2013Cambridge Business & Economics ConferenceISBN : 9780974211428

FINLAND: ECONOMIC GROWTH THROUGH EDUCATION

TRANSFORMATION FROM A RESSOURCE BASED ECONOMY TO A KNOWLEDGE BASED ECONOMY

Table of Contents

Abstract3

INTRODUCTION4

Education

Economic growth through education5

Finland’s Economic transformation through education7

Investment Development Path

Finland’s Global and Competitive Path7

Finland’s Investment Development Path: NOKIA10

External threats

Threats in the External Environment12

Conclusion13

REFERENCES14

Abstract

Finland, the small country next to Russia has seen a great economic transformation over the past decade. The Finnish economy has transformed from a resource-based economy to a knowledge based economy, using education as the key component for their success. During the early 1990’s Finland saw a great economic decline and a high unemployment rate of 18%, with soaring debt of 60%. The economy recovered through adopting knowledge based business innovation within the telecommunications sector, most notably, the launch and breakthrough of NOKIA along with 800 high tech companies. The success of NOKIA now accounts for 64% of Finland’s GDP. With money invested in human capital and technology, Finland now ranks sixth on the Global Competitiveness scoreboard, rising from 19th just ten years earlier. Finland continues to remain competitive in the global marketplace and continues to show dominance within the communications technologies industry.

Introduction

What makes a country competitive in the global or regional marketplace? How does a country reach the height of economic superiority and global competitiveness? According to the Global Competitiveness Report published by the World Economic Forum for 2009-2010, this attempt has ranged from Adam Smith’s focus on specialization and the division of labor to neoclassical economists’ emphasis on investment in physical capital and infrastructure and, more recently, to interest in other mechanisms such as education and training, technological progress (whether created within the country or adopted from abroad), macroeconomic stability, good governance, the rule of law, transparent and well-functioning institutions, firm sophistication, demand conditions, market size, and many others.

One country rising slowly within the world competitive marketplace is Finland. Finland moved from number nineteen on the world competitiveness scoreboard in 1998 to number six in 2009-2010. Competitiveness is defined as the set of institutions, policies, and factors that determine the level of productivity of a country (Global Competitiveness Report, 2009-2010). The higher the productivity the more effective the country is meeting the demands of the global marketplace. Productivity measures the efficiency with which goods and services are produced (Daniels, Radebaugh and Sullivan, 2009). Growth and productivity in an economy is also largely defined as economic expansion states Ferrell et al. (2009), occurring when an economy is growing and people are spending more money, in turn, stimulating the production of goods and services internationally. Government investment in education has enabled Finland to reach a sustainable level of prosperity and help them produce an economy whose rate of return has grown over the last ten years.

Global Competitiveness, 2009-2010:

Rank
1
2
3
4
5
6
7
8
9
10 / Country
Switzerland
US
Singapore
Sweden
Denmark
Finland
Germany
Japan
Canada
Netherlands / Score
5.60
5.59
5.55
5.51
5.46
5.43
5.37
5.37
5.33
5.32

Economic Growth through Education

Agiomirgianakis et al. (2002) not only suggest the existence of a robust positive relationship betweeneducation and economic growth, but also that higher levels of education have a stronger effecton economic growth. The policy implication of this result is that governments will be inclinedto adopt measures that will expand higher education in their countries in order to increasepotential gains in term of a higher economic growth(Agiomirgianakiset al, 2002).

In addition state Barro and Lee (2001) human capital, particularly that attained through education, has been emphasized as a critical determinant of economic progress in which a greater amount of educational attainment implies more skilled and productive workers, who in turn increase an economy's output of goods and services. Skilled and educated individuals help advance and facilitate the advancement of technology and production. Quality higher education and training is crucial for economies that want to move up the value chain beyond simple production processes and products, in particular, today’s globalizing economy requires economies to nurture pools of well-educated workers who are able to adapt rapidly to their changing environment (Global Competitiveness Report, 2009-2010).

With a population of nearly 5.3 million people, Finland has the highest rate of teen literacy in the world, 100% literacy nationwide, the highest percent of "regular readers," and the most "creatively competitive" economy. According to the 2010 report published by the Organization for Economic and Co-operation Development, 1) Finland spends more per elementary, middle- and high- school student than any other nation on Earth, 2) comes in second on spending for higher education, 3) most class materials and university tuition are all free and, 4) the population’s level of education in Finland is clearly above the average of OECD countries. The Finnish education minister along with the government continues to heavily invest in education as a goal towards economic survival and global advancement. There are also very few private schools and the same quality education exists within inner city neighborhoods as in upper class areas. In 1960 Finland decided upon a universal comprehensive system of education which enabled all students to gain knowledgeand boost economic productivity.

Finland’sEconomic transformation through Education

During this century’s first decade, Finland has been ranked four times as the world’s most competitive economy by the World Economic Forum. This suggests that Finland possesses a very high level of human capital, widespread use of information and communication technologies, and education and research institutions that have been redesigned to foster innovation and cutting-edge research and development (World Economic Forum, 2010). Finland has advanced greatly within the global information and communication sector, with advancement and success in companies like Nokia. Indeed, Finland also ranks high in advancement of global information and communication technologies as well as in implementation of environmental policies.

Over the past few decades, Finlandhas transitioned to a knowledge-based economy, using their resources and education as the key to economic and social development, in addition state the World Economic Forum (2010), along with the structural change and the transition to the information society, the entire population’s level of knowledge, together with the labor force’s level of expertise as demanded by business life, has increased considerably. Comparatively small, Finland’s major research and development company is Nokia, with 800 other high tech companies. Finland’s high tech service sector accounts for about 64% of their total GDP accounting for their strong economic growth and stability.

During the early 1990s Finland’s unemployment rate jumped from 4 percent to 18% with a debt level 60 percent above the national GDP, along with a devastating banking crisis. For the economy to recover, Finland had no choice but to diversify its export and restructure their business. What drove these economic reforms was the emergence of new knowledge-based industries and adoption of knowledge economy concepts throughout the entire Finnish society (World Economic Forum, 2010), thus creating companies like Nokia who later not only increased anticipated the growth of the communications market, but probably capitalized on it faster than any U.S. based firm.

Finland’s global and competitive path

The foreign direct investment development path (IDP—Investment DevelopmentPath) proposes the existence of a dynamic relationship between an economy’sdegree of multi-nationalization of firms, as measured by inward and outwardstocks of direct investment, and its level of development while accepting that the degree ofstructural transformation in an economy influences the volume and nature ofinward and outward direct investment. The theory posits two groupsof developed countries: the fourth and fifth phases of the IDP (Durán & Úbeda, 2005).

Similarly Virtanen (2006) states that foreign direct investment is considered important for the development process as it provides capital, foreign exchange and export market access, enables the transfer of technology, increases competition and possibly also stimulates domestic investment and innovation. FurthermoreAli and Pernia (2003) explain that infrastructure development is one area that is generally seen as playing an important role in reducing poverty and facilitating economic growth and that requires large investments.

Investment Development Path can also be characterized as countries developing a niche market that sometimes can not be easily duplicated. Meyer (2006) argues that resources drive the growth of the firm and thus diversificationand internationalization. Firms such as Nokia that has built a strong presence in Finland have become so valuable and eventually diversified into other products or services. These firms create a competitive advantage in one industry and eventually become multi-national. Globalization changes thecompetitive terrain which reduces the scope for leveraging location-specific resourcesby domestic diversification, and gives the competitive edge to specialists that canleverage industry-specific resources across global operations (Meyer, 2006).

While focusing on a niche market, the product eventually becomes more diversified in nature therefore states Meyer (2006) converting to a global specialists in narrower niche markets andcompeting with a small number of multinational enterprises operating worldwide. The term global-focusing describes how one country that specializes in one specific industry is able to utilize their resources and shift to becoming an economic driver. In addition, management theorist Edith Penrose in her book,The theory of the growth of the firm (1959), found that a country or firms focus on resources, productive in nature, extends their internal growth while expanding the countries economy, eventually creating greater diversification and international dominance.

The Finnish model is not explicitly focused on attracting FDI, but rather on improvement of the nationaldomestic innovation system (Van Beers, 2004) and focus on technological innovation and the creation of communication firms. Although the FDI inflows in Finland are small compared with those in Ireland and the Netherlands, the (technological) quality is high and it appears that almost 100% of all foreign firms in Finland perform their own R&D (Van Beers, 2004). Many smaller countries tend to conduct their own R&D due to lack of money to invest outwards (outsourcing). Finland is one of those smaller countries whose investment in human capital (education) has helped them produce and generate external income through creative communication innovation. This was the beginning of their entry into the global and competitive market within a path for countries to start their investment inward.

As for the propensity of a country or region to attract FDI, identifies political stability, incentives and the availability of cheap labor as important determinant (Naudé, & Krugell, 2007). Naudé and Krugell (2007) also point out that the recent literature on the effects of FDI on the host country also emphasizes that the absorptive capacity of the host country affects the volume and type of FDI inflows in which the absorptive capacity of a country depends on a number of determinants such as institutional factors (e.g. legislation and trade regime, as well as scale factors such as the balance of payments position and size of the domestic market) and complimentary (threshold) human capital. Finland’s attempt at educating their workforce early has helped them turn upwards and outwards toward capitalizing on the fastest growing sector, the communications sector. Investment inwards has not only helped Finland grab hold of an emerging market, but has helped them build new ones. Additionally, Machinea (2006) argued that, countries actively seek FDI through horizontal and vertical measures, including the targeting of specific companies and FDI is a part of productive development policy, which includes linkages, training of human resources, innovation, etc.

Finland’s Investment Development Path: NOKIA

Finland experienced an economic rebound in the late 1990’s with their entry into the European Union. Their close proximity next to Russia and other Baltic countries put them into a key strategic position, exposing them to a new gateway and a market of nearly 85 million consumers. Foreigndirectinvestment has been further fostered by the agreement signed in January 1996 by the Overseas Private Investment Corp. (OPIC) to promote Finland as a base for U.S. companies doing business in Russia and the Baltics (Moline, 1996). "U.S. companies are finding that Helsinki provides a strong base from which to manage their business for the region, as well as the optimal logistics and administrative base from which they can ship their goods or sell their services safely, efficiently and economically," contends Karl Rahkamo, Lord Mayor of Helsinki, who led a delegation of public and private sector business officials to New York City this summer.

Nokia is the world leader in mobility, driving the transformation and growth of the converging Internet and communications industries and a truly global business, Nokia makes a wide range of mobile devices and provides people with experiences in music, navigation, video, television, imaging, games and business mobility through these devices (Ropponen, 2008). Within the past twenty years, Nokia has continued to build and maintain their leadership within the mobile telecommunications industry. With a recognizable name the company has moved into the forefront of providing not only communications equipment, but has managed to diversify its brands and compete with U.S. mobile device makers such as Blackberry. In addition, the company has managed to strategically align itself with cellular carriers such as Verizon, AT&T and Sprint establishing itself as a key equipment carrier.

As Doz and Kosonen (2008) point out, that from its century-old base in forest products, rubber, andcables, Nokia had grown into a diverse conglomerate in which some moves had resultedfrom diversification stemming from Nokia’s deep-rooted emphasis on technologyand innovation. Nokia happened to know howto provide cost-efficient end-to-end solutions to small operators who did nothave the big R&D centers of incumbent telecom monopolies ( Doz & Kosonen, 2008) and efficiently anticipated the needs of the external marketplace prior to the cell-phone boom.

International comparisons of business and technology environments invariably rankFinland at the top.3 and this consensus fits well with available data on IT tradebalances – a rough indicator of the international competitiveness of a country (Daveri & Silva, 2004). Asreported in the OECD Communications Outlook 2001, in 1998 Finland featured thelargest per-capita surplus in the foreign trade of communication equipment (aboutUS$1000) in the world, with its two closest followers – Sweden and Ireland – reachingsurpluses of about US$800 and US$200.

The ratio between the value of exports andthe value of imports of high-tech products in Finland was as low as 0.55 in 1990 with the definite increase undergone by such ratio over time unveils the rapid transformation of the Finnish economy from a net importer into a net exporter of high-tech goods (Daveri & Silva, 2004). Communications and technology production includes hardware, software wiring as well as communications equipment which Finland accounts for more than 15 percent of the market about 10% of the Finnish GDP. Finland’s investment development path has not only increased their GDP but has added value to the telecommunications which other smaller countries had failed to do over the years. As a result adds Daveri & Silva (2004), about two-thirds of this rise stems from the value added in the production of telecommunications equipment (the sector to which Nokia belongs), with the remaining one-third originating from IT services, furthermore this is even more significant when one considers that, industry where Nokia belongs – what we shall occasionally call the Nokia sector – was about 50% of the overall IT contribution to aggregate value added, with Nokia’s value added alone reportedly close to 3.3% of GDP.

Furthermore, Nokia accounted for as much as a fourth of Finland’s total exports, 35% of total business R&D, and 5% of total employment in the Finnish manufacturing sector, based on such evidence, it is easy to see why Nokia is viewed as Finland’s engine of IT production, innovation and exports (Daveri & Silva, 2004). Adds, Koski et al. (2001), not only is Finland one of the EU leadingproducers of IT (together with Ireland and Sweden), but is also the most prominentexample of leapfrogging with respect to the rest of the OECD. Finland saw an economic growth and reached the height of progress as the biggest of the IT producers since theearly 1990s.

Threats in the external environment

Many companies now find themselves thrust into two very demanding competitive races: 1) the global race to build a market presence in many different national and international markets and join the ranks of companies recognized as global market leaders, and 2) the race to seize opportunities on the frontiers of advancing technology and build the resource strengths and business capabilities to compete successfully in the industries and product markets of the future (Thompson & Strickland, 2007). Technology, especially IT communications is constantly changing. Finland is faced with uncertainty within our competitive market due to the emergence of other telecommunications companies and services, such as Blackberry and Apple who have formulated their own devices and services (iphone). The fastest and more effective way to remain competitive in a high risk sector is to form strategic alliances. Finland may find it advantageous to develop relationships with other companies to remain the leader in IT software/hardware, which will enable them to grow and monitor constant changes within the industry.

Thompson & Strickland (2007), name five factors that make an alliance strategic, as opposed to just an ordinary business operation.

  1. It is critical to the company’s achievement of an important objective.
  2. It helps build, sustain, or enhance a core competence or competitive advantage.
  3. It helps block a competitive threat.
  4. It helps open up important new market opportunities.
  5. It mitigates a significant risk to a company’s business.

Conclusion