Knowledge has become the main driving force of modern economies and whole
societies. Accelerated by powerful information and communication technologies
and by globalization, this trend affects countries, organizations and
individuals. While it obviously poses risks to many stakeholders, an emphasis on
the “knowledge-based economy” offers opportunities to new players in all
categories. For advanced industrialized countries with high labor and
infrastructure costs, it offers competitive advantages in high-technology
industries and efficient service sectors. For transition economies, it offers
improved technologies and higher value-added products with closer customer
linkages, as well as a path towards sustainable development. For developing
countries, it offers opportunities to short-circuit development phases, leapfrog
technologies and integrate faster into the global economy.
Information and communications are the prime examples of the key components of
the knowledge-based economy. It took more than 100 years to build the fixed-line
telephone systems in industrialized countries. In contrast, mobile telephones
took only a couple of decades to get 1.5 billion subscribers – a level that now
exceeds the worldwide number of fixed-line connections. Bypassing the costs of
digging up city streets for telephone cables and marring the countryside with
telephone poles, wireless technologies have brought domestic and global
connectivity and affordable internet access to sources of knowledge to even the
most peripheral regions.
The emergence of the knowledgebased economy has been the subject of intensive
research, which shows that the process involves both positive feedback and
turbulent evolutions, and virtuous or vicious circles with both winners and
losers among individuals, companies, countries and even continents. There is a
need for special attention to being socially inclusive and avoiding a digital
divide. In high-technology industries, we have seen new worldwide companies
emerge rapidly. Typically, their products have short life-cycles, narrow windows
of opportunity in time and the need to quickly reach international and even
global markets. Consequently, they are characterized by high research budgets
and capital-intensive development. Their cost structures are dominated by
development and marketing investments rather than by manufacturing and material
costs.
International organizations, such as the World Bank and the Davos-based World
Economic Forum, have linked the competitive ranking of regions and countries to
the state of their knowledge-based economies. Naturally, there is great interest
in identifying the factors of success or failure in the creation of new
knowledge and its conversion to economic and social benefits, and the World Bank
has organized forums on the knowledge economy and published knowledge-economy
books on China, India and Finland.
China and India are obvious choices for such study: Both these nations are major
drivers of globalization and with billion-plus populations, they need new
avenues to harmonious and sustainable development. Not just huge markets and
competitive manufacturers, China and India are emerging rapidly as powerful
players in research-intensive sectors of the economy. And China offers a unique
historic pattern in this regard. The world’s largest economy until the 1700s, it
lost its position to Europe and then the United States, partly because the
latter were more effective in generating new knowledge and coupling it to
economic development. Today, if we extrapolate China’s current eight percent
growth rate and adjust the results in terms of purchasing power, China could
become the world’s largest economy again as early as 2012.
But Finland is different. A small, peripheral country in northern Europe, it has
a population of only five million. (It is ethnically the most homogenous nation
in Europe. Interestingly, Finns account for 60 percent of all the people who
live north of the Arctic Circle, a fact that may help account for Finland’s
hardy determination to adapt when necessary to survive.) So why would the World
Bank study Finland and competitiveness? Because in recent years Finland has
consistently come out at the top in the competitiveness rankings of the World
Economic Forum and in the World Bank’s table of assessment about national
performances in the knowledge- based economy. The transformation of Finland has
been remarkable, especially considering its starting point amid a severe
economic crisis in the early 1990s. Acute balance-of-payments problems coincided
with high unemployment, a banking crisis and rapidly mounting foreign debt.
The transformation of Finland has been remarkable, considering its
starting point amid a severe economic crisis in the early 1990s
So the example of Finland shows that it is possible to make a profound
structural improvement in a short time. What are the elements of this success
and what are the lessons learned and what is their applicability to other
countries? In establishing its method for assessing countries' performance, the
World Bank defined four pillars as the critical basis of a knowledge-based
economy: the economic and institutional regime, education, innovation and the
information infrastructure.
The four pillars are interconnected and interdependent. They can be
disaggregated to more detailed indicators that appear in the World Bank’s
Knowledge Assessment Data Bank for all countries. Two pillars merit special
discussion here, namely innovation systems and consensus- building for national
strategies.
The knowledge-based economy grows with the creation of new knowledge provided by
scientific research and technological development and its ability to transform
it into economic and social benefits. Research and development can be usefully
measured as the share of gross domestic product (GDP) invested in this sector:
The average is about 2.4 percent for advanced nations in the Organization of
Economic Cooperation and Development. The United States and Japan invest
slightly more – about 2.8 percent. For the European Union, the level is about
1.9 percent; the Lisbon Agenda calls for it to rise to three percent by 2010.
Recently approved EU financial projections foresee a rise in joint R&D spending
by about 50 percent over the next seven years, to a rate of 54 billion. Finland
has more than doubled the rate of its R&D spending since the early 1990s, so it
now runs about 3.5 percent of GDP.
What are the results of R&D investments and how can they be measured? The
classical methods of assessment favor numerical metrics listing scholarly
publications and references, advanced degrees and international prizes, patents
and the creation of new companies. But the impact of this input on a nation can
also be measured in the structural changes of the economy, for example, the
share of high-tech products in a country’s output and exports.
Such a structural change is clearly visible in Finland. Fifteen years ago
hightech exports accounted for about five percent of total exports while the
current share is over 20 percent. Before, exports were dominated by forest
industries, which still play a major role in the Finnish economy. However,
forest products are a cyclical market, which proved risky and led to frequent
currency devaluations. That is no longer deemed feasible: Finland has adopted
the euro, ruling out devaluations, and the old system had undesirable impacts on
economic and social stability.
As Harvard University’s Michael Porter explains in his books, most countries
start their economic development in a natural resource-driven phase, then
proceed to an investment-driven phase and subsequently aim at a knowledgedriven
economy. Finland illustrates this process (see chart above).
The increase in the high-tech share of Finland’s manufacturing has diversified
the country’s exports and also created a positive trade balance. It is a
structural change of record magnitude, largely based on the success in the
telecommunications sector, particularly of the Finnish corporation, Nokia.With
worldwide operations, Nokia has become the global leader with about a 35 percent
market share in mobile phones. A factor helping set the stage for this success
was Finland’s deregulated domestic telecommunications market, a choice that
fostered competitiveness rather than protection for the local companies. Nokia
was the industrial engine for many developments in the information-andcommunication-
technology field. Excellent results were obtained in such related sectors as
pulse-rate meters. These successes were often characterized by cluster dynamics
combining skills of many research and company teams and niche strategies aiming
at the positioning of Finnish products as the global leaders in their specific
narrow market sectors.
The key element of a successful innovation system is an appropriate balance
between public and private investments as well as between institutional and more
competitive types of funding. This is best achieved with independent funding
agencies and flexibility of funding instruments. When Finland more than doubled
its R&D investments, the additional funds on the public side were put to
competitive funding rather than diffusing the resources along conventional
institutional channels. This allows rapid shifts in focusing of resources to new
fields, a faster system than reorientation of old institutions. It also rewards
individual activity and entrepreneurs and enhances multidisciplinary projects
and public-private partnerships.Money is often the best persuader, even in the
scientific world.
Finns Have Confidence in their Country’s Competitivity
"A New Model for Old Europe," read a headline in an extensive series of articles
about Finland and its economic turnaround written by Robert G. Kaiser and
published in The Washington Post in 2005 (www.washingtonpost.com). In a
concluding commentary, he singled out “the Finns’ confidence that they can shape
their own fate. Finns speak of the Finnish National Project, an effort involving
much of the country, and nearly all of its elites, to make the country more
educated, more agile and adaptive, more green, more fair and more competitive in
a fast-changing global economy.” He quoted Manuel Castells, the renowned Spanish
sociologist who teaches at the University of Southern California and has been
writing about Finland for nearly a decade, who contends that Finland’s ability
to remake itself followed from its success in creating a welfare state that made
Finns feel secure. “If you provide security and it is felt, then you can make
reforms,” Castells said. Of course, you have to agree on what reforms are
needed.
It is crucial for innovation-policy questions to be placed high enough on a
nation’s political and corporate agendas. In Finland, the top policy body in
this field is the Science and Technology Council, which is chaired by the prime
minister and includes the ministers of education and of trade and industries as
well as, perhaps most important of all, the finance minister.
In formulating successful national strategies, it is vital to have a working
consensus among policy-makers about goals and instruments for achieving them.
There are crucial questions. How can decision-makers be convinced of the
advantages of long-term structural investments rather than short-term
priorities? Finland is an appropriate case study: while in economic crisis in
the 1990s, Finland shunned short-term spending on public works (often the chosen
option for responding to high unemployment) and instead made longterm structural
investments in research and development.
As a result, Finland has succeeded in combining high international
competitiveness with a Nordic-style welfare state. Nowadays demographic changes
with aging population and increasing global competition are putting new
pressures on the old models of the Nordic-style welfare state. But it should be
seen as an element of competitiveness to have a well-functioning public sector
with minimum level of corruption and to maintain social justice and reasonable
social safety-net systems.
Part of the reason Finland was able to embrace this strategy of strong
knowledge- based competitiveness was an important institutional innovation over
the last 25 years: a series of high-level programs of education and discussion
about economic policy and national strategy. The participants have included
practically all new members of the parliament, who then go on to become cabinet
ministers and political leaders as well as industrial, labor and university
leaders, media people and civil servants with active roles in economic policy
making. These programs cover fiscal policies and macro-economic instruments
related to budget planning and monetary policy, as well as structural topics
related to globalization and international integration, industrial sectors and
agriculture, education and research policies, energy and the environment.
During its economic crisis in the 1990s, Finland chose long-term
structural investments in research and development over short-term public works
spending
However, the most important part of these exercises amounted to providing almost
a “shadow government” on economic policy-formulation and implementation.
Consensus must be found between conflicting goals: on the one hand, economic
growth and employment and, on the other hand, the budgetary and trade balances
and low inflation-targets. The choice of economic policy instruments – for
example, taxation options and investment incentives – is also important. Over
the years, these educational and consensus-building programs have generated
support for policies aimed at increasing R&D, improving competitiveness and
investing in the knowledge-based economy.
Finland Tops Global School Table
The BBC reported this year that recent international school-pupil comparisons
have reinforced Finland’s claim to having the world’s best early education
system. In its latest in a series of studies conducted every three years, a
survey by the Organization for Economic Cooperation and Development, which
groups the world’s leading industrialized nations, tested 15-year-olds in 2003
on math, reading and science. Finland’s pupils came second in math (led by Hong
Kong-China), top in reading (followed by South Korea) and top in science
(followed by Japan). Some major EU countries would have made it into the upper
ranks if their overall national performance had not been significantly dragged
down by small groups of students within each country who did very much worse
than the average. This was true, for example, in Belgium and Germany. A detailed
report of this study (and its methodology) is available online at
www.pisa.oecd.org.
This process cannot be carried out overnight, but once a country has started on
a virtuous circle, many factors can combine to accelerate movement toward a
knowledge-based economy. As the Finnish case shows, this structural change can
be accomplished in a relatively short time. But the foundations have to be laid
by long-term decisions that shape research, education and systematic innovation
and provide guidelines for long-term growth and sustainable competitiveness.
*The Finnish case is reviewed in greater detail in a World Bank book,
Finland
as a Knowledge Economy – Elements of Success and Lessons Learned. A 23-page
summary overview of the book, as well as overviews of the book on China and
India, are available online from the World Bank at these web sites:
http://info.worldbank.org/etools/docs/library/201645/Finland_ES.pdf
http://www1.worldbank.org/publications/pdfs/15005overview.pdf
http://info.worldbank.org/etools/docs/library/145261/India_KE_Overview.pdf
Jorma Routti is a professor at Helsinki University of Technology and
chairman of the firm, Creative Industries Management (CIM). He headed the
Directorate-General for Research at the European Commission and was President
of Sitra, the Finnish National Fund for Research and Development, in Helsinki.
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