Innovation to boost productivity and competitiveness
Finland faces the combined effects of the global recession and the challenges related to economic transformation and an ageing population. Productivity and living standards still rank relatively high among the developed countries, but especially the positive development of productivity has halted. Since 2008, Finnish exports have declined by approximately one fifth, which is more than in any other advanced economy. The performance of the Finnish economy is lagging far behind most countries in the euro area. Although Finland also has many structural strengths, their impact on the national economy has not been strong enough to pull the country out of the recession.
In particular, Finland has lost much of its cost competitiveness in global markets for reasons related to the high cost level and losses in multifactor and labour productivity. An important factor behind this is the (lack of) flexibility in the labour market. As a consequence, Finnish enterprises have lost their market shares in global markets more than those of any other European country. The impact of Finnish R&I policy measures is deemed to be poor, if at the same time the cost competitiveness does not support the growth and exports of Finnish companies. These challenges call for renewal of existing businesses and creative destruction in the economy.
Converting high R&D investment into medium and high-tech exports is a significant challenge for Finland, while facing low increase in multifactor productivity. Limited investment in non-R&D innovation expenditures over recent years could be one explanation for the lack of success in converting the R&D inputs into viable products. On the other hand, it may indicate a lack of innovation, e.g. good investment objects.
Finland’s innovation policy and national measures are geared towards speeding up the development, commercialisation and take–up of new technologies and businesses. The Finnish National Reform Programme (2012) and the latest recommendations of the RIC (2014) identified the important reforms needed in research and innovation policy to be the introduction of new means and models to strengthen innovation activity, the establishment of attractive hubs of expertise, internationalisation, structural development of higher education, the reform of research institutes and research funding, infrastructure policy and setting up the tenure track system.
The current Government has shifted the focus of most state aids from direct grants to refundable forms of funding, such as loans, guarantees and equity investments. The Government’s objective has been to use business aid to restructure the economy and industry and to boost the internationalisation of companies. At the same time the Government significantly cut R&D grants for enterprises.
Overall, the number and scale of reforms taking place signal a continuous commitment to a broad and ambitious R&I policy. In addition to the efforts to enhance the efficiency and improve the internationalisation of the innovation system, the policy reforms are targeted at increasing the number of high-growth innovative companies as they are considered to be major contributors to employment of tomorrow. The innovative high-growth companies are also considered as a means to diversify the Finnish economic structure. Connected with the growth companies, a temporary tax incentive for private investment in start-ups was introduced, and Vigo accelerators were set up and expanded to increase the volume of the domestic venture capital market. The newly founded Tekes Venture Capital Ltd adopts asymmetric profit distribution mechanisms functioning as the fund of funds. Moreover, Tekes funding has been focused on start-ups. In total, these actions are expected to support especially knowledge- and innovation-based young growth enterprises. What is more, the Finnish Government has recently widened Finnvera’s mandate in business and encouraged innovation and the country’s transformation into a digital service economy by releasing non-sensitive public data as open data.
Targets of the new Government Programme related to innovation are i) strengthening competitiveness by improving conditions for business and entrepreneurship by reforming key legislation and removing sectoral regulation that prevents competition, ii) strengthening cooperation between higher education institutions and business to bring innovations to the market, iii) aiming at deregulation and the reduction of the administrative burden as well as iiii) creating a culture of experimentation especially by increasing, innovative public procurement.
Improving the economic competitiveness and reforming the research and innovation system are at the top of the political agenda of the current Government. Most of the Government Programme’s strategic objectives and specific plans (spearhead projects) are closely relevant to these goals. The target to increase the share of innovative public procurement up to 5% is a strong incentive for innovation, although the means to reach the target have not been defined. As objectives, these are welcomed from an R&I policy perspective. However, there are significant further cuts to the government research and innovation funding especially on its priority areas. The incentives for business – higher education cooperation will mostly be cut. In many respects, the focus of these cuts is not aligned with objectives in the Government Programme.
The planned actions on cutting red tape and rigidities of the labour market are equally important and likely to improve the productivity and competitiveness. But in the long-term, significant productivity and competitiveness improvements will require also systematic investments in knowledge and innovation.
Despite introducing significant cuts to public R&D expenses, the new Government Programme aims to enhance the funding, equity capital and risk-taking capacity of start-ups and YICs. The cuts to Tekes’ budget are likely to harden the funding for large businesses and research organizations as the needs of young companies and SMEs will be prioritised. Combined with the additional investments to Tekes Venture Capital Ltd, it is evident that the focus of the Finnish R&D system will further shift towards start-ups and YICs in the coming years.
Finland has made some progress in boosting its capacity to deliver innovative products. Policy programmes for new growth areas, such as clean technology, biotechnology and digitalisation are promising but still relatively small-scale.
Health technology is a business sector where progress has been very positive. The sector has been able to grow during the recession and was in 2014 the largest high-tech sector in Finland. Recent success stories can be found also in the ICT related service sector, with an increase in turnover by 8 % in 2013–20142. This was achieved mostly due to the gaming (entertainment) industry, with 70 % of its companies being established in the last 5 years. These industries require only modest investments in physical capital, but a well-functioning infrastructure for all companies in the service sector is a necessity.
Implementation of the new university funding model is a good step forward in rewarding for quality and internationalisation, but incentives for creating socio-economic impacts are not yet in place. Nonetheless, the Government has made important policy initiatives focusing on structural reforms to improve the sustainability of the public finances, the most significant of the reforms being pension and health care reforms. These aim at fiscal consolidation, and increasing the labour supply. The reforms were necessary, but the weak trend in the economy indicates that reforms have not significantly raised the productivity. Major decisions in many areas of policy are needed both now and in the years ahead.
An area in which decision-making is needed is the reduction in production costs relative to Finland’s trading partners. Moreover, the need for removing regulatory controls that limit competition and innovation still remains. New means are especially needed to increase multifactor and labour productivity of the whole economy by introducing R&I measures which aim at broadening the innovation base, and increasing the incentives for R&I and risk-taking of businesses and capital.