World Bank Interest in Finland as a Knowledge Economy Carl Dahlman Jean-Eric Aubert August 30, 2004 Helsinki, Finland ©Knowledge for Development, WBI

Structure of Presentation 1.World Bank Interest in Knowledge Economy Work 2.Work on Developing Countries Done to Date 3.Why Studies on Developed Countries? 4.Benchmarking Methodology Analysis of Finland 5.Questions on the Finnish Case

World Bank Interest in Knowledge Economy World is in period of very rapid technical change which could be considered a knowledge revolution We are concerned that there is major risk developing countries will be left behind as knowledge gap between developed and developing countries increases We are seeking to raise awareness among policy makers, the business community, and civil society in developing countries of what is at stake, and to help developing countries develop strategies to make more effective use of knowledge for their development

Work on Developing Countries to Date Policy Forums: Baltics and Poland (1999): Korea, Malaysia, Thailand, Vietnam( 1999); Brazil, China, India (2001); Ghana, Tanzania, Uganda (2003); Argentina, Brazil, Chile, Mexico (2003); Benin, Mauritania, Senegal 2004) Policy Conferences: (Europe and Central Asia: 2002, 2003, 2004), Middle East and North Africa: 2002, 2004) Country Reports Main reports: Korea (2000), China(2001), Lithuania (2003), Poland (2004), Latvia (2004), Turkey (2004), Chile (2004), Mexico (2004), India (2004) Smaller reports: Argentina(2003), Brazil (2003),Russia (2003), Egypt (2004), Slovakia (2004) KAM Web-based tool on country knowledge assessments (do-it-yourself analysis)

Why Studies on Developed Economies? There are interesting lessons to learn from developed countries about how they have harnessed knowledge for their development We have picked three developed countries to study: Japan-because its strong manufacturing technology and process strength, in spite of its current macro weaknessess Korea-because of its very rapid shift from technology acquirer to technology leader in several areas Finland-because of its success as a small economy in a world dominated by large economies of scale We are interested not just narrowly in science and technology or high technology, but more generally how these countries have been able to factor the knowledge dimension into their growth strategies. We are very interested in the process of political economy of what it takes to develop and implement such strategies, and how it is done.

Framework for KE: Four Pillars  Economic incentive and institutional regime that provides incentives for the efficient use of existing and new knowledge and the flourishing of entrepreneurship  Educated, creative and skilled people  Dynamic information infrastructure  Effective national innovation system ©Knowledge for Development, WBI

K4D Program/KAM Methodology 2004  KAM: 76 structural/qualitative variables to benchmark performance on 4 pillars  Variables normalized from 0 (worst) to 10 (best) for 121 countries   Multiple modes offering wide range of graphic representations and functionalities ( Most Recent, comparison options)  Aggregate Knowledge Economy Index (KEI) – average of performance in 4 pillars – KI  Weighted and unweighted version – Innovation Variables ©Knowledge for Development, WBI

KAM Normalization Procedure Absolute values Allocation of rankings Normalization (0-10) Formula: Normalized (u) = 10*(Nw/Nc) Normalized (u) – normalized score allocated Nw – no of countries with worse ranking Nc – total sample of countries (121) ©Knowledge for Development, WBI

Global Knowledge Economy Index

Global Economic Incentive Regime Index

Education Index

ICT Index

Innovation Index ©Knowledge for Development, WBI

Innovation Index-- Size matters ©Knowledge for Development, WBI

Finland—Basic Scorecard

Finland—Economic Performance

Finland—Governance Variables

Finland—Economic Regime

Finland—Education Variables

Finland—ICT Variables

Finland—Innovation Variables

Finland—Diamond Chart

Response to 1991 Crisis The policy changes Finland undertook as a result of its 1991 crises are impressive. The crisis was widespread and the policy response was quite broad. How was consensus generated to undertake this reform agenda? Who championed the reforms? What was the process? The large increase in R&D in the midst of the crisis is particularly impressive. This focus on the longer term is very different than what most countries do when faced with a crisis. What explains this focus on the longer term? Who lead it? How did he or this group convince the private sector to do this at such a difficult time?

Social Cohesion and Policy Making We have been very impressed by the strong social cohesion in Finland. What accounts for this? How is policy consensus created? We have heard about the 2 week course all senior policy makers and heads of key institutions have taken over the past 25 years. How important is has this been? When was it started, by whom, and why? How is it financed? What other special initiatives or institutional arrangements been put in place to help create consensus?

Governance Finland ’ s excellent scores on governance (including the rule of law) are very impressive. Where does this come from? How far back does it date? What accounts for it? How importance is this for Finland ’ s success? Is this replicable? How do Finnish companies cope with regimes in other countries where governance and the rule of law are much weaker?

Economic Incentive Regime We note that Finland has a good economic regime, although we note that it is weaker than its governance system, and is the weakest of the four pillars of our methodology Does this predate the 1991 crisis or Was improvement of this a result of the crisis? We are interested in understanding the somewhat lower than expected scores on tariff and non-tariff barriers. We also note that Finland has a relatively high rate of unemployment. What explains that? And how can Finland be so competitive when it is not making full use of its labor force?

Competitiveness and the Welfare State More fundamentally, we find it interesting that a welfare state can be so competitive How this is achieved? How does the incentive regime work such that people who can get lots of benefits from the state still strive to work hard to be competitive? How large is the state and how does it support itself? What are the corporate and income tax rates? What are the marginal tax rates and how is it that they do not create disincentives for extra effort? What are the non-pecuniary rewards to success?

Education and Skills When did Finland start to spend heavily on education? How much of education if publicly financed? Is there any important private higher education? How do workers keep up their skills? Who finances these continuous up-skilling costs — the firms, the individuals, the government? And if the latter, how is this financing done — direct subsidy to firm, voucher to student, public provision to whoever applies? How developed is the system for life-long learning? Given that Finnish is a very unique language and that a very small share of the global population speaks it, How does Finland manage to do so well in terms of internationalization? Are foreign languages such as English and others strongly emphasized in school

Education and Innovation Finland seems to be a very innovative and creative economy by the success of Nokia and Linux and Finnish design. Are these more broad based? What accounts for that? Are they any special elements of its education system which fosters creativity and independence? We have heard that there is some concern about entrepreneurship in Finland. What are the reasons behind that concern? How is it being addressed?

Information & Communication Technologies Finland is an excellent example of success based on the production of telecommunications equipment, digital phones in particular. What explains the long tradition with strong emphasis on telecommunications? Why has there been so much competition in the sector? Finland is not know as a major IC producer so it must buy its chips from others. Does this create some vulnerability How is this overcome? How advanced is Finland as a major user of information and communications technologies throughout the economy? Manufacturing, government, logistics, education, services, etc? How heavily emphasized are information and telecommunications technologies in schools and universities?

R&D and Innovation How much is the increase in R&D due to what Nokia did? Why did Nokia do it? Do the figures for Nokia count just Nokia R&D in Finland, or all its R&D effort? How much did the government increase its own R&D? What incentives were given for private R&D? How has this evolved over time? What have been the role of government research institutes and universities? We understand that foreign firms are setting up R&D centers in Finland. What attracts them? Is it the existing ICT cluster and high level technical manpower, or are there also special government incentives?

Non-ICT R&D and Innovation How much R& D is non-ICT related? Who carries this out? Is it supported to the same extent as ICT research by the government? How have more traditional industries such as forestry, pulp and paper, shipbuilding, etc. managed to remain competitive? How have they been able to be innovative? Has the government developed special programs to help them? How is technology diffused throughout the economy? What special mechanisms and institutions are there for this?

The Finnish Innovation System How has interaction among public and private research institutes and universities been fostered? How was a strong IPR regime developed? What is the incentive regime for university professors to develop and commercialize research? How much public vs private support has there been for technology parks and high tech incubators? How do the public and private sector tap into global knowledge? What are the most importance sources of foreign knowledge and why? Are there specific government support programs to develop strategic alliances or to buy or set up research facilities in foreign countries?

Role of Nokia in Finland’s Success Would Finland have made the impressive recovery it made after 1991 without Nokia ’ s expansion? We understand Nokia already has substantial R&D abroad and is moving even more R&D to San Diego. What is the reason for this What are the implications for Finland? As Nokia has become a multinational with major research and production activities outside Finland are their any concerns that Nokia will act more as global corporation than a Finnish company, and what does that imply for Finland ? How resilient is Finland to downturn in Nokia ’ s fortunes? Which are Finland ’ s other horses? Are their enough? Are they large enough to compete globally?

Finland’s Future Challenges What are the main competitive challenges to Finland ’ s future? Who worries and strategizes about this? The government? The private sector? Both? What are the forums for these deliberations? What are the sources of information? What futures sources of growth are being laid? By whom? How?

Thank you!