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2013 Cambridge Business & Economics Conference ISBN : 9780974211428

FINLAND: ECONOMIC GROWTH THROUGH EDUCATION

TRANSFORMATION FROM A RESSOURCE BASED ECONOMY TO A KNOWLEDGE


BASED ECONOMY

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2013 Cambridge Business & Economics Conference ISBN : 9780974211428

Table of Contents

Abstract 3

INTRODUCTION 4

Education

Economic growth through education 5

Finland’s Economic transformation through education 7

Investment Development Path

Finland’s Global and Competitive Path 7

Finland’s Investment Development Path: NOKIA 10

External threats

Threats in the External Environment 12

Conclusion 13

REFERENCES 14

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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.

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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.

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Global Competitiveness, 2009-2010:


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

Economic Growth through Education

Agiomirgianakis et al. (2002) not only suggest the existence of a robust positive

relationship between education and economic growth, but also that higher levels of education

have a stronger effect on economic growth. The policy implication of this result is that

governments will be inclined to adopt measures that will expand higher education in their

countries in order to increase potential gains in term of a higher economic growth

(Agiomirgianakis et 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

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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 knowledge and boost economic productivity.

Finland’s Economic 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

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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, Finland has 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 Development Path)

proposes the existence of a dynamic relationship between an economy’s degree of multi-

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nationalization of firms, as measured by inward and outward stocks of direct investment, and its

level of development while accepting that the degree of structural transformation in an economy

influences the volume and nature of inward and outward direct investment. The theory posits two

groups of 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. Furthermore Ali 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 diversification and 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 the competitive terrain which reduces

the scope for leveraging location-specific resources by domestic diversification, and gives the

competitive edge to specialists that can leverage 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

and competing 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

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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 national domestic 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

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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. Foreign direct investment 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,

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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, and cables, Nokia had grown into a diverse conglomerate in which some moves had

resulted from diversification stemming from Nokia’s deep-rooted emphasis on technology and

innovation. Nokia happened to know how to provide cost-efficient end-to-end solutions to small

operators who did not have 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 rank

Finland at the top.3 and this consensus fits well with available data on IT trade balances – a

rough indicator of the international competitiveness of a country (Daveri & Silva, 2004). As

reported in the OECD Communications Outlook 2001, in 1998 Finland featured the largest per-

capita surplus in the foreign trade of communication equipment (about US$1000) in the world,

with its two closest followers – Sweden and Ireland – reaching surpluses of about US$800 and

US$200.

The ratio between the value of exports and the 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

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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 leading producers of IT (together with Ireland and Sweden), but is also the most

prominent example 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 the

early 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

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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

Finland has seen enormous growth and prosperity over the last decade. Their dominance

in the telecommunications sector has helped them gain entry into the competitive international

global arena. Future alliances would be greatly beneficial to aiding Finland further achieve

economic dominance since the communications sector is a highly competitive industry,

constantly changing. I propose an alliance with a company like Apple, who constantly stay

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ahead of the marketplace and almost uncertainly anticipates consumer needs. Apples continuing

dominance and Finland’s global presence could make for a formidable opponent against other

incoming or current telecommunications company.

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