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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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
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 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 multiJuly 2-3, 2013
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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 cellphone 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 percapita 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
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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
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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