Introduction 1980s, a process started of transforming an investment-driven economy into an innovationdriven one.

en one. Collapse of the Soviet Union around 1990, dragged Finland into crisis. Finland became the member of the European Union with fiscal stability. Finnish constitution had the semi-presidential form of government that plays a significant role in forming the good foreign relations. Nokia accounting for some 70% to 80% of the cluster exports and the world leader in mobile phones. Finnish government plays an important role in the leading companies of the Finland industry. Positive influence of Finnish exports, R&D expenditures and market capitalization.

Problem & Issues Slowdown of global telecommunication. Overall growth rates were also on the way out with the major export markets weakening. The telecommunication cluster was at its peak and was also facing severe downturn. Demand for skilled labor was increasing whereas Nokia had shortage of skilled labor engineers and scientists. Unemployment was also increasing in Finnish society among young and unskilled.

Economic condition Background of the crisis: financial market deregulation o Until the 1980s the Finnish banking sector and international capital flows heavely regulated low risks, no credit losses o Financial deregulation in the 1980s, following international pattern o After gates were opened, a flow of foreign credit increased rapidly domestic liquidity 1986-89 o Credit expansion fuelled an investment boom and asset price bubble in 1987-89 Strong growth led quickly to overheating and indebtedness o Rapid growth of output, consumption and investment o Consumer price and asset price inflation o Widening current account deficit (to 5 % of GDP), increasing foreign debt but stable debt/GDP-ratio (25 %) o Full employment and good fiscal balance, very low public debt o Inflation & currency appreciation increased the Finnish price level so that finally it was 40 percent higher than OECD average (in 1990)

Private sector debt was doubled within 4 years

Private sector debt

450 400 350 300 250 200 150 100 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Foreign debt became a problem only after currency depreciation and output fall in 1991-93

billions of markka

Foreign debt
50 45 40 35

percent of GDP

30 25 20 15 10 5 0 1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Period of high interest rates

3-month interbank rate

16 14 12 10 8 6 4 2 0 1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

A 5 year slump in GDP volume

GDP volume
130 125 120 115 110 105 100 95 90 85 80 1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Employment was reduced by 20 percent

Employment
2600 2500 2400 2300

1000 henke

2200 2100 2000 1900 1800 1700 1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Unemployment rate climbed from 3 to 18 percent within four years

Unemployment rate
20 18 16 14

percent

12 10 8 6 4 2 0 1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

THE WAY OUT OF CRISIS The Bank of Finland was forced to abandon the policy of fixed exchange rate in September 1992 during the European currency crisis after losing its currency reserves and the Finnish markka was allowed to float the Finnish markka depreciated by 40 percent, but started to appreciate later domestic interest rates were decreased rapidly from 15 to 5 percent

Currency depreciation was partly temporary and partly permanent

Effective exchange rate
140

130

120
index

110

100

90

80 1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Industrial production benefited from devaluation and recovered rapidly

Industrial production
140 130 120 110 100 90 80 70 60 1987

1990=100

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Factors helping to overcome crisis Finlands overall economy was consistent in innovation in telecommunication and IT industry. New universities were opened Huge investments in R&D Acquisitions for latest technology and market developments Government was monitoring mergers and acquisitions in private sectors to harmonize and reinforce overall R&D efforts. A telecommunication cluster was emerged in Finland in which smaller companies merged in large conglomerates like Nokia. The best combination for innovation in telecommunication was formed in Finland.

Major Business

The 3 largest clusters in Finnish economy were; Pulp & paper (accounted for 40% of exports) Wood products (accounted for 16% of exports) Engineered metal (accounted for 23% of exports)

Telecom Sector In 2001, over 200 million mobile phones were sold worldwide. Telecom industry was divided into two parts: Mobile communication infrastructure Mobile handsets

SWOT Analysis

Strength
Early movers High mobile penetration Government involvment in leading companies A high literacy rate

Weakness
Unskilled employees and scientists Difficulties in relation to attractiveness; small domestic market area, limited number of inhabitants, a small language area Venture capital

Opportunities
Going beyond EU, looking for best competence globally Open minded and sufficient support for creativity and innovation

Threat
Intense competition Unemployment (2001) Decreasing sales