1. 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

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

3. 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

4. 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

5. 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

6. 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.

7. 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

8. 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

9. 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)

10. 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

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