (Blomstrom, Kokko, and Sjoholm 2002, 22). Thus,
Finland’s commitment to innovation policy begins at the highest levels of its government and
strives to include the perspectives of all relevant R&D stakeholders in its most elite decisionmaking processes.
Tekes, the National Technology Agency, is the main financing agency for the provision of
public R&D to Finnish industry. Over the course of the 1990s, Tekes provided 75-80 percent of
the total public R&D to the manufacturing sector (Asplund 2002, 5). Its investment criteria are in
line with the goals of public innovation discussed above. Tekes requires its beneficiary firms to
provide 50 percent project co-financing, on average, and also strives to maximize economic
spillovers and knowledge-sharing by requiring all the large companies whose projects it cofinances to cooperate with either small companies or research institutes (Schienstock and
Hamalainen 2001, 193). Besides ensuring such positive spillovers, Tekes has also been successful
in increasing the private productivity of the firms in which it invests. The average productivity
level and growth rate of firms receiving Tekes funding has been found to be significantly higher
than that of firms that rely solely upon private R&D funding (Asplund 2000, 8).
Sitra, an independent public fund that is responsible to the Finnish Parliament, is the largest
venture capital provider in the country (Anderson Wright Associates 1999, 2.2). Its investment
goals are largely the same as those of Tekes—namely, to encourage the development of projects
with positive social profitability and spillovers—but it typically invests in later stages of the
project lifecycle. Thus, while Sitra collaborates with Tekes on a small percentage of projects, it is
primarily focused on helping to commercialize technologies that have already been developed
(Vihko et al. 2002, 32).
Aside from providing public R&D financing, the Finnish government has also played a key
role in stimulating an increase in the supply of private financing for R&D activities. Its reform of
the investment rules of pension funds in the early 1990s is cited as being central to the growth of
the Finnish venture capital market (Finnish Ministry of Trade and Industry 2001, 37). Indeed, the
annual amount of venture capital funding grew more than tenfold between 1995 and 2000,
reaching a level of over €400 million (Wagner and Vocke 2001, 11).
As the above discussion illustrates, Finland has in place a comprehensive system of
institutions to ensure that innovation policy is a top government priority and that it is aimed at
projects that will maximize social profits, whether they are in the technical or commercial phases
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 10
of development. Similarly, through reforms of financial regulations, its government has ensured
that more private money is available for investment in R&D projects.
4.3 National Innovation Strategy
But these goals and institutions alone do not fully explain the Finns’ ability to maximize the
efficiency of their public innovation initiatives. In order to understand their success in this arena,
we need to examine where these institutions have been investing their funds in order to attain the
national innovation goals. And in order to answer the “where” question, we must look not among
individual industries, but among industrial clusters, which most often consist of one or two core
industrial sectors, as well as their various service and input suppliers and customers.
Michael Porter was the first economist to explicitly cite clusters as the key determinants of
national competitive advantage in his 1990 article, “The Competitive Advantage of Nations.” It
was there that he first argued that “a nation’s competitiveness depends on the capacity of its
industry to innovate and upgrade” and that companies gain advantage by being subjected to an
environment of “pressure and challenge”(Porter 2002, 73). Industrial clusters were a way of
fostering this type of advantage, for they offered a high degree of competition among rival buyers
and suppliers, resulting in an increased drive by individual firms in the cluster to innovate and stay
ahead of their competitors.
Over the past decade, Finland’s policymakers have fully embraced Porter’s line of reasoning,
adopting a cluster-based approach to national innovation policy. In addition to Porter’s arguments
regarding international competitiveness, however, these policymakers have also justified their
cluster-based approach by noting that, because of the high level of interactions between firms in a
cluster, investing in one company in a cluster will create extensive spillovers (of technology,
know-how, and productivity) to other firms (Luukainen 2001, 273). This multiplier effect ensures
that the social rate of return for investments in a cluster is significant, and therefore provides the
most cost-effective way for public R&D spending to maximize social profitability.
Finland’s cluster-based strategy was first outlined in the Ministry of Industry and Trade’s
National Industrial Strategy of 1993 (Paija 2001, 32). Prior to that time, Finnish public R&D
policy had been focused primarily upon individual enterprises, and did not give much
consideration to their contexts (Romanainen 2001, 381). However, because of the dire economic
consequences of that time, the government recognized that it needed to both foster the
international competitiveness of its industries and to do this as inexpensively as possible. A
cluster-based policy fit the task perfectly and was seen as the perfect means for “diversifying the
economy away from the forestry and metals industries towards new high-technology industries”
(ibid., 378). Furthermore, since 75 percent of the country’s value added was produced in five
clusters (foodstuffs, information and communication technology, metals, construction, and
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 11
forestry), such a policy could ensure that a few cluster-specific investments had the potential to
affect large portions of the country’s industrial base (Luukkainen 2001, 276).
4.4 Maximizing Public R&D Effectiveness: The Case of the Information and
Communication Technology Cluster
It is this cluster-based innovation strategy that has enabled Finland to reach the heights of
international competitiveness; the cluster that has benefited most is the information and
communication technology (ICT) cluster. The cluster is largely centered around Nokia, the
telecommunications equipment giant, which in 2001 represented 2.8 percent of the country’s GDP
and undertook 47 percent of its private sector R&D (Ali-Yrrko and Hermans 2002, 2). However,
despite Nokia’s massive private investments, the Finnish government’s innovation strategy is
largely responsible for the emergence of both Nokia and the ICT cluster as symbols of modern
Finnish success.
It was the Finnish Post and Telegraph Office and Tekes that financed the R&D activities in
the 1970s and 1980s that were instrumental to the creation of the GSM standard (upon which all
non-US mobile telephone networks are presently based [ibid.,13]) Since the early 1990s, when
Nokia divested itself from all non-electronics businesses, the majority of its business has been
related to devices that utilize the GSM standard (whether consumer items such as telephones or
more sophisticated hardware). Thus, while those particular government investments pre-dated the
cluster-based approach, they did lay the groundwork for Nokia’s future success as the main pillar
of the ICT cluster.
After the implementation of the cluster-based national innovation strategy in 1993, the ICT
cluster became the most important recipient of public R&D funding. Even Nokia, which enjoyed
unrivalled growth and profitability in the second half of the 1990s, continued to receive significant
public funding for its R&D projects. Public co-financing of Nokia’s R&D steadily increased from
64 million Finnmarks in 1994 to 108 million Finnmarks in 2000 (ibid., 8). The fact that the
government continued to increase its funding of such an immensely profitable company is indeed
noteworthy. The explanation for this lies once again in the government’s aim of maximizing
spillovers to other companies in the ICT cluster. Throughout the 1990s, Nokia concentrated on
outsourcing more and more of its value-added work, thereby expanding its network of suppliers
(Paija 2001, 35). By 2000, there were nearly 300 companies in the company’s “first tier” supplier
and customer network, employing around 20,000 workers (Ali-Yrrko and Hermans 2002, 15).
Given such an extensive network, the potential for spillovers was huge.
Another important player has recently emerged in the Finnish ICT cluster—namely, Linux, a
user-developed computer operating system that has recently been touted as a potential competitor
to Microsoft (Wagner and Vocke 2001, 9). Linus Torvald, Linux’s founder, also recently launched
a new venture, Transmeta, which produces microprocessors that aim to compete with those of
Intel on the world market. Nokia formed an alliance with Transmeta for the provision of
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 12
microprocessors for some of its devices, further strengthening the possibility of spillovers in the
ICT cluster through the closer collaboration of two of its most significant players (Steinbock 2001,
203). Thus, the ICT cluster—the prime example of Finnish cluster-based innovation policy
success—enters the new millennium as both a beneficiary of past government investments and an
attractive location for further ones.
5. Future Challenges
Cluster-based innovation policy has proven to be a successful model for Finland’s development
over the past decade. However, as is the case with all models, it must be adapted to meet changing
realities presented by both domestic and international factors. In order to continue its reign at the
top of the international competitiveness rankings in years to come, Finland will therefore need to
adapt its innovation policy to meet a host of new challenges.
5.1 Moving Beyond Clusters
Many observers contend that there are further spillover benefits to be gained from pursuing a
policy that targets, not merely clusters, but networks of firms that operate across two or more
clusters. Targeting such networks would increase the possibility and extent of positive
externalities that can be created by public R&D funding (Pentikainen 2001, 314). While such a
policy has not yet been adopted in Finland (or in most other countries), it represents a significant
future opportunity for policymakers to enhance the country’s competitiveness (Schienstock and
Hamalainen 2001, 190).
5.2 Diversification
The ICT cluster, which has been the primary driver of the country’s growth over the past several
years, is very highly export-oriented. The Finnish Ministry of Trade and Industry itself has
publicly admitted that a downturn in global markets for this industry’s products would therefore
have a disproportionately negative effect upon the country’s economy (Ministry of Trade and
Industry 2001, 29.) The prospect of such an event occurring is becoming increasingly realistic, as
the mobile phone—Nokia’s main product—threatens to become an increasingly commoditized
product. To date, the company’s management has dismissed such a scenario, stressing its ability
to grow its share to over 35 percent of the world market in the past few years and emphasizing the
opportunities that will arise as a result of the adoption of third generation (3G) mobile telephone
technology in the next few years (Brown-Humes, Budden, and Gowers 2002, 13).
Nonetheless, it is far from assured that Nokia will continue to enjoy high levels of demand
and international competitiveness. As a result, the Finnish government would be well advised to
pursue policies aimed at diversifying its portfolio of successful industries and products. It has
already begun a diversification initiative within the ICT cluster through the Content Finland
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 13
Programme, which strives to promote the country’s competitiveness in the provision of electronic
content/software (Paija 2001, 31). This is certainly a step in the right direction, but it would be
wise to develop the country’s competencies in high-value-added products and services outside of
the ICT cluster as well.
5.3 Retaining Talent
Finland’s often-punishing Nordic climate is enough to drive many natives to move to more
temperate climates. However, many of the most talented Finns have also been leaving the country
because of its astronomical personal income tax rates, which stand at nearly 60 percent (Times
[London] March 2002). A continued brain drain of this sort could serve to severely undermine the
country’s competitiveness in the long run, and therefore the government should take steps—
perhaps through something as simple as lower tax rates for knowledge workers—to retain its top
talent.
5.4 Increasing the Supply of Skilled Labor
In addition to stemming the outflow of skilled labor, the Finnish government must increase the
overall amount of skilled labor that is available in the country. Nokia, for one, has only been able
to grow its home country operations half as quickly as its operations abroad, primarily because of
a lack of skilled labor in Finland (Wagner and Vocke 2001, 10). Since the late 1990s, government
policy has been focused upon increasing education in the technical and natural sciences; these
areas represented around 40 percent of all entrants into higher education in 2001 (Finnish Ministry
of Finance 2002, 22). Still, Nokia’s increased recent efforts to influence the direction of Finnish
higher education funding indicate that even such concerted government policies will take time to
yield results, and in the short term may not be enough to satisfy domestic demand for these skills
(Ali-Yrrko and Hermans 2002, 11).
Government policies should also strive to ensure that there is an adequate supply of domestic
management and marketing expertise. While the country’s strengths in technology and
engineering have fueled its success to date, many observers have cited a lack of management and
marketing talent in early-stage Finnish companies (Vihko et al. 2002, 14). Public funding for
developing such market-oriented (rather than technology-oriented) skills has increased recently,
and this effort must be sustained in order to ensure future competitiveness (Paija 2001, 33). Of
course, all initiatives aimed at increasing the supply of skilled labor must also contend with the
fact that, as is the case across Europe, Finnish society is aging, and therefore the workforce will be
undergoing a natural decline over the next decade or two.
5.5 Increasing Entrepreneurship
Entrepreneurial talent and drive are the keys to further innovation and competitiveness of any
country’s industry. However, by many accounts, entrepreneurship is currently not viewed as a
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 14
“desirable quality” in Finnish society (Vihko et al. 2002, 14). The government has recently
implemented a number of initiatives aimed at streamlining the process of registering and
managing small enterprises; while they are an important step, such initiatives are not enough to
reverse an aversion to entrepreneurship (Finnish Ministry of Finance 2002, 14). The process of
fostering entrepreneurship must begin early in life, through positive reinforcement of creativity
and risk-taking in the educational system. This is a project that will pay off mostly in the longterm, but experience suggests that the Finnish government is willing to undertake such long-term
investments in order to ensure the future competitiveness of its country.
6. Finland’s Role in an Enlarged European Union
The purpose of the above discussion is not to cast a shadow over Finland’s considerable
achievements to date, nor to question their continuation into the future. It is merely to outline
some of the potential challenges with which the country will need to grapple in order to ensure
sustained competitive success. There is no doubt that the country is excellently positioned to
leverage its innovation success in its interaction with the rest of the EU member countries. Indeed,
Finland has already been taking the lead on innovation issues within the European Union—its
European Commissioner, Erkki Liikanen, is in charge of the Enterprise and Information Society
Directorates General. Aside from applying its expertise in innovation in this formal bureaucratic
capacity, Finland will also play several important roles in the enlarged European Union.
6.1 Role Model for New Members
The eight former Communist economies that are set to join the European Union in 2004 are all at
a level of economic development that is significantly lower than the current EU average. As a
result, they will have a considerable amount of “catching up” to do in the coming years and
decades. While mere membership in the European Union will likely provide some degree of
stimulus for growth through full integration into the EU economy, these countries will need to
engineer much of their growth effort on their own, through a pursuit of policies that ensure
sustained productivity growth and international competitiveness. Finland’s experiences with
innovation policy over the past decade could serve as a valuable role model for these countries in
designing their national growth strategies. While not all of them may be able to apply the Finnish
model in its entirety, or be as successful as Finland has been, Finland’s experience will surely
provide some valuable insights into how a government can effectively engineer its national growth
strategy.
6.2 Source of Foreign Direct Investment for New Members
Apart from beneficial demonstration effects, Finnish enterprises can provide direct assistance to
the new EU member states by serving as a source of funding for their domestic enterprises. The
incoming member countries do not have considerable domestic capital bases, yet most have highly
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 15
skilled labor forces with an entrepreneurial spirit that was formed out of necessity during their
economic transformations of the 1990s. Given these circumstances, all of these countries would
benefit from the funding and management expertise that Finnish firms could offer. To date,
Finnish investors have seemed quite willing to undertake such partnerships, investing, most
notably, in the computer industry of neighboring Estonia (Meier). With the passage of time, they
may increase their involvement in such ventures throughout Central and Eastern Europe.
6.3 Test Market for Cutting-Edge Technology
One result of the ICT cluster’s success has been the development of a sophisticated consumer base
in Finland. The country’s citizens are among the most technologically advanced in the world, and
Nokia has repeatedly used them as a test market for its new devices. Given this fact, as well as the
relatively small size of the country’s population, Finland has great potential as a test market for all
types of cutting-edge consumer technology. European firms choosing to undertake such activities
in Finland will be able to reap the benefit of a true test of their products’ future market viability in
a location that is culturally and geographically close to home, and therefore representative of the
greater European market in most cases.
7. Ensuring Future Success at Home and Across the Continent
Through the well-planned application of a thorough national innovation policy, Finland has been
able to reverse its fortunes from depression to international success over the course of less than a
decade. Moving forward, its experiences in this arena will be extremely useful in the context of
the European Union, especially for its new member states. Of course, on the home front, the
Finnish government will need to actively manage the country’s innovation initiatives in order to
anticipate and overcome future challenges and continue the country’s success story. Given the
fact that it has followed a visionary approach in the past, there is no reason to believe that it will
not continue to do so in the future. If executed properly, these international and domestic
measures will only serve to economically strengthen both Finland and its partners in the European
Union.
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 16
References
Ali-Yrkko, Jyrki, and Raine Hermans. 2002. Nokia in the Finnish innovation system (Discussion
Paper no. 811). Helsinki: ETLA (The Research Institute of the Finnish Economy).
Anderson Wright Associates. 1999. Report on Finland for the Industrial Innovation Working
Group of the National Innovation Summit. Melbourne: Anderson Wright Associates,
September.
Asplund, Rita, ed. 2000. Public R&D funding, technological competitiveness, productivity, and
job creation. Helsinki: ETLA (The Research Institute of the Finnish Economy).
Blomstrom, Magnus, Ari Kokko, and Fredrik Sjoholm. 2002. Growth and innovation policies for
a knowledge economy: Experiences from Finland, Sweden, and Singapore (Working paper
no. 156). Stockholm: European Institute of Japanese Studies, October.
Brown-Humes, Christopher, Robert Budden, and Andrew Gowers. 2002. Nokia is the great
telecoms survivor, but the advent of 3G technology means this is no time for complacency.
Financial Times, 18 November, 13.
Cordis: the European Union’s Community Research & Development Information Service.
Innovation in Finland (schematic).
http://www.cordis.lu/finland/en/innovfi.htm.
Cornelius, Peter K. 2002. Executive summary. In The World Economic Forum’s Global
competitiveness report 2002-2003. Oxford: Oxford University Press.
http://www.weforum.org/
Cornelius, Peter K., Jennifer Blanke, and Fiona Paua. 2002. The growth competitiveness index:
Recent economic developments and the prospects for a sustained recovery. In The World
Economic Forum’s Global Competitiveness Report 2002-2003. Oxford: Oxford University
Press.
http://www.weforum.org/.
Economist Intelligence Unit. EIU Country Data (online database).
http://eiu.bvdep.com.
Honkapohja, Seppo, and Erkki Koskela. 1999. Finland’s depression: A tale of bad luck and bad
policies. Economic Policy, October, 400.
International Institute for Management Development (IMD). 2002. World competitiveness
yearbook. Lausanne: IMD.
Available at http://www02.imd.ch/wcy.
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 17
Luukkainen, Sakari. 2001. Industrial clusters in the Finnish economy. In Innovative Clusters:
Drivers of National Innovation Systems. Paris: Organisation for Economic Cooperation and
Development, 273.
Meier, Andrew. Estonia’s tiger leap to technology. United Nations Development Programme:
ICT for Development.
http://www.sndp.undp.org/it4dev/stories/estonia.html.
Ministry of Finance. 2002. Product and capital market reforms in Finland. Helsinki: Ministry of
Finance, November.
Ministry of Trade and Industry. 2001. Business environment policy in the new economy. Helsinki:
Ministry of Trade and Industry.
Paija, Laura. 2001. The ICT cluster: the engine of knowledge-driven growth in Finland. In
Innovative Clusters: Drivers of National Innovation Systems. Paris: Organisation for
Economic Cooperation and Development, 19.
Pentikainen, Tuomo. 2001. Trade-flow-based networks in the Finnish economy: Heterogeneous
practices. In Innovative Clusters: Drivers of National Innovation Systems. Paris:
Organisation for Economic Cooperation and Development, 313.
Porter, Michael. 2002. Building the microeconomic foundations of prosperity: Findings from the
microeconomic competitiveness index. In The World Economic Forum’s Global
Competitiveness Report 2002-2003. Oxford: Oxford University Press, 23-45.
http://www.weforum.org/.
Porter, Michael. 1990. The competitive advantage of nations. Harvard Business Review,
March/April, 73.
Romanainen, Jari. 2001. The cluster approach in Finnish technology policy. In Innovative
Clusters: Drivers of National Innovation Systems. Paris: Organisation for Economic
Cooperation and Development, 377.
Schienstock, Gerd, and Timo Hamalainen. 2001. Transformation of the Finnish Innovation
System: a Network Approach (Sitra Reports series 7). Helsinki: Sitra.
Statistics Finland. 2002. Business enterprise R&D expenditure by industry in 1999 and 2000
(table). Helsinki: Statistics Finland.
http://tilastokeskus.fi/tk/yr/ttiede_rd6_en.html.
_______. 2002. GDP share of R&D expenditure in selected OECD countries (table). Helsinki:
Statistics Finland.
http://tilastokeskus.fi/tk/yr/tttiede_rd2_en.html.
_______. 2002. Industrial statistics: 2000. Helsinki: Statistics Finland.
http://www.tilastokeskus.fi/tk/tp/tasku/taskue_teollisuus.html.
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 18
_______. 2002. R&D expenditure by sector in 1991-2000 (table). Helsinki: Statistics Finland.
http://tilastokeskus.fi/tk/yr/tttiede_rd1_en.html.
_______. 2002. Volume index of industrial output. Helsinki: Statistics Finland.
http://www.tilastokeskus.fi/tk/tp/tasku/taskue_teollisuus.html.
Steinbock, Dan. 2001. The Nokia revolution: The story of an extraordinary company that
transformed an industry. New York: AMACOM.
Times (London). 2002. Tech triumphs bring Finns in from the cold, 2 March.
http://web.lexis-nexis.com.
Vihko, Reijo, Manuel Castells, Luke Georghiou, Sirpa Jalkanen, Frieder Meyer-Krahmer, Pirjo
Vuokko, and Mirja Grohn. 2002. Evaluation of Sitra 2002. Helsinki: Sitra.
Wagner, Nancy, and Matthias Vocke. 2001. Finland: Selected Issues (IMF Country Report no.
01/215). Washington: International Monetary Fund.
FALL 2003
CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 19