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Innovative Activity in the Times of Crisis – Experiences of Finland. Petri Rouvinen ETLA, The Research Institute of the Finnish Economy World Bank’s Knowledge Economy Forum VIII INSEAD, Fontainebleau, France April 28 – May 1, 2009.

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Innovative Activity in the Times of Crisis – Experiences of Finland

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Innovative Activity in the Times of Crisis – Experiences of Finland

Petri Rouvinen

ETLA, The Research Institute of the Finnish Economy

World Bank’s Knowledge Economy Forum VIII

INSEAD, Fontainebleau, France

April 28 – May 1, 2009

Take Home Message Whatever you do (as a country), do not cut (public) investment in knowledge in times of economic hardship.

Why Not?

  • Accumulated knowledge is in the heads of those engaged  If no longer involved, some knowledge is lost forever

  • ½ of knowledge production is learning & training

  • Large adjustment costs  Hard to scale up

  • Clustering dynamics & localized spillovers

  • Path dependency

  • Discontinuities

  • Loses may be unrecoverable

  • Negative spirals / domino effects

 Counter-cyclicalpublic expenditure+ Better opportunities+ Lower (opportunity) cost+ R&D/educ. Is 50–100% wages & related overhead  Full immediate local stimulus with upside potential

In 1990 Finland Was Hit by the Deepest Crisis of Any OECD in the Postwar Era

  • Private & public knowledge expenditures /

  • Major policy shifts

    • Macro  Micro

    • Closed  Open

    • Pro competition

    • Pro globalization

    • Creative destruction

    • Incentivizing individuals & firms

  • The crisis marked Finland’s transition into a knowledge economy

    • But the foundations laid in the preceding 50–100 years!

    • The crisis was beneficial & necessary for restructuring

A stylized view of the real educational expenditure in Finland

Billions of euros,year 2000 prices

This ETLA stylized view is based on Arto Kokkinen(forth-coming), Human Capital and Finland’s Economic Growth in 1910–2000, European University Institute.

€6 bn

6-fold increase

in volume in the

last 50 years

€1 bn

1890 1950 2000

Finnish Annual Economic Growth 1976–2011% change of real GDP, Statistics Finland with ETLA forecasts for 2009–2011

Rapid & eventually complete

opening up of the economy

Collapse of the Soviet Union  Trade disruption

Mismanaged liberalization  Banking crisis

Domestic real estate & securities bubble

Downturn in forest-related industries

Finland hit mostly by the contraction in global demand

rather than directly by the financial crisis per se.

Domestic financial crisis,booming global demand

Strategy: Export-led recovery, re-industrialization

Policy: From macro to micro

Unutilized human capital

1/10 of R&D outsourced

Basic knowledge jobs


Improving competitiveness

Global financial crisis,contracting global demand

Strategy: Domestic demand, boost competences, “sit out”

Policy: Micro-micro (?)

Weak entrepreneurial spirit

1/4 of R&D outsourced

Advanced knowledge jobs


Loosing ground

Early 1990s vs. The Current Crisis

Finnish Response to the Current Crisis

  • Finnish stimulus mostly not related to innovation

    • Social safety nets  Automatic/passive stimulus

    • Active stimulus, e.g., by advancing public works

  • +7–10% in government R&D expenditure in ‘09

    • Largely competitive funding with strong public–private dialog

    • Consideration of previously delayed VC / angel inv. incentives?

    • Further tax-based R&D incentives in 2010?

    • Further +5–10% in 2010?

  • Nat. Innov. Strategy  Demand- & broad-based

    • Strategic Centres for STI (industry-led R&D consortia)

    • Restructuring public research organizations

    • University reform

Innovation Policy Objectives in Crisis

  • Accumulated knowledge stock should not be lost

    • Stock is mostly in the heads of those engaged

    • Maintained by keeping the people engaged

  • Generation & use of new ideas should continue

    • Stock accessed/accumulated by having people solve problems

  • Creative destruction/renewal should prevail

    • For society the stock is enhanced by labor mobility

  • Focus on the innovators (= people engaged)

Lessons from the Experiences of Finland

  • Engage in the global knowledge economy – it is the only way to a country’s lasting prosperity

  • Take time to build foundations from K–12 up (cf. Aghion)

  • Initially accept any role, however small, in the global knowledge economy – Once in, be conscious of gradually upgrading

  • Investing not only for economic gain but also for cultural & societal development – It will benefit the country in ways not directly measurable in money

  • Do not force it – Have fate in individuals/incentives

  • Waste or not? Depends strongly on framework conditions, business dynamics & individuals

Evaluation of the Finnish Innovation System to Be Completed by September

Rouvinen & Ylä-Anttila: Case Study: Little Finland's Transformation to a Wireless Giant. In Dutta, Lanvin & Paua (Eds.), The Global Information Technology Report 2003-2004. World Economic Forum.

Dahlman, Routti & Ylä-Anttila 2006: Finland as a Knowledge Economy. World Bank Institute.

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