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-cyclical public 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.

Early 1990s vs. The Current Crisis 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 Technical 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 Non-technical Loosing ground

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 2009 www.evaluation.fi 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.