Towards a European knowledge-based economy: the evolutionary case of Finland

Table of contents

1. Introduction

2. Finland’s geographical and historical background
A. Does size matter? Finland’s geographical setting
B. Finnish roots tapped in ‘green gold’
C. From boom to bust: depression and the emergence of a new path

3. Finland’s structural transformation: from a factor to a knowledge-driven economy

4. Significance of clusters

5. Finland’s ICT cluster
A. Finland’s national diamond model
1. Factor conditions
2. Demand conditions
3. Related and supporting industries
4. Firm strategy, structure, and rivalry
5. Government
6. Chance
B. Finland’s national diamond in the European Union

6. Finland’s road ahead
A. Future challenges
B. Finland’s role in the European Union

7. Conclusion

8. Bibliography

9. Appendix

Listing of Illustrations

Figure 1: Finland’s stages of industrial and economic development

Figure 2: The determinants of national advantage as presented by Porter

Figure 3: The Finnish national diamond in the European Union

Appendix 1: The World Bank Knowledge Economic Index (KEI) by countries and regions

Appendix 2: The fastest growing country in the postwar era: GDP volume in Finland and OECD-countries

Appendix 3: Finnish R&D expenditures as a share of GDP

Appendix 4: Finnish manufacturing production volume by industry

Appendix 5: The Lisbon Review: an assessment of policies and reforms in Europe

Appendix 6: Finland’s number of researchers

1. Introduction

Throughout the course of the 1990s, Finland underwent a tremendous economic transformation unrivaled by any other European or OECD country in the post-World War II era.^[1] In less than a decade Finland went from being perhaps one of the least knowledge-based economies to becoming the sole most embraced one,^[2] subsequently heralding it to be a model example of not only Europe’s but the world’s ‘new economy’. During the twentieth-first century, Finland has three times to date ranked number one in the World’s Economic Forum’s (WEF) Competitiveness Index,^[3] alongside achieving an astonishing close second to Sweden in the World Bank’s Knowledge Economic Index (KEI).^[4] On these grounds, Finland’s recent development towards a knowledge-based economy has indeed captured the international spotlight, and justly the attention of economic policy-makers across the world.

To this day in age, knowledge has irrefutably become the driving force behind economic growth and social development, with exogenous factors particularly that of globalization playing enormous roles in the acceleration of the diffusion and the application of knowledge. Perhaps, not better put then in the trivial words of Bill Clinton “in today’s knowledge-based economy, what you earn depends on what you learn,”^[5] such words do certainly substantiate the importance of knowledge and innovation in today’s ‘new economy’. Thus is seems, successful economies and societies will be those who can adapt to the rapid demands of globalization, where the need of countries to be more flexible, creative, innovative, and welcoming to the winds of change, have been more critical than it has ever been before. Advancement in information and communication technologies (ICTs) has often been seen as one method of achieving a more knowledge-based economy, as development in ICTs seem to provide new opportunities in product specialization, improved productivity, and sustainable growth.^[6]

Conceivably, the importance of a knowledge-based economy can perhaps best be revealed in the European Union’s Lisbon Agenda, which indeed embarks on an ambitious economic vision for Europe’s twentieth-first century. During the Lisbon Summit of March 2000 the European Union set out the bold objective that Europe “would become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion”.^[7] This goal within its entirety undeniably seeks the growing acceptance that the ability to acquire and apply knowledge has increasingly become a key factor in determining a country’s economic vitality. Moreover, it validates that competitiveness is an essential component that will facilitate European economic growth particularly in light of other global competitors such as the United States and Japan.

An important factor in both the knowledge-base and competitiveness of European economies can be observed in the emerging role of clusters. In his ‘Competitive Advantage of Nations,’ Michael Porter, a prominent advocator of cluster theory defines a cluster as “a geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities”.^[8] Through his work, and the works of others in the field, clusters have increasingly become realized as important factors for the competitiveness of European economies, as it is maintained that “clusters are important, because they allow companies to be more productive and innovative than they could be in isolation”.^[9] Moreover, clusters have been realized to reduce the barriers of entry for new business creation.^[10]

The Finnish experience of the 1990s proves an exceptional case in point of how knowledge and the use of ICT clusters has become the pinnacle of economic growth and success. Finland, a country which in the 1980s relied predominantly on its ‘green gold' of resource-intensive industries is now one of the most ICT specialized countries of the world.^[11] This achievement becomes all the more remarkable considering that Finland in the early 1990s was hit by a deep economic recession which led to stark unemployment, and the overall disruption in Finland’s external balance.^[12] What becomes most intriguing is how Finland has managed over the short course of a decade to transform itself out of a resource-based economy into that of a knowledge-based economy? It seems fitting to assert that the Finnish success story may lie in its innovative ICT cluster base. Against this very background, and throughout this rather prolonged introduction, that purpose of this paper will attempt to reveal that Finland’s remarkable economic growth during the onset of the 1990s to this present day may be attributed to the success of its ICT cluster base. Furthermore, this analysis would not be sound in its entirety, without examining the question of whether or not the country of Finland constitutes an exemplary model for other EU member states in attaining a knowledge-based economy representational of Lisbon criterion. Indeed, does the Finnish success story hold lessons for other European countries? Can Finland justifiably be a valuable role model for European Union countries who seek to improve national growth strategies, according to the ambitious targets established by the Lisbon Agenda? In order to examine this, it will be essential that the paper takes both a quantitative and a qualitative approach, relying on both empirical evidence and sheer argumentation. Assuming this, a quantitative approach would allow appropriate use of statistical data in reference to Finland’s economic growth, whereas a qualitative approach would allow for a more thorough interpretation of cluster theory, Finish economic policy, and the like. The paper will begin in section two, which offers a brief overview of Finland’s geographical, and historical development, followed by section three which reflects on Finland’s recent ‘rise to the top’, highlighting knowledge as a turnaround catalyst, and Finland’s renowned transformation from a factor to knowledge-based economy. Section four will provide insight into the significance of clusters, particularly to their importance in achieving aspired Lisbon targets, succeeded by section five, in of which, will highlight the role of the ICT cluster in Finland. In section six, the paper will go on to include some of the challenges that Finnish economic policy will have to address in the future, alongside the prospect of Finland being an exemplary role model in assisting the European Union in reaching established Lisbon targets. Lastly, the paper will conclude with section seven, which will incorporate a summary of findings and concluding remarks.

2. Finland’s geographical and historical background

Before analyzing Finland’s success story, it is imperative that one considers the initial stages of economic development that have been part in parcel of Finland’s transformation process. As frivolous as it might sound “where regions are going always depend on where they are coming from,”^[13] and thus in order to determine Finland’s economic progress it is essential that we unravel it’s geographical and historical past.

A. Does size matter? Finland’s geographical setting

Geographically speaking, Finland is a rather small and comparatively seen, a peripheral country. It encompasses some 338,000 sq km of territory;^[14] which is roughly the equivalent in area to either that of Japan or the United Kingdom.^[15] An astonishing 10 percent of Finland is considered to be water, which is representational of the some 188,000 lakes that cover its land mass. 69 percent of its territory is covered by forests, and about one quarter of Finland lies north of the Arctic Circle.^[16] Perhaps then, it comes to little surprise that Finland sustains one of the sparsest population densities in Europe, with a mere 5.2 million people^[17] calling Finland home. What is remarkably surprising when one speaks of Finland is that despite heavy beliefs that a moderately small country cannot fuel robust economic growth; Finland has still managed to build a successful and growing affluent knowledge-based economy. Given this reality, what comes into question is how can the size of a nation determine its economic vitality? Is smallness seen as advantageous or disadvantageous when it comes to the dynamic forces of globalization? Indeed, there seems to be much evidence throughout economic literature that supports that smallness of countries impedes economic growth, as small nations it is argued “have less scope for utilizing scale economies in production and marketing”.^[18]

Additionally, it is advocated that small countries often become dependent on particular market niches, and in the advent of a market change, they are often vulnerable to market collapse.^[19] Indeed, Finland is not new to this scenario, as the Finnish recession of the nineties is often attributed to the collapse of Finland’s leading trade partner, the Soviet Union. However, on the other hand, as it is argued, smaller economies, may justifiably find strength in increased adaptability and flexibility to change.^[20] Small nations may also in turn “drive firms to specialize and seek foreign markets,”^[21] which consequently open their economies to large exporting sectors, which may in themselves not always be negative. While indeed specialization may increase a country’s vulnerability to external shocks, “small economies have developed various ways to cope with the problem. These include not only macroeconomic policies but also many kinds of networking and social security systems.”^[22] Indeed, Finland has long been contended to retain a history of networking and a strong spirit of cohesiveness upheld by its population, a trait in of which may be attributed to its historical geographic isolation and relatively homogeneous gene pool. This may have even in turn been strengthened by its unique language, which remains distinct from other Nordic languages and tends to form an exclusive bond among the Finns.^[23] Additionally, as Rouvinen & Ylä-Anttila add, “smallness and a homogeneous society might also be beneficial for the diffusion of new knowledge in specific areas such as ICT, in the world of rapid technological change this could be a competitive advantage.”^[24] Thus it seems, Finland may embody a uniqueness that enables it to be economically successful in light of odds against, notably its small size, and its geographical seclusion.

B. Finnish roots tapped in ‘green gold’

For much of history Finland’s most important, and virtually only endowment of natural resources, forests, proved to be the most influential factor in Finland’s industrial development. In fact, during the mid-nineteenth century, Finland was among the poorest countries in Europe.^[25] At this time, Finland was predominantly an agrarian country, and being only its early stages of economic development, the process and gains of industrialization had not yet been fully realized.^[26] However, times would soon change, and by the late-nineteenth and early-twentieth centuries, Finland underwent rapid economic development on the basis of its forest-related product exports, including timber, pulp, and paper.^[27] Additionally, this success would continue, as from the late 1950s to the late 1970s the Finnish forest industry carried out enormous investments, transforming itself gradually into an international technology leader which would later comprise one of the most contemporary and efficient production capacities in the world. It has been said that, “by the 1980s, the forest sector had developed into a competitive industrial cluster that today provides high value-added paper grades, as well as forestry technologies and consulting services.”^[28]

Indeed, through the acquisition of foreign machinery and equipment Finland would ultimately pave its path to technological proficiency. However, this would not be an exclusive element, as successful economic growth is also accredited to a multitude of other contributing factors that will be touched on throughout the remainder of this paper. Indeed, one of these contributing factors would include strong state intervention during the post-war period, as Dahlman, Rouvinen & Ylä-Anttila contend, “The centralized steering of the Finnish economy through various national projects triggered mergers and acquisitions in the forest cluster, as large companies could better exploit the advantages of a planned economy such as stable demand, low prices, long-term planning periods, and a stable economic environment.”^[29] It is also interesting to add that this period of modernization led to the establishment of the Finnish welfare state, in addition to the expansion of the public sector, and contributed significantly to high investments witnessed in the national university system.^[30]

C. From boom to bust: depression and the emergence of a new path

By the 1980s, Finland enjoyed one of the highest living standards in the world. In terms of GDP per capita, it ranked eighth in the world, falling just short of the Federal Republic of Germany.^[31] However, at the wake of new decade, Finland would plummet into what would turn out to be the severest depression of its independent history.^[32] In the early 1990s, Finland’s prospects were indeed discouraging; in just three years, Finnish real GDP had dropped by over 10 percent and industrial production had shrunk by over 10 percent.^[33] By 1994, the unemployment rate had reached a whopping 20 percent, up from 4 percent a mere four years earlier.^[34] Moreover, prior to the depression Finnish GDP per capita had been 5 percent above that of EU15 countries, and subsequent to the depression it was 13 percent below.^[35] Certainly, at this time the Finnish outlook seemed dim.

The explanations leading to the Finnish economic recession remain vast, but essence they range from the effects of external shocks, primarily in reference to the collapse of Finland’s leading trade partner the USSR, which had contributed to a downturn in vital national forest related industries. Secondly, due to poorly designed financial deregulation, to thirdly, mistakes in reactions taken against the depression itself.^[36] However, whatever the causes may have been, the depression had in and of itself, irrefutably led to a sincere shift in policy thinking. The Finnish forest industry with its minimal productivity would simply be unable to manage to reduce high unemployment figures significantly enough, and macro-level economic policies targeted at the devaluation of currency would no longer be an option.^[37] Evidently, it soon became apparent that without clear and concise structural changes Finland would not be able to escape an indigent economic fate. Finland had to find a new growth path, continuing with its old one simply was no longer an option. Acknowledging this, Finland began to place greater emphasis on its long-term microeconomic polices in contrast to short-term macroeconomic ones that were no longer deemed to be sufficient.^[38]

Concomitantly, placing R&D and innovation center stage, it would become microeconomic polices that would be the new driving vehicle behind Finnish economic growth.

After all, it is understood that the competitive edge of an economy rests at the micro level: in national firms and financial institutions, innovation and policy organizations, and educational institutions.^[39]

[...]

^[1] Werner, 2003.

^[2] Rouvinen & Ylä-Anttila, 2003.

^[3] Cited in Dahlman, Routti & Ylä-Anttila, 2005.

^[4] Please see Appendix 1.

^[5] CNN.com: http://archives.cnn.com/2000/TECH/computing/10/18/clinton.high.tech.visas.ap/

^[6] Dahlman, Routti & Ylä-Anttila, 2005.

^[7] Cited in World Economic Forum: The Lisbon Review 2002-2003: An Assessment of Polices and Reforms in Europe: www.weforum.org/pdf/Gcr/LisbonReview/LisbonReview_2002.pdf

^[8] Porter, 1990.

^[9] Ketels, 2004

^[10] Ibid,.

^[11] Rouvinen & Ylä-Anttila, 2003.

^[12] Dahlman, Routti & Ylä-Anttila, 2005.

^[13] Cited in Hospers, 2005.

^[14] Finnish Information Society Development Center (TIEKE):

www.e.finland.fi/netcomm/ImgLib/17/85/ITC-finland_050419_LR.pdf

^[15] Dahlman, Routti & Ylä-Anttila, 2005.

^[16] Finnish Information Society Development Center (TIEKE):

www.e.finland.fi/netcomm/ImgLib/17/85/ITC-finland_050419_LR.pdf

^[17] Ibid,.

^[18] Rouvinen & Ylä-Anttila, 2003.

^[19] Pyöriä, 2003.

^[20] Ibid,.

^[21] Rouvinen & Ylä-Anttila, 2003.

^[22] Ibid,.

^[23] Dahlman, Routti & Ylä-Anttila, 2005.

^[24] Rouvinen & Ylä-Anttila, 2003.

^[25] Boschma & Sotarauta, 2005.

^[26] FinnFacts: www.finnfacts.com.

^[27] Boschma & Sotarauta, 2005.

^[28] Ibid,.

^[29] Dahlman, Routti & Ylä-Anttila, 2005.

^[30] Boschma & Sotarauta, 2005.

^[31] FinnFacts: www.finnfacts.com.

^[32] Please see Appendix 2.

^[33] Cited in Boschma & Sotarauta, 2005.

^[34] Ibid,.

^[35] Ibid,.

^[36] Werner, 2003.

^[37] Cited in Boschma & Sotarauta, 2005.

^[38] Rouvinen & Ylä-Anttila, 2003.

^[39] Please see Appendix 3.