Competitiveness paradox in Finland – an opportunity for investors, companies and entrepreneurs

Posted on October 8 2014 by frank

[This article is co-authored with Jukka Luoma. It was originally published in Helsinki Times on 25th of September 2014.]

Recently, the World Economic Forum ranked Finland as the most competitive economy of Europe. In an opinion piece published in the Financial Times on June 23rd, the chief executive of Finnish chamber of commerce, Risto Penttilä, was quick to remark that “If Finland is the best the EU can offer, we should all be very concerned.” He painted a gloomy vision of the Finnish economy, which has not grown in five years, where Nokia lost its handset business, shipyards are in trouble and forestry companies are closing their plants. Public debt is growing and the population aging.

Which of these pictures is true of Finland? WEF’s or Penttilä’s? Both – and this paradox presents a great opportunity for foreign investors, companies and entrepreneurs.

Penttilä agrees with WEF’s assessment that Finland provides a great institutional context for thriving businesses: strong property rights, world-class educational system, stable political environment and large research and development spending.

However, as Mr. Penttilä correctly notes, “well-functioning institutions do not always translate into competitiveness.” The Finnish private sector is indeed in trouble. ICT industry cluster and pulp and paper industry have been traditionally key sources of growth in Finland, but now both of them are in decline. This is the paradox: Finland has one of the world’s best institutional settings for doing business, but with the decline of Finnish companies, the Finnish economy has lost its “growth recipe,” as pointed out by a group of Finnish economists, among them Bengt Holmström from MIT.

Penttilä seeks solutions for the competitiveness paradox from institutional changes: “reducing the size of the public sector and easing the tax burden” or “introducing sticks and carrots for the unemployed.” This is off the mark. Institutions are not the problem. As even he himself acknowledges, they are still great for doing business. The problem, as pointed out by Holmström and colleagues, is that the Finnish economy has traditionally been dependent on a small number companies and industries, and now that they are in decline, the whole economy is in decline. So the hardships of the Finnish economy are caused by the decline of individual companies and industries, not any institutional failure.

This is why the competitiveness paradox is in fact an opportunity. Given the decline of traditional industries, the Finnish economy will have to reinvent itself leading eventually to the emergence of new industries and clusters. As the WEF analysis shows, Finland already provides a good institutional setting for this to happen. Those companies and entrepreneurs leading this reinvention are the ones that can reap its biggest benefits taking advantage of the available, educated workforce and other opportunities that a moment of structural change always provides for the bold.

What Finland needs are forward-looking investors, companies and entrepreneurs who will seize this opportunity. The recent success of Supercell, a Finnish gaming company, shows that Helsinki-based companies can make big exits: After only three years of existence and two published games, the company that was characterized by Forbes as the “fastest-growing game company ever” sold half of the company for $1.5bn. In the wake of the success of Supercell and Rovio, the maker of the iconic Angry Birds game, there is a booming startup scene in Helsinki. They take opportunity of the educated workforce, reliable infrastructure, the government-sponsored seed funding, and the collaborative spirit among the entrepreneurs. Right now the timing and institutional settings are perfect for building global success stories based in Finland.

Investors, companies and entrepreneurs heading to take over the world, we are ready for you.

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